-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EA0m0zgsPT+PaaiW1F8NFoo+PSvj5jlb8uZNf6lDeMY+uS7po04HfDeMlDlFReFJ AtbMmXQZMO7zTdRaHqOvXQ== 0000086312-01-000004.txt : 20010329 0000086312-01-000004.hdr.sgml : 20010329 ACCESSION NUMBER: 0000086312-01-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST PAUL COMPANIES INC /MN/ CENTRAL INDEX KEY: 0000086312 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 410518860 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10898 FILM NUMBER: 1582542 BUSINESS ADDRESS: STREET 1: 385 WASHINGTON ST CITY: SAINT PAUL STATE: MN ZIP: 55102 BUSINESS PHONE: 6123107911 FORMER COMPANY: FORMER CONFORMED NAME: ST PAUL COMPANIES INC /MN/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SAINT PAUL COMPANIES INC DATE OF NAME CHANGE: 19900730 10-K 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________to___________ Commission file number 0-3021 THE ST. PAUL COMPANIES, INC. (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 ------------------- ------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 385 Washington Street, Saint Paul, MN 55102 ------------------------------------- -------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, Including area code 651-310-7911 ------------ Securities registered pursuant to Section 12(b) of the Act: New York Stock Exchange Common Stock (without par value) London Stock Exchange - ------------------------------- -------------------------- (Title of class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None. 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the outstanding Common Stock held by nonaffiliates of the Registrant on March 15, 2001, was $9,390,235,520. The number of shares of the Registrant's Common Stock, without par value, outstanding at March 15, 2001, was 216,847,384. An Exhibit Index is set forth at page 35 of this report. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the Registrant's 2000 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV of this report. Portions of the Registrant's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 1, 2001 are incorporated by reference into Parts III and IV of this report. PART I Item 1. Business. - ------ -------- General Description - ------------------- The St. Paul Companies, Inc. ("The St. Paul") is incorporated as a general business corporation under the laws of the State of Minnesota. The St. Paul and its subsidiaries constitute one of the oldest insurance organizations in the United States, dating back to 1853. We are a management company principally engaged, through our subsidiaries, in providing commercial property-liability insurance and reinsurance products and services worldwide. We also own F&G Life Insurance Company ("F&G Life"), and we have a presence in the asset management industry through our 78% majority ownership of The John Nuveen Company ("Nuveen"). As a management company, we oversee the operations of our subsidiaries and provide them with capital, management and administrative services. At March 1, 2001, we and our subsidiaries employed approximately 10,500 persons. Based on total revenues, we ranked No. 204 on the 1999 Fortune 500 list of the largest companies in the United States. SUMMARY OF RESULTS The following table summarizes The St. Paul's consolidated results for the last three years: Year ended December 31 2000 1999 1998 ---------------------- ----- ----- ----- (In millions, except per share data) Pretax income (loss): Property-liability insurance $1,467 $ 971 $ 298 Life insurance 53 66 21 Asset management 135 123 104 Parent company and other operations (202) (143) (303) ----- ----- ----- Pretax income from continuing operations 1,453 1,017 120 Income tax expense (benefit) 440 238 (79) ----- ----- ----- Income from continuing operations before cumulative effect of accounting change 1,013 779 199 Cumulative effect of accounting change, net of taxes - (30) - ----- ----- ----- Income from continuing operations 1,013 749 199 Discontinued operations, net of taxes (20) 85 (110) ----- ----- ----- Net income $ 993 $ 834 $ 89 ===== ===== ===== Per common share (diluted) $ 4.24 $ 3.41 $ 0.32 ===== ===== ===== The growth in pretax income from continuing operations in 2000 was centered in our property-liability insurance operations and was primarily due to a $330 million increase in realized investment gains and improved underwriting results in several business segments. Property-liability underwriting results in both 2000 and 1999 benefited from the aggregate excess-of-loss reinsurance treaties described in more detail on page 10 of this report. In addition, after several years of intense competitive pressures, during which pricing levels throughout the property-liability industry failed to keep pace with rising loss costs, the pricing environment improved in nearly all market sectors in 2000, contributing to our improvement over 1999. Excluding the impact of the reinsurance treaties in both years referred to above, our property-liability written premium volume in 2000 totaled $6.36 billion, nearly $1 billion higher than comparable 1999 volume of $5.38 billion. Major 2000 Transactions. In April 2000, we completed our acquisition of MMI