<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission File Number 0-3021
------
THE ST. PAUL COMPANIES, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
------------------------------ -----------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
385 Washington St., Saint Paul, MN 55102
---------------------------------- --------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (651) 310-7911
-------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
The number of shares of the Registrant's Common Stock, without par
value, outstanding at May 8, 2000, was 212,060,928.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION --------
Consolidated Statements of Income (Unaudited),
Three Months Ended March 31, 2000 and 1999 3
Consolidated Balance Sheets, March 31, 2000
(Unaudited) and December 31, 1999 4
Consolidated Statements of Shareholders' Equity,
Three Months Ended March 31, 2000
(Unaudited) and Twelve Months Ended 6
December 31, 1999
Consolidated Statements of Comprehensive Income
(Unaudited), Three Months Ended March 31, 2000
and 1999 7
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 2000 and 1999 8
Notes to Consolidated Financial Statements
(Unaudited) 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 22
PART II. OTHER INFORMATION
Item 1 through Item 6 36
Signatures 37
EXHIBIT INDEX 38
<PAGE>
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Unaudited
(In millions, except per share data)
Three Months Ended
March 31
---------------------
2000 1999
------ ------
Revenues:
Premiums earned $1,388 $1,345
Net investment income 406 392
Asset management 93 81
Realized investment gains 334 65
Other 32 26
------ ------
Total revenues 2,253 1,909
------ ------
Expenses:
Insurance losses and loss adjustment expenses 1,028 995
Life policy benefits 73 68
Policy acquisition expenses 350 336
Operating and administrative expenses 264 247
------ ------
Total expenses 1,715 1,646
------ ------
Income from continuing operations
before income taxes 538 263
Income tax expense 176 66
------ ------
Income from continuing operations before
cumulative effect of accounting change 362 197
Cumulative effect of
accounting change, net of taxes - (30)
------ ------
Income from continuing operations 362 167
Discontinued operations, net of taxes (4) (2)
------ ------
Net income $358 $165
====== ======
Basic earnings per common share:
Income from continuing
operations before cumulative effect $1.62 $0.84
Cumulative effect of accounting
change, net of taxes - (0.13)
Discontinued operations, net of taxes (0.02) (0.01)
------ ------
Net income $1.60 $0.70
====== ======
Diluted earnings per common share:
Income from continuing
operations before cumulative effect $1.53 $0.80
Cumulative effect of accounting
change, net of taxes - (0.12)
Discontinued operations, net of taxes (0.02) (0.01)
------ ------
Net income $1.51 $0.67
====== ======
Dividends declared on common stock $0.27 $0.26
====== ======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
March 31, December 31,
ASSETS 2000 1999
- ------ --------- ------------
(Unaudited)
Investments:
Fixed maturities, at estimated fair value $19,484 $19,329
Equities, at estimated fair value 1,693 1,618
Real estate and mortgage loans 1,431 1,504
Venture capital, at estimated fair value 1,008 866
Securities lending collateral 1,185 1,216
Other investments 436 301
Short-term investments, at cost 1,168 1,373
------- -------
Total investments 26,405 26,207
Cash 84 165
Asset management securities held for sale 65 45
Reinsurance recoverables:
Unpaid losses 4,563 4,426
Paid losses 242 195
Ceded unearned premiums 621 641
Receivables:
Underwriting premiums 2,326 2,334
Interest and dividends 363 358
Other 299 230
Deferred policy acquisition expenses 1,012 959
Deferred income taxes 1,162 1,271
Office properties and equipment, at cost less
accumulated depreciation of $456 (1999; $443) 508 507
Goodwill 519 509
Other assets 1,085 1,026
------- -------
Total assets $39,254 $38,873
======= =======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In millions)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
- ------------------------------------ --------- -----------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $17,769 $17,934
Future policy benefits 4,999 4,885
Unearned premiums 3,154 3,118
------- -------
Total insurance reserves 25,922 25,937
Debt 1,517 1,466
Payables:
Reinsurance premiums 697 654
Income taxes 457 319
Accrued expenses and other 998 1,156
Securities lending collateral 1,185 1,216
Other liabilities 1,440 1,228
------- -------
Total liabilities 32,216 31,976
------- -------
Company-obligated mandatorily redeemable
preferred capital securities of subsidiaries
or trusts holding solely convertible
subordinated debentures of the Company 425 425
------- -------
Shareholders' equity:
Preferred:
SOP convertible preferred stock;
1.45 shares authorized; 0.8 shares
outstanding (0.9 shares in 1999) 122 129
Guaranteed obligation - SOP (72) (105)
------- -------
Total preferred shareholders' equity 50 24
------- -------
Common:
Common stock, 480 shares authorized;
212 shares outstanding (225 shares in 1999) 1,970 2,079
Retained earnings 3,923 3,827
Accumulated other comprehensive income:
Unrealized appreciation 710 568
Unrealized loss on foreign currency translation (40) (26)
------- -------
Total accumulated other comprehensive income 670 542
------- -------
Total common shareholders' equity 6,563 6,448
------- -------
Total shareholders' equity 6,613 6,472
------- -------
Total liabilities, redeemable preferred
securities and shareholders' equity $39,254 $38,873
======= =======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In millions)
Three Twelve
Months Ended Months Ended
March 31 December 31
------------ ------------
2000 1999
------ ------
(Unaudited)
Preferred shareholders' equity:
SOP convertible preferred stock:
Beginning of period $129 $134
Redemptions during period (7) (5)
----- -----
End of period 122 129
----- -----
Guaranteed obligation - SOP:
Beginning of period (105) (119)
Principal payments 33 14
----- -----
End of period (72) (105)
----- -----
Total preferred shareholders' equity 50 24
----- -----
Common shareholders' equity:
Common stock:
Beginning of period 2,079 2,128
Stock issued under stock incentive plans 6 37
Stock issued for preferred shares redeemed 11 9
Reacquired common shares (126) (102)
Other - 7
----- -----
End of period 1,970 2,079
----- -----
Retained earnings:
Beginning of period 3,827 3,480
Net income 358 834
Dividends declared on common stock (57) (235)
Dividends declared on preferred stock, net of taxes (2) (8)
Reacquired common shares (205) (254)
Tax benefit on employee stock
options, and other changes 6 14
Premium on preferred shares redeemed (4) (4)
----- -----
End of period 3,923 3,827
----- -----
Unrealized appreciation, net of taxes:
Beginning of period 568 1,027
Change during the period 142 (459)
----- -----
End of period 710 568
----- -----
Unrealized loss on foreign currency
translation, net of taxes:
Beginning of period (26) (14)
Change during the period (14) (12)
----- -----
End of period (40) (26)
----- -----
Total common shareholders' equity 6,563 6,448
----- -----
Total shareholders' equity $6,613 $6,472
===== =====
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Unaudited
(In millions)
Three Months Ended
March 31
------------------
2000 1999
------ ------
Net income $358 $165
------ ------
Other comprehensive income (loss), net of taxes:
Change in unrealized appreciation 142 (108)
Change in unrealized loss on
foreign currency translation (14) (2)
------ ------
Other comprehensive income (loss) 128 (110)
------ ------
Comprehensive income $486 $55
====== ======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In millions)
Three Months Ended
March 31
------------------
2000 1999
------ ------
OPERATING ACTIVITIES
Net income $358 $165
Adjustments:
Loss from discontinued operations 4 2
Change in property-liability
insurance reserves (17) 43
Change in reinsurance balances (204) (127)
Change in premiums receivable 8 (13)
Provision for deferred tax expense 33 47
Change in asset management balances (25) 3
Depreciation and amortization 22 37
Realized investment gains (334) (65)
Cumulative effect of accounting change - 30
Other (53) (49)
------ ------
Net Cash Provided (Used) by
Continuing Operations (208) 73
Net Cash Provided by
Discontinued Operations 20 4
------ ------
Net Cash Provided (Used) by
Operating Activities (188) 77
------ ------
INVESTING ACTIVITIES
Purchase of investments (1,829) (1,585)
Proceeds from sales and
maturities of investments 2,008 1,180
Net sale of short-term investments 177 244
Change in open security transactions (81) 28
Purchases of office properties and equipment (20) (96)
Sales of office purchases and equipment 2 52
Acquisitions (37) -
Other 45 (71)
------ ------
Net Cash Provided (Used) by
Continuing Operations 265 (248)
Net Cash Provided (Used) by
Discontinued Operations 28 (14)
------ ------
Net Cash Provided (Used) by
Investing Activities 293 (262)
------ ------
FINANCING ACTIVITIES
Deposits on universal life
and investment contracts 222 268
Withdrawals on universal life
and investment contracts (105) (30)
Dividends paid on common
and preferred stock (61) (61)
Proceeds from issuance of debt 96 275
Repayment of debt (46) (21)
Repurchase of common shares (331) (229)
Stock options exercised and other 39 6
------ ------
Net Cash Provided (Used) by
Financing Activities (186) 208
------ ------
Increase (decrease) in cash (81) 23
Cash at beginning of period 165 146
------ ------
Cash at end of period $ 84 $169
====== ======
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
March 31, 2000
Note 1 - Basis of Presentation
- ------------------------------
The financial statements include The St. Paul Companies, Inc. and
subsidiaries (The St. Paul or the company), and have been
prepared in conformity with generally accepted accounting
principles.
