UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 001-10898 --------- THE ST. PAUL COMPANIES, INC. ---------------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 ------------------------------ ------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 385 Washington St., Saint Paul, MN 55102 ---------------------------------- --------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (651) 310-7911 ------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ The number of shares of the Registrant's Common Stock, without par value, outstanding at October 31, 2001, was 207,405,759.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION ------- Consolidated Statements of Operations (Unaudited), (Unaudited), Three Months and Nine Months Ended September 30, 2001 and 2000 3 Consolidated Balance Sheets, September 30, 2001 (Unaudited) and December 31, 2000 4 Consolidated Statements of Shareholders' Equity, Nine Months Ended September 30, 2001 (Unaudited) and Twelve Months Ended December 31, 2000 6 Consolidated Statements of Comprehensive Income (Unaudited), Nine Months Ended September 30, 2001 and 2000 7 Consolidated Statements of Cash Flows (Unaudited), Nine Months Ended September 30, 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 42 Signatures 43 EXHIBIT INDEX 44
PART I FINANCIAL INFORMATION THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended (In millions, September 30 September 30 (except per share data) ------------------ ----------------- data) 2001 2000 2001 2000 Revenues: ----- ----- ----- ----- Premiums earned $1,860 1,325 5,231 4,102 Net investment income 289 318 924 954 Asset management 95 88 265 265 Realized investment gains (losses) (81) 106 2 551 Other 67 24 133 99 ----- ----- ----- ----- Total revenues 2,230 1,861 6,555 5,971 ----- ----- ----- ----- Expenses: Insurance losses and loss adjustment expenses 2,455 813 4,984 2,867 Policy acquisition expenses 397 324 1,133 981 Operating and administrative 255 408 884 986 ----- ----- ----- ----- Total expenses 3,107 1,545 7,001 4,834 ----- ----- ----- ----- Income (loss) from continuing operations before income taxes (877) 316 (446) 1,137 Income tax expense (benefit) (282) 97 (156) 352 ----- ----- ----- ----- Income (loss) from continuing operations (595) 219 (290) 785 Discontinued operations: Operating gain (loss), net of taxes - 10 (1) 29 Gain (loss) on disposal, net of taxes (64) 2 (61) (14) ----- ----- ----- ----- Income (loss) from discontinued operations, net of taxes (64) 12 (62) 15 ----- ----- ----- ----- Net income (loss) $(659) 231 (352) 800 ===== ===== ===== ===== Basic earnings (loss) per common share: Income (loss) from continuing operations $(2.86) 0.98 (1.42) 3.56 Discontinued operations, net of taxes (0.30) 0.06 (0.29) 0.07 ----- ----- ----- ----- Net income (loss) $(3.16) 1.04 (1.71) 3.63 ===== ===== ===== ===== Diluted earnings (loss) per common share: Income (loss) from continuing operations $(2.86) 0.93 (1.42) 3.35 Discontinued operations, net of taxes (0.30) 0.05 (0.29) 0.07 ----- ----- ----- ----- Net income (loss) $(3.16) 0.98 (1.71) 3.42 ===== ===== ===== ===== Dividends declared on common stock $ 0.28 0.27 0.84 0.81 ===== ===== ===== ===== See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In millions) Restated September 30, December 31, ASSETS 2001 2000 ------ ------------- ----------- (Unaudited) Investments: Fixed maturities, at estimated fair value $14,962 $14,730 Equities, at estimated fair value 1,393 1,466 Real estate and mortgage loans 997 1,025 Venture capital, at estimated fair value 935 1,064 Securities lending collateral 1,053 1,207 Other investments 101 229 Short-term investments, at cost 2,438 2,331 ------- ------- Total investments 21,879 22,052 Cash 168 52 Reinsurance recoverables: Unpaid losses 6,505 4,651 Paid losses 338 324 Ceded unearned premiums 681 814 Receivables: Underwriting premiums 3,236 2,937 Interest and dividends 273 277 Other 202 181 Deferred policy acquisition expenses 671 576 Deferred income taxes 1,136 930 Office properties and equipment, at cost less accumulated depreciation of $473 (2000; $452) 488 492 Goodwill 585 510 Other assets 1,488 1,706 ------- ------- Total assets $37,650 $35,502 ======= ======= See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In millions) Restated September 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 ------------------------------------ ------------ ----------- (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $20,874 $18,196 Unearned premiums 4,010 3,648 ------- ------- Total insurance reserves 24,884 21,844 Debt 2,145 1,647 Payables: Reinsurance premiums 944 1,060 Income taxes 58 170 Accrued expenses and other 918 1,031 Securities lending 1,099 1,231 Other liabilities 1,273 955 ------- ------- Total liabilities 31,321 27,938 ------- ------- Company-obligated mandatorily redeemable preferred capital securities of trusts holding solely subordinated debentures of the Company 318 337 ------- ------- Shareholders' equity: Preferred: SOP convertible preferred stock; 1.45 shares authorized; 0.8 shares outstanding (0.8 shares in 2000) 113 117 Guaranteed obligation - SOP (53) (68) ------- ------- Total preferred shareholders' equity 60 49 ------- ------- Common: Common stock, 480 shares authorized; 207 shares outstanding (218 shares in 2000) 2,170 2,238 Retained earnings 3,285 4,243 Accumulated other comprehensive income: Unrealized appreciation 570 765 Unrealized loss on foreign currency translation (69) (68) Unrealized loss on derivatives (5) - ------- ------- Total accumulated other comprehensive income 496 697 ------- ------- Total common shareholders' equity 5,951 7,178 ------- ------- Total shareholders' equity 6,011 7,227 ------- ------- Total liabilities, redeemable preferred securities and shareholders' equity $37,650 $35,502 ======= ======= See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In millions) Nine Twelve Months Ended Months Ended September 30 December 31 ------------ ------------ 2001 2000 ------- ------- (Unaudited) Preferred shareholders' equity: Series B SOP convertible preferred stock: Beginning of period $117 $129 Redemptions during period (4) (12) ------ ------ End of period 113 117 ------ ------ Guaranteed obligation - SOP: Beginning of period (68) (105) Principal payments 15 37 ------ ------ End of period (53) (68) ------ ------ Total preferred shareholders' equity 60 49 ------ ------ Common shareholders' equity: Common stock: Beginning of period 2,238 2,079 Stock issued under stock incentive plans 47 95 Stock issued for preferred shares redeemed 11 23 Conversion of company-obligated preferred securities - 207 Reacquired common shares (134) (170) Other 8 4 ------ ------ End of period 2,170 2,238 ------ ------ Retained earnings: Beginning of period 4,243 3,827 Net income (loss) (352) 993 Dividends declared on common stock (177) (232) Dividends declared on preferred stock, net of taxes (6) (8) Reacquired common shares (454) (366) Tax benefit on employee stock options, and other changes 37 40 Premium on preferred shares redeemed (6) (11) ------ ------ End of period 3,285 4,243 ------ ------ Unrealized appreciation, net of taxes: Beginning of period 765 568 Change during the period (195) 197 ------ ------ End of period 570 765 ------ ------ Unrealized loss on foreign currency translation, net of taxes: Beginning of period (68) (26) Change during the period (1) (42) ------ ------ End of period (69) (68) ------ ------ Unrealized loss on derivatives, net of taxes: Beginning of period - - Change during the period (5) - ------ ------ End of period (5) - ------ ------ Total common shareholders' equity 5,951 7,178 ------ ------ Total shareholders' equity $6,011 $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 Nine Months Ended September 30 September 30 ------------------ ----------------- 2001 2000 2001 2000 ------ ------ ------ ------ Net income (loss) $(659) $231 $(352) $800 ------ ------ ------ ------ Other comprehensive income (loss), net of taxes: Change in unrealized appreciation 48 70 (195) 167 Change in unrealized loss on foreign currency translation (7) (21) (1) (42) Change in unrealized loss on derivatives (4) - (5) - ------ ------ ------ ------ Other comprehensive income (loss) 37 49 (201) 125 ------ ------ ------ ------ Comprehensive income (loss) $(622) $280 $(553) $925 ====== ====== ====== ====== See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (In millions) Nine Months Ended September 30 ------------------------- 2001 2000 OPERATING ACTIVITIES ------- ------- Net income (loss) $(352) $800 Adjustments: Loss (gain) from discontinued operations 62 (15) Change in insurance reserves 3,047 289 Change in reinsurance balances (1,792) (876) Realized investment gains (2) (551) Change in deferred acquisition costs (95) (68) Change in accounts payable and accrued expenses (105) (91) Change in insurance premiums receivable (300) (418) Change in income taxes payable/refundable (82) 68 Provision for federal deferred tax expense (benefit) (3) 161 Depreciation and amortization 75 74 Change in other assets and liabilities (121) 27 ------ ------ Net Cash Provided (Used) by Continuing Operations 332 (600) Net Cash Provided by Discontinued Operations 217 138 ------ ------ Net Cash Provided (Used) by Operating Activities 549 (462) ------ ------ INVESTING ACTIVITIES Purchase of investments (4,334) (3,970) Proceeds from sales and maturities of investments 4,599 4,854 Net sales (purchases) of short-term investments (232) 263 Change in open security transactions 43 6 Purchases of office properties and equipment (52) (72) Sales of office properties and equipment 4 8 Acquisitions, net of cash acquired (203) (202) Proceeds from sale of subsidiaries 358 201 Other 9 (40) ------ ------ Net Cash Provided by Continuing Operations 192 1,048 Net Cash Used by Discontinued Operations (591) (440) ------ ------ Net Cash Provided (Used) by Investing Activities (399) 608 ------ ------ FINANCING ACTIVITIES Dividends paid on common and preferred stock (185) (180) Proceeds from issuance of debt 637 498 Repayment of debt and capital securities (196) (372) Repurchase of common shares (588) (512) Stock options exercised and other (44) 50 ------ ------ Net Cash Used by Continuing Operations (376) (516) Net Cash Provided by Discontinued Operations 343 315 ------ ------ Net Cash Used by Financing Activities (33) (201) ------ ------ Effect of exchange rate changes on cash (1) - ------ ------ Increase (decrease) in cash 116 (55) Cash at beginning of period 52 105 ------ ------ Cash at end of period $ 168 $50 ====== ====== See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited September 30, 2001 Note 1 - Basis of Presentation ------------------------------ The financial statements include The St. Paul Companies, Inc. and its subsidiaries ("The St. Paul" or "the company"), and have been prepared in conformity with generally accepted accounting principles ("GAAP"). 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 September 28, 2001, our subsidiary, St. Paul Fire and Marine Insurance Company, closed on the sale of 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 sheet as of Dec. 31, 2000, F&G Life's net assets were included in "Other Assets," classified as net assets of discontinued operations. See Note 13 on page 22 of this report for further information on the sale of F&G Life. Reference should be made to the "Notes to Consolidated Financial Statements" in The St. Paul's annual report to shareholders for the year ended December 31, 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 Note 12 on page 21 and Note 7 on page 15 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 Share --------------------------- The following table provides the calculation of our earnings (loss) per common share for the three months and nine months ended September 30, 2001 and 2000. Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 2001 2000 2001 2000 ------ ------ ------ ------ (In millions, except per share data) EARNINGS Basic: Net income (loss), as reported $(659) $231 $(352) $800 Dividends on preferred stock, net of taxes (2) (2) (6) (6) Premium on preferred shares redeemed (1) (3) (6) (9) ------ ------ ------ ------ Net income (loss) available to common shareholders $(662) $226 $(364) $785 ====== ====== ====== ====== Diluted: Net income (loss) available to common shareholders $(662) $226 $(364) $785 Effect of dilutive securities: Convertible preferred stock - 2 - 5 Zero coupon convertible notes - 1 - 5 Convertible monthly income preferred securities - 1 - 2 ------ ------ ------ ------ Net income (loss) available to common shareholders, as adjusted $(662) $230 $(364) $797 ====== ====== ====== ====== COMMON SHARES Basic: Weighted average common shares outstanding 209 217 213 216 ====== ====== ====== ====== Diluted: Weighted average common shares outstanding 209 217 213 216 Effect of dilutive securities: Stock options - 4 - 2 Convertible preferred stock - 6 - 7 Zero coupon convertible notes - 2 - 2 Convertible monthly income preferred securities - 3 - 6 ------ ------ ------ ------ Total 209 232 213 233 ====== ====== ====== ====== EARNINGS (LOSS) PER SHARE Basic $(3.16) $1.04 $(1.71) $3.63 ====== ====== ====== ====== Diluted $(3.16) $0.98 $(1.71) $3.42 ====== ====== ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 2 - Earnings Per Share (continued) -------------------------------------- Diluted EPS is the same as Basic EPS for both periods of 2001 because Diluted EPS calculated in accordance with Statement of Financial Standards (SFAS) No. 128, "Earnings Per Share," for The St. Paul's loss from continuing operations, results in a lesser loss per share than the Basic EPS calculation does. The provisions of SFAS No. 128 prohibit this "anti-dilution" of earnings per share, and require that the larger Basic loss per share also be reported as the Diluted loss per share amount. Note 3 - September 11th Terrorist Attack ---------------------------------------- On September 11, 2001 a terrorist attack was made on the two World Trade Center towers in New York, NY, the Pentagon in Washington D.C. and on a passenger jet airplane that subsequently crashed in Pennsylvania. This attack resulted in unprecedented losses for the property-liability insurance industry. Our estimated gross pretax losses and loss adjustment expenses incurred as a result of the terrorist attack totaled $2.16 billion. The estimated net pretax operating loss of $866 million from that event includes an estimated benefit of $1.2 billion from cessions made under various reinsurance agreements, a $40 million provision for uncollectible reinsurance, a net $44 million benefit from additional and reinstated insurance and reinsurance premiums, and a $90 million reduction in contingent commission expenses in our Reinsurance segment. The estimated net pretax operating loss of $866 million represented an increase over the estimated operating loss of $700 million we announced on September 19, 2001, primarily due to our intention, which we announced on October 23, 2001, to not cede losses from the attack to our corporate aggregate excess-of-loss reinsurance program. The after-tax operating loss of $606 million attributable to the attack included a write-off of $43 million in foreign tax credits. Our estimated losses are based on a variety of actuarial techniques, coverage interpretation and claims estimation methodologies, and include an estimate of losses incurred but not reported, as well as estimated costs related to the settlement of claims. Our estimate of losses is also based on our belief that property- liability insurance losses from the terrorist attack will total between $30 billion and $35 billion for the insurance industry. Our estimate of industry losses is subject to significant uncertainties and may change over time as additional information becomes available. A material increase in our estimate of industry losses would likely cause us to make a corresponding material increase to our provision for losses related to the attack. The estimated net pretax operating loss of $866 million was distributed among our property-liability business segments as follows: Net Pretax (In millions) Operating Loss ----------- -------------- International $164 Commercial Lines Group 147 Other Specialty 49 Global Health Care 6 Global Surety - ------ Total Primary Insurance 366 Reinsurance 500 ------ Total Property- Liability Insurance $866 ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 4 - Investments -------------------- Investment Activity. The following is a summary of our investment purchases, sales and maturities for continuing operations. Nine Months Ended September 30 ------------------------------ 2001 2000 -------- -------- (In millions) Purchases: Fixed maturities $2,754 $1,918 Equities 1,279 1,662 Real estate and mortgage loans 51 5 Venture capital 235 372 Other investments 15 13 ------- ------- Total purchases 4,334 3,970 ------- ------- Proceeds from sales and maturities: Fixed maturities 3,057 2,352 Equities 1,274 1,666 Real estate and mortgage loans 94 209 Venture capital 13 613 Other investments 161 14 ------- ------- Total sales and maturities 4,599 4,854 ------- ------- Net sales $(265) $(884) ======= =======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 4 - Investments (continued) ------------------------------- Change in Unrealized Appreciation. The increase (decrease) in unrealized appreciation of investments recorded in common shareholders' equity was as follows: Restated Nine Months Ended Twelve Months Ended September 30, 2001 December 31, 2000 ------------------- -------------------- (In millions) Fixed maturities $ 342 $425 Equities (357) (199) Venture capital (298) (61) Securities lending collateral 18 43 Other (52) 47 -------- -------- Total change in pretax unrealized appreciation on continuing operations (347) 255 Change in deferred taxes on continuing operations 152 (92) -------- -------- Total change in unrealized appreciation on continuing operations, net of taxes $ (195) $163 Change in pretax unrealized appreciation on discontinued operations - 52 Change in deferred taxes on discontinued operations - (18) -------- -------- Total change in pretax appreciation on discontinued operations, net of taxes - 34 -------- -------- Total change in unrealized appreciation, net of taxes $(195) $197 ======== ========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 5 - Income Taxes --------------------- The components of income tax expense (benefit) on income (loss) from continuing operations were as follows : Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 2001 2000 2001 2000 ------ ------ ------ ------ (In millions) Federal current tax expense (benefit) $ (71) $ 48 $ (96) $ 177 Federal deferred tax expense (benefit) (152) 44 (3) 161 ------ ------ ------ ------ Total federal income tax expense (benefit) (223) 92 (99) 338 Foreign income tax expense (benefit) (62) - (64) 1 State income tax expense 3 5 7 13 ------ ------ ------ ------ Total income tax expense (benefit) $ (282) $ 97 $(156) $352 ====== ====== ====== ====== Note 6 - Contingent Liabilities ------------------------------- On Sept. 28, 2001, we closed on the sale of F&G Life (see Note 13). Under the terms of the agreement, we received Old Mutual plc common shares valued at $300 million, which we are required to hold for one year following the closing. The proceeds from the sale of F&G Life are subject to possible adjustment based on the movement of the market price of Old Mutual's stock at the end of the one-year period. If the market value of the Old Mutual stock exceeds $330 million at the end of the one-year period, we are required to remit to Old Mutual either cash or Old Mutual shares in the amount representing the excess over $330 million. If the market value of the Old Mutual shares is less than $300 million at the end of the one-year period, we will receive either cash or Old Mutual shares in the amount representing the deficit below $300 million, up to $40 million. In the ordinary course of conducting business, we and some of our subsidiaries have been named as defendants in numerous lawsuits, some of which have been brought on behalf of various alleged classes of complainants. Some of these lawsuits attempt to establish liability under insurance contracts issued or allegedly issued by our underwriting operations and seek damages of unspecified amounts. 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 7 - Debt ------------- Debt consists of the following: September 30, December 31, 2001 2000 ------------ ----------- Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- (In millions) Medium-term notes $ 591 $ 616 $ 617 $ 619 Commercial paper 575 575 138 138 7-7/8% senior notes 249 273 249 261 8-1/8% senior notes 249 281 249 267 Short-term borrowings 173 173 - - Zero coupon convertible notes 102 121 98 95 7-1/8% senior notes 80 85 80 82 Variable rate borrowings 64 64 64 64 Real estate debt 30 31 2 2 8-3/8% senior notes - - 150 151 ----- ----- ----- ----- Total debt obligations 2,113 2,219 $1,647 $1,679 Fair value of interest ===== ===== rate swap agreements 32 32 ----- ----- Total debt reported on balance sheet $2,145 $2,251 ===== ===== In June 2001, our $150 million, 8-3/8% senior notes matured. The repayment of these notes was funded through a combination of internally-generated funds and the issuance of commercial paper. In the third quarter of 2001, our asset management subsidiary, The John Nuveen Company, issued $173 million of short-term debt to finance a portion of its acquisition of Symphony Asset Management LLC, an institutional money management firm. At September 30, 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 $230 million, and their aggregate fair value at September 30, 2001 was an asset of $32 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 8 - 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.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 8 - Segment Information (continued) --------------------------------------- As discussed in Note 13 on page 22 of this report, on September 28, 2001, we closed on the sale of F&G Life, which comprised our life insurance segment. As a result, F&G Life's results of operations were included in discontinued operations on our statements of operations included in this report for all periods. 