<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- --- SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-3021
THE ST. PAUL COMPANIES, INC.
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(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
385 Washington Street, Saint Paul, MN 55102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
Including area code 651-310-7911
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock (without par value) New York Stock Exchange
- ------------------------------- London Stock Exchange
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(Title of class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act:
None.
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ( )
The aggregate market value of the outstanding Common Stock held by
nonaffiliates of the Registrant on March 13, 2000, was
$4,785,479,797. The number of shares of the Registrant's Common
Stock, without par value, outstanding at March 13, 2000, was
214,895,253.
An Exhibit Index is set forth at page 38 of this report.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's 1999 Annual Report to Shareholders are
incorporated by reference into Parts I, II and IV of this report.
Portions of the Registrant's Proxy Statement relating to the Annual
Meeting of Shareholders to be held May 2, 2000 are incorporated by
reference into Parts III and IV of this report.
<PAGE>
PART I
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Item 1. Business.
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General Description
The St. Paul Companies, Inc. (The St. Paul) is incorporated as a
general business corporation under the laws of the State of
Minnesota. The St. Paul and its subsidiaries constitute one of the
oldest insurance organizations in the United States, dating back to
1853. The St. Paul is a management company principally engaged,
through its subsidiaries, in providing commercial property-
liability and life insurance, and reinsurance products and services
worldwide. The St. Paul also has a presence in the asset
management industry through its 79% majority ownership of The John
Nuveen Company (Nuveen). As a management company, The St. Paul
oversees the operations of its subsidiaries and provides them with
capital, management and administrative services. At March 1, 2000,
The St. Paul and its subsidiaries employed approximately 12,000
persons. Based on total revenues, The St. Paul ranked No. 171 on
the 1998 Fortune 500 list of the largest companies in the United
States.
1999 Developments
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Summary of Results. The following table summarizes The St. Paul's
consolidated results for the last three years:
Year ended December 31
1999 1998 1997
(In millions, except per ------ ------ ------
share data)
Pretax income (loss):
Property-liability insurance $ 971 $ 298 $1,488
Life insurance 66 21 78
Asset management 123 104 93
Parent company and
other operations (143) (303) (226)
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Pretax income from
continuing operations 1,017 120 1,433
Income tax expense (benefit) 238 (79) 371
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Income from continuing
operations before
cumulative effect of
accounting change 779 199 1,062
Cumulative effect of accounting
change, net of taxes (30) - -
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Income from continuing
operations 749 199 1,062
Discontinued operations,
net of taxes 85 (110) (133)
------ ------ ------
Net income $ 834 $ 89 $ 929
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Per common share (diluted) $ 3.41 $ 0.32 $ 3.69
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The improvement in pretax income from continuing operations in 1999
over 1998 was driven by The St Paul's property-liability insurance
operations, reflecting efficiencies realized from the 1998 merger
with USF&G Corporation (USF&G), the favorable impact of two
aggregate excess-of-loss reinsurance treaties, and improvements in
certain commercial insurance underwriting results. Pretax income
in 1999 was reduced by a charge of $60 million related to a cost
reduction program, whereas 1998 pretax income reflected the impact
of a provision to strengthen loss reserves, and merger-related and
other expenses.
Strategic Transactions. The St. Paul took four major actions in
1999 consistent with its strategy of focusing its resources on
specialty commercial and professional property-liability insurance
lines. First, The St. Paul completed the sale of its standard
personal insurance underwriting operations to Metropolitan Property
and Casualty Insurance Company (Metropolitan). Second, The St.
Paul reached a definitive agreement to sell its nonstandard auto
insurance operations to Prudential Insurance Company of America
(Prudential), in a transaction expected to be completed in the
second quarter of 2000. The results of the operations sold and to
be sold are included in discontinued operations for all periods in
the preceding table. Note 14 to the consolidated financial
statements on pages 66 and 67 of The St. Paul's 1999 Annual Report
to Shareholders, which includes additional information regarding
the sale of these operations, including the components of the
respective gain and estimated loss on disposal, is incorporated
herein by reference.
<PAGE>
Third, The St. Paul reached definitive agreement to purchase MMI
Companies, Inc., a provider of insurance products and consulting
services to the healthcare industry, in a transaction expected to
be finalized in the second quarter of 2000. Fourth, The St. Paul
agreed to purchase Pacific Select Insurance Company, which will
increase its earthquake risk underwriting capabilities in
California, in a transaction completed in the first quarter of
2000. Note 2 to the consolidated financial statements on pages 52
and 53 of The St. Paul's 1999 Annual Report to Shareholders
includes additional information about these acquisitions and is
incorporated herein by reference.
Cost Reduction Program. In the third quarter of 1999, The St. Paul
announced a cost reduction program designed to enhance the
company's efficiency in the highly-competitive property-liability
insurance marketplace. The St. Paul recorded a pretax charge to
earnings of $60 million in 1999 related to this program, consisting
of $33 million of occupancy-related expenses, $25 million of
employee-related expenses related to the anticipated elimination of
approximately 700 positions, and $2 million of equipment charges.
Through Dec. 31, 1999, the employment of approximately 480
individuals had been terminated under this plan.
Realignment of Primary Insurance Operations. In the fourth quarter
of 1999, The St. Paul realigned its primary property-liability
insurance operations in order to further streamline the company's
organization and ease agent and broker access to its products and
services. The St. Paul created a Global Specialty Practices
organization, encompassing The St. Paul's Specialty Commercial and
Surety business segments, which has worldwide responsibility for
product development, strategic planning, pricing and risk selection
for The St. Paul's specialty commercial insurance operations.
USF&G Merger Update
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In April 1998, The St. Paul merged with USF&G Corporation (USF&G),
a Baltimore, Maryland-based holding company for property-liability
and life insurance and reinsurance operations. The St. Paul issued
66.5 million of its common shares in exchange for all of the
outstanding common stock of USF&G in a business combination
accounted for as a pooling of interests. The combined entity
retained The St. Paul name, with headquarters in St. Paul,
Minnesota.
In 1999, The St. Paul substantially completed the integration of
USF&G into its operations, achieving significant efficiencies
through the elimination of duplicate functions throughout the
combined organization, including the consolidation of corporate
headquarters' functions and the elimination of approximately 2,200
employee positions. By the end of 1999, The St. Paul had realized
pretax annual expense savings of approximately $260 million (as
measured against the combined 1997 pre-merger expenses of The St.
Paul and USF&G) as a result of the merger and the subsequent
restructuring of its commercial insurance underwriting operations
in late 1998.
The St. Paul recorded a pretax merger-related charge to earnings of
$292 million in 1998, primarily for severance and facilities exit
costs. Note 15 to the consolidated financial statements, on pages
67 through 69 of The St. Paul's 1999 Annual Report to Shareholders,
which includes additional information regarding the charge,
including the components thereof and cash disbursements through
Dec. 31, 1999, is incorporated herein by reference.
The St. Paul also recorded a $215 million pretax provision to
increase USF&G's loss and loss adjustment expense reserves
subsequent to the merger. Note 8 to the consolidated financial
statements included in The St. Paul's 1999 Annual Report to
Shareholders, which includes additional information about the $215
million provision, is incorporated herein by reference.
Business Segments
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The St. Paul's property-liability insurance operations, composed of
five distinct underwriting business segments and an investment
operations segment, accounted for 89%, 91% and 92% of consolidated
revenues from continuing operations in 1999, 1998 and 1997,
respectively. The St. Paul's life insurance segment, Fidelity and
Guaranty Life Insurance Company and subsidiaries (F&G Life),
accounted for 6% of revenues in 1999 and 5% of revenues in 1998 and
1997, with Nuveen accounting for virtually all of the remaining
revenues in each year. Financial information about The St. Paul's
business segments is set forth in Note 18 to the consolidated
financial statements on pages 71 through 73 of The St. Paul's 1999
Annual Report to Shareholders, and is incorporated herein by
reference.
<PAGE>
The following table summarizes the sources of The St. Paul's
consolidated revenues from continuing operations for each of the
last three years. Following the table is a narrative description
of each of The St. Paul's business segments.
Percentage of
Consolidated Revenues
1999 1998 1997
------ ------ ------
Property-liability insurance:
Primary insurance operations
U.S. Underwriting:
Commercial Lines Group 25.7% 29.5% 31.5%
Specialty Commercial 19.4 18.8 17.4
Surety 5.0 4.4 3.5
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Total U.S. Underwriting 50.1 52.7 52.4
International 5.2 4.3 3.4
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Total primary underwriting 55.3 57.0 55.8
Reinsurance 12.1 13.5 14.7
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Total Underwriting 67.4 70.5 70.5
Investment operations:
Net investment income 16.6 16.8 15.9
Realized investment gains 3.6 2.4 4.9
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Total investment operations 20.2 19.2 20.8
Other 1.0 0.8 0.5
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Total property-
liability insurance 88.6 90.5 91.8
Life insurance 6.3 5.1 4.9
Asset management 4.7 4.0 3.2
Parent company, other
operations and eliminations 0.4 0.4 0.1
------ ------ ------
Total 100.0% 100.0% 100.0%
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Narrative Description of Business
Property-Liability Insurance
- ----------------------------
The St. Paul's property-liability insurance underwriting operations
consist of three U.S.-based primary underwriting segments
collectively referred to as U.S. Underwriting, an international
underwriting segment (International) and a reinsurance segment (St.
Paul Re). The St. Paul's U.S. Underwriting operations underwrite
property and liability insurance and provide insurance-related
products and services to commercial and professional customers
throughout the United States. International underwrites most of
The St. Paul's primary property and liability insurance coverages
outside the United States. International also includes The St.
Paul's operations at Lloyd's (formerly Lloyd's of London), and
insurance written for non-U.S. risks of U.S.-based corporate
policyholders and non-U.S.- based policyholders' exposures in the
United States. St. Paul Re underwrites reinsurance for leading
property-liability insurance companies worldwide. The St. Paul's
property-liability operations also include an investment segment
responsible for overseeing the property-liability investment
portfolio.
The primary sources of property-liability revenues are premiums
earned from insurance policies and reinsurance contracts, income
earned from the investment portfolio and gains from sales of
investments. According to the most recent industry statistics
published in "Best's Review" with respect to property-liability
insurers doing business in the United States, The St. Paul's
property-liability underwriting operations ranked 11th on the basis
of 1998 written premiums.
Principal Departments and Products. The "Property-Liability
Underwriting Results by Segment" table included in "Management's
Discussion and Analysis" on page 24 of The St. Paul's 1999 Annual
Report to Shareholders, which summarizes written premiums,
underwriting results and statutory combined ratios for each of its
underwriting segments for the last three years, is incorporated
herein by reference. The following discussion summarizes the
business structure of The St. Paul's property-liability insurance
underwriting operations as it existed on Dec. 31, 1999.
<PAGE>
U.S. Underwriting
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U.S. Underwriting operates through the following business segments:
Commercial Lines Group. The Commercial Lines Group, in general,
underwrites general liability and casualty, property, workers'
compensation, commercial auto, inland marine, umbrella and excess
liability, and package coverages. This segment includes the
following business centers: Middle Market Commercial provides "all
lines" property and casualty insurance and risk management services
for midsize and large commercial enterprises. Tailored coverages
and products are marketed to specific customer groups such as golf
courses, museums, colleges and schools, multipurpose recreational
facilities, manufacturers, wholesalers, processors, service-related
industries (retailers, insurance companies, and hospitality and
entertainment firms) and motor carriers. Insurance coverages are
also offered for nationwide, multiple-policyholder programs
generated through a single agency source. Small Commercial
provides coverages to small businesses, including retailers,
wholesalers, professional offices, manufacturers and contractors,
and offers unique coverages for group accounts, such as franchise
operations, associations and multi-location accounts. Coverages
marketed specifically to small commercial customers include the
Business Insurance Policy (BIP). Construction provides insurance
and related services to a broad range of general contractors,
highway contractors and specialty contractors. The Cat Risk
business center underwrites property coverage for major U.S.
corporations, including policyholders with specialty needs and high
property values, with an emphasis on earthquake and hurricane
catastrophe exposures. This business center also provides personal
property coverages for earthquake exposures in California through
GeoVera Insurance Company.
The St. Paul's participation in insurance pools and associations,
which provide specialized underwriting skills and risk management
services for the classes of business that they write, is also
included in Commercial Lines Group results. These pools and
associations serve to increase the underwriting capacity of
participating companies for insurance policies where the
concentration of risk is so high or the amount so large that a
single company could not prudently accept the entire risk. The St.
Paul's participation in these pools and associations is limited.
Specialty Commercial. The Specialty Commercial segment serves
specific commercial customer groups, generally providing coverage
for damage to the customer's property (fire, inland marine and
auto), liability for bodily injury or damage to the property of
others (general liability, auto liability, umbrella and excess),
workers' compensation insurance, and various professional liability
coverages. Product and services are offered through the following
business centers:
Health Services (formerly Medical Services) underwrites
professional liability, property and general liability insurance
throughout the health care delivery system. Products include
coverages for health care professionals (physicians and surgeons,
dental professionals and nurses); individual health care facilities
(including hospitals, long-term care facilities and other
facilities such as laboratories); and entire systems, such as
hospital networks and managed care systems. Specialized claim and
loss control services are vital components of Health Services'
insurance products and services. The St. Paul's Health Services
business center is the largest medical liability insurer in the
United States, with premium volume accounting for approximately 6%
of the U.S. market based on 1998 premium data published in "Best's
Review." The St. Paul's acquisition of MMI Companies, Inc.,
expected to be completed in 2000, will create, when combined with
its existing operations, a globally integrated provider of
insurance and risk management services for the healthcare industry,
with pro forma combined annual revenues of approximately $1
billion.
Financial and Professional Services provides directors' and
officers' liability and commercial fidelity coverages to public,
private and nonprofit corporations, including financial services
organizations. The St. Paul is endorsed by two major banking
associations in the United States as the recommended insurance
carrier for their members. This business center also provides
professional liability coverages for lawyers, and offers errors and
omissions coverage to other professionals, including insurance
agents, real estate agents and appraisers. Public Sector Services
markets insurance products and services, including professional
liability coverages, to all local governments, Indian nations and
special government districts and authorities, such as water
districts, transit authorities and fire protection districts.
<PAGE>
Technology offers a comprehensive portfolio of specialty products
and services to companies involved in medical technology and
biotechnology, electronics, information technology,
telecommunications and industrial electronics manufacturing.
Excess and Surplus Lines underwrites umbrella and excess liability
coverages, as well as property and liability insurance for high-
risk classes of business and unique, sometimes one-of-a-kind risks
that standard insurance markets generally avoid. Oil and Gas
provides standard and specialty insurance coverages for customers
involved in the exploration and production of oil and gas,
including operators, drillers and oil servicing contractors. St.
Paul Athena is a specialty underwriting facility dedicated to
business generated through Swett & Crawford, a wholesale insurance
brokerage subsidiary of Aon Corporation. Global Marine provides a
variety of property-liability insurance related to ocean and inland
waterways traffic, including cargo and hull property protection.
Specialty Lines provides unsupported umbrellas, policies and self-
insured retention products in the specialty admitted market.
Surety. The Surety segment underwrites surety bonds, which are
agreements under which one party, the surety, guarantees to another
party, the owner or obligee, that a third party, the contractor or
principal, will perform in accordance with contractual obligations.
The Contract Surety business center specializes in providing bid,
performance and payment bonds, domestically and internationally, to
a broad spectrum of clients specializing in general contracting,
highway and bridge construction, asphalt paving, underground and
pipeline construction, manufacturing, civil and heavy engineering,
and mechanical and electrical construction. Bid bonds provide
financial assurance that a bid has been submitted in good faith and
that the contractor intends to enter into the contract at the price
bid and provide the required performance and payment bonds.
Performance bonds protect the obligee from financial loss should
the contractor fail to perform the contract in accordance with the
terms and conditions of the contract documents. Payment bonds
guarantee that the contractor will pay certain subcontractor, labor
and material bills associated with a project. The Commercial
Surety and Fidelity business center offers license and permit
bonds, court bonds, public official bonds and other miscellaneous
bonds.
According to data published by the Surety Association of America,
The St. Paul's domestic Surety operations were the largest in the
United States based on 1998 written premiums, accounting for
approximately 11% of the domestic market. The St. Paul's Surety
segment also includes Afianzadora Insurgentes, the leading surety
operation in Mexico. According to data published by AFIANZA, the
Mexican Surety Commission, Afianzadora Insurgentes accounted for
approximately 40% of the Mexican surety bond market based on
written premium volume for the first nine months of 1999.
International
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The St. Paul's International business segment is responsible for
most of The St. Paul's primary insurance written outside the United
States. International has a presence through insurance companies
licensed in Canada, Australia, and 12 countries in Europe, Africa
and Latin America. It also includes business generated from The
St. Paul's participation in Lloyd's as a provider of capital to
selected underwriting syndicates and as the owner of a managing
agency. International also includes insurance written for non-U.S.
operations of multinational corporations based in the United States
and insurance written to cover exposures in the United States for
non-U.S. companies. This segment predominantly markets specialty
commercial insurance in the international arena, with a particular
emphasis on liability coverages. The International segment offers
a broad range of products and services tailored to meet the unique
needs of both its multinational customers as well as its customers
in each of the domestic markets which it serves.
St. Paul Re
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St. Paul Re underwrites traditional treaty and facultative
reinsurance for property, liability, ocean marine, surety, health
and certain specialty classes of coverages, and also underwrites
"non-traditional" reinsurance, which combines traditional
underwriting risk with financial risk protection. St. Paul Re
underwrites reinsurance for leading property, liability and other
non-life insurance companies worldwide, with clients in North
America, Latin America, the Caribbean, Europe, Australia and the
Asia-Pacific region. Reinsurance is an agreement by which an
insurance company will pay a premium to transfer, or "cede," a
portion of the risk it has underwritten to a reinsurer. A large
portion of reinsurance is effected automatically under general
reinsurance contracts known as treaties. In some instances,
reinsurance is effected by negotiation on individual risks, which
is referred to as facultative reinsurance.
<PAGE>
Through Discover Re, The St. Paul's Reinsurance segment underwrites
primary insurance, reinsurance and provides related services to
self-insured companies and insurance pools, in addition to ceding
to and reinsuring captive insurers, all within the alternative risk
transfer market. Through alternative risk transfer, a company self-
insures, or insures through a captive insurer, the portion of its
own losses which are predictable and purchases insurance for the
less predictable, high-severity losses that could have a major
financial impact on the company.
According to the most recent data published by the Reinsurance
Association of America, St. Paul Re's written premium volume
through the first nine months of 1999 ranked it as the sixth-
largest reinsurer in the United States. According to data
published in "Business Insurance," St. Paul Re was ranked as the
15th-largest property-liability reinsurer in the world, based on
1998 written premiums.
Principal Markets and Methods of Distribution
- ---------------------------------------------
The St. Paul's U.S. Underwriting operations are licensed to
transact business in all 50 states, the District of Columbia,
Puerto Rico, Guam and the Virgin Islands. At least five percent of
U.S. Underwriting's 1999 property-liability written premiums were
produced in each of Illinois, California, Florida and New York.
U.S. Underwriting's business is produced primarily through
approximately 6,900 independent insurance agencies and insurance
brokers. The needs of agents, brokers and policyholders are
addressed through approximately 130 offices located throughout
the United States.
St. Paul Re produces reinsurance business from its New York
headquarters, as well as from offices in London, Atlanta, Brussels,
Chicago, Hong Kong, Miami, Morristown NJ, Munich, San Francisco,
Singapore, Sydney and Tokyo. It underwrites business through
brokers and, for certain types of reinsurance and in certain
markets, on a direct basis. Discover Re underwrites alternative
risk transfer business from its Farmington, CT headquarters, from
regional U.S. offices in Atlanta, Pittsburgh, Dallas, Minneapolis
and San Francisco, and from a correspondent office in London.
The St. Paul's International operations are headquartered in London
and underwrite insurance through domestic operations in 13 markets
outside the United States (Argentina, Australia, Botswana, Canada,
France, Germany, Ireland, Lesotho, Mexico, South Africa, Spain, The
Netherlands and the United Kingdom). These operations distribute
their products principally through independent brokers. Through
its owned operations and partner companies, International's global
network conducts business in more than 70 countries worldwide.
Through its presence at Lloyd's, International also has access to
business markets in virtually every country of the world for its
specialty products including aviation, kidnap and ransom, malicious
product tampering, creditor/payment protection and personal
accident. The Lloyd's managing agency, operating under the name
St. Paul Syndicate Management Ltd., underwrites business for eight
syndicates, collectively representing approximately 4% of Lloyd's
total capacity.
<PAGE>
Reserves for Losses and Loss Adjustment Expenses
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General Information. When claims are made by or against
policyholders, any amounts that The St. Paul's underwriting
operations pay or expect to pay to the claimant are referred to as
losses. The costs of investigating, resolving and processing these
claims are referred to as loss adjustment expenses (LAE). The St.
Paul establishes reserves that reflect the estimated unpaid total
cost of these two items. The reserves for unpaid losses and LAE at
Dec. 31, 1999 cover claims that were incurred not only in 1999 but
also in prior years. They include estimates of the total cost of
claims that have already been reported but not yet settled ("case"
reserves), and those that have been incurred but not yet reported
("IBNR" reserves). Loss reserves are reduced for estimates of
salvage and subrogation.
Loss reserves for certain workers' compensation business and
certain assumed reinsurance contracts are discounted to present
value. Additional information about these discounted liabilities
is set forth in Note 1 to the consolidated financial statements on
pages 49 through 52 of The St. Paul's 1999 Annual Report to
Shareholders, and is incorporated herein by reference. During
1999, $5.0 million of discount was amortized and $2.7 million of
additional discount was accrued.
Management continually reviews loss reserves, using a variety of
statistical and actuarial techniques to analyze current claim
costs, frequency and severity data, and prevailing economic, social
and legal factors. Management believes that the reserves currently
established for losses and LAE are adequate to cover their eventual
costs. However, final claim payments may differ from these
reserves, particularly when these payments may not take place for
several years. Reserves established in prior years are adjusted as
loss experience develops and new information becomes available.
Adjustments to previously estimated reserves are reflected in
results in the year in which they are made.
Ten-year Development. The table on page 10 presents a development
of net loss and LAE reserve liabilities and payments for the years
1989 through 1999. The top line on the table shows the estimated
liability for unpaid losses and LAE, net of reinsurance
recoverables, recorded at the balance sheet date for each of the
years indicated.
The table excludes the reserves and activity of Economy Fire and
Casualty Company and its subsidiaries (Economy), which were
included in the sale of The St. Paul's standard personal insurance
operations to Metropolitan. The table does, however, include
reserves and activity for the non-Economy standard personal
insurance business that was sold to Metropolitan, since The St.
Paul remains liable for claims on non-Economy standard personal
insurance policies that result from losses occurring prior to Sept.
30, 1999 (the closing date of the sale). Also included in the
table are the reserves and activity for The St. Paul's nonstandard
auto business, which The St. Paul has agreed to sell to Prudential
in a transaction expected to be completed in the second quarter of
2000. Notes 8 and 14 to the consolidated financial statements on
pages 56 and 57, and pages 66 and 67, respectively, of The St.
Paul's 1999 Annual Report to Shareholders, which include additional
information regarding the sale of these operations and the related
reserves, are incorporated herein by reference.
In 1997, The St. Paul changed the method by which it assigns loss
activity to a particular year for assumed reinsurance written by
its U.K.-based reinsurance operation. Prior to 1997, that loss
activity was assigned to the year in which the underlying
reinsurance contract was written. In 1997, The St. Paul's analysis
indicated that an excess amount of loss activity was being assigned
to prior years because of this practice. As a result, The St. Paul
implemented an improved procedure in 1997 that more accurately
assigns loss activity for this business to the year in which it
occurred. This change had the impact of increasing favorable
development on previously established reserves by approximately
$110 million in 1997. There was no net impact on total incurred
losses, however, because there was a corresponding increase in the
provision for current year loss activity in 1997. Development data
for individual years prior to 1997 in this table were not restated
to reflect this new procedure because reliable data to do so was
not available.
The upper portion of the table, which shows the re-estimated
amounts relating to the previously recorded liabilities, is based
upon experience as of the end of each succeeding year. These
estimates are either increased or decreased as further information
becomes known about individual claims and as changes in the trend
of claim frequency and severity become apparent.
<PAGE>
The "Cumulative redundancy (deficiency)" line on the table for any
given year represents the aggregate change in the estimates for all
years subsequent to the year the reserves were initially
established. For example, the 1991 reserve of $12,848 million
developed to $12,479 million, or a $369 million redundancy, by the
end of 1993. By the end of 1999, the 1991 reserve had developed a
redundancy of $1,041 million. The changes in the estimate of 1991
loss reserves were reflected in operations during the past eight
years.
In 1993, The St. Paul adopted the provisions of SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts." This statement required, among other
things, that reinsurance recoverables on unpaid losses and LAE be
shown as an asset, instead of the prior practice of netting this
amount against insurance reserves for balance sheet reporting
purposes.
The middle portion of the table, which includes data for only those
periods impacted since the adoption of SFAS No. 113 (the years 1992
through 1999), represents a reconciliation between the net reserve
liability as shown on the top line of the table and the gross
reserve liability as shown on The St. Paul's balance sheet. This
portion of the table also presents the gross re-estimated reserve
liability as of the end of the latest re-estimation period (Dec. 31,
1999) and the related re-estimated reinsurance recoverable.
The St. Paul did not restate data for years prior to 1992 in this
table for presentation on a gross basis due to the impracticality
of determining such gross data on a reliable basis for its foreign
underwriting operations.
The lower portion of the table presents the cumulative amounts paid
with respect to the previously recorded liability as of the end of
each succeeding year. For example, as of Dec. 31, 1999, $9,066
million of the currently estimated $11,807 million of losses and
LAE that have been incurred for the years up to and including 1991
have been paid. Thus, as of Dec. 31, 1999, it is estimated that
$2,741 million of incurred losses and LAE have yet to be paid for
the years up to and including 1991.
Caution should be exercised in evaluating the information shown on
this table. It should be noted that each amount includes the
effects of all changes in amounts for prior periods. For example,
the portion of the development shown for year-end 1995 reserves
that relates to 1989 losses is included in the cumulative
redundancy (deficiency) for the years 1989 through 1995.
In addition, the table presents calendar year data. It does not
present accident or policy year development data, which some
readers may be more accustomed to analyzing. The social, economic
and legal conditions and other trends which have had an impact on
the changes in the estimated liability in the past are not
necessarily indicative of the future. Accordingly, readers are
cautioned against extrapolating any conclusions about future
results from the information presented in this table.
Note 8 to the consolidated financial statements, on pages 56 and 57
of The St. Paul's 1999 Annual Report to Shareholders, includes a
reconciliation of beginning and ending loss reserve liabilities for
each of the last three years and is incorporated herein by
reference. Additional information about The St. Paul's reserves is
contained in the "Loss and Loss Adjustment Expense Reserves" and
"Environmental and Asbestos Claims" sections of "Management's
Discussion and Analysis" on pages 33 and 34 of The St. Paul's 1999
Annual Report to Shareholders, which are incorporated herein by
reference.
<PAGE>
Analysis of Loss and Loss Adjustment Expense (LAE) Development
(In millions)
<TABLE>
<CAPTION>
Year ended December 31 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for
unpaid losses and LAE $11,343 11,881 12,848 13,211 12,990 13,020 13,489 14,718 14,802 14,926 14,161
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Liability re-estimated
as of:
One year later 11,305 12,228 12,684 12,911 12,621 12,688 13,019 13,958 14,566 14,616
Two years later 11,517 12,130 12,479 12,589 12,247 12,250 12,314 13,733 14,360
Three years later 11,480 12,058 12,280 12,384 11,949 11,792 12,165 13,632
Four years later 11,518 11,930 12,222 12,144 11,587 11,644 12,071
Five years later 11,503 11,918 12,065 11,915 11,474 11,490
Six years later 11,544 11,850 11,944 11,818 11,343
Seven years later 11,538 11,869 11,899 11,729
Eight years later 11,646 11,844 11,807
Nine years later 11,642 11,821
Ten years later 11,669
Cumulative redundancy
(deficiency) $(326) 60 1,041 1,482 1,647 1,530 1,418 1,086 442 310
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net liability for
unpaid losses and LAE 13,211 12,990 13,020 13,489 14,718 14,802 14,926 14,161
Reinsurance recoverable on
unpaid losses 3,903 2,581 2,533 2,824 2,864 3,051 3,260 3,773
------ ------ ------ ------ ------ ------ ------ ------
Gross liability 17,114 15,571 15,553 16,313 17,582 17,853 18,186 17,934
====== ====== ====== ====== ====== ====== ====== ======
Gross re-estimated liability:
One year later 16,467 15,177 15,642 15,869 17,054 17,757 17,833
Two years later 16,143 15,201 15,280 15,130 16,816 17,429
Three years later 15,998 14,988 14,689 15,009 16,511
Four years later 15,825 14,520 14,698 14,618
Five years later 15,536 14,550 14,260
Six years later 15,565 14,174
Seven years later 15,372
Gross cumulative
redundancy 1,742 1,397 1,293 1,695 1,071 424 353
====== ====== ====== ====== ====== ====== ======
Cumulative amount of net
liability paid through:
One year later $ 3,041 3,105 3,027 3,017 2,735 2,654 2,906 3,353 3,538 3,700
Two years later 5,004 5,107 5,027 4,970 4,523 4,510 4,848 5,682 5,955
Three years later 6,390 6,433 6,380 6,263 5,797 5,838 6,333 7,284
Four years later 7,271 7,371 7,276 7,173 6,712 6,874 7,265
Five years later 7,931 8,006 7,917 7,838 7,443 7,557
Six years later 8,388 8,470 8,424 8,329 7,960
Seven years later 8,745 8,875 8,812 8,650
Eight years later 9,077 9,196 9,066
Nine years later 9,337 9,405
Ten years later 9,514
Cumulative amount of
gross liability paid
through:
One year later 4,072 3,328 3,255 3,422 3,719 3,962 4,184
Two years later 6,585 5,506 5,509 5,407 6,335 6,635
Three years later 8,178 7,072 6,864 7,098 8,156
Four years later 9,304 8,008 8,057 8,164
Five years later 10,009 8,851 8,852
Six years later 10,597 9,480
Seven years later 11,143
</TABLE>
<PAGE>
Ceded Reinsurance. Through ceded reinsurance, other insurers and
reinsurers agree to share certain risks that The St. Paul's
subsidiaries have underwritten. The purpose of reinsurance is to
limit a ceding insurer's maximum net loss arising from large risks
or catastrophes. Reinsurance also serves to increase the direct
writing capacity of the ceding insurer. Amounts recoverable on
ceded losses are recorded as an asset.
With respect to ceded reinsurance, The St. Paul strives to protect
its assets from large individual risk and occurrence losses, and
provide its respective underwriting operations with the capacity
necessary to write large limits on accounts.
The collectibility of reinsurance is subject to the solvency of
reinsurers. The St. Paul's Reinsurance Security Committee, which
has established financial standards to determine qualified,
financially secure reinsurers, guides the placement of ceded
reinsurance. Uncollectible reinsurance recoverables have not had a
material adverse impact on The St. Paul's results of operations,
liquidity or financial position.
In 1999, The St. Paul ceded losses and loss adjustment expenses
totaling $534 million under two separate aggregate excess-of-loss
reinsurance treaties. Written and earned premiums totaling $273
million were also ceded under these treaties, resulting in a $261
million benefit included in The St. Paul's 1999 pretax income.
Note 16 to the consolidated financial statements on page 70 of The
St. Paul's 1999 Annual Report to Shareholders, which provides a
schedule of ceded reinsurance and additional information about the
two 1999 reinsurance treaties, is incorporated herein by reference.
Property - Liability Investment Operations
- ------------------------------------------
Objectives. The St. Paul's board of directors approves the overall
aggregate investment plan for the companies within The St. Paul
group. Each subsidiary adopts its own specific investment policy
tailored to comply with domestic laws and regulations and the
overall corporate investment plan. The primary objectives of those
plans are as follows:
1) to maintain a widely diversified fixed maturities portfolio
structured to maximize investment income while minimizing credit
risk through investments in high-quality instruments; and
2) to provide for long-term growth in the market value of the
investment portfolio and enhance shareholder value through
investments in certain other investment classes, such as equity
securities, venture capital and real estate.
The St. Paul's property-liability investment operations have had
limited involvement with derivative financial instruments,
primarily for purposes of hedging against fluctuations in foreign
currency exchange rates and interest rates. The St. Paul's
investment operations have not participated in the derivatives
market for trading or speculative purposes.
Fixed Maturities. Fixed maturities constituted 75% (at cost) of
The St. Paul's property-liability insurance operations' investment
portfolio at Dec. 31, 1999. The portfolio is primarily composed of
high-quality, intermediate-term taxable U.S. government agency and
corporate bonds and tax-exempt U.S. municipal bonds. The following
table presents information about the fixed maturities portfolio for
the last three years (dollars in millions).
Weighted Weighted
Amortized Estimated Pretax Net Average Average
Cost at Fair Value Investment Pre-tax After-tax
Year Year-end at Year-end Income Yield Yield
- ---- ------ ----------- -------- ------- -------
1999 $15,515 $15,479 $1,171 6.8% 5.1%
1998 16,198 17,177 1,204 6.8% 5.1%
1997 16,548 17,376 1,236 7.1% 5.2%
The St. Paul determines the mix of its investments in taxable and
tax-exempt securities based on its current and projected tax
position and the relationship between taxable and tax-exempt
investment yields. Taxable, intermediate-term, investment-grade
securities accounted for the majority of new bond purchases in
1999. The fixed maturities
<PAGE>
portfolio is carried on The St. Paul's balance sheet at estimated
fair value, with unrealized appreciation and depreciation (net of
taxes) recorded in common shareholders' equity. At Dec. 31, 1999,
pretax unrealized depreciation totaled $36 million, compared with
appreciation of $979 million at the end of 1998. The decline in
unrealized appreciation was primarily the result of an increase in
market interest rates during 1999.
The fixed maturities portfolio is managed conservatively to provide
reasonable returns while limiting exposure to risks. Approximately
95% of the fixed maturities portfolio is rated at investment grade
levels (BBB or better). The remaining 5% of the portfolio is split
between nonrated and non-investment grade (high-yield) securities.
The St. Paul believes the nonrated securities would be considered
investment-grade in quality if rated.
Equities. Equity securities comprised 5% of the property-liability
operations' investments (at cost) at Dec. 31, 1999, and consist of
a diversified portfolio of common stocks, which are held with the
primary objective of achieving capital appreciation. Sales of
equities generated $118 million of pretax realized investment gains
in 1999, and dividend income totaled $16 million. The portfolio's
carrying value at year-end included $516 million of pretax
unrealized appreciation. The St Paul's domestic equity portfolio
produced a total return of 32.6% in 1999.
Real Estate and Mortgage Loans. The St. Paul's property-liability
operations' real estate holdings consist of a diversified portfolio
of commercial office and warehouse properties that The St. Paul
owns directly or has partial interest in through joint ventures.
The properties are geographically distributed throughout the United
States and had an occupancy rate of 94% at Dec. 31, 1999. The St.
Paul also has a portfolio of real estate mortgage investments
acquired in the merger with USF&G. The real estate and mortgage
loan portfolio produced $87 million of pretax investment income in
1999 and generated $18 million of pretax realized gains.
Venture Capital. Securities of small- to medium-sized companies
spanning a variety of industries comprise The St. Paul's venture
capital holdings, which accounted for 2% of property-liability
investments (at cost) at Dec. 31, 1999. These investments are in
the form of limited partnership interests or direct equity
investments. Venture capital investments generated pretax realized
investment gains of $158 million in 1999. The carrying value of
venture capital investments at Dec. 31, 1999 included $468 million
of pretax unrealized appreciation.
Securities Lending Collateral. This investment class, which
comprised 6% of property-liability investments at Dec. 31,
1999, consists of collateral held on certain fixed-maturity
securities loaned to other institutions through a lending agent for
short periods of time. The collateral is maintained at 102%,
marked to market daily, of the fair value of the loaned securities.
The St. Paul retains full ownership of the loaned securities and is
indemnified by the lending agent in the event a borrower becomes
insolvent or fails to return the securities.
Short-Term and Other Investments. The St. Paul's portfolio also
includes short-term securities and other miscellaneous investments,
which in the aggregate comprised 6% of property-liability
investments at Dec. 31, 1999.
Notes 1, 4, 5 and 7 to the consolidated financial statements, which
are included in The St. Paul's 1999 Annual Report to Shareholders,
provide additional information about The St. Paul's investment
portfolio and are incorporated herein by reference. The
"Investment Operations" and "Exposures to Market Risk" sections of
"Management's Discussion and Analysis" in said Annual Report are
also incorporated herein by reference.
Life Insurance
- --------------
F&G Life markets many forms of annuity and life insurance products,
including single premium and flexible premium deferred annuities
(such as equity-indexed annuities), tax sheltered annuities, single
premium immediate annuities, structured settlement annuities and
universal life, whole life and term life insurance.
Most of F&G Life's annuities and life insurance products are sold
primarily through independent agents and insurance brokers.
Structured settlement annuities are sold predominantly to property-
liability companies (primarily The St. Paul's U.S. Underwriting
operations) in settlement of certain of their insurance claims.
<PAGE>
Note 8 to the consolidated financial statements, on pages 56 and 57
of The St. Paul's 1999 Annual Report to Shareholders, provides a
table of F&G Life's future policy benefit reserves by type of
product and is incorporated herein by reference.
Life Insurance Investment Operations. F&G Life's investment
portfolio totaled $4.3 billion at Dec. 31, 1999, consisting of
investment grade government and corporate securities (64% of the
total); asset-backed and mortgage-backed securities (18%); high-
yield investments (7%); and real estate mortgage loans and other
investments (11%). F&G Life uses derivative instruments in the form
of over-the-counter indexed call options for the purpose of hedging
interest credited on its equity-indexed annuity products. The cost
of derivatives amounted to 1% of invested assets at Dec. 31, 1999.
Note 7 on page 56 of The St. Paul's 1999 Annual Report to
Shareholders, which includes additional information about F&G
Life's involvement with derivative financial instruments, is
incorporated herein by reference.
Asset Management
- ----------------
The John Nuveen Company (Nuveen) is The St. Paul's asset management
subsidiary. The St. Paul and its largest property-liability
insurance subsidiary, St. Paul Fire and Marine Insurance Company
(Fire and Marine) hold a combined 79% interest in Nuveen.
Nuveen's principal businesses are asset management and related
research, as well as the development, marketing and distribution of
investment products and services. Nuveen distributes its
investment products, including mutual funds, exchange-traded funds
(closed-end funds), defined portfolio products (unit trusts), and
individually managed accounts through registered representatives
associated with unaffiliated firms, including broker-dealers,
commercial banks, affiliates of insurance providers, financial
planners, accountants, consultants, and investment advisers. In
1999, Nuveen sold its investment banking business to U.S. Bancorp
Piper Jaffray, enabling Nuveen to focus on its asset management
business.
Nuveen's primary business activities generate two principal sources
of revenue: (1) ongoing advisory fees earned on assets under
management, including mutual funds, exchange-traded funds, and
individually managed accounts; and (2) transaction-based revenue
earned upon the distribution of mutual fund, exchange-traded fund
and defined portfolio products.
Nuveen's operations are organized around six subsidiaries: John
Nuveen & Co. Incorporated (Nuveen & Co.), a registered broker and
dealer in securities under the Securities Exchange Act of 1934 and
five investment advisory subsidiaries registered under the
Investment Advisers Act of 1940. The five investment advisory
subsidiaries are Nuveen Advisory Corp. (NAC), Nuveen Institutional
Advisory Corp. (NIAC), Nuveen Asset Management Inc. (NAM),
Rittenhouse Financial Services, Inc. (Rittenhouse) and Nuveen
Senior Loan Asset Management, Inc. (NSLAM). Nuveen & Co. provides
investment product distribution and related services for Nuveen's
managed funds and defined portfolios. NAC, NIAC and NSLAM provide
investment management services for and administer the business
affairs of the Nuveen managed funds. Rittenhouse and NAM provide
investment management services to individually managed accounts,
and Rittenhouse also acts as sub-adviser and portfolio manager for
a mutual fund managed by NIAC.
At Dec. 31, 1999, Nuveen's assets under management totaled $59.8
billion, consisting of $26.8 billion of exchange-traded funds,
$20.9 billion of managed accounts, and $12.1 billion of mutual
funds. Municipal securities accounted for 66% of the underlying
managed assets.
In 1999, Nuveen repurchased 914,100 of its outstanding common
shares for a total cost of $36 million. In 1998, Nuveen
repurchased 732,700 of its outstanding common shares for a total
cost of $27 million. The repurchases in both years were solely
from minority shareholders, which served to increase The St. Paul's
ownership percentage from 77% at Dec. 31, 1997 to 79% at Dec. 31,
1999.
<PAGE>
Competition and Regulation
- --------------------------
Property-Liability Insurance. The St. Paul's domestic and
international underwriting subsidiaries compete with a large number
of other insurers and reinsurers. In addition, many large
commercial customers self-insure their risks or utilize large
deductibles on purchased insurance. The St. Paul's subsidiaries
compete principally by attempting to offer a combination of
superior products, underwriting expertise and services at a
competitive, yet profitable, price. The combination of products,
services, pricing and other methods of competition varies by line
of insurance and by coverage within each line of insurance.
The St. Paul and its underwriting subsidiaries are subject to
regulation by certain states as an insurance holding company
system. Such regulation generally provides that transactions
between companies within the holding company system must be fair
and equitable. Transfers of assets among such affiliated
companies, certain dividend payments from underwriting subsidiaries
and certain material transactions between companies within the
system may be subject to prior notice to, or prior approval by,
state regulatory authorities. During 1999, The St. Paul received
$294 million of cash dividends from its U.S. Underwriting
operations. In 2000, up to $484 million in cash dividends can be
paid by the U.S. Underwriting operations to The St. Paul without
regulatory approval. In addition, any change of control (generally
presumed by the holding company laws to occur with the acquisition
of 10% or more of an insurance holding company's voting securities)
of The St. Paul and its underwriting subsidiaries is subject to
prior approval.
The underwriting subsidiaries are subject to licensing and
supervision by government regulatory agencies in the jurisdictions
in which they do business. The nature and extent of such
regulation vary but generally have their source in statutes which
delegate regulatory, supervisory and administrative powers to
insurance regulators, which in the U.S. are state authorities.
Such regulation, supervision and administration of the underwriting
subsidiaries may relate, among other things, to the standards of
solvency which must be met and maintained; the licensing of
insurers and their agents; the nature of and limitations on
investments; restrictions on the size of risk which may be insured
under a single policy; deposits of securities for the benefit of
policyholders; regulation of policy forms and premium rates;
periodic examination of the affairs of insurance companies; annual
and other reports required to be filed on the financial condition
of insurers or for other purposes; requirements regarding reserves
for unearned premiums, losses and other matters; the nature of and
limitations on dividends to policyholders and shareholders; the
nature and extent of required participation in insurance guaranty
funds; and the involuntary assumption of hard-to-place or high-risk
insurance business, primarily in workers' compensation insurance
lines.