These consolidated financial statements rely, in part, on
estimates. In the opinion of management, all necessary
adjustments, consisting of normal recurring adjustments, have
been reflected for a fair presentation of the results of
operations, financial position and cash flows in the accompanying
unaudited consolidated financial statements. The results for the
period are not necessarily indicative of the results to be
expected for the entire year.
Reference should be made to the "Notes to Consolidated Financial
Statements" in our annual report to shareholders for the year
ended Dec. 31, 1999. The amounts in those notes have not changed
materially except as a result of transactions in the ordinary
course of business or as otherwise disclosed in these notes.
Some amounts in the 1999 consolidated financial statements have
been reclassified to conform with the 2000 presentation. These
reclassifications had no effect on net income, comprehensive
income or shareholders' equity, as previously reported.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 2 - Earnings Per Common Share
- ----------------------------------
The following table provides the calculation of our earnings per
common share for the three months ended March 31, 2000 and 1999:
Three Months Ended
March 31
------------------
2000 1999
------ ------
(In millions,
except per share data)
EARNINGS
Basic:
Net income, as reported $358 $165
Preferred stock dividends, net of taxes (2) (2)
Premium on preferred shares redeemed (4) (1)
------ ------
Net income available to common shareholders $352 $162
====== ======
Diluted:
Net income available to common shareholders $352 $162
Effect of dilutive securities:
Convertible preferred stock 2 2
Convertible monthly income preferred securities 2 2
Zero coupon convertible notes 1 1
------ ------
Net income available to common shareholders $357 $167
====== ======
COMMON SHARES
Basic:
Weighted average common shares outstanding 220 230
====== ======
Diluted:
Weighted average common shares outstanding 220 230
Effect of dilutive securities:
Stock options 1 2
Convertible preferred stock 7 7
Convertible monthly income preferred securities 7 7
Zero coupon convertible notes 2 3
------ ------
Total 237 249
====== ======
EARNINGS PER SHARE
Basic $1.60 $0.70
====== ======
Diluted $1.51 $0.67
====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 - Investments
- --------------------
Investment Activity. Following is a summary of our investment
purchases, sales and maturities.
Three Months Ended March 31
---------------------------
2000 1999
------ ------
(In millions)
Purchases:
Fixed maturities $985 $1,158
Equities 587 316
Real estate and mortgage loans - 39
Venture capital 225 33
Other investments 32 39
------- -------
Total purchases 1,829 1,585
------- -------
Proceeds from sales and maturities:
Fixed maturities 871 787
Equities 573 322
Real estate and mortgage loans 77 23
Venture capital 460 37
Other investments 27 11
------- -------
Total sales and maturities 2,008 1,180
------- -------
Net purchases (sales) $(179) $405
======= =======
Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common
shareholders' equity was as follows:
Three Months Ended Twelve Months Ended
March 31, 2000 December 31, 1999
-------------------- -------------------
(In millions)
Fixed maturities $ 28 $(1,336)
Equities 34 223
Venture capital,
net of minority interest 136 255
Life deferred policy acquisition
costs and policy benefits 15 122
Single premium immediate
annuity reserves - 44
Other 6 (13)
------ ------
Total change in pretax
unrealized appreciation 219 (705)
Change in deferred taxes (77) 246
------ ------
Total change in unrealized
appreciation, net of taxes $142 $(459)
====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 4 - Income Taxes
- ---------------------
The components of income tax expense on income from continuing
operations, before the cumulative effect of accounting change,
were as follows :
Three Months Ended
March 31
------------------
2000 1999
------ ------
(In millions)
Federal current tax expense $134 $10
Federal deferred tax expense 33 47
------ ------
Total federal income tax expense 167 57
Foreign income tax expense 6 7
State income tax expense 3 2
------ ------
Total income tax expense $176 $66
====== ======
Note 5 - Contingent Liabilities
- -------------------------------
In the ordinary course of conducting business, we and some of our
subsidiaries have been named as defendants in various lawsuits.
Some of these lawsuits attempt to establish liability under
insurance contracts issued by our underwriting operations.
Plaintiffs in these lawsuits are asking for money damages or to
have the court direct the activities of our operations in certain
ways. Although it is possible that the settlement of a
contingency may be material to our results of operations and
liquidity in the period in which the settlement occurs, we
believe that the total amounts that we and our subsidiaries will
ultimately have to pay in all of these lawsuits will have no
material effect on our overall financial position.
In some cases, plaintiffs seek to establish coverage for their
liability under environmental protection laws. See
"Environmental and Asbestos Claims" in Management's Discussion
and Analysis for information on these claims.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 6 - Debt
- -------------
Debt consists of the following:
March 31, December 31,
2000 1999
------------- ------------
Book Fair Book Fair
Value Value Value Value
----- ------ ----- ------
(In millions)
Medium-term notes $617 $591 $617 $598
Commercial paper 494 494 400 400
8-3/8% senior notes 150 151 150 153
Zero coupon convertible notes 95 90 94 93
7-1/8% senior notes 80 77 80 78
Variable rate borrowings 64 64 64 64
Real estate mortgages 15 15 15 15
Nuveen short-term borrowings 2 2 - -
Floating rate notes - - 46 46
----- ----- ----- -----
Total debt $1,517 $1,484 $1,466 $1,447
===== ===== ===== =====
In April 2000, we issued $500 million of Senior Notes. See Note
13 - "Subsequent Events - Issuance of Debt."
Note 7 - Segment Information
- ----------------------------
We have seven reportable business segments in our property-
liability insurance operation, consisting of the Commercial Lines
Group, Global Surety, Global Healthcare, Other Global Specialty,
International, Reinsurance and Investment Operations. We also
have a life insurance segment (Fidelity and Guaranty Life) and an
asset management segment (The John Nuveen Company). We evaluate
the performance of our property-liability underwriting segments
based on GAAP underwriting results. The property-liability
investment operation is disclosed as a separate reportable
segment because that operation is managed at the corporate level
and the invested assets, net investment income and realized gains
are not allocated to individual underwriting segments. The life
insurance and asset management segments are evaluated based on
their respective pretax operating results, which include
investment income.
The reportable underwriting business segments in our property-
liability operation are reported separately because they offer
insurance products to unique customer classes and utilize
different underwriting criteria and marketing strategies. For
example, the Commercial Lines Group provides "commodity-type"
insurance products to the extensive, small and medium-sized
commercial markets. By contrast, each of our Global Specialty
segments (Surety, Healthcare and Other Specialty) market
specialized insurance products and services tailored to meet the
individual needs of specific customer groups, such as doctors,
lawyers, officers and directors, as well as technology firms and
government entities. Customers in the Global Specialty segments
generally require specialized underwriting expertise and claim
settlement services.
The tabular information on the following pages provide revenue
and income data for each of our business segments for the first
quarters of 2000 and 1999. In the first quarter of 2000, we
implemented a new segment reporting structure for our property-
liability insurance business following the fourth-quarter 1999
realignment of our primary insurance underwriting operations into
a Global Specialty Practices organization. Our non-U.S. primary
insurance business is now included in the respective business
segment to which it pertains, which differs from our prior
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
- ---------------------------------------
practice of including all non-U.S. business in the International
segment. Our Global Specialty segments are managed on a global
basis. Under our new segment structure, our International
segment includes our operations at Lloyd's, and specialty
insurance business that we do not manage on a global basis.
Also, our Global Healthcare underwriting operation is now
reported as a separate business segment, which differs from its
prior classification as a component of the Specialty Commercial
segment. This change reflects the increasing size of this
business, relative to our total underwriting operations.
Finally, we reclassified our Construction business center,
previously included in the Commercial Lines Group segment, to our
Other Global Specialty segment, to reflect the more specialized
nature of this product, as well as the change in management of
the business. Segment information for the first quarter of 1999
has been restated to be consistent with the 2000 presentation.
Three Months Ended
March 31
--------------------
2000 1999
------ ------
Revenues (In millions)
Property-liability insurance:
Commercial Lines Group $388 $416
Global Surety 113 93
Global Healthcare 133 182
Other Global Specialty 341 327
International 65 58
------ ------
Total primary insurance operations 1,040 1,076
Reinsurance 316 242
------ ------
Total property-liability premiums earned 1,356 1,318
------ ------
Investment operations:
Net investment income 318 318
Realized investment gains 331 61
------ ------
Total investment operations 649 379
Other 19 21
------ ------
Total property-liability insurance 2,024 1,718
------ ------
Life insurance 117 99
------ ------
Asset management 100 83
------ ------
Total reportable segments 2,241 1,900
Parent company, other operations and
consolidating eliminations 12 9
------ ------
Total revenues $2,253 $1,909
====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
- ---------------------------------------
During the first quarter of 2000, we eliminated the one - quarter
reporting lag for our reinsurance business in the United Kingdom
("St. Paul Re - UK"). First quarter consolidated results, and
our Reinsurance segment results, therefore include six months'
revenues and expenses for St. Paul Re - UK. The first-quarter
incremental impact of this change resulted in an additional $146
million of net written premiums, $53 million of earned premiums,
$32 million of loss and loss adjustment expenses; $19 million of
underwriting expenses, $2 million of GAAP underwriting profit;
$64 million of revenues; and $17 million of income before taxes
being recorded in the first quarter of 2000.