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, risk control 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 three months and nine months ended September 30, 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 Nine Months Ended September 30 September 30 ------------------ ----------------- 2001 2000 2001 2000 ------ ------ ------ ------ (In millions) REVENUES Property-liability insurance: Commercial Lines Group $418 $394 $1,276 $1,173 Global Surety 107 96 320 316 Global Health Care 221 139 584 451 Other Specialty 456 304 1,317 965 International 183 103 610 350 ------ ------ ------ ------ Total primary insurance operations 1,385 1,036 4,107 3,255 Reinsurance 475 289 1,124 847 ------ ------ ------ ------ Total property-liability premiums earned 1,860 1,325 5,231 4,102 ------ ------ ------ ------ Investment operations: Net investment income 285 312 910 943 Realized investment gains (losses) (77) 104 (20) 542 ------ ------ ------ ------ Total investment operations 208 416 890 1,485 Other 63 19 123 80 ------ ------ ------ ------ Total property- liability insurance 2,131 1,760 6,244 5,667 ------ ------ ------ ------ Asset management 99 92 273 280 ------ ------ ------ ------ Total reportable segments 2,230 1,852 6,517 5,947 Parent company, other operations and consolidating eliminations - 9 38 24 ------ ------ ------ ------ Total revenues $2,230 $1,861 $6,555 $5,971 ====== ====== ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 8 - Segment Information (continued) --------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 2001 2000 2001 2000 ------ ------ ------ ------ (In millions) INCOME (LOSS) BEFORE INCOME TAXES Property-liability insurance: Commercial Lines Group $(165) $ 15 $(56) $ 48 Global Surety 3 (2) 35 29 Global Health Care (70) (70) (324) (135) Other Specialty (69) 14 (18) (3) International (260) (8) (349) (79) ------ ------ ------ ------ Total primary insurance operations (561) (51) (712) (140) Reinsurance (510) 4 (559) (74) ------ ------ ------ ------ Total GAAP underwriting result (1,071) (47) (1,271) (214) ------ ------ ------ ------ Investment operations: Net investment income 285 312 910 943 Realized investment gains (losses) (77) 104 (20) 542 ------ ------ ------ ------ Total investment operations 208 416 890 1,485 Other (7) (24) (52) (88) ------ ------ ------ ------ Total property- liability insurance (870) 345 (433) 1,183 ------ ------ ------ ------ Asset management: Pretax income before minority interest 47 43 137 130 Minority interest (11) (10) (32) (30) ------ ------ ------ ------ Total asset management 36 33 105 100 ------ ------ ------ ------ Total reportable segments (834) 378 (328) 1,283 Parent company, other operations and consolidating eliminations (43) (62) (118) (146) ------ ------ ------ ------ Total income (loss) before income taxes $(877) $316 $(446) $1,137 ====== ====== ====== ====== See Note 15 for a discussion of our comprehensive strategic and financial review of all of our business segments. It is likely that the strategic review will result in a change to our segment reporting structure.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, C1ontinued Note 9 - 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. As a result of the losses incurred in the September 11 terrorist attack, we have ceded $1.2 billion in losses under various reinsurance agreements, and have recognized a $40 million provision for uncollectible reinsurance. We have determined that 95 percent of our total reinsurance recoverables are from companies with ratings of A- or better or from state-sponsored reinsurance programs or collateralized reinsurance programs. In both 2001 and 2000, we entered into separate aggregate excess- of-loss reinsurance treaties effective Jan. 1 of each year (the "corporate program"). Coverage under the corporate program 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 nine months ended September 30, 2001, we did not cede any losses under the corporate program; but we ceded $9 million and $7 million of written and earned premiums, respectively, representing the initial premium paid to our reinsurer. Our estimate of our net losses related to the September 11 attack was determined based on our intention to not cede losses attributable to the attack to our corporate treaty. Under the separate Reinsurance segment treaty, we ceded $118 and $120 million of written and earned premiums, respectively, and $273 million of insurance losses and loss adjustment expenses, for a net benefit of $153 million, in the first nine months of 2001. It is our intention to commute all or a portion of the 2001 corporate treaty in the fourth quarter of 2001. Also included in the comprehensive strategic review, as discussed in Note 15, is an evaluation of the use of corporate aggregate excess-of-loss reinsurance treaties. In the nine months ended September 30, 2000 our 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 and earned premiums of $263 million, and insurance losses and loss adjustment expenses of $449 million, resulting in a net benefit of $186 million to our pretax income from continuing operations. Under the separate Reinsurance segment treaty, we ceded written and earned premiums of $64 million, and insurance losses and loss adjustment expenses of $128 million, resulting in a net pretax benefit of $64 million in the nine months ended September 30, 2000.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 9 - Reinsurance (continued) ------------------------------- The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses and loss adjustment expenses (including the effect of the September 11 attack) are as follows: Three Months Nine Months Ended Sept. 30 Ended Sept. 30 --------------- -------------- (In millions) 2001 2000 2001 2000 ----------- ----- ----- ----- ----- Written premiums: Direct $1,798 $1,578 $5,016 $3,987 Assumed 755 453 2,103 1,569 Ceded (526) (539) (1,393) (1,173) ----- ----- ----- ----- Net premiums written 2,027 1,492 5,726 4,383 ===== ===== ===== ===== Earned premiums: Direct 1,659 1,307 4,687 3,755 Assumed 738 523 1,976 1,441 Ceded (537) (505) (1,432) (1,094) ----- ----- ----- ----- Total premiums earned 1,860 1,325 5,231 4,102 ===== ===== ===== ===== Insurance losses and loss adjustment expenses: Direct 2,171 1,059 4,597 2,894 Assumed 1,941 212 2,938 1,248 Ceded (1,657) (458) (2,551) (1,275) ----- ----- ----- ----- Total net insurance losses and loss adjustment expenses $2,455 $813 $4,984 $2,867 ===== ===== ===== ===== Note 10 - 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 10 - Restructuring Charges (continued) ------------------------------------------ In connection with our merger with USF&G, in the second quarter of 1998 we recorded a pretax charge to net income 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. 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 of 2001, we reduced the reserve by $1 million related to sublease and buyout activity which 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 (In millions) Pre-tax at Dec. 31, at Sept. 30, ----------- Charge 2000 Payments Adjustment 2001 -------- ---------- -------- ---------- ----------- Lease commitments previously charged to earnings: $75 $43 $(9) $(1) $33 === === === === === Note 11 - 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 an excess of purchase price over net tangible assets acquired of approximately $85 million, which we expect to amortize over approximately 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 September 30, 2001, 119 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 11 - Acquisitions (continued) --------------------------------- The following presents a rollforward of activity related to these accruals: (In millions) ----------- Original Reserve Reserve Charges to Pre-tax at Dec. 31, at Sept 30, earnings: Charge 2000 Payments Adjustment 2001 ---------- -------- ---------- -------- ---------- ---------- Employee- related $ 4 $ 1 $(1) $ - $ - Occupancy- related 24 23 (8) (7) 8 ----- ----- ----- ----- ----- Total $28 $24 $(9) $(7) $8 ===== ===== ===== ===== ===== 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. This adjustment was offset by a $1 million adjustment in the 3rd quarter related to sublease recoveries. During the latter part of 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 performed a comprehensive review of our entire Global Health Care segment. Based on the results of this review, completed during the second quarter of 2001, and specific actions identified to restore this segment to future profitability, as well as our evaluation of the ongoing strategic value of the Unionamerica entity, MMI's United Kingdom - based subsidiary, we determined that the excess of purchase price over net tangible assets acquired we recorded as part of the MMI purchase had not been impaired. In October 2001, following the change in executive management discussed in Note 15, as well as an ongoing assessment of the severity of Global Health Care claims, this business has become the subject of further strategic review. That review, expected to be completed in the fourth quarter of 2001, may impact our analysis of the recoverability of the MMI goodwill. Note 12 - 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 liability 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 the nine months ended September 30, 2001 movement in interest rates was a $17 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 12 - 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 nine months ended September 30, 2001, we recognized a $6.6 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 nine months ended September 30, 2001 we recognized a loss in the income statement of less than $1.1 million representing the portions of the forward contracts deemed ineffective. 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, including our investment in Old Mutual common stock. There was no transition adjustment related to the adoption of SFAS No. 133, and we recorded less than $2 million of operating and administrative expense in the nine months ended September 30, 2001 relating to the change in the market value of these derivatives during the period. Note 13 - Discontinued Operations ---------------------------------- Life Insurance Segment ---------------------- On September 28, 2001, our subsidiary, St. Paul Fire and Marine Insurance Company ("Fire and Marine"), closed on the sale of its life insurance company, Fidelity and Guaranty Life Insurance Company ("F&G Life") to Old Mutual plc ("Old Mutual") for $335 million in cash and $300 million in shares of Old Mutual stock. In accordance with the sale agreement, the sale proceeds were reduced by $11.7 million, on a pretax basis, related to a decrease in the market value of certain securities within F&G Life's investment portfolio between March 31, 2001 and the closing date. Pursuant to the sale agreement, we are required to hold the Old Mutual stock received for one year after the closing of the transaction. The consideration received is 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 Note 6. When the sale was announced in April 2001, we expected to realize a modest gain on the sale of F&G Life, when proceeds were combined with F&G Life's operating results through the disposal date. However, a decline in the market value of certain of F&G Life's investments since April, coupled with a change in our estimate of tax expense related to the sale, resulted in an after- tax loss of $74 million on the sale proceeds. That loss is combined with F&G Life's results of operations for a year-to-date after-tax loss of $55 million and is included in the reported loss from discontinued operations for the three months and nine months ended September 30, 2001.