Loss ratio trends in property-liability insurance underwriting
experience may be improved by, among other things, changing the
kinds of coverages provided by policies, providing loss prevention
and risk management services, increasing premium rates or by a
combination of these. The ability of The St. Paul's insurance
underwriting subsidiaries to meet emerging adverse underwriting
trends may be delayed, from time to time, by the effects of laws
which require prior approval by insurance regulatory authorities of
changes in policy forms and premium rates. The St. Paul's U.S.
Underwriting operations do business in all 50 states and the
District of Columbia, Puerto Rico, Guam and the U.S. Virgin
Islands. Many of these jurisdictions require prior approval of
most or all premium rates.
The St. Paul's insurance underwriting business in the United
Kingdom is regulated by the Financial Services Authority (FSA).
The FSA's principal objectives are to ensure that insurance
companies are responsibly managed, that they have adequate funds to
meet liabilities to policyholders and that they maintain required
levels of solvency. In Canada, the conduct of insurance business
is regulated under provisions of the Insurance Companies Act of
1992, which requires insurance companies to maintain certain levels
of capital depending on the type and amount of insurance policies
in force. The Lloyd's operation is currently regulated by the
Council of Lloyd's, a self-regulatory organization, but will in due
course be regulated by the FSA. The St. Paul is also subject to
regulations in the other countries and jurisdictions in which it
underwrites insurance business.
Life Insurance. The St. Paul's life insurance subsidiaries operate
in a competitive environment, with approximately 1,400 companies
nationwide in the industry including stock and mutual companies.
F&G Life ranked 168th based on 1998 statutory net premiums written,
142nd based on 1998 statutory assets, and 170th based on 1998
statutory capital and surplus. In the life insurance industry,
interest crediting rates, underwriting philosophy, policy features,
financial
<PAGE>
stability and service quality are important competitive factors.
F&G Life's products compete not only with those offered by other
life insurance companies, but also with other income accumulation-
oriented products offered by other financial services companies.
The life insurance industry has experienced considerable
competitive pressure in recent periods as a result of fluctuating
interest rates.
F&G Life is subject to licensing and supervision by government
regulatory agencies in the jurisdictions in which it does business.
The nature and extent of regulation vary but generally have their
source in statutes which delegate regulatory, supervisory and
administrative powers to state insurance commissioners. Such
regulation and supervision of F&G Life may relate, among other
things, to the standards of solvency which must be met and
maintained; the licensing of insurers and agents; the nature of and
limitations on investments; deposits of securities for the benefit
of policyholders; regulation of policy forms; periodic examination
of the affairs of the company; annual and other reports required to
be filed; requirements regarding reserves for policyholder
benefits; fixing maximum interest rates on life insurance policy
loans and minimum rates for accumulation of surrender values; the
nature of and limitations on dividends to policyholders and
shareholders; and the nature and extent of required participation
in insurance guaranty funds.
Asset Management. Nuveen is subject to substantial competition in
all aspects of its business. Investment products are sold to the
public by broker-dealers, banks, insurance companies and others.
Nuveen competes with these other providers of products primarily on
the basis of the range of products offered, the investment
performance of such products, quality of service, fees charged, the
level and type of broker compensation, the manner in which such
products are marketed and distributed, and the services provided to
investors.
Nuveen is a publicly-traded company registered under the Securities
Exchange Act of 1934 and listed on the New York Stock Exchange.
One of its subsidiaries, Nuveen & Co., is a broker and dealer
registered under the Securities Exchange Act of 1934, and is
subject to regulation by the Securities and Exchange Commission,
the National Association of Securities Dealers, Inc. and other
federal and state agencies and self-regulatory organizations. It
is also subject to net capital requirements that restrict its
ability to pay dividends. Nuveen's other five subsidiaries are
investment advisers registered under the Investment Advisers Act of
1940. As such, they are subject to regulation by the Securities
and Exchange Commission.
Year 2000 Readiness Disclosure
- ------------------------------
The St. Paul experienced no major disruptions in its information
technology systems at the turn of the century. The "Year 2000
Readiness Disclosure" section of "Management's Discussion and
Analysis" on page 41 of The St. Paul's 1999 Annual Report to
Shareholders is incorporated herein by reference.
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; expense savings resulting from the
USF&G merger and the restructuring actions announced in 1998 and
1999; expected closing dates for acquisitions and dispositions; and
Year 2000 issues and The St. Paul's efforts to address them.
In light of the risks and uncertainties inherent in future
projections, many of which are beyond The St. Paul's control,
actual results could differ materially from those in forward-
looking statements. These statements should not be regarded as a
representation that anticipated events will occur or that expected
objectives will be achieved. Risks and uncertainties include, but
are not limited to, the following: general economic conditions
including changes in interest rates and the performance of
financial markets; changes in domestic and foreign laws,
regulations and taxes; changes in the demand for, pricing of, or
supply of reinsurance or insurance; catastrophic events of
unanticipated frequency or severity; loss of significant customers;
judicial decisions and rulings; 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
<PAGE>
operations to Prudential; the pace and effectiveness of our
acquisition of MMI Companies, Inc.; and various other matters,
including the effects of the merger with USF&G. Actual results and
experience relating to Year 2000 issues could differ materially
from anticipated results or other expectations as a result of a
variety of risks and uncertainties, including unanticipated
judicial interpretations of the scope of the insurance or
reinsurance coverage provided by The St. Paul's policies. The St.
Paul undertakes no obligation to release publicly the results of
any future revisions it may make to forward-looking statements to
reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
Item 2. Properties.
- ------ ----------
Fire and Marine owns The St. Paul's corporate headquarters
buildings, located at 385 Washington Street and 130 West Sixth
Street, St. Paul, MN. These buildings are adjacent to one another
and consist of approximately 1.1 million square feet of gross floor
space. Fire and Marine also owns property in Woodbury, MN where
its Administrative Services Building and off-site computer
processing operations are located. The St. Paul also owns the
former USF&G headquarters campus known as Mount Washington Center,
located in Baltimore, MD. The campus currently houses offices for
certain executives of The St. Paul, as well as offices for certain
underwriting, legal and claim personnel. A training and
development center also resides on the Mount Washington campus.
The St. Paul has leased a substantial portion of one of the
buildings on the campus to an outside party.
St. Paul International Insurance Company Ltd. owns a building in
London, England, which houses a portion of its operations. The St.
Paul retained ownership of another building in London subsequent to
the sale of Minet to Aon in 1997, which is leased to an outside
party.
Fire and Marine and its subsidiary, St. Paul Properties, Inc., own
a portfolio of income-producing properties in various locations
across the United States that they have purchased for investment.
The St. Paul's operating subsidiaries rent or lease office space in
most cities in which they operate.
Management considers the currently owned and leased office
facilities of The St. Paul and its subsidiaries adequate for the
current and anticipated future level of operations.
Item 3. Legal Proceedings.
- ------ -----------------
The information set forth in the "Legal Matters" section of Note 13
to the consolidated financial statements, and the "Environmental
and Asbestos Claims" section of "Management's Discussion and
Analysis," which are included in The St. Paul's 1999 Annual Report
to Shareholders on pages 65 and 34, respectively, are incorporated
herein by reference.
In 1990, at the direction of the UK Department of Trade and
Industry (DTI), five insurance underwriting subsidiaries of London
United Investments PLC (LUI) suspended underwriting new insurance
business. At the same time, four of those subsidiaries, being
insolvent, suspended payment of claims and have since been placed
in provisional liquidation. The fifth subsidiary, Walbrook
Insurance Company, continued paying claims until May of 1992 but
has now also been placed in provisional insolvent liquidation.
Weavers Underwriting Agency (Weavers), an LUI subsidiary, managed
these insurers. Minet, a former insurance brokerage subsidiary of
The St. Paul, had brokered business to and from Weavers for many
years. From 1973 through 1980, The St. Paul's UK-based
underwriting operations, now called St. Paul International
Insurance Company Ltd. (SPI), had accepted business from Weavers.
A portion of that business was ceded by SPI to reinsurers. Certain
of those reinsurers have challenged the validity of certain
reinsurance contracts relating to the Weavers pool, of which SPI
was a member, in an attempt to avoid liability under those
contracts. SPI and other members of the Weavers pool are seeking
enforcement of the reinsurance contracts. Minet may also become
the subject of legal proceedings arising from its role as one of
the major brokers for Weavers. When The St. Paul sold Minet in May
1997, it agreed to indemnify the purchaser for most of Minet's
preclosing liabilities, including liabilities relating to the
Weavers matter. Any proceedings relating to the Weavers matter will
be vigorously contested by The St. Paul and it recognizes that the
final outcome of these proceedings, if adverse to The St. Paul, may
materially impact the results of operations in the period in which
that outcome occurs, but believes it will not have a materially
adverse effect on its liquidity or overall financial position.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
No matter was submitted to a vote of security holders during the
quarter ended Dec. 31, 1999.
Executive Officers Of The Registrant
- ------------------------------------
All of the following persons are regarded as executive officers of
The St. Paul Companies, Inc. because of their responsibilities and
duties as elected officers of The St. Paul, Fire and Marine, St.
Paul International Underwriting or St. Paul Re. There are no
family relationships between any of The St. Paul's executive
officers and directors, and there are no arrangements or
understandings between any of these officers and any other person
pursuant to which the officer was selected as an officer. The
officers listed in the chart below, except Thomas A. Bradley, James
E. Gustafson, Robert J. Lamendola, Stephen W. Lilienthal, Paul J.
Liska, John A. MacColl and David R. Nachbar, have held positions
with The St. Paul or one or more of its subsidiaries for more than
five years, and have been employees of The St. Paul or a subsidiary
for more than five years.
Messrs. Thomas A. Bradley, Stephen W. Lilienthal, John A. MacColl
and Robert J. Lamendola held positions and were employees of USF&G
Corporation or one of its subsidiaries for five or more years prior
to its merger with The St. Paul in April of 1998. James E.
Gustafson joined the company on Jan. 30, 1999. He had been an
employee of General Re Corporation since 1969 where he held various
executive positions until being named President and Chief Operating
Officer of General Re Corporation in 1995. Paul J. Liska joined
The St. Paul in January of 1997. For three years prior to that
date, Mr. Liska held various management positions with Specialty
Foods Corporation, including the position of president and chief
executive officer from January 1996 to January 1997.
David R. Nachbar joined The St. Paul in August 1998. For two years
prior to that date, Mr. Nachbar was employed as vice president,
human resources and chief of staff-Asia for Citibank. From 1995 to
1996 he was the area human resources director for Frito-Lay, a
PepsiCo unit. From 1989 through 1995, Mr. Nachbar was employed in
various capacities in the human resources area by the Pizza Hut
division of PepsiCo.
Positions Presently Term of Office and
Name Age Held Period of Service
- ------------- --- ------------------- ------------------
Douglas W. 63 Chairman and Chief Serving at the
Leatherdale Executive Officer pleasure of the
(The St. Paul Board from 5-90
Companies, Inc.)
James E. Gustafson 53 President and Chief Serving at the
Operating Officer pleasure of the
(The St. Paul Board from 1-99
Companies, Inc.)
Paul J. Liska 44 Executive Vice Serving at the
President and Chief pleasure of the
Financial Officer Board from 1-97
(The St. Paul
Companies, Inc.)
James F. Duffy 56 Chairman, President Serving at the
and Chief Executive pleasure of the
Officer (St. Paul Board from 9-93
Re)
John A. MacColl 51 Executive Vice Serving at the
President and pleasure of the
General Counsel Board from 5-99
(The St. Paul
Companies, Inc.)
<PAGE>
Positions Presently Term of Office and
Name Age Held Period of Service
- -------------- --- ------------------- ------------------
Mark L. Pabst 53 President and Chief Serving at the
Operating Officer pleasure of the
(St. Paul Board from 2-95
International)
Michael J. Conroy 58 Executive Vice Serving at the
President and Chief pleasure of the
Administrative Board from 8-95
Officer (Fire and
Marine )
Stephen W. 50 Executive Vice Serving at the
Lilienthal President (Fire and pleasure of the
Marine) Board from 4-98
Robert J. 55 President - Surety Serving at the
Lamendola and pleasure of the
Senior Vice Board from 10-99
President - Global
Specialty Practices
(Fire and Marine)
T. Michael Miller 41 Senior Vice Serving at the
President - Global pleasure of the
Specialty Practices Board from 10-99
(Fire and Marine)
Kent D. Urness 50 Senior Vice Serving at the
President - Global pleasure of the
Specialty Practices Board from 10-99
(Fire and Marine)
Bruce A. Backberg 51 Senior Vice Serving at the
President - Legal pleasure of the
Services Board from 11-97
(The St. Paul
Companies, Inc.)
Janet R. Nelson 50 Special Assistant Serving at the
to the President pleasure of the
(Fire and Marine) Board from 10-99
Thomas A. Bradley 42 Senior Vice Serving at the
President - Finance pleasure of the
(The St. Paul Board from 5-98
Companies, Inc.)
Karen L. Himle 44 Senior Vice Serving at the
President - pleasure of the
Corporate Affairs Board from 11-97
(The St. Paul
Companies, Inc.)
David R. Nachbar 37 Senior Vice Serving at the
President - Human pleasure of the
Resources Board from 8-98
(The St. Paul
Companies, Inc.)
Laura C. Gagnon 38 Vice President - Serving at the
Finance and pleasure of the
Investor Relations Board from 7-99
(The St. Paul
Companies, Inc.)
Sandra Ulsaker 40 Assistant Vice Serving at the
Wiese President and pleasure of the
Corporate Secretary Board from 5-99
(The St. Paul
Companies, Inc.)
<PAGE>
Part II
-------
Item 5. Market for the Registrant's Common Equity and
- ------ Related Stockholder Matters.
----------------------------
The St. Paul's common stock is traded on the New York Stock
Exchange, where it is assigned the symbol SPC. The stock is also
listed on the London Stock Exchange under the symbol SPA. The
number of holders of record, including individual owners, of The
St. Paul's common stock was 22,603 as of March 1, 2000.
The "Stock Trading" and "Stock Price and Dividend Rate" portions of
the "Shareholder Information" section on page 80 of The St. Paul's
1999 Annual Report to Shareholders are incorporated herein by
reference.
Item 6. Selected Financial Data.
- ------ -----------------------
The "Six-Year Summary of Selected Financial Data" on page 43 of The
St. Paul's 1999 Annual Report to Shareholders is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial
- ------ Condition and Results of Operations.
-----------------------------------
The "Management's Discussion and Analysis" on pages 18 through 42
of The St. Paul's 1999 Annual Report to Shareholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- -------- ----------------------------------------------------------
The "Exposures to Market Risk" section of "Management's Discussion
and Analysis" on pages 40 and 41 of The St. Paul's 1999 Annual
Report to Shareholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
The "Independent Auditors' Report," "Management's Responsibility
for Financial Statements," Consolidated Balance Sheets,
Consolidated Statements of Income, Comprehensive Income,
Shareholders' Equity and Cash Flows, and Notes to Consolidated
Financial Statements on pages 44 through 74 of The St. Paul's 1999
Annual Report to Shareholders are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on
- ------ Accounting and Financial Disclosure.
-----------------------------------
None.
<PAGE>
Part III
--------
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
The "Election of Directors - Nominees for Directors" section, which
provides information regarding The St. Paul's directors, on pages 4
to 6 of The St. Paul's Proxy Statement relating to the Annual
Meeting of Shareholders to be held May 2, 2000, is incorporated
herein by reference. Michael R. Bonsignore, 58, is currently a
director of The St. Paul, but is not standing for re-election at
the 2000 Annual Meeting of Shareholders.
The "Section 16(a) Beneficial Ownership Reporting Compliance"
section on pages 40 and 41 of The St. Paul's Proxy Statement
relating to the Annual Meeting of Shareholders to be held May 2,
2000, is incorporated herein by reference.
Item 11. Executive Compensation.
- ------- ----------------------
The "Executive Compensation" section on pages 21 to 36 and the
"Election of Directors - Board of Directors Compensation" section
on pages 7 to 9 of the Proxy Statement relating to the Annual
Meeting of Shareholders to be held May 2, 2000, are incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
The "Security Ownership of Certain Beneficial Owners and
Management" section on pages 38 to 40 of the Proxy Statement
relating to the Annual Meeting of Shareholders to be held May 2,
2000, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
The "Indebtedness of Management" section on page 37 of the Proxy
Statement relating to the Annual Meeting of Shareholders to be held
May 2, 2000, is incorporated herein by reference.
<PAGE>
Part IV
-------
Item 14. Exhibits, Financial Statements, Financial Statement
- ------- Schedules and Reports on Form 8-K.
---------------------------------
(a) Filed documents. The following documents are filed as part of
this report:
1. Financial Statements.
Incorporated by reference into Part II of this report:
The St. Paul Companies, Inc. and Subsidiaries:
Consolidated Statements of Income - Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income -
Years Ended December 31, 1999, 1998 and 1997
Consolidated Balance Sheets - December 31, 1999
and 1998
Consolidated Statements of Shareholders'
Equity - Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
The foregoing documents are incorporated by reference
to The St. Paul's 1999 Annual Report to
Shareholders.
2. Financial Statement Schedules.
The St. Paul Companies, Inc. and Subsidiaries:
Independent Auditors' Report on Financial
Statement Schedules
I. Summary of Investments - Other than Investments
in Related Parties
II. Condensed Financial Information of Registrant
III. Supplementary Insurance Information
IV. Reinsurance
V. Valuation and Qualifying Accounts
VII. Predecessor Auditors' Reports on Consolidated
Financial Statements and Financial Statement
Schedules
All other schedules are omitted because they are not
applicable, not required, or the information is
included elsewhere in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits. An Exhibit Index is set forth at page 38
of this report.
(3) (a) The current articles of incorporation of The
St. Paul are incorporated by reference to
Form 10-K for the year ended December 31, 1998.
(b) The current bylaws of The St.
Paul are incorporated herein by reference to Form
10-Q for the quarter ended March 31, 1994.
(4) (a) A specimen certificate of
The St. Paul's common stock is incorporated by
reference to Form 10-K for the year ended December
31, 1998.
<PAGE>
There are no long-term debt instruments
in which the total amount of securities authorized
exceeds 10% of the total assets of The St. Paul
and its subsidiaries on a consolidated basis. The
St. Paul agrees to furnish a copy of any of its
long-term debt instruments to the Securities and
Exchange Commission upon request.
(10) (a) Amended and Restated
Letter Agreement between The St. Paul and Mr.
Stephen W. Lilienthal dated as of August 5, 1999 related
to terms of his employment is filed herewith.
(b) Amendment to The St. Paul's
Directors Charitable Award Program is filed
herewith.
(c) The Employment Agreement between
The St. Paul and Mr. James E. Gustafson dated as
of January 6, 1999 is incorporated by reference to
Form 10-K for the year ended December 31, 1998.
(d) The Restricted Stock Award Plan, as
amended, is incorporated by reference to Form
10-K for the year ended December 31, 1998.
(e) The 1988 Stock Option Plan as in
effect for options granted prior to June 1994, as
amended, is incorporated by reference to Form 10-K
for the year ended December 31, 1998.
(f) The Non-Employee Director Stock
Retainer Plan is incorporated by reference to Form
10-K for the year ended December 31, 1998.
(g) The Amended and Restated Special
Severance Policy is incorporated by reference to
Form 10-K for the year ended December 31, 1998.
(h) The Annual Incentive Plan is
incorporated by reference to the Proxy Statement
relating to the 1999 Annual Meeting of
Shareholders that was held on May 4, 1999.
(i) The Amended and Restated 1994 Stock
Incentive Plan, as amended, is incorporated by
reference to the Proxy Statement relating to the
2000 Annual Meeting of Shareholders to be held on
May 2, 2000.
(j) The Deferred Management Incentive
Awards Plan is incorporated by reference to Form
10-K for the year ended December 31, 1997.
(k) The Directors' Deferred
Compensation Plan is incorporated by reference to
Form 10-K for the year ended December 31, 1997.
(l) The Relocation Loan Payback
Agreement with Mr. James F. Duffy is incorporated
by reference to Form 10-K for the year ended
December 31, 1997.
(m) The Benefit Equalization Plan -
1995 Revision is incorporated by reference to Form
10-K for the year ended December 31, 1997.
(n) First Amendment to Benefit
Equalization Plan - 1995 Revision is incorporated
by reference to Form 10-K for the year ended
December 31, 1997.
(o) Executive Post-Retirement Life
Insurance Plan - Summary Plan Description is
incorporated by reference to Form 10-K for the
year ended December 31, 1997.
(p) Executive Long-Term Disability Plan
- Summary Plan Description is incorporated by
reference to Form 10-K for the year ended December
31, 1997.
<PAGE>
(q) The St. Paul Re Long-Term Incentive
Plan is incorporated by reference to the Form S-8
Registration Statement filed March 17, 1998
(Commission File No. 333-48121).
(r) Letter Agreement between The St.
Paul and Mr. Paul J. Liska dated May 8, 1997
relating to the terms of his employment is
incorporated by reference to Form 10-Q for the
quarter ended March 31, 1997.
(s) Letter Agreement, agreed to January 20,
1997 between The St. Paul and Mr. Paul J.
Liska relating to severance benefits is
incorporated by reference to Form 10-Q for the
quarter ended March 31, 1997.
(t) The Special Leveraged Stock
Purchase Plan is incorporated by reference to Form
10-Q for the quarter ended March 31, 1997.
(u) The Directors' Charitable Award
Program is incorporated by reference to the Form
10-K for the year ended December 31, 1994.
(v) The summary description of the
Outside Directors' Retirement Plan is incorporated
by reference to the Proxy Statement relating to
the Annual Meeting of Shareholders to be held May 2,
2000.
(w) The summary description of the Key
Executive Special Incentive Arrangement is
incorporated by reference to Form 10-Q for the
quarter ended September 30, 1999.
(11) A statement regarding the computation of
per share earnings is filed herewith.
(12) A statement regarding the computation of
the ratio of earnings to fixed charges and the
ratio of earnings to combined fixed charges and
preferred stock dividends is filed herewith.
(13) The St. Paul's 1999 Annual Report to
Shareholders is furnished to the Commission in
paper format pursuant to Rule 14a-3(c). The
following portions of such annual report,
representing those portions expressly incorporated
by reference in this report on Form 10-K, are
filed as an exhibit to this report:
Location of
Portions of Annual Report Information
for the Year Ended Incorporated
December 31, 1999 by Reference
------------------------- ------------
Consolidated Financial Statements Item 8
Notes to Consolidated
Financial Statements Item 1,8
Independent Auditors' Report Item 8
Management's Discussion and
Analysis Item 1,3,7
Six-Year Summary of Selected
Financial Data Item 6
Shareholder Information Item 5
(21) List of subsidiaries of The St. Paul Companies, Inc.
is filed herewith.
<PAGE>
(23) Consents of independent auditors to incorporation
by reference of certain reports into Registration
Statements on Form S-8 (SEC File No. 33-15392, No. 33-23446
No. 33-23948, No. 33-24220, No. 33-24575, No. 33-26923,
No. 33-49273, No. 33-56987, No. 333-01065, No. 333-22329, No. 333-
25203, No. 333-28915, No. 333-48121, No. 333-50935, No. 333-50937
No. 333-50941, No. 333-50943 and No. 333-67983) and Form S-3 (SEC
File No. 333-06465 and No. 333-67139) are filed herewith.
(24) Power of attorney is filed herewith.
(27) Financial data schedule is filed herewith.
(b) Reports on Form 8-K.
A Form 8-K Current Report dated January 27, 2000
was filed relating to the announcement of The St.
Paul's financial results for the quarter and year ended
December 31, 1999.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, The St. Paul Companies, Inc. has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
---------------------------
(Registrant)
Date: March 29, 2000 By /s/ Sandra Ulsaker Wiese
-------------- ------------------------
Sandra Ulsaker Wiese
Assistant Vice President and
Corporate Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of The St. Paul Companies, Inc. and in the capacities and on
the dates indicated.
Date: March 29, 2000 By /s/ Douglas W. Leatherdale
-------------- --------------------------
Douglas W. Leatherdale,
Director, Chairman of the
Board and Chief Executive
Officer
Date: March 29, 2000 By /s/ James E. Gustafson
-------------- ----------------------
James E. Gustafson,
Director, President and
Chief Operating Officer
Date: March 29, 2000 By /s/ Paul J. Liska
-------------- -----------------
Paul J. Liska, Executive
Vice President and
Chief Financial Officer
Date: March 29, 2000 By /s/ Thomas A. Bradley
-------------- ---------------------
Thomas A. Bradley, Senior
Vice President -
Finance and Chief Accounting
Officer
Date: March 29, 2000 By /s/ H. Furlong Baldwin
-------------- ----------------------
H. Furlong Baldwin*, Director
<PAGE>
Date: March 29, 2000 By /s/ Michael R. Bonsignore
-------------- -------------------------
Michael R. Bonsignore*, Director
Date: March 29, 2000 By /s/ John H. Dasburg
-------------- -------------------
John H. Dasburg*, Director
Date: March 29, 2000 By /s/ W. John Driscoll
-------------- --------------------
W. John Driscoll*, Director
Date: March 29, 2000 By /s/ Kenneth M. Duberstein
-------------- -------------------------
Kenneth M. Duberstein*, Director
Date: March 29, 2000 By /s/ Pierson M. Grieve
-------------- ---------------------
Pierson M. Grieve*, Director
Date: March 29, 2000 By /s/ Thomas R. Hodgson
-------------- ---------------------
Thomas R. Hodgson*, Director
Date: March 29, 2000 By /s/ David G. John
-------------- -----------------
David G. John*, Director
Date: March 29, 2000 By /s/ William H. Kling
-------------- --------------------
William H. Kling*, Director
Date: March 29, 2000 By /s/ Bruce K. MacLaury
-------------- ---------------------
Bruce K. MacLaury*, Director
Date: March 29, 2000 By /s/ Glen D. Nelson, M.D.
-------------- -----------------------
Glen D. Nelson, M.D.*, Director
Date: March 29, 2000 By /s/ Anita M. Pampusch
-------------- ---------------------
Anita M. Pampusch*, Director
Date: March 29, 2000 By /s/ Gordon M. Sprenger
-------------- ----------------------
Gordon M. Sprenger*, Director
Date: March 29, 2000 *By /s/ Sandra Ulsaker Wiese
-------------- ------------------------
Sandra Ulsaker Wiese,
Attorney-in-fact
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Shareholders
The St. Paul Companies, Inc.:
Under date of February 16, 2000, we reported on the consolidated
balance sheets of The St. Paul Companies, Inc. and subsidiaries
as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, comprehensive income
and cash flows for each of the years in the three-year period
ended December 31, 1999, as contained in the 1999 annual report
to shareholders. These consolidated financial statements and our
report thereon are incorporated by reference in the annual report
on Form 10-K for the year 1999. In connection with our audits of
the aforementioned consolidated financial statements we also have
audited the related financial statement schedules I through V, as
listed in the index in Item 14(a)2. of said Form 10-K. These
financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our
audits.
The consolidated financial statements and financial statement
schedules for the year ended December 31, 1997 have been restated
to reflect the pooling of interests with USF&G Corporation. We
did not audit the consolidated financial statements or financial
statement schedules of USF&G Corporation for the year ended
December 31, 1997, which statements reflect total revenues
constituting 34 percent for the year ended December 31, 1997 of
the related consolidated total. Those statements and financial
statement schedules were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates
to the amounts included for USF&G Corporation, for the year ended
December 31, 1997, is based solely on the reports of the other
auditors.
In our opinion, based on our audits and the reports of the other
auditors, such financial statement schedules I through V, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
Minneapolis, Minnesota /s/ KPMG LLP
February 16, 2000 ------------
KPMG LLP
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1999
(In millions)
1999
-----------------------------------
Amount at
which shown
in the
Cost* Value* balance sheet
Type of investment: ------- ------- -------------
Fixed maturities:
- ----------------
United States Government and
government agencies and
authorities $ 2,174 $ 2,187 $ 2,187
States, municipalities and
political subdivisions 5,336 5,419 5,419
Foreign governments 912 934 934
Corporate securities 7,999 7,737 7,737
Asset-backed securities 669 650 650
Mortgage-backed securities 2,452 2,402 2,402
------- ------- -------
Total fixed maturities 19,542 19,329 19,329
------- ------- -------
Equity securities:
- -----------------
Common stocks:
Public utilities 8 8 8
Banks, trusts and insurance
companies 154 185 185
Industrial, miscellaneous and
all other 916 1,425 1,425
------- ------- -------
Total equity securities 1,078 1,618 1,618
------- ------- -------
Venture capital 399 866 866
------- ------- -------
Real estate and mortgage loans 1,511** 1,504
Securities lending collateral 1,216 1,216
Other investments 301 301
Short-term investments 1,373 1,373
------- -------
Total investments $ 25,420 $ 26,207
======= =======
* See Notes 1, 4, 5 and 7 to the consolidated financial statements
included in The St. Paul's 1999 Annual Report to Shareholders.
** The cost of real estate represents the cost of properties before
valuation provisions. (See Schedule V on page 35).
<PAGE>
THE ST. PAUL COMPANIES, INC. (Parent Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET INFORMATION
December 31, 1999 and 1998
(In millions)
Assets 1999 1998
- ------ ------- -------
Investment in subsidiaries $ 8,116 $ 7,207
Investments:
Fixed maturities 109 125
Equity securities 78 70
Short-term investments 33 12
Cash 4 9
Deferred income taxes 301 359
Refundable income taxes 152 42
Other assets 233 384
------- -------
Total assets $ 9,026 $ 8,208
======= =======
Liabilities:
- -----------
Debt $2,060 $1,406
Dividends payable to shareholders 58 58
Other liabilities 436 108
------- -------
Total liabilities 2,554 1,572
------- -------
Shareholders' Equity:
Preferred:
Convertible preferred stock 129 134
Guaranteed obligation - PSOP (105) (119)
------- -------
Total preferred shareholders' equity 24 15
------- -------
Common:
Common stock, authorized 480 shares;
issued 225 shares (234 in 1998) 2,079 2,128
Retained earnings 3,827 3,480
Accumulated other comprehensive income:
Unrealized appreciation of investments 568 1,027
Unrealized loss on foreign
currency translation (26) (14)
------- -------
Total accumulated other
comprehensive income 542 1,013
------- -------
Total common shareholders' equity 6,448 6,621
------- -------
Total shareholders' equity 6,472 6,636
------- -------
Total liabilities and
shareholders' equity $ 9,026 $ 8,208
======= =======
See accompanying notes to condensed financial information.
<PAGE>
THE ST. PAUL COMPANIES, INC. (Parent Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF INCOME INFORMATION
Years Ended December 31, 1999, 1998 and 1997
(In millions)
1999 1998 1997
------- ------- -------
Revenues:
Net investment income $ 17 $ 18 $ 18
Realized investment gains 10 6 7
------- ------- -------
Total revenues 27 24 25
------- ------- -------
Expenses:
Interest expense 145 67 67
Administrative and other expenses 51 66 52
------- ------- -------
Total expenses 196 133 119
------- ------- -------
Loss before income tax benefit (169) (109) (94)
Income tax benefit (59) (80) (113)
------- ------- -------
Income (loss) from continuing
operations - parent company only (110) (29) 19
Equity in net income of subsidiaries 889 228 1,043
------- ------- -------
Income from continuing operations
before cumulative effect
of accounting change 779 199 1,062
Cumulative effect of
accounting change (30) - -
------- ------- -------
Income from continuing operations 749 199 1,062
Gain (loss) from
discontinued operations 85 (110) (133)
------- ------- -------
Consolidated net income $ 834 $ 89 $ 929
======= ======= =======
See accompanying notes to condensed financial information.
<PAGE>
THE ST. PAUL COMPANIES, INC. (Parent Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS INFORMATION
Years Ended December 31, 1999, 1998 and 1997
(In millions)
1999 1998 1997
------- ------- -------
Operating Activities:
Net income (loss) - parent only $ (110) $ (29) $ 19
Cash dividends from subsidiaries 320 223 216
Tax payments from subsidiaries 69 71 166
Net federal income tax refund (payments) (71) 54 (61)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Deferred tax expense
(benefit) - operations 38 (78) (60)
Pretax realized investment gains (10) (6) (7)
Other (38) (4) (19)
------- ------- -------
Cash provided by
operating activities 198 231 254
------- ------- -------
Investing Activities:
Purchases of investments (155) (47) (56)
Proceeds from sales and maturities
of investments 153 81 76
Capital contributions and loans
to subsidiaries (4) (178) (107)
Proceeds from
repayment of intercompany loans 294 - -
Discontinued operations (10) (20) (54)
Other 6 10 (3)
------- ------- -------
Cash provided (used) by
investing activities 284 (154) (144)
------- ------- -------
Financing Activities:
Dividends paid to shareholders (246) (210) (166)
Proceeds from issuance of debt 204 239 118
Repayment of debt and capital securities (121) (25) (100)
Repurchase of common shares (356) (135) (27)
Proceeds from Nuveen stock repurchase - - 41
Stock options exercised and other 32 63 24
------- ------- -------
Cash used in financing activities (487) (68) (110)
------- ------- -------
Change in cash (5) 9 -
Cash at beginning of year 9 - -
------- ------- -------
Cash at end of year $ 4 $ 9 $ -
======= ======= =======
See accompanying notes to condensed financial information.
<PAGE>
THE ST. PAUL COMPANIES, INC. (Parent Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
1. The accompanying condensed financial information should be
read in conjunction with the consolidated financial
statements and notes included in The St. Paul's 1999 Annual
Report to Shareholders. The Annual Report includes The St.
Paul's Consolidated Statements of Shareholders' Equity and
Comprehensive Income.
Some data in the accompanying condensed financial
information for the years 1998 and 1997 were reclassified to
conform with the 1999 presentation.
2. Debt of the parent company consists of the following (in
millions):
December 31,
-------------------
1999 1998
------ ------
External:
--------
Medium-term notes $ 617 $ 637
Commercial paper 400 257
8-3/8% senior notes 150 -
Zero coupon convertible notes 94 111
7-1/8% senior notes 80 -
Variable rate borrowings 64 -
------ ------
Total external debt 1,405 1,005
------ ------
Intercompany (1):
------------
Convertible subordinated debentures 262 262
Subordinated debentures 230 -
Guaranteed PSOP debt 105 119
Notes payable to subsidiaries 58 20
------ ------
Total intercompany debt 655 401
------ ------
Total debt $2,060 $1,406
====== ======
(1) Eliminated in consolidation.
See Note 10 to the consolidated financial statements
included in the 1999 Annual Report to Shareholders for
further information on debt outstanding at Dec. 31, 1999.
The amount of debt, other than commercial paper and debt
eliminated in consolidation, that becomes due during each of
the next five years (including the debt discussed in Note 3
below) is as follows: $0 in 2000; 2001, $195 million; 2002,
$49 million; 2003, $67 million; and 2004, $55 million.
3. The St. Paul Companies, Inc. merged with USF&G Corporation
on April 24, 1998 in a business combination accounted for as
a pooling of interests. (See Note 2, "Acquisitions," to the
consolidated financial statements included in The St. Paul's
1999 Annual Report to Shareholders). Effective Jan. 1,
1999, the former holding company for USF&G Corporation was
merged into St. Paul Fire and Marine Insurance Company, and
the holding company was dissolved. Prior to that merger,
the debt obligations of USF&G's holding company were assumed
by The St. Paul Companies, Inc.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(In millions)
At December 31,
----------------------------------------------
Other
Gross loss, policy
Deferred loss adjustment claims
policy expense reserves Gross and
acquisition and policy unearned benefits
expenses benefits premiums payable
----------- --------------- --------- --------
1999
- ----
Property-Liability Insurance:
Commercial Lines Group $ 149 $ 8,268 $ 822 $ -
Specialty Commercial 131 3,872 807 -
Surety 88 289 304 -
------- ------- ------- -------
Total U. S. Underwriting 368 12,429 1,933 -
International 37 1,083 361 -
------- ------- ------- -------
Total Primary Underwriting 405 13,512 2,294 -
Reinsurance 98 3,925 436 -
------- ------- ------- -------
Total Property-Liability
Insurance 503 17,437 2,730 -
Life Insurance 439 4,885 - 122
------- ------- ------- -------
Total from
continuing operations 942 22,322 2,730 122
Discontinued operations 17 497 388 -
------- ------- ------- -------
Total $ 959 $22,819 $ 3,118 $ 122
======= ======= ======= =======
1998
- ----
Property-Liability Insurance:
Commercial Lines Group $ 215 $ 8,671 $ 958 $ -
Specialty Commercial 146 3,660 811 -
Surety 100 294 287 -
------- ------- ------- -------
Total U. S. Underwriting 461 12,625 2,056 -
International 20 1,280 163 -
------- ------- ------- -------
Total Primary Underwriting 481 13,905 2,219 -
Reinsurance 84 3,476 450 -
------- ------- ------- -------
Total Property-Liability
Insurance 565 17,381 2,669 -
Life Insurance 201 4,142 - 76
------- ------- ------- -------
Total from
continuing operations 766 21,523 2,669 76
Discontinued operations 112 805 423 -
------- ------- ------- -------
Total $ 878 $22,328 $ 3,092 $ 76
======= ======= ======= =======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(In millions)
Insurance losses
loss adjustment
expenses Amortization
Net and of policy Other
Premiums investment policy acquisition operating Premiums
1999 earned income benefits expenses expenses written
- ---- -------- --------- ---------- ----------- -------- --------
Property-Liability
Insurance:
Commmercial
Lines Group $ 1,944 $ - $ 1,490 $ 598 $ 117 $ 1,883
Specialty
Commercial 1,465 - 1,242 300 119 1,375
Surety 379 - 121 123 97 409
------- ------- ------- ------- ------- -------
Total U. S.
Underwriting 3,788 - 2,853 1,021 333 3,667
International 396 - 336 83 62 480
------- ------- ------- ------- ------- -------
Total Primary
Underwriting 4,184 - 3,189 1,104 395 4,147
Reinsurance 919 - 531 217 92 965
Net investment
income - 1,256 - - - -
Other - - - - 207 -
------- ------- ------- ------- ------- -------
Total Property-
Liability
Insurance 5,103 1,256 3,720 1,321 694 5,112
Life Insurance 187 298 367 4 39 -
------- ------- ------- ------- ------- -------
Total $ 5,290 $ 1,554 $ 4,087 $ 1,325 $ 733 $ 5,112
======= ======= ======= ======= ======= =======
1998
- ----
Property-Liability
Insurance:
Commercial
Lines Group $ 2,275 $ - $ 2,247 $ 733 $ 43 $ 2,117
Specialty
Commercial 1,447 - 1,176 289 128 1,348
Surety 340 - 81 114 73 376
------- ------- ------- ------- ------- -------
Total U. S.
Underwriting 4,062 - 3,504 1,136 244 3,841
International 333 - 277 69 54 378
------- ------- ------- ------- ------- -------
Total Primary
Underwriting 4,395 - 3,781 1,205 298 4,219
Reinsurance 1,039 - 684 226 121 1,057
Net investment
income - 1,293 - - - -
Other - - - - 366 -
------- ------- ------- ------- ------- -------
Total Property-
Liability
Insurance 5,434 1,293 4,465 1,431 785 5,276
Life Insurance 119 276 273 56 43 -
------- ------- ------- ------- ------- -------
Total $ 5,553 $ 1,569 $ 4,738 $ 1,487 $ 828 $ 5,276
======= ======= ======= ======= ======= =======
1997
- ----
Property-Liability
Insurance:
Commercial
Lines Group $ 2,616 $ - $ 1,930 $ 748 $ 110 $ 2,469
Specialty
Commercial 1,442 - 1,012 257 154 1,401
Surety 296 - 75 101 57 319
------- ------- ------- ------- ------- -------
Total U. S.
Underwriting 4,354 - 3,017 1,106 321 4,189
International 278 - 232 50 49 293
------- ------- ------- ------- ------- -------
Total Primary
Underwriting 4,632 - 3,249 1,156 370 4,482
Reinsurance 1,227 - 840 319 64 1,200
Net investment
income - 1,319 - - - -
Other - - - - 144 -
------- ------- ------- ------- ------- -------
Total Property-
Liability
Insurance 5,859 1,319 4,089 1,475 578 5,682
Life Insurance 137 253 277 12 37 -
------- ------- ------- ------- ------- -------
Total $ 5,996 $ 1,572 $ 4,366 $ 1,487 $ 615 $ 5,682
======= ======= ======= ======= ======= =======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
Years Ended December 31, 1999, 1998 and 1997
(In millions)
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed to
amount companies companies amount net
-------- --------- --------- --------- ----------
1999
- ----
Life insurance
in force $12,284 $ 4,452 $ 114 $ 7,946 1.4%
======= ======= ======= ======= =======
Premiums earned:
Life insurance 202 16 1 187 0.5%
Property-
liability
insurance 4,621 1,055 1,537 5,103 30.1%
------- ------- ------- -------
Total premiums $ 4,823 $ 1,071 $ 1,538 $ 5,290 29.1%
======= ======= ======= ======= =======
1998
- -----
Life insurance
inforce $10,637 $ 2,305 $ 137 $ 8,469 1.6%
======= ======= ======= ======= =======
Premiums earned:
Life insurance 131 13 1 119 1.2%
Property-
liability
insurance 4,796 734 1,372 5,434 25.2%
------- ------- ------- -------
Total premiums $ 4,927 $ 747 $ 1,373 $ 5,553 24.7%
======= ======= ======= ======= =======
1997
- ----
Life insurance
inforce $10,613 $ 1,785 $ 135 $ 8,963 1.5%
======= ======= ======= ======= =======
Premiums earned:
Life insurance 143 8 2 137 1.1%
Property-
liability
insurance 5,153 817 1,523 5,859 26.0%
------- ------- ------- -------
Total premiums $ 5,296 $ 825 $ 1,525 $ 5,996 25.4%
======= ======= ======= ======= =======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1999, 1998 and 1997
(In millions)
Additions
----------------------
Balance at Charged to Charged to Balance
beginning costs and other Deduc- at end
Description of year expenses accounts tions(1) of year
- ----------- --------- -------- ---------- --------- -------
1999
- ----
Real estate valuation
adjustment $ 16 - - 9 $ 7
====== ====== ====== ====== ======
Allowance for
uncollectible:
Agency loans $ 3 2 - - $ 5
====== ====== ====== ====== ======
Premiums
receivable from
underwriting
activities $ 42 8 - 5 $ 45
====== ====== ====== ====== ======
Reinsurance $ 28 1 - 1 $ 28
====== ====== ====== ====== ======
Uncollectible
deductibles $ 23 - - - $ 23
====== ====== ====== ====== ======
1998
- ----
Real estate valuation
adjustment $ 12 4 - - $ 16
====== ====== ====== ====== ======
Allowance for
uncollectible:
Agency loans $ 2 1 - - $ 3
====== ====== ====== ====== ======
Premiums
receivable from
underwriting
activities $ 41 8 - 7 $ 42
====== ====== ====== ====== ======
Reinsurance $ 30 - - 2 $ 28
====== ====== ====== ====== ======
Uncollectible
deductibles $ 19 8 - 4 $ 23
====== ====== ====== ====== ======
1997
- ----
Real estate valuation
adjustment $ 19 2 - 9 $ 12
====== ====== ====== ====== ======
Allowance for
uncollectible:
Agency loans $ 2 - - - $ 2
====== ====== ====== ====== ======
Premiums
receivable from
underwriting
activities $ 29 19 - 7 $ 41
====== ====== ====== ====== ======
Reinsurance $ 26 6 - 2 $ 30
====== ====== ====== ====== ======
Uncollectible
deductibles $ 16 3 - - $ 19
====== ====== ====== ====== ======
(1) Deductions include write-offs of amounts determined to be
uncollectible, unrealized foreign exchange gains and losses and, for
certain properties in real estate, a reduction in the valuation
allowance for properties sold during the year.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE VII - PREDECESSOR AUDITORS' REPORT ON
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Board of Directors
USF&G Corporation
We have audited the consolidated statement of financial position
of USF&G Corporation as of December 31, 1997, and the related
consolidated statements of operations, cash flows and
shareholders' equity for the year then ended (not presented
separately herein). These financial statements are the
responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of USF&G Corporation at December 31, 1997, and
the consolidated results of its operations and its cash flows for
the year then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Baltimore, Maryland
February 20, 1998
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE VII - PREDECESSOR AUDITORS' REPORT ON
FINANCIAL STATEMENT SCHEDULES
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 20, 1998, with
respect to the consolidated financial statements of USF&G
Corporation for the year ended December 31, 1997 (not included
separately herein) included as Schedule VII in The St. Paul
Companies, Inc.'s Annual Report (Form 10-K) for the year ended
December 31, 1999, filed with the Securities and Exchange
Commission.