Three Months Ended
March 31
------------------
2000 1999
------ ------
(In millions)
Income (Loss) Before Income Taxes and Cumulative
Effect of Accounting Change
Property-liability insurance:
Commercial Lines Group $(22) $(85)
Global Surety 19 16
Global Healthcare (19) (28)
Other Global Specialty (24) (25)
International (9) (11)
------ ------
Total primary insurance operations (55) (133)
Reinsurance (44) 23
------ ------
Total GAAP underwriting result (99) (110)
------ ------
Investment operations:
Net investment income 318 318
Realized investment gains 331 61
------ ------
Total investment operations 649 379
------ ------
Other (32) (19)
------ ------
Total property-liability insurance 518 250
------ ------
Life insurance 18 19
------ ------
Asset management:
Pretax income before minority interest 43 38
Minority interest (10) (9)
------ ------
Total asset management 33 29
------ ------
Total reportable segments 569 298
Parent company, other operations and
consolidating eliminations (31) (35)
------ ------
Total income before income taxes and
cumulative effect of accounting change $538 $263
====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Reinsurance
- --------------------
Our consolidated financial statements reflect the effects of
assumed and ceded reinsurance transactions. Assumed reinsurance
refers to our acceptance of certain insurance risks that other
insurance companies have underwritten. Ceded reinsurance
involves transferring certain insurance risks we have
underwritten to other insurance companies who agree to share
these risks. The primary purpose of ceded reinsurance is to
protect us from potential losses in excess of the amount we are
prepared to accept.
We expect those with whom we have ceded reinsurance to honor
their obligations. In the event these companies are unable to
honor their obligations, we will pay these amounts. We have
established allowances for possible nonpayment of amounts due to
us.
Our first-quarter 2000 income from continuing operations
benefited from cessions made under our corporate all-lines,
excess-of-loss reinsurance program (the "corporate program"), and
cessions made under a separate excess-of-loss treaty exclusive to
our Reinsurance segment. Under the corporate program, we ceded
written premiums of $80 million, earned premiums of $65 million,
and insurance losses and loss adjustment expenses of $111
million, resulting in a net benefit $46 million to our pretax
income from continuing operations. The losses and loss
adjustment expenses ceded and $61 million of the earned premiums
ceded under the corporate program in the first quarter of 2000
were the result of adverse development on losses originally
incurred during the 1999 accident year. Under the separate
Reinsurance segment treaty, we ceded written and earned premiums
of $17 million, and insurance losses and loss adjustment expenses
of $32 million, resulting in a net pretax benefit of $15 million.
The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses, loss adjustment expenses
and life policy benefits was as follows:
Three Months
Ended March 31
--------------
(In millions) 2000 1999
----- -----
Written premiums:
Direct $1,122 $1,108
Assumed 595 318
Ceded (317) (172)
----- -----
Net premiums written $1,400 $1,254
===== =====
Earned premiums:
Direct 1,161 1,162
Assumed 499 335
Ceded (304) (179)
----- -----
Net premiums earned 1,356 1,318
Life 32 27
----- -----
Total premiums earned $1,388 $1,345
===== =====
Insurance losses, loss
adjustment expenses
and policy benefits:
Direct $839 $913
Assumed 573 271
Ceded (384) (189)
----- -----
Net insurance losses and
loss adjustment expenses 1,028 995
Life policy benefits 73 68
----- -----
Total net insurance losses,
loss adjustment expenses and
policy benefits $1,101 $1,063
===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Restructuring Charges
- ------------------------------
Third Quarter 1999 Charge - In August 1999, we announced a cost
reduction program designed to enhance our efficiency and
effectiveness in a highly competitive environment. In the third
quarter of 1999, we recorded a pretax charge of $60 million
related to this program, including $25 million in employee-
related charges, $33 million in occupancy-related charges and $2
million in equipment charges.
The employee-related charge represents severance and related
benefits such as outplacement counseling, vacation buy-out and
medical coverage to be paid to terminated employees. The charge
relates to the anticipated termination of approximately 700
employees at all levels throughout the Company. As of March 31,
2000, approximately 540 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 activity related to this
charge:
(In millions) Pre-tax Reserve at Reserve at
charge Dec. 31, 1999 Payments Mar. 31, 2000
------- ------------- -------- -------------
Charges to
earnings:
Employee-related $25 $14 $(10) $4
Occupancy-related 33 31 (1) 30
Equipment charges 2 N/A N/A N/A
---- ---- ---- ----
Total $60 $45 $(11) $34
==== ==== ==== ====
Fourth Quarter 1998 Charge - Late in the fourth quarter of 1998,
we recorded a pretax restructuring charge of $34 million. The
majority of the charge, $26 million, related to the anticipated
termination of approximately 520 employees in the following
operations: Claims, Commercial Lines Group, Information Systems,
Global Healthcare, and Financial and Professional Services. The
remaining charge of $8 million related to costs to be incurred to
exit lease obligations.
As of March 31, 2000, 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, however payments are still being made to terminated
employees.
The table below provides a rollforward of activity related to
this charge.
(In millions) Pre-tax Reserve at Reserve at
charge Dec. 31, 1999 Payments Mar. 31, 2000
------- ------------- -------- -------------
Charges to
earnings:
Employee-related $26 $ 3 $ (1) $ 2
Occupancy-related 8 2 - 2
---- ---- ---- ----
Total $34 $ 5 $ (1) $ 4
==== ==== ==== ====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Restructuring Charges (continued)
- -----------------------------------------
Second Quarter 1998 Charge - Related to our merger with USF&G, we
recorded a pretax charge to earnings of $292 million in 1998,
primarily consisting of severance and other employee-related
costs, facilities exit costs, asset impairments and transaction
costs. We estimated that approximately 2,000 positions would be
eliminated due to the combination of the two organizations,
resulting from efficiencies to be realized by the larger
organization and the elimination of redundant functions. All
levels of employees, from technical staff to senior management,
were affected by the reductions. The original number of
positions expected to be reduced by function included
approximately 950 in our property-liability underwriting
operation, 350 in claims and 700 in finance and other
administrative positions, throughout the United States. Through
March 31, 2000, approximately 2,200 positions had been
eliminated, and the cost of termination benefits paid was $136
million. Termination actions taking place under this plan have
been completed; however, payments are still being made to
terminated employees.
The following table provides rollforward activity related to the
charge.
(In millions)
Pre-tax
Charges to earnings: charge
------------------- -------
USF&G corporate
headquarters $36
Long-lived assets 23
Acceleration of software
depreciation 10
Computer leases and equipment 10
Other equipment and furniture 8
-----
Subtotal $87
-----
Accrued charges subject to
rollforward:
Reserve Reserve
Pre-tax at Dec. 31, at Mar. 31,
charge 1999 Payments 2000
------- --------- --------- --------
Executive severance $89 $3 $ - $3
Other severance 52 1 (1) -
Branch lease exit costs 34 24 (2) 22
Transaction costs 30 - - -
----- ----- ----- -----
Subtotal 205 28 (3) 25
----- ----- ----- -----
Total $292 $28 $ (3) $25
===== ===== ===== =====
Note 15 in our 1999 Annual Report to Shareholders provides more
information regarding the rationale for and calculation of the
components of the merger-related charge.
Upon consummation of the merger, we determined that several of
USF&G's real estate investments were not consistent with our real
estate investment strategy. A plan was developed to sell a
number of apartment buildings and various other miscellaneous
holdings, with an expected disposal date by year-end 1999. In
applying the provisions of SFAS No. 121, it was determined that
four of these miscellaneous investments should be written down to
fair value, based on our plan to sell them. Fair value was
determined based on a discounted cash flow analysis, or based on
market prices for similar assets. The one remaining investment
represents percentage rents retained after sale of a portfolio of
stores to a third party. The current balance of this investment
is $4.0 million, with $3.3 million held in the property-liability
segment and $0.7 million held in the life segment. This
investment is expected to be sold by year-end 2000.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 10 - Acquisition
- ----------------------
On Feb. 23, 2000, we closed on our purchase of Pacific Select
Insurance Holdings, Inc., and its wholly-owned subsidiary Pacific
Select Property Insurance Co. (together, Pacific Select), a
California insurer that sells earthquake coverage to California
homeowners. The transaction was accounted for as a purchase, at
a cost of approximately $37 million. Pacific Select's results of
operations from the date of purchase are included in our first
quarter 2000 results.
Note 11 - Adoption of Accounting Pronouncement
- -----------------------------------------------
Effective Jan. 1, 2000, we adopted the provisions of the American
Institute of Certified Public Accountants Statement of Position
(SOP) 98-7, "Deposit Accounting: Accounting for Insurance and
Reinsurance Contracts That Do Not Transfer Insurance Risk." 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 initial
adoption of SOP 98-7 did not have a material impact on our
results of operations, financial condition or liquidity, and the
ongoing impact is also not expected to be material.