Companies, Inc. ("MMI"), an international health care risk services company, for a total cost of approximately $206 million in cash and the assumption of $165 million of MMI debt and capital securities. In February 2000, we completed our acquisition of Pacific Select Insurance Holdings, Inc. ("Pacific Select"), a California company that provides earthquake insurance coverages to homeowners in that state, for a total cost of approximately $37 million. Note 2 to the consolidated financial statements on pages 54 and 55 of our 2000 Annual Report to Shareholders, which includes additional information regarding these acquisitions, is incorporated herein by reference. In May 2000, we completed the sale of our nonstandard auto insurance operations to Prudential Insurance Company of America ("Prudential") for $175 million in cash (net of a $25 million dividend paid by these operations to our property-liability insurance operations prior to closing). Note 14 to the consolidated financial statements on pages 68 and 69 of our 2000 Annual Report to shareholders includes additional information about this sale and is incorporated herein by reference. In 2000, we repurchased and retired approximately 18 million of our common shares for a total cost of $536 million. The shares repurchased represented 8% of our total shares outstanding at the beginning of the year. The repurchases were financed through a combination of internally generated funds and the issuance of new debt. Also in 2000, our subsidiary, St. Paul Capital LLC, exercised its right to cause the conversion rights of the owners of its $207 million, 6% Convertible Monthly Income Preferred Securities (MIPS) to expire. Prior to the expiration date, almost all of the MIPS holders exercised their conversion rights, resulting in the issuance of seven million of our common shares. BUSINESS SEGMENTS The following table summarizes the sources of our consolidated revenues from continuing operations for each of the years 1998 through 2000. Following the table is a narrative description of each of our business segments. Additional financial information about our business segments is set forth in Note 18 to the consolidated financial statements on pages 73 through 75 of our 2000 Annual Report to Shareholders, which is incorporated herein by reference. Also included in Note 18 is a discussion of the new segment reporting structure we implemented in 2000 in our property- liability insurance operations. All data for 1999 and 1998 in the following table are presented on a basis consistent with our new reporting structure. Percentage of Consolidated Revenues -------------------------- 2000 1999 1998 Property-liability insurance: ----- ----- ----- Underwriting Commercial Lines Group 18.4% 20.0% 24.1% Global Healthcare 7.3 8.5 7.9 Global Surety 4.8 5.1 4.5 Other Global Specialty 15.6 17.9 17.4 International 5.0 3.8 3.1 ----- ----- ----- Total primary insurance operations 51.1 55.3 57.0 Reinsurance 13.9 12.1 13.5 ----- ----- ----- Total underwriting 65.0 67.4 70.5 Investment operations: Net investment income 14.5 16.6 16.8 Realized investment gains 7.2 3.6 2.4 ----- ----- ----- Total investment operations 21.7 20.2 19.2 Other 1.1 1.0 0.8 ----- ----- ----- Total property-liability insurance 87.8 88.6 90.5 Life insurance 7.4 6.3 5.1 Asset management 4.4 4.7 4.0 Parent company, other operations and eliminations 0.4 0.4 0.4 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== NARRATIVE DESCRIPTION OF BUSINESS PROPERTY-LIABILITY INSURANCE Our property-liability insurance operations consist of five business segments that underwrite primary insurance ("Primary Insurance Operations"), a reinsurance segment ("St. Paul Re"), and an investment segment responsible for administering and overseeing our property-liability investment portfolio. Our Primary Insurance Operations underwrite property and liability insurance and provide insurance-related products and services to commercial and professional customers throughout the United States and in selected international markets. In the United States, our largest primary insurance underwriting subsidiary is St. Paul Fire and Marine Insurance Company ("Fire and Marine"). Three of the five business segments in our Primary Insurance Operations comprise our Global Specialty Practices organization, which underwrites specialty commercial insurance coverages on a global basis. The primary sources of property-liability revenues are premiums earned from insurance policies and reinsurance contracts, income earned from the investment portfolio and gains from sales of investments. According to the most recent industry statistics published in "Best's Review" with respect to property-liability insurers doing business in the United States, our property- liability underwriting operations ranked 14th on the basis of 1999 written premiums. Principal Departments and Products. The "Property-Liability Underwriting Results by Segment" table included in "Management's Discussion and Analysis" on page 25 of our 2000 Annual Report to Shareholders, which summarizes written premiums, underwriting results and statutory combined ratios for each of our underwriting segments for the last three years, is