UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF ----- THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 -------------- or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) ----- OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ----------- Commission File Number 0-3021 ------ THE ST. PAUL COMPANIES, INC. ----------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 ---------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 385 Washington St., Saint Paul, MN 55102 ---------------------------------- -------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (651) 310-7911 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of the Registrant's Common Stock, without par value, outstanding at May 9, 2001, was 214,437,297.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION Consolidated Statements of Income (Unaudited), Three Months Ended March 31, 2001 and 2000 3 Consolidated Balance Sheets, March 31, 2001 (Unaudited) and December 31, 2000 4 Consolidated Statements of Shareholders' Equity, Three Months Ended March 31, 2001 (Unaudited) and Twelve Months Ended December 31, 2000 6 Consolidated Statements of Comprehensive Income (Unaudited), Three Months Ended March 31, 2001 and 2000 7 Consolidated Statements of Cash Flows (Unaudited), Three Months Ended March 31, 2001 and 2000 8 Notes to Consolidated Financial Statements (Unaudited) 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 25 PART II. OTHER INFORMATION Item 1 through Item 6 40 Signatures 41 EXHIBIT INDEX 42
PART I FINANCIAL INFORMATION THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Income Unaudited (In millions, except per share data) Three Months Ended March 31 ------------------ 2001 2000 ------ ------ Revenues: Premiums earned $1,627 $1,356 Net investment income 335 319 Asset management 85 93 Realized investment gains 77 335 Other 41 43 ------ ------ Total revenues 2,165 2,146 ------ ------ Expenses: Insurance losses and loss adjustment expenses 1,183 1,028 Policy acquisition expenses 380 337 Operating and administrative expenses 304 261 ------ ------ Total expenses 1,867 1,626 ------ ------ Income from continuing operations before income taxes 298 520 Income tax expense 89 171 ------ ------ Income from continuing operations 209 349 Discontinued operations: Operating gain (loss), net of taxes (1) 15 Loss on disposal, net of taxes (6) (6) ------ ------ Income (loss) from discontinued operations, net of taxes (7) 9 ------ ------ Net income $202 $358 ====== ====== Basic earnings per common share: Income from continuing operations $0.95 $1.56 Discontinued operations, net of taxes (0.04) 0.04 ------ ------ Net income $0.91 $1.60 ====== ====== Diluted earnings per common share: Income from continuing operations $0.90 $1.47 Discontinued operations, net of taxes (0.03) 0.04 ------ ------ Net income $0.87 $1.51 ====== ====== Dividends declared on common stock $0.28 $0.27 ====== ====== See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In millions) Restated March 31, December 31, ASSETS 2001 2000 - ---------- --------- ------------ (Unaudited) Investments: Fixed maturities, at estimated fair value $16,123 $15,937 Equities, at estimated fair value 1,211 1,466 Real estate and mortgage loans 999 1,025 Venture capital, at estimated fair value 994 1,064 Securities lending collateral 1,185 1,231 Other investments 116 229 Short-term investments, at cost 923 1,100 ------- ------- Total investments 21,551 22,052 Cash 53 52 Reinsurance recoverables: Unpaid losses 4,869 4,651 Paid losses 359 324 Ceded unearned premiums 753 814 Receivables: Underwriting premiums 2,921 2,937 Interest and dividends 276 277 Other 229 181 Deferred policy acquisition expenses 607 576 Deferred income taxes 948 930 Office properties and equipment, at cost less accumulated depreciation of $454 (2000; $452) 492 492 Goodwill 523 510 Asset management securities held for sale 32 29 Other assets 1,935 1,677 ------- ------- Total assets $35,548 $35,502 ======= ======= See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In millions) Restated March 31, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 - ------------------------------------ --------- ----------- (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $18,235 $18,196 Unearned premiums 3,804 3,648 ------- ------- Total insurance reserves 22,039 21,844 Debt 1,823 1,647 Payables: Reinsurance premiums 864 1,060 Income taxes 172 170 Accrued expenses and other 939 1,031 Securities lending collateral 1,185 1,231 Other liabilities 1,066 955 ------- ------- Total liabilities 28,088 27,938 ------- ------- Company-obligated mandatorily redeemable preferred securities of trusts holding solely subordinated debentures of the Company 337 337 ------- ------- Shareholders' equity: Preferred: SOP convertible preferred stock; 1.45 shares authorized; 0.9 shares outstanding (0.8 shares in 2000) 115 117 Guaranteed obligation - SOP (57) (68) ------- ------- Total preferred shareholders' equity 58 49 ------- ------- Common: Common stock, 480 shares authorized; 215 shares outstanding (218 shares in 2000) 2,219 2,238 Retained earnings 4,245 4,243 Accumulated other comprehensive income, net of taxes: Unrealized appreciation 652 765 Unrealized loss on foreign currency translation (49) (68) Unrealized loss on derivatives (2) - ------- ------- Total accumulated other comprehensive income 601 697 ------- ------- Total common shareholders' equity 7,065 7,178 ------- ------- Total shareholders' equity 7,123 7,227 ------- ------- Total liabilities, redeemable preferred securities and shareholders' equity $35,548 $35,502 ======= ======= See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In millions) Three Twelve Months Ended Months Ended March 31 December 31 ----------- ------------ 2001 2000 ----------- ------------ (Unaudited) Preferred shareholders' equity: SOP convertible preferred stock: Beginning of period $117 $129 Redemptions during period (2) (12) ------ ------ End of period 115 117 ------ ------ Guaranteed obligation - SOP: Beginning of period (68) (105) Principal payments 11 37 ------ ------ End of period (57) (68) ------ ------ Total preferred shareholders' equity 58 49 ------ ------ Common shareholders' equity: Common stock: Beginning of period 2,238 2,079 Stock issued: Stock incentive plans 22 95 Preferred shares redeemed 3 23 Conversion of company-obligated preferred securities - 207 Reacquired common shares (44) (170) Other - 4 ------ ------ End of period 2,219 2,238 ------ ------ Retained earnings: Beginning of period 4,243 3,827 Net income 202 993 Dividends declared on common stock (60) (232) Dividends declared on preferred stock, net of taxes (2) (8) Reacquired common shares (144) (366) Tax benefit on employee stock options, and other changes 8 40 Premium on preferred shares redeemed (2) (11) ------ ------ End of period 4,245 4,243 ------ ------ Unrealized appreciation, net of taxes: Beginning of period 765 568 Change during the period (113) 197 ------ ------ End of period 652 765 ------ ------ Unrealized gain (loss) on foreign currency translation, net of taxes: Beginning of period (68) (26) Currency translation adjustments 19 (42) ------ ------ End of period (49) (68) ------ ------ Unrealized loss on derivatives, net of taxes: Beginning of period - - Change during the period (2) - ------ ------ End of period (2) - ------ ------ Total common shareholders' equity 7,065 7,178 ------ ------ Total shareholders' equity $7,123 $7,227 ====== ====== See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Unaudited (In millions) Three Months Ended March 31 -------------------- 2001 2000 ------ ------ Net income $202 $358 ------ ------ Other comprehensive income (loss), net of taxes: Change in unrealized appreciation (113) 142 Change in unrealized loss on foreign currency translation 19 (14) Change in unrealized loss on derivatives (2) - ------ ------ Other comprehensive income (loss) (96) 128 ------ ------ Comprehensive income $106 $486 ====== ====== See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (In millions) Three Months Ended March 31 --------------------- 2001 2000 ------- ------- OPERATING ACTIVITIES Net income $202 $358 Adjustments: Loss (income) from discontinued operations 7 (9) Change in insurance reserves 205 (20) Change in reinsurance balances (453) (232) Realized investment gains (77) (335) Change in deferred policy acquisition costs (31) (23) Change in accounts payable and accrued expenses (80) (192) Change in income taxes payable/refundable 19 106 Provision for federal deferred tax expense 98 28 Depreciation and amortization 26 21 Changes in other assets and liabilities (110) 81 ------- ------- Net Cash Used by Continuing Operations (194) (217) Net Cash Provided by Discontinued Operations 39 29 ------- ------- Net Cash Used by Operating Activities (155) (188) ------- ------- INVESTING ACTIVITIES Purchase of investments (1,532) (1,593) Proceeds from sales and maturities of investments 1,634 1,933 Net sale of short-term investments 181 105 Change in open security transactions 37 (19) Purchases of office properties and equipment (17) (15) Sales of office purchases and equipment - 2 Acquisitions - (37) Other (15) 55 ------- ------- Net Cash Provided by Continuing Operations 288 431 Net Cash Used by Discontinued Operations (264) (128) ------- ------- Net Cash Provided by Investing Activities 24 303 ------- ------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (61) (61) Proceeds from issuance of debt 164 96 Repayment of debt (11) (46) Repurchase of common shares (188) (331) Other (16) 39 ------- ------- Net Cash Used by Continuing Operations (112) (303) Net Cash Provided by Discontinued Operations 244 117 ------- ------- Net Cash Provided (Used) by Financing Activities 132 (186) ------- ------- Increase (decrease) in cash 1 (71) Cash at beginning of period 52 105 ------- ------- Cash at end of period $ 53 $ 34 ======= ======= See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited March 31, 2001 Note 1 - Basis of Presentation - ------------------------------ The financial statements include The St. Paul Companies, Inc. and subsidiaries (The St. Paul or the company), and have been prepared in conformity with generally accepted accounting principles. These consolidated financial statements rely, in part, on estimates. In the opinion of management, all necessary adjustments, consisting of normal recurring adjustments, have been reflected for a fair presentation of the results of operations, financial position and cash flows in the accompanying unaudited consolidated financial statements. The results for the period are not necessarily indicative of the results to be expected for the entire year. On April 26, 2001, we announced that our subsidiary, St. Paul Fire and Marine Insurance Company, had reached a definitive agreement to sell its subsidiary, Fidelity and Guaranty Life Insurance Company ("F&G Life") to Old Mutual plc, a London-based international financial services company. F&G Life's results of operations have been reclassified to discontinued operations for all periods presented in this report. On our consolidated balance sheets as of March 31, 2001 and Dec. 31, 2000, F&G Life's net assets were included in "Other Assets," classified as net assets of discontinued operations. See Footnote 12. Reference should be made to the "Notes to Consolidated Financial Statements" in our annual report to shareholders for the year ended Dec. 31, 2000. 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 2000 consolidated financial statements have been reclassified to conform with the 2001 presentation. These reclassifications had no effect on net income, comprehensive income or shareholders' equity, as previously reported. In June, 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. This statement requires all derivatives to be recorded at fair value on the balance sheet and establishes new accounting rules for hedging. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS No. 133," which amended SFAS No. 133 to make it effective for all quarters of fiscal years beginning after June 15, 2000. In June 2000, the FASB issued FASB No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," as an additional amendment to SFAS No. 133, to address a limited number of issues causing implementation difficulties. Effective Jan. 1, 2001, we adopted the provisions of SFAS No. 133, as amended. See Footnote 11 on page 20 and Footnote 6 on page 14 of this report for further information regarding the impact of the adoption on our financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 2 - Earnings Per Common Share - ---------------------------------- The following table provides the calculation of our earnings per common share for the three months ended March 31, 2001 and 2000: Three Months Ended March 31 ------------------ 2001 2000 ------- ------- (In millions, except per share data) EARNINGS Basic: Net income, as reported $202 $358 Preferred stock dividends, net of taxes (2) (2) Premium on preferred shares redeemed (2) (4) ------- ------- Net income available to common shareholders $198 $352 ======= ======= Diluted: Net income available to common shareholders $198 $352 Effect of dilutive securities: Convertible preferred stock 2 2 Zero coupon convertible notes 1 1 Convertible monthly income preferred securities - 2 ------- ------- Net income available to common shareholders, as adjusted $201 $357 ======= ======= COMMON SHARES Basic: Weighted average common shares outstanding 217 220 ======= ======= Diluted: Weighted average common shares outstanding 217 220 Effect of dilutive securities: Stock options 4 1 Convertible preferred stock 6 7 Zero coupon convertible notes 3 2 Convertible monthly income preferred securities - 7 ------- ------- Total 230 237 ======= ======= EARNINGS PER SHARE Basic $0.91 $1.60 ======= ======= Diluted $0.87 $1.51 ======= =======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 3 - Investments - -------------------- Investment Activity. Following is a summary of our investment purchases, sales and maturities for continuing operations. Three Months Ended March 31 --------------------------- 2001 2000 -------- -------- (In millions) Purchases: Fixed maturities $931 $778 Equities 495 587 Real estate and mortgage loans 41 - Venture capital 63 225 Other investments 2 3 -------- ------- Total purchases 1,532 1,593 -------- ------- Proceeds from sales and maturities: Fixed maturities 933 810 Equities 498 573 Real estate and mortgage loans 51 77 Venture capital 7 460 Other investments 145 13 -------- -------- Total sales and maturities 1,634 1,933 -------- -------- Net sales $(102) $(340) ======== ========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 3 - Investments (continued) - ------------------------------- Change in Unrealized Appreciation. The increase (decrease) in unrealized appreciation of investments recorded in common shareholders' equity was as follows: Restated Three Months Ended Twelve Months Ended March 31, 2001 December 31, 2000 ------------------ ------------------- (In millions) Fixed maturities $186 $467 Equities (251) (198) Venture capital (131) (61) Other (48) 47 -------- -------- Total change in pretax unrealized appreciation on continuing operations (244) 255 Change in deferred taxes 92 (92) -------- -------- Total change in unrealized appreciation on continuing operations, net of taxes (152) 163 Change in pretax unrealized appreciation on discontinued operations 60 52 Change in deferred taxes (21) (18) -------- -------- Total change in unrealized appreciation on discontinued operations, net of taxes 39 34 -------- -------- Total change in unrealized appreciation, net of taxes $(113) $197 ======== ========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 4 - Income Taxes - --------------------- The components of income tax expense (benefit) on income from continuing operations were as follows : Three Months Ended March 31 ------------------ 2001 2000 ------- ------- (In millions) Federal current tax expense (benefit) $(12) $134 Federal deferred tax expense 98 28 ------- ------- Total federal income tax expense 86 162 Foreign income tax expense - 6 State income tax expense 3 3 ------- ------- Total income tax expense $ 89 $171 ======= ======= Note 5 - Contingent Liabilities - ------------------------------- In the ordinary course of conducting business, we and some of our subsidiaries have been named as defendants in various lawsuits. Some of these lawsuits attempt to establish liability under insurance contracts issued by our underwriting operations. Plaintiffs in these lawsuits are asking for money damages or to have the court direct the activities of our operations in certain ways. Although it is possible that the settlement of a contingency may be material to our results of operations and liquidity in the period in which the settlement occurs, we believe that the total amounts that we and our subsidiaries will ultimately have to pay in all of these lawsuits will have no material effect on our overall financial position. In some cases, plaintiffs seek to establish coverage for their liability under environmental protection laws. See "Environmental and Asbestos Claims" in Management's Discussion and Analysis for information on these claims.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 6 - Debt - ------------- Debt consists of the following: March 31, December 31, 2001 2000 ---------------- ---------------- Book Fair Book Fair Value Value Value Value ----- ------ ----- ------ (In millions) Medium-term notes $ 606 $ 619 $ 617 $ 619 Commercial paper 275 275 138 138 7-7/8% senior notes 249 267 249 261 8-1/8% senior notes 249 276 249 267 8-3/8% senior notes 150 151 150 151 Zero coupon convertible notes 99 109 98 95 7-1/8% senior notes 80 83 80 82 Variable rate borrowings 64 64 64 64 Real estate debt 29 29 2 2 ------ ------ ------ ------ Total obligations 1,801 1,873 $1,647 $1,679 ====== ====== Fair value of interest rate swap agreements 22 22 ------ ------ Total debt reported on balance sheet $1,823 $1,895 ====== ====== At March 31, 2001, we were party to a number of interest rate swap agreements related to several of our debt securities outstanding. The notional amount of these swaps totaled $380 million, and their aggregate fair value at March 31, 2001 was an asset of $22 million. Prior to our adoption of SFAS No. 133, as amended, on Jan. 1, 2001, the fair value of these swap agreements was not recorded on our balance sheet. Upon adoption, we reflected the fair value of these swap agreements as an increase to other assets and a corresponding increase to debt on our balance sheet. Note 7 - Segment Information - ---------------------------- We have seven reportable business segments in our property- liability insurance operation, consisting of the Commercial Lines Group, Global Surety, Global Health Care, Other Specialty, International, Reinsurance and Investment Operations. We also have an asset management segment (The John Nuveen Company). We evaluate the performance of our property-liability underwriting segments based on GAAP underwriting results. The property- liability investment operation is disclosed as a separate reportable segment because that operation is managed at the corporate level and the invested assets, net investment income and realized gains are not allocated to individual underwriting segments. The asset management segment is evaluated based on its pretax income, which includes investment income. As discussed in Note 12 on page 21 of this report, on April 26, 2001, we announced a definitive agreement to sell F&G Life, which comprises our life insurance segment. As a result, F&G Life's results of operations were included in discontinued operations on our statements of income included in this report for the three months ended March 31, 2001 and 2000.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 7 - Segment Information (continued) - --------------------------------------- The reportable underwriting business segments in our property- liability operation are reported separately because they offer insurance products to unique customer classes and utilize different underwriting criteria and marketing strategies. For example, the Commercial Lines Group provides "commodity-type" insurance products to the small and medium-sized commercial markets. By contrast, each of our Specialty segments (Global Surety, Global Health Care and Other Specialty) market specialized insurance products and services tailored to meet the individual needs of specific customer groups, such as doctors, lawyers, officers and directors, as well as technology firms and government entities. Customers in the Specialty segments generally require specialized underwriting expertise and claim settlement services. The tabular information that follows provides revenue and income data from continuing operations for each of our business segments for the first quarters of 2001 and 2000. In the first quarter of 2001, we reclassified certain business that had previously been included in the Other Specialty segment to the International segment to more accurately reflect the manner in which this business is managed. Data for 2000 in the tables have been reclassified to be consistent with the 2001 presentation. Three Months Ended March 31 ------------------ 2001 2000 --------- -------- Revenues (In millions) Property-liability insurance: Commercial Lines Group $ 421 $ 388 Global Surety 104 113 Global Health Care 182 133 Other Specialty 424 329 International 170 77 ------ ------ Total primary insurance operations 1,301 1,040 Reinsurance 326 316 ------ ------ Total property-liability premiums earned 1,627 1,356 ------ ------ Investment Operations: Net investment income 330 318 Realized investment gains 52 331 ------ ------ Total investment operations 382 649 Other 36 30 ------ ------ Total property-liability insurance 2,045 2,035 ------ ------ Asset Management 87 100 ------ ------ Total reportable segments 2,132 2,135 Parent company, other operations and consolidating eliminations 33 11 ------ ------ Total revenues $2,165 $2,146 ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 7 - Segment Information (continued) - --------------------------------------- During the first quarter of 2000, we eliminated the one - quarter reporting lag for our reinsurance business in the United Kingdom ("St. Paul Re - UK"). First-quarter 2000 consolidated results, and our Reinsurance segment results, therefore included six months' revenues and expenses for St. Paul Re - UK. The incremental impact of this change resulted in an additional $146 million of net written premiums, $53 million of earned premiums, $32 million of loss and loss adjustment expenses; $19 million of underwriting expenses, $2 million of GAAP underwriting profit; $64 million of revenues; and $17 million of income before taxes being recorded in the first quarter of 2000. Three Months Ended March 31 ------------------- 2001 2000 -------- -------- (In millions) Income (Loss) Before Income Taxes Property-liability insurance: Commercial Lines Group $ 72 $ (22) Global Surety 17 19 Global Health Care (130) (19) Other Specialty 10 (21) International (38) (12) ------ ------ Total primary insurance operations (69) (55) Reinsurance (18) (44) ------ ------ Total GAAP underwriting result (87) (99) ------ ------ Investment Operations: Net investment income 330 318 Realized investment gains 52 331 ------ ------ Total investment operations 382 649 ------ ------ Other (4) (32) ------ ------ Total property-liability insurance 291 518 ------ ------ Asset Management: Pretax income before minority interest 45 43 Minority interest (10) (10) ------ ------ Total asset management 35 33 ------ ------ Total reportable segments 326 551 Parent company, other operations and consolidating eliminations (28) (31) ------ ------ Total income before income taxes $298 $520 ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 8 - Reinsurance - -------------------- Our consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to our acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) we have underwritten to other insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to protect us against earnings volatility and from potential losses in excess of the amount we are prepared to accept. We expect those with whom we have ceded reinsurance to honor their obligations. In the event these companies are unable to honor their obligations, we will pay these amounts. We have established allowances for possible nonpayment of amounts due to us. In both 2001 and 2000, we were party to separate aggregate excess- of-loss reinsurance treaties that we entered into effective Jan. 1 of each year (the "corporate program"). Coverage under the corporate program treaties is triggered when our insurance losses and loss adjustment expenses spanning all segments of our business reach a certain level. In addition, our Reinsurance segment was party to separate aggregate excess-of-loss reinsurance treaties unrelated to the corporate program in both years. All of these treaties are collectively referred to hereafter as the "reinsurance treaties." Under terms of the reinsurance treaties, we transfer, or "cede," insurance losses and loss adjustment expenses to our reinsurers, along with the related written and earned premiums. In the first quarter of 2001, coverage under the corporate program was not triggered; but we ceded $9 million and $3 million of written and earned premiums, respectively, representing the initial premium paid to our reinsurer. Under the separate Reinsurance segment treaty, we ceded $3 million of written and earned premiums and $26 million of insurance losses and loss adjustment expenses, for a net benefit of $23 million, in the first quarter of 2001. Our first-quarter 2000 income from continuing operations benefited from cessions made under the corporate program, and cessions made under the separate treaty exclusive to our Reinsurance segment. Under the corporate program, we ceded written premiums of $80 million, earned premiums of $65 million, and insurance losses and loss adjustment expenses of $111 million, resulting in a net benefit $46 million to our pretax income from continuing operations. The losses and loss adjustment expenses ceded and $61 million of the earned premiums ceded under the corporate program in the first quarter of 2000 were the result of adverse development on losses originally incurred during the 1999 accident year. Under the separate Reinsurance segment treaty, we ceded written and earned premiums of $17 million, and insurance losses and loss adjustment expenses of $32 million, resulting in a net pretax benefit of $15 million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 8 - Reinsurance (continued) - ------------------------------- The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses, loss adjustment expenses follows: Three Months Ended March 31 ------------------ (In millions) 2001 2000 ----- ----- Written premiums: Direct $1,613 $1,122 Assumed 570 595 Ceded (337) (317) ----- ----- Net premiums written $1,846 $1,400 ===== ===== Earned premiums: Direct $1,482 $1,161 Assumed 522 499 Ceded (377) (304) ----- ----- Total premiums earned $1,627 $1,356 ===== ===== Insurance losses and loss adjustment expenses: Direct $1,220 $839 Assumed 411 573 Ceded (448) (384) ----- ----- Total net insurance losses and loss adjustment expenses $1,183 $1,028 ===== ===== Note 9 - Restructuring Charges - ------------------------------ Since 1998, we have recorded three restructuring charges related to actions taken to improve our operations. Note 15 in our 2000 Annual Report to Shareholders provides more detailed information regarding these charges. In August 1999, we announced a cost reduction program designed to enhance our efficiency and effectiveness in a highly competitive environment. In the third quarter of 1999, we recorded a pretax charge of $60 million related to this program, including $25 million in employee-related charges, $33 million in occupancy- related charges and $2 million in equipment charges. Late in the fourth quarter of 1998, we recorded a pretax restructuring charge of $34 million. The majority of the charge, $26 million, related to the anticipated termination of approximately 520 employees, primarily in our commercial insurance operations. The remaining charge of $8 million related to costs to be incurred to exit lease obligations.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 9 - Restructuring Charges (continued) - ----------------------------------------- In connection with our merger with USF&G, in the second quarter of 1998 we recorded a pretax charge to earnings of $292 million, primarily consisting of severance and other employee-related costs related to the anticipated termination of approximately 2,000 positions, facilities exit costs, asset impairments and transaction costs. As of March 31, 2001, all actions have been taken and all obligations have been met regarding these three charges, with the exception of certain remaining lease commitments. During the first quarter, we reduced the reserve by $1 million related to sublease and buyout activity which has reduced our estimated remaining lease commitments. We expect to be obligated under certain lease commitments for at least 7 years. The following presents a rollforward of activity related to these commitments: Original Reserve Reserve Pre-tax at Dec. 31, at Mar. 31, (In millions) Charge 2000 Payments Adjustment 2001 ----------- -------- ---------- -------- ---------- ---------- Lease commitments charged to earnings: $75 $43 $(3) $(1) $39 ==== ==== ==== === ==== Note 10 - Acquisitions - ----------------------- In February 2000, we closed on our purchase of Pacific Select Insurance Holdings, Inc., and its wholly-owned subsidiary Pacific Select Property Insurance Co. (together, Pacific Select), a California insurer that sells earthquake coverage to California homeowners. The transaction was accounted for as a purchase, at a cost of approximately $37 million. Pacific Select's results of operations from the date of purchase are included in our consolidated results. In April 2000, we closed on our acquisition of MMI Companies, Inc. (MMI), a Deerfield, Illinois-based provider of medical services-related insurance products and consulting services. The transaction was accounted for as a purchase, with a total purchase price of approximately $206 million, in addition to the assumption of $165 million in capital securities and debt. The final purchase price adjustments resulted in goodwill of approximately $89 million, which we expect to amortize on a straight-line basis over 15 years. MMI's results of operations from the date of purchase are included in our consolidated results. In connection with the MMI purchase, we established a reserve of $28 million, including $4 million in employee-related costs and $24 million in occupancy-related costs. The employee-related costs represent severance and related benefits such as outplacement counseling to be paid to, or incurred on behalf of, terminated employees. We estimated that approximately 130 employee positions would be eliminated, at all levels throughout MMI. Through Mar. 31, 2001, 111 employees had been terminated, with payments totaling $4 million. Our remaining obligations for employee-related costs at MMI are expected to be less than $1 million. The occupancy-related cost represents excess space created by the terminations, calculated by determining the percentage of anticipated excess space, by location, and the current lease costs over the remaining lease period. The amounts payable under the existing leases were not discounted, and sublease income was included in the calculation only for those locations where sublease agreements were in place.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 10 - Acquisitions (continued) - --------------------------------- The following presents a rollforward of activity related to these accruals: (In millions) ----------- Original Reserve Reserve Charges to Pretax at Dec. 31, at Mar. 31, earnings: Charge 2000 Payments Adjustments 2001 --------- -------- ---------- -------- ----------- ---------- Employee- related $ 4 $ 1 $(1) $ - $ - Occupancy- related 24 23 (6) (8) 9 ----- ----- ----- ----- ----- Total $28 $24 $(7) $(8) $ 9 ===== ===== ===== ===== ===== During the first quarter of 2001, we entered into a lease buyout related to a portion of the space, resulting in a cash payment of $5 million. We also reduced the reserve by $8 million, primarily representing additional lease payments we were no longer obligated to make related to the buyout. During 2000, we experienced severe prior year loss development on the reserves acquired from MMI, primarily related to its major accounts business. This was consistent with the adverse prior year development experienced on the remainder of our Global Health Care major accounts business. The major accounts business serves large health care entities, which have recently suffered from increasingly significant amounts awarded in jury verdicts. As a result of this overall deterioration, we are in the process of performing a comprehensive review of our entire Health Care segment. This review, as well as our evaluation of the ongoing strategic value of Unionamerica, MMI's United Kingdom - based subsidiary, will be considered in our assessment of the recoverability of the goodwill we recorded as part of the MMI purchase. Until this review and evaluation are completed, we cannot reasonably estimate to what extent, if any, impairment of the goodwill has occurred. Note 11 - Adoption of Accounting Pronouncement - ----------------------------------------------- Effective Jan. 1, 2001, we adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. According to the statement, hedging instruments may be specifically designated into one of three categories based on their intended use. The applicable category dictates the accounting for each derivative. The following categories and the related impacts and disclosures required by SFAS No. 133 are applicable to The St. Paul: Fair Value Hedges: We have several pay floating, receive fixed interest rate swaps that are designated as fair value hedges of selected portions of our fixed rate debt. The terms of the swaps match those of the debt instruments, and the swaps are therefore considered 100% effective. The transitional impact of adopting SFAS No. 133 for the fair value of the hedges was $15 million, which is recorded in other assets on the balance sheet with an equivalent offset recorded in debt. The related income statement impacts are offsetting; as a result, there was no transitional income statement impact of adopting SFAS No. 133 for fair value hedges. The impact related to first quarter 2001 movement in interest rates was a $7 million increase in the fair value of the swaps and the related debt on the balance sheet, with the income statement impacts again offsetting.