Note 12 - Discontinued Operations
- ----------------------------------
Standard Personal Insurance Business
- ------------------------------------
On Sept. 30, 1999, we completed the sale of our standard
personal insurance operations to Metropolitan Property and
Casualty Insurance Company (Metropolitan). As a result, the
standard personal insurance operations have been accounted for as
discontinued operations for all periods presented herein.
Metropolitan purchased Economy Fire & Casualty Company and its
subsidiaries (Economy), as well as the rights and interests in
those non-Economy policies constituting our remaining standard
personal insurance operations. Those rights and interests were
transferred to Metropolitan by way of a reinsurance and facility
agreement (Reinsurance Agreement).
The Reinsurance Agreement relates solely to the non-Economy
standard personal insurance policies, and was entered into solely
as a means of accommodating Metropolitan through a transition
period. The Reinsurance Agreement allows Metropolitan to write
non-Economy business on our policy forms while Metropolitan
obtains the regulatory license, form and rate approvals necessary
to write non-Economy business through their own insurance
subsidiaries. Any business written on our policy forms during
this transition period is then fully ceded to Metropolitan under
the Reinsurance Agreement. We recognized no gain or loss on the
inception of the Reinsurance Agreement and will not incur any net
revenues or expenses related to the Reinsurance Agreement. All
economic risk of post-sale activities related to the Reinsurance
Agreement has been transferred to Metropolitan. We anticipate
that Metropolitan will pay all claims incurred related to this
Reinsurance Agreement. In the event Metropolitan is unable to
honor their obligations to us, we will pay these amounts.
As part of the sale to Metropolitan, we guaranteed the adequacy
of Economy's loss and loss expense reserves. Under that
guarantee, we will pay for any deficiencies in those reserves and
will share in any redundancies that develop by Sept. 30, 2002.
We remain liable for claims on non-Economy policies that result
from losses occurring
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 12 - Discontinued Operations (continued)
- --------------------------------------------
prior to closing. By agreement, Metropolitan will adjust those
claims and share in redundancies in related reserves that may
develop. Any losses incurred by us under these agreements will
be reflected in discontinued operations in the period they are
incurred. In the first quarter of 2000, we recorded a pretax
loss of $5 million in discontinued operations as a result of
these agreements. We have no other contingent liabilities
related to the sale.
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 have been accounted for as
discontinued operations for all periods presented. Included in
our fourth quarter 1999 statement of income was an estimated
after tax loss on the sale of approximately $83 million, which
represented the estimated loss on disposal plus the estimated
results of operations through the disposal date.
Note 13 - Subsequent Events
- ----------------------------
Issuance of Debt
- ----------------
On Apr. 17, 2000, we issued $250 million of 7.875% senior notes
due in 2005 and $250 million of 8.125% senior notes due in 2010.
The proceeds will be used to repay commercial paper debt and for
general corporate purposes.
Purchase of MMI Companies, Inc.
- ------------------------------
On Apr. 18, 2000, we closed on our acquisition of MMI Companies,
Inc. (MMI), a Deerfield, Illinois health care risk services
company that provides integrated products and services in
strategic operational consulting, clinical risk management,
insurance and reinsurance in the U.S. and London markets, in a
transaction to be accounted for as a purchase. We paid cash of
approximately $192 million, and assumed debt and capital
securities totaling approximately $165 million.
MMI's results of operations for the first quarters of 2000 and
1999 were as follows. (These results are for periods prior to
our purchase of MMI and are not included in our consolidated
results).
Three Months
Ended March 31
---------------
(In millions) 2000 1999
----- -----
Revenues:
Net premiums earned $76 $81
Consulting fees 14 15
Other 17 19
----- -----
Total revenues 107 115
----- -----
Expenses:
Loss and loss adjustment expenses 153 62
Other 46 47
----- -----
Total expenses 199 109
----- -----
Income (loss) from continuing
operations before
income taxes $(92) $ 6
===== =====
Results in 2000 include a $93 million pretax provision to
strengthen loss and loss adjustment reserves, of which $77
million was recorded in MMI's domestic operations and $16 million
was recorded in their international operations.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 13 - Subsequent Events (continued)
- ---------------------------------------
Sale of Nonstandard Auto Business
- ---------------------------------
On May 1, 2000, we closed on the sale of our nonstandard auto
business to Prudential, receiving total cash consideration of
approximately $175 million (net of a $25 million dividend paid to
our property-liability operations prior to closing). In the
fourth quarter of 1999, we had recorded an estimated after-tax
loss on disposal of $83 million for our nonstandard auto
operation. Adjustments to the estimated loss, which will be
calculated based on our actual carrying value of these operations
on the closing date, will be recorded in discontinued operations
in the second quarter of 2000. These adjustments are not
expected to be material to our financial statements.
Share Repurchase Authorization
- ------------------------------
On May 2, 2000, our board of directors authorized a new $300
million share repurchase program. Under the program, we are
authorized to repurchase up to an additional $300 million of our
common stock in the open market and through private transactions.
The new authorization is in addition to the $77 million remaining
under a $500 million repurchase plan approved in November 1999.
Under that plan, we repurchased 16.4 million shares for a total
cost of $423 million.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
March 31, 2000
Consolidated Highlights
-----------------------
The following table summarizes our results for the first quarters
of 2000 and 1999.
Three Months Ended
March 31
------------------
(In millions, except per share data) 2000 1999
----- -----
Pretax income (loss):
Property-liability insurance:
GAAP underwriting result $ (99) $(110)
Net investment income 318 318
Realized investment gains 331 61
Other (32) (19)
----- -----
Total property-liability insurance 518 250
Life insurance 18 19
Asset management 33 29
Parent and other (31) (35)
----- -----
Income from continuing operations
before income taxes and cumulative
effect of accounting change 538 263
Income tax expense 176 66
----- -----
Income from continuing operations before
cumulative effect of accounting change 362 197
Cumulative effect of accounting
change, net of taxes - (30)
----- -----
Income from continuing operations 362 167
Discontinued operations, net of taxes (4) (2)
----- -----
Net income $ 358 $ 165
===== =====
Diluted net income per common share $1.51 $0.67
===== =====
Consolidated Results
- --------------------
Our pretax income from continuing operations of $538 million in
the first quarter of 2000 was more than double comparable 1999
pretax income of $263 million. The improvement was driven by a
$270 million increase in realized investment gains in our
property-liability insurance operations, the majority of which
were generated by our venture capital investment portfolio. In
addition, underwriting results were $11 million better than last
year's first quarter, reflecting improved loss experience in our
standard commercial operations, and a $61 million pretax benefit
from aggregate excess-of-loss reinsurance treaties (discussed in
more detail on page 24 of this report). Our first-quarter 2000
effective tax rate was significantly higher than the comparable
1999 rate, primarily due to the substantial increase in realized
investment gains, which are taxed at the 35% federal statutory
rate.
In the first quarter of 1999, our net income included a pretax
expense of $46 million ($30 million after-tax), representing the
cumulative effect of adopting the AICPA's Statement of Position
(SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments." The SOP provides guidance for
recognizing and measuring liabilities for guaranty fund and other
insurance-related assessments.
Elimination of One-Quarter Reporting Lag
- ----------------------------------------
In the first quarter of 2000, we eliminated the one-quarter
reporting lag for our reinsurance operations based in the United
Kingdom ("St. Paul Re - UK") and now report the results of those
operations on a current basis. As a result, our first quarter
2000 consolidated results include St. Paul Re - UK's results for
the fourth quarter of 1999, and the first quarter of 2000.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
The first - quarter incremental impact on our property-liability
operations of the eliminating the reporting lag, which consists
of St. Paul Re - UK's results for the three months ended March
31, 2000, was as follows:
Three
(In millions) Months Ended
----------- March 31, 2000
----------------
Written premiums $ 146
Earned premiums $ 53
GAAP underwriting result $ 2
Pretax income $17
Net income $10
Acquisition
- -----------
In February 2000, we closed on our purchase of Pacific Select
Insurance Holdings, Inc. (Pacific Select), a California company
that sells earthquake insurance coverages to California
homeowners. The acquisition was accounted for as a purchase at a
cost of approximately $37 million. Pacific Select's results of
operations from the date of purchase are included in the
Catastrophe Risk business center of our Commercial Lines Group
segment.
Discontinued Operations
- -----------------------
In 1999, we completed the sale of our standard personal insurance
operations to Metropolitan Property and Casualty Insurance
Company (Metropolitan). In January 2000, we announced a
definitive agreement to sell our nonstandard auto insurance
operations to Prudential Insurance Company of America
(Prudential), and that transaction closed in May 2000. The $4
million and $2 million losses from discontinued operations, net
of taxes, for the three months ended March 31, 2000 and 1999,
respectively, represent the combined results of these operations
for those periods.
