-----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, Wgleqizwv3CUHsn2rAqvGX/C6OUUelp81qnWDnMlx0ptUKncEhzUUCoWDEs2wS5t b1aGdqDxF6OGSfGrOzh+nw== 0000086312-02-000004.txt : 20020515 0000086312-02-000004.hdr.sgml : 20020515 20020515163142 ACCESSION NUMBER: 0000086312-02-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST PAUL COMPANIES INC /MN/ CENTRAL INDEX KEY: 0000086312 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 410518860 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10898 FILM NUMBER: 02652955 BUSINESS ADDRESS: STREET 1: 385 WASHINGTON ST CITY: SAINT PAUL STATE: MN ZIP: 55102 BUSINESS PHONE: 6123107911 FORMER COMPANY: FORMER CONFORMED NAME: SAINT PAUL COMPANIES INC DATE OF NAME CHANGE: 19900730 FORMER COMPANY: FORMER CONFORMED NAME: ST PAUL COMPANIES INC/MN/ DATE OF NAME CHANGE: 19990219 FORMER COMPANY: FORMER CONFORMED NAME: ST PAUL FIRE & MARINE INSURANCE CO/MD DATE OF NAME CHANGE: 19990219 10-Q 1 tenq102.txt FORM 10-Q MARCH 31, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 -------------- 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 001-10898 --------- THE ST. PAUL COMPANIES, INC. ---------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 ------------------------------ ------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 385 Washington St., Saint Paul, MN 55102 ---------------------------------- -------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (651) 310-7911 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of the Registrant's Common Stock, without par value, outstanding at May 9, 2002, was 208,319,416. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION Consolidated Statements of Income (Unaudited), Three Months Ended March 31, 2002 and 2001 3 Consolidated Balance Sheets, March 31, 2002 (Unaudited) and December 31, 2001 4 Consolidated Statements of Shareholders' Equity, Three Months Ended March 31, 2002 (Unaudited) and Twelve Months Ended 6 December 31, 2001 Consolidated Statements of Comprehensive Income (Unaudited), Three Months Ended March 31, 2002 and 2001 7 Consolidated Statements of Cash Flows (Unaudited), Three Months Ended March 31, 2002 and 2001 8 Notes to Consolidated Financial Statements (Unaudited) 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 23 PART II. OTHER INFORMATION Item 1 through Item 6 40 Signatures 41 EXHIBIT INDEX 42 PART I FINANCIAL INFORMATION THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Unaudited For the three months ended March 31, 2002 and 2001 (In millions, except per share data) 2002 2001 ------ ------ Revenues Premiums earned $ 1,935 $ 1,627 Net investment income 293 335 Asset management 91 85 Realized investment gains (losses) (38) 77 Other 36 38 ------ ------ Total revenues 2,317 2,162 ------ ------ Expenses Insurance losses and loss adjustment expenses 1,393 1,183 Policy acquisition expenses 410 380 Operating and administrative expenses 318 301 ------ ------ Total expenses 2,121 1,864 ------ ------ Income from continuing operations before income taxes 196 298 Income tax expense 48 89 ------ ------ Income from continuing operations 148 209 ------ ------ Discontinued operations: Operating loss, net of taxes - (1) Loss on disposal, net of taxes (9) (6) ------ ------ Loss from discontinued operations, net of taxes (9) (7) ------ ------ Net income $ 139 $ 202 ====== ====== Basic earnings per share: Income from continuing operations $ 0.69 $ 0.95 Discontinued operations, net of taxes (0.04) (0.04) ------ ------ Net income $ 0.65 $ 0.91 ====== ====== Diluted earnings per share: Income from continuing operations $ 0.67 $ 0.90 Discontinued operations, net of taxes (0.04) (0.03) ------ ------ Net income $ 0.63 $ 0.87 ====== ====== Dividends declared on common stock $ 0.29 $ 0.28 ====== ====== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 2002 (unaudited) and December 31, 2001 (In millions) 2002 2001 ------- ------- Assets Investments: Fixed maturities, at estimated fair value $ 16,511 $ 15,911 Equities, at estimated fair value 1,365 1,410 Real estate and mortgage loans 945 972 Venture capital, at estimated fair value 826 859 Securities on loan 741 775 Short-term investments 1,638 2,153 Other investments 100 98 ------- ------- Total investments 22,126 22,178 Cash 185 151 Reinsurance recoverables: Unpaid losses 6,852 6,848 Paid losses 356 351 Ceded unearned premiums 725 667 Receivables: Insurance premiums 3,252 3,123 Interest and dividends 270 260 Other 239 247 Deferred policy acquisition costs 662 628 Deferred income taxes 1,276 1,248 Office properties and equipment 485 486 Goodwill and intangible assets 783 690 Other assets 1,367 1,444 ------- ------- Total Assets $ 38,578 $ 38,321 ======= ======= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) March 31, 2002 (unaudited) and December 31, 2001 (In millions) 2002 2001 ------- ------- Liabilities: Insurance reserves: Loss and loss adjustment expenses $ 22,076 $ 22,101 Unearned premiums 4,216 3,957 ------- ------- Total insurance reserves 26,292 26,058 Debt 2,260 2,130 Payables: Reinsurance premiums 948 943 Accrued expenses and other 940 1,036 Securities lending collateral 756 790 Other liabilities 1,381 1,357 ------- ------- Total Liabilities 32,577 32,314 ------- ------- Company-obligated mandatorily redeemable preferred securities of trusts holding soley subordinated debentures of the company 893 893 ------- ------- Shareholders' Equity: Preferred: SOP convertible preferred stock 110 111 Guaranteed obligation - SOP (49) (53) ------- ------- Total Preferred Shareholders' Equity 61 58 ------- ------- Common: Common stock 2,207 2,192 Retained earnings 2,590 2,500 Accumulated other comprehensive income, net of taxes: Unrealized appreciation of investments 324 442 Unrealized loss on foreign currency translation (72) (76) Unrealized loss on derivatives (2) (2) ------- ------- Total accumulated other comprehensive income 250 364 ------- ------- Total Common Shareholders' Equity 5,047 5,056 ------- ------- Total Shareholders' Equity 5,108 5,114 ------- ------- Total Liabilities, Redeemable Preferred Securities And Shareholders' Equity $ 38,578 $ 38,321 ======= ======= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Months Ended March 31, 2002 (unaudited) and Twelve Months Ended December 31, 2001 (In millions) 2002 2001 ------- ------- Preferred Shareholders' Equity: SOP convertible preferred stock: Beginning of period $ 111 $ 117 Redemptions (1) (6) ------- ------- End of period 110 111 ------- ------- Guaranteed obligation - SOP: Beginning of period (53) (68) Principal payments 4 15 ------- ------- End of period (49) (53) ------- ------- Total preferred shareholders' equity 61 58 ------- ------- Common Shareholders' Equity: Common stock: Beginning of period 2,192 2,238 Stock issued: Stock incentive plans 11 67 Preferred shares redeemed 4 13 Reacquired common shares - (135) Other - 9 ------- ------- End of period 2,207 2,192 ------- ------- Retained earnings: Beginning of period 2,500 4,243 Net income (loss) 139 (1,088) Dividends declared on common stock (60) (235) Dividends declared on preferred stock, net of taxes (2) (9) Reacquired common shares - (454) Other changes 13 43 ------- ------- End of period 2,590 2,500 ------- ------- Unrealized appreciation on investments, net of taxes: Beginning of period 442 765 Change during the period (118) (323) ------- ------- End of period 324 442 ------- ------- Unrealized loss on foreign currency translation, net of taxes: Beginning of period (76) (68) Change during the period (4) (8) ------- ------- End of period (72) (76) ------- ------- Unrealized loss on derivatives, net of taxes: Beginning of period (2) - Change during the period - (2) ------- ------- End of period (2) (2) ------- ------- Total common shareholders' equity 5,047 5,056 ------- ------- Total shareholders' equity $ 5,108 $ 5,114 ======= ======= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended March 31, 2002 and 2001 (Unaudited) (In millions) 2002 2001 ------- ------- Net income $ 139 $ 202 Other comprehensive income (loss), net of taxes: Change in unrealized appreciation on investments (118) (113) Change in unrealized loss on foreign currency translation 4 19 Change in unrealized loss on derivatives - (2) ------- ------- Other comprehensive loss (114) (96) ------- ------- Comprehensive income $ 25 $ 106 ======= ======= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2002 and 2001 (Unaudited) (In millions) 2002 2001 ------- ------- Operating Activities Net income $ 139 $ 202 Adjustments: Loss from discontinued operations 9 7 Change in insurance reserves 97 205 Change in reinsurance balances (26) (453) Realized investment losses (gains) 38 (77) Change in deferred acquisition costs (30) (31) Change in insurance premiums receivable (122) 14 Change in accounts payable and accrued expenses (96) (80) Change in income taxes payable/refundable 46 19 Provision for federal deferred tax expense 3 98 Depreciation and amortization 21 26 Other 17 (124) ------- ------- Net cash provided (used) by continuing operations 96 (194) Net cash provided by discontinued operations - 39 ------- ------- Net cash provided (used) by operating activities 96 (155) ------- ------- Investing Activities Purchases of investments (2,419) (1,532) Proceeds from sales and maturities of investments 1,790 1,634 Net sales of short-term investments 504 181 Change in open security transactions (29) 37 Purchase of office property and equipment (16) (17) Sales of office property and equipment 1 - Acquisitions, net of cash acquired (59) - Other 95 (15) ------- ------- Net cash provided (used) by continuing operations (133) 288 Net cash used by discontinued operations (4) (264) ------- ------- Net cash provided (used) by investing activities (137) 24 ------- ------- Financing Activities Dividends paid on common and preferred stock (60) (61) Proceeds from issuance of debt 498 164 Repayment of debt (368) (11) Repurchase of common shares - (188) Subsidiary's repurchase of common shares (57) (42) Stock options exercised and other 64 26 ------- ------- Net cash provided (used) by continuing operations 77 (112) Net cash provided by discontinued operations - 244 ------- ------- Net cash provided by financing activities 77 132 Effect of exchange rate changes on cash (2) - ------- ------- Increase in cash 34 1 Cash at beginning of period 151 52 ------- ------- Cash at end of period $ 185 $ 53 ======= ======= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited March 31, 2002 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 United States generally accepted accounting principles. These consolidated financial statements rely, in part, on estimates. Our most significant estimates are those relating to our reserves for losses and loss adjustment expenses. We continually review our estimates and make adjustments as necessary, but actual results could turn out to be significantly different from what we expected when we made these estimates. With respect to those underwriting lines of business that we have decided to exit (see Note 3 to our annual report to shareholders for the year ended Dec. 31, 2001), we believe the process of estimating required reserves for losses and loss adjustment expenses has an increased level of risk and uncertainty due to regulatory and other business considerations. In the opinion of management, all necessary adjustments, consisting of normal recurring adjustments, have been reflected for a fair presentation of the results of operations, financial position and cash flows in the accompanying unaudited consolidated financial statements. The results for the period are not necessarily indicative of the results to be expected for the entire year. Reference should be made to the "Notes to Consolidated Financial Statements" in our annual report to shareholders for the year ended Dec. 31, 2001. 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 2001 consolidated financial statements have been reclassified to conform to the 2002 presentation. These reclassifications had no effect on net income, comprehensive income or shareholders' equity, as previously reported. New Accounting Policy - Goodwill and Intangible Assets ------------------------------------------------------ Effective with the first-quarter 2002 adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," as described in Note 10, our accounting for goodwill and intangible assets has changed. In an acquisition of another entity, the excess of the amount we paid over the fair value of the company's tangible net assets is recorded as either an intangible asset, if it meets certain criteria, or goodwill. Intangible assets with a finite useful life (generally over five to 20 years) are amortized to expense over their estimated life, on a basis expected to be consistent with their estimated future cash flows. Intangible assets with an indefinite useful life and goodwill are no longer amortized, effective January 1, 2002. As part of the adoption, goodwill and intangible assets will be evaluated for possible impairment under the provisions of SFAS No. 142 for goodwill and intangible assets not subject to amortization, and under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," for intangible assets subject to amortization. We expect to complete this evaluation during the second quarter of 2002. Any impairment recognized resulting from the adoption of SFAS No. 142 will be recorded as a cumulative effect of accounting change as of January 1, 2002 and will require restatement of our first-quarter 2002 results. Until that review is completed, we cannot determine whether we will recognize any impairment. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 2 - Earnings Per Common Share ---------------------------------- The following table provides the calculation of our earnings per common share for the three months ended March 31, 2002 and 2001: Three Months Ended March 31 ----------------- (in millions) 2002 2001 ----------- ----- ----- Earnings Basic: Net income, as reported $ 139 $ 202 Preferred stock dividends, net of taxes (2) (2) Premium on preferred shares redeemed (3) (2) ----- ----- Net income available to common shareholders $ 134 $ 198 ===== ===== Diluted: Net income available to common shareholders $ 134 $ 198 Effect of dilutive securities: Convertible preferred stock 2 2 Zero coupon convertible notes 1 1 ----- ----- Net income, as adjusted $ 137 $ 201 ===== ===== Common Shares Basic: Weighted average common shares outstanding 208 217 ===== ===== Diluted: Weighted average common shares outstanding 208 217 Effect of dilutive securities: Stock options 3 4 Convertible preferred stock 6 6 Zero coupon convertible notes 3 3 ----- ----- Total 220 230 ===== ===== Earnings per Common Share Basic $ 0.65 $ 0.91 ===== ===== Diluted $ 0.63 $ 0.87 ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 3 - Investments -------------------- Investment Activity. Following is a summary of our investment purchases, sales and maturities for continuing operations. Three Months Ended March 31 ----------------- (in millions) 2002 2001 ----------- ----- ----- Purchases: Fixed maturities $ 1,987 $ 931 Equities 385 495 Real estate and mortgage loans 3 41 Venture capital 37 63 Other investments 7 2 ----- ----- Total purchases 2,419 1,532 ----- ----- Proceeds from sales and maturities: Fixed maturities 1,263 933 Equities 500 498 Real estate and mortgage loans 13 51 Venture capital 12 7 Other investments 2 145 ----- ----- Total sales and maturities 1,790 1,634 ----- ----- Net purchases (sales) $ 629 $ (102) ===== ===== Change in Unrealized Appreciation. The increase (decrease) in unrealized appreciation of investments recorded in common shareholders' equity was as follows: Three Twelve Months Ended Months Ended March 31 December 31 ------------ ------------ (in millions) 2002 2001 ----------- ------ ------ Fixed maturities $ (170) $ 187 Equities 31 (347) Venture capital, net of minority interest (7) (314) Other (12) (80) ------ ------ Total change in pretax unrealized appreciation - continuing operations (158) (554) Change in deferred taxes 40 214 ------ ------ Total change in unrealized appreciation, net of taxes (118) (340) Change in pretax unrealized appreciation - discontinued operations - 26 Change in deferred taxes - (9) ------ ------ Total change in unrealized appreciation - discontinued operations net of taxes - 17 ------ ------ Total change in unrealized appreciation, net of taxes $ (118) $ (323) ====== ====== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 4 - Income Taxes --------------------- The components of income tax expense (benefit) on income from continuing operations were as follows: Three Months Ended March 31 ----------------- (in millions) 2002 2001 ----------- ----- ----- Income tax expense (benefit): Federal current $ 38 $ (12) Federal deferred 3 98 ----- ----- Total federal 41 86 Foreign 4 - State 3 3 ----- ----- Total income tax expense $ 48 $ 89 ===== ===== Note 5 - Contingent Liabilities ------------------------------- In the ordinary course of conducting business, we, and some of our subsidiaries, have been named as defendants in various lawsuits. Some of these lawsuits attempt to establish liability under insurance contracts issued by our underwriting operations, including liability under environmental protection laws and for injury caused by exposure to asbestos products. Information about these contingent liabilities is set forth under "Environmental and Asbestos Claims" in Management's Discussion and Analysis and is incorporated herein by reference. Plaintiffs in these lawsuits are seeking money damages that in some cases are substantial or extra contractual in nature or are seeking to have the court direct the activities of our operations in certain ways. We are a defendant in one such matter arising out of an insuring relationship which existed for a number of years prior to 1961 with one insured, Western Asbestos Company ("Western Asbestos"), a distributor and installer of asbestos products. Western MacArthur Company ("Western MacArthur"), which acquired certain assets of Western Asbestos in 1967, has asserted rights to coverage for claims for asbestos-related injuries arising out of the products distributed and installed by Western Asbestos. Presently, there are significant default judgments against Western MacArthur taken by asbestos claimants. Significant issues exist as to the scope of coverage, including with respect to the defaults, under policies USF&G Company, one of our insurance underwriting subsidiaries, wrote for Western Asbestos and the availability of that coverage to Western MacArthur. We believe Western Asbestos is our largest known asbestos exposure. Although the ultimate outcome of these matters is not presently determinable, it is possible that the resolution of one or more matters may be material to our results of operations; however, we do not believe that the total amounts that we and our subsidiaries will ultimately have to pay in all of these lawsuits will have a material effect on our liquidity or overall financial position. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 6 - Debt ------------- Debt consisted of the following at March 31, 2002 and December 31, 2001: March 31, 2002 December 31, 2001 --------------- ----------------- (in millions) Book Fair Book Fair ----------- Value Value Value Value ----- ----- ----- ----- Medium-term notes $ 571 $ 583 $ 571 $ 596 5.75% senior notes 498 494 - - 7.875% senior notes 249 268 249 269 8.125% senior notes 249 270 249 275 Commercial paper 240 240 606 606 Nuveen line of credit borrowings 183 183 183 183 Zero coupon convertible notes 104 105 103 106 7.125% senior notes 80 84 80 84 Variable rate borrowings 64 64 64 64 Real estate debt - - 2 2 ----- ----- ----- ----- Total obligations 2,238 2,291 2,107 2,185 Fair value of interest rate swap agreements 22 22 23 23 ----- ----- ----- ----- Total debt reported on balance sheet $2,260 $2,313 $2,130 $2,208 ===== ===== ===== ===== In March 2002, we issued $500 million of 5.75% senior notes due in 2007. Proceeds from the issuance were primarily used to repay a portion of our commercial paper outstanding. At March 31, 2002, we were party to a number of interest rate swap agreements related to several of our debt securities outstanding. The notional amount of these swaps, which qualified for hedge accounting, totaled $480 million, and their aggregate fair value at March 31, 2002 was an asset of $22 million with a corresponding increase to debt on our balance sheet. Note 7 - Segment Information ---------------------------- We have seven reportable business segments in our property- liability insurance operations, consisting of Specialty Commercial, Commercial Lines Group, Surety and Construction, Health Care, Lloyd's and Other, Reinsurance, and Investment Operations. We also have an asset management segment, consisting of our majority ownership in 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 asset management segment is evaluated based on its pretax income, which includes investment income. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 7 - Segment Information (continued) --------------------------------------- The tabular information that follows provides revenue and income data from continuing operations for each of our business segments for the first quarters of 2002 and 2001. In the fourth quarter of 2001, we implemented a new segment reporting structure for our property-liability underwriting operations. Data for 2001 in the tables have been reclassified to be consistent with the new segment reporting structure. Three Months Ended March 31 ----------------- (in millions) 2002 2001 ----------- ----- ----- Revenues from continuing operations: Property-liability insurance: Specialty Commercial $ 554 $ 433 Commercial Lines Group 432 364 Surety and Construction 278 235 Health Care 184 182 Lloyd's and Other 110 111 ----- ----- Total primary insurance operations 1,558 1,325 Reinsurance 377 302 ----- ----- Total insurance premiums earned 1,935 1,627 ----- ----- Investment operations: Net investment income 290 330 Realized investment gains (losses) (39) 52 ----- ----- Total investment operations 251 382 ----- ----- Other 34 36 ----- ----- Total property-liability insurance 2,220 2,045 ----- ----- Asset management 94 87 ----- ----- Total reportable segments 2,314 2,132 Parent company, other operations and consolidating eliminations 3 30 ----- ----- Total revenues $2,317 $2,162 ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 7 - Segment Information (continued) --------------------------------------- Three Months Ended March 31 ----------------- (in millions) 2002 2001 ----------- ----- ----- Income (loss) from continuing operations: Property-liability insurance: Specialty Commercial $ 4 $ (9) Commercial Lines Group 2 77 Surety and Construction 4 20 Health Care 3 (130) Lloyd's and Other (39) (24) ----- ----- Total primary insurance operations (26) (66) Reinsurance 15 (21) ----- ----- Total underwriting result (11) (87) ----- ----- Investment operations: Net investment income 290 330 Realized investment gains (losses) (39) 52 ----- ----- Total investment operations 251 382 ----- ----- Other (26) (4) ----- ----- Total property-liability insurance 214 291 ----- ----- Asset management: Pretax income before minority interest 49 45 Minority interest (11) (10) ----- ----- Total asset management 38 35 ----- ----- Total reportable segments 252 326 Parent company, other operations and consolidating eliminations (56) (28) ----- ----- Total income from continuing operations before income taxes $ 196 $ 298 ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 8 - Reinsurance -------------------- Our consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to our acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) we have underwritten to other insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to protect us against earnings volatility and from potential losses in excess of the amount we are prepared to accept. We expect those with whom we have ceded reinsurance to honor their obligations. In the event these companies are unable to honor their obligations, we will pay these amounts. We have established allowances for possible nonpayment of amounts due to us. In the first quarter of 2002, we were not party to an all-lines, corporate excess-of-loss reinsurance treaty. In the preceding three years, cessions made under similar treaties had a significant impact on our reported financial results for certain periods. In 2001, we were party to such a treaty that we entered into effective Jan. 1 of that year, but coverage under that treaty was not triggered in the first quarter of the year. However, we ceded $9 million and $3 million of written and earned premiums, respectively, related to the treaty in the first quarter of 2001, representing the initial premium paid to our reinsurer. Our Reinsurance segment was party to a separate aggregate excess-of-loss reinsurance treaty, unrelated to the corporate treaty, in both 2002 and 2001. Coverage was not triggered under that treaty in the first quarter of 2002, however we did record ceded written and earned premiums of $4 million in that quarter, representing the initial premium for this treaty. In the first quarter of 2001, we ceded $3 million of written and earned premiums and $26 million of insurance losses and loss adjustment expenses, for a net benefit of $23 million as a result of the Reinsurance segment treaty. The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses and loss adjustment expenses was as follows: Three Months Ended March 31 ----------------- (in millions) 2002 2001 ----------- ----- ----- Premiums written Direct $1,973 $1,613 Assumed 643 570 Ceded (509) (337) ----- ----- Net premiums written $2,107 $1,846 ===== ===== Premiums earned Direct $1,815 $1,482 Assumed 562 522 Ceded (442) (377) ----- ----- Net premiums earned $1,935 $1,627 ===== ===== Insurance losses and loss adjustment expenses Direct $1,512 $1,220 Assumed 348 411 Ceded (467) (448) ----- ----- Net insurance losses and loss adjustment expenses $1,393 $1,183 ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 9 - Restructuring Charges ------------------------------ Fourth Quarter 2001 Strategic Review - In December 2001, we announced the results of a strategic review of all of our operations, which included a decision to exit a number of businesses and countries. Note 3 in our 2001 Annual Report to Shareholders provides more detailed information on this strategic review. Related to this review, we recorded a pretax charge of $62 million, including $46 million of employee-related costs (related to the expected elimination of 800 positions during 2002), $9 million of occupancy-related costs, $4 million of equipment charges and $3 million of legal costs. Note 16 in our 2001 Annual Report to Shareholders provides more information on this charge. During the first quarter of 2002, we recorded an additional $6 million of employee-related charges related to this strategic review, as we met the criteria for accrual. As of March 31, 2002, 414 positions had been eliminated. The following presents a rollforward of activity related to this accrual: (In millions) ----------- Original Reserve Reserve Charges to Pre-tax at Dec. 31, at March 31, earnings: Charge 2001 Payments Adjustments 2002 ---------- -------- ---------- -------- ----------- ---------- Employee-related $ 46 $ 46 $(20) $ 6 $ 32 Occupancy-rrelated 9 9 - - 9 Equipment charges 4 N/A N/A N/A N/A Legal costs 3 3 - - 3 ---- ---- ---- ---- ----- Total $ 62 $ 58 $(20) $ 6 $ 44 ==== ==== ==== ==== ===== Other Restructuring Charges - Since 1997, we have recorded several restructuring and other charges related to actions taken to improve our operations. Note 16 in our 2001 Annual Report to Shareholders provides more detailed information regarding these charges. In connection with our April 2000 acquisition of MMI, we recorded a pretax charge of $28 million, including $4 million of employee- related costs (related to the elimination of approximately 120 positions) and $24 million of occupancy-related costs. In connection with a cost reduction program announced in August 1999, we recorded a pretax charge of $60 million, including $25 million of employee-related costs (related to the elimination of approximately 590 positions), $33 million in occupancy-related charges and $2 million in equipment charges. In connection with a cost reduction program primarily involving our commercial insurance operations in the fourth quarter of 1998, we recorded a pretax charge of $34 million, including $26 million of employee-related costs (related to the elimination of approximately 500 positions) and $8 million of occupancy-related costs. In connection with our merger with USF&G, in the second quarter of 1998 we recorded a pretax charge to earnings of $292 million, primarily consisting of severance and other employee-related costs (related to the elimination of approximately 2,200 positions), facilities exit costs, asset impairments and transaction costs. All actions have been taken and all obligations had been met regarding these other restructuring charges, with the exception of certain remaining lease commitments. The lease commitment charges related to excess space created by the elimination of positions. During the first quarter of 2002, we reduced the lease commitment reserve by $1 million related to sublease activity. We expect to be obligated under certain lease commitments for approximately seven years. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 9 - Restructuring Charges (continued) ----------------------------------------- The following presents a rollforward of activity related to these lease commitments: (In millions) ----------- Original Reserve Reserve Charges to Pre-tax at Dec. 31, at March 31, earnings: Charge 2001 Payments Adjustments 2002 ---------- -------- ---------- -------- ----------- ---------- Lease commitments charged to earnings: $99 $39 $(4) $(1) $34 ==== ==== ==== ==== ==== Note 10 - Adoption of Accounting Pronouncement ---------------------------------------------- In the first quarter of 2002, we began implementing the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes financial accounting and reporting for acquired goodwill and other intangible assets. The statement changes prior accounting practice in the way intangible assets with indefinite useful lives, including goodwill, are tested for impairment on an annual basis. Generally, it also requires that those assets meeting the criteria for classification as intangible with estimable useful lives be amortized to expense over those lives, while intangible assets with indefinite useful lives and goodwill are not to be amortized. As a result of implementing the provisions of this statement, we did not record any goodwill amortization expense in the first quarter of 2002. In the first quarter of 2001, goodwill amortization expense totaled $9 million. Amortization expense associated with intangible assets totaled $3 million in the first quarter of 2002, compared with $1 million in the same 2001 period. We are in the process of evaluating our recorded goodwill and intangible assets for impairment. As part of this impairment evaluation, we will adopt the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," with respect to our review of intangible assets subject to amortization. We expect to conclude our impairment evaluation in the second quarter of 2002. Any impairment recognized resulting from the adoption of SFAS No. 142 will be reflected as a cumulative effect of accounting change as of Jan. 1, 2002 and will require restatement of our first-quarter 2002 results. Until our evaluation is completed, we cannot determine if we will recognize any impairment. Related to our adoption of SFAS No. 142, we also reviewed the amortization method and useful lives of existing intangible assets, and adjusted as appropriate. Generally speaking, amortization was accelerated and useful lives shortened. The following presents a summary of our acquired intangible assets. As of March 31, 2002 ------------------------------------- (In millions) Gross ----------- Carrying Accumulated Net Amortizable intangible assets: Amount Amortization Amount ----------------------------- -------- ------------ ------ Present value future profits $ 70.8 $ (7.2) $ 63.6 Customer relationships 43.8 (1.6) 42.2 Renewal rights 16.2 (2.6) 13.6 Internal use software 1.6 (0.2) 1.4 Favorable leases 0.4 (0.1) 0.3 ------ ------ ------ Total $132.8 $(11.7) $121.1 ====== ====== ====== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 10 - Adoption of Accounting Pronouncement (continued) --------------------------------------------------------- At March 31, 2002, our estimated amortization expense for the next five years was as follows. (In millions) ----------- Estimated amortization expense for the year ended Dec. 31: ---------------------------------------- 2003 $20 2004 18 2005 15 2006 10 2007 8 The changes in the carrying value of goodwill on our balance sheet were as follows. The increase in goodwill in our Asset Management segment results from Nuveen's purchase of shares from minority shareholders. See Note 11 for a discussion of the increase to the Specialty Commercial and Surety and Construction segments. (In millions) ----------- Balance Balance at Dec. 31, Goodwill Impairment at March 31, Goodwill by Segment 2001 Acquired Losses 2002 ----------------------- ------ -------- ---------- ----------- Specialty Commercial $ 36 $ 6 $ - $ 42 Commercial Lines Group 33 - - 33 Surety and Construction 14 12 - 26 Lloyd's and Other 7 4 - 11 Asset Management 519 31 - 550 ----- ----- ----- ----- Total $ 609 $ 53 $ - $ 662 ===== ===== ===== ===== The following presents the impact of ceasing amortization of goodwill for the quarter ended March 31, 2001. For the Quarter Ended March 31, --------------------- (In millions) 2002 2001 ----------- ----- ----- Reported net income $ 139 $ 202 Add back goodwill amoritization - 9 ----- ----- Adjusted net income $ 139 $ 211 ===== ===== Basic earnings per share: Reported net income $0.65 $0.91 Goodwill amortization - 0.04 ----- ----- Adjusted net income $0.65 $0.95 ===== ===== Diluted earnings per share: Reported net income $0.63 $0.87 Goodwill amortization - 0.04 ----- ----- Adjusted net income $0.63 $0.91 ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 11 - Acquisition of London Guarantee ----------------------------------------- In late March 2002, we completed our acquisition of London Guarantee Insurance Company ("London Guarantee"), a specialty property-liability insurance company focused on providing surety products, and management liability, bond, and professional indemnity products, for a total cost of approximately $80 million. The acquisition was funded through internally-generated funds. For the year ended Dec. 31, 2001, London Guarantee, headquartered in Toronto, generated approximately $35 million in surety net written premiums (which we will report in our Surety and Construction segment going forward) and approximately $18 million in management liability, bond, and professional indemnity product written premiums (which we will report in Financial and Professional Services in the Specialty Commercial segment going forward). London Guarantee's assets and liabilities were included in our consolidated balance sheet as of March 31, 2002, but the results of their operations since the acquisition date were not material and were not included in our statement of income for the three months ended March 31, 2002. Related to the purchase, we have recorded, on a preliminary basis, an intangible asset of approximately $38 million and goodwill of approximately $18 million. The intangible asset represents the present value of future business and will be amortized, on a basis consistent with the expected cash flows, over an expected useful life of eight years. Of the preliminary goodwill amount, we expect to allocate $12 million to our Surety and Construction segment, and $6 million to our Specialty Commercial segment. Note 12 - Discontinued Operations --------------------------------- Life Insurance -------------- On September 28, 2001, we completed the sale of our life insurance company, Fidelity and Guaranty Life Insurance Company, and its subsidiary, Thomas Jefferson Life, (together, "F&G Life") to Old Mutual plc ("Old Mutual") for $335 million in cash and $300 million in shares of Old Mutual stock. Pursuant to the sale agreement, we must hold the Old Mutual stock received for one year after the closing of the transaction. The proceeds from the sale of F&G Life are subject to possible adjustment based on the movement of the market price of Old Mutual's stock at the end of the one-year period. The amount of possible adjustment will be determined by a derivative "collar" agreement included in the sale agreement. If the market value of the Old Mutual stock exceeds $330 million on Sept. 28, 2002, we are required to remit to Old Mutual either cash or Old Mutual shares in the amount representing the excess over $330 million. If the market value of the Old Mutual shares is less than $300 million on that date, we will receive either cash or Old Mutual shares in the amount representing the deficit below $300 million, up to $40 million. At March 31, 2002, the market value of the Old Mutual shares was $276 million, compared with $242 million at Dec. 31, 2001. The $34 million increase in market value since Dec. 31, 2001 was recorded as a component of unrealized appreciation of investments, net of taxes, in shareholders' equity. The estimated fair value of the collar was $12 million at March 31, 2002, down from $17 million at Dec. 31, 2001. The collar qualifies for derivative accounting treatment under provisions of SFAS No. 133; consequently, the fair value of the collar agreement is recorded as an asset on our balance sheet. The $5 million decline in value was recorded as a component of discontinued operations, net of taxes, on our statement of income for the three months ended March 31, 2002. Standard Personal Insurance Business ------------------------------------ In 1999, we sold our standard personal insurance operations to Metropolitan Property and Casualty Insurance Company (Metropolitan). 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 ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 12 - Discontinued Operations (continued) -------------------------------------------- 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. As of Mar. 31, 2002, we have estimated that we will owe Metropolitan $7 million on these guarantees, and have recorded that obligation. Any losses incurred by us under these agreements will be reflected in discontinued operations in the period they are incurred. For the first three months of 2002 and 2001, we recorded pretax losses of $2 million and $12 million, respectively, in discontinued operations. We have no other contingent liabilities related to the sale. Note 13 - Derivative Financial Instruments ------------------------------------------ We have the following derivative instruments, which have been designated into one of three categories based on their intended use: Fair Value Hedges: We have several pay-floating, receive-fixed interest rate swaps, totaling $480 million notional amount, that are designated as fair value hedges of a portion of our medium- term and senior notes, that we have entered into for the purpose of managing the effect of interest rate fluctuations on this debt. The terms of the swaps match those of the debt instruments, and the swaps are therefore considered 100% effective. The impact related to the three months ended March 31, 2002 and March 31, 2001 movement in interest rates was a $1 million decrease and a $7 million increase, respectively, in the fair value of the swaps and the related debt on the balance sheet, with the income statement impacts again offsetting. Cash Flow Hedges: We have purchased foreign currency forward contracts that are designated as cash flow hedges. They are utilized to minimize our exposure to fluctuations in foreign currency values that result from forecasted foreign currency payments, as well as from foreign currency payables and receivables. In the three months ended March 31, 2002, we recognized less than a $1 million loss on the cash flow hedges, which is included in "Other Comprehensive Income." The comparable amount for the three months ended March 31, 2001 was $3 million. The amounts included in other comprehensive income will be reclassified into earnings concurrent with the timing of the hedged cash flows. We anticipate that less than $1 million will be reclassified into earnings within the next twelve months. In both the three months ended March 31, 2002 and March 31, 2001 we recognized a loss in the income statement of less than $1 million representing the portions of the forward contracts deemed ineffective. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 13 - Derivative Financial Instruments (continued) ----------------------------------------------------- Non-Hedge Derivatives: We have entered into a variety of other financial instruments considered to be derivatives, but which are not designated as hedges, that we utilize to minimize the potential impact of market movements in certain investment portfolios. These include our investment in an embedded collar on Old Mutual common stock received as partial consideration from the sale of our life insurance business, foreign currency put options on British Pounds Sterling to hedge currency risk associated with our position in Old Mutual stock and stock warrants in our venture capital business. We recorded less than $1 million of income in continuing operations for both the three months ended March 31, 2002 and March 31, 2001 relating to the change in the market value of these derivatives during the period. We also recorded $7 million of losses in discontinued operations for the three months ended March 31, 2002 relating to non-hedge derivatives associated with the sale of our life business. Note 14 - Subsequent Event -------------------------- On April 25, 2002, we announced that we plan to transfer our ongoing reinsurance operations to a newly formed Bermuda-based reinsurer, Platinum Underwriters Holdings, Ltd. ("Platinum"). Platinum intends to offer to the public 75.1% of its common shares. We will transfer to Platinum certain renewal opportunities and tangible and intangible assets of our reinsurance operation, St. Paul Re, and enter into various agreements with Platinum and its subsidiaries, in exchange for a 24.9% interest in the common shares of Platinum, which will have 9.9% of the voting rights. A registration statement for the offering was filed with the U.S. Securities and Exchange Commission on April 25, 2002. Platinum's offering is expected to close early in the third quarter of 2002, subject to the receipt of regulatory approvals, and market and other conditions. We expect this transaction to result in a net realized capital gain, the amount of which will depend on the results of the offering. At the time of the closing of the offering, operating subsidiaries of Platinum are expected to reinsure St. Paul Fire and Marine Insurance Company and St. Paul Reinsurance Company Limited for certain reinsurance contracts incepting in 2002. Platinum will not reinsure the reinsurance liabilities of St. Paul Fire and Marine Insurance Company and St. Paul Reinsurance Company Limited relating to reinsurance contracts incepting prior to January 1, 2002. We will retain the reserves related to those liabilities. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations March 31, 2002 Forward-looking Statement Disclosure ------------------------------------ This report contains certain forward-looking statements within the meaning of the Private Securities 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; and statements concerning the anticipated public offering of Platinum Underwriters Holdings, Ltd. In light of the risks and uncertainties inherent in projections, many of which are beyond our control, actual results could differ materially from those in forward-looking statements. These statements should not be regarded as a representation that anticipated events will occur or that expected objectives will be achieved. Risks and uncertainties include, but are not limited to, the following: competitive considerations, including the ability to implement price increases and possible actions by competitors; general economic conditions, including changes in interest rates and the performance of financial markets; changes in domestic and foreign laws, regulations and taxes; changes in the demand for, pricing of, or supply of insurance or reinsurance; catastrophic events of unanticipated frequency or severity; risks relating to the ability of Platinum Underwriters Holdings, Ltd. to receive required regulatory approvals and undertake a successful public offering of its common shares in the time frame we anticipate, and of the proposed transfer of our going forward reinsurance operations to Platinum; loss of significant customers; the possibility of worse-than anticipated loss development from business written in prior years; changes in our estimate of insurance industry losses resulting from the Sept. 11, 2001 terrorist attack; the potential impact of the global war on terrorism and Federal solutions to make available insurance coverage for acts of terrorism; adverse developments in pending litigation; judicial decisions and rulings; anticipated increases in premiums; our implementation of new strategies as a result of the strategic review completed in late 2001; and various other matters. 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. Consolidated Highlights ----------------------- The following table summarizes our results for the three months ended March 31, 2002 and 2001. (In millions, except per share data) 2002 2001 ---------------------------------- ------ ------ Pretax income (loss): Property-liability insurance: Underwriting result $ (11) $ (87) Net investment income 290 330 Realized investment gains (losses) (39) 52 Other (26) (4) ------ ------ Total property-liability insurance 214 291 Asset management 38 35 Parent and other (56) (28) ------ ------ Pretax income from continuing operations 196 298 Income tax expense 48 89 ------ ------ Income from continuing operations 148 209 Discontinued operations, net of taxes (9) (7) ------ ------ Net income $ 139 $ 202 ====== ====== Diluted net income per share $0.63 $0.87 ====== ====== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Consolidated Highlights (continued) ---------------------------------- Consolidated Results -------------------- Our pretax income from continuing operations of $196 million in the first quarter of 2002 was more than $100 million less than comparable 2001 pretax income of $298 million. The decline resulted from significant reductions in realized investment gains and investment income in our property-liability insurance operations, which more than offset a $76 million improvement in underwriting results. Our asset management subsidiary, The John Nuveen Company achieved an increase in earnings, driven by strong investment product sales and growth in assets under management. Pretax losses in "Parent and other" exceeded comparable first- quarter 2001 losses due to a decline in realized investment gains. Acquisition ----------- In late March 2002, we completed our acquisition of London Guarantee Insurance Company ("London Guarantee"), a specialty property-liability insurance company focused on providing surety products and management liability, bond, and professional indemnity products, for a total cost of approximately $80 million. The acquisition was funded through internally-generated funds. London Guarantee, headquartered in Toronto, generated approximately $35 million in surety net written premiums for the year ended Dec. 31, 2001, and approximately $18 million in net written premiums from the remaining lines of business we acquired. London Guarantee's assets and liabilities were included in our consolidated balance sheet as of March 31, 2002, but the results of their operations since the acquisition date were not material and are not included in our statement of income for the three months ended March 31, 2002. Withdrawal from Certain Lines of Business ----------------------------------------- In the fourth quarter of 2001, we announced our intention to withdraw from several lines of business in our property-liability insurance operations. Beginning in January 2002, the operations listed below were placed in "runoff," meaning that we have ceased or plan to cease underwriting new business in these operations as soon as possible. We are pursuing the sale of certain operations placed in runoff. - All coverages in our Health Care segment; - All underwriting operations in Germany, France, the Netherlands, Argentina, Mexico (excluding surety business, which continues), Spain, Australia, New Zealand, Botswana, and South Africa; - In the United Kingdom, all coverages offered to the construction industry. (Unionamerica, a United Kingdom medical liability underwriting entity that we acquired in 2000, was placed in runoff in late 2000, except for business we are contractually committed to underwrite through certain syndicates at Lloyd's through 2004); - At Lloyd's, casualty insurance and reinsurance, U.S. surplus lines business, non-marine reinsurance and, when our contractual commitment expires at the end of 2003, our participation in the insuring of the Lloyd's Central Fund; - In our reinsurance operations, most North American reinsurance business underwritten in the United Kingdom, all but traditional finite reinsurance business underwritten by St. Paul Re's Financial Solutions business center, bond and credit reinsurance, and aviation reinsurance. These operations do not qualify as "discontinued operations" for accounting purposes; therefore, results from these operations are included in their respective property-liability segment results discussed on pages 30 to 36 of this report. For the three months ended March 31, 2002, these runoff operations collectively accounted for $367 million, or 19%, of our reported net earned premiums, and generated negative underwriting results totaling $18 million (an amount that does not include investment income from the assets maintained to support these operations). Runoff premium volume in 2002 was centered in our Health Care segment, where we are required to offer continuing THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Consolidated Highlights (continued) ---------------------------------- coverage to certain policyholders in the form of extended reporting endorsements, and in our Lloyd's and Other segment, where we are contractually committed to underwrite business in certain Lloyd's syndicates through 2003 and 2004. For the three months ended March 31, 2001, these runoff operations collectively accounted for $377 million, or 23%, of our net earned premiums, and generated negative underwriting results totaling $146 million. Restructuring Charge -------------------- In December 2001, in connection with the withdrawal from the foregoing lines of business and as part of our overall plan to reduce company-wide expenses, we recorded a $62 million pretax restructuring charge. The majority of the charge - $46 million - pertained to employee-related costs associated with our plan to terminate an estimated total of 800 employees by the end of 2002. As of March 31, 2002, we had terminated 414 employees and made payments of $20 million related to the $46 million charge. The remainder of the $62 million charge consisted of legal, equipment and occupancy-related costs, for which no payments had been made as of March 31, 2002. In the first quarter of 2002, we recorded an additional pretax restructuring charge of $6 million, related to additional employee-related expenses that did not meet the criteria for accrual at Dec. 31, 2001. This charge was partially offset by a $1 million reduction in occupancy-related restructuring charges recorded in prior years. Adoption of SFAS No. 142 ------------------------ In the first quarter of 2002, we began implementing the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," which establishes financial accounting and reporting for acquired goodwill and other intangible assets. The statement changes prior accounting practice in the way intangible assets with indefinite useful lives, including goodwill, are tested for impairment on an annual basis. Generally, it also requires that those assets meeting the criteria for classification as intangible with finite useful lives be amortized to expense over those lives, while intangible assets with indefinite useful lives and goodwill are not to be amortized. As a result of implementing the provisions of this statement, we did not record any goodwill amortization expense in the first quarter of 2002. In the first quarter of 2001, goodwill amortization expense totaled $9 million. Amortization expense associated with intangible assets totaled $3 million in the first quarter of 2002, compared with $1 million in the same 2001 period. We are in the process of evaluating our recorded goodwill and intangible assets for impairment. We expect to conclude that evaluation in the second quarter of 2002. Any impairment recognized as a result of adopting SFAS No. 142 will be recorded as a cumulative effect of accounting change as of Jan. 1, 2002, and will require the restatement of our first-quarter 2002 results. Until our evaluation is completed, we cannot determine whether we will recognize any impairment. September 11, 2001 Terrorist Attack ----------------------------------- In 2001, we recorded estimated net pretax losses totaling $941 million related to the September 11, 2001 terrorist attack in the United States. We are continually evaluating the adequacy of the net loss provision recorded, based on claim experience, collections from our reinsurers, and other factors. In the first quarter of 2002, we did not record any additions or reductions to our original estimated loss provision recorded in 2001. Through March 31, 2002, we have made net loss payments totaling $147 million related to the attack since it occurred, of which $85 million were made in the first quarter of 2002. For further information regarding the impact of the terrorist attack on our operations, refer to Note 2 on page 50 of our 2001 Annual Report to Shareholders. Discontinued Operations ----------------------- F&G Life - On September 28, 2001, we completed the sale of our life insurance company, Fidelity and Guaranty Life Insurance Company, and its subsidiary, Thomas Jefferson Life, (together, "F&G Life") to Old Mutual plc ("Old Mutual") for $335 million in cash and $300 million in shares of Old Mutual stock. Pursuant to the sale THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Consolidated Highlights (continued) ---------------------------------- agreement, we must hold the Old Mutual stock received for one year after the closing of the transaction. The proceeds from the sale of F&G Life are subject to possible adjustment based on the movement of the market price of Old Mutual's stock at the end of the one-year period. The amount of possible adjustment will be determined by a derivative "collar" agreement included in the sale agreement. If the market value of the Old Mutual stock exceeds $330 million on Sept. 28, 2002, we are required to remit to Old Mutual either cash or Old Mutual shares in the amount representing the excess over $330 million. If the market value of the Old Mutual shares is less than $300 million on that date, we will receive either cash or Old Mutual shares in the amount representing the deficit below $300 million, up to $40 million. At March 31, 2002, the market value of the Old Mutual shares