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 11 - Adoption of Accounting Pronouncement (continued) - ---------------------------------------------------------- Cash Flow Hedges: We have purchased foreign currency forward contracts that are designated as cash flow hedges. They are utilized to minimize our exposure to fluctuations in foreign currency values that result from forecasted foreign currency payments, as well as from foreign currency payables and receivables. The transitional impact of adopting SFAS No. 133 for cash flow hedges was a gain of less than $200,000, which was included in other comprehensive income. In the first quarter, we recognized a $3 million loss on the cash flow hedges, which is also included in other comprehensive income. The amounts included in other comprehensive income will be reclassified into earnings concurrent with the timing of the hedged cash flows, which is not expected to occur within the next twelve months. In the first quarter, we recognized a loss in the income statement of less than $300,000 representing the portions of the forward contracts deemed ineffective. Hedges of the Net Investment in a Foreign Operation: We have purchased quarterly foreign currency forward contracts that are designated as hedges of our net investment in certain foreign operations which we utilize to minimize the impact of foreign currency fluctuations. Since these hedges are purchased and mature within a given quarter, there was no transitional impact of adopting SFAS No. 133. In the first quarter, we recognized a loss of less than $200,000 on these contracts which is recorded in other comprehensive income on the balance sheet. The loss is offset by an equivalent gain in unrealized foreign currency translation adjustments on the balance sheet. Non-Hedge Derivatives: We have entered into a variety of other financial instruments considered to be derivatives, but which are not designated as hedges, that we utilize to minimize the potential impact of market movements in certain investment portfolios. There was no transition adjustment related to the adoption of SFAS No. 133, and we recorded less than $400,000 of operating and administrative expense in the first quarter of 2001, relating to the change in the market value of these derivatives during the quarter. Note 12 - Discontinued Operations - ---------------------------------- Life Insurance Segment - ---------------------- On April 26, 2001, we announced an agreement by our subsidiary, St. Paul Fire and Marine Insurance Company ("Fire and Marine"), to sell its life insurance company, Fidelity and Guaranty Life Insurance Company, and its subsidiary, Thomas Jefferson Life, (together, "F&G Life") to Old Mutual plc ("Old Mutual") for $335 million in cash and $300 million in shares of Old Mutual stock. The consideration is subject to possible adjustment related to F&G Life's investment portfolio. If the market value of specified securities within that portfolio changes between March 31, 2001 and the closing date, or if any securities within that portfolio experience specified credit rating downgrades prior to closing, the consideration is subject to adjustment. Pursuant to the purchase agreement, Fire and Marine must hold the Old Mutual stock received for one year after the closing of the transaction. The consideration is also subject to possible additional adjustment based on the market price of Old Mutual's stock at the end of that one-year period, as described in greater detail in the purchase agreement. The sale is subject to regulatory approvals and other conditions, and is expected to close later in 2001. We expect to realize a modest gain on the sale of F&G Life, the exact amount of which will be determined at closing. The measurement date for the sale of F&G Life occurred prior to the filing of this Quarterly Report on Form 10-Q; as a result, our consolidated statements of income presented herein reflect F&G Life's results of operations in discontinued operations for the three months ended March 31, 2001 and 2000. In the first quarter of 2001, F&G Life recorded a net loss of $424,000, which was driven by after-tax realized investment losses of $15 million. Those losses were primarily the result of writedowns in the carrying value of certain fixed maturity investments. In the first quarter of 2000, F&G Life recorded net income of $13 million. In addition, on our consolidated balance sheet as of March 31, 2001, F&G Life's net assets of $626 million were included in "Other Assets," classified as net assets of discontinued operations. Presented on the following pages are The St. Paul's pro forma consolidated, condensed income statement for the year ended Dec. 31, 2000, which assumes the sale of F&G Life occurred at the beginning of 2000, and The St. Paul's restated consolidated balance sheet as of Dec. 31, 2000. Included are condensed historical statements as
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 12 - Discontinued Operations (continued) - -------------------------------------------- reported before the sale of F&G Life, pro forma adjustments, and the pro forma statements after the sale. The pro forma data is provided for illustrative purposes only, and does not purport to be indicative of the results that would have actually occurred if the sale of the life insurance segment had been consummated at the beginning of 2000, or that may be obtained in the future. Statements of Income Twelve Months Ended Dec.31, 2000 -------------------------------- Restated (In millions, except Previously for Sale per share data) Reported F&G Life of F&G Life ---------- ---------- ------------ Revenues: Premiums earned $5,898 $306 $5,592 Net investment income 1,616 354 1,262 Asset management 356 - 356 Realized investment gains (losses) 607 (25) 632 Other 146 1 145 ------- ------- ------- Total revenues 8,623 636 7,987 ------- ------- ------- Expenses: Insurance losses and loss adjustment expenses 3,913 - 3,913 Life policy benefits 494 494 - Policy acquisition expenses 1,442 46 1,396 Operating and administrative expenses 1,320 43 1,277 ------- ------- ------- Total expenses 7,169 583 6,586 ------- ------- ------- Income from continuing operations before income taxes 1,454 53 1,401 Income tax expense 441 10 431 ------- ------- ------- Income from continuing operations 1,013 43 970 Discontinued operations, net of taxes (20) (43) 23 ------- ------- ------- Net income $ 993 $ - $ 993 ======= ======= ======= Basic earnings per common share: Income from continuing operations $4.59 $0.20 $4.39 Discontinued operations, net of taxes (0.09) (0.20) $0.11 ------- ------- ------- Net income $4.50 $ - $4.50 ======= ======= ======= Diluted earnings per common share: Income from continuing operations $4.32 $0.18 $4.14 Discontinued operations, net of taxes (0.08) (0.18) $0.10 ------- ------- ------- Net income $4.24 $ - $4.24 ======= ======= ======= For purposes of calculating basic earnings per share, weighted average shares outstanding totaled 216.7 million. For purposes of calculating diluted earnings per share, weighted average shares outstanding totaled 232.9 million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 12 - Discontinued Operations (continued) - --------------------------------------------- Balance Sheet As of December 31, 2000 ---------------------------------------------------- Net Assets of Restated Previously Discontinued for Sale of (in millions) Reported F&G Life Operations F&G Life ----------- ---------- -------- ------------- ----------- Assets: Fixed maturities $20,470 $ 4,533 $ - $15,937 Other investments 6,629 514 - 6,115 -------- -------- -------- -------- Total investments 27,099 5,047 - 22,052 Reinsurance recoverable on unpaid losses 5,196 545 - 4,651 Other assets 8,910 698 587 8,799 -------- -------- -------- -------- Total assets 41,205 6,290 587 35,502 ======== ======== ======== ======== Liabilities: Losses and loss adjustment expense reserves 18,196 - - 18,196 Future policy benefits 5,460 5,460 - - Unearned premium reserves 3,648 - - 3,648 -------- -------- -------- -------- Total insurance reserves 27,304 5,460 - 21,844 Other liabilities 6,674 243 - 6,431 -------- -------- -------- -------- Total liabilities 33,978 5,703 - 28,275 -------- -------- -------- -------- Shareholders' equity 7,227 587 587 7,227 -------- -------- -------- -------- Total liabilities and shareholders' equity $41,205 $6,290 $587 $35,502 ======== ======== ======== ======== Standard Personal Insurance Business - ------------------------------------ On Sept. 30, 1999, we completed the sale of our standard personal insurance operations to Metropolitan Property and Casualty Insurance Company (Metropolitan). As a result, the standard personal insurance operations were accounted for as discontinued operations for all periods presented herein. We recorded a $32 million pretax charge for various costs incurred in the disposition of the operations. All of the obligations of this charge have been met, with the exception of $5 million in occupancy-related charges. These obligations will exist until lease commitments in place at the time of the sale expire, or until we buy them out before expiration. Metropolitan purchased Economy Fire & Casualty Company and its subsidiaries (Economy), as well as the rights and interests in those non-Economy policies constituting our remaining standard personal insurance operations. Those rights and interests were transferred to Metropolitan by way of a reinsurance and facility agreement (Reinsurance Agreement).
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 12 - Discontinued Operations (continued) - --------------------------------------------- The Reinsurance Agreement relates solely to the non-Economy standard personal insurance policies, and was entered into solely as a means of accommodating Metropolitan through a transition period. The Reinsurance Agreement allows Metropolitan to write non-Economy business on our policy forms while Metropolitan obtains the regulatory license, form and rate approvals necessary to write non-Economy business through their own insurance subsidiaries. Any business written on our policy forms during this transition period is then fully ceded to Metropolitan under the Reinsurance Agreement. We recognized no gain or loss on the inception of the Reinsurance Agreement and will not incur any net revenues or expenses related to the Reinsurance Agreement. All economic risk of post-sale activities related to the Reinsurance Agreement has been transferred to Metropolitan. We anticipate that Metropolitan will pay all claims incurred related to this Reinsurance Agreement. In the event Metropolitan is unable to honor their obligations to us, we will pay these amounts. As part of the sale to Metropolitan, we guaranteed the adequacy of Economy's loss and loss expense reserves. Under that guarantee, we will pay for any deficiencies in those reserves and will share in any redundancies that develop by Sept. 30, 2002. We remain liable for claims on non-Economy policies that result from losses occurring prior to closing. By agreement, Metropolitan will adjust those claims and share in redundancies in related reserves that may develop. As of Mar. 31, 2001, we had determined that we could not reasonably estimate to any probable certainty whether any deficiency or redundancy existed in the pre- sale reserves, and we have not recorded a liability or receivable related to those reserves. Any losses incurred by us under these agreements will be reflected in discontinued operations in the period they are incurred. For the first three months of 2001, we recorded a pretax loss of $12 million in discontinued operations. We have no other contingent liabilities related to the sale. Nonstandard Auto Business - ------------------------- On Jan. 4, 2000, we announced an agreement to sell our