Metropolitan purchased Economy Fire & Casualty Company and
subsidiaries (Economy), and the rights and interests in those non-
Economy policies constituting our remaining standard personal
insurance operations. Those rights and interests were
transferred to Metropolitan by way of a reinsurance and facility
agreement. We guaranteed the adequacy of Economy's loss and loss
expense reserves, and we remain liable for claims on non-Economy
policies that result from losses occurring prior to the Sept. 30,
1999 closing date. Under the reserve guarantee, we will pay for
any deficiencies in those reserves and will share in any
redundancies that develop by Sept. 30, 2002. Any losses incurred
by us under these agreements are reflected in discontinued
operations in the period during which they are incurred. In the
first quarter of 2000, we recorded a pretax loss of $5 million in
discontinued operations as a result of these agreements.
Common Share Repurchases
- ------------------------
In the first quarter of 2000, we repurchased and retired 13.6
million of our common shares for a total cost of $331 million, or
an average of $24.43 per share. The shares repurchased in the
first quarter represented approximately 6% of our total shares
outstanding at the beginning of the year.
Subsequent Events - Acquisition and Disposition
- -----------------------------------------------
On April 18, 2000, we completed our acquisition of MMI Companies,
Inc. (MMI), an international health care risk services company
that provides integrated products and services in operational
consulting, clinical risk management, and insurance and
reinsurance in the U.S. and London markets. In 1999, MMI
reported net earned premiums and fees of $436 million. The
acquisition was accounted for as a purchase for approximately
$192 million in cash and the assumption of $165 million of MMI
debt and capital securities. The results of MMI will be included
in our second quarter results and will be reported in our Global
Healthcare segment.
On May 1, 2000, we completed the sale of our nonstandard auto
operations to Prudential for a total cash consideration of
approximately $175 million (net of a $25 million dividend paid by
these operations to our property-liability insurance operations
prior to closing). Prudential purchased the nonstandard auto
business marketed under the Victoria Financial and Titan Auto
brands. The sale furthers our strategy of focusing on our
standard commercial and specialty commercial insurance
operations.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
Global Specialty Reporting Structure
- ------------------------------------
In the first quarter of 2000, we implemented a new segment
reporting structure for our property-liability insurance business
following the fourth-quarter 1999 realignment of our primary
insurance underwriting operations into a Global Specialty
Practices organization. The most significant change from our
previous format involves the inclusion of non-U.S. primary
business in the respective business segment to which it pertains,
which differs from our prior practice of including all non-U.S.
business in the International segment. In addition, our
Construction business center was moved from the Commercial Lines
Group segment to the Other Global Specialty segment, and our
Global Healthcare operation is now reported as a separate
business segment. Our new reporting format is more closely
aligned with the global management of the majority of our
specialty insurance products and services. Our International
segment includes our operations at Lloyd's, and specialty
insurance business that we do not manage on a global basis. All
prior year data is presented on a basis consistent with our new
reporting structure.
Property-Liability Insurance
----------------------------
Overview
- --------
First-quarter 2000 consolidated written premiums of $1.40 billion
were 12% higher than comparable 1999 premiums of $1.25 billion.
The increase was almost entirely due to the elimination of the
one-quarter reporting lag for St. Paul Re - UK. The elimination
of that lag had the effect of adding $146 million of incremental
written premium volume in the quarter.
Our first-quarter premium volume was also impacted by cessions
made under our corporate all-lines, excess-of-loss reinsurance
program (the "corporate program"), and cessions made under a
separate aggregate excess-of-loss treaty exclusive to our
Reinsurance segment (together, the "reinsurance cessions").
Under the corporate program, which is triggered when our
insurance losses and loss adjustment expenses reach a prescribed
level, we ceded written premiums of $80 million, earned premiums
of $65 million and insurance losses and loss adjustment expenses
of $111 million, which resulted in a net pretax benefit of $46
million to our income from continuing operations. The amounts
ceded were allocated to our International and Reinsurance
segments. The losses and loss adjustment expenses ceded and $60
million of the earned premiums under the corporate program in the
first quarter of 2000 were the result of adverse development on
losses originally incurred during the 1999 accident year.
Under the separate Reinsurance segment treaty, we ceded written
and earned premiums of $17 million, and insurance losses and loss
adjustment expenses of $32 million for a net pretax benefit of
$15 million to income from continuing operations. The combined
impact of these cessions on our property-liability underwriting
segments for the first quarter of 2000 was as follows:
Ceded Ceded
(In millions) written Ceded earned Pretax
----------- premiums losses premiums benefit
-------- ------ -------- -------
Reinsurance $ 74 $ 110 $ 62 $ 48
International 23 33 20 13
---- ---- ---- ----
Total $ 97 $ 143 $ 82 $ 61
==== ==== ==== ====
Excluding the impacts of eliminating the quarter reporting lag
and the premium cessions, our consolidated written premiums
totaled $1.35 billion in the first quarter of 2000, 8% higher
than first-quarter 1999 premiums of $1.25 billion. The increase
was centered in our Reinsurance and Global Surety segments,
primarily as the result of new business in both operations.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Our consolidated loss ratio, which measures insurance losses and
loss adjustment expenses as a percentage of earned premiums, was
75.8 for the first quarter of 2000, slightly worse than the loss
ratio of 75.5 in the same 1999 period. The 2000 ratio reflects a
6.5 point net favorable impact from the reinsurance cessions and
the elimination of the St. Paul Re - UK reporting lag. Excluding
that benefit, our first-quarter 2000 consolidated combined ratio
was 82.3. The deterioration from 1999 was centered in our
Reinsurance segment, primarily the result of adverse development
on losses incurred in prior years, including catastrophe losses.
On a consolidated basis, we incurred $56 million of pretax
catastrophe losses in the first quarter of 2000, of which $47
million was recorded in the Reinsurance segment. The majority of
catastrophe losses in 2000 resulted from additional loss
development on catastrophes occurring in prior years. Our total
catastrophe losses in the first quarter of 1999 were $34 million.
Our primary underwriting operations, however, which exclude the
Reinsurance segment, achieved strong improvement in profitability
over the first quarter of 1999, reflecting the favorable impact
of our aggressive efforts over the last 18 months to improve the
quality and profitability of our book of business. Those efforts
focused on eliminating unprofitable business, implementing price
increases on new and renewal business, and reducing expenses.
During the first quarter of 2000, the pricing environment showed
notable improvement throughout the standard commercial insurance
market and in most specialty insurance markets in which we sell
our products and services. We expect to achieve additional price
increases during the remainder of 2000. In addition, we
experienced significant improvement in current underwriting year
results in the majority of our primary insurance operations,
reflecting our success to date in improving the quality of our
book of business.
Our consolidated expense ratio, measuring underwriting expenses
as a percentage of written premiums, was 31.8 for the first
quarter of 2000, compared with the 1999 first-quarter ratio of
34.2. Excluding the impact of the reinsurance cessions and the
elimination of St. Paul Re - UK's reporting lag, the first-
quarter 2000 ratio of 30.0 was over four points lower than the
1999 ratio. The improvement reflects efficiencies realized as a
result of the expense reduction initiatives implemented over the
last 18 months.
The table on the following page summarizes key financial results
(from continuing operations) by property-liability underwriting
business segment (Underwriting results are presented on a GAAP
basis; combined ratios are presented on a statutory accounting
basis).
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Three Months
% of 2000 Ended March 31
Written ---------------
(Dollars in millions) Premiums 2000 1999
------------------- --------- ----- -----
Commercial Lines Group:
Written Premiums 28% $392 $398
Underwriting Result $(22) $(85)
Combined Ratio 106.5 119.6
Global Surety:
Written Premiums 9% $123 $105
Underwriting Result $19 $16
Combined Ratio 80.1 78.4
Global Healthcare:
Written Premiums 8% $113 $136
Underwriting Result $(19) $(28)
Combined Ratio 115.4 120.0
Other Global Specialty:
Written Premiums 24% $335 $333
Underwriting Result $(24) $(25)
Combined Ratio 106.9 108.1
International:
Written Premiums 3% $47 $53
Underwriting Result $(9) $(11)
Combined Ratio 124.5 120.7
--- ----- -----
Total Primary Insurance:
Written Premiums 72% $1,010 $1,025
Underwriting Result $(55) $(133)
Combined Ratio 106.0 113.1
Reinsurance:
Written Premiums 28% $390 $229
Underwriting Result $(44) $23
Combined Ratio 114.2 94.1
--- ----- -----
Total Property-Liability Insurance:
Written Premiums 100% $1,400 $1,254
GAAP Underwriting Result === $(99) $(110)
Statutory Combined Ratio:
Loss and Loss Expense Ratio 75.8 75.5
Underwriting Expense Ratio 31.8 34.2
----- -----
Combined Ratio 107.6 109.7
===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Underwriting Results by Segment
- -------------------------------
COMMERCIAL LINES GROUP
The Commercial Lines Group segment includes our standard
commercial and catastrophe risk business centers, as well as the
results of our limited involvement in insurance pools. Premium
volume of $392 million in the first quarter of 2000 for this
segment declined 2% from comparable 1999 volume of $398 million.
In our standard commercial business center, which encompasses the
small to midsize commercial market, written premiums of $358
million in the first quarter were 6% below the 1999 first-quarter
total of $380 million. The decline reflects the impact of our
continuing efforts to improve the quality of our standard
commercial operations through the nonrenewal of unprofitable
business. This reduction in volume was partially offset by price
increases averaging 7.1% in the quarter on new and renewal
business. Premium volume in our catastrophe risk business center
totaled $33 million in the first quarter of 2000, $21 million
higher than the same period of 1999. The increase reflects our
acquisition in February 2000 of Pacific Select, which increased
our earthquake risk underwriting capabilities in California and
accounted for $19 million of incremental premium volume in the
quarter.