Our audit also included the financial statement schedules of
USF&G Corporation listed in Item 14(a) of USF&G Corporation's
Annual Report (Form 10-K) for the year ended December 31, 1997
(not included separately herein). These schedules are the
responsibility of management. Our responsibility is to express
an opinion based on our audit. In our opinion, the financial
statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the
Registration Statements on Form S-8 (SEC File No. 33-15392,
No. 33-23446, No. 33-23948, No. 33-24220, No. 33-24575, No. 33-
26923, No. 33-49273, No. 33-56987, No. 333-01065, No. 333-22329,
No. 333-25203, No. 333-28915, No. 333-48121, No. 333-50935, No.
333-50937, No. 333-50941, No. 333-50943 and No. 333-67983), and
Form S-3 (SEC File No. 333-06465 and No. 333-67139), of The St.
Paul Companies, Inc., of our report dated February 20, 1998, with
respect to the consolidated financial statements and schedules of
USF&G Corporation (these financial statements and schedules are
not presented herein) included as Schedule VII in The St. Paul
Companies, Inc. Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Baltimore, Maryland
March 29, 2000
<PAGE>
EXHIBIT INDEX*
-------------
Exhibit
- -------
(2) Plan of acquisition, reorganization, arrangement, liquidation,
or succession**......................................................
(3) Articles of incorporation and by-laws
(a) Articles of Incorporation***......................................
(b) By-laws***........................................................
(4) Instruments defining the rights of security holders, including
indentures
(a) Specimen Common Stock Certificate***..............................
(9) Voting trust agreements**.............................................
(10) Material contracts
(a) Amended and Restated Letter Agreement dated as of August 5,
1999 between The St. Paul and Mr. Steven W. Lilienthal
related to the terms of his employment............................(1)
(b) Amendment to The St. Paul's Directors Charitable Award
Program...........................................................(1)
(c) Employment Agreement between The St. Paul and Mr. James E.
Gustafson dated as of Jan. 6, 1999***.............................
(d) Restricted Stock Award Plan, as amended***........................
(e) 1988 Stock Option Plan***.........................................
(f) Non-Employee Director Stock Retainer Plan***......................
(g) The Amended and Restated Special Severance Policy***..............
(h) The Annual Incentive Plan***......................................
(i) The Amended and Restated 1994 Stock Incentive Plan***.............
(j) The Deferred Management Incentive Awards Plan***..................
(k) The Directors' Deferred Compensation Plan***......................
(l) Relocation Loan Payback Agreement with Mr. James F. Duffy***......
(m) Benefit Equalization Plan - 1995 Revision***......................
(n) First Amendment to Benefit Equalization Plan - 1995
Revision***.......................................................
(o) Executive Post-Retirement Life Insurance Plan - Summary
Plan Description***...............................................
(p) Executive Long-Term Disability Plan - Summary Plan
Description***....................................................
(q) The St. Paul Re Long-Term Incentive Plan***.......................
(r) Letter Agreement dated May 8, 1997 between The St. Paul
and Mr. Paul J. Liska related to the terms of his
employment***.....................................................
(s) Letter Agreement, agreed to January 20, 1997 between The
St. Paul and Mr. Paul J. Liska related to severance
benefits***.......................................................
(t) The Special Leveraged Stock Purchase Plan***......................
(u) The Directors' Charitable Award Program***........................
(v) Outside Directors' Retirement Plan -Summary Description***........
(w) Key Executive Special Incentive Arrangement***....................
(11) Statements re computation of per share earnings.......................(1)
(12) Statements re computation of ratios...................................(1)
(13) Annual report to security holders.....................................(1)
(16) Letter re change in certifying accountant**...........................
(18) Letter re change in accounting principles**...........................
(21) Subsidiaries of The St. Paul..........................................(1)
(22) Published report regarding matters submitted to vote
of security holders**................................................
(23) Consents of experts and counsel
(a) Consent of KPMG LLP...............................................(1)
(b) Consent of Ernst & Young LLP......................................(1)
(24) Power of attorney.....................................................(1)
(27) Financial data schedule...............................................(1)
(99) Additional exhibits**.................................................
* The exhibits are included only with the copies of
this report that are filed with the Securities and
Exchange Commission. However, copies of the
exhibits may be obtained from The St. Paul for a
reasonable fee by writing to the Corporate
Secretary, The St. Paul Companies, Inc., 385
Washington Street, St. Paul, Minnesota 55102.
** These items are not applicable.
*** These items are incorporated by reference as
described in Item 14(a)(3) of this report.
(1) Filed herewith.
EXHIBIT 10(a)
<PAGE>
May 4, 1998
Amended and Restated, August 5, 1999
Stephen W. Lilienthal
St. Paul Fire and Marine Insurance Company
385 Washington Street
St. Paul, MN 55102
Dear Steve:
The purpose of this letter agreement ("Letter Agreement") is
to confirm our respective understandings and agreements
regarding: i) your employment, remuneration and obligations
as of April 24, 1998, the effective time ("Effective Time")
of the merger ("Merger") detailed in the Agreement and Plan
of Merger among USF&G Corporation, The St. Paul Companies,
Inc. and SP Merger Corporation dated as of January 19, 1998
(as amended through April 24, 1998) ("Merger Agreement"),
ii) your rights and St. Paul's rights under the Executive
Severance Agreement you signed on October 16, 1997 (the
"Severance Agreement") with respect to the USF&G Senior
Executive Severance Plan dated as of February 27, 1997 (the
"Severance Plan"), and iii) your remuneration after August 5,
1999.
I. EMPLOYMENT TERMS
----------------
On or about June 12, 1998, The St. Paul Companies, Inc.
and its affiliates ("St. Paul") paid to you (i) all cash
severance payments pursuant to Sections 3.2.2, 3.2.3 and
3.2.4 of the Severance Plan (the "Cash Severance
Payments"), and (ii) certain excise tax protection
payments pursuant to Section 3.4 of the Severance Plan
[the combination of (i) and (ii) referred to as the
"Severance Benefits"] as provided in the Severance
Agreement and Severance Plan. For purposes of this
Letter Agreement and the Severance Agreement and
Severance Plan, it is agreed that (a) the approval of
the Merger by the shareholders of USF&G constituted a
Change in Control for purposes of the Severance Plan,
and (b) you were entitled to, and have received, payment
of the Severance Benefits as if you had terminated your
employment with USF&G for Good Reason (as defined in the
Severance Plan) and signed a Waiver (as defined in the
Severance Plan) as of the Effective Time. St. Paul will
continue to provide the excise tax protection pursuant
to Section 3.4 of the Severance Plan.
<PAGE>
The St. Paul Companies, Inc. and/or any of its
affiliated companies, including USF&G, will employ you
for a period of three (3) years beginning on the
Effective Time (the "Term").
Your title will be that of Executive Vice President -
Commercial Lines Group, and you will report to James
Gustafson. Your principal job responsibilities will be
the management of St. Paul's commercial lines group.
The compensation and benefits listed below will not be
reduced, except as provided below with respect to
company-wide changes in a compensation or benefit plan
which similarly impact all or most other employees at
your level in the organization.
During the Term, St. Paul will provide you or has
provided you with the following compensation and
benefits in performance of the duties outlined above:
- For the period commencing August 5, 1999, through the
remainder of the Term, St. Paul will provide you with an
annual base salary of $450,000, with annual upward
adjustments considered based on actual performance.
- Participation in St. Paul's annual incentive plan,
wherein you will have a target bonus opportunity of forty-
five percent (45%) of your annualized base salary and a
maximum bonus opportunity of sixty-seven and one-half percent
(67.5%) of your annualized base salary, measured on St.
Paul's corporate performance and your personal performance,
subject to company-wide changes in the plan which similarly
impact all or most other employees at your level in the
organization.
- Participation in St. Paul's Stock Option Plan with an
annual target of forty eight thousand (48,000) shares (after
the stock split effected on May 5, 1998), subject to company-
wide changes in the plan which similarly impact all of most
other employees at your level in the organization.
<PAGE>
- A hiring bonus ("Hiring Bonus") equal to sixteen
thousand eighty (16,080) shares of St. Paul restricted stock
granted in May 1998, and nine thousand (9,000) shares of St.
Paul restricted stock granted in November 1998. The
restricted stock Hiring Bonus shall be fully vested and
freely transferable at the end of the Term, and you will be
entitled to receive all dividends on the shares and vote the
shares during the Term. Payment of the Hiring Bonus is
conditioned upon you remaining in your current position, or a
subsequent position to which St. Paul were to assign you
within St. Paul's various business entities, on a full-time
basis through the end of the Term, subject to the provisions
of Section II regarding termination by St. Paul without Cause
(as defined in Section II) and your voluntary termination for
Good Reason (as defined in Section II).
- A lump sum cash hiring bonus in the amount of Twenty
Five Thousand Two Hundred Dollars ($25,200.). This amount
was paid to make you whole relative to the automobile
allowance you received as a member of USF&G management that
you will not receive as a member of St. Paul management. The
amount referenced above was computed by multiplying your
current monthly allowance of Seven Hundred Dollars ($700.),
by the thirty six (36) month term of this Letter Agreement.
This payment was made to you within ten (10) days of your
becoming a St. Paul employee, and was subject to federal and
state income and employment tax withholding.
- You will be covered by St. Paul's "Homeowners Plan 1"
Relocation Policy relative to your move to the Minneapolis-
St. Paul metropolitan area. The "Homeowners Plan 1" has a
$15,000 "loss on sale" protection provision. This provision
will be upgraded by St. Paul in your case to provide for full
reimbursement of those financial losses described in Plan 1
that relate to the sale of your current, primary, principal
place of residence in the Baltimore area. For purposes of
this bullet, full reimbursement of financial losses shall
mean the sum of (i) the difference (if any) between (a) the
sum of the purchase price for such residence and the cost of
all capital improvements thereon, and (b) the proceeds
received upon the sale, net of all sales expenses and
commissions, and (ii) an amount which will be sufficient on
an after-tax basis to compensate you for all federal and
state income and employment taxes incurred with respect to
payments made to you hereunder in connection with the sale of
such residence.
<PAGE>
- You will be eligible to participate in those St. Paul
savings and retirement plans generally available to employees
at your level, including financial and tax planning services;
the St. Paul Companies, Inc. Retirement, Executive
Retirement, Savings Plus and Executive Savings Plus Plans; as
well as those welfare plans which provide employees with
medical, dental, life insurance (and AD&D), short-term
disability, long-term disability, and medical/day care
reserve accounts.
- On August 2, 1999, you will be granted 15,000 shares of
restricted stock under the 1994 Amended and Restated Stock
Incentive Plan, with the restrictions to lapse in 5,000
share annual increments on August 2, of 2000, 2001, and 2002.
II. EMPLOYMENT SEPARATION
---------------------
Should your employment with St. Paul terminate prior to
the end of the Term, The St. Paul will provide you with
severance payments as follows:
- If you terminate your employment without Good Reason (as
defined below) or if your employment is terminated by St.
Paul for Cause (as defined below), you will receive no
further payments, compensation or benefits under this Letter
Agreement, including no portion of the Hiring Bonus, except
you will be eligible to receive payments that were due and
payable prior to the date of your termination and such
compensation or benefits that have been earned and will
become payable without regard to future services.
- If you terminate your employment with Good Reason or you
are involuntarily terminated by The St. Paul without Cause,
upon the signing of St. Paul's standard release form in use
at that time for employees at your salary level, (i) the
Hiring Bonus will vest and become transferable at the later
of one year from the date the shares were granted or the
effective date of such termination, and (ii) you will receive
all other compensation and benefits outlined in Section I of
this Letter Agreement, including incentive bonuses paid at
the target forty-five percent (45%) of annualized base salary
level, prorated with respect to any partial bonus period, for
the period commencing on the date of such termination and
ending on the later of (x) the last day of the Term, or (y)
the date which is twelve (12) months following such
termination (such period referred to herein as the "Severance
Period"). St. Paul may, at its election, prepay any amounts
due to you during the Severance Period in a lump sum payment
at the beginning of the Severance Period. However, if such
termination occurs within twelve
<PAGE>
(12) months of the last day of the Term, you may
elect to receive severance benefits under the
severance plan applicable to senior executive
officers of St. Paul as in effect on the date your
employment terminates (the "St. Paul Executive
Severance Plan) in lieu of the benefits described in
clause (ii) of this bullet. If you receive benefits
under the St. Paul Executive Severance Plan in lieu
of the benefits described in clause (ii), then the
confidentiality and nonsolicitation provisions of
Section III of this Letter Agreement shall not apply
and you will be subject to the terms and conditions
of the St. Paul Executive Severance Plan with regard
to such confidentiality, non-solicitation and other
related restrictions. If prior to April 25, 2000
your employment is involuntarily terminated by St.
Paul without Cause (as defined in the Severance Plan)
or you voluntarily terminate your employment for Good
Reason (as defined in the Severance Plan), you will
receive the welfare benefit continuation described in
Section 3.2.5 of the Severance Plan, provided you
comply with the provisions of Section III of this
Letter Agreement, and provided you sign a release
form in use at that time for St. Paul employees at
your level. For purposes of benefit payments that
might be due you pursuant to this subsection, St.
Paul shall have the option of providing you a cash
equivalency or equivalent alternative coverage
outside of St. Paul's existing qualified or non-
qualified benefit plans.
For purposes of this Letter Agreement, "Cause" means
(i) your conviction of any felony involving
intentional misconduct; (ii) your conviction of any
lesser crime or offense involving the illegal use or
conversion of St. Paul property; (iii) your willful
misconduct in connection with the performance of your
duties with St. Paul (which shall not be deemed to
include any action taken by you in good faith in the
interest of St. Paul) provided, however, that St.
Paul will not terminate you for willful misconduct
without giving you written notice of, and the
opportunity to promptly remedy, the specific
misconduct; or (iv) your taking illegal actions in
your business or personal life which materially and
demonstrably harm the reputation or damage the good
name of St. Paul. For purposes of clauses (iii) and
(iv), Cause shall be determined by a majority vote of
the Board of Directors of The St. Paul Companies,
Inc. after at least 10 days notice to you.
<PAGE>
For purposes of the Letter Agreement, "Good Reason"
means (i) a substantial diminution in your title,
position, duties, or responsibilities; (ii)
assignment of duties that are inconsistent in any
material respect with the scope of duties and
responsibilities associated with your position as of
the effective date of this amended and restated
Letter Agreement; (iii) relocation of your principal
workplace to a location that is more than thirty (30)
miles from your current location; or (iv) a material
reduction of or failure to pay the compensation
required under Section I of this Letter Agreement.
For purpose of clauses (i), (ii), and (iv), an
isolated, insubstantial and inadvertent action not
taken in bad faith and which is remedied by St. Paul
promptly after receipt of notice thereof shall be
excluded.
- If termination of your employment occurs after a Change
in Control of St. Paul (as defined below), and during the
Term, (i) the Hiring Bonus will immediately vest and become
transferable, and (ii) you will be entitled to all other
amounts payable, if any, under St. Paul's Special Severance
Policy ("Special Severance Policy") as in force as of the
date of the Change in Control of St. Paul (as defined below).
"Change in Control of St. Paul" means a change in control
that would cause St. Paul to file a Form 8-K with the SEC;
St. Paul's incumbent board of directors ceases to be a
majority; or fifty (50) percent of St. Paul's common stock is
acquired by a "person" within the meaning of Section 14(d) of
the Securities Exchange Act of 1934. Under the Special
Severance Policy, you are eligible for these benefits once
you've been employed for three months with St. Paul. You
have been designated as a "Tier I Executive" under the
Special Severance Policy, as in effect on the date this
amended and restated Letter Agreement is executed. To the
extent provided in the Special Severance Policy, St. Paul's
Board may amend, modify or revoke the Special Severance
Policy as it applies to senior executives of St. Paul as a
group, at any time prior to a Change in Control of St. Paul
without employees' consent. (There are restrictions on
amendments to, and the termination of, the policy after a
Change in Control of St. Paul has occurred.)
<PAGE>
If, after a Change of Control of St. Paul, you decide
to resign voluntarily without "Good Reason", you will
be able to do so without restrictions on your ability
to solicit St. Paul agents, customers or employees.
Should you make such an election, this Letter
Agreement will immediately terminate and you will be
entitled to receive only those payments described in
Section I of this Letter Agreement which have already
been earned and are payable as of your termination
date, and such compensation or benefits which have
been earned and will become payable without regard to
future services, and you will be entitled to no
severance or other payments pursuant to St. Paul's
Special Severance Policy or any other St. Paul
severance or compensation plan.
- In the event your employment terminates on account of
death or your becoming "disabled" [within the meaning of
section 72(m)(7) of the Internal Revenue Code as in effect as
of the date hereof] more than one year after the Effective
Time, you, or, in the event of your death, your estate, will
receive a pro rata portion of the Hiring Bonus based on a
fraction, the numerator of which is the number of whole and
partial calendar months from the Effective Time to the date
of death or total disability, as applicable, and the
denominator of which is 36.
Should St. Paul decide not to continue your employment
at or after the end of the Term, you will be entitled to
those severance benefits described in the St. Paul
Executive Severance Plan, subject to the terms and
conditions thereof.
III. CONFIDENTIALITY AND NON-SOLICITATION
------------------------------------
In exchange for the remuneration outlined above, in
addition to providing service to St. Paul as set forth
in this Letter Agreement, you agree to the following
covenants:
- You shall keep confidential any trade secrets and
confidential or proprietary information of St. Paul or USF&G
which are now known to you or which hereafter may become
known to you as a result of your employment or association
with St. Paul or USF&G and shall not at any time directly or
indirectly disclose any such information to any person, firm
or corporation, or
<PAGE>
use the same in any way other than in connection with
the business of St. Paul during, and at all times
after, the termination of your employment. For
purposes of this Letter Agreement, "trade secrets and
confidential or proprietary information" means
information unique to St. Paul or USF&G which has a
significant business purpose and is not known or
generally available from sources outside St. Paul or
USF&G or typical of industry practice.
- You further covenant that if your employment terminates
before the end of the Term, you will not, during the
"Restriction Period", directly or indirectly (for example,
through agents), (i) solicit any person who, at the time of
the termination of your employment with St. Paul, was a
client, customer or account of St. Paul or any of our
affiliates, including USF&G, to discontinue business, in
whole or in part, with St. Paul that was in effect at the
time of such termination, or (ii) hire or cause to be hired,
without the express written consent of St. Paul, any employee
of St. Paul and any of our affiliates, including USF&G, by a
successor entity or employer with whom you may ultimately
become associated. The term "Restriction Period" means the
period commencing on May 4, 1998, and ending twelve (12)
months after termination of your employment for any reason.
IV. GENERAL WAIVER AND RELEASE
--------------------------
The provisions of this Article IV were agreed to by you
(on May 5, 1998) and by St. Paul (on May 6, 1998) in the
original Letter Agreement dated May 4, 1998. No further
waiver and release is provided as a result of the
amendment and restatement of this revised Letter
Agreement first effective August 24, 1998 and now
subsequently effective as further revised as of August 5, 1999.
The waiver and release, as agreed to in the original Letter
Agreement, dated May 4, 1998, is as follows:
- As a material inducement to St. Paul to enter into this
Letter Agreement, and in consideration of St. Paul's promise
to make the payments set forth in the first paragraph of
Section I of this Letter Agreement, you hereby knowingly and
voluntarily release and forever discharge St. Paul, and all
of its Affiliates, parents, subsidiaries and related
entities, and all of its past, present and future respective
agents, officers, directors, shareholders, employees,
attorneys and assigns from any federal, state or local
charges, claims, demands, actions,
<PAGE>
liabilities, suits, or causes of action, at law or
equity or otherwise and any and all rights to or
claims for continued employment after the Separation
Date, attorneys fees or damages (including contract,
compensatory, punitive or liquidated damages) or
equitable relief, which you may ever have had, have
now or may ever have or which your heirs, executors
or assigns can or shall have, against any or all of
them, whether known or unknown, on account of or
arising out of your employment with St. Paul
(including USF&G) prior to the execution of this
Letter Agreement, except for claims which may arise
under this Letter Agreement or in connection with
future performance under Sections 3.2.5 and 3.4 of
the Severance Plan.
- This release includes, but is not limited to rights and
claims arising under the Age Discrimination in Employment Act
of 1967, as amended by the Older Workers Benefit Protection
Act of 1990, Title VII of the Civil Rights Act of 1964, as
amended, the Americans with Disabilities Act, the Fair Labor
Standards Act, any state or local human rights statute or
ordinance, any claims or rights of action relating to breach
of contract, public policy, personal or emotional injury,
defamation, additional compensation, or fringe benefits. You
specifically waive the benefit of any statute or rule of law
which, if applied to this Letter Agreement, would otherwise
exclude from its binding effect any claims not now known by
you to exist. This release does not purport to waive claims
arising under these laws after the date of this Letter
Agreement.
- This Letter Agreement was presented to you on or before
April 24, 1998. You acknowledge that you have reviewed the
information about the offer described above and given to you
as part of this Letter Agreement. You acknowledge that you
were granted at least forty-five (45) days within which to
consider this Letter Agreement. You further acknowledge that
by virtue of being presented with this Letter Agreement, you
have been advised in writing to consult with legal counsel
prior to executing this Letter Agreement. You acknowledge
that if you execute this Letter Agreement prior to the
expiration of forty-five (45) days, or choose to forgo the
advice of legal counsel, you do so freely and knowingly, and
waive any and all future claims that such action or actions
would affect the validity of this Letter Agreement.
<PAGE>
- You understand that you may cancel this Letter Agreement
at any time on or before the fifteenth (15th) day following
the date on which you sign this Letter Agreement. To be
effective, the decision to cancel must be in writing and
delivered to St. Paul, personally or by certified mail, to
the attention of:
Senior Vice President - Human Resources
St. Paul Fire and Marine Insurance Company
385 Washington Street, Mail Code 516A
St. Paul, Minnesota 55102-1396
on or before the fifteenth (15th) day after you sign
the Letter Agreement. No payments pursuant to the
first paragraph of Section I above will be issued
until sixteen (16) days have elapsed after you have
signed this Letter Agreement and St. Paul has
received this Letter Agreement. Thereafter, all Cash
Severance Payments will be made no later than the
twentieth (20th) day after St. Paul has received your
signature on this Agreement.
V. MISCELLANEOUS PROVISIONS
------------------------
This Letter Agreement may not be further amended or
terminated without the prior written consent of you and
St. Paul.
This Letter Agreement may be executed in any number of
counterparts which together shall constitute but one
agreement.
The rights and obligations described in this Letter
Agreement may not be assigned by either party without
the prior written consent of the other party, except
that St. Paul may assign its rights or delegate its
obligations to any direct or indirect wholly owned
subsidiary of The St. Paul Companies, Inc., without your
consent. This Letter Agreement shall be binding on and
inure to the benefit of our respective successors and,
in your case, your heirs and other legal
representatives.
Any controversy or claim between St. Paul and you
arising out of this Letter Agreement will be resolved by
binding arbitration in the State of Minnesota using the
Laws of the State of Minnesota in accordance with the
Commercial Arbitration Rules of the American Arbitration
Association. Any judgment on the award rendered by the
arbitration(s) may be entered in any court having
jurisdiction over such matters.
<PAGE>
If you are in agreement with the terms of this letter, please
indicate that acceptance by signing below. Keep one original
for your files and return the other to me. To the extent
that the content of this letter conflicts in any way with
previous written or oral communication between you and any
other representatives of The St. Paul Companies, Inc., the
content of this letter will control and take precedence over
such previous communication.
STEPHEN W. LILIENTHAL THE ST. PAUL COMPANIES, INC.
/s/ Stephen W. Lilienthal By /s/ James E. Gustafson
- -------------------------- ----------------------------
Date: As of August 5, 1999 Its: President and
-------------------- Chief Operating Officer
------------------------------
Date: As of August 5, 1999
---------------------------
<PAGE>
EXHIBIT 10(b)
AMENDMENT TO
THE ST. PAUL COMPANIES, INC.
DIRECTORS CHARITABLE AWARD PROGRAM
The first paragraph of Section 6 of the Directors Charitable Award
Program is amended, effective August 3, 1999, to read as follows:
6. VESTING
The amount of the donation made on a Director's behalf
will be determined based on the Director's months of Board
service, in accordance with the following vesting
schedule:
VESTING DATE DONATION AMOUNT
------------ ---------------
Upon first anniversary
of date first elected a
director by shareholders
(Election Date) $200,000
Upon second anniversary
of Election Date $400,000
Upon third anniversary
of Election Date $600,000
Upon fourth anniversary
of Election Date $800,000
Upon fifth anniversary
of Election Date $1,000,000
<PAGE>
EXHIBIT 11
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings per Common Share
(In millions, except per share amounts)
Twelve Months Ended
December 31,
----------------------------
1999 1998 1997
------- ------- -------
EARNINGS:
Basic:
Net income as reported $ 834 $ 89 $ 929
Preferred stock
dividends, net of taxes (8) (9) (10)
Premium on preferred shares redeemed (4) (3) (4)
----- ----- -----
Net income available
to common shareholders 822 77 915
===== ===== =====
Diluted:
Net income available
to common shareholders 822 77 915
Effect of dilutive securities:
Convertible preferred stock 6 - 6
Zero coupon convertible notes 3 - 3
Convertible monthly income
preferred securities 8 - 8
----- ----- -----
Net income available
to common shareholders $ 839 $ 77 $ 932
===== ===== =====
COMMON SHARES:
Basic:
Weighted average common shares outstanding 228 235 230
===== ===== =====
Diluted:
Weighted average common shares outstanding 228 235 230
Effect of dilutive securities:
Stock options 2 4 4
Convertible preferred stock 7 - 8
Zero coupon convertible notes 2 - 3
Convertible monthly income
preferred securities 7 - 7
----- ----- -----
Weighted average, as adjusted 246 239 252
===== ===== =====
EARNINGS PER COMMON SHARE:
Basic $3.61 $0.33 $3.97
Diluted $3.41 $0.32 $3.69
The assumed conversion of preferred stock, zero coupon notes and
monthly income preferred securities were each anti-dilutive to
The St. Paul's net income for the year ended Dec. 31, 1998. As
a result, the potentially dilutive effect of those securities is
not considered in the calculation of EPS amounts.
<PAGE>
EXHIBIT 12
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Ratios
(In millions, except ratios)
Twelve Months Ended
December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
EARNINGS:
Income from continuing
operations before
income taxes and
cumulative effect of
accounting change $1,017 $ 120 $1,433 $1,323 $1,020
Add: fixed charges 175 154 150 139 137
------ ------ ------ ------ ------
Income as adjusted $1,192 $ 274 $1,583 $1,462 $1,157
====== ====== ====== ====== ======
FIXED CHARGES AND
PREFERRED DIVIDENDS:
Fixed charges:
Interest expense
and amortization $ 99 $ 75 $ 86 $ 87 $ 91
Dividend on redeemable
preferred securities 36 38 33 13 7
Rental expense (1) 40 41 31 39 39
------ ------ ------ ------ ------
Total fixed charges 175 154 150 139 137
Preferred stock
dividend requirements 17 13 20 38 47
------ ------ ------ ------ ------
Total fixed charges and
preferred stock
dividend requirements $192 $167 $170 $177 $184
====== ====== ====== ====== ======
Ratio of earnings to
fixed charges 6.80 1.78 10.56 10.51 8.42
====== ====== ====== ====== ======
Ratio of earnings to
combined fixed charges
and preferred stock
dividend requirements 6.22 1.64 9.33 8.25 6.30
====== ====== ====== ====== ======
(1) Interest portion deemed implicit in total rent expense.
Amount for 1999 includes an $11 million provision
representative of interest included in charge for future
lease buy-outs recorded as a result of The St. Paul's cost
reduction program. Amount for 1998 includes an $11 million
provision representative of interest included in charge for
future lease buy-outs recorded as a result of The St. Paul's
merger with USF&G Corporation.
<PAGE>
THE ST. PAUL COMPANIES, INC.
ANNUAL REPORT TO SHAREHOLDERS
1999
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consolidated Overview
- ---------------------
EARNINGS REBOUND IN A YEAR OF STRATEGIC CHANGE
The St. Paul took a number of strategic actions in 1999 aimed at
transforming the 147-year old company into a commercial property-
liability insurer with a specialty focus and global presence,
poised to succeed in a persistently competitive marketplace. At
the same time, we made great strides in improving the quality of
our business, exceeded ambitious expense-reduction goals in
completing our post-merger integration with USF&G, and made it
easier for agents and brokers to do business with us.
The following table summarizes our results for each of the last
three years:
Year ended December 31
(In millions, except per share data) 1999 1998 1997
- ----------------------------------- ---- ---- ----
Pretax income (loss):
Property-liability insurance $ 971 $ 298 $1,488
Life insurance 66 21 78
Asset management 123 104 93
Parent company and
other operations (143) (303) (226)
----- ----- -----
Pretax income
continuing operations 1,017 120 1,433
Income tax expense (benefit) 238 (79) 371
----- ----- -----
Income from continuing
operations before cumulative
effect of accounting change 779 199 1,062
Cumulative effect of accounting
change, net of taxes (30) - -
----- ----- -----
Income from continuing
operations 749 199 1,062
Discontinued operations,
net of taxes 85 (110) (133)
----- ----- -----
Net income $ 834 $ 89 $ 929
===== ===== =====
Per share (diluted) $ 3.41 $ 0.32 $ 3.69
===== ===== =====
<PAGE>
The nearly $900 million improvement in pretax income from
continuing operations in 1999 was concentrated in our property-
liability operations, reflecting efficiencies realized from the
1998 merger with USF&G Corporation, the favorable impact of two
aggregate excess-of-loss reinsurance treaties, and improvement in
certain commercial underwriting results. Property-liability pretax
income in 1999 was reduced by a charge of $60 million related to a
cost reduction program, whereas 1998 pretax income from these
operations reflected the impact of a provision to strengthen loss
reserves, and merger-related and other expenses.
Our life insurance operation, F&G Life, posted strong operating
results and product sales of $1 billion in 1999, and our asset
management operation, The John Nuveen Company,
capitalizing on the success of expanded product offerings for
affluent investors, achieved a fifth consecutive year of record
earnings. The decline in the "parent company and other operations"
pretax loss in 1999 was due to expense reductions and the absence
of earnings charges that impacted this category in 1998.
Consolidated pretax income from continuing operations in 1998 was
reduced by earnings charges totaling $582 million, which we
believe warrant separate mention, consisting of the following
components:
- $292 million of charges related to our merger with USF&G
Corporation ("USF&G");
- a $215 million provision to strengthen loss reserves;
- a $41 million writedown of F&G Life's deferred acquisition
cost asset; and
- $34 million of expenses related to the restructuring of our
commercial insurance operations.
These charges were recorded in our 1998 results as follows: $406
million in property-liability insurance operations; $50 million in
our life insurance segment; and $126 million in "parent company
and other operations."
1999 STRATEGIC TRANSACTIONS
- ---------------------------
We took four major steps in 1999 consistent with our strategy of
focusing our resources on specialty commercial and professional
property-liability insurance lines. In separate transactions, we
sold our standard personal insurance operations and reached a
definitive agreement to sell our nonstandard auto operations, as
discussed in more detail in the "Discontinued Operations" section
that follows. We also reached a definitive agreement to purchase
MMI Companies, Inc., a provider of insurance products and
consulting services to the healthcare industry, for $200 million
in cash plus the assumption of $120 million of MMI capital
securities. That transaction is expected to be finalized in the
second quarter of 2000 and will create, when combined with our
existing operations, a globally integrated provider of insurance
and risk management services for the healthcare industry, with pro
forma combined annual revenues of approximately $1 billion. In
another transaction, expected to be finalized in the first quarter
of 2000, we agreed to purchase Pacific Select Insurance Company,
which will increase our earthquake risk underwriting capabilities
in California, for a total cost of approximately $37 million.
<PAGE>
USF&G MERGER UPDATE
- -------------------
In April 1998, we merged with USF&G, a Baltimore, MD-based
insurance holding company in a tax-free exchange of stock
accounted for as a pooling of interests, valued at approximately
$3.7 billion. In 1999, we substantially completed the integration
of USF&G into our operations. We achieved significant efficiencies
in 1999 as a result of our integration efforts, primarily
resulting from the elimination of duplicate functions throughout
the combined organization, including the consolidation of
corporate headquarters' functions, and the elimination of
approximately 2,200 positions. By the end of 1999, we had realized
pretax annual expense savings of approximately $260 million (as
measured against the combined 1997 pre-merger expenses of The St.
Paul and USF&G) as a result of the merger and the subsequent
restructuring of our commercial insurance underwriting segments in
late 1998.
The $292 million of merger-related charges recorded in 1998
resulted from management's comprehensive review of the two
companies as part of formulating an integration plan to merge
their respective operations. The review identified redundant job
functions, staffing levels, geographical locations, leased space
and technology platforms. In connection with our plan of
integration, we recorded the merger-related charge, which
consisted of the following components:
- $141 million of severance and other employee-related
expenses. We estimated that approximately 2,000 positions would be
eliminated due to the combination of the two organizations,
affecting all levels of employees from senior management to
technical staff. Through Dec. 31, 1999, approximately 2,200
positions had been eliminated, and $135 million in severance and
other employee-related costs had been paid.
- $70 million of facilities exit costs, consisting of a $36
million writedown in the carrying value of a former USF&G
headquarters building in Baltimore, and $34 million of expenses
related to the consolidation of redundant branch office locations.
Through Dec. 31, 1999, we had paid $10 million of branch lease
exit costs.
- $81 million of other costs, including $30 million of
transaction costs; a $23 million writedown in the carrying value
of several USF&G real estate investments; $10 million of
accelerated depreciation expense on redundant software; $10
million of expense for writedowns and lease buy-outs of redundant
computer equipment; and an $8 million writedown in the carrying
value of excess furniture and equipment. The transaction costs
were paid in full by the end of 1998.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
- --------------------------------------
Our net income in 1999 included a pretax expense of $46 million
($30 million after-tax), representing the cumulative effect of
adopting the AICPA's Statement of Position (SOP) 97-3, "Accounting
by Insurance and Other Enterprises for Insurance-Related
Assessments." The SOP provides guidance for recognizing and
measuring liabilities for guaranty and other insurance-related
assessments. In the third quarter of 1999, the State of New York
enacted a law which changed its assessment method from a loss-
based assessment method to a written premium-based method. As a
result, we reduced our previously recorded pretax accrual by $12
million, which was recorded in income from continuing operations.
The accrual is expected to be disbursed as assessed during a
period of up to 30 years.
<PAGE>
DISCONTINUED OPERATIONS
- -----------------------
We completed the sale of our standard personal insurance
operations to Metropolitan Property and Casualty Insurance Company
(Metropolitan) in 1999. We also announced a definitive agreement
to sell our nonstandard auto operations to Prudential Insurance
Company of America (Prudential) in early 2000, a transaction that
is expected to be completed in the second quarter. In 1997, we
completed the sale of our insurance brokerage operation, Minet.
The results of the operations sold or committed to be sold are
reflected as discontinued operations for all periods presented in
this report.
The following table presents the components of discontinued
operations reported in our consolidated statement of income for
each of the last three years.
Year ended December 31
(In millions) 1999 1998 1997
----- ----- -----
STANDARD PERSONAL INSURANCE:
Operating loss, net of taxes $ (22) $(120) $ (64)
Gain on disposal, net of taxes 177 - -
----- ----- -----
Total standard
personal insurance 155 (120) (64)
----- ----- -----
NONSTANDARD AUTO INSURANCE:
Operating income (loss),
net of taxes 13 10 (1)
Estimated loss on disposal,
net of taxes (83) - -
----- ----- -----
Total nonstandard
auto insurance (70) 10 (1)
----- ----- -----
INSURANCE BROKERAGE:
Loss on disposal, net of taxes - - (68)
----- ----- -----
Total insurance brokerage - - (68)
----- ----- -----
Total discontinued
operations $ 85 $(110) $(133)
===== ===== =====
Standard Personal Insurance. On Sept. 30, 1999, Metropolitan
purchased Economy Fire & Casualty Company and its subsidiaries
("Economy"), as well as the rights and interests in those policies
constituting our remaining standard personal insurance operations.
Those rights and interests were transferred to Metropolitan by way
of a reinsurance and facility agreement pursuant to which we
transferred assets of approximately $325 million to Metropolitan,
representing the estimated unearned premium on the policies in
force. The transfer of those assets, combined with our gross cash
proceeds of $576 million received upon closing of the sale,
resulted in net proceeds to The St. Paul of $251 million in 1999.
Written premiums for The St. Paul's standard personal insurance
operations totaled $815 million for the nine months ended Sept.
30, 1999 and $1.17 billion in each of the years ended Dec. 31,
1998 and 1997.
<PAGE>
We recorded a pretax gain of $258 million on the sale, consisting
of the following components: a gain on proceeds of $136 million; a
pension and postretirement curtailment gain of $26 million;
disposition costs of $32 million; and $128 million of income from
discontinued operations subsequent to the measurement date of June
30, 1999, which included a $145 million reduction in insurance
loss and loss adjustment expense reserves. This third quarter 1999
adjustment was caused by a number of factors which led us to
determine that a reserve reduction was necessary. During 1999 we
began to see the favorable impact of certain corrective actions,
taken during 1998 in our standard personal insurance operations.
The loss reserving process and evaluation in 1999 was also
influenced by the integration of The St. Paul and USF&G claim
operations and practices as well as the related consolidation of
loss reserve data, systems, and actuarial staff. Additionally,
considering the pending sale and its economic consequences, these
reserves were evaluated at a more detailed level during the third
quarter of 1999. All of these factors entered into our conclusion
to change our best estimate of required reserves at Sept. 30,
1999. We guaranteed the adequacy of Economy's 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 that may develop.
The $32 million of disposition costs represents those costs
directly associated with the decision to dispose of this business,
and included $14 million of employee-related costs associated with
the termination of approximately 385 employees resulting from the
sale of these operations. These employees are separate from the
1,600 standard personal insurance employees who effectively
transferred to Metropolitan on Oct. 1, 1999.
The magnitude of 1998's standard personal insurance operating loss
was driven by catastrophe losses and a $35 million provision to
strengthen loss reserves subsequent to the USF&G merger.
Nonstandard Auto Insurance. Prudential has agreed to purchase the
nonstandard auto insurance business marketed under the Victoria
Financial and Titan Auto brands, and operating under the "St. Paul
Specialty Auto" name, for $200 million. Nonstandard auto coverages
are marketed to individuals who are unable to obtain standard
coverage due to their inability to meet certain underwriting
criteria. The sale includes all of the outstanding common stock of
the companies in the Victoria and Titan Groups, which became a
part of The St. Paul in the 1998 merger with USF&G. We recorded an
estimated pretax loss of $74 million on the sale in 1999,
representing the estimated excess of carrying value of these
entities at closing date over proceeds to be received from the
sale, plus estimated income through the disposal date. The excess
primarily consisted of goodwill associated with USF&G's purchase
of Titan Auto in 1997. Written premiums for The St. Paul's
nonstandard auto operations totaled $236 million in 1999, $245
million in 1998 and $76 million in 1997.
Insurance Brokerage. In 1997, we completed the sale of our
insurance brokerage operation, Minet, to Aon Corporation. Proceeds
from the sale were $107 million. We recorded a pretax loss of $103
million, primarily to recognize our commitment to Aon for certain
severance, employee benefits, lease commitments and other costs.
<PAGE>
CONSOLIDATED REVENUES
- ---------------------
The following table summarizes the sources of our consolidated
revenues from continuing operations for the last three years:
Year ended December 31
(In millions) 1999 1998 1997
----- ----- -----
Revenues:
Insurance premiums earned:
Property-liability $ 5,103 $ 5,434 $ 5,859
Life 187 119 137
Net investment income 1,557 1,571 1,573
Realized investment gains 277 201 423
Asset management 340 302 262
Other 105 81 54
----- ----- -----
Total revenues $ 7,569 $ 7,708 $ 8,308
===== ===== =====
Change from prior year (2)% (7)%
===== =====
The 2% reduction in revenues in 1999 was primarily the result of a
$331 million decline in property-liability insurance premiums
earned. Over 80% of that decline was due to premiums payable under
two reinsurance treaties, as discussed on page 22 of this report.
The remainder reflects the impact of corrective underwriting
initiatives, primarily in our Commercial Lines Group segment,
which resulted in a reduction in business volume in 1999. The
slight reduction in net investment income in 1999 was driven by a
3% decline in our property-liability operations, which was
substantially offset by an 8% increase in our life insurance
segment. The growth in realized investment gains in 1999 resulted
from strong returns generated by our venture capital and equity
portfolios.
1998 vs. 1997
- -------------
The sharp decline in property-liability insurance pretax income
from continuing operations in 1998 reflects the impact of
catastrophes and an increase in other insurance losses, and $406
million of earnings charges. F&G Life recorded a solid year of
operating results in 1998, reduced by $50 million of charges
recorded after the merger. The tax benefit recorded in 1998 was
disproportionately large compared with our pretax loss from
continuing operations, due to the substantial income tax benefit
generated by our tax-exempt, fixed-maturity investments. The 7%
decline in revenues in 1998 compared with 1997 resulted from a
reduction in premiums earned in our Commercial Lines Group segment
and a $222 million decline in realized investment gains.
The following pages include a detailed discussion of the 1999
results produced by the five distinct business segments that
underwrite property-liability insurance and provide related
services for particular market sectors. We also review the
performance of our property-liability underwriting operations'
investment segment. After the property-liability discussion, we
discuss the results of our life insurance segment, F&G Life, and
our asset management segment, The John Nuveen Company.