incorporated herein by reference. The following discussion provides more information about the structure of, and products offered by, our property- liability insurance underwriting segments. Primary Insurance Operations - ---------------------------- Our Primary Insurance Operations consist of the following five business segments: Commercial Lines Group. The Commercial Lines Group, in general, underwrites general liability and casualty, property, workers' compensation, commercial auto, inland marine, umbrella and excess liability, and package coverages in the United States. This segment includes the following business centers: Middle Market Commercial provides "all lines" property and liability insurance and risk management services for midsize and large commercial enterprises that generally have less than $500 million in total revenues. Tailored coverages and products are marketed to specific customer groups such as golf facilities, museums, colleges and schools, multipurpose recreational facilities, manufacturers, wholesalers, processors and service-related industries (retailers, insurance companies, and hospitality and entertainment firms). Small Commercial provides coverages to small businesses, including retailers, wholesalers, professional offices, manufacturers and contractors. The Middle Market Commercial and Small Commercial business centers also both offer unique coverages for group accounts, such as franchise operations, associations and multi- location accounts. Our Transportation business center markets property and liability coverages and risk control services to the trucking industry. The Large Accounts business center serves large commercial entities with revenues in excess of $500 million, offering comprehensive global programs including large deductibles, self-insured retentions, and retrospective rating plans. The National Programs business center underwrites insurance programs that are national in scope and meet certain criteria, including premium volume and profitability potential. The Catastrophe Risk business center underwrites property coverage for major U.S. corporations, including policyholders with specialty needs and high property values, with an emphasis on earthquake and hurricane catastrophe exposures. This business center also provides personal property coverages for earthquake exposures in California through GeoVera Insurance Company. The acquisition of Pacific Select in February 2000 expanded our involvement in California earthquake coverages. Our participation in insurance pools and associations, which provide specialized underwriting skills and risk management services for the classes of business that they write, is also included in Commercial Lines Group results. These pools and associations serve to increase the underwriting capacity of participating companies for insurance policies where the concentration of risk is so high or the amount so large that a single company could not prudently accept the entire risk. We limit our participation in these pools and associations. Global Healthcare. Our Global Healthcare segment is one component of our Global Specialty Practices organization. This segment underwrites professional liability, property and general liability insurance throughout the healthcare delivery system in the United States and in selected international markets. Products include coverages for healthcare professionals (physicians and surgeons, dental professionals and nurses); individual healthcare facilities (including hospitals, long-term care facilities and other facilities such as laboratories); and entire systems, such as hospital networks and managed care systems. Specialized claim and loss control services are vital components of Global Healthcare's insurance products and services. Our Healthcare segment is one of the leading medical liability insurers in the United States. In April 2000, we completed our acquisition of MMI Companies, Inc. ("MMI"), an international healthcare risk services company, for a total cost of approximately $206 million in cash and the assumption of $165 million of MMI debt and capital securities. Note 2 to the consolidated financial statements on pages 54 and 55 of our 2000 Annual Report to Shareholders, which provides additional information about our acquisition of MMI, is incorporated herein by reference. Global Surety. Our Global Surety segment, another component of our Global Specialty Practices organization, underwrites surety bonds, which are agreements under which one party, the surety, guarantees to another party, the owner or obligee, that a third party, the contractor or principal, will perform in accordance with contractual obligations. The Contract Surety business center specializes in providing bid, performance and payment bonds, domestically and internationally, to a broad spectrum of clients specializing in general contracting, highway and bridge construction, asphalt paving, underground and pipeline construction, manufacturing, civil and heavy engineering, and mechanical and electrical construction. Bid bonds provide financial assurance that a bid has been submitted in good faith and that the contractor intends to enter into the