-----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, GiHldo/XcVitKvgS6gVDUf4/XTqdmr1nLDi91SZl2yPA5M2MW549ma2JpcZJ2kzn LLjVtN769sXzSuCdvWbYag== 0000086312-99-000035.txt : 19991117 0000086312-99-000035.hdr.sgml : 19991117 ACCESSION NUMBER: 0000086312-99-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: SEC FILE NUMBER: 001-10898 FILM NUMBER: 99755100 BUSINESS ADDRESS: STREET 1: 385 WASHINGTON ST CITY: SAINT PAUL STATE: MN ZIP: 55102 BUSINESS PHONE: 6123107911 FORMER COMPANY: FORMER CONFORMED NAME: ST PAUL COMPANIES INC /MN/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SAINT PAUL COMPANIES INC DATE OF NAME CHANGE: 19900730 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF ----- THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ------------------ or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) ----- OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ---------- Commission File Number 0-3021 ------ THE ST. PAUL COMPANIES, INC. ------------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 ----------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 385 Washington St., Saint Paul, MN 55102 ---------------------------------- -------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (651) 310-7911 ------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of the Registrant's Common Stock, without par value, outstanding at November 10, 1999, was 227,254,539. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION ------- Consolidated Statements of Operations (Unaudited), Three Months and Nine Months Ended September 30, 1999 and 1998 3 Consolidated Balance Sheets, September 30, 1999 (Unaudited) and December 31, 1998 4 Consolidated Statements of Shareholders' Equity, Nine Months Ended September 30, 1999 (Unaudited) and Twelve Months Ended December 31, 1998 6 Consolidated Statements of Comprehensive Income (Unaudited), Three Months and Nine Months Ended September 30, 1999 and 1998 7 Consolidated Statements of Cash Flows (Unaudited), Nine Months Ended September 30, 1999 and 1998 8 Notes to Consolidated Financial Statements (Unaudited) 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 22 PART II. OTHER INFORMATION Item 1 through Item 6 38 Signatures 38 EXHIBIT INDEX 39 PART I FINANCIAL INFORMATION THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended (In millions, September 30 September 30 except per share) ------------------- ------------------ 1999 1998 1999 1998 Revenues: ----- ----- ----- ----- Premiums earned $1,309 1,409 4,124 4,375 Net investment income 391 391 1,188 1,185 Asset management 85 76 251 223 Realized investment gains 41 25 173 210 Other 30 24 92 76 ----- ----- ----- ----- Total revenues 1,856 1,925 5,828 6,069 ----- ----- ----- ----- Expenses: Insurance losses and loss adjustment expenses 890 1,132 2,938 3,541 Life policy benefits 101 66 253 188 Policy acquisition expenses 358 350 1,057 1,110 Operating and administrative 327 286 845 1,162 ----- ----- ----- ----- Total expenses 1,676 1,834 5,093 6,001 ----- ----- ----- ----- Income from continuing operations before income taxes and cumulative effect of accounting change 180 91 735 68 Income tax expense (benefit) 39 (12) 173 (46) ----- ----- ----- ----- Income from continuing operations before cumulative cumulative effect of accounting change 141 103 562 114 Cumulative effect of accounting change, net of taxes - - (30) - ----- ----- ----- ----- Income from continuing operations 141 103 532 114 Discontinued operations: Operating loss, net of taxes - (35) (22) (125) Gain on disposal, net of taxes 186 - 186 - ----- ----- ----- ----- Income (loss) from discontinued operations, net of taxes 186 (35) 164 (125) ----- ----- ----- ----- Net income (loss) $327 68 696 (11) ===== ===== ===== ===== Basic earnings (loss) per common share: Income from continuing operations before cumulative effect of accounting change $0.61 0.42 2.42 0.45 Cumulative effect of accounting change, net of taxes - - (0.13) - ----- ----- ----- ----- Income from continuing operations $0.61 0.42 2.29 0.45 Discontinued operations, net of taxes 0.82 (0.15) 0.72 (0.54) ----- ----- ----- ----- Net income (loss) $1.43 0.27 3.01 (0.09) ===== ===== ===== ===== Diluted earnings (loss) per common share: Income from continuing operations before cumulative effect of accounting change $0.58 0.41 2.29 0.44 Cumulative effect of accounting change, net of taxes - - (0.12) - ----- ----- ----- ----- Income from continuing operations 0.58 0.41 2.17 0.44 Discontinued operations, net of taxes 0.76 (0.14) 0.67 (0.53) ----- ----- ----- ----- Net income (loss) $1.34 0.27 2.84 (0.09) ===== ===== ===== ===== Dividends declared on common stock $0.26 0.25 0.78 0.75 ===== ===== ===== ===== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In millions) September 30, December 31, ASSETS 1999 1998 - ------ ------------- ------------ (Unaudited) Investments: Fixed maturities, at estimated fair value $19,875 $20,456 Equities, at estimated fair value 1,359 1,259 Real estate and mortgage loans 1,534 1,507 Venture capital, at estimated fair value 790 571 Securities lending collateral 1,764 1,368 Other investments 245 372 Short-term investments, at cost 1,216 965 -------- ------- Total investments 26,783 26,498 Cash 175 146 Investment banking inventory securities 52 107 Reinsurance recoverables: Unpaid losses 4,267 3,974 Paid losses 162 157 Ceded unearned premiums 305 288 Receivables: Underwriting premiums 2,289 2,085 Interest and dividends 370 354 Other 168 52 Deferred policy acquisition expenses 939 878 Deferred income taxes 1,421 1,193 Office properties and equipment, at cost less accumulated depreciation of $472 (1998; $390) 521 510 Goodwill 513 592 Other assets 1,238 1,030 -------- -------- Total assets $39,203 $37,864 ======== ======== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In millions) September 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 - ------------------------------------ ------------- ------------ (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $18,122 $18,186 Future policy benefits 4,681 4,142 Unearned premiums 3,222 3,092 -------- -------- Total insurance reserves 26,025 25,420 Debt 1,316 1,260 Payables: Reinsurance premiums 508 291 Income taxes 439 221 Accrued expenses and other 1,293 1,225 Securities lending 1,764 1,368 Other liabilities 958 940 -------- -------- Total liabilities 32,303 30,725 -------- -------- Company-obligated mandatorily redeemable preferred capital securities of subsidiaries or trusts holding solely convertible subordinated debentures of the Company 477 503 -------- -------- Shareholders' equity: Preferred: Series B convertible preferred stock; 1.45 shares authorized; 0.9 shares outstanding in 1999 and 1998 131 134 Guaranteed obligation - PSOP (105) (119) -------- -------- Total preferred shareholders' equity 26 15 -------- -------- Common: Common stock, 480.0 shares authorized; 226.8 shares outstanding (233.7 shares in 1998) 2,085 2,128 Retained earnings 3,809 3,480 Accumulated other comprehensive income: Unrealized appreciation 527 1,027 Unrealized loss on foreign currency translation (24) (14) -------- -------- Total accumulated other comprehensive income 503 1,013 -------- -------- Total common shareholders' equity 6,397 6,621 -------- -------- Total shareholders' equity 6,423 6,636 -------- -------- Total liabilities, redeemable preferred securities and shareholders' equity $39,203 $37,864 ======== ======== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In millions) Nine Twelve Months Ended Months Ended September 30 December 31 ------------ ------------ 1999 1998 ------- ------- (Unaudited) Preferred shareholders' equity: Series B PSOP convertible preferred stock: Beginning of period $134 $138 Redemptions during period (3) (4) ------ ------ End of period 131 134 ------ ------ Guaranteed obligation - PSOP: Beginning of period (119) (121) Principal payments 14 2 ------ ------ End of period (105) (119) ------ ------ Total preferred shareholders' equity 26 15 ------ ------ Common shareholders' equity: Common stock: Beginning of period 2,128 2,057 Stock issued under stock incentive plans 26 70 Stock issued for preferred shares redeemed 6 8 Reacquired common shares (75) (35) Other - 28 ------ ------ End of period 2,085 2,128 ------ ------ Retained earnings: Beginning of period 3,480 3,720 Net income 696 89 Dividends declared on common stock (176) (223) Dividends declared on preferred stock, net of taxes (8) (9) Reacquired common shares (190) (100) Tax benefit on employee options and awards 10 7 Premium on preferred shares redeemed (3) (4) ------ ------ End of period 3,809 3,480 ------ ------ Unrealized appreciation, net of taxes: Beginning of period 1,027 846 Change during the period (500) 181 ------ ------ End of period 527 1,027 ------ ------ Unrealized gain (loss)loss on foreign currency translation, net of taxes: Beginning of period (14) (23) Change during the period (10) 9 ------ ------ End of period (24) (14) ------ ------ Guaranteed obligation - ESOP: Beginning of period - (8) Principal payments - 8 ------ ------ End of period - - ------ ------ Total common shareholders' equity 6,397 6,621 ------ ------ Total shareholders' equity $6,423 $6,636 ====== ====== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Unaudited (In millions) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ---------------- 1999 1998 1999 1998 ----- ----- ----- ----- Net income (loss) $327 $68 $696 $(11) ------ ------ ------ ------ Other comprehensive income (loss), net of taxes: Change in unrealized appreciation (143) 104 (500) 124 Change in unrealized loss on foreign currency translation (5) (11) (10) (10) ------ ------ ------ ------ Other comprehensive income (loss) (148) 93 (510) 114 ------ ------ ------ ------ Comprehensive income $179 $161 $186 $103 ====== ====== ====== ====== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (In millions) Nine Months Ended September 30 ------------------------- 1999 1998 -------- ------- OPERATING ACTIVITIES Net income (loss) $696 $(11) Adjustments: Change in property-liability insurance reserves 144 378 Change in reinsurance balances (487) (78) Change in premiums receivable (254) (36) Change in income taxes payable 291 56 Change in asset management balances (2) (20) Depreciation and amortization 100 98 Net gain on disposal of standard personal insurance operations (186) - Realized investment gains (173) (210) Other 32 44 ----- ----- Net Cash Provided by Operating Activities 161 221 ----- ----- INVESTING ACTIVITIES Purchase of investments (4,641) (3,976) Proceeds from sales and maturities of investments 4,378 3,888 Change in short-term investments (354) 127 Net proceeds from sale of standard personal insurance operations 252 - Change in open security transactions 61 (3) Net purchases of office properties and equipment (98) (61) Acquisitions - (98) Other 44 74 ----- ----- Net Cash Used by Investing Activities (358) (49) ----- ----- FINANCING ACTIVITIES Deposits on universal life and investment contracts 727 311 Withdrawals on universal life and investment contracts (96) (158) Dividends paid on common and preferred stock (184) (165) Proceeds from issuance of debt 110 61 Repayment of debt and capital securities (81) (205) Repurchase of common shares (265) - Stock options exercised and other 15 12 ----- ----- Net Cash Provided (Used) by Financing Activities 226 (144) ----- ----- Increase in cash 29 28 Cash at beginning of period 146 136 ----- ----- Cash at end of period $175 $164 ===== ===== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited September 30, 1999 Note 1 - Basis of Presentation - ------------------------------ The financial statements include The St. Paul Companies, Inc. and subsidiaries (The St. Paul), and have been prepared in conformity with generally accepted accounting principles. The St. Paul completed its merger with USF&G Corporation (USF&G) in April 1998. The financial statements for all current and prior periods in this report reflect the combined accounts and results of operations of The St. Paul and USF&G. On September 30, 1999, The St. Paul completed the sale of its standard personal insurance business to Metropolitan Property and Casualty Insurance Company. The results of the operations sold have been accounted for as discontinued operations for all current and prior year periods presented in this report. See Note 9 on page 17 for further information regarding the sale. These consolidated financial statements rely, in part, on estimates. In the opinion of management, all necessary adjustments, consisting of normal recurring adjustments, have been reflected for a fair presentation of the results of operations, financial position and cash flows in the accompanying unaudited consolidated financial statements. The results for the period are not necessarily indicative of the results to be expected for the entire year. Reference should be made to the "Notes to Consolidated Financial Statements" in The St. Paul's annual report to shareholders for the year ended December 31, 1998. 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 1998 consolidated financial statements have been reclassified to conform with the 1999 presentation. These reclassifications had no effect on net income or shareholders' equity, as previously reported. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 2 - Earnings Per Share - --------------------------- Earnings per common share (EPS) amounts were calculated by dividing operating earningsnet income, as adjusted, by the average common shares outstanding. Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1999 1998 1999 1998 ------ ------ ------ ------ (In millions, except per share data) EARNINGS Basic: Net income (loss), as reported $327 $68 $696 $(11) Dividends on preferred stock, net of taxes (2) (2) (6) (7) Premium on preferred shares redeemed (1) (1) (3) (3) ------ ------ ------ ------ Net income (loss) available to common shareholders $324 $65 $687 $(21) ====== ====== ====== ====== Diluted: Net income (loss) available to common shareholders $324 $65 $687 $(21) Effect of dilutive securities: Convertible preferred stock 2 1 5 - Convertible monthly income preferred securities 2 2 6 - Zero coupon convertible notes 1 1 2 - ------ ------ ------ ------ Net income (loss) available to common shareholders $329 $69 $700 $(21) ====== ====== ====== ====== COMMON SHARES Basic: Weighted average common shares outstanding 227 236 228 235 ====== ====== ====== ====== Diluted: Weighted average common shares outstanding 227 236 228 235 Effect of dilutive securities: Stock options 2 3 2 4 Convertible preferred stock 7 8 7 - Convertible monthly income preferred securities 7 7 7 - Zero coupon convertible notes 2 3 2 - ------ ------ ------ ------ Total 245 257 246 239 ====== ====== ====== ====== EARNINGS (LOSS) PER SHARE Basic $1.43 $0.27 $3.01 $(0.09) ====== ====== ====== ====== Diluted $1.34 $0.27 $2.84 $(0.09) ====== ====== ====== ====== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 3 - Investments - -------------------- Investment Activity. A summary of investment transactions is presented below. Nine Months Ended September 30 ------------------------------ 1999 1998 -------- -------- (In millions) Purchases: Fixed maturities $3,213 $2,511 Equities 1,063 1,071 Real estate and mortgage loans 123 176 Venture capital 170 119 Other investments 72 99 ------ ------ Total purchases 4,641 3,976 ------ ------ Proceeds from sales and maturities: Fixed maturities 2,971 2,391 Equities 1,085 1,169 Real estate and mortgage loans 93 196 Venture capital 156 52 Other investments 73 80 ------ ------ Total sales and maturities 4,378 3,888 ------ ------ Net purchases $ 263 $ 88 ====== ====== Change in Unrealized Appreciation. The increase (decrease) in unrealized appreciation of investments recorded in common shareholders' equity was as follows: Nine Months Ended Twelve Months Ended September 30, 1999 December 31, 1998 ------------------ ------------------- (In millions) Fixed maturities $(1,063) $203 Equities (2) 69 Venture capital 139 45 Life deferred policy acquisition costs and policy benefits 85 (1) Single premium immediate annuity reserves 45 (17) Other - (16) ------ ------ Total change in pretax unrealized appreciation (796) 283 Change in deferred taxes 296 (102) ------ ------ Total change in unrealized appreciation, net of taxes $(500) $181 ====== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 4 - Income Taxes - --------------------- The components of income tax expense on income from continuing operations before the cumulative effect of accounting change is as follows : Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1999 1998 1999 1998 ------ ------ ------ ------ (In millions) Federal current tax expense (benefit) $27 $ (95) $ 41 $(50) Federal deferred t expense (benefit) 3 79 106 (14) ----- ----- ----- ----- Total federal income tax expense (benefit) 30 (16) 147 (64) Foreign income taxes 7 3 20 13 State income taxes 2 1 6 5 ----- ----- ----- ----- Total income tax expense (benefit) on continuing operations $39 $(12) $173 $(46) ===== ===== ===== ===== Note 5 - Contingent Liabilities - ------------------------------- In the ordinary course of conducting business, The St. Paul and some of its subsidiaries have been named as defendants in various lawsuits. Some of these lawsuits attempt to establish liability under insurance contracts issued by those companies. Plaintiffs in these lawsuits are asking for money damages or to have the court direct the activities of the company's operations in certain ways. Although it is possible that the settlement of a contingency may be material to The St. Paul's results of operations and liquidity in the period in which the settlement occurs, The St. Paul believes that the total amounts that it or its subsidiaries will ultimately have to pay in all of these lawsuits will have no material effect on its overall financial position. In some cases, plaintiffs seek to establish coverage for their liability under environmental protection laws. See "Environmental and Asbestos Claims" in Management's Discussion and Analysis for information on these claims. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 6 - Debt - ------------- Debt consists of the following: September 30, December 31, 1999 1998 ------------ ------------ Book Fair Book Fair Value Value Value Value ------ ------ ------ ------ (In millions) Medium-term notes $617 $610 $637 $675 Commercial paper 244 244 257 257 8 3/8% senior notes 150 154 150 160 Zero coupon convertible notes 93 88 111 118 7 1/8% senior notes 80 80 80 86 Variable rate borrowings 64 64 - - Floating rate notes 46 46 - - Real estate mortgages 15 15 15 16 Nuveen short-term borrowings 7 7 10 10 ----- ----- ----- ----- Total debt $1,316 $1,308 $1,260 $1,322 ===== ===== ===== ===== A number of The St. Paul's real estate entities are parties to variable rate loan agreements aggregating $63.8 million at Sept. 30, 1999. The borrowings mature in the year 2030, with principal paydowns starting in the year 2006. The interest rate is set weekly by a third party, and was 3.75% at Sept. 30, 1999. Note 7 - Segment Information - ---------------------------- As of Sept. 30, 1999, The St. Paul had seven reportable business segments in its property-liability insurance operation, consisting of the Commercial Lines Group, Specialty Commercial, Surety, Specialty Auto, International, Reinsurance and Investment Operations. (In July 1999, The St. Paul sold its standard personal insurance business to Metropolitan Property and Casualty Insurance Company in a transaction that closed on September 30, 1999. The results of the operations sold have been accounted for as discontinued operations for all current and prior year periods presented in this report and are not included in The St. Paul's segment data). The St. Paul also has a life insurance segment (Fidelity and Guaranty Life) and an asset management segment (The John Nuveen Company). The St. Paul evaluates the performance of its property-liability underwriting segments based on GAAP underwriting results. The property-liability investment operation is disclosed as a separate reportable segment because that operation is managed at the corporate level and the invested assets, net investment income and realized gains are not allocated to individual underwriting segments. The life insurance and asset management segments are evaluated based on their respective pretax operating results, which include investment income. The St. Paul does not aggregate its segments for purposes of reporting segment information. The reportable underwriting business segments in The St. Paul's property-liability operation are each managed separately because each offers insurance products to unique customer classes and utilizes different underwriting criteria and marketing strategies. For example, the Commercial Lines Group provides "commodity-type" insurance products to the extensive, small and medium-sized commercial markets. It also targets certain large industry groups, such as the construction industry. By contrast, the Specialty Commercial segment markets specialized insurance products and services tailored to meet the individual needs of specific commercial customer groups, such as doctors, lawyers, officers and directors, as well as technology firms and government entities. Customers in the Specialty Commercial segment generally require specialized underwriting expertise and claim settlement services. The tabular information on the following pages provides revenue and income data for each of The St. Paul's business segments for the three months and nine months ended September 30, 1999 and 1998. In 1999, The St. Paul revised its segment reporting structure to separately disclose its Surety underwriting operation as a business THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 7 - Segment Information (continued) - --------------------------------------- segment, which differs from its prior classification as a component of the Commercial Lines Group. This revision reflects the distinct nature of this operation, which provides surety bond coverages (primarily for construction contractors). The Surety operation is managed and evaluated separately from other components of the Commercial Lines Group, and is also the largest underwriter of surety bonds in North America, based on 1998 annual written premium volume. Segment information for 1998 has been restated to be consistent with the 1999 presentation. On October 1, 1999, The St. Paul announced a realignment of its primary property-liability insurance underwriting operations. The St. Paul is currently assessing the impact of the reorganization on its external segment reporting format. Any changes to The St. Paul's segment reporting structure will be reflected in the company's financial statements for the year ended Dec. 31, 1999. Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1999 1998 1999 1998 ------ ------ ----- ----- (In millions) Revenues from Continuing Operations Property-liability insurance: U.S. Underwriting: Commercial Lines Group $435 $558 $1,464 $1,713 Specialty Commercial 329 334 1,009 1,006 Surety 100 90 284 255 Specialty Auto 63 62 176 181 ------ ------ ------ ------ Total U.S. Underwriting 927 1,044 2,933 3,155 International 107 111 368 352 ------ ------ ------ ------ Total primary insurance operations 1,034 1,155 3,301 3,507 Reinsurance 213 223 696 787 ------ ------ ------ ------ Total property-liability premiums earned 1,247 1,378 3,997 4,294 ------ ------ ------ ----- Investment operations: Net investment income 321 322 964 985 Realized investment gains 38 7 170 187 ------ ------ ------ ------ Total investment operations 359 329 1,134 1,172 Other 17 21 70 62 ------ ------ ------ ------ Total property- liability insurance 1,623 1,728 5,201 5,528 ------ ------ ------ ------ Life insurance 131 100 341 284 ------ ------ ------ ------ Asset management 87 77 256 226 ------ ------ ------ ------ Total reportable segments 1,841 1,905 5,798 6,038 Parent company, other operations and consolidating eliminations 15 20 30 31 ------ ------ ------ ------ Total revenues from continuing operations $1,856 $1,925 $5,828 $6,069 ====== ====== ====== ====== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 7 - Segment Information (continued) - --------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1999 1998 1999 1998 ------ ------ ------ ------ (In millions) Income (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Change Property-liability insurance: U.S. Underwriting: Commercial Lines Group ($69) ($157) ($241) ($584) Specialty Commercial (43) (53) (86) (99) Surety 5 20 33 53 Specialty Auto 4 (2) 4 (3) ------ ------ ------ ------ Total U.S. Underwriting (103) (192) (290) (633) International (23) (25) (76) (66) ------ ------ ------ ------ Total primary insurance (126) (217) (366) (699) Reinsurance 15 (21) 44 (5) ------ ------ ------ ------ Totla GAAP underwriting result (111) (238) (322) (704) ------ ------ ------ ------ Investment operations: Net investment income 321 322 964 985 Realized investment gains 38 7 170 187 ------ ------ ------ ------ Total investment operations 359 329 1,134 1,172 Other (77) (7) (97) (224) ------ ------ ------ ------ Total property- liability insurance 171 84 715 244 ------ ------ ------ ------ Life insurance 21 22 48 9 ------ ------ ------ ------ Asset management: Prestax income before minority interest 40 34 117 98 Minority interest (10) (8) (28) (23) ------ ------ ------ ------ Total asset management 30 26 89 75 ------ ------ ------ ------ Total reportable segments 222 132 852 328 Parent company, other operations and consolidating eliminations (42) (41) (117) (260) ------ ------ ------ ------ Total income from continuing operations before income taxes and cumulative effect of accounting change $180 $91 $735 $68 ====== ====== ====== ====== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 8 - Reinsurance - -------------------- The St. Paul's consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to The St. Paul's acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks The St. Paul has underwritten to other insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to protect The St. Paul from potential losses in excess of the amount it is prepared to accept. In 1999, The St Paul's income from continuing operations benefited from cessions made under two separate aggregate excess- of-loss reinsurance treaties. The St. Paul ceded a total of $344 million of loss and loss adjustment expenses, and written and earned premiums totaling $172 million under these two treaties, for a combined net benefit to pretax income from continuing operations of $172 million for the nine months ended Sept. 30, 1999. The St. Paul expects those with whom it has ceded reinsurance to honor their obligations. In the event these companies are unable to honor their obligations, The St. Paul will pay these amounts. The St. Paul has established allowances for possible nonpayment of amounts due to it. The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses and loss adjustment expenses is as follows: Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- ($ in millions) 1999 1998 1999 1998 ----- ----- ----- ----- Written premiums: Direct $1,289 $1,288 $3,663 $3,711 Assumed 336 295 1,236 1,044 Ceded (348) (183) (771) (514) ----- ----- ----- ----- Net premiums written 1,277 1,400 4,128 4,241 ===== ===== ===== ===== Earned premiums: Direct 1,266 1,300 3,771 3,931 Assumed 365 308 1,075 1,003 Ceded (322) (199) (722) (559) ----- ----- ----- ----- Net premiums earned 1,309 1,409 4,124 4,375 ===== ===== ===== ===== Insurance losses and loss adjustment expenses: Direct 890 1,044 2,899 3,270 Assumed 354 206 850 705 Ceded (354) (118) (811) (434) ----- ----- ----- ----- Net insurance losses and loss adjustment expenses $890 $1,132 $2,938 $3,541 ===== ===== ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 9 - Discontinued Operations - Sale of Standard Personal Insurance - ---------------------------------------------------------------------- In June 1999, The St. Paul made a strategic decision to sell its standard personal insurance business. On July 12, 1999 an agreement was reached to sell this business to Metropolitan Property and Casualty Insurance Company (Metropolitan). As a result, the standard personal insurance operations were accounted for as a discontinued operation for the second quarter and first six months of 1999, and prior period results were restated to be consistent with such presentation. The third quarter results of the standard personal insurance operations are included in the gain on sale of discontinued operations. The Specialty Auto line of business, which was previously aggregated with standard personal insurance to form The St. Paul's Personal Insurance segment for reporting purposes, was not included in this sale. The St. Paul completed its disposition of the standard personal insurance business through the stock sale of the Economy Fire & Casualty Company and its wholly-owned subsidiaries (Economy) on Sept. 30, 1999, and the sale of its rights and interests in those policies constituting the remaining portion of its standard personal insurance operations and certain related assets. This remaining portion was transferred to Metropolitan by way of a reinsurance and facility agreement effective Oct. 1, 1999, pursuant to which The St. Paul transferred assets, representing the unearned premium on the inforce policies, of approximately $325 million to Metropolitan. During the third quarter, The St. Paul received gross proceeds on the sale of $577 million, less the payment of the reinsurance premium of $325 million, for net proceeds of $252 million. Additional proceeds to be received approximate $17 million. As a result of the sale, nearly all 1,700 standard personal insurance employees of The St. Paul will transfer to Metropolitan, effective Dec. 31, 1999. For the period from closing date through Dec. 31, 1999, these employees remain employees of The St. Paul who are being leased to Metropolitan. The St. Paul recognized a pretax gain on proceeds of $138 million, net of a $27 million pension and postretirement curtailment gain and disposition costs of $32 million. The gain on proceeds combined with a $136 million pretax gain on third quarter discontinued operations to result in a total pretax gain of $269 million. The third quarter discontinued operations included a reserve takedown of $145 million, as provided for in the sale agreement. Redundancies or deficiencies which develop on these reserves will be settled at a specified point in the future. The curtailment gain represents the current estimate of the impact of a reduced number of employees in the pension and post- retirement plans due to the sale of personal insurance. The calculation of the actual curtailment gain will be made in the fourth quarter of 1999, when actual discount rates are available. Any adjustments to the estimate will be reflected as a fourth quarter adjustment to the gain on sale. The $32 million pretax disposition costs netted against the gain represent costs directly associated with the decision to dispose of the standard personal insurance segment and include $14 million of employee-related costs, $8 million of lease buyout costs, $7 million of transaction costs, $2 million of record separation costs and $1 million of equipment charges. The employee-related costs relate to the expected termination of 385 employees due to the sale of the personal insurance segment. Actions to take place related to these charges are expected to be completed by the end of 2000. The consolidated Sept. 30, 1999 balance sheet reflects the sale of Economy and the consolidated Dec. 31, 1998 balance sheet has been reclassified to present the net assets of Economy in other assets. The consolidated statements of operations for the quarter and nine months ended Sept. 30, 1999 exclude the results of standard personal insurance operations from income from continuing operations. The following table presents the consolidated statement of operations for the year ended Dec. 31, 1998 on a historical basis, and after giving effect to the removal of the results of standard personal insurance operations from income from continuing operations: THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (In millions) Historical Reclass to Reclassified Basis Discontinued Basis ---------- ------------ ------------ Premiums earned $6,945 ($1,149) $5,796 Other revenues 2,163 16 2,179 ----- ----- ----- Total revenues 9,108 (1,133) 7,975 ----- ----- ----- Insurance losses and loss adjustment expenses 5,604 (973) 4,631 Other expenses 3,551 (344) 3,207 ----- ----- ----- Total expenses 9,155 (1,317) 7,838 ----- ----- ----- Income (loss) from continuing operations before income taxes (47) 184 137 Income tax expense (benefit) (136) 63 (73) ----- ----- ----- Income from continuing operations 89 121 210 Discontinued operations, net of taxes - (121) (121) ----- ----- ----- Net income $89 $0 $89 ===== ===== ===== Note 10 - Cumulative Effect of Accounting Change - ------------------------------------------------ Effective Jan. 1, 1999, The St. Paul adopted the provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." The SOP provides guidance for recognizing and measuring liabilities for guaranty fund and other insurance-related assessments. The St. Paul recorded a pretax expense of $46 million ($30 million after-tax) in the first quarter of 1999 representing the cumulative effect of adopting the provisions of the SOP. The majority of the cumulative effect related to assessments for workers' compensation second-injury funds, with a lesser amount related to insurance guaranty funds. Second-injury funds provide reimbursement to insurance carriers or employers for workers' compensation claims when the cost of a workers' second injury combined with a prior accident or disability is greater than what the second injury alone would have produced. Second-injury funds are established to help ensure that employers are not made to suffer a greater monetary loss or increased insurance costs because of hiring previously injured or handicapped employees. The St. Paul's total accrued pre-tax expense related to insurance assessments was $74 million at March 31, 1999, which consisted of the $46 million first quarter cumulative effect of adopting SOP 97-3 and $28 million of previously recorded liabilities. The accrual was recorded as follows: $53 million in other liabilities, $16 million in insurance reserves, and $5 million in other assets as an offset to deferred premium tax recoverable. The accrued amounts are expected to be disbursed as assessed during a period of up to 30 years. During the third quarter of 1999, the state of New York enacted a law which changed its method of assessment from loss-based to written premium-based. As a result of this change, The St. Paul reduced its accrual for second-injury and guaranty fund assessments by $12 million (pretax) in the third quarter, which is reflected in Income from Continuing Operations. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 11 - Merger with USF&G Corporation - --------------------------------------- On April 24, 1998, The St. Paul issued 66.5 million of its common shares in exchange for all of the outstanding common stock of USF&G Corporation, a holding company for property- liability and life insurance operations. The St. Paul recorded a pretax charge to earnings of $292 million in the second quarter of 1998 related to the merger, primarily consisting of severance and other employee-related costs, facilities exit costs, asset impairments and transaction costs. The St. Paul estimated that approximately 2,000 positions would be eliminated due to the combination of the two organizations, resulting from efficiencies to be realized by the larger organization and the elimination of redundant functions. All levels of employees, from technical staff to senior management, were affected by the reductions. The number of positions expected to be reduced by function included approximately 950 in The St. Paul's property-liability underwriting operation, 350 in claims and 700 in finance and other administrative positions. The reductions are occurring throughout the United States. Through Sept. 30, 1999, approximately 2,200 positions had been eliminated, and the cost of termination benefits paid was $131 million. The following table provides information about the components of the 1998 charge, payments made and the balance of accrued amounts remaining at Sept. 30, 1999. Pre- tax Charges to earnings: Charge (in millions) ------ USF&G corporate headquarters $36 Long-lived assets 23 Software depreciation acceleration 10 Computer leases and equipment 9 Other equipment and furniture 8 ---- Subtotal 86 ---- Accrued charges subject to rollforward: Reserve Pre- at tax Sept. 30, Charge Payments Adjustments 1999 -------- -------- ----------- -------- Executive severance 89 $(84) $(2) $3 Other severance 53 (47) 0 6 Branch lease exit costs 34 (6) 0 28 Transaction costs 30 (30) 0 - ---- ---- ---- ---- Accruals subject to rollforward 206 $(167) $(2) $37 ---- ==== ==== ==== Total $292 ==== Footnote 2 of The St. Paul's 1998 Annual Report provides more information regarding the rationale for and calculation of the components of the merger-related charge, as updated below. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 11 - Merger with USF&G Corporation (continued) - --------------------------------------------------- Long-lived assets - ----------------- Upon consummation of the merger, The St. Paul determined that several of USF&G's real estate investments were not consistent with The St. Paul's real estate investment strategy. A plan was developed to sell a number of apartment buildings and various other miscellaneous holdings, with an expected disposal date by year-end 1999. In applying the provisions of SFAS No. 121, it was determined that four of these miscellaneous investments should be written down to fair value, based on The St. Paul's plan to sell them. Fair value was determined based on a discounted cash flow analysis, or based on market prices for similar assets. The four investments were as follows: 1) Description of Percentage rents retained after sale investment: of a portfolio of stores to a third party Carrying $21.6 million prior to writedown of amount: $16.6 million, for current amount of $5.0 million, with $4.3 million held in the property-liability segment and $0.7 million held in the life segment 2) Description of 138-acre land parcel in New Jersey, investment: with farm buildings being rented out Carrying $4.9 million prior to writedown of amount: $2.1 million, sold during the third quarter for a pretax realized loss of $.7 million 3) Description of Receivable representing cash flow investment: guarantee payments related to real estate partnerships Carrying $4.8 million prior to writedown of amount: $1.7 million, sold with no further gain or loss 4) Description of Limited partnership interests in investment: three citrus groves Carrying $4.5 million prior to writedown of amount: $2.4 million. Two of the partnership interests have been exchanged for an investment in a new partnership, with one of the original citrus grove partnership interests remaining. This partnership is carried at a current balance of $.6 million, held in "parent company and other" operations THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 12 - Fourth Quarter 1998 Restructuring Charge - -------------------------------------------------- In the fourth quarter of 1998, The St. Paul recorded a pretax restructuring charge of $34 million. The majority of the charge, $26 million, related to the anticipated termination of approximately 520 employees in the following operations: Claims, Commercial Lines Group, Information Systems, Medical Services and Professional Markets. The remaining charge of $8 million related to costs to be incurred to exit lease contracts. As of Sept. 30, 1999, approximately 300 employees had been terminated under the restructuring plan, and the cost of termination benefits paid was $19 million. The remaining reserve related to severance was written down by $2 million for the third quarter and $5 million year to date, for a balance at Sept. 30, 1999 of $2 million. Less than $1 million had been paid related to branch leases as of Sept. 30, 1999. The branch lease accrual has, however, been reduced by $5 million for subleases that have been entered into related to the vacated space. Actions to take place under this restructuring plan are expected to be completed by the end of 1999. Note 13 - Third Quarter 1999 Cost Reduction Charge - -------------------------------------------------- In August 1999, The St. Paul announced a cost reduction program designed to enhance its efficiency and effectiveness in a highly competitive industry environment. In the third quarter of 1999, The St. Paul recorded a pretax charge of $60 million related to this program, including $25 million in employee-related charges related to the expected elimination of approximately 700 positions, $33 million in lease buyout charges and $2 million in equipment charges. This charge is included in "Operating and Administrative Expenses" in the statement of operations and in "Property-liability insurance - Other" in the table titled "Income (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Change" in Note 7. As of Sept. 30, 1999, approximately 41 employees had been terminated under the cost reduction action, but no amounts had been paid. Many of these actions will occur during the fourth quarter of 1999 and all actions to take place under this cost reduction program are expected to be completed by the end of 2000. Note 14 - Subsequent Event - Share Repurchase Authorization - ----------------------------------------------------------- On November 2, 1999, The St. Paul's board of directors authorized management to repurchase up to $500 million of the company's common stock in the open market or through private transactions. This repurchase program terminates a prior $500 million repurchase authorization in November 1998, under which The St. Paul repurchased 12.1 million common shares for a total cost of $400 million. The repurchases are expected to be partially funded by proceeds from the recently completed sale of The St. Paul's standard personal insurance operations. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1999 On Sept. 30, 1999, The St. Paul completed the sale of its standard personal insurance business to Metropolitan Property and Casualty Insurance Company. The results of the operations sold have been accounted for as discontinued operations for all current and prior year periods, and are thus excluded from any table or discussion of continuing operations. Consolidated Results -------------------- The following table summarizes The St. Paul's results for the third quarter and first nine months of 1999 and 1998. Three Months Nine Months (in millions, Ended Sept. 30 Ended Sept. 30 except per share data) -------------- -------------- 1999 1998 1999 1998 Pretax income (loss): ----- ----- ----- ----- Property-liability insurance: GAAP underwriting result $(111) $(238) $(322) $(704) Net investment income 321 322 964 985 Realized investment gains 38 7 170 187 Other (77) (7) (97) (224) ---- ---- ---- ---- Total property- liability insurance 171 84 715 244 Life insurance 21 22 48 9 Asset management 30 26 89 75 Parent and other (42) (41) (117) (260) ---- ---- ---- ---- Income from continuing operations before income taxes and cumulative effect of accounting change 180 91 735 68 Income tax expense (benefit) 39 (12) 173 (46) ---- ---- ---- ---- Income from continuing operations before cumulative effect of accounting change 141 103 562 114 Cumulative effect of accounting change, net of taxes - - (30) - ---- ---- ---- ---- Income from continuing operations 141 103 532 114 Discontinued operations, net of taxes: Operating loss - (35) (22) (125) Gain on disposal 186 - 186 - ---- ---- ---- ---- Discontinued operations 186 (35) 164 (125) ---- ---- ---- ---- Net income (loss) $327 $ 68 $696 $(11) ==== ==== ==== ==== Diluted net income (loss) per common share $1.34 $0.27 $2.84 $(0.09) ==== ==== ==== ==== Consolidated Overview - --------------------- The St. Paul's pretax income from continuing operations of $180 million in the third quarter of 1999 was significantly higher than pretax income of $91 million in the same 1998 period. Results in the 1999 period include a $141 million net pretax benefit from two aggregate excess-of-loss reinsurance treaties, which are discussed in more detail on page 25 of this report. Third quarter 1999 income from continuing operations in The St. Paul's property-liability underwriting operations was reduced by a $60 million pretax charge related to the company's cost reduction program implemented in the third quarter of 1999. Excluding these items, third quarter 1999 pretax income from continuing operations totaled $99 million. This improvement over 1998's third quarter was largely due to an increase in realized investment gains in The St. Paul's property-liability insurance operations. Through the first nine months of 1999, pretax income from continuing operations of $735 million was significantly higher than equivalent 1998 income of $68 million. The 1998 total included a pretax charge of $292 million related to The St. Paul's merger with USF&G, primarily for severance and other employee-related costs and facilities exit costs. The 1998 total also reflected a $215 million provision to reflect the application of The St. Paul's loss reserving policies to USF&G's loss and loss adjustment expense reserves subsequent to the April 1998 merger, and a $41 million writedown in the carrying value of deferred acquisition costs in The St. Paul's life insurance segment. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Consolidated Results (continued) ------------------------------- Merger-Related Savings - ---------------------- The St Paul has realized efficiencies in the first nine months of 1999 as a result of its 1998 merger with USF&G, primarily resulting from the elimination of duplicate functions throughout the combined organization, including the consolidation of corporate headquarters' functions, and the elimination of approximately 2,200 employees since the consummation of the merger. By the end of 1999, The St. Paul expects to realize pretax annualized expense savings of approximately $260 million (as measured against the combined 1997 pre-merger expenses of The St. Paul and USF&G) as a result of the merger and the restructuring of its Commercial Lines Group and Specialty Commercial underwriting business segments in late 1998. These savings are separate from anticipated savings resulting from The St. Paul's 1999 cost reduction program. Cost Reduction Program - ---------------------- In September 1999, The St. Paul implemented a cost reduction program designed to enhance its efficiency and effectiveness in a highly competitive industry environment. The $60 million pretax charge recorded in the third quarter consisted of $25 million in employee-related costs associated with the anticipated elimination of approximately 700 positions by the end of 2000; $33 million for lease buy-out expenses; and $2 million for equipment charges. As of Sept. 30, 1999, no amounts had been paid related to these charges. The headcount reductions anticipated under this program are separate from any reductions related to The St. Paul's merger with USF&G, or reductions associated with The St. Paul's sale of its standard personal insurance operations. Discontinued Operations - ----------------------- The St. Paul recorded a pretax gain of $269 million ($186 million after-tax) resulting from the sale of its standard personal insurance operations to Metropolitan Property and Casualty Insurance Company (Metropolitan) in a transaction that closed on Sept. 30, 1999. Under terms of the sale agreement, Metropolitan purchased the Economy Fire & Casualty Company (a wholly-owned subsidiary of The St. Paul) and its wholly-owned subsidiaries, as well as the rights and interests in those policies constituting the remaining standard personal insurance operations of The St. Paul. These rights and interests were transferred to Metropolitan by way of a reinsurance and facility agreement pursuant to which The St. Paul transferred assets, representing the unearned premium on the inforce policies, of approximately $325 million to Metropolitan. The transfer of these assets, combined with The St. Paul's gross cash proceeds of $577 million received upon closing of the sale, resulted in net proceeds to The St. Paul of $252 million. The $269 million pretax gain recognized on the sale consisted of the following components: a gain on proceeds of $138 million; a pension and postretirement curtailment gain of $27 million; disposition costs of $32 million; and a $136 million income from third quarter 1999 discontinued operations, which included a $145 million reduction in insurance loss and loss adjustment expense reserves, as provided for in the sale agreement. Redundancies or deficiencies which develop on these reserves will be settled at a specified point in the future. The $32 million charge represents costs directly associated with the decision to dispose of the standard personal insurance business and includes employee- related costs relating to the expected termination of approximately 385 employees due to the sale of these operations. These employees are separate from the 1,700 St. Paul standard personal employees who are currently being leased to Metropolitan and who will transfer to Metropolitan effective Dec. 31, 1999. Cumulative Effect of Accounting Adjustment - ------------------------------------------ Net income for the first nine months of 1999 included a pretax expense of $46 million ($30 million after-tax), representing the cumulative effect of adopting the AICPA's Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." The SOP provides guidance for recognizing and measuring liabilities for guaranty and other insurance-related assessments. In the third quarter of 1999, the state of New York enacted a law which changed their assessment method from a loss-based assessment method to a written premium- based assessment method. As a result, The St. Paul reduced its previously recorded accrual by $12 million (pretax) in the third quarter, which was recorded in income from continuing operations. Realignment of Primary Insurance Operations - ------------------------------------------- On October 1, 1999, The St. Paul announced a realignment of its primary property-liability insurance underwriting operations. The changes are designed to streamline the organization, with an emphasis on easing access for agents and brokers in the United States. The St. Paul is currently assessing the impact of the reorganization on its external segment reporting format. Any changes to The St. Paul's segment reporting structure will be reflected in the company's financial statements for the year ended Dec. 31, 1999. Segment data presented in this report are presented in a manner consistent with the organizational structure as it existed on Sept. 30, 1999. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance ---------------------------- The following summarizes key financial results (from continuing operations) by property-liability underwriting business segment. Underwriting results are presented on a GAAP basis; combined ratios are presented on a statutory accounting basis: % of Three Months Nine Months 1999 Ended Sept. 30 Ended Sept. 30 ($ in millions) Written -------------- --------------- Premiums 1999 1998 1999 1998 -------- ----- ----- ----- ----- Commercial Lines Group: Written Premiums 35% $424 519 1,431 1,613 Underwriting Result $(69) (157) (241) (584) Combined Ratio 114.7 128.9 115.9 135.9 Specialty Commercial: Written Premiums 23% $372 374 949 915 Underwriting Result $(43) (53) (86) (99) Combined Ratio 111.5 114.0 110.1 111.9 Surety: Written Premiums 8% $110 91 324 291 Underwriting Result $5 20 33 53 Combined Ratio 84.8 79.2 81.5 79.1 Specialty Auto: Written Premiums 4% $55 58 180 191 Underwriting Result 4 (2) 4 (3) Combined Ratio 95.5 108.4 97.6 101.3 ---- ----- ----- ----- ----- Total U.S. Underwriting: Written Premiums 70% $961 1,042 2,884 3,010 Underwriting Result $(103) (192) (290) (633) Combined Ratio 108.8 118.3 109.7 122.1 International: Written Premiums 11% $117 119 462 398 Underwriting Result $(23) (25) (76) (66) Combined Ratio 117.6 120.4 117.5 116.6 ---- ----- ----- ----- ----- Total Primary Insurance: Written Premiums 81% $1,078 1,161 3,346 3,408 Underwriting Result $(126) (217) (366) (699) Combined Ratio 109.8 118.6 110.5 121.4 Reinsurance: Written Premiums 19% $199 238 782 833 Underwriting Result $15 (21) 44 (5) Combined Ratio 98.0 108.1 93.1 99.4 ---- ----- ----- ----- ----- Total Property-Liability Insurance: Written Premiums 100% $1,277 1,399 4,128 4,241 ===== ===== ===== ===== GAAP Underwriting Result $(111) (238) (322) (704) ===== ===== ===== ===== Statutory Combined Ratio: Loss and Loss Expense Ratio 71.4 82.2 73.5 82.5 Underwriting Expense Ratio 36.4 34.7 34.0 34.9 ----- ----- ----- ----- Combined Ratio 107.8 116.9 107.5 117.4 ===== ===== ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Overview - -------- The St. Paul's property-liability insurance results for the third quarter of 1999 were heavily influenced by the favorable impact of an all-lines, aggregate excess-of-loss reinsurance treaty that the company entered into effective Jan. 1, 1999 (the "corporate treaty"). The reinsurance coverage was triggered when The St. Paul's insurance losses and loss expenses across all lines of business reached a certain level as prescribed by terms of the treaty. The impact of the corporate treaty on The St. Paul's third quarter 1999 results was as follows: The St. Paul ceded insurance losses and loss adjustment expenses totaling $235 million, and ceded written and earned insurance premiums of $129 million, for a net pretax benefit of $106 million to The St. Paul's income from continuing operations. Additionally, The St. Paul's Reinsurance segment benefited from cessions made under a separate aggregate excess-of-loss reinsurance treaty unrelated to the corporate treaty. Under this treaty in the third quarter of 1999, the Reinsurance segment ceded insurance losses and loss adjustment expenses of $53 million ($109 million year-to-date), and ceded $18 million of written and earned premiums ($43 million year-to-date), for a net pretax benefit of $35 million ($66 million year-to-date) to income from continuing operations. The combined impact of the two treaties on The St. Paul's property-liability underwriting business segments for the third quarter of 1999 was as follows: (in millions) Ceded Ceded Pretax losses premiums benefit ------ -------- ------- Commercial Lines Group $131 $ 72 $ 59 Reinsurance 117 53 64 International 40 22 18 ---- ---- ---- Total $288 $147 $141 ==== ==== ==== The St. Paul's third-quarter 1999 consolidated written premiums from continuing operations of $1.28 billion were 9% below comparable 1998 premiums of $1.40 billion, primarily due to the premiums ceded under the aforementioned reinsurance treaties. Excluding the impact of those cessions, premium volume for the quarter totaled $1.42 billion, slightly higher than the 1998 third quarter total. On a year-to-date basis excluding the impact of the reinsurance cessions, consolidated written premiums of $4.30 billion grew 1% over comparable 1998 volume of $4.24 billion, primarily due to new business in the International segment. Catastrophe losses, which played a large role in triggering coverage under the corporate treaty, totaled $126 million on a pretax basis in the third quarter of 1999, compared with losses of $113 million in the same 1998 period. The 1999 losses were largely the result of Hurricane Floyd, which accounted for $62 million of losses, and earthquakes in Turkey and Taiwan, which together accounted for $40 million of losses. Catastrophe losses in 1998's third quarter were primarily the result of Hurricane Georges. The St. Paul's consolidated loss ratio, measuring insurance losses and loss adjustment expenses as a percentage of earned premiums, was 71.4 for the third quarter of 1999, compared with a loss ratio of 82.2 in the same period of 1998. The 1999 ratio reflects a 13.1 point benefit from the