The first-quarter 2000 underwriting loss of $22 million in the
Commercial Lines Group was much improved over the $85 million
loss recorded in the same period of 1999, evidence of the impact
of our profit improvement initiatives over the last 18 months.
The loss ratio in this segment was over twelve points lower than
last year's first-quarter loss ratio, reflecting significant
improvements in current accident year results, particularly in
our standard commercial business center. Our expense management
efforts continue to favorably impact results in the Commercial
Lines Group segment. The expense ratio of 34.2 in this segment
was 0.7 points better than the comparable 1999 ratio. We expect
further price increases during the remainder of 2000.
GLOBAL SURETY
Our Global Surety segment underwrites surety bonds, which
guarantee that third parties will be indemnified against the
nonperformance of contractual obligations. Written premiums of
$123 million in the first quarter of 2000 were 17% higher than
comparable 1999 premium volume of $105 million, primarily due to
the continuing strong economies in both the United States and
Mexico which have fueled demand for surety-related products.
This segment's underwriting profit of $19 million in the first
quarter of 2000 reflected the benefits of premium growth and a
decline in fixed expenses, which more than offset an increase in
incurred losses.
GLOBAL HEALTHCARE
Our Global Healthcare segment (formerly Medical Services)
provides property-liability insurance throughout the entire
health care delivery system. This segment recorded written
premiums of $113 million in the first quarter of 2000, down 17%
from premiums of $136 million in the same 1999 period. The 1999
total included a $37 million premium recorded on one three-year
policy. Excluding that premium from the 1999 total, our first-
quarter 2000 written premiums in this segment grew 14% over 1999.
The increase resulted from price increases averaging 3.6% across
the segment, growth in new business and increase in business
retention levels. In the Medical Professional liability sector,
price increases averaged 5.2% in the first quarter.
The first-quarter underwriting loss of $19 million was $9 million
less than last year's first quarter loss of $28 million, due to
favorable development on losses incurred in prior years, and a
decline in underwriting expenses. Beginning in the second
quarter, the results of MMI Companies, Inc. (MMI), acquired in
April 2000, will be reported in this segment. The addition of
MMI, which will be integrated into our existing operations, is
expected to create the largest globally integrated provider of
risk management services to the healthcare industry.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
OTHER GLOBAL SPECIALTY
The Other Global Specialty segment includes the following
business centers: Construction, Technology, Ocean Marine,
Financial and Professional Services, Public Sector Services, and
Excess and Surplus Lines. Total written premiums in this segment
of $335 million for the first quarter of 2000 were virtually
level with the same period of 1999. Construction written
premiums of $108 million were level with 1999, reflecting the
combined impact of corrective measures to reduce the amount of
unprofitable business and increased prices on new and renewal
business. Premium volume of $62 million in the Technology
business center grew 22% over the same period of 1999, due to
growth in new business, strong retention rates, and price
increases averaging 6.3% for the quarter. In our Financial and
Professional Services operation, premium volume of $72 million
grew 6% over the first quarter of 1999, primarily due to an
increase in international business.
The first-quarter 2000 underwriting loss of $24 million in the
Other Global Specialty segment was virtually level with the first
quarter of 1999. Construction results improved markedly over the
first quarter of 1999, primarily due to favorable development on
losses incurred in prior years, particularly in the general
liability sector, and a reduction in large losses. Technology
results were slightly worse than last year, but this operation
remained profitable in the first quarter. Ocean Marine posted a
breakeven underwriting result in the first quarter, a significant
improvement over the underwriting loss of $17 million in the same
1999 period, due to favorable prior year loss development.
Financial and Professional Services' $8 million underwriting loss
in the first quarter was $18 million worse than the comparable
first-quarter 1999 profit of $10 million, largely due to
significant losses incurred on international business.
INTERNATIONAL
Under our new Global Specialty reporting structure, our
International segment now consists of our operations at Lloyd's,
and specialty business that is not managed on a global basis.
First-quarter 2000 written premium volume of $47 million was 10%
below the comparable 1999 total of $53 million. Excluding the
impact of premiums ceded under our corporate reinsurance program,
however, written premiums in the first quarter totaled $70
million, an increase of 32% over 1999. The growth in 2000
occurred throughout this segment but was centered in our Lloyd's
operation, where we underwrite specialty coverages through our
investment in several underwriting syndicates. International's
underwriting loss of $9 million in the first quarter of 2000
included a $13 million benefit from our corporate reinsurance
program. Excluding that benefit, the underwriting loss of $22
million was $11 million worse than the 1999 first-quarter loss,
primarily due to poor results in one syndicate at Lloyd's, and
additional loss development on a commuter rail accident which
occurred in the United Kingdom in 1999.
REINSURANCE
The St. Paul's Reinsurance segment underwrites treaty and
facultative reinsurance for property, liability, ocean marine,
surety and certain specialty classes of business, and provides
products and services to the alternative risk transfer market.
Reported written premium volume of $390 million for the first
quarter of 2000 includes the $146 million of incremental premiums
resulting from the elimination of the one quarter lag in
reporting the results of our reinsurance operations based in the
United Kingdom. Excluding that adjustment, and the $74 million
reduction in written premiums resulting from the reinsurance
cessions, premium volume in the Reinsurance segment totaled $318
million, 39% higher than 1999 first-quarter premiums of $229
million. An increase in "non-traditional" reinsurance business,
which combines traditional underwriting risk with financial risk
protection, and growth in North American casualty business
accounted for the significant increase in premiums over 1999.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
The first quarter underwriting loss of $44 million included a $48
million benefit from our corporate reinsurance program and the
separate reinsurance treaty exclusive to this segment. Excluding
that benefit, and the $2 million underwriting profit recorded as
a result of eliminating the one quarter reporting lag, the
underwriting loss of $94 million in the first quarter was
significantly worse than last year's first quarter underwriting
profit of $23 million. The deterioration was driven by
catastrophe losses of $47 million in the 2000 period, the
majority of which represented additional loss development from
severe windstorms that struck Europe in late 1999. In addition,
the Reinsurance segment experienced adverse loss development on
casualty business written in 1997 and prior years.
Investment Operations
- ---------------------
First-quarter 2000 pretax net investment income in our property-
liability insurance operations totaled $318 million, level with
the same period of 1999. Excluding the impact of the adjustment
to record the results of our U.K.-based reinsurance operations on
a current basis, however, pretax investment income in the first
quarter of 2000 was $10 million below the first quarter of 1999.
The sale of our standard personal insurance operations in
September 1999 resulted in the transfer of approximately $325
million of invested assets to Metropolitan, contributing to the
decline in investment income compared with the first quarter of
1999. In addition, negative underwriting cash flows over the
last several quarters have resulted in the net sale of fixed
maturity investments to fund operational cash flow requirements.
We expect our cash flows to grow throughout the remainder of 2000
due to the impact of continuing price increases and improving
loss experience.
Pretax realized investment gains in our property-liability
insurance operations of $331 million were the highest quarterly
total in our history and more than five times higher than gains
of $61 million in the same period of 1999. The record first-
quarter total was driven by gains of $282 million generated by
our venture capital investment portfolio. The largest single
gain, $117 million, resulted from the sale of our investment in
Flycast Communications Corp., a leading provider of Internet
direct response solutions. We also sold two other direct
holdings which generated gains of $37 million and $31 million,
and our investments in various venture capital partnerships
accounted for an additional $98 million of pretax gains. Sale of
equity investments resulted in an additional $61 million of
pretax gains in the first quarter of 2000.
The market value of our $15.4 billion fixed maturities portfolio
was virtually level with its cost on March 31, 2000.
Approximately 95% of that portfolio is rated at investment grade
(BBB or above). The weighted average pretax yield on those
investments was 6.8% at March 31, 2000, unchanged from the same
time a year ago. Our acquisition of MMI Companies, Inc. in April
2000 added approximately $1 billion of fixed maturity investments
to our portfolio.
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.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Environmental and Asbestos Claims (continued)
--------------------------------------------
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 the ultimate liability for asbestos claims is equally
difficult. The primary factors influencing our estimate of the
total cost of these claims are case law and a history of prior
claim development, both of which continue to evolve.
The following table represents a reconciliation of total gross
and net environmental reserve development for the three months
ended March 31, 2000, and the years ended Dec. 31, 1999 and 1998.
Amounts in the "net" column are reduced by reinsurance
recoverables.
2000
Environmental (three months) 1999 1998
- ------------- ------------ ----------- -----------
(In millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $698 $599 $783 $645 $867 $677
Incurred losses 18 13 (33) 1 (16) 26
Paid losses (17) (14) (52) (47) (68) (58)
---- ---- ---- ---- ---- ----
Ending reserves $699 $598 $698 $599 $783 $645
==== ==== ==== ==== ==== ====
The following table represents a reconciliation of total gross
and net reserve development for asbestos claims for the three
months ended March 31, 2000, and the years ended Dec. 31, 1999
and 1998.