<PAGE>
Property-Liability Insurance Overview
- -------------------------------------
RESULTS IMPROVE DESPITE SIGNIFICANT CATATASTROPHE LOSSES; MERGER-
RELATED EFFICIENCIES PUSH EXPENSES DOWN SHARPLY
Although the property-liability insurance marketplace showed
preliminary signs of price stabilization in 1999, the operating
environment remained intensely competitive. The benefits of our
extensive efforts to re-underwrite our book of commercial
business, reduce expenses and sharpen our specialty focus,
although muted by catastrophe losses in excess of $250 million,
were nonetheless evident in our 1999 results.
In addition to these efforts, our Commercial Lines Group and
Reinsurance segments benefited from the impact of an all-lines,
aggregate excess-of-loss reinsurance treaty that we entered into
effective Jan. 1, 1999 (the "corporate treaty"). Coverage under
the treaty was triggered when our insurance losses and loss
adjustment expenses spanning all lines of our business reached a
certain level as prescribed by the terms of the treaty. The
corporate treaty impacted our 1999 results as follows: we
transferred, or "ceded," insurance losses and loss adjustment
expenses totaling $384 million, and ceded written and earned
insurance premiums of $211 million, resulting in a net benefit of
$173 million to our pretax income from continuing operations.
Our Reinsurance segment results also benefited from cessions made
under a separate aggregate excess-of-loss reinsurance treaty,
unrelated to the corporate treaty. Under this treaty, we ceded
insurance losses and loss adjustment expenses of $150 million, and
written and earned premiums of $62 million, for a net pretax
benefit of $88 million. Underwriting expenses were not impacted by
the treaties. The combined impact of the two treaties,
collectively referred to hereafter as the "reinsurance treaties,"
impacted our 1999 segment results as follows:
Ceded Ceded Pretax
(In millions) Losses Premiums Benefit
------ -------- -------
Commercial Lines Group $ 217 $ 119 $ 98
Reinsurance 317 154 163
----- ----- -----
Total $ 534 $ 273 $ 261
===== ===== =====
PREMIUMS
- --------
Our consolidated written premiums from continuing operations
totaled $5.11 billion in 1999, down 3% from the 1998 total of
$5.28 billion as a result of the premiums ceded under the
aforementioned reinsurance treaties. Excluding the impact of those
cessions, premium volume for the year of $5.38 billion grew 2%
over 1998, primarily due to new business in our International and
Surety segments, which offset premium declines in our Commercial
Lines Group.
<PAGE>
UNDERWRITING RESULT
- -------------------
Our consolidated GAAP underwriting loss (premiums earned less
losses incurred and underwriting expenses) was $425 million in
1999, compared with a loss of $881 million in 1998. The 1999
result includes the $261 million benefit of the reinsurance
treaties, whereas the 1998 loss includes a $215 million provision
to strengthen loss reserves, reflecting the application of our
loss reserving policies to USF&G's loss and loss adjustment
expense reserves subsequent to the merger. Excluding the benefit
of the reinsurance treaties in 1999 and the reserve provision in
1998, the 1999 underwriting loss of $686 million was slightly
worse than the 1998 loss of $666 million.
Catastrophe losses, which were a major factor in triggering
coverage under the reinsurance treaties, totaled $257 million in
1999, compared with $267 million in 1998. Major events
contributing to 1999 catastrophe losses included Hurricane Floyd,
earthquakes in Taiwan and Turkey, severe windstorms in Europe, a
variety of storms and floods across the United States, and
additional loss development from Hurricane Georges, which occurred
in 1998. Catastrophe experience in 1998 was dominated by an
unusually high number of low-severity storms across the United
States, including several which struck our home state of
Minnesota, where we have a heavy concentration of business.
The "combined ratio," representing the sum of the loss ratio and
expense ratio, is a common measurement of a property-liability
insurer's underwriting performance. The loss ratio measures
insurance losses and loss adjustment expenses incurred as a
percentage of earned premiums. The expense ratio measures
underwriting expenses as a percentage of premiums written. The
lower the ratio, the better the result. Our consolidated combined
ratio of 107.9 in 1999 was 9.5 points better than the 1998 ratio
of 117.4; however, the previously discussed factors influencing
our GAAP underwriting results in both years distorted the
comparability of our reported ratios.
The 1999 loss ratio of 72.9 reflects a 6.2 point benefit from the
reinsurance treaties. The 1998 loss ratio of 82.2 includes 4.0
points attributable to the provision to strengthen loss reserves
subsequent to the USF&G merger. Excluding these factors from both
years, the 1999 loss ratio of 79.1 was almost one point worse than
the equivalent 1998 ratio of 78.2, driven by deterioration in our
Specialty Commercial segment results.
Our reported expense ratio in 1999 was 35.0, a slight improvement
over the 1998 ratio of 35.2. The 1999 ratio, however, included a
1.7 point negative impact caused by premium cessions made under
the reinsurance treaties. Our adjusted expense ratio of 33.3 was
nearly two points better than the 1998 ratio, reflecting cost
efficiencies realized subsequent to the USF&G merger, and
additional savings resulting from the late-1998 restructuring of
our Commercial Lines Group and Specialty Commercial segments.
1999 COST REDUCTION PROGRAM
- ---------------------------
In the third quarter of 1999, we announced a cost reduction
program designed to enhance our efficiency in the highly
competitive property-liability marketplace. We recorded a pretax
charge to earnings of $60 million related to this program,
consisting of $33 million of occupancy-related expenses, $25
million of employee-related expenses related to the expected
elimination of approximately 700 positions, and $2 million of
equipment charges. Through Dec. 31, 1999, approximately 480
employees had been terminated under this plan and $11 million of
severance and other employee-related expenses were paid. We also
paid $2 million of occupancy-related expenses.
<PAGE>
1998 RESTRUCTURING CHARGE
- -------------------------
In the fourth quarter of 1998, we recorded a pretax charge to
earnings of $34 million related to the restructuring of our
Commercial Lines Group and Specialty Commercial segments. The
majority of the charge ($26 million) related to the anticipated
elimination of approximately 520 positions, with the remainder
representing the estimated costs to exit lease contracts as part
of our plan to streamline field office operations. Through Dec. 31,
1999, approximately 500 employees had been terminated and the
cost of termination benefits paid was $18 million. We reduced the
remaining severance reserve by $5 million in 1999 due to a number
of voluntary terminations, which reduced our estimate of future
severance and out-placement payments. These positions are separate
from those additional positions to be eliminated as a result of
the 1999 program. Less than $1 million had been paid related to
lease buy-outs as of year-end 1999, and we reduced the lease
accrual by $6 million for subleases that have been entered into on
the vacated space.
1998 vs. 1997
- -------------
Written premiums from continuing operations of $5.28 billion in
1998 declined 7% from 1997 premium volume of $5.68 billion,
reflecting the loss of business in certain markets following the
USF&G merger, the impact of corrective pricing and underwriting
initiatives in our commercial insurance operations, and the soft
pricing environment throughout global insurance markets. The 1998
GAAP underwriting loss of $881 million was significantly worse
than the comparable 1997 loss of $139 million, primarily due to
deterioration in commercial underwriting results, catastrophe
losses of $267 million and the $215 million provision to
strengthen loss reserves after the USF&G merger.
The loss reserve provision, discussed in more detail on page 33 of
this report, was allocated to our Commercial Lines Group segment
($197 million) and the Specialty Commercial segment ($18 million).
In addition, we recorded a $35 million provision in our Personal
Insurance operations, which were sold in 1999. That provision is
included in our reported results from discontinued operations for
1998.
2000 OUTLOOK
- ------------
We anticipate further improvement in our underwriting results in
2000. We will continue efforts to remove unprofitable business
from our operations, while implementing further price increases.
We are prepared to sacrifice additional premium volume as a
consequence of our underwriting and pricing actions. As part of
our overall ceded reinsurance program, we will continue to enter
into aggregate excess-of-loss reinsurance contracts as deemed
appropriate.
PROPERTY-LIABILITY UNDERWRITING RESULTS BY SEGMENT
- --------------------------------------------------
The following table summarizes written premiums, underwriting
results and combined ratios for each of our property- liability
underwriting business segments for the last three years. In the
fourth quarter of 1999, we realigned our primary insurance
underwriting operations in an effort to further streamline our
organization and ease agent/broker access to our products and
services in the United States. The realignment resulted in the
reclassification of certain business centers between reportable
segments, but did not change the structure of our segment
reporting format. All data for 1998 and 1997 were reclassified to
conform to the new 1999 presentation. Following the table, we take
a closer look at 1999 results for each segment and look ahead to
2000.
<PAGE>
Year ended December 31 % of 1999
(Dollars in millions) Written Premiums 1999 1998 1997
---------------- ----- ----- -----
PRIMARY INSURANCE
OPERATIONS:
U.S. Underwriting
COMMERCIAL LINES GROUP
Written premiums 37% $ 1,883 $ 2,117 $ 2,469
Underwriting result $ (261) $ (747) $ (171)
Combined ratio 112.6 134.7 108.3
Adjusted 1999 combined ratio* 116.5 - -
SPECIALTY COMMERCIAL
Written premiums 27% $ 1,375 $ 1,348 $ 1,401
Underwriting result $ (196) $ (147) $ 18
Combined ratio 114.9 111.8 99.6
SURETY
Written premiums 8% $ 409 $ 376 $ 319
Underwriting result $ 37 $ 73 $ 63
Combined ratio 83.6 79.0 78.9
--- ------- ------- -------
Total U.S. Underwriting
Written premiums 72% $ 3,667 $ 3,841 $ 4,189
Underwriting result $ (420) $ (821) $ (90)
Combined ratio 110.8 122.3 103.6
Adjusted 1999 combined ratio* 113.0 - -
INTERNATIONAL
Written premiums 9% $ 480 $ 378 $ 293
Underwriting result $ (84) $ (67) $ (53)
Combined ratio 117.9 116.7 118.1
--- ------- ------- -------
Total PRIMARY INSURANCE
Written premiums 81% $ 4,147 $ 4,219 $ 4,482
Underwriting result $ (504) $ (888) $ (143)
Combined ratio 111.4 121.7 104.4
Adjusted 1999 combined ratio* 113.4 - -
REINSURANCE
Written premiums 19% $ 965 $ 1,057 $ 1,200
Underwriting result $ 79 $ 7 $ 4
Combined ratio 92.0 98.7 99.0
Adjusted 1999 combined ratio* 108.5 - -
--- ------- ------- -------
TOTAL PROPERTY-LIABILITY
INSURANCE
Written premiums 100% $ 5,112 $ 5,276 $ 5,682
Underwriting result $ (425) $ (881) $ (139)
Combined ratio:
Loss and loss expense ratio 72.9 82.2 69.8
Underwriting expense ratio 35.0 35.2 33.5
------- ------- -------
Combined ratio 107.9 117.4 103.3
======= ======= =======
Adjusted 1999 combined ratio* 112.4 - -
======= ======= =======
* Adjusted 1999 combined ratios exclude the benefit of the two
reinsurance treaties described on page 22 of this report.
<PAGE>
PROPERTY-LIABILITY INSURANCE
Primary Insurance Operations
- ----------------------------
Our primary insurance underwriting operations consist of three
U.S.-based business segments and an International segment, which
underwrite property-liability insurance and provide insurance-
related products and services to commercial and professional
customers. We utilize a network of independent insurance agents
and brokers to distribute our insurance products. Based on 1998
premium volume, The St. Paul ranked as the 11th-largest U.S.
property-liability underwriter.
U.S. Underwriting
COMMERCIAL LINES GROUP
- ----------------------
The Commercial Lines Group segment includes our Middle Market
Commercial and Small Commercial business centers, which serve
small and mid-sized customers in the general commercial market;
our Construction business center, which provides insurance
products and services to a broad range of contractors; and our CAT
Risk operation, which underwrites property insurance focused on
catastrophe exposures for large commercial customers, and
earthquake coverage for California homeowners. The results of our
limited participation in insurance Pools are also included in this
segment.
The corporate treaty affected the Commercial Lines Group results
as follows: written and earned premiums totaling $119 million were
ceded, along with insurance losses and loss adjustment expenses of
$217 million, resulting in a net pretax benefit of $98 million.
The treaty impact was not allocated to individual business centers
within the segment; therefore, all references to respective 1999
business center results in the following discussion exclude any
impact of the corporate treaty.
PREMIUMS
- --------
Written premiums of $1.88 billion for the segment as a whole in
1999 were $234 million, or 11%, below 1998 premiums of $2.12
billion. Excluding the premium cessions under the corporate
treaty, 1999 premium volume of $2.0 billion was still down 5%
compared with 1998. The reduction was centered in our Middle
Market operation and was consistent with our decision in late 1998
to selectively reduce our exposures in this market sector due to
continuing deterioration in the pricing environment. Middle Market
written premiums of $991 million were $200 million, or 17%, below
the comparable 1998 total. The pricing situation in this market
sector showed signs of improvement as the year progressed. Price
increases on our Middle Market business accelerated during the
second half of 1999 and averaged 4% for the year in total. Our
Middle Market business retention levels in 1999 remained steady at
approximately 70%. Small Commercial premium volume of $460 million
in 1999 was 7% higher than the 1998 total of $429 million,
reflecting new business and price increases averaging 3% for the
year. Premium volume in the Construction business center totaled
$433 million in 1999, an increase of 7% over 1998 which resulted
from a strong construction industry and price increases averaging
5%.
<PAGE>
UNDERWRITING RESULT
- -------------------
The Commercial Lines Group combined ratio of 112.6, which included
a 3.9 point benefit from the corporate treaty, was a significant
improvement from the 1998 ratio of 134.7, which included an 8.6
point impact of the $197 million provision to strengthen loss
reserves subsequent to the USF&G merger. Excluding those factors
in each year, the 1999 combined ratio of 116.5 was nearly ten
points better than the 1998 ratio of 126.1, reflecting the
underwriting and expense reduction initiatives implemented in
1999.
The loss ratio for the Commercial Lines Group suffered early in
the year from large property losses across several business
centers, a problem that was addressed through several corrective
actions by the end of the year, including price increases and
extensive re-underwriting efforts. Results in the Construction
business center improved markedly during 1999, primarily due to
favorable development on prior years' workers' compensation
business. The Middle Market Commercial 1999 loss ratio of 92.2 was
slightly worse than the 1998 ratio of 89.8 (as adjusted to exclude
the impact of the provision to strengthen loss reserves), but
results improved in the second half of the year, particularly on
business written in 1999. Small Commercial results also improved
in 1999 due to favorable prior year loss development. Catastrophe
losses in the Commercial Lines Group segment totaled $72 million
in 1999, compared with $138 million in 1998.
The 1999 segment expense ratio, as adjusted for the impact of the
corporate treaty, was 33.8, over two points better than the 1998
ratio of 36.0. The improvement reflected the impact of merger-
related efficiencies and cost reduction initiatives. Total
underwriting expenses were down $86 million, or 11%, from 1998
levels, decreasing at a significantly faster rate than the 5%
decline in premium volume.
1998 vs. 1997
- -------------
Premium volume of $2.12 billion in 1998 was over $300 million less
than 1997 written premiums of $2.47 billion. The decline was
centered in the Middle Market and Construction business centers,
reflecting our efforts to reduce business volume generated from
these market sectors due to continuing price erosion and
accelerating loss costs. In addition, our exit from the
unprofitable Trucking line of business negatively impacted year-to-
year premium comparisons with 1997. Small Commercial premiums
declined 3% in 1998. Excluding the 8.6 point impact of the $197
million reserve provision, the 1998 combined ratio of 126.1 was
still significantly worse than the 1997 ratio of 108.3. Adverse
loss development on reserves established in prior years, primarily
for Middle Market and Construction business, was the primary
factor in the deterioration from 1997. In addition, catastrophe
losses of $138 million in 1998 were more than double the 1997
total of $62 million. The expense ratio in 1998 was 1.5 points
higher than 1997, reflecting higher commission expenses incurred
as the result of efforts to retain certain business subsequent to
the USF&G merger.
2000 OUTLOOK
- ------------
We are optimistic about prospects for sustaining the positive
momentum generated in this segment during the latter half of 1999.
We expect to achieve further price increases in 2000. Price
competition for desirable new business will remain intense across
all market sectors served by the Commercial Lines Group. We
continue to emphasize underwriting discipline regarding risk
selection and pricing, while continuing our aggressive efforts to
streamline our field structure and facilitate agent/broker access
to our products. We intend to expand access to automated
underwriting tools and develop additional e-commerce capabilities,
such as internet agent quoting, to create a competitive advantage
in the commercial marketplace.
<PAGE>
U.S. Underwriting
SPECIALTY COMMERCIAL
- --------------------
The Specialty Commercial segment is one component of our Global
Specialty Practices organization and is composed of the following
business centers that serve specific commercial customer groups:
Financial and Professional Services provides property, liability,
professional liability and management liability coverages for
corporations, nonprofit organizations, financial services
organizations, and a variety of professionals such as lawyers,
insurance agents and real estate agents. Public Sector Services
markets insurance products and services to all levels of
government entities. Health Services (formerly Medical Services)
provides a wide range of insurance products and services
throughout the entire health care delivery system. Technology
offers a comprehensive portfolio of specialty products and
services to companies involved in telecommunications, information
technology, medical and biotechnology, and electronics
manufacturing. Excess and Surplus Lines underwrites liability
insurance, umbrella and excess liability coverages, and coverages
for unique risks. Oil and Gas provides specialized property and
casualty products for customers involved in the exploration and
production of oil and gas. Global Marine provides insurance
related to ocean and inland waterways traffic. The Specialty
Commercial segment was not affected by the corporate reinsurance
treaty.
PREMIUMS
- --------
Specialty Commercial premium volume of $1.38 billion in 1999 grew
2% over 1998 premiums of $1.35 billion. Financial and Professional
Services' written premiums of $249 million in 1999 fell 4% short
of 1998 levels, due to a slight decline in business retention
levels in a highly competitive marketplace. Premiums in Public
Sector Services declined 3% in 1999, reflecting a reduction in new
business and lower retention levels due to price increases. Health
Services' premiums of $513 million were 5% higher than the 1998
total of $490 million, primarily the result of a one-time policy
transaction written during the year which generated a premium of
$37 million. Professional liability price increases in Health
Services averaged 7% in 1999, with business retention levels
remaining steady. Our Technology operation experienced strong
growth in 1999, driven by new product introductions, renewal
retentions of approximately 85%, and a stable pricing environment.
Technology premiums totaled $212 million in 1999, 19% higher than
1998 volume of $178 million. Excess and Surplus Lines' written
premiums were virtually level with 1998. Global Marine premiums of
$97 million in 1999 were down 16% from 1998, due to a weak ship-
building market and the nonrenewal of inadequately priced
business.
UNDERWRITING RESULT
- -------------------
The Specialty Commercial combined ratio of 114.9 was over three
points worse than the 1998 ratio of 111.8. The deterioration was
centered in three business centers, all of which implemented
corrective measures prior to the end of the year to improve future
profitability. Global Marine posted a 157.2 combined ratio in
1999, driven by poor results generated by Midwest river
transportation business, which we ceased writing in late 1999 by
selling renewal rights to that book of business. The Global Marine
combined ratio excluding this class of business was 116.7. In our
Excess and Surplus Lines operation, we implemented several
initiatives aimed at improving on 1999's combined ratio of 135.0,
including exiting unprofitable market sectors and significantly
reducing business volume in other sectors. Our Public Sector
Services operation was plagued early in the year by several large
property losses, contributing to a combined ratio of 125.3 for the
year. We implemented corrective measures, including price
increases averaging 4%, prior to the end of 1999.
<PAGE>
Our remaining Specialty Commercial operations performed well amid
intensely competitive pressures. Health Services' combined ratio
of 113.5 for the year improved by ten points compared with 1998,
primarily due to price increases and moderating loss trends. The
1999 Health Services combined ratio also benefited from certain
changes in premium accrual estimates. Our Technology business
center recorded a solid combined ratio of 100.6 for the year, and
Financial and Professional Services posted a profitable combined
ratio of 91.4.
1998 vs. 1997
- -------------
Written premiums in 1998 fell 4% short of the 1997 total of $1.40
billion, primarily due to competitive pricing pressures in the
Health Services business center and excess capacity in general
throughout primary insurance markets, which negatively impacted
premium volume in our Excess and Surplus Lines operation. The
combined ratio of 111.8 in 1998 was 12.2 points worse than the
1997 ratio, driven by marked deterioration in the Health Services
business center resulting from a sharp increase in the severity of
claims during the year and adverse loss development on prior year
business. The magnitude of Health Services' losses more than
offset improvement in Financial and Professional Services' results
and strong profitability in the Technology business center.
Catastrophe losses of $38 million in 1998 were $17 million higher
than comparable 1997 losses.
2000 OUTLOOK
- ------------
We expect modest improvement in the Specialty Commercial pricing
environment in 2000. We are optimistic that the corrective actions
implemented in those business centers with poor results in 1999
will provide the basis for improvement in this segment's 2000
performance. We will focus on maintaining underwriting discipline
while pursuing profitable growth, capitalizing on our prominence
in several markets and further strengthening our agent/broker
relationships. We expect our Technology operation to face
intensifying competitive pressures in 2000 as other carriers renew
pursuit of market share as "Year 2000" fears fade. In our Global
Marine business center, we will focus on achieving better results
in what we expect to be gradually improving market conditions
during 2000. The acquisition of MMI Companies, Inc. will
complement our existing Health Services operation, creating an
integrated global provider of insurance-related products to the
healthcare industry.
<PAGE>
U.S. Underwriting
SURETY
- ------
The Surety segment, also a component of our Global Specialty
Practices organization, underwrites surety bonds, which guarantee
that third parties will be indemnified against the nonperformance
of contractual obligations. Our Surety operation is the largest
surety insurer in the United States based on 1998 premium volume,
accounting for approximately 11% of the domestic market. In
addition, this segment includes Afianzadora Insurgentes, the
largest surety bond underwriter in Mexico, with a market share of
over 40%.
PREMIUMS
- --------
Written premiums of $409 million in 1999 grew 9% over the
comparable 1998 total of $376 million. In both the United States
and Mexico, the continuing economic expansion in 1999 fueled
growth in the construction industry, resulting in a significant
increase in the demand for contract surety coverages. In addition,
1999 premium volume reflected the successful retention of targeted
key accounts in an increasingly competitive marketplace.
UNDERWRITING RESULT
- -------------------
The 1999 combined ratio was a profitable 83.6, reflecting the
quality of our book of surety business. The combined ratio of 79.0
in 1998 included the impact of reductions in reserves established
in prior years, which did not occur to the same extent in 1999.
The expense ratio of 51.5 in 1999 was almost four points better
than the 1998 ratio of 55.3, primarily due to the efficiencies
realized in the post-merger organization.
1998 vs. 1997
- -------------
Premium volume in 1998 grew 18% over 1997, largely due to new
business initiatives and aggressive efforts to retain business
subsequent to the USF&G merger. The profitable combined ratios in
both years resulted from the absence of significant losses, and
also include the impact of reductions in previously established
reserves.
2000 OUTLOOK
- ------------
Virtually all market indicators point to an economy that will
continue to prosper into the near future, enhancing the prospects
for further growth in the demand for surety products. We intend to
build on our domestic market leadership position, leveraging our
underwriting and marketing expertise on a global basis. We expect
technology initiatives to play an increasingly important role in
shaping our agent/broker relations, with the goal of positioning
our Surety operations as the market of choice.
<PAGE>
Primary Insurance Operations
INTERNATIONAL
- -------------
Our International segment underwrites primary insurance outside of
the United States, and includes business generated from our
participation in Lloyd's of London as a provider of capital to
eight underwriting syndicates and as the owner of a managing
agency. We have built a local market presence in 14 key countries
that account for over 80% of the world's insurance market. In
addition to Canada, we underwrite insurance in Europe, Africa,
Australia and Latin America. This segment also provides coverage
for the non-U.S. risks of U.S. corporate policyholders and non-
U.S.-based policyholders' exposures in the United States. Our
International operations have a specialty commercial focus with
particular emphasis on liability coverages. At Lloyd's, we have
been a consolidator of specialty businesses which complement our
existing operations. The International segment was not impacted by
the corporate reinsurance treaty.
PREMIUMS
- --------
Virtually all of our International operations experienced growth
during 1999. Written premiums of $480 million were 27% higher than
the 1998 total of $378 million. Premiums generated through our
Lloyd's of London operations of $201 million increased by $78
million, or 63%, over the 1998 total of $123 million, reflecting
the significant expansion of our underwriting capacity in the
Lloyd's market. The eight underwriting syndicates we manage
account for approximately 4% of Lloyd's total capacity. In markets
where we have mature businesses (at least four years of
operations), premiums of $243 million were slightly below the 1998
total of $250 million, primarily due to the sale of our personal
insurance business in the United Kingdom in early 1998. Our
investment in operations established within the last four years,
particularly those in Europe and Latin America, experienced strong
growth in premium volume in 1999, as we continued to expand our
specialty product offerings.
UNDERWRITING RESULT
- -------------------
The 1999 combined ratio of 117.9 in the International segment was
slightly worse than the 1998 ratio of 116.7, largely due to
deterioration in three of our syndicates at Lloyd's, particularly
one syndicate underwriting aviation coverage. In addition, the
collision of two commuter trains in London, both insured by our
International operations, accounted for a loss of $6 million (net
of reinsurance recoveries) in the fourth quarter of the year,
adding 1.5 points to the 1999 loss ratio. Our operations in Canada
rebounded to post a combined ratio of 108.9 in 1999, much improved
over the 1998 ratio of 149.3 that was heavily impacted by severe
ice storms. Our operations in Africa achieved a combined ratio of
103.8 in 1999, slightly worse than the 1998 ratio of 98.9.
1998 vs. 1997
- -------------
Premium volume of $378 million in 1998 grew 29% over 1997 premiums
of $293 million, primarily due to increased capacity at Lloyd's of
London, and new business in Africa and Latin America. Premiums
generated by our commercial underwriting operations in the United
Kingdom also contributed to the increase over 1997. The 1998
combined ratio of 116.7 was slightly better than the 1997 ratio of
118.1, primarily due to an improvement in the expense ratio.
Significant losses incurred in Canada in early 1998 due to a
severe ice storm offset an improvement in loss experience across
almost all of our other International operations.
2000 OUTLOOK
- ------------
We expect significant additional premium growth and improved
results in 2000 as our International operations continue to
mature. At Lloyd's, we will continue to consolidate the capacity
we manage, adding specialized underwriting teams as opportunities
for business expansion arise. Our mature operations are expected
to grow through the introduction and expansion of customer-focused
liability products linked with our specialized risk management
capabilities. Our appointment in late 1999 by the Law Society of
England and Wales as its joint venture partner, effective Sept. 1,
2000, should provide opportunities for significant professional
indemnity premium growth in this segment going forward.
<PAGE>
Reinsurance
ST. PAUL RE
- -----------
Our Reinsurance segment, St. Paul Re, underwrites traditional
treaty and facultative reinsurance for property, liability, ocean
marine, surety and certain specialty classes of coverage and also
underwrites "non-traditional" reinsurance, which combines
traditional underwriting risk with financial risk protection. St.
Paul Re underwrites reinsurance for leading property liability
insurance companies worldwide. Through Discover Re, our
Reinsurance segment also underwrites primary insurance and
reinsurance and provides related insurance products and services
to self-insured companies and insurance pools, in addition to
ceding to and reinsuring captive insurers, all within the
alternative risk transfer market. Based on 1998 written premium
volume, our reinsurance operations ranked as the 15th-largest
reinsurer in the world.
PREMIUMS
- --------
St. Paul Re's written premiums of $965 million in 1999 were 9%
below the 1998 total of $1.06 billion. Premium volume in 1999 was
reduced by cessions of $92 million under our corporate reinsurance
treaty and $62 million under the separate aggregate stop-loss
treaty exclusive to the Reinsurance segment. These reductions were
partially offset by a $61 million increase in 1999 written
premiums that resulted from a change in the process we use to
estimate reinsurance premiums that have been earned, but not
reported (EBNR), by ceding insurers. Excluding these factors, 1999
written premiums were level with 1998. A difficult operating
environment, characterized by excess capacity and inadequate
pricing levels on traditional reinsurance products, continued to
plague the global reinsurance marketplace in 1999. St. Paul Re
capitalized on new business opportunities in non-traditional
reinsurance, offsetting the decline in traditional reinsurance
premium volume.
UNDERWRITING RESULT
- -------------------
The 1999 combined ratio of 92.0 in our Reinsurance segment was
driven by favorable development on business written in prior
years, as well as benefits realized from the aggregate stop-loss
treaties. We ceded insurance losses and loss adjustment expenses
totaling $317 million under the two treaties which, when reduced
by the $154 million in related premiums ceded, resulted in a net
pretax benefit of $163 million to our Reinsurance segment in 1999.
Excluding the impact of these treaties, the combined ratio in this
segment was 108.5, nearly ten points worse than the 1998 ratio of
98.7. The change in the process we use to estimate EBNR, discussed
previously, resulted in increases to earned premiums of $47
million, losses and loss adjustment expenses of $47 million and
other expenses of $9 million, for a net pretax loss of
approximately $9 million. Catastrophe losses of $143 million in
1999 played a large role in the deterioration from 1998, as well
as unfavorable current year noncatastrophe loss experience on
property coverages. Catastrophes in 1999 included the highly
unusual windstorm that swept across Europe late in the year,
earthquakes in Taiwan and Turkey, and Hurricane Floyd. Catastrophe
losses in 1998 totaled $86 million, largely resulting from
Hurricane Georges.
1998 vs. 1997
- -------------
Premium volume in 1998 fell 12% below the 1997 total, primarily
due to adverse conditions in worldwide reinsurance markets,
including continued rate erosion and competition from capital
markets. Our property reinsurance volume was down sharply from
1997, reflecting a deliberate reduction in exposures caused by
inadequate pricing. The 1998 combined ratio of 98.7 was slightly
improved over the 1997 ratio. Favorable development on prior
years' business offset a significant increase in catastrophe
losses in 1998, which largely resulted from Hurricane Georges.
2000 OUTLOOK
- ------------
We expect modest improvement in reinsurance markets in 2000,
having achieved some progress on pricing for business renewing in
January 2000. Conditions will remain challenging, however,
requiring innovative approaches to developing new business while
maintaining underwriting discipline. In the current marketplace,
ceding companies appear to be receptive to expanding
nontraditional insurance arrangements, which should provide new
opportunities for that portion of our operations. We intend to
expand our alternative risk transfer business, and explore
business expansion in China and Japan.
<PAGE>
Property-Liability Insurance
INVESTMENT OPERATIONS
We maintain a high-quality portfolio with the primary objective of
maximizing investment returns and generating sufficient liquidity
to fund our cash requirements. The majority of our funds available
for investment are deployed in a widely diversified portfolio of
predominantly investment-grade fixed maturities. We also invest
lesser amounts in equity securities, venture capital and real
estate with the goal of producing long-term growth in the value of
our invested asset base and ultimately enhancing shareholder
value. The latter investment classes have the potential for higher
returns but also involve a greater degree of risk, including less
stable rates of return and less liquidity. Funds to be invested
are generated by underwriting cash flows, consisting of the excess
of premiums collected over losses and expenses paid, and
investment cash flows, which consist of income received on
existing investments and proceeds from sales and maturities of
investments.
Our property-liability investment segment generated pretax
investment income of $1.26 billion in 1999, down 3% from income of
$1.29 billion in 1998. Pretax investment income in 1997 totaled
$1.32 billion. Negative underwriting cash flows over the last two
years, combined with merger-related and restructuring payments
over the same period, resulted in a net reduction in our
investment portfolio (excluding the effects of unrealized
appreciation) in both 1999 and 1998.
The following table summarizes the composition and carrying value
of our property-liability investment segment's portfolio at the
end of the last two years. More information on each of our
investment classes follows the table.
December 31
(In millions) 1999 1998
- -------------- ------ ------
CARRYING VALUE:
Fixed maturities $ 15,479 $ 17,178
Equities 1,537 1,193
Real estate and mortgage loans 1,268 1,151
Venture capital 866 571
Securities lending collateral 1,216 1,368
Short-term investments 1,192 842
Other investments 110 286
------ ------
Total investments $ 21,668 $ 22,589
====== ======
<PAGE>
FIXED MATURITIES
- ----------------
Our fixed maturities portfolio is composed of high-quality,
intermediate-term taxable U.S. government, corporate and mortgage-
backed bonds, and tax-exempt U.S. municipal bonds. We manage our
bond portfolio conservatively, investing almost exclusively in
investment-grade (BBB or better) securities. Approximately 95% of
our portfolio at the end of 1999 was rated investment grade, with
the remaining 5% split between high yield and nonrated securities,
most of which we believe would be considered investment-grade if
rated.
Taxable securities accounted for the majority of our new bond
purchases in 1999 and comprised 67% of our long-term portfolio at
the end of the year. The decision whether to purchase taxable or
tax-exempt bonds is driven by our consolidated tax position and
the relationship between taxable and tax-exempt yields. The
average yield on taxable bond purchases in 1999 was 7.2%, compared
with 6.4% in 1998, reflecting the upward movement of interest
rates during the year. Our bond portfolio in total carried a
weighted average pretax yield of 6.8% at Dec. 31, 1999, unchanged
from year-end 1998. These investments produced pretax investment
income of $1.17 billion in 1999, compared with $1.20 billion and
$1.24 billion in 1998 and 1997, respectively.
The amortized cost of our bond portfolio at the end of 1999 was
$15.52 billion, compared with $16.20 billion at the end of 1998.
The decline was primarily due to the net sale of bonds in 1999 to
fund our cash flow requirements. As part of the sale of our
standard personal insurance operations in 1999, we transferred
bonds having an amortized cost of $499 million at Sept. 30, 1999
to Metropolitan. In connection with that sale, bonds having an
amortized cost of $563 million were reclassified to net assets of
discontinued operations (included in "other assets") as of Dec.
31, 1998. We carry bonds on our balance sheet at market value,
with the corresponding appreciation or depreciation recorded in
shareholders' equity, net of taxes. The market values of our bonds
fluctuate with changes in market interest rates. Anticipated
future trends in market yields can also significantly impact the
market value of our bonds.
At the end of 1999, the pretax unrealized depreciation on our bond
portfolio was $36 million, compared with appreciation of $979
million at the end of 1998. Although a portion of the change was
due to the net decline in our bond holdings in 1999, the vast
majority of the erosion in market value was attributable to the
upward trend in market interest rates during 1999. The Federal
Reserve Board raised short-term interest rates on three occasions
in 1999 for a combined total of 0.75%. That increase offset
interest rate reductions of the same amount in 1998 that had
driven unrealized appreciation on our bond portfolio near the $1
billion mark.
EQUITIES
- --------
Our equity holdings consist of a diversified portfolio of common
stocks which accounted for 5% of total investments (at cost) at
Dec. 31, 1999. Equity markets in the United States experienced
another year of substantial appreciation, driven by a significant
increase in the value of internet-related technology firms. Our
domestic equity portfolio produced a total return of 32.6% in
1999, outperforming the 21.1% return generated by the Standard &
Poor's 500 equity index. The pretax unrealized appreciation
included in the $1.54 billion carrying value of our equity
portfolio totaled $516 million at the end of 1999, compared with
$300 million at the end of 1998.
REAL ESTATE AND MORTGAGE LOANS
- ------------------------------
Real estate ($876 million) and mortgage loans ($392 million)
comprised 6% of our total investments at the end of 1999. Our real
estate holdings primarily consist of commercial office and
warehouse properties that we own directly or in which we have a
partial interest through joint ventures. Our properties are
geographically distributed throughout the United States and had an
occupancy rate of 94% at year-end 1999. These investments produced
pretax income of $57 million in 1999 and generated cash flows
totaling $84 million. Gross new real estate investments totaled
$137 million in 1999.
We acquired the portfolio of mortgage loans in the USF&G merger.
The loans, which are collateralized by income-producing real
estate, produced investment income of $30 million in 1999. We did
not originate any new loans during the year.
<PAGE>
VENTURE CAPITAL
- ---------------
Venture capital comprised 2% of our invested assets (at cost) at
the end of 1999. These private investments span a variety of
industries but are concentrated in information technology, health
care and consumer products. In 1999, we invested $237 million in
this asset class, a 65% increase over 1998. Our portfolio produced
a total pretax return of over $440 million in 1999, consisting of
realized gains and the increase in unrealized appreciation. The
carrying value of the venture capital portfolio at year-end 1999
and 1998 included unrealized appreciation of $468 million and $182
million, respectively.
SECURITIES LENDING COLLATERAL
- -----------------------------
These investments are collateral for our securities lending
operations. Through our lending agent, we loan certain securities
from our fixed-maturity portfolio to other approved institutions.
We receive a fee from the borrower in return. We require
collateral from the borrower equal to 102% of the fair value of
the loaned securities. We retain full ownership of the securities
loaned, and are indemnified by the lending agent in the event a
borrower becomes insolvent or fails to return securities. We
record securities lending collateral as an asset, with a
corresponding liability for the same amount.
REALIZED INVESTMENT GAINS AND LOSSES
- ------------------------------------
The following table summarizes our property-liability operations'
realized gains and losses by investment class for each of the last
three years.
Year ended December 31
(In millions) 1999 1998 1997
- ---------------------- ----- ----- -----
Pretax Realized Investment
Gains (Losses):
Fixed maturities $ (19) $ 1 $ (18)
Equities 118 158 155
Real estate and mortgage loans 18 8 53
Venture capital 158 25 213
Other investments (1) (4) 9
----- ----- -----
Total $ 274 $ 188 $ 412
===== ===== =====
Venture capital gains in 1999 were driven by sales of investments
in technology-related companies. Venture capital gains in 1997
included a $129 million gain on the sale of the stock of Advanced
Fibre Communications, Inc., one of our direct investments.
2000 INVESTMENT OUTLOOK
- -----------------------
We expect interest rates to increase in the first half of 2000 as
the Federal Reserve continues its efforts to keep inflationary
pressures in check in an expanding economy. We remain committed to
maintaining the quality of our diversified investment portfolio.
We will continue to invest the majority of funds available in
investment-grade fixed-maturities, with additional funds allocated
to our other asset classes as market conditions warrant. Our
equity portfolio activities will be responsive to the
opportunities that develop in the market. We believe our venture
capital investments have the potential to once again generate
sizeable realized gains in 2000. Our acquisition of MMI Companies,
Inc. is expected to add a high-quality, $1.0 billion fixed-
maturity portfolio to our operations in the second quarter of
2000. The sale of our nonstandard auto operations is expected to
result in the transfer of approximately $290 million of
investments to Prudential in the second quarter of 2000.
<PAGE>
Property-Liability Insurance
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
- -----------------------------------------
Our loss reserves reflect estimates of total losses and loss
adjustment expenses we will ultimately have to pay under insurance
and reinsurance policies. These include losses that have been
reported but not settled and losses that have been incurred but
not reported to us (IBNR). Loss reserves for certain workers'
compensation business and certain assumed reinsurance contracts
are discounted to present value. We reduce our loss reserves for
estimates of salvage and subrogation.
For reported losses, we establish reserves on a "case" basis
within the parameters of coverage provided in the insurance policy
or reinsurance agreement. For IBNR losses, we estimate reserves
using established actuarial methods. Our case and IBNR reserve
estimates consider such variables as past loss experience, changes
in legislative conditions, changes in judicial interpretation of
legal liability and policy coverages, and inflation. We consider
not only monetary increases in the cost of what we insure, but
also changes in societal factors that influence jury verdicts and
case law and, in turn, claim costs.
Because many of the coverages we offer involve claims that may not
ultimately be settled for many years after they are incurred,
subjective judgments as to our ultimate exposure to losses are an
integral and necessary component of our loss reserving process. We
record our reserves by considering a range of estimates bounded by
a high and low point. Within that range, we record our best
estimate. We continually review our reserves, using a variety of
statistical and actuarial techniques to analyze current claim
costs, frequency and severity data, and prevailing economic,
social and legal factors. We adjust reserves established in prior
years as loss experience develops and new information becomes
available. Adjustments to previously estimated reserves are
reflected in our financial results in the periods in which they
are made.
After the consummation of our merger with USF&G in April 1998, we
recorded a $250 million loss provision to reflect the application
of The St. Paul's reserving policies to USF&G's loss reserves. Our
actuaries reviewed the raw data underlying, and documentation
supporting, USF&G's year-end 1997 reserve analysis, and concurred
with the reasonableness of USF&G's range of estimates for those
reserves. However, applying their judgment and interpretation to
the range, The St. Paul's actuaries, who would be responsible for
setting reserve amounts for the merged entity, concluded that
strengthening of the reserves would be appropriate, resulting in
the $250 million adjustment. Of that provision, $35 million was
allocated to the standard personal insurance operations that were
sold in 1999, and that amount is included in discontinued
operations for 1998.
Note 8 to the financial statements, on page 56 of this report,
includes a reconciliation of our beginning and ending loss and
loss adjustment expense reserves for each of the years 1999, 1998
and 1997. That reconciliation shows that we have recorded
reductions in the loss provision from continuing operations for
claims incurred in prior years totaling $208 million, $217 million
and $716 million in 1999, 1998 and 1997, respectively.
<PAGE>
The reductions in prior year losses recorded in 1999 and 1998 were
lower than those recorded in the preceding several years. In 1999,
favorable prior year loss development in several lines of
business, including workers' compensation and assumed reinsurance,
was reduced by adverse development in our Global Marine operation
and certain commercial business centers. In 1998, the reduction in
prior year losses was impacted by the provision to strengthen loss
reserves subsequent to our merger with USF&G.
The favorable prior year development recorded on workers'
compensation coverages in recent years reflected the impact of
legal and regulatory reforms throughout the country in the early
1990's that caused us to reduce our estimate of ultimate loss
costs on those coverages. In 1999 and 1998, there were no
significant additional changes in our estimate of those ultimate
loss costs; as a result, while we still recorded a reduction in
prior year losses, it was not of the same magnitude as those in
preceding years.
In our Health Services operation, the magnitude of favorable
adjustments to prior year losses significantly declined in 1999
and 1998. Loss activity in those years indicated an increase in
the severity of claims incurred in the years 1995 through 1997;
accordingly, we adopted a more cautious view of ultimate loss
provisions for those years, resulting in a much smaller reduction
in prior year loss provisions during 1999 and 1998 than those
recorded in recent years.
Favorable prior year development on assumed reinsurance also
contributed to the reduction in prior year loss provisions in 1998
and 1997.
The reduction in 1997 was also impacted by a change in the way we
assign loss activity to a particular year for a portion of our
reinsurance business. We implemented an improved procedure in 1997
that more accurately assigns loss activity for this business to
the year in which it occurred. This change had the effect of
increasing favorable development on previously established
reserves by approximately $110 million in 1997. There was no net
impact on total incurred losses, however, because there was a
corresponding increase in the provision for current year loss
activity in 1997.
<PAGE>
Property-Liability Insurance
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 are still developing.