nonstandard auto business to The Prudential Insurance Company of America (Prudential) for $200 million in cash. As a result, the nonstandard auto business results of operations were accounted for as discontinued operations for all periods presented. On May 1, 2000, we closed on the sale of our nonstandard auto business to Prudential, receiving total cash consideration of approximately $175 million (net of a $25 million dividend paid to our property-liability operations prior to closing). Note 13 - Statutory Accounting Practices - ---------------------------------------- The National Association of Insurance Commissioners has published revised statutory accounting practices in connection with its codification project which became effective, and which we adopted, as of Jan. 1, 2001. The cumulative effect to our property-liability insurance operations of the adoption of these practices was to increase statutory surplus by $328 million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations March 31, 2001 On April 26, 2001, The St. Paul Companies, Inc. announced that its subsidiary, St. Paul Fire and Marine Insurance Company ("Fire and Marine"), had reached a definitive agreement to sell Fidelity and Guaranty Life Insurance Company ("F&G Life") to Old Mutual plc ("Old Mutual"), a London-based international financial services company. F&G Life's results of operations have been reclassified to discontinued operations for all periods presented in the following discussion. Consolidated Highlights ----------------------- The following table summarizes our results for the first quarters of 2001 and 2000. Three Months Ended March 31 ------------------ (In millions, except per share data) 2001 2000 ----- ----- Pretax income (loss): Property-liability insurance: GAAP underwriting result $ (87) $(99) Net investment income 330 318 Realized investment gains 52 331 Other (4) (32) ----- ----- Total property-liability insurance 291 518 Asset management 35 33 Parent and other (28) (31) ----- ----- Income from continuing operations before income taxes 298 520 Income tax expense 89 171 ----- ----- Income from continuing operations 209 349 Discontinued operations, net of taxes (7) 9 ----- ----- Net income $ 202 $ 358 ===== ===== Diluted net income per common share $0.87 $1.51 ===== ===== Consolidated Results - -------------------- Our pretax income from continuing operations of $298 million in the first quarter of 2001 was more than $220 million less than comparable 2000 pretax income of $520 million. The decline resulted from a significant reduction in realized investment gains in our property-liability insurance operations. Realized gains in last year's first quarter were unusually high due to the sale of several venture capital investments. Property-liability underwriting results were $12 million better than last year's first quarter, primarily due to improved loss experience in our Commercial Lines Group segment of business. Our effective tax rate in last year's first quarter was higher than the comparable 2001 rate, primarily due to the substantial amount of realized investment gains, which are taxed at the 35% federal statutory rate. Subsequent Event - Agreement to Sell F&G Life Insurance Company - --------------------------------------------------------------- On April 26, 2001, we announced that Fire and Marine had signed a definitive agreement to sell F&G Life to Old Mutual. Under terms of the agreement, Fire and Marine will receive $335 million in cash, and shares of Old Mutual common stock valued at $300 million on the closing date. The consideration is subject to possible adjustment related to F&G Life's investment portfolio. If the market value of specified securities within that portfolio changes between March 31, 2001 and the closing date, or if any securities within that portfolio experience specified credit rating downgrades prior to closing, the consideration is subject to adjustment. Pursuant to the purchase
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Consolidated Highlights (continued) ---------------------------------- agreement, Fire and Marine must hold the Old Mutual stock received for one year after the closing of the transaction. The consideration is also subject to possible adjustment based on the market price of Old Mutual's stock at the end of that one-year period, as described in greater detail in the purchase agreement. The sale is subject to regulatory approvals and other conditions, and is expected to close later in 2001. We expect to realize a modest gain on the sale of F&G Life, the exact amount of which will be determined at closing. F&G Life's results of operations for the three months ended March 31, 2001 and 2000 are included in discontinued operations on our consolidated statements of income. In the first quarter of 2001, F&G Life recorded a net loss of $424,000, which was driven by after-tax realized investment losses of $15 million. Those losses were primarily the result of writedowns in the carrying value of certain fixed maturity investments. In the first quarter of 2000, F&G Life recorded net income of $13 million. F&G Life's product sales totaled $457 million in the first quarter of 2001, compared with sales of $227 million in the same 2000 period. Discontinued Operations - Personal Insurance and Nonstandard Auto - ----------------------------------------------------------------- In 1999, we sold our standard personal insurance operations to Metropolitan Property and Casualty Insurance Company (Metropolitan). Metropolitan purchased Economy Fire & Casualty Company and subsidiaries (Economy), and the rights and interests in those non-Economy policies constituting the remainder of our standard personal insurance operations. Those rights and interests were transferred to Metropolitan by way of a reinsurance and facility agreement. We guaranteed the adequacy of Economy's loss and loss expense reserves, and we remain liable for claims on non-Economy policies that result from losses occurring prior to the Sept. 30, 1999 closing date. Under the reserve guarantee, we will pay for any deficiencies in those reserves and will share in any redundancies that develop by Sept. 30, 2002. As of March 31, 2001, we had determined that we could not reasonably estimate to any probable certainty whether any deficiency or redundancy existed in the pre-sale reserves and we have not recorded a liability or receivable related to those reserves. Any losses incurred by us under these agreements are reflected in discontinued operations in the period during which they are incurred. In the first quarters of 2001 and 2000, we recorded pretax losses of $6 million and $5 million, respectively, in discontinued operations. In May 2000, we completed the sale of our nonstandard auto insurance operations to Prudential Insurance Company of America (Prudential). Prudential purchased the nonstandard auto business marketed under the Victoria Financial and Titan Auto brands. In the first quarter of 2000, we recorded pretax income of $1 million in discontinued operations related to these operations, representing their results of operations for the first three months of the year. Common Share Repurchases - ------------------------ In the first quarter of 2001, we repurchased and retired 4.2 million of our common shares for a total cost of $187 million, or an average of $44.23 per share. These repurchases were funded through a combination of internally-generated funds and the issuance of commercial paper. The shares repurchased in the first quarter represented approximately 2% of our total shares outstanding at the beginning of the year. Adoption of SFAS No. 133 - ------------------------ On January 1, 2001, we adopted the provisions of Statement of Financial Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS Nos. 137 and 138. Provisions of SFAS No. 133 require the recognition of derivatives as either assets or liabilities on the balance sheet and the measurement of those instruments at fair value. We have limited involvement with derivative instruments, primarily for purposes of hedging against fluctuations in market indices, foreign currency exchange rates and interest rates. Our adoption of SFAS No 133, as amended, did not have a material impact on our financial position or results of operations.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance ---------------------------- Overview - -------- Our first-quarter 2001 consolidated written premiums of $1.85 billion were 32% higher than comparable 2000 premiums of $1.40 billion. Several factors had a significant impact on our reported premium volume in both years. First, we acquired MMI Companies, Inc. ("MMI"), an international health care risk services company, in the second quarter of 2000. MMI accounted for $97 million of incremental written premiums in the first quarter of 2001. Second, last year's first-quarter total included $146 million of written premiums resulting from our elimination of the one-quarter reporting lag for our reinsurance operations based in the United Kingdom ("St Paul Re - UK"). Third, our reported written premium volume in the first quarters of 2001 and 2000 was reduced by $12 million and $97 million respectively, by cessions made under certain reinsurance treaties (described below). Excluding all of these factors in both years, consolidated written premiums of $1.76 billion in the first quarter of 2001 were 30% higher than comparable first-quarter 2000 premium volume of $1.35 billion. Premium growth occurred throughout virtually all of our business segments, driven by price increases, new business and strong renewal retention rates. In both 2001 and 2000, we were party to separate aggregate excess- of-loss reinsurance treaties that we entered into effective Jan. 1 of each year (the "corporate program"). Coverage under the corporate program treaties is triggered when our insurance losses and loss adjustment expenses spanning all segments of our business reach a certain level. In addition, our Reinsurance segment was party to separate aggregate excess-of-loss reinsurance treaties unrelated to the corporate program in both years. All of these treaties are collectively referred to hereafter as the "reinsurance treaties." Under terms of the reinsurance treaties, we transfer, or "cede," insurance losses and loss adjustment expenses to our reinsurers, along with the related written and earned premiums. The following table describes the combined impact of these cessions on our property-liability underwriting segments for the first quarters of 2001 and 2000. In the first quarter of 2001, coverage under the corporate program was not triggered; the written and earned premiums ceded represent the initial premium paid to our reinsurer. Three Months Ended March 31 ---------------- (in millions) 2001 2000 ----------- ----- ----- Corporate program: ----------------- Ceded written premiums $9 $ 80 Ceded earned premiums 3 65 Ceded losses and loss adjustment expenses - 111 ----- ----- Net pretax benefit (detriment) (3) 46 ----- ----- Reinsurance segment treaty: -------------------------- Ceded written premiums 3 17 Ceded earned premiums 3 17 Ceded losses and loss adjustment expenses 26 32 ----- ----- Net pretax benefit 23 15 ----- ----- Combined total: -------------- Ceded written premiums 12 97 Ceded earned premiums 6 82 Ceded losses and loss adjustment expenses 26 143 ----- ----- Net pretax benefit $ 20 $ 61 ===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- The pretax benefit (detriment) of the reinsurance treaties was allocated to our business segments as follows: Three Months Ended March 31 -------------- (in millions) 2001 2000 ----------- ---- ---- Commercial Lines Group $ (1) $ - Other Specialty (1) - International (1) 13 ---- ---- Total Primary Insurance (3) 13 Reinsurance 23 48 ---- ---- Total Property-Liability Insurance $ 20 $ 61 ==== ==== Our reported consolidated loss ratio, which measures insurance losses and loss adjustment expenses as a percentage of earned premiums, was 72.7 for the first quarter of 2001, compared with a reported loss ratio of 75.8 in the same 2000 period. Excluding the reinsurance treaties in both years, however, and the impact of eliminating the one-quarter reporting lag in last year's first quarter, our first-quarter 2001 consolidated loss ratio was 74.0, significantly better than the comparable 2000 loss ratio of 82.3. The improvement was centered in our Commercial Lines Group, Other Specialty and Reinsurance segments, but was offset somewhat by adverse prior year loss development in our Global Health Care and International segments. During the first quarter of 2001, the pricing environment continued to be favorable throughout virtually all of the commercial and reinsurance markets in which we sell our products and services. We expect to achieve additional price increases during the remainder of the year. In addition, we continued to achieve improvement in current underwriting year results in the majority of our primary insurance operations, reflecting our success to date in improving the quality of our business through disciplined risk selection. Our reported consolidated expense ratio, measuring underwriting expenses as a percentage of written premiums, was 31.1 for the first quarter of 2001, compared with the 2000 first-quarter ratio of 31.8. Excluding the impact of the reinsurance treaties in both years and the elimination of St. Paul Re - UK's reporting lag in 2000, the first-quarter 2001 ratio of 30.9 was slightly higher than the adjusted 2000 ratio of 30.0, primarily due to an increase in expenses in our Global Surety and Reinsurance segments. Our expense ratio in recent quarters has benefited from efficiencies realized as a result of continuing expense reduction initiatives. The table on the following page summarizes key financial results (from continuing operations) by property-liability underwriting business segment (Underwriting results are presented on a GAAP basis; combined ratios are presented on a statutory accounting basis). In the first quarter of 2001, certain business that had previously been included in our "Other Specialty" segment was reclassified to our "International" segment to more accurately reflect the manner in which this business is managed. Data for 2000 in the table have been reclassified to be consistent with the 2001 presentation.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Three Months % of 2001 Ended March 31 Written -------------- (Dollars in millions) Premiums 2001 2000 ------------------- -------- ---- ---- Commercial Lines Group: Written Premiums 27% $491 $392 Underwriting Result $72 $(22) Combined Ratio 79.7 106.4 Global Surety: Written Premiums 6% $105 $123 Underwriting Result $17 $19 Combined Ratio 84.3 80.1 Global Health Care: Written Premiums 9% $177 $113 Underwriting Result $(130) $(19) Combined Ratio 170.8 115.4 Other Specialty: Written Premiums 25% $462 $319 Underwriting Result $10 $(21) Combined Ratio 98.0 106.0 International: Written Premiums 8% $153 $63 Underwriting Result $(38) $(12) Combined Ratio 126.0 123.9 --- ------ ------ Total Primary Insurance: Written Premiums 75% $1,388 $1,010 Underwriting Result $(69) $(55) Combined Ratio 104.7 106.0 Reinsurance: Written Premiums 25% $458 $390 Underwriting Result $(18) $(44) Combined Ratio 100.0 114.2 --- ------ ------ Total Property-Liability Insurance: Written Premiums 100% $1,846 $1,400 GAAP Underwriting Result === $(87) $(99) Statutory Combined Ratio: Loss and Loss Expense Ratio 72.7 75.8 Underwriting Expense Ratio 31.1 31.8 ------ ------ Combined Ratio 103.8 107.6 ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Underwriting Results by Segment - ------------------------------- Commercial Lines Group The Commercial Lines Group ("CLG") segment includes our standard commercial, nonstandard commercial and catastrophe risk business centers, as well as the results of our limited involvement in insurance pools. The following table summarizes key financial data for this segment excluding the impact of the corporate reinsurance program. Three Months Ended March 31 (Dollars in millions) -------------- ------------------- 2001 2000 ---- ---- Net written premiums $494 $392 Percentage change from 2000 26% GAAP underwriting result $73 ($21) Statutory combined ratio: Loss and loss adjustment expense ration 49.2 72.2 Underwriting expense ratio 30.4 34.2 ----- ----- Combined ratio 79.6 106.4 ===== ===== The strong growth in written premium volume over 2000 was driven by price increases, strong renewal retention rates and new business. Price increases in our standard and nonstandard commercial operations averaged 11.8% in the first quarter of 2001, after averaging 10.3% for the year ended Dec. 31, 2000. Our renewal retention rates continued to grow in the first three months of the year despite the magnitude of price increases. The reported loss ratio and underwriting profit in the CLG segment for the first quarter of 2001 benefited from the impact of an approximately $100 million reduction in previously established reserves during the quarter. Those reserves pertained to certain business written in years prior to 1989, and were reduced based on actuarial analysis which indicated that ultimate losses on that business would fall short of the established reserves. Excluding the reserve reduction, the CLG loss ratio for the first quarter of 2001 was 72.9, slightly worse than the comparable 2000 ratio. The nearly four-point improvement in the expense ratio reflects the impact of our aggressive efficiency initiatives in recent years, as well as the significant growth in written premium volume. Global Surety Our Global Surety segment underwrites surety bonds, which guarantee that third parties will be indemnified against the nonperformance of contractual obligations. The table on the following page summarizes key financial data for this segment for the first three months of 2001 and 2000. The Surety segment was not impacted by the reinsurance treaties in either year.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Three Months Ended March 31 -------------- (Dollars in millions) 2001 2000 ------------------- ---- ---- Net written premiums $106 $123 Percentage change from 200 (14%) GAAP underwriting result $17 $19 Statutory combined ratio: Loss and loss adjustment expense ratio 31.3 35.9 Underwriting expense ratio 52.7 44.2 ----- ----- Combined ratio 84.0 80.1 ===== ===== The decline in written premium volume compared with 2000 reflected the impact of tightened underwriting standards implemented over the last several quarters in anticipation of an economic slowdown in both the United States and Mexico. The improvement in the loss ratio over 2000 was due to favorable development on losses incurred in prior years, as well as improved loss experience in Mexico. The increase in the expense ratio was driven by higher reinsurance costs in the first quarter of 2001. Global Health Care Our Global Health Care segment provides property-liability insurance throughout the entire health care delivery system. The following table summarizes key financial data for the Global Health Care segment for the first quarter of 2001 and 2000 excluding the impact of the corporate reinsurance program. Three Months Ended March 31 -------------- (Dollars in millions) 2001 2000 ------------------- ---- ---- Net written premiums $178 $113 Percentage change from 2000 57% GAAP underwriting result ($130) ($19) Statutory combined ratio: Loss and loss adjustment expense ratio 146.5 90.6 Underwriting expense ratio 23.9 24.8 ----- ----- Combined ratio 170.4 115.4 ===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- The 57% increase in written premium volume was primarily due to our acquisition of MMI in the second quarter of 2000, which contributed $48 million of incremental premium volume in the first quarter of 2001. In addition, price increases averaging 24.4% across this segment in the first quarter of 2001 accounted for a significant portion of the growth over 2000. In our major accounts line of business, which serves large health care entities in major metropolitan areas, price increases averaged 40% in the first quarter of 2000. The deterioration in underwriting results in 2001 was primarily the result of adverse loss development throughout our domestic operations on reserves established in prior years. Amounts awarded in jury verdicts in professional liability lawsuits have increased sharply, resulting in an increase in our estimate of insurance losses incurred. The adverse development occurred throughout our operations, including, but not limited to, the business acquired in the MMI transaction in April 2000. We are currently conducting a comprehensive review of our entire Health Care segment, which is expected to be completed in the second quarter of this year. The results of that review will be considered in our assessment of the recoverability of the goodwill recorded in connection with the purchase of MMI. Until this review is completed, we cannot reasonably estimate to what extent, if any, impairment of that goodwill has occurred. During the remainder of 2001, we will pursue further price increases in our Health Care segment. We will cease to underwrite business in those market sectors and geographic locations in which we are unable to achieve appropriate pricing levels for our products. Other Specialty The Other Specialty segment includes the following business centers: Construction, Technology, Financial and Professional Services, Global Marine, Public Sector Services, Excess & Surplus Lines, and Oil and Gas. The following table summarizes results for this segment excluding the impact of the corporate reinsurance program. Three Months Ended March 31 -------------- (Dollars in millions) 2001 2000 ------------------- ---- ---- Net written premiums $464 $319 Percentage change from 2000 46% GAAP underwriting result $11 ($21) Statutory combined ratio: Loss and loss adjustment expense ratio 70.1 76.0 Underwriting expense ratio 27.6 30.0 ----- ----- Combined ratio 97.7 106.0 ===== ===== All business centers in this segment achieved growth in premium volume over the first quarter of 2000, generally due to significant price increases, new business and strong renewal retention rates. In our Construction business center, where premiums of $159 million were 51% higher than the same period of 2000, price increases averaged 15.1% in the first quarter. Financial and Professional Services premium volume of $95 million in the first quarter grew 32% over 2000's first quarter, reflecting price increases averaging 9.1% and new business in selected international markets. In our Technology operation, premium volume of $94 million grew by 51% over the first quarter of 2000. Price increases in this market sector averaged 11.9% in the first quarter.