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 13 - Discontinued Operations (continued) --------------------------------------------- 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 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 September 30, 2001, our preliminary analysis indicated that neither a deficiency nor a 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 nine months of 2001, we recorded a pretax loss of $7 million in discontinued operations, related to pre- sale non-Economy claims. 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 14 - 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 $314 million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 15 - Subsequent Event - Executive Management and Expected Strategic Initiatives -------------------------------------------------------------- On October 11, 2001, our Board of Directors appointed Jay S. Fishman as Chairman, President and Chief Executive Officer of The St. Paul. Mr. Fishman has initiated a comprehensive strategic and financial review of all of our business segments, as well as our use of aggregate excess-of-loss reinsurance treaties. It is likely that the review will result in our announcement of significant strategic initiatives during the fourth quarter of this year, including potential strategic initiatives affecting our Global Health Care, International and Reinsurance segments. These segments, which accounted for 35% of our consolidated revenues in the first nine months of 2001 and 28% of our consolidated revenues in 2000, have produced losses and/or have increased the volatility of our earnings profile in recent times. The strategic initiatives are likely to result in material restructuring or related charges in the fourth quarter of 2001, but are expected to result in an emphasis on businesses that have the potential to more consistently produce acceptable returns.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 2001 Forward-looking Statement Disclosure ------------------------------------ This discussion 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 and other actions and initiatives 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; worse than anticipated loss development from business written in prior years; changes in our estimate of insurance industry losses resulting from the September 11, 2001 terrorist attack; the potential impact of the global war on terrorism and Federal solutions to make available insurance coverage for acts of terrorism; judicial decisions and rulings; and various other matters. We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Consolidated Results -------------------- The following table summarizes The St. Paul's results for the third quarter and first nine months of 2001 and 2000. Three Months Nine Months Ended September 30 Ended September 30 ------------------ ------------------ (In millions, except per share data) 2001 2000 2001 2000 ---------------------------------- ------ ------ ------ ----- Pretax income (loss): Property-liability insurance: GAAP underwriting result $(1,071) $ (47) $(1,271) $(214) Net investment income 285 312 910 943 Realized investment gains (losses) (77) 104 (20) 542 Other (7) (24) (52) (88) ----- ----- ----- ----- Total property- liability insurane (870) 345 (433) 1,183 Asset management 36 33 105 100 Parent and other (43) (62) (118) (146) ----- ----- ----- ----- Pretax income (loss) from continuing operations (877) 316 (446) 1,137 Income tax expense (benefit) (282) 97 (156) 352 ----- ----- ----- ----- Income (loss) from continuing operations (595) 219 (290) 785 Discontinued operations, net of taxes (64) 12 (62) 15 ----- ----- ----- ----- Net income (loss) $(659) $231 $(352) $800 ===== ===== ===== ===== Diluted net income (loss) per share ($3.16) $0.98 ($1.71) $3.42 ===== ===== ===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Consolidated Results (continued) Our pretax loss from continuing operations of $877 million in the third quarter of 2001 was primarily driven by significant losses incurred in our property-liability insurance operations as a result of the terrorist attack in the United States on September 11, 2001. Our currently estimated net pretax operating loss from that event is $866 million. On an after-tax basis, including the write-off of $43 million in foreign tax credits, estimated net operating losses from the terrorist attack totaled $606 million, or $2.90 per common share for the third quarter. The impact of the terrorist attack on our results is discussed in further detail in the following section of this report. In addition to the terrorist attack, our property-liability results in the third quarter and first nine months of 2001 were adversely impacted by poor underwriting results in our Global Health Care, International and Reinsurance business segments and significant net realized investment losses. September 11, 2001 Terrorist Attack ----------------------------------- Our estimated gross pretax losses and loss adjustment expenses incurred as a result of the terrorist attack totaled $2.16 billion. The estimated net pretax operating loss of $866 million includes an estimated benefit of $1.20 billion from cessions made under various reinsurance agreements, a $40 million provision for uncollectible reinsurance, a net $44 million benefit from additional and reinstated insurance and reinsurance premiums, and a $90 million reduction in contingent commission expenses in our Reinsurance segment. The estimated net pretax operating loss of $866 million represented an increase over the estimated operating loss of $700 million we announced on September 19, 2001, primarily due to our intention, announced on October 23, 2001, to not cede losses from the attack to our corporate aggregate excess- of-loss reinsurance program. We have determined that 95% of our total reinsurance recoverables are from companies with ratings of A- or better or from state- sponsored reinsurance programs or collateralized reinsurance programs. Our estimated losses are based on a variety of actuarial techniques, coverage interpretation and claims estimation methodologies, and include an estimate of losses incurred but not reported, as well as estimated costs related to the settlement of claims. Our estimate of losses is also based on our belief that property- liability insurance losses from the terrorist attack will total between $30 billion and $35 billion for the insurance industry. Our estimate of industry losses is subject to significant uncertainties and may change over time as additional information becomes available. A material increase in our estimate of industry losses would likely cause us to make a corresponding material increase to our provision for losses related to the attack. As a result of the terrorist attack on September 11, certain of the major independent rating organizations revised their financial ratings of a number of companies in the insurance industry. Our financial ratings were revised as follows: Standard & Poor's Ratings Group placed us on CreditWatch Negative; Moody's Investor Services, Inc. announced that our ratings were under review for a possible downgrade; and A. M. Best announced that our ratings were under review with developing implications. The impact of the estimated net pretax operating loss of $866 million in the third quarter was distributed among our property- liability business segments as follows: Net Pretax GAAP Operating GAAP Underwriting Loss from Underwriting (Dollars in millions) Loss as Terrorist Loss as ------------------- Reported Attack Adjusted -------- --------- ------------ International $ (260) $(164) $ (96) Commercial Lines Group (165) (147) (18) Other Specialty (69) (49) (20) Global Health Care (70) (6) (64) Global Surety 3 - 3 ----- ----- ----- Total Primary Insurance (561) (366) (195) Reinsurance (510) (500) (10) ----- ----- ----- Total Property- Liability Insurance $(1,071) $(866) $(205) ===== ===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Consolidated Results (continued) ------------------------------- Estimated losses in our International segment were centered in our operations at Lloyd's, where we are a participant in an aviation syndicate that provided property coverage on the four planes involved in the terrorist attack. Our International losses also included losses resulting from our participation in the insuring of the Lloyd's Central Fund, which would be utilized if an individual member of Lloyd's is unable to pay its share of a syndicate's losses. In the Commercial Lines Group segment, losses were centered in our small and middle market operations, as well as our Catastrophe Risk business center. In the Other Specialty segment, the Financial and Professional Services and Technology business centers accounted for the majority of losses associated with the terrorist attack. Sale of F&G Life Insurance Company ---------------------------------- On September 28, 2001, The St. Paul's subsidiary, St. Paul Fire and Marine Insurance Company ("Fire and Marine") completed the sale of Fidelity and Guaranty Life Insurance Company ("F&G Life") to Old Mutual plc, a London-based international financial services company. Under terms of the agreement, Fire and Marine received $335 million in cash and 190,356,631 ordinary shares of Old Mutual valued at $300 million based on the average closing price of Old Mutual shares on the London Stock Exchange for the ten consecutive trading days prior to September 27, 2001. Pursuant to the purchase agreement, Fire and Marine must hold the Old Mutual shares received for one year after the closing of the transaction. The consideration is subject to possible adjustment based on the market price of Old Mutual's shares at the end of that one-year period. When the sale agreement with Old Mutual was announced in April 2001, we expected to realize a modest pretax gain on the sale of F&G Life, when proceeds were combined with F&G Life's operating results through the disposal date. However, a decline in the market value of certain of F&G Life's investments since April, coupled with a change in our estimate of tax expense related to the sale, resulted in a net after-tax loss of $74 million on the sale proceeds. That loss is combined with F&G Life's results of operations for a year-to-date after-tax loss of $55 million and is included in the reported loss from discontinued operations for the three months and nine months ended September 30, 2001. Discontinued Operations - Personal Insurance -------------------------------------------- In 1999, we sold our standard personal insurance operations to Metropolitan Property and Casualty Insurance Company ("Metropolitan"). Metropolitan purchased Economy Fire & Casualty Company and subsidiaries ("Economy"), and the rights and interests in those non-Economy policies constituting the remainder of our standard personal insurance operations. Those rights and interests were transferred to Metropolitan by way of a reinsurance and facility agreement. We guaranteed the adequacy of Economy's loss and loss expense reserves, and we remain liable for claims on non-Economy policies that result from losses occurring prior to the Sept. 30, 1999 closing date. Under the reserve guarantee, we will pay for any deficiencies in those reserves and will share in any redundancies that develop by Sept. 30, 2002. As of Sept. 30, 2001, our preliminary analysis indicated that neither a deficiency nor a 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 nine months of 2001 and 2000, we recorded pretax losses of $7 million and $5 million, respectively, in discontinued operations related to these agreements. Common Share Repurchases ------------------------ In the third quarter of 2001, we repurchased and retired 4.6 million of our common shares for a total cost of $200 million, bringing our year-to-date repurchase total to 13.0 million shares at a total cost of $589 million, or $45.36 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 nine months of 2001 represented approximately 6% 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 Accounting 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,
