-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B2cAbLUiSVnSEA5NT2By6bN1oKGIA7g1KLfXSwZtZGCxem9kx8dGqBgyugiHNYs6 /KMTDVhrN7Ns1Ej5IoGZXw== /in/edgar/work/20000814/0000086312-00-000020/0000086312-00-000020.txt : 20000921 0000086312-00-000020.hdr.sgml : 20000921 ACCESSION NUMBER: 0000086312-00-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST PAUL COMPANIES INC /MN/ CENTRAL INDEX KEY: 0000086312 STANDARD INDUSTRIAL CLASSIFICATION: [6331 ] IRS NUMBER: 410518860 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10898 FILM NUMBER: 699392 BUSINESS ADDRESS: STREET 1: 385 WASHINGTON ST CITY: SAINT PAUL STATE: MN ZIP: 55102 BUSINESS PHONE: 6123107911 FORMER COMPANY: FORMER CONFORMED NAME: ST PAUL COMPANIES INC /MN/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SAINT PAUL COMPANIES INC DATE OF NAME CHANGE: 19900730 10-Q 1 0001.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF --- THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 ------------- or --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- --------- Commission File Number 0-3021 ------ THE ST. PAUL COMPANIES, INC. --------------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 ----------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 385 Washington St., Saint Paul, MN 55102 ---------------------------------- -------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (651) 310-7911 ------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of the Registrant's Common Stock, without par value, outstanding at August 9, 2000, was 216,345,254. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION ------- Consolidated Statements of Operations (Unaudited), Three Months and Six Months Ended June 30, 2000 and 1999 3 Consolidated Balance Sheets, June 30, 2000 (Unaudited) and December 31, 1999 4 Consolidated Statements of Shareholders' Equity, Six Months Ended June 30, 2000 (Unaudited) and Twelve Months Ended December 31, 1999 6 Consolidated Statements of Comprehensive Income (Unaudited), Six Months Ended June 30, 2000 and 1999 7 Consolidated Statements of Cash Flows (Unaudited), Six Months Ended June 30, 2000 and 1999 8 Notes to Consolidated Financial Statements (Unaudited) 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 22 PART II. OTHER INFORMATION Item 1 through Item 6 38 Signatures 38 EXHIBIT INDEX 39 PART I FINANCIAL INFORMATION THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) Three Months Ended Six Months Ended (In millions, June 30 June 30 except per share data) ------------------- ------------------ 2000 1999 2000 1999 ------ ------ ------ ------ Revenues: Premiums earned $1,497 1,356 2,885 2,701 Net investment income 402 398 808 789 Asset management 84 84 177 166 Realized investment gains 91 67 424 132 Other 31 28 63 54 ------ ------ ------ ------ Total revenues 2,105 1,933 4,357 3,842 ------ ------ ------ ------ Expenses: Insurance losses and loss adjustment expenses 1,026 975 2,054 1,970 Life policy benefits 120 85 193 152 Policy acquisition expenses 353 350 703 686 Operating and administrative 305 236 568 485 ------ ------ ------ ------ Total expenses 1,804 1,646 3,518 3,293 ------ ------ ------ ------ Income from continuing operations before income taxes and cumulative effect of accounting change 301 287 839 549 Income tax expense 82 68 258 133 ------ ------ ------ ------ Income from continuing operations before cumulative effect of accounting change 219 219 581 416 Cumulative effect of accounting change, net of taxes - - - (30) ------ ------ ------ ------ Income from continuing operations 219 219 581 386 Loss from discontinued operations, net of taxes (7) (15) (12) (17) ------ ------ ------ ------ Net income $212 204 569 369 ====== ====== ====== ====== Basic earnings per common share: Income from continuing operations before cumulative effect of accounting change $1.01 0.96 2.65 1.79 Cumulative effect of accounting change, net of taxes - - - (0.13) ------ ------ ------ ------ Income from continuing operations $1.01 0.95 2.65 1.66 Loss from discontinued operations, net of taxes (0.03) (0.07) (0.06) (0.07) ------ ------ ------ ------ Net income $0.98 0.89 2.59 1.59 ====== ====== ====== ====== Diluted earnings per common share: Income from continuing operations before cumulative effect of accounting change $0.95 0.90 2.48 1.69 Cumulative effect of accounting change, net of taxes - - - (0.12) ------ ------ ------ ------ Income from continuing operations 0.95 0.90 2.48 1.57 Loss from discontinued operations, net of taxes (0.03) (0.06) (0.05) (0.07) ------ ------ ------ ------ Net income $0.92 0.84 2.43 1.50 ====== ====== ====== ====== Dividends declared on common stock $0.27 0.26 0.54 0.52 ====== ====== ====== ====== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In millions) June 30, December 31, ASSETS 2000 1999 - ------ ----------- ------------ (Unaudited) Investments: Fixed maturities, at estimated fair value $20,049 $19,080 Equities, at estimated fair value 1,696 1,617 Real estate and mortgage loans 1,421 1,504 Venture capital, at estimated fair value 1,076 867 Securities lending collateral 1,456 1,216 Other investments 313 298 Short-term investments, at cost 1,193 1,347 -------- ------- Total investments 27,204 25,929 Cash 84 158 Investment banking inventory securities 39 45 Reinsurance recoverables: Unpaid losses 5,070 4,331 Paid losses 309 191 Ceded unearned premiums 699 639 Receivables: Underwriting premiums 2,704 2,292 Interest and dividends 365 356 Other 311 223 Deferred policy acquisition expenses 1,069 942 Deferred income taxes 1,236 1,262 Office properties and equipment, at cost less accumulated depreciation of $451 (1999; $431) 511 499 Goodwill 505 399 Other assets 1,033 1,290 ------- ------- Total assets $41,139 $38,556 ======= ======= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In millions) June 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 - ------------------------------------ ---------- ----------- (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $18,932 $17,720 Future policy benefits 5,080 4,885 Unearned premiums 3,385 3,048 -------- -------- Total insurance reserves 27,397 25,653 Debt 1,593 1,466 Payables: Reinsurance premiums 858 654 Income taxes 381 311 Accrued expenses and other 1,019 1,138 Securities lending 1,456 1,216 Other liabilities 1,163 1,221 -------- -------- Total liabilities 33,867 31,659 -------- -------- Company-obligated mandatorily redeemable preferred capital securities of subsidiaries or trusts holding solely convertible subordinated debentures of the Company 544 425 -------- -------- Shareholders' equity: Preferred: SOP convertible preferred stock; 1.45 shares authorized; 0.8 shares outstanding (0.9 shares in 1999) 120 129 Guaranteed obligation - SOP (72) (105) -------- -------- Total preferred shareholders' equity 48 24 -------- -------- Common: Common stock, 480 shares authorized; 213 shares outstanding (225 shares in 1999) 1,985 2,079 Retained earnings 4,077 3,827 Accumulated other comprehensive income: Unrealized appreciation 665 568 Unrealized loss on foreign currency translation (47) (26) -------- -------- Total accumulated other comprehensive income 618 542 -------- -------- Total common shareholders' equity 6,680 6,448 -------- -------- Total shareholders' equity 6,728 6,472 -------- -------- Total liabilities, redeemable preferred securities and shareholders' equity $41,139 $38,556 ======== ======== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In millions) Six Twelve Months Ended Months Ended June 30 December 31 ------------ ------------ 2000 1999 ------- ------- (Unaudited) Preferred shareholders' equity: Series B SOP convertible preferred stock: Beginning of period $129 $134 Redemptions during period (9) (5) ------- ------- End of period 120 129 ------- ------- Guaranteed obligation - SOP: Beginning of period (105) (119) Principal payments 33 14 ------- ------- End of period (72) (105) ------- ------- Total preferred shareholders' equity 48 24 ------- ------- Common shareholders' equity: Common stock: Beginning of period 2,079 2,128 Stock issued under stock incentive plans 18 37 Stock issued for preferred shares redeemed 14 9 Reacquired common shares (126) (102) Other - 7 ------- ------- End of period 1,985 2,079 ------- ------- Retained earnings: Beginning of period 3,827 3,480 Net income 569 834 Dividends declared on common stock (114) (235) Dividends declared on preferred stock, net of taxes (4) (8) Reacquired common shares (206) (254) Tax benefit on employee options, and other charges 10 14 Premium on preferred shares redeemed (5) (4) ------- ------- End of period 4,077 3,827 ------- ------- Unrealized appreciation, net of taxes: Beginning of period 568 1,027 Change during the period 97 (459) ------- ------- End of period 665 568 ------- ------- Unrealized gain (loss)loss on foreign currency translation, net of taxes: Beginning of period (26) (14) Change during the period (21) (12) ------- ------- End of period (47) (26) ------- ------- Total common shareholders' equity 6,680 6,448 ------- ------- Total shareholders' equity $6,728 $6,472 ======= ======= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Unaudited (In millions) Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 2000 1999 2000 1999 ------ ------ ------ ------ Net income $212 $204 $569 $369 ------ ------ ------ ------ Other comprehensive income (loss), net of taxes: Change in unrealized appreciation (45) (249) 97 (357) Change in unrealized loss on foreign currency translation (7) (3) (21) (5) ------ ------ ------ ------ Other comprehensive income (loss) (52) (252) 76 (362) ------ ------ ------ ------ Comprehensive income (loss) $160 $(48) $645 $7 ====== ====== ====== ====== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (In millions) Six Months Ended June 30 ----------------------- 2000 1999 OPERATING ACTIVITIES ------ ------ Net income $569 $369 Adjustments: Loss from discontinued operations 12 17 Change in property-liability insurance reserves 245 149 Change in reinsurance balances (612) (89) Change in premiums receivable (210) (350) Provision for federal deferred income tax expense 118 105 Change in accounts payable and accrued expenses (202) (103) Change in asset management balances (17) 16 Depreciation and amortization 52 65 Realized investment gains (424) (132) Cumulative effect of accounting change - 30 Other 53 (126) ------ ------ Net Cash Used by Continuing Operations (416) (49) Net Cash Provided (Used) by Discontinued Operations (8) 14 ------ ------ Net Cash Used by Operating Activities (424) (35) ------ ------ INVESTING ACTIVITIES Purchase of investments (3,449) (3,402) Proceeds from sales and maturities of investments 3,703 2,851 Net sales of short-term investments 248 262 Change in open security transactions (54) 54 Purchases of office properties and equipment (60) (124) Sales of office properties and equipment 7 50 Acquisitions, net of cash acquired (206) - Proceeds from sale of subsidiaries 201 - Other 65 (102) ------ ------ Net Cash Provided (Used) by Continuing Operations 455 (411) Net Cash Provided (Used) by Discontinued Operations 44 (6) ------ ------ Net Cash Provided (Used) by Investing Activities 499 (417) ------ ------ FINANCING ACTIVITIES Deposits on universal life and investment contracts 468 602 Withdrawals on universl life and investment contracts (281) (56) Dividends paid on common and preferred stock (120) (123) Proceeds from issuance of debt 498 286 Repayment of debt (415) (41) Repurchase of common shares (333) (265) Stock options exercised and other 34 22 ------ ------ Net Cash Provided (Used) by Financing Activities (149) 425 ------ ------ Effect of exchange rate changes on cash - 2 ------ ------ Decrease in cash (74) (25) Cash at beginning of period 158 146 ------ ------ Cash at end of period $ 84 $121 ====== ====== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited June 30, 2000 Note 1 - Basis of Presentation - ------------------------------ The financial statements include The St. Paul Companies, Inc. and subsidiaries (The St. Paul or the company), and have been prepared in conformity with generally accepted accounting principles. These consolidated financial statements rely, in part, on estimates. In the opinion of management, all necessary adjustments, consisting of normal recurring adjustments, have been reflected for a fair presentation of the results of operations, financial position and cash flows in the accompanying unaudited consolidated financial statements. The results for the period are not necessarily indicative of the results to be expected for the entire year. Reference should be made to the "Notes to Consolidated Financial Statements" in The St. Paul's annual report to shareholders for the year ended December 31, 1999. The amounts in those notes have not changed materially except as a result of transactions in the ordinary course of business or as otherwise disclosed in these notes. Some amounts in the 1999 consolidated financial statements have been reclassified to conform with the 2000 presentation. These reclassifications had no effect on net income, comprehensive income or shareholders' equity, as previously reported. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 2 - Acquisitions - --------------------- In February 2000, we closed on our purchase of Pacific Select Insurance Holdings, Inc., and its wholly-owned subsidiary Pacific Select Property Insurance Co. (together, Pacific Select), a California insurer that sells earthquake coverage to California homeowners. The transaction was accounted for as a purchase, at a cost of approximately $37 million. Pacific Select's results of operations from the date of purchase are included in our consolidated results for the six months ended June 30, 2000. In April 2000, we closed on our acquisition of MMI Companies, Inc. (MMI), a Deerfield, Illinois-based provider of medical services-related insurance products and consulting services. The transaction was accounted for as a purchase, with a total purchase price of approximately $206 million, in addition to the assumption of $165 million in capital securities and debt. The purchase price resulted in goodwill of approximately $101 million, which we expect to amortize on a straight-line basis over 15 years. MMI's results of operations from the date of purchase are included in our consolidated results for the six months ended June 30, 2000. Related to the purchase, we established a reserve of $28 million, including $4 million in employee-related costs and $24 million in occupancy-related costs. The employee-related costs represent severance and related benefits such as outplacement counseling to be paid to, or incurred on behalf of, terminated employees. We estimated that approximately 130 employee positions would be eliminated, at all levels throughout MMI. Through June 30, 2000, 42 employees had been terminated, with payments totaling $1 million. The occupancy-related cost represents excess space created by the terminations, calculated by determining the percentage of anticipated excess space, by location, and the current lease costs over the remaining lease period. The amounts payable under the existing leases were not discounted, and sublease income was included in the calculation only for those locations where sublease agreements were in place. No payments have been made related to the occupancy-related reserve. The following table presents the pro forma results of our operations for the six months ended June 30, 2000 and 1999, as though we had purchased MMI at the beginning of each of the periods presented. The pro forma data is provided for illustrative purposes only, and does not purport to be indicative of the results that would have actually occurred if the purchase of MMI had been consummated at the beginning of the periods presented, or that may be obtained in the future. (in millions) ----------- 2000 1999 -------- ------- Total revenues $4,461 4,069 Net income 449 374 Fully diluted earnings per share $1.92 1.52 As disclosed in our March 31, 2000 Form 10-Q, MMI's first quarter 2000 results included reserve strengthening of $93 million, with $77 million reflected in their domestic operations and $16 million reflected in their international operations. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 3 - Discontinued Operations - -------------------------------- Standard Personal Insurance Business - ------------------------------------ On Sept. 30, 1999, we completed the sale of our standard personal insurance operations to Metropolitan Property and Casualty Insurance Company (Metropolitan). As a result, the standard personal insurance operations have been accounted for as discontinued operations for all periods presented herein. Metropolitan purchased Economy Fire & Casualty Company and its subsidiaries (Economy), as well as the rights and interests in those non-Economy policies constituting our remaining standard personal insurance operations. Those rights and interests were transferred to Metropolitan by way of a reinsurance and facility agreement (Reinsurance Agreement). The Reinsurance Agreement relates solely to the non-Economy standard personal insurance policies, and was entered into solely as a means of accommodating Metropolitan through a transition period. The Reinsurance Agreement allows Metropolitan to write non-Economy business on our policy forms while Metropolitan obtains the regulatory license, form and rate approvals necessary to write non-Economy business through their own insurance subsidiaries. Any business written on our policy forms during this transition period is then fully ceded to Metropolitan under the Reinsurance Agreement. We recognized no gain or loss on the inception of the Reinsurance Agreement and will not incur any net revenues or expenses related to the Reinsurance Agreement. All economic risk of post-sale activities related to the Reinsurance Agreement has been transferred to Metropolitan. We anticipate that Metropolitan will pay all claims incurred related to this Reinsurance Agreement. In the event Metropolitan is unable to honor their obligations to us, we will pay these amounts. As part of the sale to Metropolitan, we guaranteed the adequacy of Economy's loss and loss expense reserves. Under that guarantee, we will pay for any deficiencies in those reserves and will share in any redundancies that develop by Sept. 30, 2002. We remain liable for claims on non-Economy policies that result from losses occurring prior to closing. By agreement, Metropolitan will adjust those claims and share in redundancies in related reserves that may develop. Any losses incurred by us under these agreements will be reflected in discontinued operations in the period they are incurred. For the first six months of 2000, we recorded a pretax loss of $8 million in discontinued operations. We have no other contingent liabilities related to the sale. Nonstandard Auto Business - ------------------------- On Jan. 4, 2000, we announced an agreement to sell our nonstandard auto business to The Prudential Insurance Company of America (Prudential) for $200 million in cash. As a result, the nonstandard auto business results of operations have been accounted for as discontinued operations for all periods presented. On May 1, 2000, we closed on the sale of our nonstandard auto business to Prudential, receiving total cash consideration of approximately $175 million (net of a $25 million dividend paid to our property-liability operations prior to closing). In the fourth quarter of 1999, we had recorded an estimated after-tax loss on disposal of $83 million for our nonstandard auto operations. We recorded an additional after-tax loss of $7 million through closing. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 4 - Earnings Per Share - --------------------------- Earnings per common share (EPS) amounts were calculated by dividing net income, as adjusted, by the average common shares outstanding. Three Months Ended Six Months Ended June 30 June 30 ------------------- ---------------- 2000 1999 2000 1999 ------ ------ ------ ------ (In millions, except per share data) EARNINGS Basic: Net income, as reported $212 $204 $569 $369 Dividends on preferred stock, net of taxes (2) (2) (4) (4) Premium on preferred shares redeemed (2) (1) (6) (2) ------ ------ ------ ------ Net income available to common shareholders $208 $201 $559 $363 ====== ====== ====== ====== Diluted: Net income available to common shareholders $208 $201 $559 $363 Effect of dilutive securities: Convertible preferred stock 2 2 3 3 Convertible monthly income preferred securities 2 2 4 4 Zero coupon convertible notes 1 1 1 2 ------ ------ ------ ------ Net income available to common shareholders $213 $206 $567 $372 ====== ====== ====== ====== COMMON SHARES Basic: Weighted average common shares outstanding 212 226 216 228 ====== ====== ====== ====== Diluted: Weighted average common shares outstanding 212 226 216 228 Effect of dilutive securities: Stock options 2 2 1 2 Convertible preferred stock 7 7 7 7 Convertible monthly income preferred securities 7 7 7 7 Zero coupon convertible notes 2 3 3 3 ------ ------ ------ ------ Total 230 245 234 247 ====== ====== ====== ====== EARNINGS PER SHARE Basic $0.98 $0.89 $2.59 $1.59 ====== ====== ====== ====== Diluted $0.92 $0.84 $2.43 $1.50 ====== ====== ====== ====== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 5 - Investments - -------------------- Investment Activity. A summary of investment transactions is presented below. Six Months Ended June 30 ------------------------ 2000 1999 -------- -------- (In millions) Purchases: Fixed maturities $1,905 $2,481 Equities 1,189 654 Real estate and mortgage loans 6 110 Venture capital 299 107 Other investments 50 50 ------ ------ Total purchases 3,449 3,402 ------ ------ Proceeds from sales and maturities: Fixed maturities 1,878 1,969 Equities 1,170 673 Real estate and mortgage loans 80 78 Venture capital 532 110 Other investments 43 21 ------ ------ Total sales and maturities 3,703 2,851 ------ ------ Net purchases (sales) $(254) $ 551 ====== ====== Change in Unrealized Appreciation. The increase (decrease) in unrealized appreciation of investments recorded in common shareholders' equity was as follows: Six Months Ended Twelve Months Ended June 30, 2000 December 31, 1999 ---------------- ------------------- (In millions) Fixed maturities $ 2 $(1,336) Equities (25) 223 Venture capital 148 255 Life deferred policy acquisition costs and policy benefits 15 122 Single premium immediate annuity reserves - 44 Other 8 (13) ------ ------ Total change in pretax unrealized appreciation 148 (705) Change in deferred taxes (51) 246 ------ ------ Total change in unrealized appreciation, net of taxes $ 97 $(459) ====== ====== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 6 - Income Taxes - --------------------- The components of income tax expense on income from continuing operations, before the cumulative effect of accounting change, were as follows : Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 2000 1999 2000 1999 ------ ------ ------ ------ (In millions) Federal current tax expense (benefit) $ (3) $ 1 $ 131 $ 11 Federal deferred tax expense 85 59 118 105 ------- ------- ------- ------- Total federal income tax expense 82 60 249 116 Foreign income tax expense (benefit) (5) 6 1 13 State income tax expense 5 2 8 4 ------- ------- ------- ------- Total income tax expense on continuing operations $82 $68 $258 $133 ======= ======= ======= ======= In connection with our purchase of MMI, we established a $30 million valuation allowance for deferred tax assets related to MMI's non - U.S. operations. This allowance did not impact our consolidated results of operations for the second quarter or first six months of 2000. Note 7 - Contingent Liabilities - ------------------------------- In the ordinary course of conducting business, we and some of our subsidiaries have been named as defendants in various lawsuits. Some of these lawsuits attempt to establish liability under insurance contracts issued by our underwriting operations. Plaintiffs in these lawsuits are asking for money damages or to have the court direct the activities of the operations in certain ways. Although it is possible that the settlement of a contingency may be material to our results of operations and liquidity in the period in which the settlement occurs, we believe that the total amounts that we or our subsidiaries will ultimately have to pay in all of these lawsuits will have no material effect on our overall financial position. In some cases, plaintiffs seek to establish coverage for their liability under environmental protection laws. See "Environmental and Asbestos Claims" in Management's Discussion and Analysis for information on these claims. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 8 - Debt - ------------- Debt consists of the following: June 30, December 31, 2000 1999 ------------- ------------- Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- (In millions) Medium-term notes $617 $591 $617 $598 7-7/8% senior notes 249 250 - - 8-1/8% senior notes 249 250 - - 8-3/8% senior notes 150 152 150 153 Zero coupon convertible notes 96 93 94 93 7-1/8% senior notes 80 77 80 78 Commercial paper 73 73 400 400 Variable rate borrowings 64 64 64 64 Real estate mortgages 15 15 15 15 Floating rate notes - - 46 46 ----- ----- ----- ----- Total debt $1,593 1,565 $1,466 $1,447 ===== ===== ===== ===== On April 17, 2000, we issued $250 million of 7.875% senior notes due April 15, 2005 and $250 million of 8.125% senior notes due April 15, 2010. Proceeds were used to repay commercial paper debt and for general corporate purposes. Note 9 - Segment Information - ---------------------------- We have seven reportable business segments in our property- liability insurance operation, consisting of the Commercial Lines Group, Global Surety, Global Healthcare, Other Global Specialty, International, Reinsurance and Investment Operations. We also have a life insurance segment (primarily Fidelity and Guaranty Life Insurance Company) and an asset management segment (The John Nuveen Company). We evaluate the performance of our property- liability underwriting segments based on GAAP underwriting results. The property-liability investment operation is disclosed as a separate reportable segment because that operation is managed at the corporate level and the invested assets, net investment income and realized gains are not allocated to individual underwriting segments. The life insurance and asset management segments are evaluated based on their respective pretax operating results, which include investment income. The reportable underwriting business segments in our property- liability operation are reported separately because they offer insurance products to unique customer classes and utilize different underwriting criteria and marketing strategies. For example, the Commercial Lines Group provides "commodity-type" insurance products to the small and medium-sized commercial markets. By contrast, each of our Global Specialty segments (Surety, Healthcare and Other Specialty) market specialized insurance products and services tailored to meet the individual needs of specific customer groups, such as doctors, lawyers, officers and directors, as well as technology firms and government entities. Customers in the Global Specialty segments generally require specialized underwriting expertise and claim settlement services. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The tabular information on the following pages provides revenue and income data for each of our business segments for the three months and six months ended June 30, 2000 and 1999. In the first quarter of 2000, we implemented a new segment reporting structure for our property-liability insurance business following the fourth-quarter realignment of our primary insurance underwriting operations into a Global Specialty Practices organization. As part of that realignment, a portion of our non-U.S. primary insurance business is now included in the respective business segment to which it pertains, which differs from our prior practice of including all non-U.S. business in the International segment. Our Global Specialty segments are managed on a global basis. Under our new segment structure, our International segment includes our operations at Lloyd's and specialty insurance business that we do not manage on a global basis, including Unionamerica, MMI's international business. Also, our Global Healthcare underwriting operation is now reported as a separate business segment, which differs from its prior classification as a component of the Specialty Commercial segment. This change reflects the increasing size of this business, including MMI's U.S. business, relative to our total underwriting operation. Finally, we reclassified our Construction business center, previously included in the Commercial Lines Group segment, to our Other Global Specialty segment, to reflect the more specialized nature of this product. Segment information for 1999 has been restated to be consistent with the 2000 presentation. Three Months Ended Six Months Ended June 30 June 30 ----------------- ---------------- 2000 1999 2000 1999 ------ ------ ------ ------ In millions) Revenues from Continuing Operations Property-liability Insurance: Primary Insurance Operations: Commercial Lines Group $392 $424 $780 $839 Global Surety 107 97 220 189 Global Healthcare 178 148 312 330 Other Global Specialty 348 330 690 658 International 154 78 217 137 ------- ------- ------- ------- Total primary insurance operations 1,179 1,077 2,219 2,153 Reinsurance 242 242 558 483 ------- ------- ------- ------ Total property-liability premiums earned 1,421 1,319 2,777 2,636 ------- ------- ------- ------- Investment operations: Net investment income 312 316 631 634 Realized investment gains 107 71 438 132 ------- ------- ------- ------- Total investment operations 419 387 1,069 766 Other 23 24 41 46 ------- ------- ------- ------- Total property-liability insurance 1,863 1,730 3,887 3,448 ------- ------- ------- ------- Life insurance 143 110 260 209 ------- ------- ------- ------- Asset management 88 86 188 169 ------- ------- ------- ------- Total reportable segments 2,094 1,926 4,335 3,826 Parent company, other operations and consolidating eliminations 11 7 22 16 ------- ------- ------- ------- Total revenues $2,105 $1,933 $4,357 $3,842 ======= ======= ======= ======= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 10 - Segment Information (continued) - ---------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 2000 1999 2000 1999 ------ ------ ------ ------ (In millions) Income (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Change Property-liability insurance: Primary Insurance Operations: Commercial Lines Group $54 $(56) $32 $(142) Global Surety 12 11 31 27 Global Healthcare (45) (19) (64) (47) Other Global Specialty (4) (35) (28) (59) International (51) (8) (60) (19) ------- ------- ------- ------- Total primary insurance (34) (107) (89) (240) Reinsurance (33) 6 (78) 29 ------- ------- ------- ------- Total GAAP underwriting result (67) (101) (167) (211) ------- ------- ------- ------- Investment operations: Net investment income 312 316 631 634 Realized investment gains 107 71 438 132 ------- ------- ------- ------- Total investment operations 419 387 1,069 766 Other (33) 1 (64) (18) ------- ------- ------- ------- Total property- liability insurance 319 287 838 537 ------- ------- ------- ------- Life insurance - 9 18 28 ------- ------- ------- ------- Asset management: Pretax income before minority interest 43 39 86 77 Minority interest (10) (9) (20) (18) ------- ------- ------- ------- Total asset management 33 30 66 59 ------- ------- ------- ------- Total reportable segments 352 326 922 624 Parent company,other operations and consolidating eliminations (51) (39) (83) (75) ------- ------- ------- ------- Total income before income taxes and cumulative effect of change $301 $287 $839 $549 ======= ======= ======= ======= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 11 - Reinsurance - --------------------- Our consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to our acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks we have underwritten to other insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to protect us from potential losses in excess of the amount we are willing to accept. We expect those to whom we have ceded reinsurance to honor their obligations. In the event these companies are unable to honor their obligations, we will pay these amounts. We have established allowances for possible nonpayment of reinsurance recoverable amounts due to us. Our 2000 income from continuing operations benefited from cessions made under our corporate all-lines, excess-of-loss reinsurance program (the "corporate program"), and cessions made under a separate excess-of-loss treaty exclusive to our Reinsurance segment. Under the corporate program, we ceded written premiums of $80 million, earned premiums of $70 million, and insurance losses and loss adjustment expenses of $111 million, resulting in a year-to-date net pretax benefit of $41 million. The losses and loss adjustment expenses ceded and $61 million of the earned premiums ceded under the corporate program in the first quarter of 2000 were the result of adverse development on losses originally incurred during the 1999 accident year. Under the separate Reinsurance segment treaty, during the second quarter of 2000, we ceded written and earned premiums of $39 million, and insurance losses and loss adjustment expenses of $88 million, resulting in a net pretax benefit of $49 million. For the six months ended June 30, 2000 under this treaty, we ceded written and earned premiums of $56 million, and insurance losses and loss adjustment expenses of $120 million, resulting in a net pretax benefit of $64 million. The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses, loss adjustment expenses and life policy benefits are as follows: Three Months Six Months Ended June 30 Ended June 30 ------------- ------------- (In millions) 2000 1999 2000 1999 ---- ---- ----- ----- Written premiums: Direct $1,288 $1,122 $2,410 $2,230 Assumed 521 572 1,116 891 Ceded (318) (221) (636) (394) ----- ----- ----- ----- Net premiums written 1,491 1,473 2,890 2,727 ===== ===== ===== ===== Earned premiums: Direct 1,286 1,135 2,447 2,297 Assumed 420 366 918 700 Ceded (285) (182) (588) (361) ----- ----- ----- ----- Net premiums earned 1,421 1,319 2,777 2,636 Life 76 37 108 65 ----- ----- ----- ----- Total premiums earned 1,497 1,356 2,885 2,701 ===== ===== ===== ===== Insurance losses and loss adjustment expenses: Direct 995 967 1,834 1,879 Assumed 463 218 1,036 490 Ceded (432) (210) (816) (399) ----- ----- ----- ----- Net insurance losses and loss adjustment expenses $1,026 $975 $2,054 $1,970 Life policy benefits 120 85 193 152 ----- ----- ----- ----- Total 1,146 1,060 2,247 2,122 ===== ===== ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 12 - Restructuring Charges - ------------------------------- Third Quarter 1999 Charge - In August 1999, we announced a cost reduction program designed to enhance our efficiency and effectiveness in a highly competitive environment. In the third quarter of 1999, we recorded a pretax charge of $60 million related to this program, including $25 million in employee- related charges, $33 million in occupancy-related charges and $2 million in equipment charges. The employee-related charge represents severance and related benefits such as outplacement counseling, vacation buy-out and medical coverage to be paid to terminated employees. The charge relates to the anticipated termination of approximately 700 employees at all levels throughout the Company. As of June 30, 2000, approximately 565 employees had been terminated under this action. The occupancy-related charge represents excess space created by the cost reduction action. The charge was calculated by determining the percentage of anticipated excess space, by location, and the current lease costs over the remaining lease period. The amounts payable under the existing leases were not discounted, and sublease income was included in the calculation only for those locations where sublease agreements were in place. The equipment charges represent the elimination of personal computers directly related to the number of employees being severed under this cost reduction action and the elimination of network servers and other equipment resulting from this action. The amount was calculated as the book value of this equipment less estimated sale proceeds. All actions to be taken under this plan are expected to be complete in 2000. The following presents a rollforward of activity related to this charge: (In millions) Pre-tax Reserve at Reserve at Charge Dec. 31, 1999 Payments June 30, 2000 ------- ------------- -------- ------------- Charges to earnings: Employee- related $25 $14 $(12) $2 Occupancy-related 33 31 (4) 27 Equipment charges 2 N/A N/A N/A ------ ------ ------ ------ Total $60 $45 $(16) $29 ====== ====== ====== ====== Fourth Quarter 1998 Charge - Late in the fourth quarter of 1998, we recorded a pretax restructuring charge of $34 million. The majority of the charge, $26 million, related to the anticipated termination of approximately 520 employees in the following operations: Claims, Commercial Lines Group, Information Systems, Global Healthcare, and Financial and Professional Services. The remaining charge of $8 million related to costs to be incurred to exit lease obligations. As of June 30, 2000, approximately 500 employees had been terminated under the restructuring plan. Termination actions taking place under this plan have been completed. Since substantially all payments have been made to terminated employees, we reduced the employee-related accrual by $2 million. The table below provides