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- The improvement in underwriting results in the Other Specialty segment was centered in the Technology business center, which recorded a $15 million underwriting profit, compared with a $1 million underwriting loss in last year's first quarter. Favorable development on prior year losses accounted for the majority of the improvement over 2000. First-quarter Global Marine underwriting results were $8 million better than the comparable 2000 period, reflecting the impact of our efforts to improve the quality of this book of business. In the Excess & Surplus Lines business center, underwriting results deteriorated compared with the first quarter of 2000 due to adverse prior year loss development. International Our International segment consists of our operations at Lloyd's, specialty business written outside of the United States that is not managed on a global basis and MMI's London-based insurance operation, Unionamerica. The following table summarizes this segment's results for the first quarters of 2001 and 2000 excluding the impact of the corporate reinsurance program. Three Months Ended March 31 -------------- (Dollars in millions) 2001 2000 ------------------- ---- ---- Net written premiums $154 $86 Percentage change from 2000 78% GAAP underwriting result ($37) ($26) Statutory combined ratio: Loss and loss adjustment expense ratio 89.6 95.8 Underwriting expense ratio 35.8 34.2 ----- ----- Combined ratio 125.4 130.0 ===== ===== The significant increase in written premiums over 2000 was primarily due to the addition of Unionamerica, which accounted for $49 million of premium volume in the first quarter. Although we ceased underwriting new business through Unionamerica Insurance Company in 2000, we are contractually obligated to underwrite business in several of Unionamerica's syndicates at Lloyd's. At The St. Paul's other operations at Lloyd's, written premiums of $49 million grew 36% over the first quarter of 2000, primarily due to significant price increases. Our Lloyd's operations accounted for $18 million of the underwriting loss in the first quarter of 2001, driven by deteriorating claim experience and provisions to strengthen insurance reserves in several syndicates. Our European operations accounted for the majority of the remaining underwriting loss in the first quarter. We continue to implement corrective underwriting, pricing and efficiency initiatives throughout our International segment, and we expect to see improved results by the end of 2001. We continue to reduce our business volume in those market sectors where pricing remains inadequate.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Reinsurance Our Reinsurance segment ("St. Paul Re") underwrites treaty and facultative reinsurance for property, liability, ocean marine, surety and certain specialty classes of coverage and also underwrites "nontraditional" reinsurance, which combines traditional underwriting risk with financial risk protection. The following table summarizes key financial data for the Reinsurance segment for the first quarters of 2001 and 2000, excluding the impact of the reinsurance treaties. Three Months Ended March 31 -------------- (Dollars in millions) 2001 2000 ------------------- ---- ---- Net written premiums $463 $464 Percentage change from 2000 - GAAP underwriting result ($40) ($92) Statutory combined ratio: Loss and loss adjustment expense ratio 75.9 102.3 Underwriting expense ratio 30.8 22.2 ----- ----- Combined ratio 106.7 124.5 ===== ===== Premium volume in last year's first quarter included $146 million of incremental premiums resulting from the elimination of the one- quarter reporting lag for our reinsurance operations based in the United Kingdom. Excluding that adjustment, premium volume in 2001 grew 46% over the first quarter of 2000. The significant increase was driven by price increases throughout worldwide reinsurance markets on business renewed in January. In addition, St. Paul Re's nontraditional insurance operations continued to achieve growth in the first quarter. St. Paul Re's underwriting result in the first three months of 2001 benefited from the impact of price increases and corrective underwriting initiatives implemented in recent quarters, as well as the lack of significant catastrophe losses. The primary sources of St. Paul Re's underwriting loss in the first quarter were the sinking of the Petrobras oil platform, and a provision to strengthen insurance reserves for North American casualty business. Underwriting results in last year's first quarter were severely impacted by catastrophe losses, primarily resulting from additional loss development from severe windstorms that struck Europe at the end of 1999. The elimination of the quarter- reporting lag had a minimal impact on underwriting results in the first quarter of 2000. Investment Operations First-quarter 2001 pretax net investment income in our property- liability insurance operations totaled $330 million, $12 million ahead of the same period of 2000. The increase was driven by strong returns generated by our real estate investment portfolio, and incremental investment income resulting from the acquisition of MMI in April 2000. For the remainder of 2001, we anticipate little or no growth in investment income compared with 2000 levels, due to declining yields on new investments, and negative underwriting cash flows over the last several quarters which have resulted in the net sale of fixed maturity investments to fund a portion of our operational cash
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- requirements. Our underwriting cash flows have been negatively affected by an increase in insurance loss and loss adjustment expense payments, centered in our Health Care and International business segments, which have more than offset the increase in premium collections resulting from price increases and new business. In addition, cumulative premium payments totaling $630 million since the fourth quarter of 1999 related to our corporate reinsurance program have reduced funds available for investment. We expect our cash flows to gradually improve throughout the remainder of the year due to continued price increases and the initiatives we continue to implement throughout our property- liability operations to improve loss experience. Pretax realized investment gains in our property-liability insurance operations of $52 million fell significantly short of the comparable 2000 total of $331 million, which represented the highest quarterly total in our history. A significant decline in equity values during the first quarter of 2001 resulted in a reduction in the amount of investment gains realized from our equity and venture capital investment portfolios compared with the same period of 2000. Pretax realized gains in 2001 were reduced by writedowns in the carrying value of various venture capital investments totaling $33 million. In March 2001, we realized a pretax gain of $77 million on the sale of our investment in RenaissanceRe Holdings Ltd., a Bermuda-based reinsurer. The record first-quarter realized gain total in 2000 was driven by gains of $282 million generated by our venture capital investment portfolio, the largest of which, $117 million, resulted from the sale of our investment in Flycast Communications Corp., a leading provider of Internet direct response solutions. We also sold two other direct holdings in last year's first quarter which generated gains of $37 million and $31 million, and our investments in various venture capital partnerships accounted for an additional $98 million of pretax gains. The market value of our $15.3 billion fixed maturities portfolio exceeded its cost by $612 million at March 31, 2001. Approximately 95% of that portfolio is rated at investment grade (BBB or above). The weighted average pretax yield on those investments was 6.9% at March 31, 2001, up slightly from 6.8% a year ago. Environmental and Asbestos Claims --------------------------------- We continue to receive claims alleging injury or damage from environmental pollution or seeking payment for the cost to clean up polluted sites. We also receive asbestos injury claims arising out of product liability coverages under general liability policies. The vast majority of these claims arise from policies written many years ago. Our alleged liability for both environmental and asbestos claims is complicated by significant legal issues, primarily pertaining to the scope of coverage. In our opinion, court decisions in certain jurisdictions have tended to broaden insurance coverage beyond the intent of original insurance policies. Our ultimate liability for environmental claims is difficult to estimate because of these legal issues. Insured parties have submitted claims for losses not covered in their respective insurance policies, and the ultimate resolution of these claims may be subject to lengthy litigation, making it difficult to estimate our potential liability. In addition, variables, such as the length of time necessary to clean up a polluted site and controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of an environmental claim. Estimating the ultimate liability for asbestos claims is equally difficult. The primary factors influencing our estimate of the total cost of these claims are case law and a history of prior claim development, both of which continue to evolve. The following table represents a reconciliation of total gross and net environmental reserve development for the three months ended March 31, 2001, and the years ended Dec. 31, 2000 and 1999. Amounts in the "net" column are reduced by reinsurance recoverables.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Environmental and Asbestos Claims (continued) -------------------------------------------- 2001 Environmental (three months) 2000 1999 ------------- ------------ ------------ ------------ (In millions) Gross Net Gross Net Gross Net ----- ---- ----- ---- ----- ---- Beginning reserves $665 $563 $698 $599 $783 $645 Incurred losses 26 21 25 14 (33) 1 Paid losses (21) (18) (58) (50) (52) (47) ----- ---- ----- ---- ----- ---- Ending reserves $670 $566 $665 $563 $698 $599 ===== ==== ===== ==== ===== ==== The following table represents a reconciliation of total gross and net reserve development for asbestos claims for the three months ended March 31, 2001, and the years ended Dec. 31, 2000 and 1999. 2001 Asbestos (three months) 2000 1999 -------- ------------ ------------ ------------ (In millions) Gross Net Gross Net Gross Net ----- ---- ----- ---- ----- ---- Beginning reserves $397 $299 $398 $298 $402 $277 Incurred losses 2 12 41 33 28 51 Paid losses (9) (10) (42) (32) (32) (30) ----- ---- ----- ---- ----- ---- Ending reserves $390 $301 $397 $299 $398 $298 ===== ==== ===== ==== ===== ==== Our reserves for environmental and asbestos losses at March 31, 2001 represent our best estimate of our ultimate liability for such losses, based on all information currently available. Because of the inherent difficulty in estimating such losses, however, we cannot give assurances that our ultimate liability for environmental and asbestos losses will, in fact, match current reserves. We continue to evaluate new information and developing loss patterns, but we believe any future additional loss provisions for environmental and asbestos claims will not materially impact our results of operations, liquidity or financial position. Total gross environmental and asbestos reserves at March 31, 2001, of $1.06 billion represented approximately 6% of gross consolidated reserves of $18.23 billion.