reinsurance treaties. Through the first nine months of 1999, the loss ratio of 73.5 includes a 5.2 point benefit from the treaties. The nine-month 1998 loss ratio of 82.5 includes a 5.0 point negative impact of the $215 million provision to reflect the application of The St. Paul's loss reserving policies to USF&G's loss and loss adjustment expense reserves subsequent to the April 1998 merger. The consolidated expense ratio, measuring underwriting expenses as a percentage of written premiums, was 36.4 for the 1999 third quarter, compared with an expense ratio of 34.7 in the same 1998 period. Excluding the 3.8 point negative impact of ceding $147 million written premiums under the reinsurance treaties, the adjusted ratio of 32.6 was over two points better than the 1998 third-quarter ratio. The year-to-date expense ratio of 32.6 (as adjusted for ceded premiums) was also over two points better than last year's comparable ratio of 34.9. The improvement in 1999 reflects cost savings realized as a result of the merger with USF&G, and efficiencies resulting from the restructuring of the THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Commercial Lines Group and Specialty Commercial segments in late 1998. That restructuring resulted in the elimination of approximately 300 positions from these segments during the first nine months of 1999. These positions are separate from those positions eliminated as a result of the merger with USF&G and those to be eliminated by the end of 2000 as a result of the additional expense reduction initiatives announced in August 1999. Underwriting Results by Segment - ------------------------------- COMMERCIAL LINES GROUP The Commercial Lines Group segment includes The St. Paul's Middle Market and Small Commercial business centers, and several other business centers providing specialized products and services for targeted industry groups. Written premiums in the third quarter and first nine months of 1999 were 18% and 11% lower than the same periods of 1998, respectively. Excluding the $72 million premium reduction resulting from the corporate treaty, premium volume was still down 4% and 7%, respectively, from the third quarter and first nine months of 1998. The decline was centered in the Middle Market business center, reflecting the impact of management's initiatives to improve profitability by refusing to underwrite inadequately priced business. This segment's underwriting loss of $69 million in the third quarter of 1999 included a $59 million net benefit from the corporate treaty. Excluding that benefit, the underwriting loss for the third quarter totaled $128 million, a $29 million improvement over the same 1998 period. Through nine months of 1999, the underwriting loss of $300 million (excluding the $59 million corporate treaty benefit) was significantly improved over the nine-month 1998 loss of $584 million, which included $197 million of the provision to reflect the application of The St. Paul's loss reserving policies to USF&G's loss and loss adjustment expense reserves subsequent to the April 1998 merger. The improvement in 1999 results reflects the impact of corrective underwriting and pricing initiatives and ongoing expense reductions. Excluding the 5.7 point negative impact of the corporate treaty, the adjusted expense ratio of 33.2 in this segment was over two points better than last year's third quarter expense ratio of 35.5. SPECIALTY COMMERCIAL The Specialty Commercial segment includes the Medical Services, Custom Markets and Professional Markets business centers, all of which provide specialized insurance products and services tailored to meet the needs of specific commercial customer groups. This segment was not affected by the corporate treaty. Written premiums for the third quarter of $372 million were virtually level with premiums of $374 million in the same 1998 period. An increase in written premiums in the Technology business center of Custom Markets was offset by a decline in volume in the Public Sector business center of Professional Markets. Year-to-date premium volume grew 4% over the first nine months of 1998, primarily due to premiums on a Medical Services' three-year policy recorded in the second quarter of 1999. The underwriting loss of $43 million in this segment for the third quarter of 1999 improved by $10 million compared with the same period of 1998. Medical Services posted its fourth consecutive quarter of improvement with an underwriting loss of $15 million, compared with a loss of $38 million in the same 1998 period. Custom Markets' third quarter 1999 underwriting results deteriorated by $13 million compared with last year's third quarter, primarily due to an increase in large property losses in the Technology business center. Through the first nine months of 1999, Specialty Commercial's underwriting loss of $86 million was $13 million less than the $99 million loss recorded in the same period of 1998. Last year's nine-month total included an $18 million provision to reflect the application of The St. Paul's loss reserving policies to USF&G's loss and loss adjustment expense reserves subsequent to the April 1998 merger. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- SURETY The St. Paul is the largest underwriter of surety bonds in North America, based on 1998 written premiums. Written premiums in 1999's third quarter of $110 million grew 20% over third-quarter 1998 volume of $91 million. Through the first nine months of 1999, written premiums of $324 million were 11% higher than the comparable 1998 total of $291 million. In both the United States and Mexico, strong economies have fueled growth in the construction industry, resulting in a significant increase in the demand for contract surety business. This segment continues to produce strong results, posting underwriting profits of $5 million and $33 million in the third quarter and first nine months of 1999, respectively. The year-to-date expense ratio in this segment of 49.4 was five points better than in the same period of 1998. SPECIALTY AUTO The Specialty Auto segment provides personal property-liability insurance products and services to individuals who are unable to obtain standard coverage due to their inability to meet certain underwriting criteria. These operations were not included in the sale of The St. Paul's standard personal insurance business to Metropolitan. Written premium volume of $55 million in the third quarter of 1999 was 4% below written premiums in the same 1998 period. Through the first nine months of 1999, premiums of $180 million fell 6% short of comparable 1998 levels. Industry competition in this market segment has intensified during 1999, as standard insurance underwriters pursue nonstandard risks through new product offerings. The St. Paul's disciplined pricing approach and refined market segmentation resulted in underwriting profits for the third quarter and first nine months of 1999 despite the difficult market environment. INTERNATIONAL The St. Paul's International segment provides commercial and personal property-liability insurance products and services in selected international markets. Premium volume of $117 million in the third quarter was down slightly from the comparable 1998 total of $119 million. Excluding the $22 million of written premiums ceded under the corporate treaty, however, third quarter premiums grew 17% over the same 1998 period. Premium volume through the first nine months of 1999 increased 16% over the comparable 1998 period. Growth in 1999 was centered in the Lloyd's of London operation, where The St. Paul has significantly increased its underwriting capacity on the syndicates that are managed by the managing agencies that it owns. New commercial business opportunities in Europe also contributed to the 1999 growth rate. The third quarter and nine-month underwriting losses of $23 million and $76 million, respectively, reflected an $18 million benefit from the corporate treaty. Excluding that benefit, results for the third quarter were $15 million worse than the same 1998 period, primarily due to adverse prior year loss development on several Lloyd's syndicates. On a year-to-date basis excluding the corporate treaty benefit, the underwriting loss of $93 million was $27 million worse than the same 1998 period, due to the increase in losses at Lloyd's, as well as significant losses in Canada early in 1999 and reserve strengthening in the Global Marine business center. REINSURANCE The St. Paul's Reinsurance segment underwrites treaty and facultative reinsurance for property, liability, ocean marine, surety and certain specialty classes of business, and provides products and services to the alternative risk transfer market. Premium volume in the third quarter of $199 million was 17% below comparable 1998 levels, primarily due to the $35 million of premiums ceded under the corporate treaty and $18 million of premiums ceded under the separate aggregate excess-of-loss reinsurance treaty. Year-to-date volume of $782 million was 6% below the comparable 1998 total, primarily due to the combined total of $78 million of premiums ceded under the two aggregate excess-of-loss reinsurance treaties. During 1999, The St. Paul changed its process for estimating reinsurance premiums that have been earned, but not yet reported, by ceding insurers. That change added approximately $11 million and $61 million, respectively, to third quarter and year-to-date premium volume. Worldwide reinsurance markets remain highly competitive, driven by excess capacity in primary insurance markets which has put downward pressure on the demand for and price of reinsurance coverage. The Reinsurance segment posted a $15 million underwriting profit in the third quarter of 1999, pushing the year-to-date profit to $44 million. Underwriting losses in the equivalent periods of 1998 were $21 million and $5 million, respectively. Cessions under the two reinsurance treaties had a net positive impact on underwriting results of $64 million and $95 million for the third quarter and first nine months of 1999, respectively. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Investment Operations - --------------------- Third quarter 1999 pretax investment income of $321 million in The St. Paul's property-liability operations was virtually level with the comparable 1998 total of $322 million. Year-to-date pretax investment income of $964 million fell 2% short of the 1998 nine- month total of $985 million. Negative underwriting cash flows over the last several quarters (an excess of loss and expense payments over premium receipts) have resulted in a net reduction in the underwriting operations' invested assets compared with the same time in 1998. In addition, merger-related and restructuring payments totaling $186 million over the last seventeen months have further reduced opportunities for growth in the investment portfolio. These factors have resulted in the decline in investment income compared with 1998. The sale of The St. Paul's standard personal insurance business resulted in the transfer of approximately $325 million of net invested assets to Metropolitan Property and Casualty Insurance Company, which will further reduce investment income levels going forward. Investment income in future periods will also be negatively impacted by the combined $172 million in premiums ceded during 1999 under the two aggregate excess-of-loss reinsurance treaties. The St. Paul does not anticipate substantial improvement in its underwriting cash flow situation during the fourth quarter of 1999. However, the company believes the corrective pricing and underwriting initiatives that have been implemented in 1999, along with continuing expense reduction efforts, will provide the opportunity for improved cash flows in 2000. Pretax realized investment gains in The St. Paul's property- liability insurance operations of $38 million in the third quarter of 1999 were significantly higher than gains of $7 million in the same period of 1998. An increase in gains from sales of equity and venture capital investments accounted for the growth over the 1998 period. Pretax gains for the first nine months of 1999 totaled $170 million, compared with $187 million through the first nine months of 1998. In 1998's second quarter, The St. Paul took advantage of favorable market conditions to restructure its equity portfolio, which resulted in an unusually high level of realized gains. The $16.2 billion carrying value of the property-liability fixed maturities portfolio on Sept. 30, 1999 included $200 million of pretax unrealized appreciation in market value. An upward movement in market interest rates during the first nine months of 1999 resulted in an $816 million pretax decline in the unrealized appreciation of the bond portfolio since the end of 1998. Approximately 96% of that portfolio is rated at investment grade (BBB or above). The weighted average pretax yield on those investments was 6.8% at Sept. 30, 1999. Environmental and Asbestos Claims --------------------------------- The St. Paul continues to receive claims alleging injuries from environmental pollution or alleging covered property damages for the cost to clean up polluted sites. The company also receives asbestos injury and property damage claims arising out of product liability coverages under general liability policies. The vast majority of these claims arise from policies written many years ago. The St. Paul's alleged liability for both environmental and asbestos claims is complicated by significant legal issues, primarily pertaining to the scope of coverage. In the company's opinion, court decisions in certain jurisdictions have tended to broaden insurance coverage beyond the intent of original insurance policies. The St. Paul's ultimate liability for environmental claims is difficult to estimate because of these legal issues. Insured parties have submitted claims for losses not covered in their respective insurance policies, and the ultimate resolution of these claims may be subject to lengthy litigation, making it difficult to estimate The St. Paul's 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 equally difficult. The primary factors influencing the estimate of the total cost of these claims are case law and a history of prior claim development. The following table represents a reconciliation of total gross and net environmental reserve development for the nine months ended September 30, 1999, and the years ended Dec. 31, 1998 and 1997. Amounts in the "net" column are reduced by reinsurance recoverables. 