was $276 million, compared with $242 million at Dec. 31, 2001. The $34 million increase in market value since Dec. 31, 2001 was recorded as a component of unrealized appreciation of investments, net of taxes, in shareholders' equity. The collar's estimated fair value was $12 million at March 31, 2002, down from $17 million at Dec. 31, 2002. The collar qualifies for derivative accounting treatment under provisions of SFAS No. 133; consequently, the fair value of the collar agreement is recorded as an asset on our balance sheet. The $5 million decline in value was recorded as a component of discontinued operations, net of taxes, on our statement of income for the three months ended March 31, 2002. Standard Personal Insurance - 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. As of March 31, 2002, our analysis indicated that we will owe Metropolitan approximately $7 million related to the reserve guarantee, an estimate that was unchanged from our estimate at Dec. 31, 2001. (We recorded a pretax expense equal to that amount in discontinued operations in 2001 related to the reserve guarantee). In the first quarters of 2002 and 2001, we recorded pretax losses of $2 million and $12 million, respectively, in discontinued operations, related to pre- sale claims. Subsequent Event - Announcement of Intention to Transfer Ongoing Reinsurance Operations to Bermuda-Based Reinsurer ---------------------------------------------------------------- On April 25, 2002, we announced that we plan to transfer our ongoing reinsurance operations to a newly formed Bermuda-based reinsurer, Platinum Underwriters Holdings, Ltd. ("Platinum"). Platinum intends to offer to the public 75.1% of its common shares. We will transfer to Platinum certain renewal opportunities and tangible and intangible assets of our reinsurance operation, St. Paul Re, and enter into various agreements with Platinum and its subsidiaries, in exchange for a 24.9% interest in the common shares of Platinum, which will have 9.9% of the voting rights. A registration statement for the offering was filed with the U.S. Securities and Exchange Commission on April 25, 2002. Platinum's offering is expected to close early in the third quarter of 2002, subject to regulatory approvals and market conditions. We expect the transaction, which is subject to market and other conditions, to result in a net realized capital gain, the amount of which will depend on the results of the offering. At the time of the closing of the offering, Platinum will reinsure St. Paul Fire and Marine Insurance Company and St. Paul Reinsurance Company Limited for certain reinsurance contracts incepting in 2002. Platinum will not reinsure the reinsurance liabilities of St. Paul Fire and Marine Insurance Company and St. Paul Reinsurance Company Limited relating to reinsurance contracts incepting prior to January 1, 2002. We will retain the reserves related to those liabilities. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Consolidated Highlights (continued) ---------------------------------- Critical Accounting Policies ---------------------------- Overview - The St. Paul Companies, Inc. is a holding company with subsidiaries operating in the property-liability insurance industry and the asset management industry. We combine our financial statements with those of our subsidiaries and present them on a consolidated basis in accordance with U.S. generally accepted accounting principles. We make estimates and assumptions that can have a significant effect on the amounts that we report in our financial statements. The most significant estimates relate to our reserves for property-liability insurance losses and loss adjustment expenses. We continually review and analyze our estimates, but actual results may turn out to be significantly different than we expected when the estimates were made. We believe the process of estimating loss and loss adjustment expense reserves for those lines of business we have placed in runoff involves an increased level of risk and uncertainty due to regulatory and other business considerations. As described on page 25 of this report, in the first quarter of 2002, we adopted a new standard relating to accounting for goodwill and intangible assets. In our investment portfolio, we continually monitor the difference between our cost and the estimated fair value of investments. If any experience a decline in value that we believe is other than temporary, we write down the investment for the decline and record a realized loss on our statement of operations. Property-Liability Operations - Premiums on insurance policies we sell are our largest source of revenue, and we recognize the premiums as revenue evenly over the term of the policy. Our insurance reserves are our largest liability, and reflect our estimate of claims reported but not yet paid, and claims incurred but not yet reported to us. The costs related to writing a policy are amortized over the same period the related premiums are recognized as revenue. Reinsurance accounting is followed when risk transfer requirements have been met. These requirements involve significant assumptions being made related to the amount and timing of expected cash flows, as well as the interpretation of underlying contract terms. Asset Management Operations - We are the 77% owner of The John Nuveen Company, which comprises our asset management segment. We consolidate 100% of Nuveen's revenues, expenses, assets and liabilities, with reductions on the statement of operations and balance sheet for minority shareholders' proportionate interest in Nuveen's earnings and equity. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance ---------------------------- Overview -------- Our first-quarter 2002 consolidated written premiums of $2.11 billion were 14% higher than comparable 2001 premiums of $1.85 billion. Strong growth in our Specialty Commercial, Commercial Lines Group, and Surety and Construction segments was partially offset by premium declines in our Health Care and Lloyd's and Other segments, where our runoff operations are concentrated. In our U.S. commercial insurance operations, price increases averaged 25% in the first three months of 2002, while business retention levels remained strong. We expect the favorable pricing environment to continue throughout the remainder of 2002. In the first quarter of 2002, we were not party to an all-lines, corporate aggregate excess-of-loss reinsurance treaty. In the preceding three years, cessions made under such treaties had a significant impact on our reported financial results for certain periods. In 2001, we were party to such a treaty that we entered into effective January 1 of that year, but coverage under that treaty was not triggered in the first quarter and the impact of the treaty on our first quarter results was limited to cessions of a modest amount of deposit premiums to our reinsurer. Our Reinsurance segment, St. Paul Re, was party to a separate aggregate excess-of-loss treaty, unrelated to the corporate treaty, in both 2002 and 2001. In the first quarter of 2002, coverage was not triggered under that treaty, but St. Paul Re ceded $4 million of net written and earned deposit premiums to its reinsurer. In the first quarter of 2001, St. Paul Re ceded $3 million of written and earned premiums and $26 million of insurance losses and loss adjustment expenses under that treaty, for a net pretax benefit of $23 million. Our reported consolidated loss ratio, which measures insurance losses and loss adjustment expenses as a percentage of earned premiums, was 72.0 for the first quarter of 2002, compared with a reported loss ratio of 72.7 in the same 2001 period. Excluding the benefit of the Reinsurance segment treaty in 2001, the first- quarter 2001 loss ratio was 74.1. The improvement in 2002 was concentrated in our Health Care and Reinsurance segments and reflected the initial impact of our strategic initiative to exit unprofitable market sectors. Our results in the first quarter of both years benefited from the absence of significant catastrophe losses. Our reported consolidated expense ratio, measuring underwriting expenses as a percentage of written premiums, was 27.9 for the first quarter of 2002, compared with the 2001 first-quarter ratio of 31.1. The significant improvement reflected the effects of strong written premium growth and our aggressive expense reduction efforts in recent years, including the strategic initiatives implemented near the end of 2001. 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). In the fourth quarter of 2001, we implemented a new segment reporting structure for our property-liability underwriting operations. Data for first-quarter 2001 in the table have been reclassified to be consistent with the new segment reporting structure. Following the table is a detailed discussion of the results for each segment. In those discussions, we sometimes use the term "prior accident year loss development" (or similar terms) which refers to an increase or decrease in losses recorded in the current year that relate to business underwritten prior to 2002. Similarly, we sometimes refer to "current accident year loss development" (or similar terms), which refers to losses recorded on business written in 2002. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Three Months Ended March 31 -------------- (Dollars in millions) 2002 2001 ------------------- ---- ---- Specialty Commercial Written premiums 27%* $576 $456 Underwriting result $4 $(9) Combined ratio 99.3 102.2 Commercial Lines Group Written premiums 24%* $505 $430 Underwriting result $2 $77 Combined ratio 97.8 75.4 Surety and Construction Written premiums 17%* $348 $264 Underwriting result $4 $20 Combined ratio 94.5 90.2 Health Care Written premiums 7%* $147 $177 Underwriting result $3 $(130) Combined ratio 105.6 170.8 Lloyd's and Other Written premiums 3%* $68 $98 Underwriting result $(39) $(24) Combined ratio 143.0 124.1 ---- ------ ------ Total Primary Insurance Written premiums 78%* $1,644 $1,425 Underwriting result $(26) $(66) Combined ratio 101.8 104.0 Reinsurance Written premiums 22%* $463 $421 Underwriting result $15 $(21) Combined ratio 92.2 101.6 ---- ------ ------ Total Insurance Written premiums 100% $2,107 $1,846 ==== ====== ====== Underwriting result $(11) $(87) ====== ====== Statutory combined ratio: Loss and loss adjustment expense ratio 72.0 72.7 Underwriting expense ratio 27.9 31.1 ------ ------ Combined ratio 99.9 103.8 ====== ====== * Percentage of total. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Underwriting Results by Segment ------------------------------- Specialty Commercial -------------------- The Specialty Commercial segment includes the following 11 business centers: Technology, Financial and Professional Services, Ocean Marine, Catastrophe Risk, Public Sector Services, Discover Re, Umbrella/Excess & Surplus Lines, Oil and Gas, Transportation, National Programs and International Specialty. These business centers are considered specialty operations because each provides products and services requiring specialty expertise and focuses on the respective customer group served. The following table summarizes results for this segment for the first quarters of 2002 and 2001. Three Months Ended March 31 -------------- (Dollars in millions) 2002 2001 ------------------- ---- ---- Net written premiums $576 $456 Percentage increase over 2001 26% Underwriting result $4 $(9) Statutory combined ratio: Loss and loss adjustment expense ratio 73.8 75.6 Underwriting expense ratio 25.5 26.6 ----- ----- Combined ratio 99.3 102.2 ===== ===== The strong premium growth in 2002 was driven by price increases that averaged 24% across the entire segment. The following discussion summarizes results from several of the largest business centers in this segment. - Financial & Professional Services - Written premiums of $116 million in the first quarter of 2002 grew 23% over the same 2001 period, driven by price increases averaging 28%. The loss ratio of 79.0 in 2002 improved slightly over the comparable 2001 ratio of 79.6. - Technology - Premium volume of $99 million grew 6% over the first quarter of 2001. Price increases averaged 18% in the first quarter. The loss ratio was 68.5 in 2002, compared with the 2001 first-quarter ratio of 53.7. Deterioration in prior accident year loss experience was the primary factor driving the increase in the loss ratio. - Public Sector - Written premiums totaled $65 million in 2002, up 30% from the same period of 2001 due to a combination of new business and price increases that averaged 19% in the first three months of 2002. The loss ratio rose from 71.1 in 2001 to 74.2 in 2002, primarily due to deterioration in prior accident year loss experience. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- - International Specialty - Premium volume of $64 million in 2002 grew 15% over the 2001 first-quarter total, with the increase entirely due to price increases that averaged in excess of 40% in the international markets where we operate. As part of the strategic initiatives announced at the end of 2001, we are now limiting our ongoing international business to Canada, the United Kingdom and Ireland. The first-quarter loss ratio in this business center improved by over 17 points to 80.1, reflecting the initial impact of our decision to exit those international markets where we lacked the scale to produce profitable results. - Umbrella/Excess & Surplus Lines - Price increases averaging 45% and new business combined to produce first- quarter 2002 written premiums of $61 million, an increase of $42 million over the same period of 2001. The first-quarter loss ratio of 71.4 was slightly worse than the comparable 2001 ratio of 70.5. Commercial Lines Group ---------------------- The Commercial Lines Group ("CLG") segment includes our Small Commercial, Middle Market Commercial and Large Accounts business centers, as well as the results of our limited involvement in insurance pools. The Small Commercial business center serves small businesses such as retailers, wholesalers, service companies, professional offices, manufacturers and contractors. The Middle Market Commercial business center offers comprehensive insurance coverages for a wide variety of commercial enterprises where annual insurance costs range from $75,000 to $1 million. The Large Accounts business center offers insurance programs to larger commercial businesses that are willing to share insurance risk through significant deductibles and self-insured retentions. The following table summarizes results for this segment for the first quarters of 2002 and 2001. Three Months Ended March 31 -------------- (Dollars in millions) 2002 2001 ------------------- ---- ---- Net written premiums $505 $430 Percentage increase over 2001 18% Underwriting result $2 $77 Statutory combined ratio: Loss and loss adjustment expense ratio 68.7 44.3 Underwriting expense ratio 29.1 31.1 ----- ----- Combined ratio 97.8 75.4 ===== ===== The strong growth in written premium volume over 2001 was primarily driven by price increases, which averaged 22% in the first quarter, and to a lesser extent, new business. Premiums of $172 million in the Small Commercial business center grew 18% over the first quarter of 2001. We have identified the small commercial marketplace as one providing significant potential for profitable growth, and we are in the process of building a field organization THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- throughout the United States to better serve these customers. In the Middle Market Commercial business center, premium volume of $296 million in the first quarter was 16% higher than the same period of 2001. Large Accounts' written premiums of $19 million in the first quarter of 2002 grew 4% over comparable premium volume in the same period of 2001. The reported loss ratio and underwriting profit in the CLG segment in last year's first quarter were unusually favorable due to the impact of a $100 million reduction in previously established reserves. Those reserves pertained to certain business written in years prior to 1989, and were reduced based on actuarial analyses, which indicated that ultimate losses on that business would fall short of the established reserves. Excluding the reserve reduction, the CLG loss ratio in last year's first quarter was 71.8 and the underwriting loss was $23 million, both significantly worse than 2002 first-quarter results. Current accident year results in 2002 for both the Small and Middle Market Commercial business centers improved over comparable results in 2001, reflecting the impact of price increases and an improvement in the quality of our book of business. The two-point improvement in the expense ratio compared with last year's first quarter reflected the impact of our cost-saving initiatives in recent years, as well as the significant growth in written premium volume. The first-quarter 2002 expense ratio was 1.6 points better than the fourth-quarter 2001 ratio (as adjusted to exclude the effects of aggregate excess-of-loss reinsurance in the 2001 quarter). Surety and Construction ----------------------- Our Surety business center underwrites predominantly contract surety bonds, which guarantee that third parties will be indemnified against the nonperformance of contractual obligations. Our Construction business center provides insurance products and services to a broad range of contractors and owners of construction projects. The following table summarizes key financial data for this segment for the first three months of 2002 and 2001. Three Months Ended March 31 -------------- (Dollars in millions) 2002 2001 ------------------- ---- ---- Net written premiums $348 $264 Percentage increase over 2001 32% Underwriting result $4 $20 Statutory combined ratio: Loss and loss adjustment expense ratio 63.3 54.0 Underwriting expense ratio 31.2 36.2 ----- ----- Combined ratio 94.5 90.2 ===== ===== The strong increase in premium volume over 2001 was centered in the Construction business center, where premiums of $238 million grew 50% over comparable 2001 volume of $159 million. Price increases averaged 28% for Construction business in the first quarter of 2002, and business retention levels and new business volume were strong. Surety premium volume of $110 million in 2002 increased 5% over the first quarter of 2001, with the growth THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- primarily due to new business resulting from our acquisition in late 2001 of the right to seek to renew surety bond business previously underwritten by Fireman's Fund Insurance Company. Our Surety operation, the largest in the world based on premium volume, has maintained a conservative risk profile over the last two years in anticipation of, and the subsequent occurrence of, an economic slowdown in both the United States and Mexico. We anticipate the acquisition of London Guarantee in March 2002 to contribute to further growth in our Surety operation during the remainder of 2002. The Surety business center accounted for the decline in underwriting profits in this segment compared with the first quarter of 2001. Surety's loss ratio of 43.4 was over twelve points worse than the 2001 first-quarter ratio of 31.3, primarily due to deterioration in current-year loss experience. Despite that deterioration, however, Surety's operations remained profitable, posting a $3 million underwriting profit in 2002, compared with a profit of $17 million in the same 2001 period. Construction's first-quarter loss ratio of 74.2 was worse than the comparable 2001 ratio of 72.0, due to a slight deterioration in prior-year loss experience. The five-point improvement in expense ratios quarter-over-quarter reflected the combined impact of strong written premium growth and the continued success of expense reduction initiatives. Health Care ----------- Our Health Care segment historically has provided property- liability insurance throughout the entire health care delivery system. In late 2001, we announced our intention to exit the medical liability insurance market, subject to applicable regulatory requirements. As a result, we consider the entire segment to be in runoff in 2002. The following table summarizes key financial data for the Health Care segment for the first quarters of 2002 and 2001. Three Months Ended March 31 -------------- (Dollars in millions) 2002 2001 ---- ---- Net written premiums $147 $177 Percentage decline from 2001 (17%) Underwriting result $3 $(130) Statutory combined ratio: Loss and loss adjustment expense ratio 82.0 146.7 Underwriting expense ratio 23.6 24.1 ----- ----- Combined ratio 105.6 170.8 ===== ===== Written premiums in the first quarter of 2002 primarily consisted of premiums generated by extended reporting endorsements, which we are required to offer to physicians and surgeons at the time their policies are nonrenewed. These endorsements cover losses incurred in prior periods that have not yet been reported. Unlike typical policies, premiums on these endorsements are fully earned, and the expected losses are recorded, at the time the endorsement is written. Our exit of the medical liability market is proceeding as planned when we announced the action at the end of 2001. As of March 31, 2002, we had obtained regulatory approval to cease underwriting new business in all THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- but two states, and had begun the process of nonrenewing policies where such approval had been obtained. The two states where regulatory approval is pending accounted for approximately 6% of net written premium volume in the Health Care segment for the year ended Dec. 31, 2001. We anticipate net written premium volume of approximately $400 million in the Health Care segment for the full year of 2002, with reporting endorsement premiums expected to account for the majority of that total. The improvement in underwriting results in the first quarter of 2002 compared with the same 2001 period reflected the impact of our decision to exit this market and the absence of significant adverse prior-year loss development. In the year ended Dec. 31, 2001, we recorded cumulative pretax provisions of $735 million to strengthen prior accident year loss reserves in this segment, of which $91 million was recorded in the first quarter of 2001. In addition, 2002 results included a cumulative $20 million pretax benefit resulting from the commutation of a reinsurance contract and the reduction of premium deficiency reserves. Lloyd's and Other ----------------- Our Lloyd's and Other segment consists of the following components: our operations at Lloyd's, where we provide capital to five underwriting syndicates and own a managing agency; our participation in the insuring of the Lloyd's Central Fund, which would be utilized if an individual member of Lloyd's were to be unable to pay its share of a syndicate's losses; and results from Unionamerica, a London-based insurance operation we acquired in April 2000 as part of our purchase of MMI Companies, Inc. In late 2001, we announced that we would cease underwriting certain business through Lloyd's beginning in 2002, and would, when current contractual commitments expire in 2003, end our involvement in the insuring of the Lloyd's Central Fund. At Unionamerica, we ceased underwriting new business in late 2000 except for that business we are contractually obligated to underwrite through 2004. The following table summarizes this segment's results for the first quarters of 2002 and 2001. Three Months Ended March 31 -------------- (Dollars in millions) 2002 2001 ------------------- ---- ---- Net written premiums $68 $98 Percentage decline from 2001 (31%) Underwriting result $(39) $(24) Statutory combined ratio: Loss and loss adjustment expense ratio 103.9 86.1 Underwriting expense ratio 39.1 38.0 ----- ----- Combined ratio 143.0 124.1 ===== ===== Our ongoing business in the Lloyd's and Other segment in the first quarter of 2002 consisted of the following coverages offered through our involvement at Lloyd's: aviation, marine, financial and professional services, property insurance, kidnap and ransom, accident and health, creditor and other personal specialty products. The 31% decline in premium volume in 2002 reflected the impact of our reduced involvement at Lloyd's and a decrease in premiums generated by Unionamerica. On the business we continued to underwrite through Lloyd's in the first quarter of 2002, price increases averaged 55%. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Our operations at Lloyd's accounted for the majority of the deterioration in underwriting results compared with the first quarter of 2001, with Unionamerica also contributing to a lesser extent. Provisions to strengthen prior-year reserves were the primary factor in underwriting losses in this segment in the first quarter of both years. We are continuing to review the role of our operations at Lloyd's in our long-term corporate strategy. In April 2002, we announced that in addition to the steps undertaken near the end of 2001, we would further narrow the focus of our operations at Lloyd's to four key product lines: marine, personal lines, property and aviation. Reinsurance ----------- Our Reinsurance segment ("St. Paul Re") underwrites treaty and facultative reinsurance for property, liability, ocean marine, surety and certain specialty classes of coverage, and also underwrites "nontraditional" reinsurance, which provides limited traditional underwriting risk combined with financial risk protection. In late 2001, we announced our intention to cease underwriting certain types of reinsurance coverages in 2002, as described in more detail on page 24 of this report. The following table summarizes key financial data for the Reinsurance segment for the first quarters of 2002 and 2001, excluding the impact of the aggregate excess-of-loss reinsurance treaty exclusive to this segment that is described on page 28 of this report. Three Months Ended March 31 -------------- (Dollars in millions) 2002 2001 ------------------- ---- ---- Net written premiums $467 $424 Percentage increase over 2001 10% Underwriting result $19 $(44) Statutory combined ratio: Loss and loss adjustment expense ratio 64.7 75.4 Underwriting expense ratio 26.7 33.8 ----- ----- Combined ratio 91.4 109.2 ===== ===== Premium growth resulted from price increases that averaged approximately 30% on business renewed on January 1 of this year. In the first three months of 2002, terms and conditions for reinsurance coverages continued to tighten, and rate increases continued to accelerate, amid heightened demand for reinsurance coverages from primary insurers. Our total reinsurance exposures declined significantly compared with the first quarter of 2001 due to our more narrow business profile resulting from the actions announced in late 2001. Our Reinsurance segment now focuses almost exclusively on property catastrophe reinsurance, excess-of-loss casualty reinsurance, marine reinsurance and traditional finite reinsurance. St. Paul Re's underwriting result in the first three months of 2002 benefited from the significant price increases and its emphasis on those lines of business that it believes offer the greatest potential for profitable results. In addition, we recorded a net reduction of $9 million in losses related to catastrophes occurring in prior years. In the first quarter of 2001, the primary sources of St. Paul Re's underwriting loss were the sinking of the Petrobras oil platform, and a provision to strengthen insurance reserves for North American casualty business. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- As discussed in more detail on page 26 of this report, in April 2002, we announced our intention to transfer our ongoing reinsurance operations to a newly formed Bermuda-based reinsurer, Platinum Underwriters Holdings, Ltd. Platinum intends to offer to the public 75.1% of its common shares. We will transfer certain renewal opportunities and tangible and intangible assets of St. Paul Re to Platinum and enter into various agreements with Platinum and its subsidiaries, in exchange for a 24.9% interest in the common shares of the new company. Investment Operations --------------------- First-quarter 2002 pretax net investment income in our property- liability insurance operations totaled $290 million, $40 million below the same period of 2001. Last year's first-quarter total was unusually high due to $22 million of income generated by the development of certain properties in our real estate investment portfolio. Our investment income in recent quarters has been negatively impacted by declining yields on new investments and a general reduction in the amount of funds available for investment due to significant cash payments for insurance losses and loss adjustment expenses, particularly in our Health Care, Reinsurance and Lloyd's and Other segments. In addition, we made cumulative premium payments totaling $639 million between the fourth quarter of 1999 and the first quarter of 2001 related to our corporate reinsurance program. Since the end of 1999, average new money rates on taxable and tax-exempt securities have fallen from 7.2% and 5.4%, respectively, to 6.0% and 3.5%, respectively, at March 31, 2002. Pretax realized investment losses in our property-liability insurance operations totaled $39 million in the first quarter of 2002, compared with realized gains of $52 million in the same 2001 period. Losses in 2002 were concentrated in our venture capital portfolio. Pretax realized gains in 2001 included a gain of $77 million on the sale of our investment in RenaissanceRe Holdings Ltd., a Bermuda-based reinsurer. The market value of our $16.0 billion fixed maturities portfolio exceeded its cost by $393 million at March 31, 2002. Approximately 96% of that portfolio is rated at investment grade (BBB or above). The weighted average pretax yield on those investments was 6.5% at March 31, 2002, down from 6.9% a year ago. Environmental and Asbestos Claims --------------------------------- We continue to receive claims, including through lawsuits, alleging injury or damage from environmental pollution or seeking payment for the cost to clean up polluted sites. We also receive asbestos injury claims, including through lawsuits, arising out of coverages under general liability policies. The vast majority of these claims arise from policies written many years ago. Significant legal issues, primarily pertaining to the scope of coverage, complicate the determination of our alleged liability for both environmental and asbestos claims. In our opinion, court decisions in certain jurisdictions have tended to broaden insurance coverage for both environmental and asbestos matters beyond the intent of the original insurance policies. Our ultimate liability for environmental claims is difficult to estimate because of these legal issues. Insured parties are seeking recovery 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. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Environmental and Asbestos Claims (continued) -------------------------------------------- Estimating the ultimate liability for asbestos claims is more 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 and are complicated by aggressive litigation against insurers, including us. Estimating ultimate liability is also complicated by the difficulty of assessing what rights, if any, we may have to seek contribution from other insurers of any policyholder. As a result of developments in the asbestos litigation environment generally, we have determined that it is desirable to seek more aggressively early resolutions of certain pending asbestos- related litigations. As a result, we have decided where possible to seek to resolve these matters while continuing to vigorously assert defenses in pending litigations. We intend to take a similar approach to environmental litigations. The resolution of one or more of these litigations may require us to make substantial payments and/or to become responsible for substantial contingent payments. These payments may be material to our results of operations, but we do not believe they will have a material effect on our liquidity or overall financial position. The following table represents a reconciliation of total gross and net environmental reserve development for the three months ended March 31, 2002, and the years ended Dec. 31, 2001 and 2000. Amounts in the "net" column are reduced by reinsurance recoverables. 2002 Environmental (three months) 2001 2000 ------------- ------------ ------------ ------------ (In millions) Gross Net Gross Net Gross Net ----------- ----- ---- ----- ---- ----- ---- Beginning reserves $582 $507 $665 $563 $698 $599 Incurred losses (1) (1) 1 18 25 14 Paid losses (10) (9) (84) (74) (58) (50) ---- ---- ---- ---- ---- ---- Ending reserves $571 $497 $582 $507 $665 $563 ==== ==== ==== ==== ==== ==== The following table represents a reconciliation of total gross and net reserve development for asbestos claims for the three months ended March 31, 2002, and the years ended Dec. 31, 2001 and 2000. 2002 Asbestos (three months) 2001 2000 -------- ------------ ------------ ------------ (In millions) Gross Net Gross Net Gross Net ----------- ----- ---- ----- ---- ----- ---- Beginning reserves $478 $367 $397 $299 $398 $298 Incurred losses 1 - 133 110 41 33 Paid losses (16) (12) (52) (42) (42) (32) ---- ---- ---- ---- ---- ---- Ending reserves $463 $355 $478 $367 $397 $299 ==== ==== ==== ==== ==== ==== Our reserves for environmental and asbestos losses at March 31, 2002 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, as well as the potential impact of our determination to seek more aggressively early resolutions of certain pending asbestos and environmental related litigations. Future changes in our estimates of our ultimate liability for environmental and asbestos claims may be material to our results of operations, but we do not believe they will materially impact our liquidity or overall financial position. Total gross environmental and asbestos reserves at March 31, 2002, of $1.03 billion represented approximately 5% of gross consolidated reserves of $22.1 billion. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Asset Management ---------------- Our asset management segment consists of our 77% majority ownership interest in The John Nuveen Company (Nuveen). Nuveen provides customized individual accounts, mutual funds, exchange- traded funds and defined portfolios through financial advisors serving the affluent, high net worth and institutional market segments. Highlights of Nuveen's performance for the first quarters of 2002 and 2001 were as follows: Three Months Ended March 31 -------------- (In millions) 2002 2001 ----------- ---- ---- Revenues $ 94 $ 87 Expenses 45 42 ---- ---- Pretax earnings 49 45 Minority interest (11) (10) ---- ---- The St. Paul's share of pretax earnings $ 38 $ 35 ==== ==== Assets under management $69,538 $61,289 ====== ====== Nuveen's total revenues in the first quarter of 2002 grew 8% over the same period of 2001, primarily due to an increase in investment advisory fees. Gross sales of $3.4 billion in the first quarter of 2002 included $1.8 billion of retail and institutional managed accounts and $1.1 billion of closed-end exchange-traded funds. Institutional account sales in 2002 grew significantly over those in the first quarter of 2001, due to Nuveen's acquisition in July 2001 of Symphony Asset Management LLC, an institutional investment management firm. Total gross sales in the first quarter of 2001 totaled $3.8 billion. Nuveen's specialty focus on risk management and tax-sensitivity in equity and fixed-income securities contributed to earnings growth amid persistent market and economic uncertainties. Nuveen's net flows (equal to the sum of sales, reinvestments and exchanges, less redemptions) during the first quarter of 2002 totaled $1.9 billion, compared with net flows of $2.6 billion in the first quarter of 2001. Managed assets at the end of the first quarter consisted of $33.0 billion of exchange-traded funds, $19.2 billion of retail managed accounts, $5.6 billion of institutional managed accounts and $11.7 billion of mutual funds. The significant increase in managed assets over the same time a year ago was partially due to Nuveen's acquisition of Symphony, which added approximately $4 billion in managed assets. Capital Resources ----------------- Common shareholders' equity of $5.05 billion at March 31, 2002 declined slightly from the year-end 2001 total of $5.06 billion, as our net income of $139 million in the first quarter was more than offset by dividends declared on our common stock and a decline in the unrealized appreciation of our investment portfolio. We did not repurchase any of our common shares during the first three months of 2002. Total debt outstanding at March 31, 2002 of $2.26 billion increased by $130 million over the year-end 2001 total of $2.13 billion, largely due to the issuance of $500 million of 5.75% senior notes in March 2002. Proceeds from the notes, which mature in 2007, were primarily used to repay a portion of our commercial paper outstanding. Our ratio of total debt to total capitalization of 27% at the end of the first quarter increased slightly over the year-end 2001 ratio of 26%. Net interest expense related to debt totaled $25 million in the first quarter of 2002, compared with $30 million in the same period of 2001. Preferred distribution expense related to mandatorily redeemable preferred securities totaled $18 million in the first quarter of 2002, compared with $7 million in the same 2001 period. The increase was due to the issuance of $575 million of 7.6% mandatorily redeemable preferred securities in November 2001. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Capital Resources (continued) ---------------------------- Capital expenditures that we might consider during the remainder of 2002 include acquisitions of existing businesses consistent with our commercial insurance focus, and repurchases of our common stock. As of May 11, 2002 we had the capacity to make up to approximately $89 million in common stock repurchases under a repurchase program authorized by our board of directors in February 2001. We repurchase our shares in the open market and through private transactions when we deem such repurchases to be a prudent use of capital. The company's ratio of earnings to fixed charges was 4.90 the first three months of 2002, compared with 7.73 for the same period of 2001. The company's ratio of earnings to combined fixed charges and preferred stock dividend requirements was 4.58 for the first three months of 2002, compared with 7.15 for the same period of 2001. 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. In our insurance operations, short-term cash needs primarily consist of funds to pay insurance losses and loss adjustment expenses and day-to-day operating expenses. Those needs are met through cash provided from operations, which primarily consist of insurance premiums collected and investment income. Net cash flows provided by continuing operations totaled $96 million in the first quarter of 2002, compared with cash used by continuing operations of $194 million in the same period of 2001. Written premium growth of 14% significantly outpaced the 3% growth in losses and loss adjustment expenses paid in the first quarter of 2002, contributing to the improvement in cash flows over 2001. In addition, we made no premium payments related to our corporate reinsurance program in the first three months of 2002, whereas such payments totaled $156 million in the same 2001 period. Net loss payments related to the September 11, 2001 terrorist attack totaled $85 million in the first quarter of 2002. We expect operational cash flows during the remainder of 2002 to continue to be negatively impacted by insurance losses and loss adjustment expenses payable related to the September 11, 2001 terrorist attack, as well as losses payable related to our operations in runoff. Excluding these factors, however, we expect improvement in operational cash flows as a result of continuing price increases in our ongoing insurance segments and expense reductions throughout our operations. We believe our financial strength provides 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. Impact of Accounting Pronouncements to be Adopted in the Future --------------------------------------------------------------- In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which establishes financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset. This statement is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material impact on our financial statements. PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements is incorporated herein by reference. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. The St. Paul's annual shareholders' meeting was held on May 7, 2002. (1) All fifteen persons nominated for directors by the board of directors were named in proxies for the meeting which were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to the nominees as listed in the proxy statements. All fifteen nominees were elected by the following votes: In favor Withheld ----------- -------- H. Furlong Baldwin 188,544,771 2,940,916 Carolyn H. Byrd 188,680,642 2,805,045 John H. Dasburg 188,498,918 2,986,769 Janet M. Dolan 189,640,308 1,845,379 Kenneth M. Duberstein 189,438,888 2,046,799 Jay S. Fishman 165,685,874 25,799,813 Lawrence G. Graev 189,566,116 1,919,571 Pierson M. Grieve 189,484,269 2,001,418 Thomas R. Hodgson 188,729,190 2,756,497 David G. John 188,724,682 2,761,005 William H. Kling 189,524,775 1,960,912 John A. MacColl 189,295,119 2,190,568 Bruce K. MacLaury 188,635,354 2,850,333 Glen D. Nelson 189,612,807 1,872,879 Gordon M. Sprenger 189,573,842 1,911,845 (2) By a vote of 187,008,854 in favor, 3,533,145 against and 848,298 abstaining, the shareholders ratified the selection of KPMG LLP as the independent auditors for The St. Paul. (3) By a vote of 156,557,749 in favor, 33,265,420 against and 1,567,128 abstaining, the shareholders approved The St. Paul's Senior Executive Performance Plan. 