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Consolidated Results (continued) ------------------------------- primarily for purposes of hedging against fluctuations in market indices, foreign currency exchange rates and interest rates. We also 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. Our adoption of SFAS No 133, as amended, did not have a material impact on our financial position or results of operations. Subsequent Event - Change in Executive Management and Expected Strategic Initiatives -------------------------------------------------------------- On October 11, 2001, our Board of Directors appointed Jay S. Fishman as Chairman, President and Chief Executive Officer of The St. Paul. Mr. Fishman has initiated a comprehensive strategic and financial review of all of our business segments, as well as our use of corporate aggregate excess-of-loss reinsurance treaties. It is likely that the review will result in our announcement of significant strategic initiatives during the fourth quarter of this year, including potential strategic initiatives affecting our Global Health Care, International and Reinsurance segments. These segments, which accounted for 35% of our consolidated revenues in the first nine months of 2001 and 28% of our consolidated revenues in 2000, have produced losses and/or have increased the volatility of our earnings profile in recent times. The strategic initiatives are likely to result in material restructuring or related charges in the fourth quarter of 2001, but are expected to result in an emphasis on businesses that have the potential to more consistently produce acceptable returns. It is also likely that the strategic initiatives will result in a change in our segment reporting structure. Property-Liability Insurance ---------------------------- Overview -------- Our consolidated reported written premiums totaled $2.03 billion in the third quarter of 2001, 36% higher than reported premium volume of $1.49 billion in the same period of 2000. Through the first nine months of 2001, our reported premium volume of $5.73 billion grew $1.35 billion, or 31%, over comparable reported 2000 written premiums of $4.38 billion. Several factors impacted the comparability of our 2001 and 2000 third quarter and year-to-date premium volume, as follows: Three Months Nine Months Ended September 30 Ended September 30 ------------------ ------------------ (In millions) 2001 2000 2001 2000 ----------- ------ ------ ------ ------ Reported net written premiums $2,027 $1,492 $5,726 $4,383 Adjustments: Excess-of-loss reinsurance cessions 73 191 127 327 Net reinstated and additional premiums (49) - (49) - Incremental impact of MMI acquisition - - (97) - Elimination of quarter-reporting lag - - - (40) ----- ----- ----- ----- Net written premiums, as adjusted $2,051 $1,683 $5,707 $4,670 ===== ===== ===== ===== Percentage increase over 2000 22% 22% ===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- The aggregate excess-of-loss reinsurance cessions are described below. The net reinstated and additional premiums were concentrated in our Reinsurance segment and resulted from the magnitude of losses associated with the terrorist attack. We acquired MMI Companies, Inc. ("MMI"), an international health care risk services company, in April 2000, which accounted for $97 million of incremental written premiums in the first nine months of 2001. In 2000, we eliminated the one-quarter reporting lag for our reinsurance operations based in the United Kingdom ("St. Paul Re - UK"), which added $40 million to our year-to-date premium volume in 2000. The adjusted third-quarter and year-to- date premium growth rates of 22% were primarily the result of significant price increases and strong renewal retention rates throughout nearly all of our business segments, as well as new business in several of those segments. Through the first nine months of 2001, the pricing environment throughout virtually all of the commercial and reinsurance markets in which we operate continued to be favorable. Price increases throughout our United States primary insurance operations averaged 16% in the first nine months of the year. We expect to achieve additional price increases in the final three months of 2001. In both 2001 and 2000, we entered into separate aggregate excess- of-loss reinsurance treaties effective Jan. 1 of each year (the "corporate reinsurance program"). Coverage under the corporate reinsurance program can be 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 reinsurance 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 in 2001 and 2000. We do not intend to cede losses arising from the September 11, 2001 terrorist attack to the corporate reinsurance program. The written and earned premiums ceded in the three months and nine months ended September 30, 2001 represented the initial premium paid to our reinsurer. Our primary purpose in entering into the corporate reinsurance treaty was to reduce the volatility in our reported quarterly earnings over time. Because of the magnitude of losses associated with the terrorist attack, that purpose could not be fulfilled had the treaty been invoked to its full capacity in the third quarter. Accordingly, it is our intention to commute all or a portion of the 2001 corporate treaty in the fourth quarter. In addition, as part of the strategic review of our business operations, we are reviewing our use of aggregate excess-of-loss reinsurance treaties. Three Months Nine Months Ended September 30 Ended September 30 ------------------ ------------------ (In millions) 2001 2000 2001 2000 ----------- ------ ------ ------ ------ Corporate program: Ceded written premiums $ - $183 $ 9 $263 Ceded earned premiums 2 193 7 263 Ceded losses and loss adjustment expenses - 338 - 449 ------ ------ ------ ------ Net pretax benefit (detriment) (2) 145 (7) 186 ------ ------ ------ ------ Reinsurance segment treaty: Ceded written premiums 73 8 118 64 Ceded earned premiums 77 8 120 64 Ceded losses and loss adjustment expenses 171 8 273 128 ------ ------ ------ ------ Net pretax benefit 94 - 153 64 ------ ------ ------ ------ Combined total: Ceded written premiums 73 191 127 327 Ceded earned premiums 79 201 127 327 Ceded losses and loss adjustment expenses 171 346 273 577 ------ ------ ------ ------ Net pretax benefit $ 92 $145 $146 $250 ====== ====== ====== ======
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 Nine Months Ended September 30 Ended September 30 ------------------ ------------------ (In millions) 2001 2000 2001 2000 ----------- ------ ------ ------ ------ Commercial Lines Group $ (1) $ (5) $ (2) $ (5) Global Health Care - 43 (1) 43 Global Surety - 6 - 6 Other Specialty (1) 40 (2) 40 International - 57 (1) 70 ----- ----- ----- ----- Total Primary Insurance (2) 141 (6) 154 Reinsurance 94 4 152 96 ----- ----- ----- ----- Total Property- Liability Insurance $ 92 $145 $146 $250 ===== ===== ===== ===== Our reported consolidated loss ratio, which measures insurance losses and loss adjustment expenses as a percentage of earned premiums, was 132.0 in the third quarter of 2001, over 70 points worse than the reported third-quarter 2000 loss ratio of 61.3. The 2001 ratio included the impact of catastrophe losses incurred totaling $1.09 billion, of which $956 million resulted from the terrorist attack, and $50 million resulted from the explosion of a chemical manufacturing plant in Toulouse, France. Catastrophe losses totaled $17 million in the third quarter of 2000. Last year's reported third-quarter loss ratio included a $56 million benefit from a reduction in our estimate of ultimate losses on certain nontraditional reinsurance contracts. Excluding the impact of the reinsurance treaties and catastrophes in both years, as well as the reduction in reinsurance losses in 2000, the adjusted 2001 third-quarter loss ratio of 82.0 was 3.5 points worse than the adjusted third-quarter 2000 loss ratio of 78.5. The deterioration was centered in our Global Health Care, International and Reinsurance segments, as discussed in more detail in the following pages. Our reported consolidated expense ratio, measuring underwriting expenses as a percentage of premiums written, was 25.6 for the third quarter of 2001, compared with a reported ratio of 39.0 for the same 2000 period. The 2000 third-quarter ratio included the impact of a $66 million increase in our estimate of contingent commission expense for certain nontraditional reinsurance business. Excluding that provision last year, and excluding the impact of the reinsurance treaties and catastrophe losses in both years, the adjusted third-quarter 2001 expense ratio was 29.7, compared with an adjusted third-quarter 2000 ratio of 30.6. The improvement over 2000 reflects the combined effect of significant premium growth and the efficiencies realized as a result of our expense reduction initiatives over the last two years. The table on the following page summarizes key financial results (from continuing operations) by property-liability underwriting business segment (underwriting results are presented on a GAAP basis; combined ratios are presented on a statutory accounting basis).