a rollforward of activity related to this charge: Reserve at (In millions) Pre-tax Reserve at June 30, charge Dec. 31,1999 Payments Adjustments 2000 ------- ------------ -------- ----------- ------- Charges to earnings: Employee-related $26 $3 $(1) $(2) $0 Occupancy-related 8 2 - - 2 ----- ----- ----- ----- ----- Total $34 $5 $(1) $(2) $2 ===== ===== ===== ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 12 - Restructuring Charges (continued) - ------------------------------------------ Second Quarter 1998 Charge - Related to our merger with USF&G, we recorded a pretax charge to earnings of $292 million in 1998, primarily consisting of severance and other employee-related costs, facilities exit costs, asset impairments and transaction costs. We estimated that approximately 2,000 positions would be eliminated due to the combination of the two organizations, resulting from efficiencies to be realized by the larger organization and the elimination of redundant functions. All levels of employees, from technical staff to senior management, were affected by the reductions. The original number of positions expected to be reduced by function included approximately 950 in our property-liability underwriting operation, 350 in claims and 700 in finance and other administrative positions, throughout the United States. Through June 30, 2000, approximately 2,200 positions had been eliminated, and the cost of termination benefits paid was $137 million. Termination actions taking place under this plan were completed by Dec. 31, 1999, however, payments were still being made to terminated employees during the first six months of the year. Since certain executives remained with the company and are no longer eligible to receive the amounts accrued, the executive severance accrual was reduced by $2 million. The following table provides a rollforward of activity related to the charge: (In millions) Pre- tax Charges to earnings: Charge ------------------- ------ USF&G corporate headquarters $36 Long-lived assets 23 Acceleration of software depreciation 10 Computer leases and equipment 10 Other equipment and furniture 8 ----- Subtotal 87 ----- Accrued charges subject to rollforward: ----------------------- Reserve at Pre-tax Reserve at June 30, charge Dec. 31, 1999 Payments Adjustments 2000 ------- ------------- -------- ----------- -------- Executive severance $89 $3 $(1) $(2) $- Other severance 52 1 (1) - - Branch lease exit costs 34 24 (4) - 20 Transaction costs 30 - - - - ----- ----- ----- ----- ----- Accruals subject to rollforward 205 28 (6) (2) 20 ----- ----- ----- ----- ----- Total $292 $28 $(6) $(2) $20 ===== ===== ===== ===== ===== Note 15 in our 1999 Annual Report to Shareholders provides more information regarding the rationale for and calculation of the components of the merger-related charge. Upon consummation of the merger, we determined that several of USF&G's real estate investments were not consistent with our real estate investment strategy. A plan was developed to sell a number of apartment buildings and various other miscellaneous holdings, with an expected disposal date by year-end 1999. In applying the provisions of SFAS No. 121, it was determined that four of these miscellaneous investments should be written down to fair value, based on our plan to sell them. Fair value was determined based on a discounted cash flow analysis, or based on market prices for similar assets. The one remaining investment represents percentage rents retained after sale of a portfolio of stores to a third party. The current balance of this investment is $2.4 million held in the property-liability segment and $0.4 million held in the life segment. This investment is expected to be sold by year-end 2000. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 13 - Share Repurchase Authorization - ---------------------------------------- On May 2, 2000, our board of directors authorized a new $300 million share repurchase program. Under the program, we are authorized to repurchase up to an additional $300 million of our common stock in the open market and through private transactions. The new authorization is in addition to the $76 million remaining under a $500 million repurchase plan approved in November 1999. Note 14 - Subsequent Events - --------------------------- On July 14, 2000, St. Paul Capital L.L.C. (a wholly-owned subsidiary of the company) provided notice to the holders of its $207 million of 6% Convertible Monthly Income Preferred Securities that it was exercising its right to cause the conversion rights of the holders of those securities to expire on Aug. 14, 2000. Each of the 4,140,000 securities outstanding is convertible into 1.695 shares of our common stock at a conversion price of $29.50 per security. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations June 30, 2000 Consolidated Results -------------------- The following table summarizes The St. Paul's results for the second quarter and first six months of 2000 and 1999. Three Months Six Months Ended June 30 Ended June 30 (In millions, ------------- ------------- except per share data) 2000 1999 2000 1999 Pretax income (loss): ---- ---- ---- ---- Property-liability insurance: GAAP underwriting result $(67) $(101) $(167) $(211) Net investment income 312 316 631 634 Realized investment gains 107 71 438 132 Other (33) 1 (64) (18) ---- ---- ---- ---- Total property- liability insurance 319 287 838 537 Life insurance - 9 18 28 Asset management 33 30 66 59 Parent and other (51) (39) (83) (75) ---- ---- ---- ---- Income from continuing operations before income taxes and cumulative effect of accounting change 301 287 839 549 Income tax expense 82 68 258 133 ---- ---- ---- ---- Income from continuing operations before cumulative effect of accounting change 219 219 581 416 Cumulative effec of accounting change, net of taxes - - - (30) ---- ---- ---- ---- Income from continuing operations 219 219 581 386 Loss from discontinued operations, net of taxes (7) (15) (12) (17) ---- ---- ---- ---- Net income $212 $204 $569 $369 ==== ==== ==== ==== Diluted net income per common share $0.92 $0.84 $2.43 $1.50 ==== ==== ==== ==== Consolidated Results - -------------------- The St. Paul's pretax income from continuing operations of $301 million in the second quarter was 5% ahead of comparable pretax income of $287 million in the same 1999 period, driven by improved underwriting results and an increase in realized investment gains in our property-liability operations. Through the first half of 2000, pretax income from continuing operations was $290 million higher than the comparable period of 1999, primarily due to the significant increase in realized investment gains. Our property-liability insurance pretax results for the second quarter and first six months of 2000 reflected benefits of $44 million and $105 million, respectively, from aggregate excess-of-loss reinsurance treaties (discussed in more detail on page 24 of this report), and the benefit of a $102 million reserve reduction (discussed on page 25 of this report). Our effective tax rate in 2000 was significantly higher than the comparable 1999 rate, primarily due to the substantial increase in realized investment gains, which were taxed at the 35% federal statutory rate. In the first half of 1999, our net income included a pretax expense of $46 million ($30 million after-tax), representing the cumulative effect of adopting the AICPA's Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." The SOP provides guidance for recognizing and measuring liabilities for guaranty fund and other insurance-related assessments. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Consolidated Highlights (continued) ---------------------------------- Elimination of One-Quarter Reporting Lag - ---------------------------------------- In the first quarter of 2000, we eliminated the one-quarter reporting lag for our reinsurance operations based in the United Kingdom ("St. Paul Re - UK"), and now report the results of those operations on a current basis. As a result, our consolidated results for the first six months of 2000 include St. Paul Re - UK's results for the fourth quarter of 1999 and the first six months of 2000. The year-to-date incremental impact on our property-liability operations of eliminating the reporting lag, which consists of St. Paul Re - UK's results for the three months ended June 30, 2000, was as follows: Three Months Ended (In millions) June 30, 2000 ----------- ------------------ Written premiums $ 31 Earned premiums $ 61 GAAP underwriting result $(32) Net investment income $12 Pretax loss $(23) Net loss $(17) Acquisitions - ------------ In February 2000, we completed our acquisition of Pacific Select Insurance Holdings, Inc. (Pacific Select), a California company that sells earthquake insurance coverages to California homeowners. The acquisition was accounted for as a purchase, at a cost of approximately $37 million. Pacific Select's results of operations are included in the Catastrophe Risk business center of our Commercial Lines Group segment. In April 2000, we completed our acquisition of MMI Companies, Inc. (MMI), an international health care risk services company that provides integrated products and services in operational consulting, clinical risk management, and insurance and reinsurance in the U.S. and London markets. The acquisition was accounted for as a purchase for approximately $206 million in cash plus the assumption of $165 million of MMI debt and capital securities. The results of MMI's domestic U.S. operations are reported in our Global Healthcare segment, and the results of MMI's U.K.-based operations, Unionamerica Insurance Company Limited (Unionamerica), are included in our International segment. The acquisition of MMI added the following amounts to our property-liability results of operations for the second quarter and first six months of 2000: (In millions) ----------- Written premiums $ 43 Earned premiums $ 93 GAAP underwriting result $(56) Net investment income $ 19 Discontinued Operations - ----------------------- In 1999, we sold our standard personal insurance operations to Metropolitan Property and Casualty Insurance Company (Metropolitan). Metropolitan purchased Economy Fire & Casualty Company and subsidiaries (Economy), and the rights and interests in those non-Economy policies constituting the remainder of our standard personal insurance operations. Those rights and interests were transferred to Metropolitan by way of a reinsurance and facility agreement. We guaranteed the adequacy of Economy's loss and loss expense reserves, and we remain liable for claims on non-Economy policies that result from losses occurring prior to the Sept. 30, 1999 closing date. Under the reserve guarantee, we will pay for any deficiencies in those reserves and will share in any redundancies that develop by Sept. 30, 2002. Any losses incurred by us under these agreements are reflected in discontinued operations in the period during which they are incurred. In the first six months of 2000, we recorded a pretax loss of $8 million in discontinued operations. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Consolidated Highlights (continued) ---------------------------------- In May 2000, we completed the sale of our nonstandard auto insurance operations to Prudential Insurance Company of America (Prudential) for a total cash consideration of approximately $175 million (net of a $25 million dividend paid by these operations to our property-liability insurance operations prior to closing). Prudential purchased the nonstandard auto business marketed under the Victoria Financial and Titan Auto brands. In the first six months of 2000, we recorded a pretax loss of $12 million in discontinued operations related to these operations, representing their operating results for the first half of 2000 plus an additional loss recorded on closing. Global Specialty Reporting Structure - ------------------------------------ In the first quarter of 2000, we implemented a new segment reporting structure for our property-liability insurance business following the fourth-quarter 1999 realignment of our primary insurance underwriting operations into a Global Specialty Practices organization. The most significant change from our previous format involves the inclusion of certain non-U.S. primary business in the respective business segment to which it pertains, which differs from our prior practice of including all non-U.S. business in the International segment. In addition, our Construction business center was moved from the Commercial Lines Group segment to the Other Global Specialty segment, and our Global Healthcare operation is now reported as a separate business segment. Our new reporting format is more closely aligned with the global management of the majority of our specialty insurance products and services. Our International segment includes our operations at Lloyd's and specialty insurance business that we do not manage on a global basis, including MMI's U.K.