1999 Environmental (nine 1998 1997 - ------------- months) ---- ---- (in millions) Gross Net Gross Net Gross Net ----- ---- ----- ---- ----- ---- Beginning reserves $783 $645 $867 $677 $889 $676 Incurred losses (41) (5) (16) 26 44 58 Paid losses (35) (33) (68) (58) (66) (57) ---- ---- ---- ---- ---- ---- Ending reserves $707 $607 $783 $645 $867 $677 ==== ==== ==== ==== ==== ==== The following table represents a reconciliation of total gross and net reserve development for asbestos claims for the nine months ended September 30, 1999, and the years ended Dec. 31, 1998 and 1997. 1999 Asbestos (nine 1998 1997 - -------- months) ---- ---- (in millions) Gross Net Gross Net Gross Net ----- ---- ----- ---- ----- ---- Beginning reserves $402 $277 $397 $279 $413 $304 Incurred losses 13 45 44 13 22 (5) Paid losses (19) (17) (39) (15) (38) (20) ---- ---- ---- ---- ---- ---- Ending reserves $396 $305 $402 $277 $397 $279 ==== ==== ==== ==== ==== ==== The St. Paul's reserves for environmental and asbestos losses at September 30, 1999 represent its best estimate of its ultimate liability for such losses, based on all information currently available. Because of the inherent difficulty in estimating such losses, however, The St. Paul cannot give assurances that its ultimate liability for environmental and asbestos losses will, in fact, match current reserves. The St. Paul continues to evaluate new information and developing loss patterns, but it believes any future additional loss provisions for environmental and asbestos claims will not materially impact The St. Paul's results of operations, liquidity or financial position. Total gross environmental and asbestos reserves at September 30, 1999 of $1.10 billion represented approximately 6% of gross consolidated reserves of $18.12 billion. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Life Insurance -------------- The St. Paul's life insurance segment consists of Fidelity and Guaranty Life Insurance Company and subsidiaries ("F&G Life"). F&G Life's primary products are deferred annuities (including tax- sheltered annuities and equity indexed annuities), structured settlement annuities and immediate annuities. F&G Life also underwrites traditional life insurance products. Highlights of F&G Life's financial performance for the third quarter and first nine months of 1999 and 1998 were as follows: Three Months Nine Months Ended Sept. 30 Ended Sept. 30 -------------- -------------- (in millions) 1999 1998 1999 1998 ---- ---- ---- ---- Pretax income $21 $22 $48 $9 Sales (annualized premiums) $145 $131 $761 $282 Premiums and policy charges $62 $31 $127 $81 Policy surrenders $55 $48 $155 $162 Net investment income $68 $66 $221 $198 Life insurance in force $11,672 $10,693 F&G Life's pretax earnings for the first nine months of 1999 reflect a growing spread from increased assets under management and strong product sales, offset by increased product development and channel expansion expenses and realized investment losses of $8 million. Pretax income of $9 million for the nine months ended Sept. 30, 1998 included a $41 million writedown in the carrying value of deferred acquisition costs, and $9 million of charges (primarily for severance and writedowns in the carrying value of investments) related to The St. Paul's merger with USF&G. Excluding realized investment gains and losses in both years and earnings charges in 1998, pretax earnings of $56 million for the first nine months of 1999 were slightly ahead of earnings of $54 million in the same period of 1998. After-tax earnings, however, grew at a stronger pace, reflecting the impact of F&G Life's adoption of an investment strategy to allocate 1% of its investment portfolio to tax-favored investments. These investments generate tax credits that have lowered F&G Life's effective tax rate. The increase in sales volume in the third quarter and first nine months of 1999 compared with the same periods of 1998 resulted from sales of an equity-indexed annuity product introduced in June 1998. Sales of that product accounted for $80 million, or 55%, of total sales in the third quarter, and $565 million, or 74%, of total year- to-date sales. Credited interest rates on this product are tied to the performance of the S&P 500 equity index. Sales of fixed interest rate annuities in 1999 declined due to the negative impact of continued low levels of market interest rates on F&G Life's fixed rate products. The demand for annuity products is affected by fluctuating interest rates and the relative attractiveness of alternative investments, particularly equity-based products. Sales of traditional life insurance rose to $7 million during the third quarter of 1999, more than double the equivalent sales total in the same 1998 period. The increase reflects the successful launch of a new term life product line targeted at the mortgage protection market. In July 1999, F&G Life announced that it will begin to provide its products to banks and broker-dealers that specialize in offering annuities and life insurance directly to consumers. The entry into the institutional marketplace, which will complement existing distribution channels, is expected to enable F&G Life to distribute its products in markets to which it has previously had limited access. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Life Insurance (continued) ------------------------- The increase in premiums and policy charges over the third quarter and first nine months of 1998 resulted from an increase in sales of structured settlement annuities and life-contingent single premium immediate annuities ("SPIA"). Structured settlement annuities are sold primarily to property-liability insurers to settle insurance claims. Sales of structured settlement annuities, annuities with life contingencies and term life insurance are recognized as premiums earned under GAAP. However, sales of investment-type contracts, such as equity-indexed, deferred and tax sheltered annuities and universal life-type contracts are recorded directly on the balance sheet and are not recognized as premium revenue under GAAP. The expansion of the structured settlement program into The St. Paul's property-liability claim organization led to the increase in structured settlement sales. The growth in SPIA sales resulted from an increased emphasis on this product in 1999. Deferred annuities and universal life products are subject to surrender by policyholders. Nearly all of F&G Life's surrenderable annuity policies allow a refund of the cash value balance less a surrender charge. Surrender activity in the third quarter of 1999 increased over the same 1998 period due to an increase in tax- sheltered annuity surrenders. Through the first nine months of 1999, surrenders were 5% lower than the same period of 1998. Policy surrenders in 1998 reflected surrenders on a block of single premium deferred annuities ("SPDA") policies sold through a distributor that ceased doing business with F&G Life in 1997. Net investment income in the third quarter and first nine months of 1999 grew 3% and 12%, respectively, over the same periods of 1998 as a result of an increasing asset base generated by positive cash flow. Asset Management ---------------- The St. Paul's portion of pretax earnings from The John Nuveen Company (Nuveen) was $30 million in the third quarter of 1999, compared with $26 million in 1998's third quarter. For the first nine months of 1999, The St. Paul's $89 million portion of Nuveen's pretax earnings was 20% higher than comparable earnings of $75 million in 1998. The company holds a 78% interest in Nuveen. Nuveen's asset management revenues totaled $77 million in the third quarter of 1999, a 12% increase over revenues of $69 million in the same 1998 period. Nine-month asset management revenues grew 13% over the same period of 1998. Total managed assets grew to $58.5 billion at Sept. 30, 1999, a $3.2 billion increase over year-end 1998 and $6.0 billion higher than at the same time a year ago. The increase in assets under management was due to new product sales, particularly managed accounts sold through Rittenhouse Financial Services, Inc., a Nuveen subsidiary. Gross product sales totaled $2.9 billion in the third quarter of 1999, a 45% increase over sales of $2.0 billion in the same 1998 period. Sales of both equity and fixed-income products have been strong in 1999, with equity-based products accounting for 54% of third quarter gross sales. Through nine months of 1999, gross product sales totaled $11.0 billion, compared with sales of $5.6 billion in the same period of 1998. During the third quarter, Nuveen completed the sale of its investment banking division to U.S. Bancorp Piper Jaffray. The divestiture will enable Nuveen to focus on its asset management business. Capital Resources ----------------- Common shareholders' equity totaled $6.40 billion at Sept. 30, 1999, down $224 million from the year-end 1998 total of $6.62 billion, primarily due to a $682 million decline in the after-tax unrealized appreciation of the consolidated fixed maturity investment portfolio and significant common share repurchases, which more than offset The St. Paul's nine-month net income of $696 million. The St. Paul repurchased 8.3 million of its common shares for a total cost of $265 million during the first half of 1999, for an average cost of $32.03 per share. No shares were repurchased in the third quarter of 1999. An increase in market interest rates during the first nine months of 1999 led to the decline in the unrealized appreciation of The St. Paul's bond holdings compared with year-end 1998. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Capital Resources (continued) ---------------------------- Total debt outstanding at Sept. 30, 1999 of $1.32 billion grew $56 million over the year-end 1998 total of $1.26 billion. The increase was primarily due to $64 million of variable rate borrowings entered into by a number of The St. Paul's real estate entities, and the February 1999 issuance of $46 million of floating rate notes by a special purpose offshore entity that is providing reinsurance to a property-liability subsidiary of The St. Paul. In March 1999, The St. Paul purchased $33.5 million face amount of its $1,000 principal amount zero coupon convertible notes from note holders for a total cash consideration of $21 million, which represented the original issue price plus the original issue discount accrued to the date of purchase. The St. Paul purchased the notes at the option of the note holders. Approximately 47% of The St. Paul's consolidated debt outstanding at Sept. 30, 1999 consisted of medium-term notes bearing a weighted- average interest rate of 6.9%. The ratio of total debt to total capitalization of 16% at the end of the third quarter increased slightly over the year-end 1998 ratio of 15%. In the third quarter of 1999, The St. Paul repurchased and retired $25.9 million (principal amount) of its company-obligated mandatorily redeemable preferred securities of subsidiaries ("capital securities") in open market transactions. The St. Paul may continue to repurchase these securities from time to time if it determines that such repurchases are a prudent use of capital. The company anticipates that any capital expenditures during the remainder of 1999 would involve further repurchases of its common shares and capital securities, or acquisitions of existing businesses. The net proceeds from the sale of The St. Paul's standard personal insurance business of $252 million are expected to be used for general corporate purposes, which may include strategic acquisitions to augment The St. Paul's existing specialty insurance and general commercial lines, expansion of its specialty product offerings, and continuation of The St. Paul's common share repurchase program. On November 2, 1999, The St. Paul's board of directors authorized management to repurchase up to $500 million of the company's common stock in the open market or through private transactions. This repurchase program terminates a prior $500 million repurchase authorization, under which The St. Paul repurchased 12.1 million common shares for a total cost of $400 million. The St. Paul has no plans for major capital improvements during the remainder of 1999. For the first nine months of 1999, The St. Paul's ratio of earnings to fixed charges was 6.45, and the ratio of earnings to combined fixed charges and preferred stock dividend requirements was 5.91. For the first nine months of 1998, The St. Paul's ratio of earnings to fixed charges was 1.56, and the ratio of earnings to combined fixed charges and preferred stock dividend requirements was 1.41. Fixed charges consist of interest expense, distributions on capital securities and that portion of rental expense deemed to be representative of an interest factor. Liquidity --------- Liquidity is a measure of The St. Paul's ability to generate sufficient cash flows to meet the short- and long-term cash requirements of its business operations. Net cash flows from operating activities totaled $161 million in the first nine months of 1999, compared with net cash flows from operating activities of $221 million in the same period of 1998. Operational cash flows in both 1999 and 1998 were negatively impacted by the decline in premium volume and investment receipts in The St. Paul's property- liability insurance operations, as well as cash disbursements associated with The St. Paul's merger with USF&G and the restructuring of the company's commercial insurance operations. The St. Paul does not anticipate significant improvement in operational cash flows during the final three months of 1999 due to the expected continuation of the decline in premium volume, severance payments associated with the previously-discussed position eliminations, and a further reduction in investment income. On a long-term basis, The St. Paul believes its operational cash flows will benefit from the corrective pricing and underwriting actions under way in its property-liability operations as well as expense control initiatives. The St. Paul's financial strength and conservative level of debt provide it 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. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Market Risk ----------- Upward movement in market interest rates during the first nine months of 1999 resulted in a significant decline in the unrealized appreciation of the bond portfolio since the end of 1998, as discussed in Property-Liability Insurance - Investment Operations. However, The St. Paul's portfolio mix, and therefore its exposure to market risk, has not changed materially from its position at December 31, 1998. Year 2000 Readiness Disclosure ------------------------------ Many computer systems in the world have the potential of being disrupted at the turn of the century due to programming limitations that may cause the two-digit year code of "00" to be recognized as the year 1900, instead of 2000. The St. Paul is heavily dependent on its many computer systems, and those of its independent agents and brokers (The St. Paul "distribution network") and its vendors, for virtually every aspect of its operations, including underwriting, claims, investments and financial reporting. Thus, the "Year 2000" issue involves potentially serious operational risks for the company. For several years, The St. Paul has been evaluating its computer systems to determine the impact of the Year 2000 issue on its operations. As compliance evaluation of systems has progressed to an advanced stage, a shift of emphasis from evaluation to correction and compliance testing has taken place. The St. Paul has also been working with vendors and members of its distribution network in an effort to address Year 2000 issues that such relationships involve. Finally, The St. Paul has been reviewing and taking action to address non-systems related issues that may arise as a result of the Year 2000 problem, including insurance and reinsurance coverage issues, and it has also been seeking to reduce the company's Year 2000-related exposures through the development of contingency plans. The following discussion describes The St. Paul's efforts to date and future plans to deal with the Year 2000 issue. These plans have been and continue to be updated and revised as additional information becomes available. State of Readiness - ------------------ The St. Paul established a Review Board in the third quarter of 1997 to review the remediation and testing methodology applied to the hundreds of internally developed and externally sourced systems used in the company's corporate headquarters in St. Paul, MN. To coordinate the Year 2000 remediation efforts, The St. Paul created the Year 2000 Project Office, which is responsible for the oversight, coordination and monitoring of Year 2000 efforts including, among other things, reviewing the compliance status of information systems in all operating units and subsidiaries, both foreign and domestic, directing the Year 2000 coordinators assigned to operating units, and formulating company-wide contingency plans. Prior to The St. Paul's merger with USF&G in April 1998, a separate "Y2K Action Committee" was maintained by USF&G, and a comprehensive program to address each of three identified aspects to the Year 2000 issue (readying USF&G's systems, coordinating with agents and other third parties with whom USF&G interacts, and managing the risk of claims from insured parties) had been established. The Year 2000 program developed by USF&G's Y2K Action Committee has now been integrated into The St. Paul's overall Year 2000 response. Information Technology Systems - ------------------------------ All of The St. Paul's systems, whether internally developed or externally sourced, are subject to the company-wide comprehensive testing and compliance standards promulgated by the company's Information Services Division (ISD), the oversight and monitoring of which is the responsibility of the Year 2000 Project Office. Insofar as internal systems maintained in St. Paul, MN. are concerned, with few exceptions, Year 2000 compliance was achieved by December 31, 1998. With few exceptions, initial compliance validation of all such systems was completed by March 31, 1999. All subsidiaries not headquartered in Saint Paul, MN or Baltimore, MD completed initial validation testing of their application systems before June 30, 1999. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Year 2000 Readiness Disclosure (continued) ----------------------------------------- The Year 2000 Project Office's plan for remediation and validation of externally sourced systems provides for the company to work with the vendors of those systems to ensure that those systems become Year 2000 compliant at the earliest practicable date. Compliance testing in accordance with ISD standards takes place as and when compliant versions and/or affirmations of compliance from vendors are received. The St. Paul has identified what it believes to be all of its third-party supplied mission critical systems, and, with few exceptions, has received Year 2000 compliant versions and/or affirmations of compliance for each of them, and has completed the validation process. Third-Party Service Providers and Distribution Network - ------------------------------------------------------ The St. Paul relies indirectly on the information technology systems of its service providers and those of its distribution network. The Year 2000 Project Office is communicating with the company's service providers, including financial institutions providing custody accounts and other services, its independent agents and brokers, and other entities with which it does business, to identify and resolve Year 2000 issues and to determine the potential impact, where relevant, of the possible failure of certain of such persons to achieve Year 2000 compliance on a timely basis. Results of this process are expected to be used in The St. Paul's contingency planning efforts discussed below. Nuveen Systems - -------------- Having started the development and implementation of internal four- digit date code software and system standards in the early 1980s, Nuveen's Year 2000 program consists primarily of Year 2000 compliance examination and testing of the software packages and hardware provided by third parties and of the systems and software of its service providers. Certification of Year 2000 compliance and testing of critical third-party hardware and software systems used in trade processing at Nuveen was completed by the end of the first quarter of 1999. The remaining certification and testing was completed in the second quarter of 1999. Nuveen is in the process of developing contingency plans based upon its examination of the Year 2000 readiness of its third-party supplied systems and its service providers. Nuveen believes that the costs associated with its Year 2000 efforts will not be material to its operations and financial position. Embedded Chip Issues - -------------------- Given the nature of its business, and that of its vendors and the members of its distribution network, The St. Paul believes that its exposure to embedded chip Year 2000 issues is minimal (other than its exposure to possible disruptions in electricity, telecommunications and other essential services provided by public utilities that are subject to embedded chip-related disruption). The St. Paul is, where deemed appropriate, coordinating with vendors to obtain certificates of Year 2000 compliance for the embedded computer technology equipment that it uses. Year 2000 Compliance Program Costs - ---------------------------------- The St. Paul has developed and implemented plans to address the system modifications required to prepare for the Year 2000, and does not expect the planning and implementation costs associated with Year 2000 efforts to be material to its results of operations, cash flows or consolidated financial position. Through December 31, 1997, the costs of Year 2000 remediation measures incurred, including costs incurred by USF&G prior to the merger, totaled approximately $8.7 million. The St. Paul incurred costs of approximately $11.3 million in 1998, and it anticipates additional costs of approximately $6.6 million in 1999. Contingency Planning - -------------------- During the first half of 1999, contingency plans were developed by business and staff units, field offices and subsidiary location teams in accordance with a model that focused first on restoring and maintaining infrastructure, and secondly on business resumption. Individual teams identified their critical processes and then identified pre-emptive actions to mitigate the potential impact of a Year 2000 disruption. Teams also developed plans for reacting to potential threat and duration scenarios. Following a detailed review of the submitted plans by the Year 2000 Project Office, each team was advised of required plan modifications, and all modifications were completed by the end of July. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Year 2000 Readiness Disclosure (continued) ----------------------------------------- On-site validation and testing of plans were conducted in core- critical U.S. domestic field offices in mid-September. Subsidiary validation testing is being conducted in October and November 1999. An integral part of this testing effort addresses how field offices, subsidiaries and business units within corporate headquarters interface with the corporate "command center" during the millennium transition period. Planning for the corporate command center was completed in time for the operation to commence "ready-mode" status on Oct. 1, 1999. The St. Paul believes that its most significant Year 2000 exposure is the potential business disruptions that would be caused by widespread failure of public utility systems, particularly in the power generation/distribution and the telecommunication industries. While the contingency plans The St. Paul is developing will provide alternative procedures to lessen the impact of short duration disruptions, prolonged failure of power and telecommunications systems could have a material adverse effect on the company's results of operations, cash flows and consolidated financial position. As noted above, The St. Paul indirectly relies on the information systems of the many components of its distribution network, which includes thousands of independent agents and brokers. The St. Paul is aware that some of its independent agents and brokers are currently Year 2000 non-compliant and expects that a small percentage, consisting primarily of smaller agents, will be non- compliant on January 1, 2000. The St. Paul believes that Year 2000- related difficulties experienced by members of its distribution network have the potential to materially disrupt its business and that such potential disruptions constitute its second greatest area of potential exposure to the Year 2000 problem. As part of its contingency planning effort, The St. Paul has been providing information to members of its distribution network intended to sensitize them to the Year 2000 issue and to encourage them to take appropriate steps to become Year 2000 compliant. Although the company's distribution network consists of thousands of agents and brokers, the number of different systems used by the constituent members is far less. For example, the company believes that fewer than 20 different types of agency management systems are used by its property-liability insurance agents in the United States. Contingency arrangements are being discussed with distribution network members pursuant to which the company may, among other provisional steps, provide data in alternative formats and institute temporary direct billing services in the event of a disruption in their individual systems. The company notes that the Year 2000 issue by its nature carries the risk of unforeseen and potentially very serious problems of internal or external origin. Some commentators believe that the Year 2000 issue has the potential of destabilizing the global economy or causing a global recession, either of which could adversely affect the company. While The St. Paul believes it is taking appropriate action with respect to third parties on whose systems and services it relies to a significant extent, there can be no assurance that the systems of such third parties will be Year 2000 compliant or that any third party's failure to have Year 2000 compliant systems would not have a material adverse effect on The St. Paul's earnings, cash flows or financial condition. Insurance Coverage - ------------------ The St. Paul has received some Year 2000-related claims and faces additional potential Year 2000 claims under coverages provided by insurance or reinsurance policies sold to insured parties who may incur, or take action claimed to prevent, losses as a result of the failure of such parties, or the customers or vendors of such parties, to be Year 2000 compliant. For example, the company, like other property-liability insurers, has received claims for reimbursement of expenses incurred by policyholders in connection with their Year 2000 compliance efforts. Because coverage determinations depend on unique factual situations, specific policy language and other variables, it is not possible to determine at this time whether and to what extent insured parties will incur losses, the amount of the losses or whether the losses will be covered under The St. Paul's insurance policies. With respect to Year 2000-related claims in general, in some instances, coverage is not provided under the insurance policies or reinsurance contracts, while in other instances, coverage may be provided under certain circumstances. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Year 2000 Readiness Disclosure (continued) ----------------------------------------- The St. Paul's standard property and inland marine policies require, among other things, direct physical loss or damage from a covered cause of loss as a condition of coverage. In addition, it is a fundamental principle of all insurance that a loss must be fortuitous to be considered potentially covered. Given the fact that Year 2000-related losses are not unforeseen, and that The St. Paul expects that such losses will not, in most if not all cases, cause direct physical loss or damage, The St. Paul has concluded that its property and inland marine policies do not generally provide coverage for losses relating to Year 2000 issues. To reinforce its view on coverage afforded by such policies, The St. Paul has developed and continues to implement a specific Year 2000 exclusion endorsement. The company may also face claims from the beneficiaries of its surety bonds resulting from Year 2000-related performance failures by the purchasers of the bonds. As with insurance policies in general, because surety claims depend on particular factual situations, specific bond language and other variables, it is not possible to determine in advance whether and to what extent Year 2000-related claims will arise under surety bonds issued by The St. Paul, the amount of any such claims or whether any such claims will by payable under surety bonds issued by The St. Paul. The St. Paul is taking a number of actions to address its exposure to insurance claims arising from its liability coverages, including individual risk evaluation, communications with insured parties, the use of exclusions in certain types of policies, and classification of high hazard exposures that in the company's view present unacceptable risk. The St. Paul does not believe that Year 2000-related insurance or reinsurance coverage claims will have a material adverse effect on its earnings, cash flows or financial position. However, the uncertainties of litigation are such that unexpected policy interpretations could compel claim payments substantially beyond the company's coverage intentions, possibly resulting in a material adverse effect on its results of operations and/or cash flows and a material adverse effect on its consolidated financial position. Impact of Accounting Pronouncements to be Adopted in the Future - --------------------------------------------------------------- In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which amended SFAS No. 133 to make it effective for all quarters of fiscal years beginning after June 15, 2000, and prohibits retroactive application to financial statements of prior periods. The St. Paul intends to implement the provisions of SFAS No. 133 in the first quarter of 2001. The St. Paul currently has limited involvement with derivative instruments, primarily for purposes of hedging against fluctuations in market indices, foreign currency exchange rates and interest rates. The company cannot at this time reasonably estimate the potential impact of this adoption on its financial position or results of operations for future periods. In October 1998, the AICPA issued SOP No. 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk," which provides guidance for accounting for such contracts. The SOP specifies that insurance and reinsurance contracts for which the deposit method of accounting is appropriate should be classified in one of four categories, and further specifies the accounting treatment for each of these categories. The SOP is effective for fiscal years beginning after June 15, 1999. The St. Paul currently intends to implement the provisions of the SOP in the first quarter of the year 2000. The company cannot at this time reasonably estimate the potential impact of this adoption on its financial position or results of operations for future periods. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Forward-looking Statement Disclosure ------------------------------------ This report contains certain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. Forward- looking statements are statements other than historical information or statements of current condition. Words such as expects, anticipates, intends, plans, believes, seeks or estimates, or variations of such words, and similar expressions are also intended to identify forward-looking statements. Examples of these forward- looking statements include statements about The St. Paul's expectations concerning: market conditions and their effect on future premiums, revenues, cash flow and investment income; expense savings resulting from the USF&G merger and the restructuring actions announced in 1998 and 1999; and Year 2000 issues and the company's efforts to address them. In light of the risks and uncertainties inherent in future projections, many of which are beyond The St. Paul's control, actual results could differ materially from those in forward- looking statements. These statements should not be regarded as a representation that anticipated events will occur or that expected objectives will be achieved. Risks and uncertainties include, but are not limited to, the following: general economic conditions including changes in interest rates and the performance of financial markets; changes in domestic and foreign laws, regulations and taxes; changes in the demand for, pricing of, or supply of insurance or reinsurance; catastrophic events of unanticipated frequency or severity; loss of significant customers; judicial decisions and rulings; the pace and effectiveness of the transfer of the standard personal insurance business from The St. Paul to Metropolitan; and various other matters, including the effects of the merger with USF&G. Actual results and experience relating to Year 2000 issues could differ materially from anticipated results or other expectations as a result of a variety of risks and uncertainties, including the impact of system faults, the failure to successfully remediate material systems, the time it may take to remediate system failures once they occur, the failure of third parties (including public utilities, agents and brokers) to properly remediate material Year 2000 problems, and unanticipated judicial interpretations of the scope of the insurance or reinsurance coverage provided by The St. Paul's policies. The St. Paul undertakes no obligation to release publicly the results of any future revisions we may make to forward- looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements is incorporated herein by reference. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. The pro forma financial information required under Item 7. (b) (2) of The St. Paul's Form 8-K Current Report dated September 30, 1999 is set forth in Note 9 to the consolidated financial statements and is incorporated herein by reference. 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 July 12, 1999 relating to the announcement of The St. Paul's sale of its standard personal insurance underwriting operations to Metropolitan Property and Casualty Insurance Company. 2) The St. Paul filed a Form 8-K Current Report dated September 30, 1999 related to the completion of The St. Paul's sale of its standard personal insurance underwriting operations to Metropolitan Property and Casualty Insurance Company. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE ST. PAUL COMPANIES, INC. ---------------------------- (Registrant) Date: November 15, 1999 By /s/ Bruce A. Backberg --------------------- Bruce A. Backberg Senior Vice President - Legal Services (Authorized Signatory) Date: November 15, 1999 By /s/ Thomas A. Bradley --------------------- Thomas A. Bradley Senior Vice President - Finance (Principal Accounting Officer) EXHIBIT INDEX ------------- Exhibit - ------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession*............................. (3) (i) Articles of incorporation*............................ (ii) By-laws*............................................. (4) Instruments defining the rights of security holders, including indentures*.................................. (10) Material contracts........................................ (i) Key Executive Special Incentive Arrangement**.........(1) (11) Statement re computation of per share earnings** .........(1) (12) Statement re computation of ratios**......................(1) (15) Letter re unaudited interim financial information*........ (18) Letter re change in accounting principles*................ (19) Report furnished to security holders*..................... (22) Published report regarding matters submitted to vote of security holders*.............................. (23) Consents of experts and counsel*.......................... (24) Power of attorney*........................................ (27) Financial data schedule**.................................(1) (99) Additional exhibits*...................................... * These items are not applicable. ** This exhibit is included only with the copies of this report that are filed with the Securities and Exchange Commission. However, a copy of the exhibit may be obtained from the Registrant for a reasonable fee by writing to The St. Paul Companies, Inc., 385 Washington Street, Saint Paul, MN 55102, Attention: Corporate Secretary. (1) Filed herewith. EX-10 2 Key Executive Special Incentive Arrangement ------------------------------------------- In August 1999, a key executive special incentive arrangement was implemented that could result in the payment of up to a maximum of $1.5 million to the Company's Chairman and Chief Executive Officer, Douglas W. Leatherdale; $750,000 to its President and Chief Operating Officer, James E. Gustafson; and $375,000 to its Executive Vice President and Chief Financial Officer, Paul J. Liska, over the 18-month period ending December 31, 2000, with the possibility of a partial interim payment being made by December 31, 1999. The amount of incentive payments, if any, to be made under this arrangement will depend on the extent to which certain components of the company's strategic business plan are successfully implemented. Certain payments would not be made under this arrangement unless specific business goals are met within specified time and financial parameters. Any incentive payouts under this arrangement would be included in the calculation of each participating executive's benefits under the Executive Retirement Plan. EX-11 3 Exhibit 11 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings Per Share Three Months Ended Nine Months Ended September 30 September 30 ------------------- ------------------ 1999 1998 1999 1998 ------ ------ ------ ------ (In millions, except per share data) EARNINGS Basic: Net income (loss), as reported $327 $68 $696 $(11) Dividends on preferred stock, net of taxes (2) (2) (6) (7) Premium on preferred shares redeemed (1) (1) (3) (3) ------ ------ ------ ------ Net income (loss) available to common shareholders $324 $65 $687 $(21) ====== ====== ====== ====== Diluted: Net income (loss) available to common shareholders $324 $65 $687 $(21) Effect of dilutive securities: Convertible preferred stock 2 1 5 - Convertible monthly income preferred securities 2 2 6 - Zero coupon convertible notes 1 1 2 - ------ ------ ------ ------ Net income (loss) available to common shareholders $329 $69 $700 $(21) ====== ====== ====== ====== COMMON SHARES Basic: Weighted average common shares outstanding 227 236 228 235 ====== ====== ====== ====== Diluted: Weighted average common shares outstanding 227 236 228 235 Effect of dilutive securities: Stock options 2 3 2 4 Convertible preferred stock 7 8 7 - Convertible monthly income preferred securities 7 7 7 - Zero coupon convertible notes 2 3 2 - ------ ------ ------ ------ Total 245 257 246 239 ====== ====== ====== ====== EARNINGS (LOSS) PER SHARE Basic $1.43 $0.27 $3.01 ($0.09) ====== ====== ====== ====== Diluted $1.34 $0.27 $2.84 ($0.09) ====== ====== ====== ====== EX-12 4 Exhibit 12 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Ratios Three Months Ended Nine Months Ended September 30 September 30 ------------------- ----------------- 1999 1998 1999 1998 ------ ------ ----- ----- (In millions, except ratios) EARNINGS: Income from continuing operations before income taxes and cumulative effect of accounting change $180 $91 $735 $68 Add: fixed charges 55 35 135 122 ----- ----- ----- ----- Income as adjusted $235 $126 $870 $190 ===== ===== ===== ===== FIXED CHARGES: Interest expense and amortization $26 $19 $75 $60 Dividends on redeemable preferred securities 9 9 28 28 Rental expense (1) 20 7 32 34 ----- ----- ----- ----- Total fixed charges 55 35 135 122 Preferred stock dividend requirements 4 4 12 13 ----- ----- ----- ----- Total fixed charges and preferred stock dividend requirements $59 $39 $147 $135 ===== ===== ===== ===== Ratio of earnings to fixed charges 4.26 3.57 6.45 1.56 ===== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 3.97 3.19 5.91 1.41 ===== ===== ===== ===== (1)Interest portion deemed implicit in total rent expense. Amounts for the three months and nine months ended Sept. 30, 1999 include an $11 million provision representative of interest included in charge for future lease buy-outs recorded in the third quarter of 1999 as a result of The St. Paul's cost reduction program. Amount for the nine months ended Sept. 30, 1998 includes an $11 million provision representative of interest included in charge for future lease buy-outs recorded in the second quarter of 1998 as a result of The St. Paul's merger with USF&G Corporation. EX-27 5
7 1,000,000 9-MOS 9-MOS DEC-31-1999 DEC-31-1998 SEP-30-1999 SEP-30-1998 19,875 20,505 0 0 0 0 1,359 1,064 603 674 930 936 26,783 25,573 176 164 162 128 939 876 39,203 37,038 22,803 22,323 3,222 3,241 0 0 0 0 1,316 1,098 477 503 26 17 2,085 2,143 4,338 4,477 39,203 37,038 4,124 4,375 1,188 1,185 173 210 343 299 3,191 3,729 1,057 1,110 845 1,162 735 68 173 (46) 562 114 164 (125) 0 0 (30) 0 696 (11) 3.01 (0.09) 2.84 (0.09) 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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