The following table represents a reconciliation of total gross and
net environmental reserve development for each of the years in the
three-year period ended Dec. 31, 1999. Amounts in the "net" column
are reduced by reinsurance recoverables.
1999 1998 1997
------------ ------------ ------------
(In millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
ENVIRONMENTAL
Beginning reserves $783 $645 $867 $677 $889 $676
Incurred losses (33) 1 (16) 26 44 58
Paid losses (52) (47) (68) (58) (66) (57)
----- ---- ----- ---- ----- ----
Ending reserves $698 $599 $783 $645 $867 $677
===== ==== ===== ==== ===== ====
The following table represents a reconciliation of total gross and
net reserve development for asbestos claims for each of the years
in the three-year period ended Dec. 31, 1999.
1999 1998 1997
------------ ------------ ------------
(In millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
ASBESTOS
Beginning reserves $402 $277 $397 $279 $413 $304
Incurred losses 28 51 44 13 22 (5)
Paid losses (32) (30) (39) (15) (38) (20)
----- ---- ----- ---- ----- ----
Ending reserves $398 $298 $402 $277 $397 $279
===== ==== ===== ==== ===== ====
Our reserves for environmental and asbestos losses at Dec. 31,
1999 represent our best estimate of our ultimate liability for
such losses, based on all information currently available to us.
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 our 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 the results of our operations, liquidity or
financial position.
Total gross environmental and asbestos reserves at Dec. 31, 1999,
of $1.10 billion represented approximately 6% of gross
consolidated reserves of $17.93 billion.
<PAGE>
SALES REACH $1 BILLION IN 1999 ON STRENGTH OF POPULAR EQUITY-
INDEXED PRODUCTS
Life Insurance
F&G LIFE
- --------
Our life insurance segment consists of Fidelity and Guaranty Life
Insurance Company and subsidiaries ("F&G Life"). F&G Life's
primary products are deferred annuities (including tax sheltered
annuities and equity-indexed annuities), structured settlement
annuities, and immediate annuities. F&G Life also underwrites
traditional and universal life insurance products. F&G Life's
products are sold throughout the United States through independent
agents, managing general agents and specialty brokerage firms.
Highlights of F&G Life's financial performance for the last three
years were as follows:
Year ended December 31
(In millions) 1999 1998 1997
----- ----- -----
Sales (premiums and deposits) $ 1,000 $ 501 $ 446
Premiums and policy charges 187 119 137
Policy surrenders 217 207 171
Net investment income 298 276 253
Pretax earnings 66 21 78
Life insurance in force $ 12,398 $ 10,774 $ 10,748
F&G Life's increase in pretax earnings in 1999 was due to growth
in assets under management, driven by strong product sales and
improved operating cash flows, offset by increased product
development and distribution channel expansion expenses, and
realized investment losses of $9 million. In addition, an increase
in interest rates had a favorable impact on our investment spreads
which, combined with greater estimated future gross profits,
resulted in lower amortization of deferred policy acquisition
costs (DPAC). Pretax earnings in 1998 were reduced by a $41
million writedown of DPAC and $9 million of charges related to The
St. Paul's merger with USF&G. Excluding realized investment gains
and losses in both years and the writedown and other charges in
1998, pretax earnings of $75 million in 1999 were virtually level
with 1998. After-tax earnings on a similar basis, however,
increased in 1999, reflecting the impact of F&G Life's
implementation of a strategy to allocate 1% of its investment
portfolio to tax-favored securities. These investments, while
typically contributing little or no operating earnings, generate
tax credits that lowered F&G Life's effective tax rate from 34% in
1998 to 29% in 1999.
<PAGE>
The following table shows life insurance and annuity sales
(premiums and deposits) by product type and distribution system.
Year ended December 31
(In millions) 1999 1998 1997
----- ----- -----
Product Type:
Equity-indexed annuities $ 686 $ 209 $ -
Structured settlement annuities 95 49 74
Single premium deferred
annuities 78 134 248
Tax sheltered annuities 49 64 84
Single premium immediate and
other annuities 70 30 23
Life insurance 22 15 17
----- ----- -----
Total $ 1,000 $ 501 $ 446
===== ===== =====
Distribution System:
Brokerage $ 822 $ 367 $ 268
Structured settlement brokers 113 55 74
Tax-sheltered annuity
wholesalers 49 68 91
Other 16 11 13
----- ----- -----
Total $ 1,000 $ 501 $ 446
===== ===== =====
Sales volume doubled in 1999, primarily due to the success of
equity-indexed annuity (EIA) products first introduced in mid-
1998. Credited interest rates on the EIA products are tied to the
performance of a leading market index. EIA sales in 1999 were $477
million higher than 1998, and accounted for 69% of total product
sales for the year. Sales of fixed interest rate annuities in 1999
were below 1998 levels due to the negative impact of comparatively
low market interest rate levels on our fixed interest rate
products. The demand for annuity products is affected by
fluctuating interest rates and the relative attractiveness of
alternative products, particularly equity-based products.
Traditional life insurance sales increased 47% in 1999, reflecting
the successful launch during the second quarter of a new term life
product line targeted at the mortgage protection market.
Premiums and policy charges increased 57% in 1999, resulting from
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 expansion
of the structured settlement program into The St. Paul's property-
liability claim organization accounted for the increase in 1999
sales volume. The growth in SPIA sales resulted from an increased
emphasis on this product in 1999.
Sales of structured settlement annuities, annuities with life
contingencies and term life insurance are recognized as premiums
earned under GAAP. Investment-type contracts, however, such as our
equity-indexed, deferred and tax sheltered annuities, and our
universal life-type contracts, are recorded directly to our
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 our surrenderable
annuity policies allow a refund of the cash value balance less a
surrender charge. Surrender activity increased modestly in 1999,
primarily due to an increase in tax-sheltered annuity surrenders,
which was largely offset by a decline in single premium deferred
annuity surrenders.
Net investment income grew 8% in 1999 as a result of an increasing
asset base generated by positive cash flow. Pretax realized
investment losses of $18 million in the fixed-maturity portfolio
were partially offset by gains of $9 million generated from real
estate and mortgage loan investments.
Total life insurance in force grew 15% in 1999 to $12.4 billion,
due to the success of the new term life product line introduced in
1999.
<PAGE>
1998 vs. 1997
- -------------
Pretax earnings of $21 million in 1998 were well below comparable
1997 earnings of $78 million, primarily reflecting the $41 million
DPAC writedown and $9 million of merger-related charges recorded
in 1998. The DPAC writedown consisted of the following components:
$19 million of accelerated amortization resulting from a reduction
in the estimated future profits on certain universal life
insurance business; a $16 million charge to reflect the impact of
assumption changes as to the future "spread" on certain interest
sensitive products; and a $6 million charge resulting from a
change in annuitization assumptions for certain tax-sheltered
annuity products. The $9 million merger-related charge was
primarily related to severance and facilities exit costs. Sales
volume of $501 million in 1998 grew 12% over the 1997 total of
$446 million, due to the mid-year launch of our new equity-indexed
annuity product.
2000 OUTLOOK
- ------------
We expect that our sales momentum will carry into 2000, based on
strong fourth quarter 1999 sales generated by all distribution
channels. In mid-1999, we announced plans to provide our products
to banks and broker-dealers that specialize in offering annuities
and life insurance directly to consumers. This entry into the
institutional marketplace is scheduled to be launched in the third
quarter of 2000, and as a result, we expect to distribute our
products in markets where we previously had limited access. In
addition, we anticipate expanding our e-commerce platform, making
it a more effective sales tool for our producers.
<PAGE>
STRATEGIC INITIATIVES EVIDENT IN RECORD SALES, EARNINGS
Asset Management
The John Nuveen Company
- -----------------------
We hold a 79% interest in The John Nuveen Company (Nuveen), which
comprises our asset management segment. Nuveen's core businesses
are asset management and the development, marketing and
distribution of investment products and services. Nuveen provides
customized individual accounts, mutual funds, exchange-traded
funds and defined portfolios (unit investment trusts) to help
financial advisers serve their affluent and high net worth
clients. During 1999, Nuveen completed the sale of its investment
banking division to U.S. Bancorp Piper Jaffray, enabling the
company to fully focus its resources on its asset management
business. Nuveen is listed on the New York Stock Exchange, trading
under the symbol "JNC."
The following table summarizes Nuveen's key financial data for the
last three years:
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
Revenues $ 353 $ 308 $ 269
Expenses 193 171 146
------ ------ ------
Pretax income 160 137 123
Minority interest (37) (33) (30)
------ ------ ------
The St. Paul's share
of pretax income $ 123 $ 104 $ 93
====== ====== ======
Assets under management $ 59,784 $ 55,267 $ 49,594
====== ====== ======
Nuveen's principal sources of revenue are ongoing advisory fees
earned on assets under management, and transaction-based revenue
earned upon the distribution of defined portfolio and fund
products. These revenues totaled $329 million in 1999, an increase
of 16% over the same 1998 revenues of $284 million. An increase in
average assets under management and significant growth in defined
portfolio sales during the year accounted for the increase in 1999
advisory fee and distribution revenues. The increase in expenses
over 1998 corresponds to the significant increase in business
volume, as well as an increase in advertising expenses associated
with strategic efforts to promote the Nuveen brand.
Gross product sales of $14.1 billion in 1999 were 81% higher than
1998 sales of $7.8 billion, driven by significant additions to
managed accounts and strong growth in equity defined portfolio
sales. Nuveen introduced 17 new defined portfolios in 1999, and
also raised over $2.7 billion of new assets in its exchange-traded
funds. Nuveen has strategically diversified its product offerings
in recent years, introducing a variety of equity-based products to
complement its traditional fixed-income investment vehicles. The
diversification strategy played a crucial role in Nuveen's record
results in 1999, with equity-based products accounting for 60% of
gross product sales in a year during which fixed-income
investments suffered substantial declines in value. Nuveen's net
flows (equal to the sum of sales, reinvestments and exchanges less
redemptions) totaled $9.6 billion in 1999, compared with $5.7
billion in 1998.
<PAGE>
At the end of 1999, managed assets consisted of $26.8 billion of
exchange-traded funds, $20.9 billion of managed accounts, and
$12.1 billion of mutual funds. The $4.5 billion increase in
managed assets since the end of 1998 resulted from 1999 net flows
in funds and accounts, reduced by a $2.3 billion decline in the
unrealized appreciation of underlying fund investments (primarily
fixed-income). Municipal securities accounted for 66% of managed
assets at the end of 1999, compared with 71% at the end 1998.
Including defined portfolios, Nuveen managed or oversaw
approximately $71 billion in assets at year-end 1999.
Nuveen repurchased 914,100 and 732,700 common shares from minority
shareholders in 1999 and 1998, respectively, for a total cost of
$36 million and $27 million. Nuveen also made significant share
repurchases in 1997, proportioned between our holdings and
minority shareholders to maintain our ownership percentage in
Nuveen at the time of the repurchases. Our proceeds from the share
repurchase in 1997 were $41 million.
1998 vs. 1997
- -------------
In 1998, Nuveen's revenues grew 14% over 1997 on the strength of a
significant increase in average assets under management for the
year. In mid-1997, Nuveen acquired Rittenhouse Financial Services,
Inc., an equity and balanced account management firm serving
affluent investors, which added over $9 billion to Nuveen's
managed assets. Gross product sales of $7.8 billion in 1998 were
more than double 1997 sales of $3.0 billion, largely due to a full
year of Rittenhouse managed account sales and a $600 million
increase in mutual fund sales.
2000 OUTLOOK
- ------------
Nuveen's increased emphasis on brand development is expected to
attract more financial advisers and investors to its investment
products. New defined portfolios, mutual funds and exchange-traded
funds are expected to be introduced in 2000 as Nuveen focuses on
family wealth management strategies.
<PAGE>
The St. Paul Companies
CAPITAL RESOURCES
Our capital resources consist of shareholders' equity, debt and
capital securities, representing funds deployed or available to be
deployed to support our business operations. The following table
summarizes our capital resources at the end of the last three
years:
December 31
(In millions) 1999 1998 1997
------ ------ ------
Shareholders' equity:
Common equity:
Common stock and
retained earnings $ 5,906 $ 5,608 $ 5,777
Unrealized appreciation
of investments and other 542 1,013 814
------ ------ ------
Total common
shareholders' equity 6,448 6,621 6,591
Preferred shareholders' equity 24 15 17
------ ------ ------
Total shareholders' equity 6,472 6,636 6,608
Debt 1,466 1,260 1,304
Capital securities 425 503 503
------ ------ ------
Total capitalization $ 8,363 $ 8,399 $ 8,415
====== ====== ======
Ratio of debt to
total capitalization 18% 15% 15%
====== ====== ======
EQUITY
- ------
Common shareholders' equity at the end of 1999 was 3% below the
year-end 1998 total despite our strong net income of $834 million
for the year. The increase in market interest rates during 1999
led to an $884 million decline in the after-tax unrealized
appreciation of our bond portfolio since the end of 1998. This
decline was partially offset by a $425 million increase in the
after-tax unrealized appreciation on our equity and venture
capital investment portfolios. Our common equity was also reduced
in 1999 by common share repurchases totaling $356 million and
common dividends declared of $235 million. Common equity at the
end of 1998 was virtually level with year-end 1997, as a decline
in our retained earnings resulting from common share repurchases
and dividends was offset by an increase in the net unrealized
appreciation of our investment portfolio. Our book value per
common share at Dec. 31, 1999 was $28.68, compared with a per
share book value of $28.32 at the end of 1998.
Our preferred shareholders' equity at the end of the last three
years consisted of the par value of Series B preferred shares we
issued to our Stock Ownership Plan (SOP) Trust, less the remaining
principal balance of the SOP Trust debt.
<PAGE>
DEBT
- ----
Consolidated debt outstanding of $1.47 billion at the end of 1999
increased by $206 million over the year-end 1998 total of $1.26
billion. The increase was primarily due to the issuance of
additional commercial paper throughout the year, which brought the
year-end 1999 outstanding balance to $400 million, compared with
$257 million at Dec. 31, 1998. In addition, several of our real
estate investment entities entered into variable rate borrowings
in June 1999 totaling $64 million. The interest rate on these
borrowings was 5.65% at the end of 1999. Also in 1999, a special
purpose offshore entity we created to provide reinsurance to one
of our subsidiaries issued $46 million of floating rate notes,
which are included in The St. Paul's consolidated debt. At year-
end 1999, the interest rate on those notes was 11.36%. Medium-term
notes, bearing a weighted average interest rate of 6.9%, comprised
42%, or $617 million, of our consolidated debt at Dec. 31, 1999.
In March 1999, we purchased $34 million (principal amount) of our
zero coupon convertible notes from note holders for a total cash
consideration of $21 million, representing the original issue
price plus the original issue discount accrued to the date of
purchase. We purchased these notes at the option of the note
holders. The zero coupon note repurchases, along with several
medium-term note maturities totaling $20 million during the first
half of the year, were primarily funded by commercial paper
borrowings.
Consolidated debt at year-end 1998 was $44 million less than a
year earlier, largely the result of a $75 million reduction in
Nuveen's debt. We issued $150 million of medium-term notes in
1998, with proceeds primarily used to fund our 1998 common share
repurchases. The maturity of our $145 million, 7% senior notes in
May 1998, as well as several medium-term note maturities
throughout the year totaling $25 million, were funded through a
combination of commercial paper issuances and internally generated
funds. Commercial paper outstanding at the end of 1998 increased
$89 million over year-end 1997.
CAPITAL SECURITIES
- ------------------
These securities consist of company-obligated mandatorily
redeemable preferred securities issued by four business trusts
wholly-owned by The St. Paul. One of the trusts issued $207
million of preferred securities bearing a dividend rate of 6%
which are convertible into our common stock. The three remaining
trusts each issued $100 million of preferred securities bearing
dividend rates of 8.5%, 8.47% and 8.312%, respectively. During
1999, we repurchased and retired securities from the latter three
trusts with an aggregate principal value of $79 million, comprised
of the following components: $27 million at 8.5%; $22 million at
8.47%; and $30 million at 8.312%. The repurchases were made in
open market transactions and were primarily funded by commercial
paper borrowings.
CAPITAL TRANSACTIONS
- --------------------
We completed the sale of our standard personal insurance
operations to Metropolitan in September 1999. Net proceeds of $251
million received at closing are being used for general corporate
purposes, including strategic acquisitions of existing businesses,
expansion of our commercial insurance business, and additional
common share repurchases.
<PAGE>
In 1999, we repurchased 11.1 million of our common shares for a
total cost of $356 million, or an average of $32 per share. We
repurchased 3.8 million common shares for a total cost of $135
million in 1998, largely funded through the issuance of medium-
term notes. We also repurchased 3.4 million shares in 1997 for a
total cost of $128 million.
Our common and preferred dividend payments totaled $246 million in
1999, $226 million in 1998 and $198 million in 1997. In February
2000, The St. Paul's board of directors increased our quarterly
dividend rate to $0.27 per share, a 4% increase over the 1999
quarterly rate of $0.26 per share.
Our merger with USF&G in 1998 was a tax-free exchange accounted
for as a pooling-of-interests. The St. Paul issued 66.5 million of
its common shares for all of the outstanding shares of USF&G. The
transaction was valued at $3.7 billion, which included the
assumption of USF&G's debt and capital securities.
We made no major capital improvements during any of the last three
years.
In December 1999, we announced a definitive agreement to acquire
MMI Companies, Inc. for approximately $200 million in cash plus
the assumption of approximately $120 million of MMI capital
securities, in a transaction expected to be finalized in the
second quarter of 2000. Also in December, we announced a
definitive agreement to purchase Pacific Select Insurance
Holdings, Inc., which underwrites earthquake risk insurance in
California, for approximately $37 million. This transaction is
expected to be completed in the first quarter of 2000. In January
2000, we announced a definitive agreement to sell our nonstandard
auto business to Prudential Insurance Company of America for $200
million in cash, in a transaction expected to be finalized in the
second quarter of 2000. We do not anticipate substantial changes
in our capital structure as a result of these transactions.
We have no current plans for other major capital expenditures in
2000, but if any were to occur, they would likely involve
acquisitions consistent with our specialty commercial focus, and
further common share repurchases. As of Dec. 31, 1999, we had the
capacity to make up to $409 million in additional share
repurchases under a $500 million repurchase program authorized by
our board of directors in November 1999.
<PAGE>
The St. Paul Companies
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. Our underwriting operations' short-term cash
needs primarily consist of paying insurance loss and loss
adjustment expenses and day-to-day operating expenses. Those needs
are met through cash receipts from operations, which consist
primarily of insurance premiums collected and investment income.
Our investment portfolio is also a source of additional liquidity,
through the sale of readily marketable fixed maturities, equity
securities and short-term investments, as well as longer-term
investments which have appreciated in value. Cash flows from these
underwriting and investment activities are used to build the
investment portfolio and thereby increase future investment
income.
Cash outflows from continuing operations were $41 million in 1999,
compared with cash inflows of $169 million in 1998 and $837
million in 1997. Our cash flows in 1999 and 1998 were negatively
impacted by the reductions in written premium volume and
investment receipts in our property-liability operations, as well
as cash disbursements associated with our merger with USF&G and
the restructuring of our commercial insurance operations.
Underwriting cash flows have trended downward over the last
several years due to difficult market conditions in our property-
liability operations, where loss and loss expense payments have
exceeded premium revenues by a significant margin. The sale of
fixed-maturity investments to fund operational cash flow
requirements has also resulted in a reduction in investment cash
flows during the last three years.
On a long-term basis, we believe our operational cash flows will
benefit from the corrective pricing and underwriting actions
underway in our property-liability operations to improve the
quality of our business. In addition, we expect our long-term
liquidity position to improve as a result of the restructuring and
expense reduction initiatives implemented in the last two years.
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.
We are not aware of any current recommendations by regulatory
authorities that, if implemented, might have a material impact on
our liquidity, capital resources or operations.
<PAGE>
The St. Paul Companies
EXPOSURES TO MARKET RISK
- ------------------------
INTEREST RATE RISK
- ------------------
Our exposure to market risk for changes in interest rates is
concentrated in our investment portfolio, and to a lesser extent,
our debt obligations. However, changes in investment values
attributable to interest rate changes are mitigated by
corresponding and partially-offsetting changes in the economic
value of our insurance reserves and debt obligations. We monitor
this exposure through periodic reviews of our asset and liability
positions. Our estimates of cash flows, as well as the impact of
interest rate fluctuations relating to our investment portfolio
and insurance reserves, are modeled and reviewed quarterly.
The following table provides principal runoff estimates by year
for our Dec. 31, 1999 inventory of interest-sensitive financial
instrument assets. Also provided are the weighted-average interest
rates associated with each year's runoff. Principal runoff
projections for collateralized mortgage obligations were prepared
using third-party prepayment analyses. Runoff estimates for
mortgage passthroughs were prepared using average prepayment rates
for the prior three months. Principal runoff estimates for
callable bonds are either to maturity or to the next call date
depending on whether the call was projected to be "in-the-money"
assuming no change in interest rates. No projection of the impact
of reinvesting the estimated cash flow runoff is included in the
table, regardless of whether the runoff source is a short-term or
long-term fixed income security.
We have assumed that our "available-for-sale" securities are
similar enough to aggregate those securities for purposes of this
disclosure.
December 31, 1999 Principal Weighted Average
(In millions) Cash Flows Interest Rate
---------- ----------------
Fixed Maturities, Short-Term
Investments and Mortgage Loans
2000 $ 3,875 5.1%
2001 2,069 7.1%
2002 2,012 7.2%
2003 1,743 7.5%
2004 1,444 7.8%
Thereafter 11,316 6.7%
-------
Total $ 22,459
=======
Market Value at Dec. 31, 1999 $ 21,284
=======
<PAGE>
The following table provides principal runoff estimates by year
for our Dec. 31, 1999 inventory of interest-sensitive debt
obligations and related weighted average interest rates by stated
maturity dates.
December 31, 1999 Principal Weighted Average
(In millions) Cash Flows Interest Rate
---------- ----------------
Medium-Term Notes, Zero
Coupon Notes and Senior Notes
2000 $ - -
2001 195 8.1%
2002 49 7.5%
2003 67 6.5%
2004 55 7.1%
Thereafter 622 6.3%
------
Total $ 988
======
Fair Value at Dec. 31, 1999 $ 922
======
FOREIGN CURRENCY EXPOSURE
- -------------------------
Our exposure to market risk for changes in foreign exchange rates
is concentrated in our invested assets denominated in foreign
currencies. Cash flows from our foreign operations are the primary
source of funds for our purchase of these investments. We purchase
these investments primarily to hedge insurance reserves and other
liabilities denominated in the same currency, effectively reducing
our foreign currency exchange rate exposure. At Dec. 31, 1999,
approximately 6.5% of our invested assets were denominated in
foreign currencies, with no individual currency accounting for
more than 4% of that total.
<PAGE>
OTHER MARKET RISK
- -----------------
Equity Price Risk - Our portfolio of marketable equity securities,
which we carry on our balance sheet at market value, has exposure
to price risk. This risk is defined as the potential loss in
market value resulting from an adverse change in prices. Our
objective is to earn competitive relative returns by investing in
a diverse portfolio of high-quality, liquid securities. Portfolio
characteristics are analyzed regularly and market risk is actively
managed through a variety of modeling techniques. Our holdings are
diversified across industries, and concentrations in any one
company or industry are limited by parameters established by
senior management.
Our portfolio of venture capital investments also has exposure to
market risks, primarily relating to the viability of the various
entities in which we have invested. These investments by their
nature involve more risk than other investments, and we actively
manage our market risk in a variety of ways. First, we allocate a
comparatively small amount of funds to venture capital. At the end
of 1999, the cost of these investments accounted for only 2% of
total invested assets. Second, the investments are diversified to
avoid concentration of risk in a particular industry. Third, we
perform extensive research prior to investing in a new venture to
gauge prospects for success. Fourth, we regularly monitor the
operational results of the entities in which we have invested.
Finally, we generally sell our holdings in these firms soon after
they become publicly traded, thereby reducing exposure to further
market risk.
At Dec. 31, 1999, our marketable equity securities and venture
capital investments were recorded at their fair value of $2.48
billion. A hypothetical 10% decline in each stock's price would
have resulted in a $248 million impact on fair value.
Equity-Indexed Annuity Products - Our Life operation's equity-
indexed annuity products are tied to the performance of a leading
market index. Interest is credited to the equity portion of these
annuities annually based on an average change in the index during
the policy period (one or two years). We hedge our exposure by
purchasing options with similar terms as the index component to
provide us with the same return as we guarantee to the annuity
contract holder, subject to minimums guaranteed in the annuity
contract. At Dec. 31, 1999, we held options with a notional amount
of $906 million, with a market value of $44 million. The weighted
average strike price on these options at Dec. 31, 1999 was
1,361.50.
<PAGE>
The St. Paul Companies
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
The "Year 2000" issue refers to computer programming limitations
that may have caused many information technology systems
throughout the world to recognize the two-digit year code of "00"
as the year 1900, instead of 2000, at the turn of the century.
STATUS OF OPERATIONS
- --------------------
For many years, beginning in the late 1980s, we evaluated our
computer systems to determine the potential impact of the Year
2000 issue on our operations. We established a Review Board in the
third quarter of 1997 to review the remediation and testing
methodology applied to the hundreds of internally developed and
externally sourced systems used in our corporate headquarters in
Saint Paul, MN. The Year 2000 program developed by USF&G's Y2K
Action Committee was integrated into our overall Year 2000 efforts
subsequent to USF&G's merger with The St. Paul in April 1998.
In 1998, we created the Year 2000 Project Office, which is
responsible for the oversight, coordination and monitoring of all
Year 2000 efforts including, among other things, monitoring the
compliance status of information systems in all operating units
and subsidiaries, both foreign and domestic, throughout the Year
2000 transition period. The Year 2000 Project Office's definition
of our transition period encompassed the period beginning Oct. 1,
1999 and ending March 31, 2000. The Year 2000 Project Office
established detailed transition event plans, focusing particularly
on the eight-day period from Dec. 31, 1999 through Jan. 7, 2000.
To date, our transition to the Year 2000 has been notably
uneventful and successful. Specific monitoring will continue
through March 31, 2000, as originally planned, but we do not
anticipate experiencing any Year 2000 disruptions.
Through Dec. 31, 1999, the cost of our Year 2000 remediation
measures incurred, including costs incurred by USF&G prior to the
merger, totaled approximately $27 million. We do not expect to
incur significant additional costs related to the Year 2000 issue.
INSURANCE COVERAGE
- ------------------
We have received some Year 2000-related claims and we face
additional potential Year 2000 claims under coverages provided by
insurance or reinsurance policies sold to insured parties who have
incurred or may incur, or have taken or may take action claimed to
prevent losses as a result of the failure of such parties, or the
customers or vendors of such parties to be Year 2000 compliant.
For example, 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 or will incur 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
claims in general, in some instances, coverage is not provided
under the insurance or reinsurance policies, while in other
instances coverage may be provided under certain circumstances.
<PAGE>
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 are not unforeseen, and that we
expect that such losses will not, in most if not all cases, cause
direct physical loss or damage, we have concluded that our
property and inland marine policies do not generally provide
coverage for losses relating to Year 2000 issues. To reinforce our
view on coverage afforded by such policies, we have developed and
continue to implement a specific Year 2000 exclusion endorsement.
We may also face claims from the beneficiaries of our surety bonds
resulting from Year 2000-related performance failures by the
purchasers of the bonds. As with insurance policies in general,
because surety claims depend on particular factual situations,
specific bond language and other variables, it is not possible to
determine at this time whether and to what extent Year 2000-
related claims have arisen or will arise under surety bonds we
issued, the amount of any such claims or whether any such claims
will be payable under surety bonds we issued.
We have taken and continue to take a number of actions to address
our exposure to insurance claims arising from our liability
coverages, including the use of exclusions in certain types of
policies. 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.
<PAGE>
The St. Paul Companies
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." SFAS No. 133 is now effective for all quarters
of fiscal years beginning after June 15, 2000, and prohibits
retroactive application to financial statements of prior periods.
We intend to implement the provisions of SFAS No. 133 in the first
quarter of the year 2001. Our property-liability operations
currently have limited involvement with derivative instruments,
primarily for purposes of hedging against fluctuations in interest
rates. Our life insurance operation purchases options to hedge its
obligation to pay credited rates on equity-indexed annuity
products. We cannot at this time reasonably estimate the potential
impact of this adoption on our financial position or results of
operations for future periods.
In October 1998, the AICPA issued SOP No. 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Insurance Risk," which provides guidance for
accounting for such contracts. The SOP specifies that insurance
and reinsurance contracts for which the deposit method of
accounting is appropriate should be classified in one of four
categories, and further specifies the accounting treatment for
each of these categories. The SOP is effective for fiscal years
beginning after June 15, 1999. We currently intend to implement
the provisions of the SOP in the first quarter of the year 2000.
We expect the impact of this adoption to be immaterial to our
financial position and results of operations for future periods.
<PAGE>
FORWARD-LOOKING STATEMENT DISCLOSURE
- ------------------------------------
This discussion 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; expense
savings resulting from the USF&G merger and the restructuring
actions announced in 1998 and 1999; expected closing dates for
acquisitions and dispositions; and Year 2000 issues and our
efforts to address them.
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: 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 acquisition of MMI Companies, Inc.;
and various other matters, including the effects of the merger
with USF&G Corporation. Actual results and experience relating to
Year 2000 issues could differ materially from anticipated results
or other expectations as a result of a variety of risks and
uncertainties, including 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>
Six-Year Summary of Selected Financial Data
The St. Paul Companies
(Dollars in millions,
except per share data) 1999 1998 1997 1996 1995 1994
----- ----- ----- ----- ----- -----
CONSOLIDATED
Revenues from
continuing operations $7,569 $7,708 $8,308 $7,893 $7,273 $6,481
Income from continuing
operations after
cumulative effect of
accounting change 749 199 1,062 1,323 1,020 677
INVESTMENT ACTIVITY
Net investment income 1,557 1,571 1,573 1,509 1,471 1,419
Pretax realized
investment gains 277 201 423 262 91 47
OTHER SELECTED FINANCIAL
DATA (as of December 31)
Total assets 38,873 37,864 36,887 34,667 32,798 29,745
Debt 1,466 1,260 1,304 1,171 1,304 1,244
Capital securities 425 503 503 307 207 -
Common shareholders'
equity 6,448 6,621 6,591 5,631 5,342 3,675
Common shares
outstanding 224.8 233.7 233.1 230.9 235.4 227.5
PER COMMON SHARE DATA
Income from continuing
operations after
cumulative effect of
accounting change 3.07 0.78 4.22 5.22 3.92 2.65
Book value 28.68 28.32 28.27 24.39 22.69 16.15
Year-end market price 33.69 34.81 41.03 29.31 27.81 22.38
Cash dividends declared 1.04 1.00 0.94 0.88 0.80 0.75
PROPERTY-LIABILITY
INSURANCE
Written premiums 5,112 5,276 5,682 5,683 5,561 4,812
Pretax operating earnings 697 111 1,076 995 949 861
GAAP underwriting result (425) (881) (139) (35) (127) (179)
Statutory combined ratio:
Loss and loss
expense ratio 72.9 82.2 69.8 68.9 71.5 72.6
Underwriting
expense ratio 35.0 35.2 33.5 31.9 30.6 35.2
----- ----- ----- ----- ----- -----
Combined ratio 107.9 117.4 103.3 100.8 102.1 107.8
===== ===== ===== ===== ===== =====
LIFE INSURANCE
Product sales 1,000 501 446 427 348 286
Premium income 187 119 137 145 174 152
Net income (loss) 44 13 51 (5) 19 12
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
The St. Paul Companies, Inc.:
We have audited the accompanying consolidated balance sheets of The
St. Paul Companies, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholders'
equity, comprehensive income and cash flows for each of the years in
the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We did not audit the consolidated financial statements of USF&G
Corporation, a wholly-owned subsidiary, for the year ended December
31, 1997, which statements reflect total revenues constituting 34
percent for the year ended December 31, 1997, of the related
consolidated total. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for USF&G Corporation, is based solely
on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
The St. Paul Companies, Inc. and subsidiaries as of December 31, 1999
and 1998, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in
1999 the Company changed its method of accounting for insurance-
related assessments.
/s/ KPMG LLP
- ------------
KPMG LLP
Minneapolis, Minnesota
February 16, 2000
<PAGE>
Management's Responsibility for Financial Statements
Scope of Responsibility - Management prepares the accompanying
financial statements and related information and is responsible for
their integrity and objectivity. The statements were prepared in
conformity with generally accepted accounting principles. These
financial statements include amounts that are based on management's
estimates and judgments, particularly our reserves for losses and loss
adjustment expenses. We believe that these statements present fairly
the company's financial position and results of operations and that
the other information contained in the annual report is consistent
with the financial statements.
Internal Controls - We maintain and rely on systems of internal
accounting controls designed to provide reasonable assurance that
assets are safeguarded and transactions are properly authorized and
recorded. We continually monitor these internal accounting controls,
modifying and improving them as business conditions and operations
change. Our internal audit department also independently reviews and
evaluates these controls. We recognize the inherent limitations in all
internal control systems and believe that our systems provide an
appropriate balance between the costs and benefits desired. We believe
our systems of internal accounting controls provide reasonable
assurance that errors or irregularities that would be material to the
financial statements are prevented or detected in the normal course of
business.
Independent Auditors - Our independent auditors, KPMG LLP, have
audited the consolidated financial statements. Their audit was
conducted in accordance with generally accepted auditing standards,
which includes the consideration of our internal controls to the
extent necessary to form an independent opinion on the consolidated
financial statements prepared by management.
Audit Committee - The audit committee of the board of directors,
composed solely of outside directors, oversees management's discharge
of its financial reporting responsibilities. The committee meets
periodically with management, our internal auditors and
representatives of KPMG LLP to discuss auditing, financial reporting
and internal control matters. Both internal audit and KPMG LLP have
access to the audit committee without management's presence.
Code of Conduct - We recognize our responsibility for maintaining a
strong ethical climate. This responsibility is addressed in the
company's written code of conduct.
/s/ Douglas W. Leatherdale /s/ Paul J. Liska
- -------------------------- -----------------
Douglas W. Leatherdale Paul J. Liska
Chairman and Executive Vice President and
Chief Executive Officer Chief Financial Officer
<PAGE>
Consolidated Statements of Income
The St. Paul Companies
Year ended December 31
(In millions, except per share data) 1999 1998 1997
------ ------ -----
REVENUES
Premiums earned $ 5,290 $ 5,553 $ 5,996
Net investment income 1,557 1,571 1,573
Asset management 340 302 262
Realized investment gains 277 201 423
Other 105 81 54
------ ------ ------
Total revenues 7,569 7,708 8,308
------ ------ ------
EXPENSES
Insurance losses and
loss adjustment expenses 3,720 4,465 4,089
Life policy benefits 367 273 277
Policy acquisition expenses 1,325 1,487 1,487
Operating and administrative expenses 1,140 1,363 1,022
------ ------ ------
Total expenses 6,552 7,588 6,875
------ ------ ------
Income from continuing operations
before income taxes 1,017 120 1,433
Income tax expense (benefit) 238 (79) 371
------ ------ ------
Income from continuing operations before
cumulative effect of accounting change 779 199 1,062
Cumulative effect of accounting
change, net of taxes (30) - -
------ ------ ------
INCOME FROM CONTINUING OPERATIONS 749 199 1,062
------ ------ ------
Discontinued operations:
Operating loss, net of taxes (9) (110) (65)
Gain (loss) on disposal, net of taxes 94 - (68)
------ ------ ------
Gain (loss) from discontinued operations 85 (110) (133)
------ ------ ------
NET INCOME $ 834 $ 89 $ 929
====== ====== ======
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations
before cumulative effect $ 3.37 $ 0.79 $ 4.55
Cumulative effect of accounting
change, net of taxes (0.13) - -
Gain (loss) from discontinued
operations, net of taxes 0.37 (0.46) (0.58)
------ ------ ------
NET INCOME $ 3.61 $ 0.33 $ 3.97
====== ====== ======
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations
before cumulative effect $ 3.19 $ 0.78 $ 4.22
Cumulative effect of accounting
change, net of taxes (0.12) - -
Gain (loss) from discontinued
operations, net of taxes 0.34 (0.46) (0.53)
------ ------ ------
NET INCOME $ 3.41 $ 0.32 $ 3.69
====== ====== ======
See notes to consolidated financial statements.
<PAGE>
Consolidated Balance Sheets
The St. Paul Companies
December 31
(In millions) 1999 1998
------- -------
ASSETS
Investments:
Fixed maturities $ 19,329 $ 20,444
Equities 1,618 1,259
Real estate and mortgage loans 1,504 1,507
Venture capital 866 571
Other investments 301 384
Securities lending 1,216 1,368
Short-term investments 1,373 965
------- -------
Total investments 26,207 26,498
Cash 165 146
Asset management securities held for sale 45 107
Reinsurance recoverables:
Unpaid losses 4,426 3,974
Paid losses 195 157
Ceded unearned premiums 641 288
Receivables:
Underwriting premiums 2,334 2,085
Interest and dividends 358 354
Other 230 52
Deferred policy acquisition costs 959 878
Deferred income taxes 1,271 1,193
Office properties and equipment 507 510
Goodwill 509 592
Other assets 1,026 1,030
------- -------
TOTAL ASSETS $ 38,873 $ 37,864
======= =======
LIABILITIES
Insurance reserves:
Losses and loss adjustment expenses $ 17,934 $ 18,186
Future policy benefits 4,885 4,142
Unearned premiums 3,118 3,092
------- -------
Total insurance reserves 25,937 25,420
Debt 1,466 1,260
Payables:
Reinsurance premiums 654 291
Income taxes 319 221
Accrued expenses and other 1,156 1,225
Securities lending 1,216 1,368
Other liabilities 1,228 940
------- -------
TOTAL LIABILITIES 31,976 30,725
------- -------
Company-obligated mandatorily redeemable
preferred securities of subsidiaries or
trusts holding solely convertible
subordinated debentures of the Company 425 503
SHAREHOLDERS' EQUITY
Preferred:
SOP convertible preferred stock 129 134
Guaranteed obligation - SOP (105) (119)
------- -------
TOTAL PREFERRED SHAREHOLDERS' EQUITY 24 15
------- -------
Common:
Common stock 2,079 2,128
Retained earnings 3,827 3,480
Accumulated other comprehensive income, net of taxes:
Unrealized appreciation 568 1,027
Unrealized loss on foreign currency translation (26) (14)
------- -------
Total accumulated other comprehensive income 542 1,013
------- -------
TOTAL COMMON SHAREHOLDERS' EQUITY 6,448 6,621
------- -------
TOTAL SHAREHOLDERS' EQUITY 6,472 6,636
------- -------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARIES OR TRUSTS AND
AND SHAREHOLDERS' EQUITY $ 38,873 $ 37,864
======= =======
See notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Shareholders' Equity
The St. Paul Companies
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
PREFERRED SHAREHOLDERS' EQUITY
SOP convertible preferred stock:
Beginning of year $ 134 $ 138 $ 142
Redemptions during the year (5) (4) (4)
------ ------ ------
End of year 129 134 138
------ ------ ------
Guaranteed obligation - SOP:
Beginning of year (119) (121) (126)
Principal payments 14 2 5
------ ------ ------
End of year (105) (119) (121)
------ ------ ------
Convertible preferred stock:
Beginning of year - - 200
Redemptions during the year - - (200)
------ ------ ------
End of year - - -
------ ------ ------
TOTAL PREFERRED SHAREHOLDERS' EQUITY 24 15 17
------ ------ ------
COMMON SHAREHOLDERS' EQUITY
Common stock:
Beginning of year 2,128 2,057 1,896
Stock issued under stock incentive plans 37 70 32
Stock issued for preferred shares redeemed 9 8 9
Stock issued for acquisitions - - 113
Reacquired common shares (102) (35) (14)
Other 7 28 21
------ ------ ------
End of year 2,079 2,128 2,057
------ ------ ------
Retained earnings:
Beginning of year 3,480 3,720 3,097
Net income 834 89 929
Dividends declared on common stock (235) (223) (186)
Dividends declared on
preferred stock, net of taxes (8) (9) (10)
Reacquired common shares (254) (100) (114)
Tax benefit on employee stock
options, and other changes 14 6 8
Premium on preferred shares
converted or redeemed (4) (3) (4)
------ ------ ------
End of year 3,827 3,480 3,720
------ ------ ------
Guaranteed obligation - SOP:
Beginning of year - (8) (20)
Principal payments - 8 12
------ ------ ------
End of year - - (8)
------ ------ ------
Unrealized appreciation, net of taxes:
Beginning of year 1,027 846 679
Change for the year (459) 181 167
------ ------ ------
End of year 568 1,027 846
------ ------ ------
Unrealized loss on foreign
currency translation, net of taxes:
Beginning of year (14) (24) (21)
Currency translation adjustments (12) 10 (3)
------ ------ ------
End of year (26) (14) (24)
------ ------ ------
TOTAL COMMON SHAREHOLDERS' EQUITY 6,448 6,621 6,591
------ ------ ------
TOTAL SHAREHOLDERS' EQUITY $6,472 $6,636 $6,608
====== ====== ======
Consolidated Statements of Comprehensive Income
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
Net income $ 834 $ 89 $ 929
Other comprehensive income
(loss), net of taxes:
Change in unrealized appreciation (459) 181 167
Change in unrealized (loss)
gain on foreign currency translation (12) 10 (3)
------ ------ ------
Other comprehensive income (loss) (471) 191 164
------ ------ ------
COMPREHENSIVE INCOME $ 363 $ 280 $1,093
====== ====== ======
See notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Cash Flows
The St. Paul Companies
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
OPERATING ACTIVITIES
Net income $ 834 $ 89 $ 929
Adjustments:
Loss (income) from discontinued operations (85) 110 133
Change in property-liability
insurance reserves (142) (146) (159)
Change in reinsurance balances (536) 25 14
Change in premiums receivable (286) 53 12
Change in accounts payable and accrued expenses 153 50 (15)
Provision for deferred tax expense (benefit) 120 (114) 39
Change in asset management balances 31 (32) 154
Depreciation and amortization 130 133 108
Realized investment gains (277) (201) (423)
Cumulative effect of accounting change 30 - -
Other (13) 202 45
------ ------ ------
NET CASH PROVIDED (USED) BY
CONTINUING OPERATIONS (41) 169 837
NET CASH PROVIDED (USED) BY
DISCONTINUED OPERATIONS (9) (100) 10
------ ------ ------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (50) 69 847
------ ------ ------
INVESTING ACTIVITIES
Purchases of investments (6,271) (4,901) (5,356)
Proceeds from sales and
maturities of investments 6,239 4,828 5,153
Purchases of short-term investments (546) (22) (181)
Net proceeds from sale of
standard personal insurance operations 251 - -
Change in open security transactions 23 (8) 23
Venture capital distributions 63 50 30
Purchases of office property and equipment (176) (87) (142)
Sales of office property and equipment 70 2 2
Acquisitions - (98) (236)
Other 65 87 (27)
------ ------ ------
NET CASH USED BY CONTINUING OPERATIONS (282) (149) (734)
NET CASH PROVIDED (USED) BY
DISCONTINUED OPERATIONS (10) 80 (64)
------ ------ ------
NET CASH USED BY INVESTING ACTIVITIES (292) (69) (798)
------ ------ ------
FINANCING ACTIVITIES
Deposits on universal life
and investment contracts 934 518 460
Withdrawals on universal life
and investment contracts (101) (186) (210)
Dividends paid on common and preferred stock (246) (226) (199)
Proceeds from issuance of debt 250 239 198
Repayment of debt (52) (225) (161)
Repurchase of common shares (356) (135) (128)
Issuance (retirement) of company-obligated
mandatorily redeemable preferred securities
of subsidiaries or trusts (79) - 196
Redemption of preferred shares - - (199)
Stock options exercised and other 11 25 24
------ ------ ------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 361 10 (19)
------ ------ ------
INCREASE IN CASH 19 10 30
Cash at beginning of year 146 136 106
------ ------ ------
CASH AT END OF YEAR $ 165 $ 146 $ 136
====== ====== ======
See notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
The St. Paul Companies
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles - We prepare our financial statements in
accordance with generally accepted accounting principles (GAAP). We
follow the accounting standards established by the Financial
Accounting Standards Board (FASB) and the American Institute of
Certified Public Accountants.