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- % of Three Months Nine Months 2001 Ended September 30 Ended September 30 (Dollars in millions) Written ------------------ ------------------ ------------------- Premiums 2001 2000 2001 2000 -------- ------ ------ ------ ------ Commercial Lines Group: Written Premiums 24% $465 457 1,400 1,252 Underwriting Result $(165) 15 (56) 48 Combined Ratio 137.9 94.6 102.9 95.7 Global Health Care: Written Premiums 10% $259 179 583 419 Underwriting Result $(70) (70) (324) (135) Combined Ratio 131.3 146.1 157.0 131.2 Global Surety: Written Premiums 6% $106 102 319 342 Underwriting Result $3 (2) 35 29 Combined Ratio 99.0 98.5 89.6 88.2 Other Specialty: Written Premiums 25% $479 364 1,418 1,043 Underwriting Result $(69) 14 (18) (3) Combined Ratio 115.7 92.0 101.3 98.9 International: Written Premiums 12% $195 114 717 426 Underwriting Result $(260) (8) (349) (79) Combined Ratio ___ 239.4 99.7 155.7 117.7 ----- ----- ----- ----- Total Primary Insurance: Written Premiums 77% $1,504 1,216 4,437 3,482 Underwriting Result $(561) (51) (712) (140) Combined Ratio 139.7 101.2 116.8 103.3 ----- ----- ----- ----- Reinsurance: Written Premiums 23% $523 276 1,289 901 Underwriting Result $(510) 4 (559) (74) Combined Ratio ___ 209.9 100.3 149.7 109.0 ----- ----- ----- ----- Total Property-Liability Insurance: Written Premiums 100% $2,027 1,492 5,726 4,383 GAAP Underwriting Result $(1,071) (47) (1,271) (214) Statutory Combined Ratio: Loss and Loss Expense Ratio 132.0 61.3 95.3 69.9 Underwriting Expense Ratio 25.6 39.0 28.6 34.6 ------ ------ ------ ------ Combined Ratio 157.6 100.3 123.9 104.5 ====== ====== ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Underwriting Results by Segment ------------------------------- To provide a more meaningful analysis of the underlying performance of our business segments, the following discussion excludes the impact of the terrorist attack in 2001 and the reinsurance treaties in both 2001 and 2000. The impact of the terrorist attack on segment results was discussed on pages 26 and 27 of this report, and the impact of the reinsurance treaties on segment results was discussed on pages 29 and 30 of this report. 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 terrorist attack in 2001 and the reinsurance treaties in both years. Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- (Dollars in millions) 2001 2000 2001 2000 ------------------- ------ ------ ------ ------ Net written premiums $492 $463 $1,430 1,258 Percentage change from 2000 6% 14% GAAP underwriting profit (loss) $(17) $21 $92 $53 Statutory combined ratio: Loss and loss adjustment expense ratio 74.3 62.8 62.2 62.7 Underwriting expense ratio 28.3 30.6 29.3 32.6 ------ ----- ----- ----- Combined ratio 102.6 93.4 91.5 95.3 ====== ===== ===== ===== Premium growth in the third quarter and first nine months of 2001 was driven by price increases, strong renewal retention rates and new business in our standard and nonstandard commercial operations. In the first nine months of the year, price increases averaged 13.0% in those operations, with third-quarter price increases averaging 14.6%. Premium growth in the standard and nonstandard operations in the third quarter was partially offset by a significant decline in catastrophe risk net written premiums due to an increase in premiums ceded for reinsurance. The deterioration in the third-quarter loss ratio compared with the same 2000 period was primarily the result of adverse prior year loss development in our standard commercial insurance operations. The reported year-to-date loss ratio in 2001 benefited from a $100 million reduction in previously established reserves in the first quarter, which resulted from an actuarial analysis of reserves for certain business written prior to 1989. In 2000, the year-to-date loss ratio included the benefit of a $69 million reduction in previously established workers' compensation reserves. Excluding those reserve reductions in both years, the adjusted nine-month 2001 loss ratio of 69.8 was slightly worse than the adjusted 2000 ratio of 68.6. The significant improvement in the third-quarter and year-to-date expense ratios in 2001 reflected the combined impact of our expense reduction initiatives over the last several years and the significant growth in written premium volume. 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 Global Health Care excluding the impact of the terrorist attack in 2001 and the reinsurance treaties in both years.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- (Dollars in millions) 2001 2000 2001 2000 ------------------- ------ ------ ------ ------ Net written premiums $263 $234 $588 $474 Percentage change from 2000 12% 24% GAAP underwriting loss $(64) $(113) $(317) $(178) Statutory combined ratio: Loss and loss adjustment expense ratio 106.2 135.2 131.8 110.1 Underwriting expense ratio 21.8 21.2 23.6 26.0 ------ ------ ------ ------ Combined ratio 128.0 156.4 155.4 136.1 ====== ====== ====== ====== Premium growth in the third quarter and first nine months of 2001 was driven by significant price increases, which averaged 25.4% across this segment in the first nine months of the year. In addition, our acquisition of MMI in April 2000 accounted for approximately $48 million of incremental year-to-date premium volume in 2001. We have severely curtailed the amount of new business in the Global Health Care segment in 2001 due to an unfavorable pricing environment and unacceptable loss experience in many of the lines of business and geographical locations in which we offer our products. This has resulted in a significant decline in policy counts since the end of 2000. Of the 28 states in which we filed for approval for rate increases on July 2001 renewals for physicians and surgeons coverage, we received approval in 27 states, with price increases averaging 21%. The improvement in the third-quarter loss ratio compared with the same 2000 period was due to a reduction in the level of adverse prior-year loss development. Through the first nine months of 2001, however, the loss ratio was significantly worse than in the same period of 2000, primarily due to a $107 million provision recorded in the second quarter of this year to strengthen loss reserves for the accident years 1997 through 1999. Our actuarial analysis indicated that the severity of losses incurred throughout our domestic operations, including, but not limited to, business acquired in the MMI transaction, had increased to a degree that warranted the recording of additional reserves for those accident years. Amounts awarded in jury verdicts in professional liability lawsuits have continued to increase sharply, resulting in an increase in our estimate of ultimate losses incurred and causing a severe negative impact on our results in 2001. In addition, we have implemented a Health Care claims initiative in 2001 to accelerate the resolution of high-severity claims in order to minimize the impact of the increase in the cost of jury verdicts. This initiative accelerated paid losses into the current year that would have otherwise likely been included in future periods, and has contributed to the increase in severity which prompted the second-quarter reserve strengthening. Business written in accident years 2000 and 2001 has not exhibited the same deterioration experienced in the earlier accident years, indicating that the actions we have implemented in the last two years to significantly raise prices, exit unfavorable geographic locations, and restrict the terms and conditions of coverage offered have favorably impacted loss experience for those years. However, we will continue to consider the impact of the Health Care claims initiative on our actuarial analysis of loss reserves in this segment. In the second quarter of 2001, we completed a comprehensive review of our entire Health Care segment. Based on the results of that review, as well as our evaluation of the strategic value of the Unionamerica entity (MMI's United Kingdom-based subsidiary), we determined that the excess purchase price over net tangible assets acquired that we recorded as part of the MMI acquisition had not been impaired. In October 2001, our new Chairman, President and Chief Executive Officer, Jay S. Fishman, commenced a comprehensive review of all of our business operations which is expected to be completed in the fourth quarter of 2001, at which time significant strategic initiatives, possibly affecting our Global Health Care segment, are expected to be announced. That review may impact our analysis of the recoverability of goodwill associated with the MMI acquisition.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Global Surety ------------- Our Global Surety segment underwrites surety bonds, which guarantee that third parties will be indemnified against the nonperformance of contractual obligations. The following table summarizes key financial data for this segment for the third quarter and first nine months of 2001 and 2000 excluding the impact of the reinsurance treaties in both years. (The Global Surety segment was not impacted by the terrorist attack in 2001). Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- (Dollars in millions) 2001 2000 2001 2000 ------------------- ------ ------ ------ ------ Net written premiums $106 $113 $320 $353 Percentage change from 2000 (6)% (9)% GAAP underwriting profit (loss) $3 $(8) $35 $23 Statutory combined ratio: Loss and loss adjustment expense ratio 48.3 54.0 38.4 41.6 Underwriting expense ratio 50.6 50.7 51.1 49.0 ------ ------ ------ ------ Combined ratio 98.9 104.7 89.5 90.6 ====== ====== ====== ====== The decline in written premium volume compared with 2000 reflects the impact of tightened underwriting standards implemented in 2001 in anticipation of an economic slowdown in both the United States and Mexico. The current economic slowdown could negatively impact the construction industry, and, in turn, our contract surety operations. The enhanced underwriting standards in effect over the last several quarters have reduced the risk profile of this segment's book of business. The improvement in Global Surety's year-to-date 2001 loss ratio over the same 2000 period was primarily due to favorable current-year loss experience. The increase in the expense ratio over 2000 was driven by higher reinsurance costs in the first nine months of 2001. Other Specialty --------------- The Other Specialty segment includes the following business centers: Construction, Technology, Ocean Marine, Financial & Professional Services, Public Sector Services, Excess & Surplus Lines and Oil & Gas. The following table summarizes results for this segment excluding the impact of the terrorist attack in 2001 and the reinsurance treaties in both years. Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- (Dollars in millions) 2001 2000 2001 2000 ------ ------ ------ ------ Net written premiums $488 $424 $1,429 $1,104 Percentage change from 2000 15% 29% GAAP underwriting profit (loss) $(19) $(26) $33 $(43) Statutory combined ratio: Loss and loss adjustment expense ratio 76.8 76.1 69.7 73.3 Underwriting expense ratio 27.9 29.1 27.8 29.8 ------ ------ ------ ------ Combined ratio 104.7 105.2 97.5 103.1 ====== ====== ====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Price increases, strong renewal retention rates and new business in nearly all of the business centers comprising this segment accounted for the growth in third-quarter and year-to-date premium volume over the equivalent periods of 2000. In our Construction operation, premium volume of $122 million in the third quarter was 4% ahead of the same period last year, and year- to-date premiums of $430 million grew 30% over 2000. Price increases in this operation averaged 17.2% for the first nine months of 2001. Our Technology business center recorded premiums of $288 million through the first nine months of 2001, 25% higher than the same period of 2000. Year-to-date price increases in Technology averaged 11.9%. In our Financial and Professional Services operation, year-to-date written premiums of $282 million were 23% ahead of 2000, driven by price increases averaging 10.9% and new business in both domestic and international markets. Year-to-date premium growth of 79% in Oil and Gas and 36% in Excess & Surplus Lines also contributed to the Other Specialty segment's strong increase in written premiums over the first nine months of 2000. Year-to-date results last year in the Other Specialty segment included a $33 million benefit from a reduction in previously established workers' compensation reserves. Excluding that benefit last year, the loss ratio of 69.7 for the first nine months of 2001 was nearly seven points better than the adjusted nine-month 2000 ratio of 76.5. Financial & Professional Services, Technology, and Ocean Marine were all major contributors to the significant improvement in year-to-date results in 2001, reflecting the favorable impact of significant price increases in recent quarters and the underlying improvement in the quality of our business in these market sectors. International ------------- Our International segment consists of our operations at Lloyd's, our participation in the insuring of the Lloyd's Central Fund, specialty business underwritten 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 third quarter and first nine months of 2001 and 2000 excluding the impact of the terrorist attack in 2001 and the reinsurance treaties in both years. Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- (Dollars in millions) 2001 2000 2001 2000 ------------------- ------ ------ ------ ------ Net written premiums $196 $177 $718 $512 Percentage change from 2000 11% 40% GAAP underwriting loss $(96) $(65) $(184) $(149) Statutory combined ratio: Loss and loss adjustment expense ratio 119.1 107.2 102.2 102.6 Underwriting expense ratio 30.5 28.0 26.5 28.6 ------ ------ ------ ------ Combined ratio 149.6 135.2 128.7 131.2 ====== ====== ====== ====== The 11% increase in third-quarter 2001 premium volume over the same 2000 period was primarily the result of new business and price increases at Lloyd's, which accounted for $108 million of the International segment's premium volume for the quarter, compared with $53 million in the same 2000 period. The growth in Lloyd's written premiums in the third quarter was partially offset by a $41 million decline in premiums generated through Unionamerica Insurance Company, which was acquired in the MMI transaction in April 2000. Although we ceased writing new business through Unionamerica in 2001, we are contractually obligated to underwrite business in certain of Unionamerica's syndicates at Lloyd's. Through the first nine months of 2001, premium volume generated at Lloyd's totaled $429 million, an increase of 72% over comparable 2000 premiums of $250 million. Year-to-date premiums in the International segment included $49 million of incremental premiums generated by Unionamerica.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- The deterioration in the International segment's third-quarter 2001 loss ratio compared to the same period of 2000 was the result of adverse prior-year loss development in several Lloyd's syndicates. We are in the process of reorganizing our operations at Lloyd's, focusing on increasing our capacity in selected syndicates that offer potential for profitable growth. In addition, our new Chairman, President and Chief Executive Officer, Jay S. Fishman, has commenced a comprehensive review of all of our business operations which is expected to be completed in the fourth quarter of 2001, at which time significant strategic initiatives, which may affect our International segment, are expected to be announced. Reinsurance ----------- Our Reinsurance segment ("St. Paul Re") underwrites treaty and facultative reinsurance for property, liability, ocean marine, surety and certain specialty classes of business, 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 excluding the impact of the terrorist attack in 2001 and the reinsurance treaties in both years. Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- (Dollars in millions) 2001 2000 2001 2000 ------------------- ------ ------ ------ ------ Net written premiums $507 $265 $1,320 $946 Percentage change from 2000 91% 40% GAAP underwriting loss $(104) $- $(210) $(106) Statutory combined ratio: Loss and loss adjustment expense ratio 91.4 42.7 85.8 76.8 Underwriting expense ratio 32.1 60.6 31.6 35.5 ------ ------ ------ ------ Combined ratio 123.5 103.3 117.4 112.3 ====== ====== ====== ====== Premium growth in 2001 was driven by new business and significant price increases across virtually all lines of traditional reinsurance coverages, as well as new business opportunities in the nontraditional insurance market. Year-to-date premium volume last year included $40 million of incremental premiums resulting from the elimination of the one-quarter reporting lag for St. Paul Re - UK. Excluding those premiums, St. Paul Re's 2001 year- to-date premium volume was 46% higher than the adjusted 2000 total. Following the terrorist attack on September 11, all property and liability reinsurance business quoted by St. Paul Re includes terrorism exclusions. The components of St. Paul Re's third-quarter combined ratio last year were distorted by a reduction in the estimate of ultimate losses on certain nontraditional reinsurance by $56 million and a corresponding increase in our estimate of reserves for contingent commissions by $66 million. Excluding those changes, the third- quarter 2000 loss ratio would have been 62.4, and the expense ratio would have been 35.6. The deterioration in the third- quarter loss ratio in 2001 compared to the adjusted 2000 ratio was primarily due to an increase in catastrophe losses. St. Paul Re incurred a $50 million loss representing our estimate of losses related to the explosion of a chemical plant in Toulouse, France in the third quarter, and an additional $13 million in loss development from Tropical Storm Allison, which occurred earlier this year. In addition, several large losses in North American casualty coverages and global marine coverages also contributed to the poor result in the third quarter of 2001. Our new Chairman, President and Chief Executive Officer, Jay S. Fishman, has commenced a comprehensive review of all of our business operations which is expected to be completed in the fourth quarter of 2001, at which time significant strategic initiatives, which may affect our Reinsurance segment, are expected to be announced.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Property-Liability Insurance (continued) --------------------------------------- Investment Operations --------------------- The St. Paul's property-liability insurance operations produced pretax investment income of $285 million in the third quarter of 2001, down 9% from income of $312 million in the same period of 2000. Our year-to-date pretax investment income of $910 million was 4% below comparable 2000 income of $943 million. The decline in investment income in 2001 reflected the impact of net sales of fixed maturities in recent quarters to fund a portion of our negative underwriting cash flow, and a lower interest rate environment. In addition, we have made cumulative premium payments totaling $639 million since the fourth quarter of 1999 related to our corporate reinsurance program, which has reduced funds available for investment. Our underwriting cash flows, while still negative, have improved through the first nine months of 2001 compared to the same period of 2000, primarily due to significant price increases throughout our operations. Underwriting cash flows continue to be negatively impacted by an increase in insurance loss and loss adjustment expense payments, particularly in our Health Care and International segments. In addition, in January 2001 we undertook an initiative to hasten the settlement of potentially high-severity pending claims throughout our property-liability operations, which has resulted in an acceleration of claim payments in the first nine months of the year. We expect to achieve further price increases during the remainder of 2001; however, we expect our underwriting cash flows to significantly deteriorate in the fourth quarter of 2001 and into the first quarter of 2002 due to the magnitude of insurance losses and loss adjustment expenses that will be paid related to the September 11th terrorist attack in the United States. Pretax realized investment losses in our property-liability insurance operations totaled $77 million in the third quarter, compared with realized gains of $104 million in the same period of 2000. The third-quarter 2001 losses were driven by losses on the sale of equity securities and negative returns on several of our venture capital investments. Through the first nine months of 2001, realized losses were $20 million, compared with year-to- date 2000 realized gains of $542 million. An uncertain economic outlook contributed to a decline in equity values and a lack of venture capital activity during the first nine months of 2001, resulting in a significant reduction in realized gains in comparison to 2000. 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. Last year's record nine-month total was dominated by gains from our venture capital portfolio, including the single largest gain ($117 million) from the sale of our investment in Flycast Communications Corp., a leading provider of Internet direct response solutions. We also sold several other direct holdings, and our investments in various venture capital partnerships also contributed to the nine- month 2000 realized gain total. The quality of our investment portfolio remains high, and we have not recorded any significant permanent impairments in the carrying value of our investment holdings. The $14.8 billion carrying value of our fixed maturities portfolio included over $700 million of pretax unrealized appreciation on September 30, 2001. Approximately 94% of our portfolio is rated at investment grade (BBB or above), and its weighted average pretax yield at September 30, 2001 was 6.8%, unchanged from a year ago. The combined carrying value of our equity and venture capital investments at September 30, 2001 included pretax unrealized appreciation of $81 million. 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.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Environmental and Asbestos Claims (continued) -------------------------------------------- Our ultimate liability for environmental claims is difficult to estimate because of these legal issues. Insured parties have submitted claims for losses not covered in their respective insurance policies, and the ultimate resolution of these claims may be subject to lengthy litigation, making it difficult to estimate our potential liability. In addition, variables, such as the length of time necessary to clean up a polluted site and controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of an environmental claim. Estimating our ultimate liability for asbestos claims is equally difficult. The primary factors influencing our estimate of the total cost of these claims are case law and a history of prior claim development, both of which continue to evolve. The following table represents a reconciliation of total gross and net environmental reserve development for the nine months ended September 30, 2001, and the years ended Dec. 31, 2000 and 1999. Amounts in the "net" column are reduced by reinsurance recoverables. 2001 Environmental (nine months) 2000 1999 ------------- ----------- ------------ ------------ (In millions) Gross Net Gross Net Gross Net ----------- ----- ----- ----- ----- ----- ----- Beginning reserves $665 $563 $698 $599 $783 $645 Incurred losses 55 53 25 14 (33) 1 Paid losses (52) (46) (58) (50) (52) (47) ----- ----- ----- ----- ----- ----- Ending reserves $668 $570 $665 $563 $698 $599 ===== ===== ===== ===== ===== ===== The following table represents a reconciliation of total gross and net reserve development for asbestos claims for the nine months ended September 30, 2001, and the years ended Dec. 31, 2000 and 1999. 