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 March 5, 2002, containing the following documents for The St. Paul for the year ended Dec. 31, 2001: Management's Discussion and Analysis of Financial Condition and Results of Operations; Six-year Summary of Selected Financial Data; Statement Regarding Management's Responsibility for Financial Statements; Independent Auditor's Report; Consolidated Financial Statements; Notes to Consolidated Financial Statements; and Consent of Independent Auditors. 2) The St. Paul filed a Form 8-K Current Report dated March 7, 2002 related to the issuance of $500 million of Senior Notes due in 2007. 3) The St. Paul filed a Form 8-K Current Report dated April 25, 2002 related to the announcement of The St. Paul's intent to transfer its ongoing reinsurance operation to a newly formed Bermuda-based reinsurer, Platinum Underwriters Holdings, Ltd. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE ST. PAUL COMPANIES, INC. --------------------------- (Registrant) Date: May 15, 2002 By Bruce A. Backberg ------------ ----------------- Bruce A. Backberg Senior Vice President (Authorized Signatory) Date: May 15, 2002 By John C. Treacy ------------ -------------- John C. Treacy Vice President and Corporate Controller (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 (a) Senior Executive Performance Plan**.............................(1) (11) Statement re computation of per share earnings**....................(1) (12) Statement re computation of ratios**................................(1) (15) Letter re unaudited interim financial information*.................. (18) Letter re change in accounting principles*.......................... (19) Report furnished to security holders*............................... (22) Published report regarding matters submitted to vote of security holders*........................................ (23) Consents of experts and counsel*.................................... (24) Power of attorney*.................................................. (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-10 3 senex102.txt SENIOR EXECUTIVE PERFORMANCE PLAN EXHIBIT 10(a) THE ST. PAUL COMPANIES, INC. SENIOR EXECUTIVE PERFORMANCE PLAN 1. PURPOSE The purpose of The St. Paul Companies, Inc. Senior Executive Performance Plan is to permit The St. Paul Companies, Inc. (the "Company"), through awards of annual incentive compensation which satisfy the requirements for performance-based compensation under Section 162(m) of the Internal Revenue Code, to attract and retain executives and to motivate these executives to promote the profitability and growth of the Company. 2. DEFINITIONS "AFTER-TAX OPERATING EARNINGS" shall mean, for each Performance Period, the Company's net income from continuing operations as reported in the Company's income statement for the Performance Period, adjusted to eliminate the after-tax effects of net realized investment gains or losses in the fixed maturities and real estate portfolios, extraordinary items, and the cumulative effect of accounting changes, each as defined by accounting principles generally accepted in the United States. This amount will be further adjusted to eliminate the after-tax impact of any restructuring charges (as reported in the footnotes to the Company's financial statements), losses from catastrophes (as designated by the Insurance Service Office's Property Claims Service Group, the Lloyd's Claim Office, Swiss Reinsurance Company's sigma report, or a comparable report or organization generally recognized by the insurance industry) in the Company's "core" businesses (as reported in press releases announcing its financial results), and underwriting results of the businesses that the Company does not treat as "core" businesses in those press releases. "AWARD" shall mean the amount granted to a Participant by the Committee for a Performance Period. "BEGINNING TOTAL COMMON STOCKHOLDERS' EQUITY" shall mean, for each Performance Period, the Company's total common stockholders' equity as reported in the Company's balance sheet for the beginning of the Performance Period, excluding net unrealized appreciation or depreciation of investments. "BOARD" shall mean the Board of Directors of the Company. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMMITTEE" shall mean the Personnel and Compensation Committee of the Board or any subcommittee thereof which meets the requirements of Section 162(m)(4)(C) of the Code. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "EXECUTIVE" shall mean any covered employee as defined in Section 162(m) of the Code and, in the discretion of the Committee, any other executive officer of the Company or its Subsidiaries. "PARTICIPANT" shall mean, for each Performance Period, each Executive who is a "covered employee" (as defined in Section 162(m) of the Code) for that Performance Period, unless otherwise determined by the Committee in its sole discretion. "PERFORMANCE PERIOD" shall mean the Company's fiscal year or any other period designated by the Committee with respect to which an Award may be granted. "PLAN" shall mean The St. Paul Companies, Inc. Senior Executive Performance Plan, as amended from time to time. "RETURN ON EQUITY" shall mean, for each Performance Period, the percentage equivalent to the fraction resulting from dividing After-Tax Operating Earnings by Beginning Total Common Stockholders' Equity. "STOCK PLANS" shall mean The St. Paul Companies, Inc. Amended and Restated 1994 Stock Incentive Plan and/or any prior and successor stock plans adopted or assumed by the Company. "SUBSIDIARY" shall mean any entity that is directly or indirectly controlled by the Company or any entity, in which the Company has at least a 50% equity interest. 3. ADMINISTRATION The Plan shall be administered by the Committee, which shall have full authority to interpret the Plan, to establish rules and regulations relating to the operation of the Plan, to select Participants, to determine the maximum Awards and the amounts of any Awards and to make all determinations and take all other actions necessary or appropriate for the proper administration of the Plan. Before any payments are made under the Plan, the Committee shall certify in writing that the Return on Equity required by Section 4(b) has been met. The Committee's interpretation of the Plan, and all actions taken within the scope of its authority, shall be final and binding on the Company, its stockholders and Participants, Executives, former Executives and their respective successors and assigns. No member of the Committee shall be eligible to participate in the Plan. 4. DETERMINATION OF AWARDS (a) Prior to the beginning of each Performance Period, or at such later time as may be permitted by applicable provisions of the Code, the Committee shall establish for each Participant a maximum Award, expressed as a percentage of the incentive pool for the Performance Period pursuant to paragraph (b) of this section, provided that the total of all such maximum percentages shall not exceed 100%, and the maximum percentage for any single Participant shall not exceed 50%. (b) If the Return on Equity for a Performance Period is greater than 8%, the incentive pool for the Performance Period shall be equal to 1.5% of After-Tax Operating Earnings. If the Return on Equity for a Performance Period is equal to or less than 8%, the incentive pool shall be $0. (c) Following the end of each Performance Period, the Committee may determine to grant to any Participant an Award, which may not exceed the maximum amount specified in paragraph (a) of this section for such Participant. The aggregate amount of all Awards under the Plan for any Performance Period shall not exceed 100% of the incentive pool pursuant to paragraph (b) of this section. 5. PAYMENT OF AWARDS Each Participant shall be eligible to receive, as soon as practicable after the amount of such Participant's Award for a Performance Period has been determined, payment of all or a portion of that Award. Awards may be paid in cash, stock, restricted stock, options, other stock-based or stock- denominated units or any combination thereof determined by the Committee. Equity or equity-based awards may be granted under the terms and conditions of the applicable Stock Plan. Payment of the award may be deferred in accordance with a written election by the Participant pursuant to procedures established by the Committee. 6. AMENDMENTS The Committee may amend the Plan at any time and from time to time, provided that no such amendment that would require the consent of the stockholders of the Company pursuant to Section 162(m) of the Code or the Exchange Act, or any other applicable law, rule or regulation, shall be effective without such consent. No such amendment which adversely affects a Participant's rights to, or interest in, an Award granted prior to the date of the amendment shall be effective unless the Participant shall have agreed thereto in writing. 7. TERMINATION The Committee may terminate this Plan at any time. In such event, and notwithstanding any provision of the Plan to the contrary, payment of deferred amounts plus any earnings may be accelerated with respect to any affected Participant in the discretion of the Committee and paid as soon as practicable; but in no event shall the termination of the Plan adversely affect the rights of any Participant to deferred amounts previously awarded such Participant, plus any earnings thereon. 8. OTHER PROVISIONS (a) No Executive or other person shall have any claim or right to be granted an Award under this Plan until such Award is actually granted. Neither the establishment of this Plan, nor any action taken hereunder, shall be construed as giving any Executive any right to be retained in the employ of the Company. Nothing contained in this Plan shall limit the ability of the Company to make payments or awards to Executives under any other plan, agreement or arrangement. (b) The rights and benefits of a Participant hereunder are personal to the Participant and, except for payments made following a Participant's death, shall not be subject to any voluntary or involuntary alienation, assignment, pledge, transfer, encumbrance, attachment, garnishment or other disposition. (c) Awards under this Plan shall not constitute compensation for the purpose of determining participation or benefits under any other plan of the Company unless specifically included as compensation in such plan. (d) The Company shall have the right to deduct from Awards any taxes or other amounts required to be withheld by law. (e) All questions pertaining to the construction, regulation, validity and effect of the provisions of the Plan shall be determined in accordance with the laws of the State of Minnesota without regard to principles of conflict of laws. (f) If any provision of this Plan would cause Awards not to constitute "qualified performance-based compensation" under Section 162(m) of the Code, that provision shall be severed from, and shall be deemed not to be a part of, the Plan, but the other provisions hereof shall remain in full force and effect. (g) No member of the Committee or the Board, and no officer, employee or agent of the Company shall be liable for any act or action hereunder, whether of commission or omission, taken by any other member, or by any officer, agent, or employee, or, except in circumstances involving bad faith, for anything done or omitted to be done in the administration of the Plan. 9. EFFECTIVE DATE The Plan shall be effective as of January 1, 2002, subject to approval by the stockholders of the Company in accordance with Section 162(m) of the Code. EX-11 4 ex11102.txt EARNINGS PER SHARE EXHIBIT 11 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE Three Months Ended March 31, 2002 and 2001 (In millions, except per share data) (in millions) 2002 2001 ----------- ------ ------ EARNINGS Basic: Net income, as reported $139 $202 Preferred stock dividends, net of taxes (2) (2) Premium on preferred shares redeemed (3) (2) ------ ------ Net income available to common shareholders $134 $198 ====== ====== Diluted: Net income available to common shareholders $134 $198 Effect of dilutive securities: Convertible preferred stock 2 2 Zero coupon convertible notes 1 1 ------ ------ Net income, as adjusted $137 $201 ====== ====== COMMON SHARES Basic: Weighted average common shares outstanding 208 217 ====== ====== Diluted: Weighted average common shares outstanding 208 217 Effect of dilutive securities: Stock options 3 4 Convertible preferred stock 6 6 Zero coupon coupon convertible notes 3 3 ------ ------ Total 220 230 ====== ====== EARNINGS PER COMMON SHARE Basic $0.65 $0.91 ====== ====== Diluted $0.63 $0.87 ====== ====== EX-12 5 ex12102.txt COMPUTATION OF RATIOS EXHIBIT 12 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES COMPUTATION OF RATIOS Three Months Ended March 31, 2002 and 2001 (In millions, except ratios) (in millions) 2002 2001 ------ ------ EARNINGS Income from continuing operations before income taxes $ 196 $ 298 Add: fixed charges 50 44 ------ ------ Income as adjusted $ 246 $ 342 ====== ====== FIXED CHARGES AND PREFERRED DIVIDENDS Fixed charges: Interest expense and amortization $ 26 $ 31 Distributions on redeemable preferred securities 18 7 Rental expense (1) 6 6 ------ ------ Total fixed charges 50 44 Preferred stock dividend requirements 4 4 ------ ------ Total fixed charges and preferred stock dividend requirements $ 54 $ 48 ====== ====== Ratio of earnings to fixed charges 4.90 7.73 ====== ====== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 4.58 7.15 ====== ====== (1) Interest portion deemed implicit in total rent expense. -----END PRIVACY-ENHANCED MESSAGE-----