-based operation, Unionamerica. All prior year data is presented on a basis consistent with our new reporting structure. Property-Liability Insurance ---------------------------- Overview - -------- Consolidated written premiums of $1.49 billion in the second quarter of 2000 were slightly higher than comparable 1999 premium volume of $1.47 billion. Premium growth in our Global Healthcare and International segments (primarily due to the MMI acquisition), as well as in the Other Global Specialty segment, was largely offset by a $121 million decline in our Reinsurance segment's premium volume, which is discussed in more detail on page 29 of this report. Our premium volume in 2000 was impacted by cessions made under a corporate all-lines, aggregate excess-of-loss reinsurance program (the "corporate program"), and cessions made under a separate aggregate excess-of-loss treaty exclusive to our Reinsurance segment (together, the "reinsurance cessions"). The following table summarizes the impact of the reinsurance cessions on our 2000 results: Three Months Six Months Ended June 30 Ended June 30 ------------- ------------- (In millions) 2000 2000 ------ ------ Corporate program: ----------------- Ceded written premiums $ - $ 80 Ceded earned premiums 5 70 Ceded losses and loss adjustment expenses - 111 ------ ------ Net pretax benefit (loss) (5) 41 ------ ------ Reinsurance segment treaty: -------------------------- Ceded written premiums 39 56 Ceded earned premiums 39 56 Ceded losses and loss adjustment expenses 88 120 ------ ------ Net pretax benefit 49 64 ------ ------ Combined total: -------------- Ceded written premiums $ 39 $136 Ceded earned premiums 44 126 Ceded losses and loss adjustment expenses 88 231 ------ ------ Net pretax benefit $ 44 $105 ====== ====== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- The combined year-to-date pretax benefit of $105 million was allocated to our Reinsurance segment ($92 million) and our International segment ($13 million). The loss and loss adjustment expense cessions made under the corporate program in the first quarter of 2000 were the result of adverse development on losses incurred during the 1999 accident year. No losses were ceded under the corporate program in the second quarter. In 1999's second quarter, our Reinsurance segment ceded written and earned premiums of $25 million, and losses and loss adjustment expenses of $56 million, for a net benefit of $31 million under the aggregate excess-of-loss reinsurance treaty exclusive to that segment. Excluding the impact of the reinsurance cessions in both years, the elimination of the quarter reporting lag, and the addition of MMI, our consolidated year to date written premium volume in 2000 totaled $2.95 billion, $200 million higher than the same period of 1999. The increase was centered in our Reinsurance and International segments, and, to a lesser extent, in our Other Global Specialty segment. Our consolidated loss ratio, which measures insurance losses and loss adjustment expenses as a percentage of earned premiums, was 72.2 for the second quarter of 2000, compared with a loss ratio of 73.9 in the same 1999 period. The 2000 ratio includes a 7.2 point benefit resulting from a $102 million reduction in workers' compensation reserves related to favorable prior year development. The benefit was recorded in our Commercial Lines Group segment ($69 million) and the Construction business center of our Other Global Specialty segment ($33 million). Our acquisition of MMI, which posted a 124.7 loss ratio for the second quarter, added 3.7 points to our consolidated second quarter loss ratio and 1.8 points to our year-to-date loss ratio. Excluding the impact of MMI, the workers' compensation reserve reduction, and the reinsurance cessions, our second-quarter consolidated loss ratio was 80.2, three and a half points worse than the comparable 1999 ratio. On a year-to-date basis, excluding those factors and the impact of the elimination of the quarter reporting lag, our consolidated loss ratio was 79.9, nearly four points worse than the first six months of 1999. The deterioration in 2000 was centered in our Reinsurance and International segments, which masked significant improvement in our domestic primary insurance operations. Our domestic primary operations achieved strong improvement in profitability over the second quarter and first six months of 1999. Over the last two years, we have taken aggressive actions to improve the quality and profitability of our domestic book of business. Those actions focused on eliminating unprofitable business, implementing price increases on new and renewal business, and reducing expenses. Through the first half of 2000, we have achieved significant price increases on our standard commercial insurance business as well as on most specialty commercial insurance coverages we offer. We expect continued price increases during the last half of 2000. We have also achieved significant improvement in the current underwriting year results for the majority of our primary insurance operations. Our consolidated expense ratio, measuring underwriting expenses as a percentage of premiums written, was 32.9 for the second quarter and 32.3 for the first half of 2000, compared to expense ratios of 32.0 and 33.0 for the respective periods of 1999. Excluding all of the factors discussed above which impacted our 2000 results, our consolidated expense ratios for the second quarter and first six months of 2000 were 31.4 and 30.4, respectively. The significant improvement over the same periods of 1999 reflects efficiencies realized as a result of our expense reduction initiatives over the last two years. The table on the following page summarizes key financial results (from continuing operations) by property-liability underwriting business segment (Underwriting results are presented on a GAAP basis; combined ratios are presented on a statutory accounting basis). THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) ---------------------------------------- % of Three Months Six Months 2000 Ended June 30 Ended June 30 (Dollars in millions) Written ------------- ------------- ------------------- Premiums 2000 1999 2000 1999 Commercial Lines Group: -------- ----- ----- ----- ----- Written Premiums 28% $403 399 795 798 Underwriting Result $54 (56) 32 (142) Combined Ratio 86.5 114.6 96.4 117.1 Global Surety: Written Premiums 8% $117 115 240 220 Underwriting Result $12 11 31 27 Combined Ratio 87.7 82.1 83.8 80.4 Global Healthcare: Written Premiums 8% $127 110 240 245 Underwriting Result $(45) (19) (64) (47) Combined Ratio 133.2 120.0 125.1 120.0 Other Global Specialty: Written Premiums 25% $383 339 717 671 Underwriting Result $(4) (35) (28) (59) Combined Ratio 100.2 108.9 103.5 108.5 International: Written Premiums 9% $227 155 274 209 Underwriting Result $(51) (8) (60) (19) Combined Ratio 127.8 105.7 123.6 109.6 --- ----- ----- ----- ----- Total Primary Insurance: Written Premiums 78% $1,257 1,118 2,266 2,143 Underwriting Result $(34) (107) (89) (240) Combined Ratio 102.7 109.8 104.2 111.4 Reinsurance: Written Premiums 22% $234 355 624 584 Underwriting Result $(33) 6 (78) 29 Combined Ratio 116.8 90.1 115.1 91.4 --- ----- ----- ----- ----- Total Property- Liability Insurance: Written Premiums 100% $1,491 1,473 2,890 2,727 === GAAP Underwriting Result $(67) (101) (167) (211) Statutory Combined Ratio: Loss and Loss Expense Ratio 72.2 73.9 74.0 74.7 Underwriting Expense Ratio 32.9 32.0 32.3 33.0 ----- ----- ----- ----- Combined Ratio 105.1 105.9 106.3 107.7 ===== ===== ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Underwriting Results by Segment - ------------------------------- Commercial Lines Group - ---------------------- The Commercial Lines Group segment includes our standard commercial and catastrophe risk business centers, as well as the results of our limited involvement in insurance pools. Premium volume of $403 million in the second quarter of 2000 was slightly higher than comparable 1999 volume of $399 million. Through the first half of 2000, written premiums of $795 million were level with the same period of 1999. We have continued our efforts in 2000 to improve the quality of our standard commercial business through the nonrenewal of unprofitable business, leading to a decline in accounts written compared to 1999. Price increases on new and renewal standard commercial business, however, have averaged 8.6% through the first half of 2000, offsetting the impact of that decline. Catastrophe Risk premium volume of $67 million through the first half of 2000 was $29 million higher than in the same period of 1999, reflecting our February 2000 acquisition of Pacific Select, which underwrites earthquake coverages in California. The second quarter 2000 underwriting profit of $54 million in this segment was largely driven by the $69 million benefit realized from the favorable prior year development on workers' compensation reserves. Excluding that benefit, however, the underwriting loss of $15 million was still greatly improved over the comparable 1999 loss of $56 million, reflecting the impact of our ongoing profit improvement initiatives which have resulted in a 16-point improvement in current accident year loss ratio results compared to the second quarter of 1999. Through the first six months of 2000, underwriting results excluding the workers' compensation benefit improved by $105 million over the comparable 1999 period. The year-to-date expense ratio in 2000 is a full point better than the 1999 six- month expense ratio. We anticipate additional improvement throughout the second half of the year due to further price increases and the continuing improvement in the quality of our book of standard commercial business. Global Surety - ------------- Our Global Surety segment underwrites surety bonds, which guarantee that third parties will be indemnified against the nonperformance of contractual obligations. Premium volume of $117 million in the second quarter of 2000 was slightly higher than comparable 1999 premiums of $115 million, but year-to-date premiums of $240 million were 9% ahead of the same 1999 period. The pace of premium growth slowed in the second quarter, reflecting the impact of stricter underwriting initiatives implemented to prepare for a potential slowdown in the economy. The growth in year-to-date premium volume resulted from increased business from our existing customer base, as well as from new customers. The Global Surety segment continued to generate profitable results, but its combined ratios for the second quarter and first half of 2000 deteriorated by 5.6 points and 3.4 points, respectively, from the same periods of 1999, primarily due to increased losses in our Mexican operations. We have implemented corrective underwriting measures designed to improve the results of our operations in Mexico. Global Healthcare - ----------------- Our Global Healthcare segment (formerly Medical Services) provides property-liability insurance throughout the entire health care delivery system. Written premium volume of $127 million in the second quarter included $13 million of premiums from MMI's domestic operations. Excluding the MMI impact, second quarter premium volume was 4% ahead of the same 1999 period, primarily due to growth in international business. Excluding a $37 million premium recorded on one three-year policy in the first half of 1999, Global Healthcare's year-to-date 2000 premium volume of $240 million was 15% higher than the comparable 1999 total. New business, price increases, higher retention ratios and the addition of MMI accounted for the increase. Price increases in the Healthcare Professionals' line of business averaged 8.6% through the first half of 2000, while price increases for Major Accounts professional business averaged 13.2% for the same period. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Underwriting results in the Global Healthcare segment were heavily influenced by the addition of MMI, which accounted for $41 million of the $45 million second quarter loss. This segment's performance excluding MMI continues to improve, however, as evidenced by a 14-point improvement in the current accident year loss ratio compared with the first half of 1999. After the MMI transaction was completed in April, we immediately launched aggressive efforts to improve MMI's underwriting results and remove redundant expenses from the newly combined Global Healthcare operations. As MMI policies renew, we are extensively reunderwriting the book of business and implementing price increases designed to achieve our return on equity targets. We expect the reunderwriting process to result in the elimination of up to 50% of MMI's book of business. Other Global Specialty - ---------------------- The Other Global Specialty segment includes the following business centers: Construction, Technology, Ocean Marine, Financial and Professional Services, Public Sector Services, and Excess and Surplus Lines. Total second quarter written premiums of $383 million in this segment grew 13% over the same period of 1999, while year-to-date premium volume of $717 million was 7% ahead of 1999. The increases were driven by growth in our Technology business center, where new business, strong retention rates and price increases averaging 7% led to a premium growth of 52% and 37%, respectively, over the second quarter and first six months of 1999. Construction premium volume was down 5% in the second quarter and 3% in the first half of the year compared with 1999, due to a reduction in new business stemming from our extensive efforts to eliminate unprofitable business. Price increases in Construction for the first six months of 2000 averaged 14%. Our Financial and Professional Services and Public Sector Services operations also achieved strong premium growth in the first half of the year. Underwriting results in the Other Global Specialty segment for the second quarter and first half of 2000 benefited from the $33 million favorable prior year development on workers' compensation reserves in the Construction business center. Excluding that benefit, Construction's second quarter underwriting loss of $12 million was still $11 million better than the comparable 1999 result, reflecting favorable development on losses incurred in prior years, particularly for general liability coverages. Underwriting results in our Financial and Professional Services business center for the second quarter and first half of 2000 deteriorated from the same 1999 periods, primarily due to adverse prior year development on international business. Our growing Technology business center recorded break-even underwriting results for the second quarter and first half of the year, and the second quarter Technology expense ratio has fallen below 28 on the strength of the significant increase in written premium volume. International - ------------- Under our new Global Specialty reporting structure, our International segment consists of our operations at Lloyd's, and specialty business that is not managed on a global basis. In addition, beginning in the second quarter of 2000, this segment includes the results of MMI's London-based insurance and reinsurance operation, Unionamerica. Our international expansion efforts over the last several years have built a presence in 15 countries representing 85% of the global property-liability insurance market. Second quarter written premium volume of $227 million was 46% above the comparable 1999 total of $155 million. On a year-to-date basis, written premiums are 31% higher than 1999 despite the first quarter cession of $23 million of written premiums under our corporate aggregate excess-of-loss reinsurance treaty. Although the addition of $30 million of premiums from Unionamerica accounted for a portion of this growth, our International premium volume excluding Unionamerica increased 26% and 17%, respectively, over the second quarter and first six months of 1999. Our growth in 2000 has been centered in our Lloyd's operation, through increases in our investment in Lloyd's syndicates, and the addition of new underwriting teams. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- The second quarter and six-month underwriting losses of $51 million and $60 million, respectively, were significantly worse than comparable results for the same periods of 1999. To a large extent, the deterioration is attributable to two of our syndicates at Lloyd's which underwrite aviation and professional liability coverages. We have implemented corrective underwriting initiatives and made management changes in these syndicates in an effort to improve their results going forward. In addition, Unionamerica recorded a $15 million underwriting loss in the second quarter. Year-to-date underwriting results in our International segment include a net pretax benefit of $11 million resulting from cessions made under our corporate aggregate excess- of-loss reinsurance treaty. Reinsurance - ----------- The St. Paul's Reinsurance segment underwrites treaty and facultative reinsurance for property, liability, ocean marine, surety and certain specialty classes of business, and provides products and services to the alternative risk transfer market. Second quarter written premium comparisons between 2000 and 1999 were impacted by the elimination of the one-quarter reporting lag for St. Paul Re - UK. Reported premium volume for this year's second quarter represents results for the period April 1 through June 30, 2000, which is historically a low-volume period for St. Paul Re's UK-based operations. By contrast, the reported premium volume for last year's second quarter, when the reporting lag was still in effect, represents results for the period January 1 through March 31, 1999, which is traditionally a high-volume period for these operations. The Reinsurance segment's year-to- date written premium total of $624 million includes the $31 million of incremental premiums resulting from the elimination of the reporting lag, but also reflects a $113 million reduction in premiums from the reinsurance cessions. This segment's 1999 year- to-date written premium total of $584 million includes a $25 million reduction from cessions made under its aggregate excess- of-loss treaty. Excluding these factors for both years, premium volume through the first six months of 2000 of $706 million was $97 million, or 16%, ahead of comparable 1999 premiums of $609 million. The increase was primarily due to growth in non- traditional business, and new business written through our Discover Re subsidiary, which serves the alternative risk transfer market. Significant price increases in virtually all reinsurance lines and in every geographic region also contributed to the sizeable growth in reinsurance volume in 2000. The 2000 year-to-date underwriting loss of $78 million in our Reinsurance segment included the $92 million benefit from the reinsurance cessions. The 1999 year-to-date underwriting profit of $29 million included a $31 million benefit from that year's reinsurance cession. Excluding that benefit for both years, the year-to-date loss of $170 million was $168 million worse than the comparable 1999 underwriting loss of $2 million. Results in 2000 were severely impacted by catastrophe losses totaling $110 million, the majority of which were the result of additional loss development from the severe windstorms that struck Europe at the end of 1999. Adverse prior year loss development on casualty reinsurance coverages also contributed to the deterioration from 1999, while the 1999 six-month results included favorable prior year development. We anticipate improved results during the remainder of the year and into 2001 as the full impact of the recent and anticipated price increases take effect. Investment Operations - --------------------- The St. Paul's property-liability insurance operations produced pretax investment income of $312 million in the second quarter of 2000, down 1% from income of $316 million in the same period of 1999. Our acquisition of MMI added $19 million of pretax investment income in the second quarter; excluding that amount, investment income would have been approximately 6% below the second quarter of 1999. Our year-to-date pretax investment income of $631 million was slightly below comparable 1999 income of $634 million. However, excluding the MMI acquisition, and the $12 million of incremental pretax investment income resulting from the elimination of the quarter reporting lag, year-to-date investment income in 2000 would have been approximately 5% below the comparable 1999 total. The sale of our standard personal insurance operations in September 1999 resulted in the transfer of approximately $325 million of invested assets to Metropolitan, contributing to the decline in investment THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Investment Operations (continued) - -------------------------------- income compared with the second quarter and first half of 1999. In addition, negative underwriting cash flows over the last several quarters have resulted in the net sale of fixed maturity investments to fund operational cash flow requirements. Included in the negative underwriting cash flows were $163 million of premium payments made in 2000 for cessions made under the corporate reinsurance treaty. We expect our cash flows to improve throughout the remainder of 2000 due to the impact of continuing price increases and improving loss experience throughout our standard and specialty commercial operations. Pretax realized investment gains in our property-liability insurance operations totaled $107 million in the second quarter, pushing the year-to-date 2000 total to $438 million. Both amounts were significantly higher than the comparable 1999 totals of $71 million and $132 million, respectively. The six-month total in 2000 was driven by gains of $366 million from our venture capital portfolio, with the single largest gain ($117 million) resulting from the sale of our investment in Flycast Communications Corp., a leading provider of Internet direct response solutions. We also sold several other direct holdings, and our investments in various venture capital partnerships also contributed to our record six-month realized gain total. In addition, sales of equity investments generated $75 million of pretax realized gains in the first half of the year. The market value of our $15.9 billion fixed maturities portfolio was approximately equal to its cost on June 30, 2000. Our acquisition of MMI in April 2000 added approximately $1 billion of high-quality fixed maturity investments to our portfolio. Approximately 95% of our portfolio is rated at investment graded (BBB or above), and its weighted average pretax yield at June 30, 2000 was 6.8%. The combined carrying value of our equity and venture capital investments at June 30, 2000 included pretax unrealized appreciation of $1.1 billion. Environmental and Asbestos Claims --------------------------------- We continue to receive claims alleging injury or damage from environmental pollution or seeking payment for the cost to clean up polluted sites. We also receive asbestos injury claims arising out of product liability coverages under general liability policies. The vast majority of these claims arise from policies written many years ago. Our alleged liability for both environmental and asbestos claims is complicated by significant legal issues, primarily pertaining to the scope of coverage. In our opinion, court decisions in certain jurisdictions have tended to broaden insurance coverage beyond the intent of original insurance policies. Our ultimate liability for environmental claims is difficult to estimate because of these legal issues. Insured parties have submitted claims for losses not covered in their respective insurance policies, and the ultimate resolution of these claims may be subject to lengthy litigation, making it difficult to estimate our potential liability. In addition, variables, such as the length of time necessary to clean up a polluted site and controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of an environmental claim. Estimating our ultimate liability for asbestos claims is equally difficult. The primary factors influencing our estimate of the total cost of these claims are case law and a history of prior claim development, both of which continue to evolve. The following table represents a reconciliation of total gross and net environmental reserve development for the six months ended June 30, 2000, and the years ended Dec. 31, 1999 and 1998. Amounts in the "net" column are reduced by reinsurance recoverables. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Environmental and Asbestos Claims (continued) -------------------------------------------- 2000 Environmental (six months) 1999 1998 - ------------- ----------- ----------- ----------- (In millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Beginning reserves $698 $599 $783 $645 $867 $677 Incurred losses 20 15 (33) 1 (16) 26 Paid losses (35) (28) (52) (47) (68) (58) ---- ---- ---- ---- ---- ---- Ending reserves $683 $586 $698 $599 $783 $645 ==== ==== ==== ==== ==== ==== The following table represents a reconciliation of total gross and net reserve development for asbestos claims for the six months ended June 30, 2000, and the years ended Dec. 31, 1999 and 1998. 2000 Asbestos (six months) 1999 1998 - -------- ----------- ----------- ----------- (In millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Beginning reserves $398 $298 $402 $277 $397 $279 Incurred losses 31 24 28 51 44 13 Paid losses (23) (17) (32) (30) (39) (15) ---- ---- ---- ---- ---- ---- Ending reserves $406 $305 $398 $298 $402 $277 ==== ==== ==== ==== ==== ==== Our reserves for environmental and asbestos losses at June 30, 2000 represent our best estimate of our ultimate liability for such losses, based on all information currently available. Because of the inherent difficulty in estimating such losses, however, we cannot give assurances that our ultimate liability for environmental and asbestos losses will, in fact, match current reserves. We continue to evaluate new information and developing loss patterns, but we believe any future additional loss provisions for environmental and asbestos claims will not materially impact our results of operations, liquidity or financial position. Total gross environmental and asbestos reserves at June 30, 2000 of $1.09 billion represented approximately 6% of gross consolidated reserves of $18.93 billion. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Life Insurance -------------- Our life insurance segment consists primarily of Fidelity and Guaranty Life Insurance Company and subsidiaries ("F&G Life"). F&G Life's primary products are deferred annuities (including tax- sheltered annuities and equity indexed annuities), structured settlement annuities and immediate annuities. F&G Life also underwrites traditional life and universal life insurance products. Highlights of F&G Life's financial performance for the second quarter and first six months of 2000 and 1999 were as follows: Three Months Six Months Ended June 30 Ended June 30 ------------- ------------- (In millions) 2000 1999 2000 1999 ---- ---- ---- ---- Pretax earnings $ - $ 9 $18 $28 Sales (annualized premiums) $260 $312 $487 $616 Premiums and policy charges $76 $37 $108 $65 Policy surrenders $152 $52 $242 $100 Net investment income $85 $82 $172 $153 Life insurance in force $15,062 $11,044 F&G Life's pretax earnings in the second quarter and first six months of 2000 benefited from growth in assets under management, driven by continued strong product sales and positive operating cash flows, offset by realized investment losses of $20 million, an increase in product development and channel expansion expenses, and an increase in mortality and surrender costs. Pretax results in the first half of 2000 also include $1.3 million of interest expense on an intercompany note payable to The St. Paul's property-liability operations. Excluding realized investment gains and losses in both years, and the intercompany interest expense in 2000, pretax earnings of $39 million for the first six months of 2000 were $2 million higher than comparable 1999 earnings. After-tax earnings on a similar basis also improved over 1999 levels, reflecting the impact of F&G Life's adoption of an investment strategy to allocate 1% of its investment portfolio to tax-favored securities. These investments, while typically contributing little or no operating earnings, generated tax credits that lowered F&G Life's effective tax rate from 28% in 1999 to 25% in 2000. Sales volume declined in the second quarter and first six months of 2000 compared with the same 1999 periods, primarily due to lower equity-indexed annuity (EIA) sales, which was partially offset by an increase in fixed interest rate annuity sales. Credited interest rates on the EIA products are tied to the performance of a leading market index. Fluctuations in equity markets during the first half of 2000 contributed to a decline in EIA sales. In addition, sales of these products were unusually high in the first quarter of 1999 due to the continued popularity of F&G Life's first-generation portfolio of EIA products that had been introduced in mid - 1998. Sales of fixed interest rate annuities in 2000 continued their momentum from late 1999, as the overall level of market interest rates have continued to increase. The demand for annuity products is affected by fluctuating interest rates and the relative attractiveness of alternative investments, particularly equity-based products. Traditional life insurance sales in the first half of 2000 were nearly three times higher than the same period of 1999, reflecting the continued success of a new term life product line launched in 1999 targeted at the mortgage protection market. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Life Insurance (continued) ------------------------- F&G Life hedges its exposure on its EIA products by purchasing options with terms similar to the market index component to provide the same return as F&G Life guarantees to the annuity contract holder, subject to minimums guaranteed in the annuity contract. At June 30, 2000, F&G Life held options with a notional amount of $1.08 billion and a market value of $33 million. Premiums and policy charges increased in the second quarter and first six months of 2000 compared with the same periods of 2000, primarily the result of growth in the sale of structured settlement annuities and life-contingent single premium immediate annuities (SPIA). Structured settlement annuities are sold primarily to property-liability insurers to fund the settlement of insurance claims. The continued expansion of the structured settlement program into The St. Paul's property-liability claim organization accounts for the increase in sales volume. The growth in SPIA sales resulted from an increase in marketing emphasis on this product. Policy charges from surrenders on tax sheltered and equity indexed annuities also contributed to the overall increase in premiums and policy charges. Sales of structured settlement annuities, annuities with life contingencies and term life insurance are recognized as premiums earned under GAAP. However, sales of investment-type contracts, such as equity-indexed, deferred and tax sheltered annuities and universal life-type contracts are recorded directly on the balance sheet on a deposit accounting basis and are not recognized as premium revenue under GAAP. Deferred annuities and universal life products are subject to surrender by policyholders. Nearly all of F&G Life's surrenderable annuity policies allow a refund of the cash value balance less a surrender charge. Several different products contributed to the increase in surrender activity in the first six months of 2000. Surrenders on tax-sheltered annuities increased due to F&G Life's transition from one exclusive distribution partner to a new network of approximately 15 distributors. EIA surrenders have increased naturally, as a result of the significant growth in the size of the EIA book of business. F&G Life has written over $1 billion in EIA business since the products were introduced in mid - 1998. Surrender activity in 2000 also reflects an internal policy change this year, whereby the replacement of an existing F&G Life policy with another F&G Life policy is now reported as a surrender. Net investment income grew 12% in 2000 as a result of an increasing asset base generated by positive cash flow. The 36% increase in life insurance in force over the same time a year ago reflects the sales of the new term life product line introduced in mid - 1999. Asset Management ---------------- Our asset management segment consists of our 78% majority ownership interest in The John Nuveen Company (Nuveen). Nuveen provides customized individual accounts, mutual funds, exchange- traded funds and defined portfolios to help financial advisors serve their affluent and high net worth clients. Highlights of Nuveen's performance for the second quarter and first six months of 2000 and 1999 were as follows: Three Months Six Months Ended June 30 Ended June 30 ------------- ------------- (In millions) 2000 1999 2000 1999 ---- ---- ---- ---- Revenues $88 $86 $188 $169 Expenses 45 47 102 92 ---- ---- ---- ---- Pretax earnings 43 39 86 77 Minority interest (10) (9) (20) (18) ---- ---- ---- ---- The St. Paul's share of pretax earnings $33 $30 $66 $59 ==== ==== ==== ==== Assets under management $60,299 $59,538 ====== ====== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Asset Management (continued) --------------------------- Nuveen's revenues for the first six months of 2000 grew 11% over the same period of 1999, primarily due to an increase in defined portfolio products sold. The high quality of its diverse range of products enabled Nuveen to post strong earnings in a quarter which saw most market indices decline. Nuveen had positive net flows (equal to the sum of sales, reinvestments and exchanges, less redemptions) in the second quarter of 2000, specifically in managed accounts, as investors shifted their portfolios from high technology concentrations earlier in the year to a more balanced investing approach as the quarter progressed. Demand for Nuveen's defined portfolio also remained high, with one newly- introduced trust alone garnering new sales of over $400 million in the second quarter. Managed assets at the halfway point of 2000 consisted of $27.3 billion of exchange-traded funds, $21.3 billion of managed accounts, $11.2 billion of mutual funds and $499 million of money market funds. Equity securities now account for approximately 35% of Nuveen's assets under management. Including defined portfolios, Nuveen managed or oversaw approximately $72 billion in assets at June 30, 2000. Capital Resources ----------------- Common shareholders' equity totaled $6.68 billion at June 30, 2000, an increase of $232 million over the year-end 1999 total of $6.45 billion which resulted from our strong net income through the first six months of the year, and an increase in the unrealized appreciation of our equity and venture capital investment portfolios. Through the first six months of 2000, we repurchased 13.6 million of our common shares for a total cost of $333 million, for an average cost of $24.45 per share. Virtually all of the repurchases occurred in the first quarter of the year, and were financed through a combination of internally-generated funds and commercial paper borrowings. Since November 1998, we have repurchased and retired 28.6 million of our common shares for a total cost of $824 million, or an average cost of $28.85 per share. Total debt outstanding at June 30, 2000 of $1.59 billion was $127 million higher than the year-end 1999 total of $1.47 billion. In April 2000, we issued $500 million of senior debt, the proceeds of which were used to repay commercial paper borrowings and for general corporate purposes. Of the debt issued, $250 million is due in April 2005 and bears an interest rate of 7.875%, and $250 million is due in 2010 and bears an interest rate of 8.125%. In February 2000, we repaid $46 million of floating rate notes that had been issued by a special purpose offshore entity that provided reinsurance to one of our subsidiaries. In April 2000, we assumed $45 million of short-term borrowings as part of our acquisition of MMI; that debt was paid off in its entirety shortly after the acquisition was completed. We also assumed MMI's obligations on $125 million of capital securities bearing an annual dividend rate of 7.625%. Those securities are classified as "Company-obligated mandatorily redeemable preferred securities of subsidiaries" on our consolidated balance sheet as of June 30, 2000. The ratio of total debt to total capitalization of 18% at June 30, 2000 was unchanged from the year-end 1999 ratio. In July 2000, St. Paul Capital LLC, a wholly-owned subsidiary of The St. Paul, provided notice to the holders of its $207 million, 6% Convertible Monthly Income Preferred Securities (MIPS) that St. Paul Capital LLC is exercising its right to cause the conversion rights of the owners of the MIPS to expire on August 14, 2000. Each of the 4,140,000 MIPS outstanding is convertible into 1.695 shares of our common stock. We expect the owners to convert their MIPS prior to the conversion expiration date, which would result in the issuance of 7,017,300 of our common shares. These shares are currently considered common stock equivalents for purposes of our diluted earnings per share calculation. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Capital Resources (continued) ---------------------------- We anticipate that any major capital expenditures during the remainder of 2000 would involve further repurchases of our common shares or acquisitions of existing businesses. At June 30, 2000, we had approximately $376 million of capacity to repurchase additional common shares under a repurchase program authorized by the company's board of directors in May 2000. We repurchase our shares in the open market and through private transactions when we deem such repurchases to be a prudent use of capital. We have no major capital improvements planned for the remainder of 2000. For the first six months of 2000, our ratio of earnings to fixed charges was 10.68, compared with 7.97 for the same period of 1999. Our ratio of earnings to combined fixed charges and preferred stock dividend requirements was 9.82, compared with 7.22 for the same period of 1999. Fixed charges consist of interest expense, dividends on preferred capital securities and that portion of rental expense deemed to be representative of an interest factor. Liquidity --------- Liquidity is a measure of our ability to generate sufficient cash flows to meet the short- and long-term cash requirements of our business operations. Net cash flows used by continuing operations totaled $416 million in the first six months of 2000, compared with cash used by continuing operations of $49 million in the same period of 1999. The deterioration in 2000 was primarily due to significant loss payments in our Reinsurance segment, and premium payments of $163 million related to our corporate reinsurance program. The operational cash flow shortfall was partially funded by investment sales generating net proceeds of $254 million. We expect our operational cash flows to improve during the remainder of 2000 as the full impacts of continuing price increases and improvements in the quality of our book of business are realized. On a long-term basis, we believe our operational cash flows will benefit from the corrective pricing and underwriting actions under way in our property- liability operations. Our financial strength and conservative level of debt provide us with the flexibility and capacity to obtain funds externally through debt or equity financings on both a short-term and long-term basis should the need arise. Year 2000 Claims ---------------- The "Year 2000" issue refers to computer programming limitations that had the potential to cause information technology systems to incorrectly process certain dates and date-related information, including the incorrect interpretation of the two-digit year code of "00" as the year 1900, instead of the year 2000, at the turn of the century. We have received some Year 2000-related claims and we could face additional Year 2000 claims under coverages provided by insurance or reinsurance policies sold to insured parties who have incurred, or have taken action claimed to prevent, losses as a result of the failure of such parties, or the customers or vendors of such parties, to be Year 2000 compliant. For example, like other property-liability insurers, we have received claims for reimbursement of expenses incurred by policyholders in connection with their Year 2000 compliance efforts. Because coverage determinations depend on unique factual situations, specific policy language and other variables, it is not possible to determine at this time whether and to what extent insured parties have incurred losses, the amount of the losses or whether any such losses will be covered under our insurance or reinsurance policies. With respect to Year 2000-related claims in general, in some instances, coverage is not provided under the insurance policies or reinsurance policies, while in other instances, coverage may be provided under certain circumstances. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Year 2000 Claims (continued) --------------------------- Our standard property and inland marine policies require, among other things, direct physical loss or damage from a covered cause of loss as a condition of coverage. In addition, it is a fundamental principle of all insurance that a loss must be fortuitous to be considered potentially covered. Given the fact that Year 2000-related losses were not unforeseen, and that we expect that such losses did not, in most if not all cases, cause direct physical loss or damage, we have concluded that our property and inland marine policies do not generally provide coverage for losses relating to Year 2000 issues. To reinforce our view on coverage afforded by such policies, we have developed and continue to implement a specific Year 2000 exclusion endorsement. We do not believe that Year 2000-related insurance or reinsurance coverage claims will have a material adverse effect on our earnings, cash flows or financial position. However, the uncertainties of litigation are such that unexpected policy interpretations could compel claim payments substantially beyond our coverage intentions, possibly resulting in a material adverse effect on our results of operations and/or cash flows and a material adverse effect on our consolidated financial position. Impact of Accounting Pronouncements to be Adopted in the Future --------------------------------------------------------------- In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which amended SFAS No. 133 to make it effective for all quarters of fiscal years beginning after June 15, 2000, and prohibits retroactive application to financial statements of prior periods. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," as an additional amendment to SFAS No. 133, to address a limited number of issues causing implementation difficulties. We intend to implement the provisions of SFAS No. 133, as amended, in the first quarter of 2001. Our property-liability operations currently have limited involvement with derivative instruments, primarily for purposes of hedging against fluctuations in market indices, foreign currency exchange rates and interest rates. Our life insurance operation purchases options to hedge its obligation to pay credited rates on equity-indexed annuity products. We cannot at this time reasonably estimate the potential impact of this adoption on our financial position or results of operations for future periods. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Forward-looking Statement Disclosure ------------------------------------ This report contains certain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. Forward-looking statements are statements other than historical information or statements of current condition. Words such as expects, anticipates, intends, plans, believes, seeks or estimates, or variations of such words, and similar expressions are also intended to identify forward-looking statements. Examples of these forward-looking statements include statements concerning: market and other conditions and their effect on future premiums, revenues, earnings, cash flow and investment income; price increases, improved loss experience, and expense savings resulting from the restructuring actions announced in recent years. In light of the risks and uncertainties inherent in future projections, many of which are beyond our control, actual results could differ materially from those in forward-looking statements. These statements should not be regarded as a representation that anticipated events will occur or that expected objectives will be achieved. Risks and uncertainties include, but are not limited to, the following: competitive considerations, including the ability to implement price increases; general economic conditions including changes in interest rates and the performance of financial markets; changes in domestic and foreign laws, regulations and taxes; changes in the demand for, pricing of, or supply of insurance or reinsurance; catastrophic events of unanticipated frequency or severity; loss of significant customers; judicial decisions and rulings; the pace and effectiveness of the transfer of the standard personal insurance business to Metropolitan; the pace and effectiveness of the transfer of the nonstandard auto operations to Prudential; the pace and effectiveness of our integration of MMI Companies, Inc.; and various other matters. Actual results and experience relating to Year 2000 issues could differ materially from anticipated results or other expectations as a result of a variety of risks and uncertainties, including unanticipated judicial interpretations of the scope of the insurance or reinsurance coverage provided by our policies. We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements is incorporated herein by reference. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. An Exhibit Index is set forth as the last page in this document. (b) Reports on Form 8-K. 1) The St. Paul filed a Form 8-K Current Report dated April 12, 2000, relating to its issuance of $500 million of Senior Notes. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE ST. PAUL COMPANIES, INC. (Registrant) Date: August 14, 2000 By /s/ Bruce A. Backberg --------------------- Bruce A. Backberg Senior Vice President - Legal Services (Authorized Signatory) Date: August 14, 2000 By /s/ Thomas A. Bradley --------------------- Thomas A. Bradley Senior Vice President - Finance (Principal Accounting Officer) 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. EX-11 2 0002.txt Exhibit 11 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings Per Share Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 2000 1999 2000 1999 ------ ------ ------ ------ (In millions, except per share data) EARNINGS Basic: Net income, as reported $212 $204 $569 $369 Dividends on preferred stock, net of taxes (2) (2) (4) (4) Premium on preferred shares redeemed (2) (1) (6) (2) ----- ----- ----- ----- Net income available to common shareholders $208 $201 $559 $363 ===== ===== ===== ===== Diluted: Net income available to common shareholders $208 $201 $559 $363 Effect of dilutive securities: Convertible preferred stock 2 2 3 3 Convertible monthly income preferred securities 2 2 4 4 Zero coupon convertible notes 1 1 1 2 ----- ----- ----- ----- Net income available to common shareholders $213 $206 $567 $372 ===== ===== ===== ===== COMMON SHARES Basic: Weighted average common shares outstanding 212 226 216 228 ===== ===== ===== ===== Diluted: Weighted average common shares outstanding 212 226 216 228 Effect of dilutive securities: Stock options 2 2 1 2 Convertible preferred stock 7 7 7 7 Convertible monthly income preferred securities 7 7 7 7 Zero coupon convertible notes 2 3 3 3 ----- ----- ----- ----- Total 230 245 234 247 ===== ===== ===== ===== EARNINGS PER SHARE Basic $0.98 $0.89 $2.59 $1.59 ===== ===== ===== ===== Diluted $0.92 $0.84 $2.43 $1.50 ===== ===== ===== ===== EX-12 3 0003.txt Exhibit 12 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Ratios Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 2000 1999 2000 1999 ------ ------ ----- ----- (In millions, except ratios) EARNINGS: Income from continuing operations before income taxes and cumulative effect of accounting change $301 $287 $839 $549 Add: fixed charges 47 41 86 79 ----- ----- ----- ----- Income, as adjusted $348 $328 $925 $628 ===== ===== ===== ===== FIXED CHARGES AND PREFERRED DIVIDENDS: Interest expense and amortization $30 $25 $55 $47 Dividends on preferred capital securities 10 9 18 19 Rental expense (1) 7 7 13 13 ----- ----- ----- ----- Total fixed charges 47 41 86 79 Preferred stock dividend requirements 4 4 8 8 ----- ----- ----- ----- Total fixed charges and preferred stock dividend requirements $51 $45 $94 $87 ===== ===== ===== ===== Ratio of earnings to fixed charges 7.40 7.93 10.68 7.97 ===== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 6.85 7.22 9.82 7.22 ===== ===== ===== ===== (1) Interest portion deemed implicit in total rent expense. EX-27 4 0004.txt
7 1,000,000 6-MOS 6-MOS DEC-31-2000 DEC-31-1999 JUN-30-2000 JUN-30-1999 20,049 20,597 0 0 0 0 1,696 1,392 510 612 912 919 27,204 27,036 84 121 309 183 1,069 988 41,139 39,010 24,012 22,890 3,385 3,261 0 0 0 0 1,593 1,506 544 503 48 18 1,985 2,078 4,695 4,192 41,139 39,010 2,885 2,701 808 789 424 132 240 220 2,247 2,122 703 686 568 485 839 549 258 133 581 416 (12) (17) 0 0 0 (30) 569 369 2.59 1.59 2.43 1.50 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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