2000
Asbestos (three months) 1999 1998
- -------- ------------ ----------- -----------
(In millions) Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Beginning reserves $398 $298 $402 $277 $397 $279
Incurred losses 16 20 28 51 44 13
Paid losses (14) (11) (32) (30) (39) (15)
---- ---- ---- ---- ---- ----
Ending reserves $400 $307 $398 $298 $402 $277
==== ==== ==== ==== ==== ====
Our reserves for environmental and asbestos losses at March 31,
2000 represent our best estimate of our ultimate liability for
such losses, based on all information currently available.
Because of the inherent difficulty in estimating such losses,
however, we cannot give assurances that our ultimate liability
for environmental and asbestos losses will, in fact, match
current reserves. We continue to evaluate new information and
developing loss patterns, but we believe any future additional
loss provisions for environmental and asbestos claims will not
materially impact our results of operations, liquidity or
financial position.
Total gross environmental and asbestos reserves at March 31,
2000, of $1.10 billion represented approximately 6% of gross
consolidated reserves of $17.77 billion.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Life Insurance
--------------
The St. Paul's life insurance segment consists of Fidelity and
Guaranty Life Insurance Company and subsidiaries ("F&G Life").
F&G Life's primary products are deferred annuities (including tax-
sheltered annuities and equity indexed annuities), structured
settlement annuities and immediate annuities. F&G Life also
underwrites traditional life and universal life insurance
products.
Highlights of F&G Life's financial performance for the first
quarters of 2000 and 1999 were as follows:
Three Months
Ended March 31
--------------
(In millions) 2000 1999
---- ----
Sales (premiums and deposits) $227 $304
Premiums and policy charges $32 $27
Policy surrenders $90 $48
Net investment income $85 $72
Pretax earnings $18 $19
Life insurance in force $13,535 $10,818
F&G Life's pretax earnings of $18 million in the first quarter of
2000 benefited from growth in assets under management, driven by
continued strong product sales and positive operating cash flows,
offset by product development and distribution channel expansion
expenses, and an increase in mortality costs. Pretax earnings in
2000 also include $0.7 million of interest expense on an
intercompany note payable to The St. Paul's property-liability
operations that was entered into in the fourth quarter of 1999.
Excluding realized gains and losses in both years and the
intercompany interest expense in 2000, pretax earnings of $20
million were slightly higher than comparable 1999 earnings.
After-tax earnings on a similar basis also improved slightly over
the first quarter of 1999, reflecting the impact of F&G Life's
strategy to allocate 1% of its investment portfolio to tax-
favored securities. These investments, while typically
contributing little or no operating earnings, generated tax
credits that lowered F&G Life's effective tax rate from 30% in
the first quarter of 1999 to 25% in the same period of 2000.
Sales volume declined 25% in the first quarter of 2000 compared
with the same 1999 period, primarily due to lower equity-indexed
annuity (EIA) sales, which was partially offset by an increase in
fixed interest rate annuity sales. Credited interest rates on
the EIA products are tied to the performance of a leading market
index. Fluctuations in equity markets during the first three
months of 2000 contributed to a decline in EIA sales during the
quarter. In addition, sales of these products were unusually
high in the first quarter of 1999 due to the continued popularity
of F&G Life's first-generation portfolio of EIA products that had
been introduced in mid - 1998. Sales of fixed interest rate
annuities in the first quarter of 2000 continued their momentum
from late 1999, as the overall level of market interest rates
have continued to increase. The demand for annuity products is
affected by fluctuating interest rates and the relative
attractiveness of alternative investments, particularly equity-
based products. Traditional life insurance sales in the first
quarter of 2000 were nearly four times higher than the same
period of 1999, reflecting the continued success of a new term
life product line launched in 1999 targeted at the mortgage
protection market.
F&G Life hedges its exposure on its EIA products by purchasing
options with terms similar to the market index component to
provide the same return as F&G Life guarantees to the annuity
contract holder, subject to minimums guaranteed in the annuity
contract. At March 31, 2000, F&G Life held options with a
notional amount of $1.01 billion and a market value of $51
million.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Life Insurance (continued)
-------------------------
Premiums and policy charges increased 18% over the first quarter
of 1999, primarily the result of growth in the sale of life-
contingent single premium immediate annuities (SPIA) and term
life insurance policies. The growth in SPIA sales resulted from
an increase in marketing emphasis on this product. Policy
charges from surrenders on tax sheltered annuities also
contributed to the overall increase in premiums and policy
charges.
Sales of structured settlement annuities, annuities with life
contingencies and term life insurance are recognized as premiums
earned under GAAP. However, sales of investment-type contracts,
such as equity-indexed, deferred and tax sheltered annuities and
universal life-type contracts are recorded directly on the
balance sheet and are not recognized as premium revenue under
GAAP.
Deferred annuities and universal life products are subject to
surrender by policyholders. Nearly all of F&G Life's
surrenderable annuity policies allow a refund of the cash value
balance less a surrender charge. Several different products
contributed to the increase in surrender activity in the first
quarter of 2000. Surrenders on tax-sheltered annuities increased
due to F&G Life's transition from one exclusive distribution
partner to a new network of approximately 15 distributors. EIA
surrenders have increased naturally as a result of the
significant growth in the size of the EIA book of business. F&G
Life has written over $1 billion in EIA business since the
products were introduced in mid - 1998. Surrender activity in
2000 also reflects an internal policy change this year, whereby
the replacement of an existing F&G Life policy with another F&G
Life policy is now reported as a surrender.
Net investment income grew 18% in 2000 as a result of an
increasing asset base generated by positive cash flow. The 25%
increase in life insurance in force over the same time a year ago
reflects the sales of the new term life product line introduced
in mid - 1999.
Asset Management
----------------
Our asset management segment consists of our 78% majority
ownership interest in The John Nuveen Company (Nuveen).
Highlights of Nuveen's performance for the first quarters of 2000
and 1999 were as follows:
Three Months
Ended March 31
--------------
(In millions) 2000 1999
----------- ---- ----
Revenues $100 $83
Expenses 57 45
---- ----
Pretax earnings 43 38
Minority interest (10) (9)
---- ----
The St. Paul's
share of pretax earnings $ 33 $ 29
==== ====
Assets under management $59,965 $57,315
====== ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Asset Management (continued)
---------------------------
The increase in Nuveen's revenues over the first quarter of 1999
reflected growth in the sale of investment products and an
increase in asset management fees earned. Sales of equity-based
investment products accounted for 80% of total gross sales of
$3.2 billion in the first quarter, compared with 60% of total
sales in the same period of 1999. The increase in expenses over
1999 corresponds to the increase in business volume, and an
increase in advertising and promotional expenses associated with
strategic efforts to promote the Nuveen brand.
Managed assets at the end of the first quarter consisted of $27.3
billion of exchange-traded funds, $20.7 billion of managed
accounts, $11.4 billion of mutual funds and $563 million of money
market funds. Including defined portfolios, Nuveen managed or
oversaw more than $71 billion in assets at March 31, 2000.
Capital Resources
-----------------
Common shareholders' equity grew to $6.56 billion at March 31,
2000, an increase of $115 million over the year-end 1999 total of
$6.45 billion. Net income of $358 million and a $124 million
increase in the after-tax appreciation of our equity and venture
capital investments in the first quarter of 2000 were
substantially offset by significant common share repurchases. In
the first three months of 2000, we repurchased and retired 13.6
million shares of our common stock for a total cost of $331
million, or an average of $24.43 per share. The first - quarter
repurchases were financed through a combination of internally-
generated funds and commercial paper borrowings. Since November
1998, we have repurchased and retired 28.5 million of our common
shares for a total cost of $823 million, or an average of $28.87
per share.
Total debt outstanding at March 31, 2000 of $1.52 billion
increased by $50 million over the year-end 1999 total of $1.47
billion, largely due to the issuance of $94 million of additional
commercial paper during the quarter to finance a portion of our
common share repurchases. In February 2000, we repaid $46
million of floating rate notes that had been issued by a special
purpose offshore entity that provided reinsurance to one of our
subsidiaries. Approximately 41% of our consolidated debt
outstanding at March 31, 2000 consisted of medium-term notes
bearing a weighted-average interest rate of 6.9%. Our ratio of
total debt to total capitalization of 18% at the end of the first
quarter was unchanged from year-end 1999.
In April 2000, we issued $500 million of senior debt, the
proceeds of which will be used to repay commercial paper debt and
for general corporate purposes. Of the debt issued, $250 million
is due in April 2005 and bears an interest rate of 7.875%, and
$250 million is due in April 2010 and bears an interest rate of
8.125%.
The company anticipates that any major capital expenditures
during the remainder of 2000 would involve acquisitions of
existing businesses and further repurchases of its common stock.