Consolidation - We combine our financial statements with those of our
subsidiaries and present them on a consolidated basis. The
consolidated financial statements do not include the results of
material transactions between our parent company and our subsidiaries
or among our subsidiaries. Our foreign underwriting operations'
results are recorded on a one-month to one-quarter lag due to time
constraints in obtaining and analyzing such results for inclusion in
our consolidated financial statements on a current basis. In the
event that significant events occur in the subsequent period, the
impact is included in the current period results.
Discontinued Operations - In 1999, we sold our standard personal
insurance business. In December 1999, we decided to sell our
nonstandard auto business. In 1997, we sold our insurance brokerage
operations, Minet. Accordingly, the results of operations for all
years presented reflect standard personal insurance results,
nonstandard auto results and insurance brokerage results as
discontinued operations.
Reclassifications - We reclassified certain figures in our 1998 and
1997 financial statements and notes to conform with the 1999
presentation. These reclassifications had no effect on net income, or
common or preferred shareholders' equity, as previously reported for
those years.
Use of Estimates - We make estimates and assumptions that have an
effect on the amounts that we report in our financial statements. Our
most significant estimates are those relating to our reserves for
property-liability losses and loss adjustment expenses and life
policy benefits. We continually review our estimates and make
adjustments as necessary, but actual results could turn out
significantly different than what we envisioned when we made these
estimates.
Stock Split - In May 1998, we declared a 2-for-1 stock split. All
references in these financial statements and related notes to per-
share amounts and to the number of shares of common stock reflect the
effect of this stock split on all periods presented unless otherwise
noted.
ACCOUNTING FOR OUR PROPERTY-LIABILITY UNDERWRITING OPERATIONS
Premiums Earned - Premiums on insurance policies are our largest
source of revenue. We recognize the premiums as revenues evenly over
the policy terms using the daily pro rata method or, in the case of
our Lloyd's business, the one-eighths method. We record the premiums
that we have not yet recognized as revenues as unearned premiums on
our balance sheet. Assumed reinsurance premiums are recognized as
revenues proportionately over the contract period. Premiums earned
are recorded in our statement of income, net of our cost to purchase
reinsurance.
<PAGE>
Insurance Losses and Loss Adjustment Expenses - Losses represent the
amounts we paid or expect to pay to claimants for events that have
occurred. The costs of investigating, resolving and processing these
claims are known as loss adjustment expenses ("LAE"). We record these
items on our statement of income net of reinsurance, meaning that we
reduce our gross losses and loss adjustment expenses incurred by the
amounts we have recovered or expect to recover under reinsurance
contracts.
We establish reserves for the estimated total unpaid cost of losses
and LAE, which cover events that occurred in 1999 and prior years.
These reserves reflect our estimates of the total cost of claims that
were reported to us, but not yet paid, and the cost of claims
incurred but not yet reported to us (IBNR). Our estimates consider
such variables as past loss experience, current claim trends and the
prevailing social, economic and legal environments. We reduce our
loss reserves for estimated amounts of salvage and subrogation
recoveries. Estimated amounts recoverable from reinsurers on unpaid
losses and LAE are reflected as assets. We believe that the reserves
we have established are adequate to cover the ultimate costs of
losses and LAE. Final claim payments, however, may differ from the
established reserves, particularly when these payments may not occur
for several years. Any adjustments we make to reserves are reflected
in the results for the year during which the adjustments are made.
We participate in Lloyd's of London as an investor in underwriting
syndicates and as the owner of a managing agency. We record our pro
rata share of syndicate assets, liabilities, revenues and expenses,
after making adjustments to convert Lloyd's accounting to U.S. GAAP.
The most significant U.S. GAAP adjustments relate to income
recognition. Lloyd's syndicates determine underwriting results by
year of account at the end of three years. We record adjustments to
recognize underwriting results as incurred, including the expected
ultimate cost of losses incurred. These adjustments to losses are
based on actuarial analysis of syndicate accounts, including
forecasts of expected ultimate losses provided by the syndicates.
Financial information is available on a timely basis for the
syndicates controlled by the managing agency that we own, which make
up the majority of the company's investment in Lloyd's syndicates.
Syndicate results are recorded on a one-quarter lag due to time
constraints in obtaining and analyzing such results for inclusion in
our consolidated financial statements on a current basis.
Our liabilities for unpaid losses and LAE related to tabular workers'
compensation and certain assumed reinsurance coverage are discounted
to the present value of estimated future payments. Prior to
discounting, these liabilities totaled $820 million and $866 million
at Dec. 31, 1999 and 1998, respectively. The total discounted
liability reflected on our balance sheet was $608 million and $669
million at Dec. 31, 1999 and 1998, respectively. The liability for
workers' compensation was discounted using rates of up to 3.5%, based
on state-prescribed rates. The liability for certain assumed
reinsurance coverage was discounted using rates up to 8.0%, based on
our return on invested assets or, in many cases, on yields
contractually guaranteed to us on funds held by the ceding company.
Policy Acquisition Expenses - The costs directly related to writing
an insurance policy are referred to as policy acquisition expenses
and consist of commissions, state premium taxes and other direct
underwriting expenses. Although these expenses arise when we issue a
policy, we defer and amortize them over the same period as the
corresponding premiums are recorded as revenues.
<PAGE>
On a regular basis, we perform an analysis of the deferred policy
acquisition costs in relation to the expected recognition of
revenues, including anticipated investment income, and reflect
adjustments, if any, as period costs.
ACCOUNTING CHANGE - GUARANTEE FUND AND OTHER INSURANCE-RELATED ASSESSMENTS
Effective Jan. 1, 1999, we adopted the provisions of the American
Institute of Certified Public Accountants (AICPA) 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. We recorded a pretax expense of $46
million ($30 million after-tax) in the first quarter of 1999
representing the cumulative effect of adopting the provisions of the
SOP, with the majority related to our property-liability insurance
business. The accrual is expected to be disbursed as assessed during
a period of up to 30 years.
ACCOUNTING FOR OUR LIFE INSURANCE OPERATIONS
Premiums - Premiums on life insurance policies with fixed and
guaranteed premiums and benefits, premiums on annuities with
significant life contingencies and premiums on structured settlement
annuities are recognized when due. Premiums received on universal
life policies and investment-type annuity contracts are not recorded
as revenues; instead, they are recognized as deposits on our balance
sheet. Policy charges and surrender penalties are recorded as
revenues.
Policy Benefits - Ordinary life insurance reserves are computed under
the net level premium method, which makes no allowance for higher
first-year expenses. A uniform portion of each year's premium is used
for calculating the reserve. The reserves also reflect assumptions we
make for future investment yields, mortality and withdrawal rates.
These assumptions reflect our experience, modified to reflect
anticipated trends, and provide for possible adverse deviation.
Reserve interest rate assumptions are graded and range from 2.5% to
6.0%.
Universal life and deferred annuity reserves are computed on the
retrospective deposit method, which produces reserves equal to the
cash value of the contracts. Such reserves are not reduced for
charges that would be deducted from the cash value of policies
surrendered. Reserves on immediate annuities with guaranteed payments
are computed on the prospective deposit method, which produces
reserves equal to the present value of future benefit payments.
Policy Acquisition Expenses - We consider anticipated policy
benefits, remaining costs of servicing the policies and anticipated
investment income in determining the recoverability of deferred
acquisition costs for interest-sensitive life and annuity products.
Deferred policy acquisition costs (DPAC) on ordinary life business
are amortized over their assumed premium paying periods based on
assumptions consistent with those used for computing policy benefit
reserves. Universal life and investment annuity acquisition costs are
amortized in proportion to the present value of their estimated gross
profits over the products' assumed durations, which we regularly
evaluate and adjust as appropriate.
<PAGE>
Equity-Indexed Annuities - Interest on our equity-indexed annuities
is credited to the equity portion of these annuities annually based
on an average change in a leading market index during the policy
period, which is one or two years. The interest credited is subject
to minimums guaranteed in the annuity contract. We hedge our exposure
by purchasing one- and two-year options with similar terms as the
index component to provide us with the same return as we guarantee to
the annuity contract holder, subject to minimums guaranteed in the
annuity contract. We carry a reserve on these annuities at an amount
equal to the premium deposited, plus the change in the market value
of the option purchased, subject to minimums guaranteed in the
annuity contract, plus the amortization of the original purchase
price of the option. The options are included in other investments at
market value, with changes in unrealized gains or losses reflected in
our statement of income.
ACCOUNTING FOR OUR ASSET MANAGEMENT OPERATIONS
The John Nuveen Company comprises our asset management segment. We
held a 79% and 78% interest in Nuveen on Dec. 31, 1999 and 1998,
respectively. Nuveen sponsors and markets open-end and closed-end
(exchange-traded) managed funds, defined portfolios (unit investment
trusts) and individual managed accounts. Nuveen regularly purchases
and holds for resale municipal securities and defined portfolio
units. The level of inventory maintained by Nuveen will fluctuate
daily and is dependent upon the need to support on-going sales. These
inventory securities are carried at market value. Prior to the sale
of their investment banking operation in the third quarter of 1999,
they also underwrote and traded municipal bonds.
Nuveen's on-going revenues include investment advisory fees, revenues
from the distribution of defined portfolios and managed fund
investment products, interest income, gains and losses from the sale
of inventory securities, and gains and losses from changes in the
market value of investment products and securities held temporarily.
We consolidate 100% of Nuveen's assets, liabilities, revenues and
expenses, with reductions on the balance sheet and statement of
income for the minority shareholders' proportionate interest in
Nuveen's equity and earnings. Minority interest of $74 million and
$67 million was recorded in other liabilities at the end of 1999 and
1998, respectively.
Nuveen repurchased and retired 0.9 million and 0.7 million of its
common shares in 1999 and 1998, respectively, for a total cost of $36
million in 1999 and $27 million in 1998.
ACCOUNTING FOR OUR INVESTMENTS
Fixed Maturities - Our entire fixed maturity investment portfolio is
classified as available-for-sale. Accordingly, we carry that
portfolio on our balance sheet at estimated fair value. Fair values
are based on quoted market prices, where available, from a third-
party pricing service. If quoted market prices are not available,
fair values are estimated using values obtained from independent
pricing services or a cash flow estimate is used.
Equities - Our equity securities are also classified as available-for-
sale and carried at estimated fair value. Fair values are based on
quoted market prices obtained from a third-party pricing service.
<PAGE>
Real Estate and Mortgage Loans - Our real estate investments include
apartments and office buildings and other commercial land and
properties that we own directly or in which we have a partial
interest through joint ventures with other investors. Our mortgage
loan investments consist of fixed-rate loans collateralized by
apartment, warehouse and office properties.
For direct real estate investments, we carry land at cost and
buildings at cost less accumulated depreciation and valuation
adjustments. We depreciate real estate assets on a straight-line
basis over 40 years. Tenant improvements are amortized over the term
of the corresponding lease. The accumulated depreciation of our real
estate investments was $125 million and $108 million at Dec. 31, 1999
and 1998, respectively.
We use the equity method of accounting for our real estate joint
ventures, which means we carry these investments at cost, adjusted
for our share of earnings or losses, and reduced by cash
distributions from the joint ventures and valuation adjustments.
We carry our mortgage loans at the unpaid principal balances less any
valuation adjustments, which approximates fair value. Valuation
allowances are recognized for loans with deterioration in collateral
performance that are deemed other than temporary. The estimated fair
value of mortgage loans at Dec. 31, 1999 was $582 million.
Venture Capital - We invest in small- to medium-sized companies.
These investments are in the form of limited partnerships or direct
ownership. The limited partnerships are carried at our equity in the
estimated market value of the investments held by these limited
partnerships. The investments we own directly are carried at
estimated fair value. Fair values are based on quoted market prices
obtained from a third-party pricing service for publicly-traded
stock, or an estimate of value as determined by an internal
management committee for privately-held stock. Restricted publicly-
traded stock may be carried at a discount of 10-35% of the quoted
market prices.
Securities Lending - We participate in a securities lending program
whereby certain securities from our portfolio are loaned to other
institutions for short periods of time. We receive a fee from the
borrower in return. Our policy is to require collateral equal to 102
percent of the fair value of the loaned securities. We maintain full
ownership rights to the securities loaned. In addition, we have the
ability to sell the securities while they are on loan. We have an
indemnification agreement with the lending agents in the event a
borrower becomes insolvent or fails to return securities.
Realized Investment Gains and Losses - We record the cost of each
individual investment so that when we sell any of them, we are able
to identify and record the gain or loss on that transaction on our
statement of income.
We continually monitor the difference between the cost and estimated
fair value of our investments. If any of our investments experience a
decline in value that we believe is other than temporary, we
establish a valuation allowance for the decline and record a realized
loss on the statement of income.
<PAGE>
Unrealized Appreciation or Depreciation - For investments we carry at
estimated fair value, we record the difference between cost and fair
value, net of deferred taxes, as a part of common shareholders'
equity. This difference is referred to as unrealized appreciation or
depreciation. In our life insurance operations, deferred policy
acquisition costs and certain reserves are adjusted for the impact on
estimated gross margins as if the net unrealized gains and losses on
securities had actually been realized. The change in unrealized
appreciation or depreciation during the year is a component of
comprehensive income.
CASH RESTRICTIONS
We have entered into reinsurance contracts with third parties which
restrict cash in the amount of $31 million and $29 million at Dec.
31, 1999 and 1998, respectively.
GOODWILL
Goodwill is the excess of the amount we paid to acquire a company
over the fair value of its net assets, reduced by amortization and
any subsequent valuation adjustments. We amortize goodwill over
periods of up to 40 years. The accumulated amortization of goodwill
was $180 million and $137 million at Dec. 31, 1999 and 1998,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
We monitor the value of our long-lived assets to be held and used for
recoverability based on our estimate of the future cash flows
(undiscounted and without interest charges) expected to result from
the use of the asset and its eventual disposition considering any
events or changes in circumstances which indicate that the carrying
value of an asset may not be recoverable. We monitor the value of our
goodwill based on our estimates of discounted future earnings. If
either estimate is less than the carrying amount of the asset, we
reduce the carrying value to fair value with a corresponding charge
to expenses. We monitor the value of our longed-lived assets, and
certain identifiable intangibles, to be disposed of and report them
at the lower of carrying value or fair value less our estimated cost
to sell.
OFFICE PROPERTIES AND EQUIPMENT
We carry office properties and equipment at depreciated cost. We
depreciate these assets on a straight-line basis over the estimated
useful lives of the assets. The accumulated depreciation for office
properties and equipment was $443 million and $390 million at the end
of 1999 and 1998, respectively.
ACCOUNTING CHANGE - INTERNALLY DEVELOPED SOFTWARE COSTS
Effective Jan. 1, 1999, we adopted SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use,"
issued by the AICPA. This SOP provides guidance for determining when
computer software developed or obtained for internal use should be
capitalized. It also provides guidance on the amortization of
capitalized costs and the recognition of impairment. At Dec. 31,
1999, we had $25 million in unamortized internally developed computer
software costs and charged to income during 1999 $2 million of
amortization expense.
<PAGE>
FOREIGN CURRENCY TRANSLATION
We assign functional currencies to our foreign operations, which are
generally the currencies of the local operating environment. Foreign
currency amounts are remeasured to the functional currency, and the
resulting foreign exchange gains or losses are reflected in the
statement of income. Functional currency amounts are then translated
into U.S. dollars. The unrealized gain or loss from this translation,
net of tax, is recorded as a part of common shareholders' equity. The
change in unrealized foreign currency translation gain or loss during
the year, net of tax, is a component of comprehensive income. Both
the remeasurement and translation are calculated using current
exchange rates for the balance sheets and average exchange rates for
the statements of income.
FOREIGN CURRENCY HEDGE ACCOUNTING
We may use forward contracts to hedge our exposure to net investments
in our foreign operations from adverse movements in foreign currency
exchange rates. The effects of movements in foreign currency exchange
rates on the hedging instrument are recorded as unrealized gains or
losses, net of tax, as part of common shareholders' equity. If
unrealized gains or losses on the foreign currency hedge exceed the
offsetting currency translation gain or loss on the investments in
the foreign operations, they are included in the statements of
income.
SUPPLEMENTAL CASH FLOW INFORMATION
Interest and Income Taxes Paid - We paid interest of $90 million in
1999, $71 million in 1998 and $81 million in 1997. We paid federal
income taxes of $73 million in 1999, $68 million in 1998 and $99
million in 1997.
Noncash Financing Activities - The John Nuveen Company issued $45
million of preferred stock in 1997 to fund a portion of its purchase
of Flagship Resources, Inc. In December 1997, we issued $112 million
of common stock in consideration for our acquisition of TITAN
Holdings, Inc. Cash provided from operating activities in 1997 does
not include a $104 million portion of a coinsurance contract
purchased to cede certain structured settlement annuity obligations
(see Note 16 "Reinsurance").
<PAGE>
2. ACQUISITIONS
In December 1999, we announced that we had entered into a definitive
agreement to acquire MMI Companies, Inc. (MMI), a Deerfield, IL-based
provider of medical services-related insurance products and
consulting services, in a purchase transaction. Under the terms of
the merger agreement, MMI shareholders will have the right to receive
$10 in cash for each common share. The total value of the transaction
is expected to approximate $320 million, which includes the
assumption of $120 million of MMI capital securities. The transaction
is expected to close in the second quarter of 2000, subject to
regulatory approvals.
Also in December 1999, we announced that we had entered into a
definitive agreement to acquire Pacific Select Insurance Holdings
Inc., and its wholly-owned subsidiary Pacific Select Property
Insurance Co., a Walnut Creek, CA insurer that sells earthquake
coverage to California homeowners, in a purchase transaction. The
purchase price is $37 million, subject to certain adjustments. The
transaction is expected to close in the first quarter of 2000,
subject to regulatory approvals.
On April 24, 1998, we issued 66.5 million of its common shares in a
tax-free exchange for all of the outstanding common stock of USF&G
Corporation (USF&G), a holding company for property-liability and
life insurance operations. This business combination was accounted
for as a pooling of interests; accordingly, the consolidated
financial statements for all periods prior to the combination were
restated to include the accounts and results of operations of USF&G.
There were no material intercompany transactions between The St. Paul
and USF&G prior to the merger.
Prior to the merger, USF&G discounted all of its workers'
compensation reserves to present value, whereas The St. Paul did not
discount any of its loss reserves. Subsequent to
the merger, The St. Paul and USF&G on a combined basis discounted
tabular workers' compensation reserves using an interest rate of up
to 3.5%. An adjustment was made, which represented the net reduction
in insurance losses and loss adjustment expenses, to conform the
discounting policies of the two companies with regard to these
reserves.
In 1997, we acquired TITAN Holdings, Inc. (Titan), a property-
liability insurance company located in San Antonio, Texas, for $259
million including assumed debt. Titan specializes in the non-standard
automobile and government entities insurance markets. The transaction
resulted in goodwill of approximately $151 million, which is being
amortized over 40 years. The consideration paid included shares of
our common stock, valued at approximately $112 million. See Note 14
for a discussion of the pending sale of this company.
In 1997, The John Nuveen Company (Nuveen), our asset management
segment, acquired Flagship Resources, Inc. (Flagship), a firm that
manages the assets of both its sponsored and marketed family of
mostly tax-free mutual funds and its private investment accounts, for
a total cost of approximately $72 million, plus additional payments
of as much as $20 million contingent upon meeting growth targets
during the years 1997 through 2000. Actual contingent consideration
through 1999 amounted to approximately $6 million. Nuveen also
acquired Rittenhouse Financial Services, Inc. (Rittenhouse), an
equity and balanced fund investment management firm, in 1997 for a
total cost of approximately $147 million. The cost of these
acquisitions was largely composed of goodwill of $213 million which
is being amortized over 30 years.
The Titan, Flagship and Rittenhouse acquisitions were accounted for
as purchases. As a result, the acquired companies' results were
included in our consolidated results from the date of purchase.
<PAGE>
3. EARNINGS PER COMMON SHARE
Earnings per common share (EPS) amounts are calculated based on the
provisions of SFAS No. 128, "Earning Per Share."
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
BASIC
Net income, as reported $ 834 $ 89 $ 929
Preferred stock dividends,
net of taxes (8) (9) (10)
Premium on preferred shares
redeemed (4) (3) (4)
------ ------ ------
Net income available to
common shareholders $ 822 $ 77 $ 915
====== ====== ======
DILUTED
Net income available to
common shareholders $ 822 $ 77 $ 915
Effect of dilutive securities:
Convertible preferred stock 6 - 6
Zero coupon convertible notes 3 - 3
Convertible monthly income
preferred securities 8 - 8
------ ------ ------
Net income available to
common shareholders $ 839 $ 77 $ 932
====== ====== ======
COMMON SHARES
BASIC
Weighted average common
shares outstanding 228 235 230
====== ====== ======
DILUTED
Weighted average common
shares outstanding 228 235 230
Effects of dilutive securities:
Stock options 2 4 4
Convertible preferred stock 7 - 8
Zero coupon convertible notes 2 - 3
Convertible monthly income
preferred securities 7 - 7
------ ------ ------
Total 246 239 252
====== ====== ======
The assumed conversion of preferred stock, zero coupon notes and
monthly income preferred securities were each anti-dilutive to our net
income per share for the year ended Dec. 31, 1998, and therefore not
included in the EPS calculation.
<PAGE>
4. INVESTMENTS
Valuation of Investments - The following presents the cost, gross
unrealized appreciation and depreciation, and estimated fair value of
our investments in fixed maturities, equities and venture capital.
Gross Gross
December 31, 1999 Unrealized Unrealized Estimated
(In millions) Cost Appreciation Depreciation Fair Value
------- ------------ ------------ ----------
Fixed maturities:
U.S. government $ 2,174 $ 29 $ (16) $ 2,187
States and political
subdivisions 5,336 145 (62) 5,419
Foreign governments 912 28 (6) 934
Corporate securities 7,999 45 (307) 7,737
Asset-backed securities 669 2 (21) 650
Mortgage-backed
securities 2,452 14 (64) 2,402
------- ------- ------- -------
Total fixed maturities 19,542 263 (476) 19,329
Equities 1,078 600 (60) 1,618
Venture capital 399 529 (62) 866
------- ------- ------- -------
Total $21,019 $ 1,392 $ (598) $21,813
======= ======= ======= =======
Gross Gross
December 31, 1998 Unrealized Unrealized Estimated
(In millions) Cost Appreciation Depreciation Fair Value
------- ------------ ------------ ----------
Fixed maturities:
U.S. government $ 2,440 $ 188 $ - $ 2,628
States and political
subdivisions 5,979 437 - 6,416
Foreign governments 900 70 (2) 968
Corporate securities 6,689 371 (26) 7,034
Asset-backed securities 661 26 (3) 684
Mortgage-backed
securities 2,652 63 (1) 2,714
------- ------- ------- -------
Total fixed maturities 19,321 1,155 (32) 20,444
Equities 942 361 (44) 1,259
Venture capital 389 201 (19) 571
------- ------- ------- -------
Total $20,652 $ 1,717 $ (95) $22,274
======= ======= ======= =======
Statutory Deposits - At Dec. 31, 1999, our property-liability and life
insurance operations had investments in fixed maturities with an
estimated fair value of $659 million on deposit with regulatory
authorities as required by law.
Fixed Maturities by Maturity Date - The following table presents the
breakdown of our fixed maturities by years to maturity. Actual
maturities may differ from those stated as a result of calls and
prepayments.
December 31, 1999 Amortized Estimated
(In millions) Cost Fair Value
--------- ----------
One year or less $ 1,044 $ 1,052
Over one year through five years 5,661 5,712
Over five years through 10 years 5,325 5,219
Over 10 years 4,391 4,294
Asset-backed securities with
various maturities 669 650
Mortgage-backed securities with
various maturities 2,452 2,402
--------- --------
Total $19,542 $19,329
========= ========
<PAGE>
5. INVESTMENT TRANSACTIONS
Investment Activity - Following is a summary of our investment purchases,
sales and maturities.
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
PURCHASES
Fixed maturities $ 4,405 $ 3,187 $ 3,345
Equities 1,403 1,250 1,510
Real estate and mortgage loans 171 211 380
Venture capital 218 153 97
Other investments 74 100 24
------ ------ ------
Total purchases 6,271 4,901 5,356
====== ====== ======
PROCEEDS FROM SALES AND MATURITIES
Fixed maturities:
Sales 2,251 967 1,630
Maturities and redemptions 2,026 2,012 1,322
Equities 1,438 1,341 1,479
Real estate and mortgage loans 182 339 468
Venture capital 283 64 250
Other investments 59 105 4
------ ------ ------
Total sales and maturities 6,239 4,828 5,153
------ ------ ------
Net purchases $ 32 $ 73 $ 203
====== ====== ======
Net Investment Income - Following is a summary of our net investment income.
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
Fixed maturities $ 1,375 $ 1,365 $ 1,400
Equities 17 16 17
Real estate and mortgage loans 108 121 113
Venture capital (1) - -
Securities lending 2 1 1
Other investments 12 20 10
Short-term investments 71 75 58
------ ------ ------
Total 1,584 1,598 1,599
Investment expenses (27) (27) (26)
------ ------ ------
Net investment income $ 1,557 $ 1,571 $ 1,573
====== ====== ======
Realized and Unrealized Investment Gains (Losses) - The following
summarizes our pretax realized investment gains and losses, and the
change in unrealized appreciation of investments recorded in common
shareholders' equity and in comprehensive income.
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
PRETAX REALIZED INVESTMENT
GAINS (LOSSES)
Fixed maturities:
Gross realized gains $ 13 $ 9 $ 36
Gross realized losses (50) (21) (43)
------ ------ ------
Total fixed maturities (37) (12) (7)
------ ------ ------
Equities:
Gross realized gains 224 241 209
Gross realized losses (97) (77) (46)
------ ------ ------
Total equities 127 164 163
------ ------ ------
Real estate and mortgage loans 27 14 45
Venture capital 158 25 213
Other investments 2 10 9
------ ------ ------
Total pretax realized
investment gains $ 277 $ 201 $ 423
====== ====== ======
<PAGE>
CHANGE IN UNREALIZED
APPRECIATION
Fixed maturities $(1,336) $ 203 $ 400
Equities 223 69 62
Venture capital net of
minority interest 255 45 (155)
Life deferred policy acquisition
costs and policy benefits 122 (1) (21)
Single premium immediate
annuity reserves 44 (17) (27)
Other (13) (17) (2)
------ ------ ------
Total change in pretax
unrealized appreciation (705) 282 257
Change in deferred taxes 246 (101) (90)
------ ------ ------
Total change in unrealized
appreciation, net of taxes $ (459) $ 181 $ 167
====== ====== ======
6. DEFERRED POLICY ACQUISITION COSTS
The following table presents the amortization of deferred policy
acquisition costs for our property-liability operations and our life
operation for each of the last three years.
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
Property-liability $ 1,321 $ 1,431 $ 1,475
Life 4 56 12
------ ------ ------
Total $ 1,325 $ 1,487 $ 1,487
====== ====== ======
Included in the 1998 life insurance amortization is a $41 million
charge to reduce the carrying value of deferred policy acquisition
costs (DPAC), related to three components. First, the persistency of
certain in-force business, particularly universal life and flexible
premium annuities, sold through some USF&G distribution channels, had
begun to deteriorate after the USF&G merger announcement. To mitigate
this, management decided, in the second quarter of 1998, to increase
credited rates on certain universal life business. This change lowered
the estimated future profits on this business, which triggered $19
million in accelerated DPAC amortization. Second, the low interest
rate environment during the first half of 1998 led to assumption
changes as to the future "spread" on certain interest sensitive
products, lowering gross profit expectations and triggering a $16
million DPAC charge. The remaining $6 million of the charge resulted
from a change in annuitization assumptions for certain tax-sheltered
annuity products.
7. DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are defined as futures, forward, swap
or option contracts and other financial instruments with similar
characteristics. We have had limited involvement with these
instruments for purposes of hedging against fluctuations in foreign
currency exchange rates and interest rates. During 1999, we
significantly increased our involvement with option contracts to hedge
market indices, related to our Life operation's equity-indexed annuity
product. All investments, including derivative instruments, have some
degree of market and credit risk associated with them. However, the
market risk on our derivatives substantially offsets the market risk
associated with fluctuations in interest rates, foreign currency
exchange rates and market indices. We seek to reduce our credit risk
exposure by conducting derivative transactions only with reputable,
investment-grade counterparties. Additionally, with respect to the
options hedging our equity-indexed annuity product, we establish
limits on options purchased from each counterparty.
We enter into interest rate swap agreements for the purpose of
managing the effect of interest rate fluctuations on some of our debt
and investments. We purchase foreign exchange forward contracts to
minimize the impact of fluctuating foreign currencies on our results
of operations. Individually, and in the aggregate, the impact of these
transactions on our financial position and results of operations is
not material.
We hedge our obligation to pay credited rates on equity-indexed
annuity products by purchasing one- and two-year options tied to a
leading market index. At Dec. 31, 1999, we held options with a
notional amount of $906 million and a market value of $44 million,
which had gross unrealized appreciation of $6 million and gross
unrealized depreciation of $12 million.
<PAGE>
8. RESERVES FOR LOSSES, LOSS ADJUSTMENT EXPENSES AND LIFE POLICY BENEFITS
Reconciliation of Loss Reserves - The following table represents a
reconciliation of beginning and ending consolidated property-liability
insurance loss and loss adjustment expense (LAE) reserves for each of
the last three years.
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
Loss and LAE reserves at
beginning of year, as reported $ 18,186 $ 17,853 $ 17,582
Less reinsurance recoverables
on unpaid losses at
beginning of year (3,260) (3,051) (2,864)
------ ------ ------
Net loss and LAE reserves at
beginning of year 14,926 14,802 14,718
Activity on reserves of
discontinued operations:
Losses incurred 438 822 672
Losses paid (626) (767) (734)
------ ------ ------
Net activity (188) 55 (62)
------ ------ ------
Net reserves of
acquired companies - - 141
------ ------ ------
Provision for losses and LAE
for claims incurred on
continuing operations:
Current year 3,928 4,682 4,805
Prior years (208) (217) (716)
------ ------ ------
Total incurred 3,720 4,465 4,089
------ ------ ------
Losses and LAE payments
for claims incurred on
continuing operations:
Current year (959) (1,136) (1,065)
Prior years (3,411) (3,245) (3,025)
------ ------ ------
Total paid (4,370) (4,381) (4,090)
------ ------ ------
Unrealized foreign exchange
loss (gain) 73 (15) 6
------ ------ ------
Net loss and LAE reserves at
end of year 14,161 14,926 14,802
Plus reinsurance recoverables
on unpaid losses at end of year 3,773 3,260 3,051
------ ------ ------
Loss and LAE reserves at
end of year, as reported $ 17,934 $ 18,186 $ 17,853
====== ====== ======
The table above presents separately "activity on reserves of
discontinued operations." These amounts represent incurred and paid
losses for our nonstandard auto business, which is expected to be sold
by the second quarter of 2000, and for certain activity related to the
sale of our standard personal insurance business. These reserve
balances are included in the above total reserves, but the related
incurred losses are excluded from continuing operations in our
statements of income for all periods presented.
<PAGE>
In 1998, we recorded pretax loss and LAE of $215 million to reflect
the application of our loss reserving policies to USF&G's loss and LAE
reserves subsequent to the merger. In the above table $50 million of
the charge is reflected in the provision for current year losses and
LAE, and the remaining $165 million is reflected in the provision for
prior year losses and LAE. An additional charge of $35 million related
to our standard personal insurance business is now reflected in 1998
discontinued operations.
Prior to the merger, both companies, in accordance with generally
accepted accounting principles, recorded their best estimate of
reserves within a range of estimates bounded by a high point and a low
point. Subsequent to the consummation of the merger in April 1998, we
obtained the raw data underlying, and documentation supporting,
USF&G's Dec. 31, 1997 reserve analysis. Our actuaries reviewed such
information and concurred with the reasonableness of USF&G's range of
estimates for their reserves. However, applying their judgment and
interpretation to the range, our actuaries, who would be responsible
for setting reserve amounts for the combined entity, concluded that
strengthening the reserves would be appropriate, resulting in the $215
million adjustment. The adjustment was allocated to the following
business segments: Commercial Lines Group ($197 million); and
Specialty Commercial ($18 million).
In 1996, we acquired Northbrook Holdings, Inc. and its three insurance
subsidiaries (Northbrook) from Allstate Insurance Company. In the
Northbrook purchase agreement, we agreed to pay Allstate additional
consideration of up to $50 million in the event a redundancy develops
on the acquired Northbrook reserves between the purchase date and July
31, 2000. Included in "Other liabilities" on our Dec. 31, 1999 balance
sheet is an accrual for $50 million under this agreement.
Life Benefit Reserves - The following table shows our life insurance
operation's future policy benefit reserves by type.
December 31
(In millions) 1999 1998
------ ------
Single premium annuities:
Deferred $ 2,041 $ 1,366
Immediate 1,173 1,119
Other annuities 1,052 1,032
Universal/term/group life 619 625
------ ------
Gross balance 4,885 4,142
Less reinsurance recoverables 653 714
------ ------
Total net reserves $ 4,232 $ 3,428
====== ======
Environmental and Asbestos Reserves - Our underwriting operations
continue to receive claims under policies written many years ago
alleging injury or damage from environmental pollution or seeking
payment for the cost to clean up polluted sites. We have also received
asbestos injury claims arising out of product liability coverages
under general liability policies.
The following table summarizes the environmental and asbestos reserves
reflected in our consolidated balance sheet at Dec. 31, 1999 and 1998.
Amounts in the "net" column are reduced by reinsurance.
December 31 1999 1998
(In millions) Gross Net Gross Net
----- ----- ----- -----
Environmental $ 698 $ 599 $ 783 $ 645
Asbestos 398 298 402 277
----- ----- ----- -----
Total environmental
and asbestos
reserves $1,096 $ 897 $1,185 $ 922
===== ===== ===== =====
<PAGE>
9. INCOME TAXES
Method for Computing Income Tax Expense (Benefit) - We are required to
compute our income tax expense under the liability method. This means
deferred income taxes reflect what we estimate we will pay or receive
in future years. A current tax liability is recognized for the
estimated taxes payable for the current year.
Income Tax Expense (Benefit) - Income tax expense or benefits are
recorded in various places in our financial statements. A summary of
the amounts and places follows:
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
STATEMENTS OF INCOME
Expense (benefit) on
continuing operations $ 238 $ (79) $ 371
Benefit on operating loss of
discontinued operations (4) (57) (32)
Expense (benefit) on gain
or loss on disposal 90 - (36)
------ ------ ------
Total income tax expense
(benefit) included in
statements of income 324 (136) 303
------ ------ ------
COMMON SHAREHOLDERS' EQUITY
Expense (benefit) relating to
stock-based compensation
and the change in unrealized
appreciation and unrealized
foreign exchange (253) 87 78
------ ------ ------
Total income tax expense
(benefit) included in
financial statements $ 71 $ (49) $ 381
====== ====== ======
Components of Income Tax Expense (Benefit) - The components of income tax
expense (benefit) on continuing operations are as follows:
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
Federal current tax expense $ 105 $ 13 $ 298
Federal deferred tax expense
(benefit) 120 (114) 39
------ ------ ------
Total federal income tax
expense (benefit) 225 (101) 337
Foreign income taxes 2 14 19
State income taxes 11 8 15
------ ------ ------
Total income tax expense
(benefit) on continuing
operations $ 238 $ (79) $ 371
====== ====== ======
Our Tax Rate is Different from the Statutory Rate - Our total income
tax expense on income from continuing operations differs from the
statutory rate of 35% of income from continuing operations before
income taxes as shown in the following table:
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
Federal income tax expense
at statutory rate $ 356 $ 42 $ 502
Increase (decrease)
attributable to:
Nontaxable investment income (103) (112) (112)
Valuation allowance 2 (35) (32)
Nondeductible merger expense - 31 -
Other (17) (5) 13
------ ------ ------
Total income tax expense
(benefit) on continuing
operations $ 238 $ (79) $ 371
====== ====== ======
<PAGE>
Major Components of Deferred Income Taxes on Our Balance Sheet -
Differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in
taxable or deductible amounts in future years are called temporary
differences. The tax effects of temporary differences that give rise
to the deferred tax assets and deferred tax liabilities are presented
in the following table:
December 31
(In millions) 1999 1998
------ ------
DEFERRED TAX ASSETS
Loss reserves $ 1,036 $ 1,048
Unearned premium reserves 152 181
Alternative minimum tax credit carryforwards 168 117
Net operating loss carryforwards 232 460
Deferred compensation 115 118
Other 548 505
------ ------
Total gross deferred tax assets 2,251 2,429
Less valuation allowance (8) (6)
------ ------
Net deferred tax assets 2,243 2,423
------ ------
DEFERRED TAX LIABILITIES
Unrealized appreciation of investments 294 536
Deferred acquisition costs 286 278
Real estate 135 115
Prepaid compensation 73 56
Other 184 245
------ ------
Total gross deferred tax liabilities 972 1,230
------ ------
Deferred income taxes $ 1,271 $ 1,193
====== ======
If we believe that all of our deferred tax assets will not result in
future tax benefits, we must establish a "valuation allowance" for the
portion of these assets that we think will not be realized. The net
change in the valuation allowance for deferred tax assets was an
increase of $2 million in 1999, and a decrease of $35 million in 1998,
relating to our foreign underwriting operations and our provision for
loss on disposal of insurance brokerage operations. Based upon a
review of our anticipated future earnings and all other available
evidence, both positive and negative, we have concluded it is "more
likely than not" that our net deferred tax assets will be realized.
Net Operating Loss (NOL) and Foreign Tax Credit (FTC) Carryforwards -
For tax return purposes, as of Dec. 31, 1999, we have NOL
carryforwards that expire, if unused, in 2004-2019 and FTC
carryforwards that expire, if unused, in 2001-2003. The amount and
timing of realizing the benefits of NOL and FTC carryforwards depends
on future taxable income and limitations imposed by tax laws. The
approximate amounts of those NOLs on a regular tax basis and an
alternative minimum tax (AMT) basis were $662 million and $342
million, respectively. The approximate amounts of the FTCs on a
regular tax basis and an AMT basis were $61 million and $54 million,
respectively. The benefits of the NOL and FTC carryforwards have been
recognized in our financial statements.
Undistributed Earnings of Subsidiaries - U.S. income taxes have not
been provided on $58 million of our foreign operations' undistributed
earnings as of Dec. 31, 1999, as such earnings are intended to be
permanently reinvested in those operations. Furthermore, any taxes
paid to foreign governments on these earnings may be used as credits
against the U.S. tax on any dividend distributions from such earnings.
We have not provided taxes on approximately $240 million of
undistributed earnings related to our majority ownership of The John
Nuveen Company as of Dec. 31, 1999, because we currently do not expect
those earnings to become taxable to us.
IRS Examinations - The IRS is currently examining USF&G's pre-merger
consolidated returns for the years 1992 through 1997. The IRS has
examined The St. Paul's pre-merger consolidated returns through 1994
and is currently examining the years 1995 through 1997. We believe
that any additional taxes assessed as a result of these examinations
would not materially affect our overall financial position, results of
operations or liquidity.
<PAGE>
10. CAPITAL STRUCTURE
The following summarizes our capital structure:
December 31
(In millions) 1999 1998
------ ------
Debt $ 1,466 $ 1,260
Company-obligated mandatorily redeemable
preferred securities of subsidiaries or trusts
holding solely convertible subordinated
debentures of the Company 425 503
Preferred shareholders' equity 24 15
Common shareholders' equity 6,448 6,621
------ ------
Total capital $ 8,363 $ 8,399
====== ======
Ratio of debt to total capital 18% 15%
====== ======
DEBT
Debt consists of the following:
1999 1998
December 31 Book Fair Book Fair
(In millions) Value Value Value Value
------ ------ ------ ------
Medium-term notes $ 617 $ 598 $ 637 $ 675
Commercial paper 400 400 257 257
8-3/8% senior notes 150 153 150 160
Zero coupon convertible notes 94 93 111 118
7-1/8% senior notes 80 78 80 86
Variable rate borrowings 64 64 - -
Floating rate notes 46 46 - -
Real estate mortgages 15 15 15 16
Nuveen short-term borrowings - - 10 10
------ ------ ------ ------
Total debt $ 1,466 $ 1,447 $ 1,260 $ 1,322
====== ====== ====== ======
Fair Value - The fair values of our commercial paper and short-term
borrowings approximate their book values because of their short-term
nature. The fair values of our variable rate borrowings and floating
rate notes approximate their book values due to the floating interest
rates of these instruments. For our other debt, which has longer terms
and fixed interest rates, our fair value estimate is based on current
interest rates available on debt securities in the market that have
terms similar to ours.
Medium-Term Notes - The medium-term notes bear interest rates ranging
from 5.9% to 8.3%, with a weighted average rate of 6.9%. Maturities
range from five to 15 years after the issuance date. During 1998, we
issued $150 million of medium-term notes bearing a weighted average
interest rate of 6.4%.
Commercial Paper - Our commercial paper is supported by a $400 million
credit agreement that expires in 2002. The credit agreement requires
us to meet certain provisions. We were in compliance with all
provisions of the agreement as of Dec. 31, 1999 and 1998.
Interest rates on commercial paper issued in 1999 ranged from 4.6% to
6.6%; in 1998 the range was 4.5% to 6.3%; and in 1997 the range was
5.2% to 6.8%.
<PAGE>
8-3/8% Senior Notes - The 8-3/8% senior notes mature in 2001.
Zero Coupon Convertible Notes - The zero coupon convertible notes are
redeemable beginning in 1999 for an amount equal to the original issue
price plus accreted original issue discount. In addition, on March 3,
1999 and March 3, 2004, the holders of the zero coupon convertible
notes had/have the right to require us to purchase their notes for the
price of $640.82 and $800.51, respectively, per $1,000 of principal
amount due at maturity. In 1999, we repurchased approximately $34
million face amount of the zero coupon convertible notes, for a total
cash consideration of $21 million. These notes mature in 2009.