2001 Asbestos (nine months) 2000 1999 -------- ------------ ------------ ------------- (In millions) Gross Net Gross Net Gross Net ----------- ----- ----- ----- ----- ----- ----- Beginning reserves $397 $299 $398 $298 $402 $277 Incurred losses 52 52 41 33 28 51 Paid losses (39) (29) (42) (32) (32) (30) ----- ----- ----- ----- ----- ----- Ending reserves $410 $322 $397 $299 $398 $298 ===== ===== ===== ===== ===== ===== Our reserves for environmental and asbestos losses at September 30, 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. We believe any future additional loss provisions for, or settlement of, environmental and asbestos claims will not materially impact our financial position, but may materially impact our results of operations or liquidity in the period in which such provisions or settlements occur. Total gross environmental and asbestos reserves at September 30, 2001 of $1.08 billion represented approximately 5% of gross consolidated reserves of $20.87 billion.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Asset Management ---------------- Our asset management segment consists of our 78% majority ownership interest in The John Nuveen Company (Nuveen). Nuveen provides customized individual accounts, mutual funds, exchange- traded funds and defined portfolios to help financial advisors serve their affluent and high net worth clients. Highlights of Nuveen's performance for the third quarter and first nine months of 2001 and 2000 were as follows: Three Months Nine Months Ended September 30 Ended September 30 ------------------ ------------------ (In millions) 2001 2000 2001 2000 ----------- ------ ------ ------ ------ Revenues $99 $92 $273 $280 Expenses 52 49 136 150 ----- ----- ----- ----- Pretax earnings 47 43 137 130 Minority interest (11) (10) (32) (30) ----- ----- ----- ----- The St. Paul's share of pretax earnings $36 $33 $105 $100 ===== ===== ===== ===== Assets under management $66,477 $61,003 ====== ====== The increase in Nuveen's third-quarter 2001 revenues over the same 2000 period was primarily due to growth in asset management fees resulting from the acquisition of Symphony Asset Management, LLC ("Symphony") during the quarter. Symphony is an institutional money manager specializing in alternative investment strategies. Nuveen's gross product sales of $3.2 billion in the third quarter were 36% higher than the same 2000 quarter, driven by the popularity of equity and fixed-income retail managed accounts and exchange-traded common stock fund products. The success of Nuveen's diverse selection of products for affluent investors continued to result in strong positive net asset flows (sales, plus reinvestments and exchanges, less redemptions) in a volatile and uncertain market environment. Net asset flows were $1.5 billion in the third quarter of 2001, 39% higher than net flows in the same 2000 period. Managed assets at September 30, 2001 consisted of $31.4 billion of exchange-traded funds, $23.3 billion of managed accounts and $11.8 billion of mutual funds. Total assets under management of $66.48 billion grew over $5 billion over the year-end 2000 managed asset total, due to the acquisition of Symphony, which added $4.1 billion of managed assets, and the strong positive net asset flows through the first nine months of the year. Capital Resources ----------------- Common shareholders' equity totaled $5.95 billion at September 30, 2001, down $1.23 billion from the year-end 2000 total of $7.18 billion. The decline reflected the impact of our net loss of $352 million in the first nine months of the year, significant share repurchases and a reduction in the unrealized appreciation of our equity and venture capital investment portfolio. Through the first nine months of 2001, we repurchased 13.0 million of our common shares for a total cost of $589 million, and an average cost of $45.36 per share. The repurchases were financed through a combination of internally-generated funds and commercial paper borrowings. From November 1998 through September 2001, we repurchased and retired 45.8 million of our common shares for a total cost of $1.62 billion, or an average cost of $35.27 per share. Total debt outstanding at September 30, 2001 of $2.14 billion was $497 million higher than the year-end 2000 total of $1.65 billion. The increase was driven by the issuance of an additional $437 million of commercial paper in 2001 to finance the maturity of our $150 million, 8.375% senior notes in June and to finance a portion of our common share repurchases. In addition, The John Nuveen Company issued $173 million of short term debt to finance a portion of their acquisition of Symphony Asset Management. The St. Paul's ratio of total debt obligations to total capitalization was 25% at September 30, 2001, compared with 18% at the end of 2000.
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 of existing businesses. We have not repurchased any common shares during the period from October 1, 2001 to November 2, 2001. As of November 5, 2001, we had approximately $89 million of capacity to repurchase additional common shares under a repurchase program authorized by the company's 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. For the first nine months of 2001, our loss from continuing operations was inadequate to cover "fixed charges" by $446 million and "combined fixed charges and preferred stock dividends" by $456 million. For the first nine months of 2000, the ratio of earnings to fixed charges was 7.83, and the ratio of earnings to combined fixed charges and preferred stock dividend requirements was 7.25. 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 provided by continuing operations totaled $332 million in the first nine months of 2001, compared with cash used by continuing operations of $600 million in the same period of 2000. The improvement over 2000 was centered in our property-liability underwriting operations and was primarily due to price increases. Our asset management segment also contributed to the improvement in operational cash flows in 2001. In our property-liability operations, year-to- date underwriting cash flows (premium collections less payments for losses and loss adjustment expenses and underwriting expenses) remained negative, driven by significant loss payments in certain of our business segments. Underwriting cash flows in 2001, however, improved significantly compared with the same period of 2000. We expect our operational cash flows to deteriorate in the last quarter of 2001 and into the first quarter of 2002 due to the magnitude of insurance losses and loss adjustment expenses payable as a result of the September 11th terrorist attack. On a long-term basis, however, 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 June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" which establishes financial accounting and reporting standards for business combinations. The provisions of this statement reflect a fundamentally different approach to accounting for business combinations than previous requirements. It requires all business combinations to be accounted for under the purchase method of accounting and no longer allows for the pooling method to be used. In addition, this statement requires that intangible assets that can be identified and meet certain criteria be recognized as assets apart from goodwill. The provisions of this statement apply to all business combinations initiated after June 30, 2001. Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" which establishes financial accounting and reporting for acquired goodwill and other intangible assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. It also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Impact of Accounting Pronouncements to be Adopted in the Future (continued) -------------------------------------------------------------------------- statements. The statement changes current accounting by requiring intangible items to be tested for impairment on an annual basis in lieu of the historical approach, which required goodwill to be amortized over the estimated useful life, not to exceed 40 years. The statement is effective for fiscal years beginning after December 15, 2001. We intend to implement SFAS No. 142 in the period during which its provisions become effective. We expect our adoption of this statement to result in a material reduction in the amount of our goodwill amortization in 2002. Also in June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which establishes financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset. This statement is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material impact on our financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual or Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale. It also resolves significant implementation issues related to SFAS No. 121. This statement is effective for fiscal years beginning after December 15, 2001. We have not yet determined the impact of adopting this statement.
PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 6 to the consolidated financial statements is incorporated herein by reference. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. An Exhibit Index is set forth as the last page in this document. (b) Reports on Form 8-K. 1) The St. Paul filed a Form 8-K Current Report dated July 16, 2001, relating to the announcement of the expected impact of catastrophes and Health Care losses on The St. Paul's second- quarter 2001 operating results. 2) The St. Paul filed a Form 8-K Current Report dated July 19, 2001, relating to the announcement of several changes in executive management at the company, and the announcement of second-quarter 2001 operating results. 3) The St. Paul filed a Form 8-K Current Report dated August 3, 2001, related to the announcement of an agreement to purchase London Guarantee Insurance Company. 4) The St. Paul filed a Form 8-K Current Report dated September 19, 2001, related to the announcement of the anticipated impact of the September 11, 2001 terrorist attack on The St. Paul's third-quarter 2001 operating results. 5) The St. Paul filed a Form 8-K Current Report dated September 28, 2001 (as amended by Form 8-K/A filed on October 29, 2001), related to the announcement of the completion of The St. Paul's sale of Fidelity and Guaranty Life Insurance Company to Old Mutual plc, and the appointment of Jay S. Fishman as chairman and chief executive officer of The St. Paul.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE ST. PAUL COMPANIES, INC. (Registrant) Date: November 5, 2001 By /s/ Bruce A. Backberg --------------------- Bruce A. Backberg Senior Vice President (Authorized Signatory) Date: November 5, 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*........................................ (3) (i) Articles of incorporation*....................................... (ii) By-laws*........................................................ (4) Instruments defining the rights of security holders, including indentures*............................................. (10) Material contracts .... (a) Employment Agreement between The St. Paul Companies, Inc. and Mr. Jay S. Fishman dated October 10, 2001**...............(1) (b) Employment Agreement between The St. Paul Companies, Inc. and Mr. Douglas W. Leatherdale dated September 18, 2001**.....(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.