At March 31, 2000, we had approximately $77 million of capacity
to repurchase additional common shares under the $500 million
repurchase program authorized by our board of directors in
November 1999. In May 2000, our board of directors approved an
additional $300 million authorization to repurchase our common
shares. We repurchase our shares in the open market and through
private transactions when we deem such repurchases to be a
prudent use of capital. We have no major capital improvements
planned for the remainder of 2000.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Capital Resources (continued)
----------------------------
The company's ratio of earnings to fixed charges was 14.58 for
the first three months of 2000, compared with 8.02 for the same
period of 1999. The company's ratio of earnings to combined
fixed charges and preferred stock dividend requirements was 13.30
for the first three months of 2000, compared with 7.22 for the
same period of 1999. Fixed charges consist of interest expense,
dividends on preferred capital securities and that portion of
rental expense deemed to be representative of an interest factor.
Liquidity
---------
Liquidity is a measure of our ability to generate
sufficient cash flows to meet the short- and long-term cash
requirements of our business operations. Net cash flows used by
continuing operations totaled $208 million in the first quarter of
2000, compared with cash provided from continuing operations of $73
million in the same period of 1999. The deterioration in 2000 was
primarily due to significant loss payments in our Reinsurance
segment, and premiums paid related to our corporate reinsurance
program. We expect our operational cash flows to improve during
the remainder of 2000 as the full impacts of continuing price
increases and improvements in the quality of our book of business
are realized. On a long-term basis, we believe our operational
cash flows will benefit from the corrective pricing and
underwriting actions under way in our property-liability
operations. Our financial strength and conservative level of
debt provide us with the flexibility and capacity to obtain funds
externally through debt or equity financings on both a short-term
and long-term basis should the need arise.
Year 2000 Readiness Disclosure
------------------------------
The "Year 2000" issue refers to computer programming limitations
that had the potential to cause information technology systems to
incorrectly process certain dates and date-related information,
including the incorrect interpretation of the two-digit year code
of "00" as the year 1900, instead of the year 2000, at the turn
of the century.
Status of Operations
- --------------------
As originally planned, our specific monitoring for Year 2000
disruptions continued through March 31, 2000. No significant
disruptions were experienced. Our transition to the Year 2000
has been notably uneventful and successful, and we view it as
complete.
Through March 31, 2000, the cost of our Year 2000 remediation
measures incurred, including costs incurred by USF&G prior to the
April 1998 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
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Year 2000 Readiness Disclosure (continued)
-----------------------------------------
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-related claims in general, in some instances, coverage
is not provided under the insurance policies or reinsurance
policies, while in other instances, coverage may be provided
under certain circumstances.
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 do not believe that Year 2000-related insurance or reinsurance
coverage claims will have a material adverse effect on our
earnings, cash flows or financial position. However, the
uncertainties of litigation are such that unexpected policy
interpretations could compel claim payments substantially beyond
our coverage intentions, possibly resulting in a material adverse
effect on our results of operations and/or cash flows and a
material adverse effect on our consolidated financial position.
Impact of Accounting Pronouncements to be Adopted in the Future
- ---------------------------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet,
and measure those instruments at fair value. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." 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 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.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Forward-looking Statement Disclosure
------------------------------------
This report contains certain forward-looking statements within
the meaning of the Private Litigation Reform Act of 1995.
Forward-looking statements are statements other than historical
information or statements of current condition. Words such as
expects, anticipates, intends, plans, believes, seeks or
estimates, or variations of such words, and similar expressions
are also intended to identify forward-looking statements.
Examples of these forward-looking statements include statements
concerning: market and other conditions and their effect on
future premiums, revenues, earnings, cash flow and investment
income; price increases, and expense savings resulting from the
restructuring actions announced in 1998 and 1999.
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
integration of MMI Companies, Inc.; and various other matters.
Actual results and experience relating to Year 2000 issues could
differ materially from anticipated results or other expectations
as a result of a variety of risks and uncertainties, including
unanticipated judicial interpretations of the scope of the
insurance or reinsurance coverage provided by our policies. We
undertake no obligation to release publicly the results of any
future revisions we may make to forward-looking statements to
reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 5 to the
consolidated financial statements is incorporated
herein by reference.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The St. Paul's annual shareholders' meeting was held on
May 2, 2000.
(1) All fourteen persons nominated for directors by the
board of directors were named in proxies for the
meeting which were solicited pursuant to Regulation
14A of the Securities Exchange Act of 1934. There
was no solicitation in opposition to management's
nominees as listed in the proxy statements. All
fourteen nominees were elected by the following
votes:
In favor Withheld
----------- -----------
H. Furlong Baldwin 180,264,852 2,098,548
John H. Dasburg 164,746,000 17,617,400
W. John Driscoll 180,307,456 2,055,944
Kenneth M. Duberstein 180,330,698 2,032,702
Pierson M. Grieve 180,284,112 2,079,288
James E. Gustafson 180,378,749 1,984,651
Thomas R. Hodgson 180,462,076 1,901,324
David G. John 180,461,501 1,901,899
William H. Kling 180,356,124 2,007,276
Douglas W. Leatherdale 155,618,085 26,745,315
Bruce K. MacLaury 180,390,333 1,973,067
Glen D. Nelson 180,413,192 1,950,208
Anita M. Pampusch 180,412,749 1,950,651
Gordon M. Sprenger 180,401,902 1,961,498
(2) By a vote of 180,957,141 in favor, 640,523 against
and 765,736 abstaining, the shareholders ratified
the selection of KPMG LLP as the independent
auditors for The St. Paul.
(3) By a vote of 156,367,729 in favor, 24,582,607
against and 1,413,064 abstaining, the shareholders
approved an amendment to The St. Paul's Amended and
Restated 1994 Stock Incentive Plan.
Item 5. Other Information.
Not applicable.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth as the
last page in this document.
(b) Reports on Form 8-K.
1) The St. Paul filed a Form 8-K Current
Report dated January 27, 2000, relating to the
announcement of its financial results for the
year ended Dec. 31, 1999.
2) The St. Paul filed a Form 8-K Current
Report dated April 12, 2000, relating to its
issuance of $500 million of Senior Notes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
(Registrant)
Date: May 15, 2000 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Senior Vice President -
Legal Services
(Authorized Signatory)
Date: May 15, 2000 By /s/ Thomas A. Bradley
---------------------
Thomas A. Bradley
Senior Vice President - Finance
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
- -------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession*................................
(3) (i) Articles of incorporation*...............................
(ii) By-laws*................................................
(4) Instruments defining the rights of security holders,
including indentures*.....................................
(10) Material contracts*..........................................
(11) Statement re computation of per share earnings**.............(1)
(12) Statement re computation of ratios**.........................(1)
(15) Letter re unaudited interim financial information*...........
(18) Letter re change in accounting principles*...................
(19) Report furnished to security holders*........................
(22) Published report regarding matters submitted to
vote of security holders*.................................
(23) Consents of experts and counsel*.............................
(24) Power of attorney*...........................................
(27) Financial data schedule**....................................(1)
(99) Additional exhibits*.........................................
* These items are not applicable.
** This exhibit is included only with the copies of this
report that are filed with the Securities and Exchange
Commission. However, a copy of the exhibit may be obtained
from the Registrant for a reasonable fee by writing to The
St. Paul Companies, Inc., 385 Washington Street, Saint
Paul, MN 55102, Attention: Corporate Secretary.
(1) Filed herewith.
<PAGE>
Exhibit 11
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
Three Months Ended
March 31
------------------
2000 1999
----- -----
(In millions,
except for per share data)
EARNINGS
Basic:
Net income, as reported $358 $165
Dividends on preferred stock, net of taxes (2) (2)
Premium on preferred shares redeemed (4) (1)
----- -----
Net income available to common shareholders $352 $162
===== =====
Diluted:
Net income available to common shareholders $352 $162
Effect of dilutive securities:
Convertible preferred stock 2 2
Convertible monthly income preferred securities 2 2
Zero coupon convertible notes 1 1
----- -----
Net income available to common shareholders $357 $167
===== =====
COMMON SHARES
Basic:
Weighted average common shares outstanding 220 230
===== =====
Diluted:
Weighted average common shares outstanding 220 230
Effect of dilutive securities:
Stock options 1 2
Convertible preferred stock 7 7
Convertible monthly income preferred securities 7 7
Zero coupon convertible notes 2 3
----- -----
Total 237 249
===== =====
EARNINGS PER COMMON SHARE
Basic $1.60 $0.70
===== =====
Diluted $1.51 $0.67
===== =====
<PAGE>
Exhibit 12
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Ratios
Three Months Ended
March 31
------------------
2000 1999
----- -----
(In millions, except ratios)
EARNINGS:
Income from continuing operations
before income taxes and cumulative
effect of accounting change $538 $263
Add: fixed charges 40 37
----- -----
Income, as adjusted $578 $300
===== =====
FIXED CHARGES AND PREFERRED DIVIDENDS:
Interest expense and amortization $26 $22
Dividends on preferred capital securities 8 9
Rental expense (1) 6 6
----- -----
Total fixed charges $40 $37
Preferred stock dividend requirements 3 4
----- -----
Total fixed charges and
preferred stock dividend requirements $43 $41
===== =====
Ratio of earnings to fixed charges 14.58 8.02
===== =====
Ratio of earnings to combined fixed
charges and preferred stock
dividend requirements 13.30 7.22
===== =====
(1) Interest portion deemed implicit in total rent expense.
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