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Asset Management ---------------- Our asset management segment consists of our 79% majority ownership interest in The John Nuveen Company (Nuveen). Nuveen provides customized individual accounts, mutual funds, exchange- traded funds and defined portfolios through financial advisors serving affluent and high net worth clients. Highlights of Nuveen's performance for the first quarters of 2001 and 2000 were as follows: Three Months Ended March 31 -------------- (In millions) 2001 2000 ----------- ----- ----- Revenues $ 87 $100 Expenses 42 57 ----- ----- Pretax earnings 45 43 Minority interest (10) (10) ----- ----- The St. Paul's share of pretax earnings $ 35 $ 33 ===== ===== Assets under management $61,289 $59,965 ====== ====== Nuveen's total revenues in the first quarter of 2001 were down 13% compared with the same period of 2000, primarily due to a decline in defined portfolio distribution revenue. Sales of equity and fixed-income retail managed accounts, however, which are customized individual portfolios offered to the high net worth market, grew 36% to $1.9 billion in the first quarter of 2001. Nuveen's diverse array of high-quality investment products continues to meet the investment needs of affluent investors in a highly volatile market environment. Nuveen's net flows (equal to the sum of sales, reinvestments and exchanges, less redemptions) during the first quarter of 2001 totaled $2.6 billion, compared with net flows of $140 million in the first quarter of 2000. Managed assets at the end of the first quarter consisted of $29.6 billion of exchange-traded funds, $19.8 billion of managed accounts, $11.4 billion of mutual funds and $441 million of money market funds. Total assets under management at the end of March were down slightly from the year-end 2000 total of $62.0 billion, reflecting a decline in the market value of equity securities under management. Capital Resources ----------------- Common shareholders' equity of $7.07 billion at March 31, 2001 declined $111 million from the year-end 2000 total of $7.18 billion, primarily due to our share repurchases and a decline in the unrealized appreciation of our equity and venture capital investment portfolios. In the first three months of 2001, we repurchased and retired 4.2 million shares of our common stock for a total cost of $187 million, or an average of $44.23 per share. The first-quarter repurchases were financed through a combination of internally-generated funds and commercial paper borrowings. From November 1998 through March 2001, we have repurchased and retired 37.1 million of our common shares for a total cost of $1.2 billion, or an average of $32.75 per share. Total debt obligations at March 31, 2001 of $1.80 billion increased by $154 million over the year-end 2000 total of $1.65 billion, largely due to the issuance of $137 million of additional commercial paper during the quarter to finance a portion of our common share repurchases. We also incurred $27 million of mortgage debt associated with our investment in a real estate property in London. Approximately 34% of our consolidated debt outstanding at March 31, 2001 consisted of medium-term notes bearing a weighted-average interest rate of 6.9%. Our ratio of total debt to total capitalization of 19% at the end of the first quarter increased slightly over the year-end 2000 ratio of 18%.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Capital Resources (continued) ---------------------------- We have no current plans for major capital expenditures during the remainder of 2001, other than possible additional repurchases of our common stock. If any other expenditures were to occur, they would likely involve acquisitions consistent with our specialty commercial focus. From April 1, 2001 through May 11, 2001, we repurchased 438,600 common shares at a total cost of $19 million. As of May 11, 2001 we had the capacity to make up to $469 million in additional share repurchases under a repurchase program authorized by our board of directors in February 2001. We repurchase our shares in the open market and through private transactions when we deem such repurchases to be a prudent use of capital. The company's ratio of earnings to fixed charges was 7.73 for the first three months of 2001, compared with 14.20 for the same period of 2000. The company's ratio of earnings to combined fixed charges and preferred stock dividend requirements was 7.15 for the first three months of 2001, compared with 12.95 for the same period of 2000. Fixed charges consist of interest expense, dividends on preferred capital securities and that portion of rental expense deemed to be representative of an interest factor. Liquidity --------- Liquidity is a measure of our ability to generate sufficient cash flows to meet the short- and long-term cash requirements of our business operations. Net cash flows used by continuing operations totaled $194 million in the first quarter of 2001, compared with cash used by continuing operations of $217 million in the same period of 2000. Negative underwriting cash flows, driven by significant loss payments in several of our business segments and premium payments related to our corporate reinsurance program, were the primary cause of our negative operational cash flows in both 2001 and 2000. We expect our operational cash flows to gradually improve during the remainder of 2001 as the full impacts of continuing price increases and improvements in the quality of our book of business are realized. On a long-term basis, we believe our operational cash flows will benefit from the corrective pricing and underwriting actions under way in our property-liability operations. Our financial strength and conservative level of debt provide us with the flexibility and capacity to obtain funds externally through debt or equity financings on both a short-term and long-term basis should the need arise. Impact of Accounting Pronouncements to be Adopted in the Future - --------------------------------------------------------------- In September 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125." The Statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it retains most of the provisions of SFAS No. 125 without reconsideration. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, with collateral and disclosure requirements effective for fiscal years ending after Dec. 15, 2000. We intend to implement SFAS No. 140 in the periods during which its provisions become effective, and we expect the impact of adoption to be immaterial to our financial position and results of operations for future periods.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Forward-looking Statement Disclosure ------------------------------------ This report contains certain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. Forward-looking statements are statements other than historical information or statements of current condition. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks" or "estimates," or variations of such words, and similar expressions are also intended to identify forward-looking statements. Examples of these forward-looking statements include statements concerning: market and other conditions and their effect on future premiums, revenues, earnings, cash flow and investment income; price increases, improved loss experience and expense savings resulting from the restructuring actions announced in recent years. In light of the risks and uncertainties inherent in future projections, many of which are beyond our control, actual results could differ materially from those in forward-looking statements. These statements should not be regarded as a representation that anticipated events will occur or that expected objectives will be achieved. Risks and uncertainties include, but are not limited to, the following: competitive considerations, including the ability to implement price increases and possible actions by competitors; general economic conditions including changes in interest rates and the performance of financial markets; changes in domestic and foreign laws, regulations and taxes; changes in the demand for, pricing of, or supply of insurance or reinsurance; catastrophic events of unanticipated frequency or severity; loss of significant customers; judicial decisions and rulings; satisfaction of the conditions to closing of the sale of our life insurance business; and various other matters. We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements is incorporated herein by reference. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. The St. Paul's annual shareholders' meeting was held on May 1, 2001. (1) All thirteen persons nominated for directors by the board of directors were named in proxies for the meeting which were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the proxy statements. All thirteen nominees were elected by the following votes: In favor Withheld -------------- ----------- Carolyn H. Baldwin 194,683,607 1,761,721 H. Furlong Baldwin 194,532,971 1,912,357 John H. Dasburg 181,686,633 14,758,695 Janet M. Dolan 194,726,586 1,718,742 Kenneth M. Duberstein 194,669,389 1,775,939 Pierson M. Grieve 194,591,035 1,854,293 Thomas R. Hodgson 194,712,839 1,732,489 David G. John 194,762,351 1,682,977 William H. Kling 194,657,500 1,787,828 Douglas W. Leatherdale 189,761,482 6,683,846 Bruce K. MacLaury 194,708,171 1,737,157 Glen D. Nelson 194,706,304 1,739,024 Gordon M. Sprenger 194,723,273 1,722,055 (2) By a vote of 194,547,020 in favor, 1,198,787 against and 699,572 abstaining, the shareholders ratified the selection of KPMG LLP as the independent auditors for The St. Paul. (3) By a vote of 113,267,926 in favor, 63,476,512 against and 1,125,491 abstaining, the shareholders approved certain amendments to The St. Paul's Amended and Restated 1994 Stock Incentive Plan. Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. An Exhibit Index is set forth as the last page in this document. (b) Reports on Form 8-K. 1) The St. Paul filed a Form 8-K Current Report dated March 9, 2001, relating to the announcement of the resignation of Paul J. Liska as Executive Vice President and Chief Financial Officer of The St. Paul, effective April 1, 2001. 2) The St. Paul filed a Form 8-K Current Report dated April 26, 2001, relating to the announcement of an agreement to sell Fidelity and Guaranty Life Insurance Company to Old Mutual plc, a London-based international financial services 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: May 14, 2001 By /s/ Bruce A. Backberg --------------------- Bruce A. Backberg Senior Vice President (Authorized Signatory) Date: May 14, 2001 By /s/ John C. Treacy ------------------ John C. Treacy Vice President and Corporate Controller (Principal Accounting Officer)
EXHIBIT INDEX ------------- Exhibit - ------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession..................................... (a) Stock Purchase Agreement between St. Paul Fire and Marine Insurance Company and Old Mutual PLC related to sale of Fidelity and Guaranty Life Insurance Company**...........(1) (3) (i) Articles of incorporation*................................... (ii) By-laws*.................................................... (4) Instruments defining the rights of security holders, including indentures*......................................... (10) Material contracts............................................... (a) Senior Executive Severance Policy, as Amended**..............(1) (b) Amendment to the Amended and Restated 1994 Stock Incentive Plan**............................................(1) (11) Statement re computation of per share earnings**.................(1) (12) Statement re computation of ratios**.............................(1) (15) Letter re unaudited interim financial information*................ (18) Letter re change in accounting principles*........................ (19) Report furnished to security holders*............................. (22) Published report regarding matters submitted to vote of security holders*...................................... (23) Consents of experts and counsel*.................................. (24) Power of attorney*................................................ (27) Financial data schedule*.......................................... (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.