7-1/8% Senior Notes - The 7-1/8% senior notes mature in 2005.
Variable Rate Borrowings - A number of The St. Paul's real estate
entities are parties to variable rate loan agreements aggregating $64
million. The borrowings mature in the year 2030, with principal
paydowns starting in the year 2006. The interest rate is set weekly by
a third party, and was 5.65% at Dec. 31, 1999.
Floating Rate Notes - A special purpose offshore subsidiary of The St.
Paul is a party to a reinsurance agreement under which it issued $46
million of floating rate notes and certificates due Feb. 18, 2000. The
proceeds from this issuance were used to purchase investments in
accordance with underlying agreements. The sale of these investments
prior to Feb. 18, 2000 is restricted by the reinsurance agreement. The
weighted average interest rate on the notes and certificates was
11.36% at Dec. 31, 1999.
Real Estate Mortgages - The real estate mortgages represent a portion
of the purchase price of two of our investments. One $13 million
mortgage bears a fixed interest rate of 6.7% and matures in November
2000. A second $2 million mortgage bears a fixed rate of 8.1% and
matures in February 2002.
Nuveen Short-Term Borrowings - Short-term borrowings at the end of
1998 were obligations of our asset management segment that were
collateralized by some of its inventory securities. These borrowings
bore a weighted average interest rate of 6.3% at Dec. 31, 1998.
Interest Expense - Our interest expense was $96 million in 1999, $75
million in 1998 and $86 million in 1997.
Maturities - The amount of debt, other than commercial paper, that
becomes due in each of the next five years is as follows: 2000, $59
million; 2001, $195 million; 2002, $51 million; 2003, $67 million; and
2004, $55 million.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARIES OR TRUSTS HOLDING SOLELY CONVERTIBLE SUBORDINATED
DEBENTURES OF THE COMPANY
In 1995, we issued, through St. Paul Capital L.L.C. (SPCLLC),
4,140,000 company-obligated mandatorily redeemable preferred
securities, generating proceeds of $207 million. These securities are
also known as convertible monthly income preferred securities (MIPS).
The MIPS pay a monthly dividend at an annual rate of 6% of the
liquidation preference of $50 per security. We directly or indirectly
own all of the common securities of SPCLLC, a special purpose limited
liability company which was formed for the sole purpose of issuing the
MIPS. We have effectively fully and unconditionally guaranteed
SPCLLC's obligations under the MIPS. The MIPS are convertible into
1.6950 shares of our common stock (equivalent to a conversion price of
$29.50 per share). The MIPS were redeemable after May 31, 1999, at the
option of SPCLLC.
In 1997 and 1996, USF&G issued three series of capital securities.
After consummation of the merger with USF&G in 1998, The St. Paul
assumed all obligations relating to these capital securities. These
Series A, Series B and Series C Capital Securities were issued through
separate wholly-owned business trusts (USF&G Capital I, USF&G Capital
II and UF&G Capital III, respectively) formed for the sole purpose of
issuing the securities. We have effectively fully and unconditionally
guaranteed all obligations of the three business trusts.
<PAGE>
In December 1996, USF&G Capital I issued 100,000 shares of 8.5% Series
A Capital Securities, generating proceeds of $100 million. The
proceeds were used to purchase $100 million of USF&G Corporation 8.5%
Series A subordinated debentures, which mature on Dec. 15, 2045. The
debentures are redeemable under certain circumstances related to tax
events at a price of $1,000 per debenture. The proceeds of such
redemptions will be used to redeem a like amount of the Series A
Capital Securities.
In January 1997, USF&G Capital II issued 100,000 shares of 8.47%
Series B Capital Securities, generating proceeds of $100 million. The
proceeds were used to purchase $100 million of USF&G Corporation 8.47%
Series B subordinated debentures, which mature on Jan. 10, 2027. The
debentures are redeemable at our option at any time beginning in
January 2007 at scheduled redemption prices ranging from $1,042 to
$1,000 per debenture. The debentures are also redeemable prior to
January 2007 under certain circumstances related to tax and other
special events. The proceeds of such redemptions will be used to
redeem a like amount of the Series B Capital Securities.
In July 1997, USF&G Capital III issued 100,000 shares of 8.312% Series
C Capital Securities, generating proceeds of $100 million. The
proceeds were used to purchase $100 million of USF&G Corporation
8.312% Series C subordinated debentures, which mature on July 1, 2046.
The debentures are redeemable under certain circumstances related to
tax events at a price of $1,000 per debenture. The proceeds of such
redemptions will be used to redeem a like amount of the Series C
Capital Securities.
Under certain circumstances related to tax events, we have the right
to shorten the maturity dates of the Series A, Series B and Series C
debentures to no earlier than June 24, 2016, July 10, 2016 and April
8, 2012, respectively, in which case the stated maturities of the
related Capital Securities will likewise be shortened.
During 1999, The St. Paul repurchased and retired approximately $79
million (principal amount) of its company-obligated mandatorily
redeemable preferred securities of subsidiaries in open market
transactions. The amount retired included $27 million of 8.5% Series
A, $22 million of 8.47% Series B, and $30 million of 8.312% Series C
securities.
PREFERRED SHAREHOLDERS' EQUITY
The preferred shareholders' equity on our balance sheet represents the
par value of preferred shares outstanding that we issued to our Stock
Ownership Plan (SOP) Trust, less the remaining principal balance on
the SOP Trust debt. The SOP Trust borrowed funds from a U.S.
underwriting subsidiary to finance the purchase of the preferred
shares, and we guaranteed the SOP debt.
The SOP Trust may at any time convert any or all of the preferred
shares into shares of our common stock at a rate of eight shares of
common stock for each preferred share. Our board of directors has
reserved a sufficient number of our authorized common shares to
satisfy the conversion of all preferred shares issued to the SOP Trust
and the redemption of preferred shares to meet employee distribution
requirements. Upon the redemption of preferred shares, we issue shares
of our common stock to the trust to fulfill the redemption
obligations.
During the first half of 1997, we redeemed all of the remaining
outstanding shares of USF&G's Series A Preferred Stock for $200
million cash.
COMMON SHAREHOLDERS' EQUITY
Common Stock and Reacquired Shares - We are governed by the Minnesota
Business Corporation Act. All authorized shares of voting common stock
have no par value. Shares of common stock reacquired are considered
unissued shares. The number of authorized shares of the company is 480
million.
<PAGE>
Our cost for reacquired shares in 1999, 1998 and 1997 was $356
million, $135 million and $128 million, respectively. We reduced our
capital stock account and retained earnings for the cost of these
repurchases. In December 1997, we issued approximately 2.9 million
shares of common stock valued at $112 million as partial consideration
for our acquisition of Titan. Also in 1997, we issued 40,976 shares of
our common stock valued at $1.7 million, as partial consideration for
our acquisition of a Lloyd's of London managing agency.
A summary of our common stock activity for the last three years is as
follows:
Year ended December 31
(Shares) 1999 1998 1997
------ ------ ------
Outstanding at beginning of year 233,749,778 233,129,721 230,851,306
Shares issued:
Stock incentive plans 1,896,229 4,243,354 1,501,532
Conversion of preferred stock 287,951 204,765 1,223,571
Acquisition 27,936 - 2,918,396
Reacquired shares (11,131,000) (3,828,062) (3,365,084)
------------ ----------- -----------
Outstanding at end of year 224,830,894 233,749,778 233,129,721
============ =========== ===========
Undesignated Shares - Our articles of incorporation allow us to issue
five million undesignated shares. The board of directors may designate
the type of shares and set the terms thereof. The board designated
1,450,000 shares as Series B Convertible Preferred Stock in connection
with the formation of our Preferred Stock Ownership Plan.
Shareholder Protection Rights Plan - Our Shareholder Protection Rights
Plan, entered into on Dec. 19, 1989, was designed to protect the
interests of our shareholders in the event of unsolicited and unfair
or coercive attempts to acquire control of the company. Our
shareholders owned one right for each common share owned, which
enabled them to initiate specified actions to protect their interests.
The agreement governing the Rights expired on Dec. 19, 1999.
Dividend Restrictions - We primarily depend on dividends from our
subsidiaries to pay dividends to our shareholders, service our debt
and pay expenses. Various state laws and regulations limit the amount
of dividends we may receive from our U.S. property-liability
underwriting subsidiaries and our life insurance subsidiary. In 2000,
$484 million will be available for dividends free from such
restrictions. During 1999, we received cash dividends of $294 million
from our U.S. underwriting subsidiaries.
<PAGE>
11. RETIREMENT PLANS
Pension Plans - We maintain funded defined benefit pension plans for
most of our employees. Benefits are based on years of service and the
employee's compensation while employed by the company. Pension
benefits generally vest after five years of service.
Our pension plans are noncontributory. This means that employees do
not pay anything into the plans. Our funding policy is to contribute
amounts sufficient to meet the minimum funding requirements of the
Employee Retirement Income Security Act and any additional amounts
that may be necessary. This may result in no contribution being made
in a particular year.
Plan assets are invested primarily in equities and fixed maturities,
and included 804,035 shares of our common stock with a market value of
$27 million and $28 million at Dec. 31, 1999 and 1998, respectively.
We maintain non-contributory, unfunded pension plans to provide
certain company employees with pension benefits in excess of limits
imposed by federal tax law.
Postretirement Benefits Other Than Pension - We provide certain health
care and life insurance benefits for retired employees and their
eligible dependents. We currently anticipate that most of our
employees will become eligible for these benefits if they retire while
working for us. The cost of these benefits is shared with the retiree.
The benefits are generally provided through our employee benefits
trust, to which periodic contributions are made to cover benefits paid
during the year. We accrue postretirement benefits expense during the
period of the employee's service.
A health care inflation rate of 6.25% was assumed to change to 5.82%
in 2000, decrease annually to 5.00% in 2002 and then remain at that
level. A one-percentage-point change in assumed health care cost trend
rates would have the following effects:
1-Percentage 1-Percentage
(In millions) Point Increase Point Decrease
-------------- --------------
Effect on total of service
and interest cost components $ 4 $ (3)
Effect on postretirement
benefit obligation 24 (20)
<PAGE>
The following tables provide a reconciliation of the changes in the
plans' benefit obligations and fair value of assets over the two-year
period ended Dec. 31, 1999, and a statement of the funded status as of
Dec. 31, of 1999 and 1998. For the year ended Dec. 31, 1999, the
plans' benefit obligations include the impact of curtailment gains
related to employee terminations under the third quarter 1999 cost
reduction action and the sale of standard personal insurance.
Pension Benefits Postretirement Benefits
(In millions) 1999 1998 1999 1998
------ ------ ------ ------
Change in benefit obligation:
Benefit obligation
at beginning of year $ 1,006 $ 846 $ 214 $ 192
Service cost 38 31 8 6
Interest cost 60 58 14 13
Plan amendment - - 16 -
Actuarial (gain) loss (197) 113 (37) 15
Benefits paid (100) (42) (9) (12)
Curtailment gain (30) - (17) -
------ ------ ------ ------
Benefit obligation
at end of year $ 777 $ 1,006 $ 189 $ 214
------ ------ ------ ------
Change in plan assets:
Fair value of plan assets
at beginning of year $ 1,135 $ 953 $ 22 $ 19
Actual return on plan assets 187 176 (2) 3
Employer contribution 4 48 9 12
Benefits paid (100) (42) (9) (12)
------ ------ ------ ------
Fair value of plan
assets at end of year $ 1,226 $ 1,135 $ 20 $ 22
------ ------ ------ ------
Funded status $ 449 $ 129 $ (169) $ (192)
Unrecognized
transition asset (3) (5) - -
Unrecognized
prior service cost (7) (13) 10 (4)
Unrecognized net
actuarial (gain) loss (208) 65 (22) 12
------ ------ ------ ------
Prepaid (accrued)
benefit cost $ 231 $ 176 $ (181) $ (184)
====== ====== ====== ======
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
------ ------ ------ ------
Weighted average assumptions
as of December 31:
Discount rate 7.25% 6.25% 7.50% 6.50%
Expectred return on
plan assets 10.00% 10.00% 8.00% 8.00%
Rate of compensation
increase 4.00% 4.00% 4.00% 4.00%
The following table provides the components of our net periodic benefit cost
for the years ended Dec. 31, 1999, 1998 and 1997:
Pension Benefits Postretirement Benefits
(In millions) 1999 1998 1997 1999 1998 1997
----- ----- ----- ----- ----- -----
Components of net
periodic benefit cost:
Service cost $ 38 $ 31 $ 28 $ 8 $ 6 $ 6
Interest cost 60 58 57 14 13 13
Expected return
on plan assets (114) (98) (71) (2) (2) (2)
Amortization of
transition asset (1) (2) (2) - - -
Amortization of
prior service cost (4) (4) (4) 1 - -
Recognized net
actuarial loss (gain) - 6 7 - - -
----- ----- ----- ----- ----- -----
Net periodic benefit
cost (income) (21) (9) 15 21 17 17
Curtailment gain (32) - (8) (15) - (6)
----- ----- ----- ----- ----- -----
Net periodic benefit
cost (income) after
curtailment $ (53) $ (9) $ 7 $ 6 $ 17 $ 11
===== ===== ===== ===== ===== =====
<PAGE>
STOCK OWNERSHIP PLAN
As of Jan. 1, 1998, the Preferred Stock Ownership Plan (PSOP) and the
Employee Stock Ownership Plan (ESOP) were merged into The St. Paul
Companies, Inc. Stock Ownership Plan (SOP). The plan allocates
preferred shares semiannually to those employees participating in our
Savings Plus Plan. Under the former PSOP, the match was 60% of
employees' contributions up to a maximum of 6% of their salary. This
match has been enhanced to 100% of employees' contributions up to a
maximum of 4% of their salary plus shares equal to the value of
dividends on previously allocated shares. Additionally, this plan now
provides an annual allocation to qualified U.S. employees based on
company performance.
To finance the preferred stock purchase for future allocation to
qualified employees, the SOP (formerly the PSOP) borrowed $150 million
at 9.4% from our U.S. underwriting subsidiary. As the principal and
interest of the trust's loan is paid, a pro rata amount of our
preferred stock is released for allocation to participating employees.
Each share pays a dividend of $11.72 annually and is currently
convertible into eight shares of common stock. Preferred stock
dividends on all shares held by the trust are used to pay this SOP
obligation. In addition to dividends paid to the trust, we make
additional cash contributions to the SOP as necessary in order to meet
the SOP's debt obligation.
The SOP (formerly the ESOP) borrowed funds to finance the purchase of
common stock for future allocation to qualified participating U.S.
employees. The final principal payment on the trust's loan was made in
the first quarter of 1998. As the principal of the trust loan was
paid, a pro rata amount of our common stock was released for
allocation to eligible participants. The final allocation was made as
of Dec. 31, 1997. Common stock dividends on all shares held by the
trust were used to pay this SOP obligation. In addition to dividends
paid to the trust, we made additional cash contributions as necessary
in order to meet the SOP's debt obligation. Starting in the second
quarter of 1998 common stock dividends on shares allocated under the
former ESOP are paid directly to participants.
All common shares and the common stock equivalent of all preferred
shares held by the SOP are considered outstanding for diluted EPS
computations and dividends paid on all shares are charged to retained
earnings. Our SOP expense was reduced by the dividends we paid to the
SOP trust that were used to pay the SOP debt obligations.
We follow the provisions of Statement of Position 76-3, "Accounting
Practices for Certain Employee Stock Ownership Plans," and related
interpretations in accounting for this plan. We recorded expense of
$26 million, $8 million and $17 million for the years 1999, 1998 and
1997, respectively.
The following table details the shares held in the SOP:
December 31 1999 1998
(Shares) Common Preferred Common Preferred
-------- ---------- -------- ----------
Allocated 6,578,570 370,122 7,250,535 324,938
Committed to be released - 130,896 - 27,809
Unallocated - 393,248 - 577,132
--------- -------- --------- --------
Total 6,578,570 894,266 7,250,535 929,879
========= ======== ========= ========
<PAGE>
The SOP allocated 183,884 preferred shares in 1999, 53,949 preferred
shares in 1998 and 41,810 preferred shares in 1997. The remaining
unallocated preferred shares at Dec. 31, 1999, will be released for
allocation annually through Jan. 31, 2005. The SOP (formerly ESOP)
made its final allocation in 1997 totaling 1,207,254 common shares.
12. STOCK INCENTIVE PLANS
We have made fixed stock option grants to certain U.S.-based company
management and outside directors. We also have made separate fixed
option grants to certain employees of our non-U.S. operations. These
plans are referred to as "fixed plans" because the measurement date
for determining compensation costs is fixed on the date of grant. In
1999 and 1997, we also made variable stock option grants to certain
company executives. These were considered "variable" grants because
the measurement date is contingent upon future increases in the market
price of our common stock. At the end of 1999, approximately 3,400,000
shares remained available for grant under our stock incentive plan.
We follow the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for our stock option plans. We also
follow the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" for our option plans. SFAS No. 123 requires
pro forma net income and earnings per share information, which is
calculated assuming we had accounted for our stock option plans under
the "fair value" method described in that Statement.
Since the exercise price of our fixed options equals the market price
of our stock on the day the options are granted there is no related
compensation cost. We have recorded compensation cost associated with
our variable options and restricted stock awards, and the former
USF&G's Long-Term Incentive Program, of $8 million, $10 million and
$18 million in 1999, 1998 and 1997, respectively.
In connection with the USF&G merger, The St. Paul assumed USF&G's
obligations under four stock option plans and its Long-Term Incentive
Plan. Exercise prices were based on the fair market value of USF&G's
common stock on the date of grant. As a result of the merger, all
outstanding options under the stock option plans were vested and
converted into options to acquire The St. Paul's common stock.
FIXED OPTION GRANTS
U.S.-Based Plans - Our fixed option grants for certain U.S.-based
company management and outside directors give these individuals the
right to buy our stock at the market price on the day the options were
granted. Fixed stock options granted under the stock incentive plan
adopted by our shareholders in May 1994 become exercisable no less
than one year after the date of grant and may be exercised up to ten
years after grant date. Options granted under our option plan in
effect prior to May 1994 may be exercised at any time up to 10 years
after the grant date.
Non-U.S. Plans - We also have separate stock option plans for certain
employees of our non-U.S. operations. The options granted under these
plans were priced at the market price of our common stock on the grant
date. Generally, they can be exercised from three to 10 years after
the grant date. Approximately 142,000 option shares remained available
at Dec. 31, 1999 for future grants under our non-U.S. plans.
The following table summarizes the activity for our fixed option plans
for the last three years. All grants were made at fair value on the
date of grant.
Weighted Average
Option Shares Exercise Price
-------------- ----------------
Outstanding Jan. 1, 1997 11,880,795 $ 22.60
Granted 3,353,133 34.38
Exercised (2,133,788) 20.07
Canceled (557,329) 31.77
----------- -------
Outstanding Dec. 31, 1997 12,542,811 25.76
Granted 3,693,511 42.65
Exercised (3,663,620) 23.04
Canceled (1,428,810) 37.23
----------- -------
Outstanding Dec. 31, 1998 11,143,892 30.78
Granted 3,531,418 30.16
Exercised (1,578,903) 22.63
Canceled (1,033,435) 39.07
----------- -------
12,062,972 $ 30.96
=========== =======
<PAGE>
The following table summarizes the options exercisable at the end of
the last three years and the weighted average fair value of options
granted during those years. The fair value of options is estimated on
the date of grant using the Black-Scholes option-pricing model, with
the following weighted-average assumptions used for grants in 1999,
1998 and 1997, respectively: dividend yield of 2.8%, 3.0% and 2.1%;
expected volatility of 23.8%, 18.9% and 20.1%; risk-free interest
rates of 5.3%, 5.6% and 6.5%; and an expected life of 6.5 years, 5.9
years and 5.4 years.
1999 1998 1997
------ ------ ------
Options exercisable at year-end 7,940,793 8,078,734 8,174,128
Weighted average fair
value of options granted
during the year $ 7.59 $ 8.91 $ 8.88
The following tables summarize the status of fixed stock options outstanding
and exercisable at Dec. 31, 1999:
Options Outstanding
- --------------------------------------------------------------------------
Weighted Average
Range of Number of Remaining Weighted Average
Exercise Prices Options Contractual Life Exercise Price
- --------------- --------- ---------------- ----------------
$11.13-24.28 2,303,610 3.2 years $ 19.73
24.38-29.00 2,251,819 5.6 years 25.98
29.19-30.19 3,053,116 9.2 years 29.93
30.48-42.94 2,175,688 7.6 years 35.76
43.13-50.76 2,278,739 8.1 years 44.02
- ------------ ---------- ---------- --------
$11.13-50.76 12,062,972 6.9 years $ 30.96
============ ========== ========== ========
Options Exercisable
- --------------------------------------------------------------------------
Range of Weighted Average
Exercise Prices Option Shares Exercise Price
- --------------- ------------- ----------------
$11.13-24.28 2,303,610 $ 19.73
24.38-29.00 2,251,819 25.98
29.19-30.19 3,666 29.81
30.48-42.94 1,631,188 35.85
43.13-50.76 1,750,510 43.73
- ------------ ---------- ------
$11.13-50.76 7,940,793 $ 30.11
============ ========== ======
VARIABLE STOCK OPTION GRANT
In 1999 and 1997, we made variable option grants of 375,000 and
316,200 shares, respectively, from our 1994 stock incentive plan to
certain of our key executives. One-half of the options will vest when
the market price of our stock reaches a 20-consecutive-day average of
$50 per share. The remaining options will vest when our stock price
reaches a 20-consecutive-day average of $55 per share. The exercise
price of each option is equal to the market price of our stock on the
grant date. These options may be exercised during the twelve months
preceding the Dec. 1, 2001, expiration date provided the stock price
targets are achieved.
<PAGE>
The following table summarizes the activity for our variable option
grants for the last three years.
Weighted Average
Option Shares Exercise Price
-------------- ----------------
Outstanding Jan. 1, 1997 1,650,600 $ 29.38
Granted 316,200 33.56
----------- -------
Outstanding Dec. 31, 1997 1,966,800 30.05
Canceled (468,600) 29.38
----------- -------
Outstanding Dec. 31, 1998 1,498,200 30.26
Granted 375,000 29.63
Canceled (152,400) 29.38
----------- -------
Outstanding Dec. 31, 1999 1,720,800 $ 30.20
=========== =======
The weighted average fair value of options granted during 1999 and
1997 was $2.66 and $5.46 per option, respectively. The fair value of
the variable options was estimated on the date of grant using a
variable option-pricing model with the following weighted average
assumptions in 1999 and 1997, respectively: dividend yield of 2.8% for
both years; expected volatility of 22.9% and 20%; risk-free interest
rate of 4.7% and 6.1%; and an expected life of 2.8 years and 4.6
years.
RESTRICTED STOCK AND DEFERRED STOCK AWARDS
Up to 20% of the 14.4 million shares available under our 1994 stock
incentive plan may be granted as restricted stock awards. The stock is
restricted because recipients receive the stock only upon completing a
specified objective or period of employment, generally one to five
years. The shares are considered issued when awarded, but the
recipient does not own and cannot sell the shares during the
restriction period. Up to 2,200,000 shares remain available for
restricted stock awards at Dec. 31, 1999.
We also have a Deferred Stock Award Plan for stock awards to non-U.S.
employees. Deferred stock awards are the same as restricted stock
awards, except that shares granted under the deferred plan are not
issued until the vesting conditions specified in the award are
fulfilled. Up to 19,000 shares remain available for deferred stock
awards at Dec. 31, 1999.
PRO FORMA INFORMATION
Had we calculated compensation expense on a combined basis for our
stock option grants based on the "fair value" method described in SFAS
No. 123, our net income and earnings per share would have been reduced
to the pro forma amounts as indicated.
Year ended December 31
(In millions, except per share data) 1999 1998 1997
----- ----- -----
NET INCOME
As reported $ 834 $ 89 $ 929
Pro forma 825 76 915
BASIC EARNINGS PER SHARE
As reported 3.61 0.33 3.97
Pro forma 3.57 0.27 3.91
DILUTED EARNINGS PER SHARE
As reported 3.41 0.32 3.69
Pro forma 3.38 0.27 3.63
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
Investment Commitments - We have long-term commitments to fund venture
capital and other investments totaling $101 million as of Dec. 31,
1999. We estimate these commitments will be paid as follows: $34
million in 2000; $36 million in 2001; $23 million in 2002 and $8
million in 2003.
Financial Guarantees - We are contingently liable for financial
guarantee exposures ceded through reinsurance agreements with a
company in which we formerly had a minority ownership interest
totaling approximately $67 million as of Dec. 31, 1999.
Lease Commitments - A portion of our business activities is carried on
in rented premises. We also enter into leases for equipment, such as
office machines and computers. Our total rental expense was $82
million in 1999, $88 million in 1998 and $92 million in 1997.
Certain leases are noncancelable, and we would remain responsible for
payment even if we stopped using the space or equipment. On Dec. 31,
1999, the minimum annual rents for which we would be liable under
these types of leases are as follows: $108 million in 2000, $97
million in 2001, $77 million in 2002, $61 million in 2003, $52 million
in 2004 and $223 million thereafter.
We are also the lessor under various subleases on our office
facilities. The minimum rentals to be received in the future under
noncancelable subleases is $107 million at Dec. 31, 1999.
Legal Matters - 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 our operations in certain ways.
In connection with our sale of Minet to Aon Corporation in 1997, we
agreed to indemnify Aon against any future professional liability
claims for events that occurred prior to the sale. Included in our
1997 provision for loss on disposal of Minet was the cost of
purchasing insurance to cover a portion of our exposure to such claims
(see Note 14 "Discontinued Operations").
It is possible that the settlement of these lawsuits or payments for
Minet-related liability claims may be material to our results of
operations and liquidity in the period in which they occur. However,
we believe the total amounts that we and our subsidiaries will
ultimately have to pay in all of these matters will have no material
effect on our overall financial position.
<PAGE>
14. DISCONTINUED OPERATIONS
Standard Personal Insurance Business - In June 1999, we decided to
sell our standard personal insurance business. On July 12, 1999 an
agreement was reached to sell this business to Metropolitan Property
and Casualty Insurance Company (Metropolitan). As a result, the
standard personal insurance operations were accounted for as a
discontinued operation through the first six months of 1999.
Subsequent period operating results of the standard personal insurance
operations were included in the gain on sale of discontinued
operations. The nonstandard auto line of business, which was
previously combined with standard personal insurance to form our
Personal Insurance segment for reporting purposes, was not included in
this sale.
We completed our disposition of the standard personal insurance
business through the stock sale of Economy Fire & Casualty
Company and its wholly-owned subsidiaries (Economy) on
Sept. 30, 1999, and the sale of our rights and interests in those
policies constituting the remaining portion of our standard personal
insurance operations and certain related assets. This remaining
portion was transferred to Metropolitan by way of a reinsurance and
facility agreement effective Oct. 1, 1999, pursuant to which we
transferred assets, representing the estimated unearned premium on the
in force policies, of approximately $325 million to Metropolitan.
During the third quarter, we received gross proceeds on the sale of
$576 million, less the payment of the reinsurance premium of $325
million, for net proceeds of $251 million. Additional proceeds to be
received approximate $21 million and relate to post-closing
adjustments.
As a result of the sale, approximately 1,600 standard personal
insurance employees of The St. Paul effectively transferred to
Metropolitan, on Oct. 1, 1999.
We recognized a pretax gain on proceeds of $130 million, after
adjusting for a $26 million pension and postretirement curtailment
gain and disposition costs of $32 million. The gain on proceeds was
combined with the $128 million pretax income from discontinued
operations (subsequent to the decision to sell), resulting in a total
pretax gain of $258 million. These discontinued operations included a
$145 million reduction in loss and loss adjustment expense reserves.
In the third quarter of 1999, based on favorable trends noted in the
standard personal insurance reserve analysis, and considering the
pending sale and its economic consequences, we concluded that this
reserve reduction was appropriate. We guaranteed the adequacy of
Economy's 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 that
may develop.
The $26 million pretax curtailment gain represents the impact of a
reduced number of employees in the pension and post-retirement plans
due to the sale of the standard personal insurance business.
The $32 million pretax disposition costs netted against the gain
represent costs directly associated with the decision to dispose of
the standard personal insurance segment and include $14 million of
employee-related costs, $8 million of occupancy-related costs, $7
million of transaction costs, $2 million of record separation costs
and $1 million of equipment charges. The employee-related costs relate
to the expected termination of 385 employees due to the sale of the
standard personal insurance business.
<PAGE>
The consolidated statements of operations for all periods presented
exclude the results of standard personal insurance operations from
income from continuing operations. The consolidated Dec. 31, 1998
balance sheet has been reclassified to present the net assets of
Economy in other assets.
Nonstandard Auto Business - In December 1999, we decided to sell our
nonstandard auto business. On Jan. 4, 2000, we announced
an agreement to sell this business to The Prudential
Insurance Company of America (Prudential) for $200 million in cash,
subject to certain balance sheet adjustments at closing. As a result,
the nonstandard auto business results of operations were accounted for
as discontinued operations for the year ended Dec. 31, 1999. Included
in "Discontinued operations - gain on disposal, net of tax" in our
1999 statement of income is an estimated loss on the sale of
approximately $83 million, which includes the estimated results of
operations through the disposal date. All prior period results of
nonstandard auto have been reclassified to discontinued operations.
Under the terms of the agreement, Prudential will purchase the
nonstandard auto insurance business marketed under the Victoria
Financial and Titan Auto brands. Their combined net book value at Dec.
31, 1999 approximated $274 million, including investments and other
assets, goodwill (of approximately $111 million), loss reserves,
unearned premium and other liabilities. At Dec. 31, 1999, these
balance sheet amounts are included in the applicable line items of our
consolidated balance sheet.
We anticipate that this transaction will close in the second quarter
of 2000, subject to regulatory approval.
Minet - In December 1996, we decided to sell our insurance brokerage,
Minet, and in May 1997, we completed the sale to Aon Corporation.
Proceeds from the sale of Minet to Aon were $107 million. In 1997, we
recorded a pretax loss on disposal of $103 million (with a
corresponding tax benefit of $35 million), which resulted primarily
from our agreement to be responsible for certain severance, employee
benefits, future lease commitments and other costs related to Minet.
We agreed to indemnify Aon against any future professional liability
claims for events that occurred prior to the sale. Since this
indemnification relates to claims that had not yet been discovered or
reported, it is not possible to estimate a range of the potential
liability. The company monitors its exposure under these claims on a
regular basis. We believe reserves for reported claims are adequate,
but the company still does not have information on unreported claims
to estimate a range of additional liability. The company purchased
insurance to cover a portion of its exposure to such claims. The
insurance covers claims reported three years from the date of the
sale, with the option to renew the contract for an additional three
years. The policy provides $125 million maximum coverage with a $25
million aggregate deductible.
The following table summarizes our discontinued operations, including
our standard personal insurance business, nonstandard auto business
and Minet, for the three-year period ended Dec. 31, 1999:
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
Operating loss,
before income taxes $ (13) $ (167) $ (98)
Income tax benefit (4) (57) (33)
------ ------ ------
Operating loss, net of taxes (9) (110) (65)
------ ------ ------
Gain (loss) on disposal,
before income taxes 184 - (103)
Income tax expense (benefit) 90 - (35)
------ ------ ------
Gain (loss) on disposal
net of taxes 94 - (68)
------ ------ ------
Gain (loss) from
discontinued operations $ 85 $ (110) $ (133)
====== ====== ======
<PAGE>
15. RESTRUCTURING AND OTHER 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 charge was included in "Operating and administrative
expenses" in the 1999 statement of income and in "Property-liability
insurance - Other" in the table titled "Income (Loss) from Continuing
Operations Before Income Taxes and Cumulative Effect of Accounting
Change" in Note 18.
The employee-related charge represents severance and related benefits
such as outplacement counseling, vacation buy-out and medical
coverage to be paid to terminated employees. The charge relates to
the anticipated termination of approximately 700 employees at all
levels throughout the Company. As of Dec. 31, 1999, approximately 480
employees had been terminated under this action.
The occupancy-related charge represents excess space created by the
cost reduction action. The charge was calculated by determining the
percentage of anticipated excess space, by location, and the current
lease costs over the remaining lease period. The amounts payable
under the existing leases were not discounted, and sublease income
was included in the calculation only for those locations where
sublease agreements were in place.
The equipment charges represent the elimination of personal computers
directly related to the number of employees being severed under this
cost reduction action and the elimination of network servers and
other equipment resulting from this action. The amount was calculated
as the net book value of this equipment less estimated sale proceeds.
All actions to be taken under this plan are expected to be completed
in 2000.
The following presents a rollforward of 1999 activity related to this
charge:
Pretax Reserve at
(In millions) Charge Payments Dec. 31,1999
-------- --------- -------------
Charges to earnings:
Employee-related $ 25 $ (11) $ 14
Occupancy-related 33 (2) 31
Equipment charges 2 N/A N/A
------ ------ ------
Total $ 60 $ 45
====== ======
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, Health Services and
Professional Markets. The remaining charge of $8 million related to
costs to be incurred to exit lease obligations. The charge was
reflected in "Operating and administrative expenses" in the 1998
statement of income and in "Property-liability insurance - Other" in
the table titled "Income (Loss) from Continuing Operations Before
Income Taxes and Cumulative Effect of Accounting Change" in Note 18.
As of Dec. 31, 1999, approximately 500 employees had been terminated
under the restructuring plan. Termination actions taking place under
this plan were substantially completed by the end of 1999.
<PAGE>
The table on the next page provides information about the components
of the charge taken in the fourth quarter of 1998, the balance of
accrued amounts at Dec. 31, 1999 and 1998, and payment activity during
the year ended Dec. 31, 1999. The table also reflects adjustments made
to the reserve during 1999. We reduced the severance reserve by $5
million due to a number of voluntary terminations, which reduced the
expected severance and outplacement payments to be made. We also
reduced the occupancy-related reserve by $6 million for subleases that
we have since entered into on the vacated space.
Original Reserve Reserve
Pretax at Dec. 31, Adjust- at Dec. 31,
(In millions) Charge 1998 Payments ments 1999
- ------------- -------- ---------- -------- -------- ----------
Charges to earnings:
Severance $ 26 $ 26 $ (18) $ (5) $ 3
Occupancy-related 8 8 - (6) 2
----- ----- ----- ----- -----
Total $ 34 $ 34 $ (18) $ (11) $ 5
===== ===== ===== ===== =====
Second Quarter 1998 Charge - Related to our merger with USF&G (as
discussed in Note 2), we recorded a pretax charge to earnings of $292
million in 1998, primarily consisting of severance and other employee-
related costs, facilities exit costs, asset impairments and
transaction costs. We estimated that approximately 2,000 positions
would be eliminated due to the combination of the two organizations,
resulting from efficiencies to be realized by the larger organization
and the elimination of redundant functions. All levels of employees,
from technical staff to senior management, were affected by the
reductions. The original number of positions expected to be reduced by
function included approximately 950 in our property-liability
underwriting operation, 350 in claims and 700 in finance and other
administrative positions, throughout the United States. Through Dec.
31, 1999, approximately 2,200 positions had been eliminated, and the
cost of termination benefits paid was $135 million. Termination
actions taking place under this plan have been completed, however
payments are still being made to terminated employees.
The following table provides information about the components of the
charge taken in the second quarter of 1998, the balance of accrued
amounts at Dec. 31, 1999 and 1998, and payment activity during the
year ended Dec. 31, 1999. The table also reflects a $2 million
adjustment to the executive severance reserve related to voluntary
terminations, which reduced the expected severance and outplacement
payments to be made.
Original
Pretax
(in millions) Charge
--------
Charges to earnings:
USF&G Corp.
headquarters $ 36
Long-lived assets 23
Acceleration of
software depreciation 10
Computer leases and
equipment 10
Other equipment and
furniture 8
-----
Subtotal $ 87
-----
Original Reserve Reserve
Pretax at Dec. 31, Adjust- at Dec. 31,
Charge 1998 Payments ments 1999
-------- ---------- -------- ------- ----------
Accrued charges
subject to roll-
forward:
Executive severance $ 89 $ 37 $ (32) $ (2) $ 3
Other severance 52 26 (25) - 1
Branch lease exit costs 34 34 (10) - 24
Transaction costs 30 - - - -
----- ----- ----- ----- -----
Subtotal 205 97 (67) (2) 28
----- ----- ----- ----- -----
Total $ 292 $ 97 $ (67) $(2) $ 28
===== ===== ===== ===== =====
<PAGE>
On our 1998 Statement of Income, $269 million of the charge was
recorded in the "Operating and administrative" expense caption and $23
million was recorded in the "Realized investment gains" revenue
caption. The charge was recorded in the following captions in the
table titled "Income (Loss) from Continuing Operations Before Income
Taxes and Cumulative Effect of Accounting Change" in Note 18: $143
million in Property-liability insurance - Other; $14 million in
Property-liability - Realized investment gains; $9 million in Life
insurance; and $126 million in Parent company, other operations and
consolidating eliminations.
The following discussion provides more information regarding the
rationale for, and calculation of, each component of the 1998 merger-
related charge:
USF&G Corporate Headquarters - The Founders Building had been one of
USF&G's headquarters buildings in Baltimore, MD. Upon consummation of
the merger, it was determined that the headquarters for the combined
entity would reside in St. Paul, MN, and that a significant number of
personnel working in Baltimore would be terminated, thus vacating a
substantial portion of the Founders Building. We developed a plan to
lease that space to outside parties and thus categorized it as an
"asset to be held or used" as defined in SFAS No. 121 for purposes of
evaluating the potential impairment of its $64 million carrying value.
That evaluation, based on the anticipated undiscounted future cash
flows from potential lessees, indicated that an impairment in the
carrying value had occurred, and the building was written down by $36
million to its fair value of $28 million. The writedown was reflected
in our 1998 "Parent and other" segment results. We continue to
depreciate this building over its estimated remaining life.
Long-Lived Assets - 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 in 1999. In applying the
provisions of SFAS No. 121 we 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 impairment writedown was reflected in our 1998 Statement
of Income in "Realized investment gains." The investments are as
follows:
Description of investment: Percentage rents retained after sale of a
portfolio of stores to a third party.
Carrying amount: $22 million prior to writedown of $17 million, for
current amount of $5 million, with $4 million held in our property-
liability investment segment and $1 million held in our life insurance
segment. We expect to dispose of this asset by the end of 2000.
Description of investment: 138-acre land parcel in New Jersey, with
farm buildings being rented out.
Carrying amount: $5 million prior to writedown of $2 million; sold in
1999 with a pretax realized loss of $1 million.
Description of investment: Receivable representing cash flow guarantee
payments related to real estate partnerships.
Carrying amount: $5 million prior to writedown of $2 million; sold in
1999 with no further gain or loss.
Description of investment: Limited partnership interests in three
citrus groves.
Carrying amount: $5 million prior to writedown of $2 million; two of
the partnership interests have been exchanged for an investment in a
new partnership, with one of the original citrus grove partnership
interests remaining. This partnership is carried at a current balance
of less than $1 million, held in parent company and other operations.
These investment writedowns are reflected in the following 1998
segment results in the table titled "Income (Loss) from Continuing
Operations Before Income Taxes and Cumulative Effect of Accounting
Change" in Note 18: $14 million in Property-liability Investment; $6
million in Parent company and other; and $3 million in Life.
<PAGE>
Acceleration of Software Depreciation - We conducted an extensive
technology study upon consummation of the merger as part of the
business plan to integrate our two companies. The resulting strategy
to standardize technology throughout the combined entity and maintain
one data center in St. Paul, MN, resulted in the identification of
duplicate software applications. As a result, the estimated useful
life for that software was shortened, resulting in an additional
charge to earnings.
Computer Leases and Equipment - The technology study also identified
redundant computer hardware, resulting in lease buy-out transactions
and disposals of computer equipment.
Other Equipment and Furniture - The decision to combine all corporate
headquarters in St. Paul, MN created excess equipment and furniture in
Baltimore, MD. The charge was calculated based on the book value of
assets at that location.
Executive Severance - Represents the obligations The St. Paul was
required to pay in accordance with the USF&G Senior Executive
Severance Plan in place at the time of the merger. The plan provides
for payments to participants in the event the participant is
terminated without cause by the company or for good reason by the
participant within two years of the effective date of a transaction
covered by the plan.
Other Severance - Represents severance and related benefits such as
outplacement counseling, vacation buy-out and medical coverage to be
paid to terminated employees not covered under the USF&G Senior
Executive Severance Plan.
Branch Lease Exit Costs - As a result of the merger, excess space was
created in several locations due to the anticipated staff reduction in
the combined organization. The charge for branch lease exit costs was
calculated by determining the percentage of anticipated excess space
at each site and the current lease costs over the remaining lease
period. In certain locations, the lease was expected to be terminated.
For leases not expected to be terminated, the amount of expenses
included in the charge was calculated as the percentage of excess
space (20% to 100%) times the net of: remaining rental payments plus
capitalized leasehold improvements less actual sub-lease income. No
amounts were discounted to present value in the calculation.
Transaction Costs - This amount consists of registration fees, costs
of furnishing information to stockholders, consultant fees, investment
banker fees, and legal and accounting fees.
<PAGE>
16. REINSURANCE
Our 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 means other insurance companies agree
to share certain risks with us. The primary purpose of our ceded
reinsurance program, including the aggregate excess-of-loss coverages
discussed below, is to protect us from potential losses in excess of
what we are prepared to accept.
We report balances pertaining to reinsurance transactions "gross" on
the balance sheet, meaning that reinsurance recoverables on unpaid
losses and ceded unearned premiums are not deducted from insurance
reserves but are recorded as assets.
We expect the companies to which we have ceded reinsurance to honor
their obligations. In the event these companies are unable to honor
their obligations to us, we will pay these amounts. We have
established allowances for possible nonpayment of amounts due to us.
The largest concentration (approximately 15%) of our total reinsurance
recoverables and ceded unearned premiums at Dec. 31, 1999 was with
General Reinsurance Corporation. That company is rated "A++" by A.M.
Best, "Aaa" by Moody's and "AAA" by Standard & Poor's for its property-
liability insurance claims-paying ability.
During 1999, we entered into two aggregate excess-of-loss reinsurance
treaties. One of these treaties is corporate- wide, with coverage
triggered when our insurance losses and LAE across all lines of
business reach a certain level, as prescribed by terms of the treaty
(the "corporate treaty"). The impact of the corporate treaty on our
1999 results was as follows: we ceded insurance losses and LAE
totaling $384 million, and ceded written and earned insurance premiums
of $211 million, for a net pretax benefit of $173 million to income
from continuing operations. Additionally, our Reinsurance segment
benefited from cessions made under a separate treaty unrelated to the
corporate treaty. Under this treaty, the Reinsurance segment ceded
insurance losses and LAE totaling $150 million, and ceded written and
earned insurance premiums of $62 million, for a net pretax benefit of
$88 million. The impact of both of these treaties is included in the
table that follows.
In December 1997, our life insurance subsidiary entered into a
coinsurance agreement with an unaffiliated life reinsurance company to
cede a significant portion of a block of single premium deferred
annuities. As part of the transaction, our life insurance subsidiary
transferred approximately $144 million of investments and other assets
to the reinsurer and recorded a reinsurance recoverable of $131
million. The difference between the assets transferred for the
reinsurance contract and the amount of the reinsurance recoverable was
considered part of the net cost of reinsurance, and is recognized over
the remaining life of the underlying reinsured contracts. The
reinsurance costs of the coinsurance transaction (net of related
deferred policy acquisition cost amortization) were deferred at the
inception of the contracts and are being amortized into expense over
the remaining term of the underlying reinsured contracts. This
transaction had no material effect on our 1997 net income.
The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses, LAE and life policy benefits is
as follows:
<PAGE>
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
PREMIUMS WRITTEN
Direct $ 4,622 $ 4,569 $ 4,972
Assumed 1,645 1,380 1,496
Ceded (1,155) (673) (786)
------ ------ ------
Net premiums written $ 5,112 $ 5,276 $ 5,682
====== ====== ======
PREMIUMS EARNED
Direct $ 4,621 $ 4,796 $ 5,153
Assumed 1,537 1,372 1,523
Ceded (1,055) (734) (817)
------ ------ ------
Net premiums earned 5,103 5,434 5,859
Life 187 119 137
------ ------ ------
Total premiums earned $ 5,290 $ 5,553 $ 5,996
====== ====== ======
INSURANCE LOSSES, LOSS
ADJUSTMENT EXPENSES
AND POLICY BENEFITS
Direct $ 3,532 $ 4,095 $ 3,691
Assumed 1,124 910 1,004
Ceded (936) (540) (606)
------ ------ ------
Net insurance losses and
loss adjustment expenses 3,720 4,465 4,089
Life policy benefits 367 273 277
------ ------ ------
Total net insurance losses,
loss adjustment
and policy benefits $ 4,087 $ 4,738 $ 4,366
====== ====== ======
17. STATUTORY ACCOUNTING PRACTICES
Our underwriting operations are required to file financial statements
with state and foreign regulatory authorities. The accounting
principles used to prepare these statutory financial statements follow
prescribed or permitted accounting principles, which differ from GAAP.
Prescribed statutory accounting practices include state laws,
regulations and general administrative rules issued by the state of
domicile as well as a variety of publications and manuals of the
National Association of Insurance Commissioners. Permitted statutory
accounting practices encompass all accounting practices not so
prescribed, but allowed by the state of domicile.
At Dec. 31, 1999 and 1998, permitted property-liability transactions
related to the disposal of certain real property acquired as security
increased statutory surplus by $2 million and $12 million,
respectively, over what it would have been had prescribed accounting
practices been followed. At Dec. 31, 1999 and 1998, permitted property-
liability transactions related to the discounting of certain assumed
reinsurance contracts increased statutory surplus by $25 million and
$34 million, respectively. At Dec. 31, 1999 and 1998, permitted life
insurance transactions related to the release of capital gains related
to a coinsurance contract, net of the related establishment of a
voluntary investment reserve, increased statutory surplus by $17
million and $18 million, respectively.
On a statutory accounting basis, our property-liability underwriting
operations reported net income of $945 million in 1999, $196 million
in 1998 and $1.15 billion in 1997. Our life insurance operations
reported statutory net income (loss) of $(28) million, $24 million and
$21 million in 1999, 1998 and 1997, respectively. Statutory surplus
(shareholder's equity) of our property-liability underwriting
operations was $5.5 billion and $4.7 billion as of Dec. 31, 1999 and
1998, respectively. Statutory surplus of our life insurance operation
was $206 million and $201 million as of Dec. 31, 1999 and 1998,
respectively.
<PAGE>
18. SEGMENT INFORMATION
We have seven reportable segments in our insurance operations, which
consist of Commercial Lines Group, Specialty Commercial, Surety,
International, Reinsurance, Property-Liability Investment Operations,
and Life Insurance. The insurance operations are managed separately
because each targets different customers and requires different
marketing strategies. We also have an Asset Management segment,
consisting of our majority ownership in The John Nuveen Company.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. We
evaluate performance based on underwriting results for our property-
liability insurance segments, investment income and realized gains for
our investment operations, and on pretax operating results for the
life insurance and asset management segments. Property-liability
underwriting assets are reviewed in total by management for purposes
of decision making. We do not allocate assets to these specific
underwriting segments. Assets are specifically identified for our life
insurance and asset management segments.
Geographic Areas - The following summary presents financial data of
our continuing operations based on their location.
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
REVENUES
U.S. $ 6,735 $ 6,914 $ 7,505
Non-U.S. 834 794 803
------ ------ ------
Total revenues $ 7,569 $ 7,708 $ 8,308
====== ====== ======
Segment Information - The summary on the next page presents revenues
and pretax income from continuing operations for our reportable
segments. In the first quarter of 1999, we revised
our segment reporting structure to separately disclose our
Surety underwriting operation as a business segment, which differed
from its prior classification as a component of the Commercial Lines
Group. This revision reflected the distinct nature of the operation,
which provides surety bond coverage (primarily for construction
contractors). The Surety operation is managed and evaluated separately
from other components of the Commercial Lines Group. All periods
presented have been revised to reflect
this reclassification.
In 1999, we announced an agreement to sell our standard personal
insurance business, which was sold Sept. 30, 1999. In December 1999,
we decided to sell our nonstandard auto business. For 1998, as
originally reported, these two operations were combined and reported
as the Personal Insurance segment. Both of these operations have been
accounted for as discontinued operations for all periods presented and
are not included in our segment data.
Also in 1999, we reclassified our Global Marine business center from
our International segment to our Specialty Commercial segment to
reflect how that business center is now managed. Additionally, we
reclassified certain pools from our International segment to our
Commercial segment to reflect the change in management of those pools.
Amounts for 1998 and 1997 were reclassified to be consistent with the
1999 presentation.
The revenues of our life insurance and asset management segments
include their respective investment income and realized investment
gains. The table also presents identifiable assets for our property-
liability underwriting operation in total, and our life insurance and
asset management segments. Included in the table amounts are life
insurance segment revenues of $92 million, $47 million and $65 million
for the years ended Dec. 31, 1999, 1998 and 1997, respectively,
related to structured settlement annuities sold primarily to our
Commercial Lines Group segment.
<PAGE>
Year ended December 31
(In millions) 1999 1998 1997
------ ------ ------
REVENUES FROM
CONTINUING OPERATIONS
Underwriting:
Commercial Lines Group $ 1,944 $ 2,275 $ 2,616
Specialty Commercial 1,465 1,447 1,442
Surety 379 340 296
------ ------ ------
Total U. S. underwriting 3,788 4,062 4,354
International 396 333 278
------ ------ ------
Total primary underwriting 4,184 4,395 4,632
Reinsurance 919 1,039 1,227
------ ------ ------
Total underwriting 5,103 5,434 5,859
Investment operations:
Net investment income 1,256 1,293 1,319
Realized investment gains 274 187 412
------ ------ ------
Total investment operations 1,530 1,480 1,731
Other 73 65 40
------ ------ ------
Total property-
liability insurance 6,706 6,979 7,630
Life insurance 476 393 404
Asset management 353 308 269
------ ------ ------
Total reportable segments 7,535 7,680 8,303
Parent company, other
operations and
consolidating eliminations 34 28 5
------ ------ ------
Total revenues $ 7,569 $ 7,708 $ 8,308
====== ====== ======
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
Underwriting:
Commercial Lines Group $ (261) $ (747) $ (171)
Specialty Commercial (196) (147) 18
Surety 37 73 63
------ ------ ------
Total U. S. underwriting (420) (821) (90)
International (84) (67) (53)
------ ------ ------
Total primary underwriting (504) (888) (143)
Reinsurance 79 7 4
------ ------ ------
Total GAAP underwriting result (425) (881) (139)
Investment operations:
Net investment income 1,256 1,293 1,319
Realized investment gains 274 187 412
------ ------ ------
Total investment operations 1,530 1,480 1,731
Other (134) (301) (104)
------ ------ ------
Total property-
liability insurance 971 298 1,488
Life insurance 66 21 78
Asset management 123 104 93
------ ------ ------
Total reportable segments 1,160 423 1,659
Parent company, other
operations and
consolidating eliminations (143) (303) (226)
------ ------ ------
Total income from continuing
operations before income taxes
and cumulative effect of
accounting change $ 1,017 $ 120 $ 1,433
====== ====== ======
<PAGE>
December 31
(In millions) 1999 1998
------ ------
IDENTIFIABLE ASSETS
Property-liability insurance $ 32,140 $ 31,882
Life insurance 5,624 4,789
Asset management 591 505
------ ------
Total reportable segments 38,355 37,176
Parent company, other operations,
consolidating eliminations and
discontinued operations 518 688
------ ------
Total assets $ 38,873 $ 37,864
====== ======
Note 15, "Restructuring and Other Charges," describes charges taken
by The St. Paul during 1999 and 1998, and where they are included in
the preceding tables.
The $215 million 1998 provision to strengthen loss reserves is
recorded as follows: $197 million in Commercial Lines Group and $18
million in Specialty Commercial.
Also included in the 1998 life insurance caption is a $41 million
charge to reduce the carrying value of deferred policy acquisition
costs, as discussed in more detail in Note 6 "Deferred Policy
Acquisition Costs."
<PAGE>
19. COMPREHENSIVE INCOME
Comprehensive income is defined as any change in our equity from
transactions and other events originating from nonowner sources. In
our case, those changes are comprised of our reported net income,
changes in unrealized appreciation and changes in unrealized foreign
currency translation adjustments. The following summaries present the
components of our comprehensive income, other than net income, for
the last three years.
Year ended December 31, 1999 Income Tax
(In millions) Pretax Effect After-tax
------ ---------- ----------
Unrealized depreciation arising
during period $ (457) $ (159) $ (298)
Less: reclassification adjustment
for realized gains included
in net income 248 87 161
------ ------ ------
Net change in unrealized
appreciation (705) (246) (459)
------ ------ ------
Net change in unrealized loss
on foreign currency translation (10) 2 (12)
------ ------ ------
Total other comprehensive loss $ (715) $ (244) $ (471)
====== ====== ======
Year ended December 31, 1998 Income Tax
(In millions) Pretax Effect After-tax
------ ----------- ---------
Unrealized appreciation arising
during period $ 459 $ 163 $ 296
Less: reclassification adjustment
for realized gains included
in net income 177 62 115
------ ------ ------
Net change in unrealized
appreciation 282 101 181
------ ------ ------
Net change in unrealized gain (loss)
on foreign currency translation 8 (2) 10
------ ------ ------
Total other
comprehensive income $ 290 $ 99 $ 191
====== ====== ======
Year ended December 31, 1997 Income Tax
(In millions) Pretax Effect After-tax
------ ---------- ---------
Unrealized appreciation arising
during period $ 626 $ 219 $ 407
Less: reclassification adjustment
for realized gains included
in net income 369 129 240
------ ------ ------
Net change in unrealized
appreciation 257 90 167
------ ------ ------
Net change in unrealized loss
on foreign currency translation (4) (1) (3)
------ ------ ------
Total other
comprehensive income $ 253 $ 89 $ 164
====== ====== ======
<PAGE>
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited summary of our quarterly results for the last
two years.
1999
(In millions, except First Second Third Fourth
per share data) Quarter Quarter Quarter Quarter
- -------------------- ------- ------- ------- -------
Revenues $ 1,909 $ 1,933 $ 1,785 $ 1,942
Income from continuing
operations after effect
of accounting change 167 219 137 226
Discontinued operations (2) (15) 190 (88)
Net income 165 204 327 138
Earnings per common share:
Basic:
Income from continuing
operations after effect
of accounting change 0.71 0.96 0.59 0.98
Discontinued operations (0.01) (0.07) 0.84 (0.38)
Net income 0.70 0.89 1.43 0.60
Diluted:
Income from continuing
operations after effect
of accounting change 0.68 0.90 0.56 0.93
Discontinued operations (0.01) (0.06) 0.78 (0.36)
Net income 0.67 0.84 1.34 0.57
1998
(In millions, except First Second Third Fourth
per share data) Quarter Quarter Quarter Quarter
- -------------------- ------- ------- ------- -------
Revenues $ 1,980 $ 2,030 $ 1,856 $ 1,842
Income (loss) from
continuing operations 201 (198) 100 96
Discontinued operations (7) (76) (32) 5
Net income (loss) 194 (274) 68 101
Earnings per common share:
Basic:
Income (loss) from
continuing operations 0.85 (0.86) 0.41 0.39
Discontinued operations (0.03) (0.32) (0.14) 0.02
Net income (loss) 0.82 (1.18) 0.27 0.41
Diluted:
Income (loss) from
continuing operations 0.78 (0.85) 0.40 0.38
Discontinued operations (0.02) (0.33) (0.13) 0.02
Net income (loss) 0.76 (1.18) 0.27 0.40
<PAGE>
SHAREHOLDER INFORMATION
CORPORATE PROFILE
The St. Paul is a group of companies providing commercial property-
liability and life insurance and nonlife reinsurance products and
services worldwide.
YOUR DIVIDENDS
A quarterly dividend of $0.27 per share was declared on Feb. 1,
2000, payable April 17, 2000, to shareholders of record as of
March 31, 2000.
Dividends have been paid every year since 1872. During those 128
years of uninterrupted dividend payments, total payments have been
increased in 68 years. The chart at the lower right contains
dividend information for 1999 and 1998.
AUTOMATIC DIVIDEND REINVESTMENT PROGRAM
This program provides a convenient way for shareholders to
increase their holding of company stock. Approximately 48 percent
of shareholders of record participate.
An explanatory brochure and enrollment card may be obtained by
calling our stock transfer agent-Norwest Bank Minnesota, N.A. at
888.326.5102, or contact them at the address below.
STOCK TRANSFER AGENT AND REGISTRAR
For address changes, dividend checks, direct deposits of
dividends, account consolidations, registration changes, lost
stock certificates, stock holdings and the Dividend Reinvestment
Program, please contact:
Norwest Bank Minnesota, N.A.
Shareowner Services Department
P.O. Box 64854
Saint Paul, MN 55164-0854
Tel: 888.326.5102
[email protected]
STOCK TRADING
The company's stock is traded nationally on the New York Stock
Exchange, where it is assigned the symbol SPC. The stock is also
listed on the London Stock Exchange under the symbol SPA. The
number of holders of record, including individual owners, of our
common stock was 22,603 as of February 4, 2000.
Options on the company's stock trade on the Chicago Board Options
Exchange under the symbol SPQ.
<PAGE>
ANNUAL SHAREHOLDERS' MEETING
The annual shareholders meeting will be at 2:00 p.m. CDT, Tuesday,
May 2, 2000, at the corporate headquarters, 385 Washington Street,
Saint Paul, Minn. A proxy statement will be sent around March 27
to each shareholder of record on March 13, 2000.
FORM 10-K AVAILABLE
The Form 10-K report filed with the Securities and Exchange
Commission is available without charge to shareholders upon
request. Write to our corporate secretary: Sandra Ulsaker Wiese,
The St. Paul Companies, 385 Washington Street, Saint Paul, MN
55102.
ADDITIONAL INFORMATION
For additional investor relations information, shareholders may
contact Laura Gagnon, vice president-investor relations at
651.310.7696. Or, general information about the company is
available on our website (www.stpaul.com).
STOCK PRICE AND DIVIDEND RATE
The table below sets forth the amount of cash dividends declared
per share and the high and low sales prices of company stock for
each quarter during the past two years.
Cash
Dividend
1999 High Low Declared
- ---- -------- ------ ----------
1st Quarter $36 1/8 $28 1/2 $0.26
2nd Quarter 37 1/16 28 1/2 0.26
3rd Quarter 35 5/16 27 0.26
4th Quarter 36 1/4 25 3/8 0.26
Cash dividend paid in 1999 was $1.03.
Cash
Dividend
1998 High Low Declared
- ---- -------- ------ ----------
1st Quarter $47 3/16 $39 5/16 $0.25
2nd Quarter 45 3/8 39 15/16 0.25
3rd Quarter 43 5/8 28 1/16 0.25
4th Quarter 37 1/2 29 9/16 0.25
Cash dividend paid in 1998 was $0.985.
<PAGE>
BOARD OF DIRECTORS*
H. Furlong Baldwin, 67
DIRECTOR SINCE 1998. Chairman and CEO of
Mercantile Bankshares Corporation, a general banking business
with offices in Maryland, Delaware and Virginia, and provider of
mortgage banking and trust services. Joined Mercantile-Safe
Deposit & Trust Company in 1956. In 1970 was named president of
Mercantile-Safe Deposit & Trust and president of Mercantile
Bankshares Corporation. Was elected to present position in 1976.
Michael R. Bonsignore, 58
DIRECTOR SINCE 1991. CEO of Honeywell, Inc., a manufacturer of
automation and control systems for homes, buildings, industry and
aerospace. Joined Honeywell in 1969 and held marketing and
operations management positions until being named chairman and CEO
in 1993. Was named to current position in December 1999 following
Honeywell's merger with AlliedSignal, Inc.
John H. Dasburg, 56
DIRECTOR SINCE 1994. President and CEO, Northwest Airlines, Inc.,
since 1990. Joined Northwest as executive vice president in 1989.
Before joining the airline, employed by Marriott Corp., where
posts included president of the lodging group, chief financial
officer and chief real estate officer.
W. John Driscoll, 70
DIRECTOR SINCE 1970. President and CEO (retired 1994), Rock Island
Company, a private investment company. Joined Rock Island in 1964
as general manager and became president and CEO in 1973.
Kenneth M. Duberstein, 55
DIRECTOR SINCE 1998. Chairman and CEO, The Duberstein Group, an
independent strategic planning and consulting company. Previously
served as chief of staff to President Ronald Reagan, 1988-89; also
served in the White House as deputy chief of staff in 1987, and
assistant and deputy assistant to the president for legislative
affairs from 1981 to 1983.
Pierson M. Grieve, 72
DIRECTOR SINCE 1985. Chairman and CEO (retired 1995), Ecolab,
Inc., a worldwide developer and marketer of cleaning and
sanitizing products, systems and services. Joined Ecolab in 1983
as chairman and CEO. Previously served in executive management
positions with several major U.S. businesses. Currently serves as
a partner of Palladium Equity Partners, LLC, a New York private
investment firm.
James E. Gustafson, 53
DIRECTOR SINCE January 1999. President and Chief Operating
Officer, The St. Paul Companies. Previously served as president
and chief operating officer of General Re Corporation, a Stamford,
Conn., international reinsurance company. Joined General Re in
1969 as an underwriter. Was named executive vice president in 1991
and president and chief operating officer in 1995.
<PAGE>
Thomas R. Hodgson, 58
DIRECTOR SINCE 1997. Served as President and Chief Operating
Officer, Abbott Laboratories, a global diversified health care
company devoted to the discovery, development and manufacture and
marketing of pharmaceutical, diagnostics, nutritional and hospital
products from 1990 through 1998. Joined Abbott in 1972 and served
as president of Abbott International from 1983 to 1990. Served on
Abbott board for 14 years.
David G. John, 61
DIRECTOR SINCE 1996. Chairman, The BOC Group, a U.K.-based
manufacturer of industrial gases and related products, and high
vacuum technology. Joined BOC as non-executive director in 1993;
named chairman in 1996. Has served as non-executive chairman of
Premier Oil since March 1998. Previously served 15 years in
executive positions with Inchcape plc.
William H. Kling, 57
DIRECTOR SINCE 1989. President, Minnesota Public Radio and
President, Minnesota Communications Group. Founded Minnesota
Public Radio in 1966 and has served as president since then. Was
founding president of American Public Radio (now Public Radio
International) in 1983 and served as vice chairman until 1993. Has
served as president of Greenspring Company, a diversified media
and catalog marketing company, since 1987.
Douglas W. Leatherdale, 63
DIRECTOR SINCE 1981. Chairman and CEO, The St. Paul Companies and
Chairman, St. Paul Fire and Marine. Joined the company's
investments department in 1972. Named to present position in 1990
after serving as vice president- investments, senior vice
president- finance, executive vice president and chief financial
officer.
Bruce K. MacLaury, 68
DIRECTOR SINCE 1987. President Emeritus (since 1995), The
Brookings Institution, a Washington, D.C., public policy research
and education institution. Prior to appointment as president of
Brookings in 1977, served with the Federal Reserve Bank of New
York and as president of the Minneapolis Federal Reserve Bank.
Also served as a deputy undersecretary of the U.S. Treasury.
Glen D. Nelson, M.D., 62
DIRECTOR SINCE 1992. Vice Chairman, Medtronic, Inc., the world's
leading medical technology company. Served Medtronic as an outside
director from 1980, then joined the company in 1986 as executive
vice president. Previously served as CEO of two health care
corporations and practiced as a surgeon in a multispecialty group
for 17 years. Serves as a clinical professor at the University of
Minnesota.
<PAGE>
Anita M. Pampusch, 61
DIRECTOR SINCE 1985. President, The Bush Foundation, Saint Paul,
Minn., since 1997. Previously served as president, The College of
St. Catherine, from 1984 to 1997. Joined the college as a
philosophy instructor in 1970, became associate professor three
years later and was named vice president and academic dean in
1980. Served one year as acting president of St. Catherine's
before being named president.
Gordon M. Sprenger, 62
DIRECTOR SINCE 1995. President and CEO, Allina Health System, a
not-for-profit integrated health care system. Assumed current
position in 1993 when HealthSpan Health Systems Corporation, of
which he was executive officer, merged with Medica. Previously
served in executive positions with Abbott-Northwestern Hospital
and as president and CEO of LifeSpan, Inc.
* As of January 1, 2000
<PAGE>
MANAGEMENT
THE ST. PAUL COMPANIES, INC.
Douglas W. Leatherdale, 63
CHAIRMAN AND CHIEF EXECUTIVE OFFICER SINCE 1990. Joined company's
investments department in 1972. Served as vice president-
investments, senior vice president-finance, executive vice
president and chief financial officer before being named to
current position. Fifteen years investment experience, including
11 years as an officer of Great West Life Assurance Company and
five years as associate executive secretary for the Lutheran
Church in America's Board of Pensions, prior to joining The St.
Paul. Reporting to Leatherdale are U.S. Underwriting,
International Underwriting, St. Paul Re, Nuveen, Finance and
Investments, Legal Services, Human Resources and Corporate
Affairs.
James E. Gustafson, 53
PRESIDENT AND CHIEF OPERATING OFFICER SINCE JANUARY 1999. Board
member since January 1999. Previously served as president and
chief operating officer of General Re Corporation, and chairman
and CEO of General Reinsurance Corporation. Joined General Re in
1969 and served in several underwriting positions before being
named vice president of the treaty underwriting division in 1978.
Named senior vice president and chief underwriting officer in
1982; president and chief executive officer of the General
Reinsurance Services Corporation in 1987; executive vice president
in 1991; and president and chief operating officer in 1995.
Reporting to Gustafson are the U.S. Insurance Operations.
Paul J. Liska, 44
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER SINCE 1997.
Joined The St. Paul in 1997. Twenty-two years prior corporate
executive and financial management experience with companies such
as Specialty Foods Corporation and Kraft General Foods. Reporting
to Liska are Financial Controls, Financial Planning and Analysis,
Investments, Corporate Audit, Corporate Actuarial, Corporate
Treasury, Strategic Planning and Development, Corporate Risk
Management, Information Systems, Ceded Reinsurance and F&G Life.
John A. MacColl, 51
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL SINCE MAY 1999.
Joined The St. Paul in the merger with USF&G in 1998. Previously
served as USF&G Corporation's executive vice president-human
resources and general counsel. Before joining USF&G in 1989, was a
partner with the law firm of Piper & Marbury in Baltimore and
served as federal prosecutor in the U.S. Attorney's Office in
Maryland.
<PAGE>
Thomas A. Bradley, 42
SENIOR VICE PRESIDENT-FINANCE SINCE 1998. Joined The St. Paul when
it merged with USF&G in 1998 as senior vice president and
corporate controller. Was added the responsibility for Strategic
Planning and Development in September 1999. Began career in 1980
at Ernst & Young in Baltimore. In 1984, joined Maryland Casualty
Company, a subsidiary of Zurich Insurance Group, as controller and
later served as vice president and chief financial officer of its
Commercial Insurance Division. Joined USF&G in 1993 as vice
president-property-liability finance and added the responsibility
of corporate controller in 1996.
Karen L. Himle, 44
SENIOR VICE PRESIDENT-CORPORATE AFFAIRS SINCE 1997. Joined
company's government affairs department in 1985. Named senior
government affairs officer in 1989 and vice president-corporate
communications in 1991. Six years prior government relations and
legislative experience.
Wayne L. Hoeschen, 52
SENIOR VICE PRESIDENT-INFORMATION SYSTEMS SINCE 1992. Joined
company's information systems department in 1972. Named vice
president-information systems in 1990.
David R. Nachbar, 37
SENIOR VICE PRESIDENT-HUMAN RESOURCES SINCE 1998. Joined The St.
Paul in 1998. Previously vice president-human resources and chief
of staff-Asia for Citicorp. Fifteen years prior human resources
experience with the American Broadcasting Companies, Time Warner,
PepsiCo and Citibank.
Janet R. Nelson, 50
SPECIAL ASSISTANT TO THE PRESIDENT SINCE OCTOBER 1999. Started
with the company's actuarial department in 1973 and joined
specialty underwriting in 1982. Named vice president in 1982 and
senior vice president in 1984. Served as president of specialty
underwriting operation from 1989 to 1993, and president of Custom
Markets from 1993 to 1999.
Bruce A. Backberg, 51
SENIOR VICE PRESIDENT-LEGAL SERVICES SINCE 1997. Started with
company's legal services department in 1972. Named vice president
in 1992 and senior vice president in 1997.
Laura C. Gagnon, 38
VICE PRESIDENT-FINANCE AND INVESTOR RELATIONS SINCE JULY 1999.
Joined company's investments department in 1986 as associate
investment analyst. Served as charter member of the corporate
planning and development department upon its inception in 1995.
Named vice president-corporate planning and development in March
1999.
<PAGE>
Thomas E. Bergmann, 33
VICE PRESIDENT AND TREASURER SINCE FEBRUARY 1999. Joined The St.
Paul's corporate treasury department earlier in 1999. Twelve years
prior experience in treasury positions with Johnson & Johnson and
Honeywell, Inc.
Sandra Ulsaker Wiese, 40
ASSISTANT VICE PRESIDENT SINCE MAY 1999 AND CORPORATE SECRETARY
SINCE 1998. Joined company's legal services department in 1991 and
named officer in 1995. Served as chief of staff of the U.S. Small
Business Administration in Washington, D.C.
U.S. INSURANCE OPERATIONS
Stephen W. Lilienthal, 50
EXECUTIVE VICE PRESIDENT OF ST. PAUL FIRE AND MARINE AND OF U.S.
INSURANCE OPERATIONS SINCE 1998. Joined The St. Paul in the merger
with USF&G in 1998. Previously served as executive vice president
and chief underwriting officer, and president of USF&G
Corporation's Commercial Insurance Group. Joined USF&G in 1993 as
senior vice president and chief commercial lines underwriting
officer. Twenty-one years prior insurance experience at Travelers
Insurance.
Michael J. Conroy, 58
EXECUTIVE VICE PRESIDENT AND CHIEF ADMINISTRATIVE OFFICER SINCE
1995. Joined company in 1994 as senior vice president-claim.
Twenty-five years prior insurance experience with the Chubb
Corporation and five years with The Home Insurance Company as
executive vice president and chief administrative officer.
James R. Lewis, 51
SENIOR VICE PRESIDENT-COMMERCIAL LINES GROUP SINCE OCTOBER 1999.
Joined The St. Paul in the merger with USF&G in 1998. Previously
served as senior vice president of USF&G Corporation's Personal
Lines and Family and Business Insurance Group. Twenty-eight years
prior insurance experience with Aetna Life and Casualty Company
and CIGNA Corporation.
Kevin M. Nish, 45
SENIOR VICE PRESIDENT-CATASTROPHE RISK SINCE 1998. Joined The St.
Paul in the merger with USF&G in 1998. Joined USF&G in 1993.
Previously served as vice president and as chief executive officer
of GeoVera Insurance. Twenty-one years prior insurance experience
with Fireman's Fund Insurance Company and Kemper Insurance.
<PAGE>
Marita Zuraitis, 39
SENIOR VICE PRESIDENT-COMMERCIAL LINES GROUP SINCE 1998. Joined
The St. Paul in the merger with USF&G in 1998. Joined USF&G in
1993. Previously served as senior vice president of USF&G
Corporation's commercial insurance group. Also served as vice
president-ceded reinsurance, branch vice president and regional
vice president. Seventeen years insurance experience.
GLOBAL SPECIALTY PRACTICES
Robert J. Lamendola, 55
PRESIDENT-SURETY SINCE 1998 AND SENIOR VICE PRESIDENT-GLOBAL
SPECIALTY PRACTICES SINCE OCTOBER 1999. Joined The St. Paul in the
merger with USF&G in 1998. Joined USF&G in 1992 as senior vice
president-fidelity and surety. Served as president of USF&G
Corporation's Surety Group. Prior to joining USF&G, served as a
managing director of Marsh & McLennan, Inc. Reporting to Lamendola
are Surety and Construction.
T. Michael Miller, 41
SENIOR VICE PRESIDENT-GLOBAL SPECIALTY PRACTICES SINCE OCTOBER
1999. Joined company in 1995 as vice president-professional
liability. Fourteen years prior insurance experience with the
Chubb Corporation, finally as senior vice president before joining
company. Reporting to Miller are Financial and Professional
Services, Public Sector Services and Excess and Surplus Lines.
Kent D. Urness, 51
SENIOR VICE PRESIDENT-GLOBAL SPECIALTY PRACTICES SINCE OCTOBER
1999. Joined company in 1971 and worked in various underwriting
and marketing positions. Named vice president-commercial insurance
in 1985 and senior vice president-agency broker services in 1991.
Appointed president and chief executive officer of St. Paul
International Insurance Company Ltd. in 1993. Reporting to Urness
are Health Services, Technology and Global Marine.
INTERNATIONAL INSURANCE OPERATIONS
ST. PAUL INTERNATIONAL UNDERWRITING
Mark L. Pabst, 53
PRESIDENT AND CHIEF OPERATING OFFICER-ST. PAUL INTERNATIONAL
UNDERWRITING SINCE 1995. Joined The St. Paul as senior vice
president-human resources in 1988. Named executive vice president
for Minet in 1992. Sixteen years experience in human resources in
banking, and five years as naval intelligence officer.
<PAGE>
REINSURANCE
ST. PAUL RE
James F. Duffy, 56
PRESIDENT-ST. PAUL RE SINCE 1993. Joined The St. Paul in 1980 as
president of surplus lines and specialty underwriting operations.
Named senior vice president in 1984 and executive vice president
in 1988. Prior to joining company, 13 years insurance and
reinsurance experience, including eight with First State Insurance
Company and New England Reinsurance Corporation.
LIFE INSURANCE
FIDELITY AND GUARANTY LIFE
Harry N. Stout, 47
PRESIDENT-FIDELITY AND GUARANTY LIFE INSURANCE SINCE 1994. Joined
The St. Paul in the merger with USF&G in 1998. Joined F&G Life in
1993 as head of product development. Previously was with Reliance
Insurance Companies and served as chief marketing officer for
United Pacific Life. Also served in various management roles with
KPMG LLP.
ASSET MANAGEMENT
THE JOHN NUVEEN COMPANY
Timothy R. Schwertfeger, 50
CHAIRMAN AND CHIEF EXECUTIVE OFFICER-THE JOHN NUVEEN COMPANY SINCE
1996. Joined investment banking department of Nuveen in 1977.
Named executive vice president and member of Nuveen's board of
directors in 1989. Subsequently appointed chairman of the board of
directors of the Nuveen Mutual Funds and Exchange-traded Funds.
<PAGE>
EXHIBIT 21
Subsidiaries of The St. Paul Companies, Inc. State or
- -------------------------------------------- Other
Jurisdiction of
Name Incorporation
- ---- -------------
(1) St. Paul Fire and Marine Insurance Company Minnesota
Subsidiaries:
(i) St. Paul Mercury Insurance Co. Minnesota
(ii) St. Paul Guardian Insurance Co. Minnesota
(iii) The St. Paul Insurance Co. Texas
(iv) The St. Paul Insurance Co. of Illinois Illinois
(v) St. Paul Fire and Casualty Insurance Co. Wisconsin
(vi) St. Paul Indemnity Insurance Co. Indiana
(vii) St. Paul Property and Casualty Insurance Co. Nebraska
(viii) St. Paul Lloyds Holdings, Inc. Texas
(ix) St. Paul Management Services, Inc. Minnesota
(x) Seaboard Surety Company New York
Subsidiaries:
(a) Northern Indemnity, Inc. Canada
(xi) St. Paul Insurance Co. of North Dakota North Dakota
(xii) St. Paul Specialty Underwriting, Inc. Delaware
Subsidiaries:
(a) St. Paul Surplus Lines Insurance Co. Delaware
(b) Athena Assurance Co. Minnesota
(c) St. Paul Medical Liability Insurance Co. Minnesota
(d) St. Paul Risk Services, Inc. Minnesota
(xiii) Northbrook Holdings, Inc. Delaware
Subsidiaries:
(a) Discover Property & Casualty Insurance Co. Illinois
(b) Northbrook Property and Casualty
Insurance Co. Illinois
(xiv) St. Paul Venture Capital IV, L.L.C. Delaware
(xv) St. Paul Venture Capital V, L.L.C. Delaware
(xvi) St. Paul Properties, Inc. Delaware
Subsidiaries:
(a) St. Paul Interchange, Inc. Minnesota
(b) 350 Market Street, Inc. Minnesota
(xvii) United States Fidelity and Guaranty Co. Maryland
Subsidiaries:
(a) Fidelity and Guaranty Insurance
Underwriters, Inc. Wisconsin
(b) Fidelity and Guaranty Insurance Co. Iowa
(c) USF&G Insurance Company of Mississippi Mississippi
(d) USF&G Insurance Company of Wisconsin Wisconsin
<PAGE>
(e) Discover Specialty Insurance Company Illinois
(f) USF&G Specialty Insurance Co. Maryland
(g) USF&G Business Insurance Co. Maryland
(h) USF&G Family Insurance Co. Maryland
(i) GeoVera Insurance Co. Maryland
(j) Inner Harbor Reinsurance, Inc. Maryland
(k) The Del Mar Co. Delaware
(l) USF&G Small Business Insurance Co. Maryland
(m) USF&G Pacific Insurance Co. Maryland
(n) USF&G West Insurance Co. Maryland
(o) USF&G Founder's Insurance Co. Maryland
(p) Charter House Underwriters, Inc. Maryland
(q) Afianzadora Insurgentes, S.A. De C.V. Mexico
(r) F&G Specialty Insurance Services, Inc. California
(s) IMG Holding Company, Inc. Maryland
Subsidiary:
(i) USF&G Realty Advisors, Inc. Delaware
(t) Discover Re Managers, Inc. Delaware
Subsidiary:
(i) Discovery Reinsurance Co. Indiana
(ii) Discovery Managers, Ltd. Indiana
(u) THI Holdings (Delaware), Inc. Delaware
Subsidiaries:
(i) Titan Holdings Service Corp. Texas
(ii) Titan Indemnity Company Texas
(iii) Victoria Financial Corp. Delaware
(xviii) Fidelity and Guaranty Life Insurance Co. Maryland
Subsidiary:
(a) Thomas Jefferson Life Insurance Co. New York
(xix) USF&G Realty, Inc. Delaware
(2) The John Nuveen Company* Delaware
Subsidiaries:
(i) John Nuveen & Co. Incorporated Delaware
Subsidiaries:
(a) Nuveen Advisory Corp. Delaware
(b) Nuveen Institutional Advisory Corp. Delaware
(ii) Nuveen Asset Management, Inc. Delaware
(iii) Rittenhouse Financial Services, Inc. Delaware
(iv) Nuveen Senior Loan Asset Management, Inc. Delaware
(3) St. Paul Re, Inc. New York
(4) Camperdown Corporation Delaware
<PAGE>
(5) St. Paul Capital L.L.C. Delaware
(6) St. Paul Venture Capital, Inc. Delaware
(7) St. Paul London Properties, Inc. Minnesota
(8) St. Paul London Investments, Inc. Minnesota
(9) St. Paul Multinational Holdings, Inc. Delaware
Subsidiaries:
(i) St. Paul Insurance Company (S.A.) Limited South Africa
(ii) Seguros St. Paul de Mexico, S.A. de C.V. Mexico
(iii) Botswana Insurance Company Limited Botswana
(iv) St. Paul Argentina Compania De Seguros S.A. Argentina
(10) St. Paul Bermuda Holdings, Inc. Delaware
Subsidiaries:
(i) St. Paul (Bermuda), Ltd. Bermuda
(ii) St. Paul Re (Bermuda), Ltd. Bermuda
(iii) F&G International Insurance, Ltd. Bermuda
(iv) Bosworth Insurance Co., Ltd. Bermuda
(11) St. Paul Holdings Limited United Kingdom
Subsidiaries:
(i) St. Paul Reinsurance Company
Limited United Kingdom
(ii) St. Paul International Insurance
Company Limited United Kingdom
(iii) St. Paul Insurance Espana Seguros
Y Reaseguros, S.A. Spain
(iv) Camperdown UK Limited United Kingdom
(v) New World Insurance Company Ltd. Guernsey
(vi) Lesotho National Insurance
Holdings Limited Lesotho
(vii) St. Paul Syndicate Holdings, Ltd. United Kingdom
Subsidiary:
(i) F&G Overseas, Ltd. Cayman Islands
(12) USF&G Financial Services Corporation. Maryland
(13) St. George Reinsurance, Ltd. B.W. Indies
(14) Mountain Ridge Insurance Co. Vermont
(15) Captiva, Ltd. Bermuda
*The John Nuveen Company is a majority-owned subsidiary jointly owned
by The St. Paul, which holds a 66% interest, and Fire and Marine,
which holds a 13% interest. The remaining 21% is publicly held.
<PAGE>
EXHIBIT 23A
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The St. Paul Companies, Inc.:
We consent to incorporation by reference in the Registration
Statements on Form S-8 (SEC File No. 33-15392, No. 33-23446, No. 33-
23948, No. 33-24220, No. 33-24575, No. 33-26923, No. 33-49273, No. 33-
56987, No. 333-01065, No. 333-22329, No. 333-25203, No. 333-28915,
No. 333-48121, No. 333-50935, No. 333-50937, No. 333-50941, No. 333-
50943 and No. 333-67983), and Form S-3 (SEC File No. 333-06465 and
No. 333-67139) of The St. Paul Companies, Inc., of our reports dated
February 16, 2000, relating to the consolidated balance sheets of The
St. Paul Companies, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income,
shareholders' equity, comprehensive income and cash flows for each of
the years in the three-year period ended December 31, 1999, and
related schedules I through V, which reports appear or are
incorporated by reference in the December 31, 1999 annual report on
Form 10-K of The St. Paul Companies, Inc. The consolidated financial
statements and financial statement schedules for the year ended
December 31, 1997 have been restated to reflect the pooling of
interests with USF&G Corporation. Our reports state the consolidated
financial statements and financial statement schedules of USF&G
Corporation, which statements reflect total revenues constituting 34
percent for the year ended December 31, 1997 of the related
consolidated total, were audited by other auditors whose reports have
been furnished to us, and our opinions, insofar as they relate to the
amounts included for USF&G Corporation, for the year ended December
31, 1997 are based solely on the reports of such other auditors.
Minneapolis, Minnesota /s/ KPMG LLP
March 29, 2000 ------------
KPMG LLP
<PAGE>
EXHIBIT 23B
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 20, 1998, with
respect to the consolidated financial statements of USF&G Corporation
for the year ended December 31, 1997 (not included separately herein)
included as Schedule VII in The St. Paul Companies, Inc.'s Annual
Report (Form 10-K) for the year ended December 31, 1999, filed with
the Securities and Exchange Commission.
Our audit also included the financial statement schedules of USF&G
Corporation listed in Item 14(a) of USF&G Corporation's Annual Report
(Form 10-K) for the year ended December 31, 1997 (not included
separately herein). These schedules are the responsibility of
management. Our responsibility is to express an opinion based on our
audit. In our opinion, the financial statement schedules referred
to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects
the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements on Form S-8 (SEC File No. 33-15392, No. 33-23446, No. 33-
23948, No. 33-24220, No. 33-24575, No. 33-26923, No. 33-49273, No. 33-
56987, No. 333-01065, No. 333-22329, No. 333-25203, No. 333-28915,
No. 333-48121, No. 333-50935, No. 333-50937, No. 333-50941, No. 333-
50943 and No. 333-67983), and Form S-3 (SEC File No. 333-06465 and
No. 333-67139), of The St. Paul Companies, Inc., of our report dated
February 20, 1998, with respect to the consolidated financial
statements and schedules of USF&G Corporation (these financial
statements and schedules are not presented herein) included as
Schedule VII in The St. Paul Companies, Inc. Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
-------------------
Ernst & Young LLP
Baltimore, Maryland
March 29, 2000
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned, a director
of The St. Paul Companies, Inc., a Minnesota corporation ("The St.
Paul"), do hereby make, nominate and appoint Sandra Ulsaker Wiese and
Bruce A. Backberg, or either of them, to be my attorney-in-fact, with
full power and authority to sign on my behalf a Form 10-K for the
year ended December 31, 1999, to be filed by The St. Paul with the
Securities and Exchange Commission, and any amendments thereto, and
shall have the same force and effect as though I had manually signed
the Form 10-K or amendments.
Dated: February 1, 2000 Signature: /s/ H. Furlong Baldwin
----------------------
Name: H. Furlong Baldwin
Dated: February 1, 2000 Signature: /s/ Michael R. Bonsignore
-------------------------
Name: Michael R. Bonsignore
Dated: February 1, 2000 Signature: /s/ John H. Dasburg
-------------------
Name: John H. Dasburg
Dated: February 1, 2000 Signature: /s/ W. John Driscoll
--------------------
Name: W. John Driscoll
Dated: February 1, 2000 Signature: /s/ Kenneth M. Duberstein
-------------------------
Name: Kenneth M. Duberstein
Dated: February 1, 2000 Signature: /s/ Pierson M. Grieve
---------------------
Name: Pierson M. Grieve
Dated: February 1, 2000 Signature: /s/ Thomas R. Hodgson
---------------------
Name: Thomas R. Hodgson
Dated: February 1, 2000 Signature: /s/ David G. John
-----------------
Name: David G. John
<PAGE>
Dated: February 1, 2000 Signature: /s/ William H. Kling
--------------------
Name: William H. Kling
Dated: February 1, 2000 Signature: /s/ Bruce K. MacLaury
---------------------
Name: Bruce K. MacLaury
Dated: February 1, 2000 Signature: /s/ Glen D. Nelson
------------------
Name: Glen D. Nelson
Dated: February 1, 2000 Signature: /s/ Anita M. Pampusch
---------------------
Name: Anita M. Pampusch
Dated: February 1, 2000 Signature: /s/ Gordon M. Sprenger
----------------------
Name: Gordon M. Sprenger
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