contract at the price bid and provide the required performance and payment bonds. Performance bonds protect the obligee from financial loss should the contractor fail to perform the contract in accordance with the terms and conditions of the contract documents. Payment bonds guarantee that the contractor will pay certain subcontractor, labor and material bills associated with a project. The Commercial Surety and Fidelity business center offers license and permit bonds, court bonds, public official bonds and other miscellaneous bonds. According to data published by the Surety Association of America, our domestic Surety operations were the largest in North America based on 1999 written premiums, accounting for approximately 11% of the domestic market. Our Surety segment also includes Afianzadora Insurgentes, the leading surety operation in Mexico. According to data published by AFIANZA, the Mexican Surety Commission, Afianzadora Insurgentes accounted for nearly 40% of the Mexican surety bond market based on annual written premium volume in 2000. Other Global Specialty. This segment, the final component of our Global Specialty Practices organization, is composed of the following business centers that serve specific commercial customer groups in the United States and in selected international markets: Construction provides traditional insurance, and financial and risk management services, to a broad range of contractors and owners of construction projects. Technology offers a comprehensive portfolio of specialty products and services to companies involved in telecommunications, information technology, medical technology and biotechnology, and industrial electronics manufacturing. Financial and Professional Services provides all coverages for financial institutions, including property, liability, professional liability and management liability coverages. This business center also provides financial products coverages for corporations and nonprofit organizations, professional liability coverages for lawyers, and errors and omissions coverages for other professionals, including insurance agents, real estate agents and appraisers. Public Sector Services markets insurance products and services, including professional liability coverages, to cities, counties, townships and special governmental districts. Global Marine provides a variety of property-liability insurance related to ocean and inland waterways traffic, including cargo and hull property protection. Excess & Surplus Lines underwrites umbrella and excess liability coverages, as well as property and liability insurance for high-risk classes of business and unique, sometimes one-of-a-kind risks that standard insurance markets generally avoid. Oil and Gas provides standard and specialty insurance coverages for customers involved in the exploration and production of oil and gas, including operators, drillers and oil servicing contractors. St. Paul Athena is a specialty underwriting facility primarily dedicated to business generated through Swett & Crawford, a wholesale insurance brokerage subsidiary of Aon Corporation. International. Our International business segment consists of our operations at Lloyd's, specialty commercial business in selected international markets that is not managed on a global basis (primarily standard commercial business), and, beginning in April 2000, MMI's London-based insurance operation, Unionamerica. This segment also provides coverage for the non-U.S. risks of U.S. corporate policyholders, and vice versa. We have built a local market presence in 14 countries that account for nearly 80% of the world's insurance market. In addition to Canada, we underwrite insurance in Europe, Africa, Australia and Latin America. At Lloyd's we provide capital to 11 underwriting syndicates and own a managing agency. Our International segment offers a broad range of products and services, with a particular emphasis on liability coverages, tailored to meet the unique needs of both our multinational customers as well as our customers in each of the domestic markets in which we operate. Reinsurance Our Reinsurance segment primarily operates under the name "St. Paul Re," which underwrites traditional treaty and facultative reinsurance for property, liability, ocean marine, surety, health and certain specialty classes of coverages. Through its Financial Solutions business center, St. Paul Re also underwrites "nontraditional" reinsurance, which combines elements of traditional underwriting risk with financial risk protection to meet specific financial objectives of corporate customers. St. Paul Re underwrites traditional reinsurance for leading property, liability and other non-life insurance companies worldwide, with clients in North America, Latin America, the Caribbean, Europe, Australia and the Asia-Pacific region. Reinsurance is an agreement by which an insurance company will pay a premium to transfer, or "cede," a portion of the risk it has underwritten to a reinsurer. A large portion of reinsurance is effected automatically under general reinsurance contracts known as treaties. In some instances, reinsurance is effected by negotiation on individual risks, which is referred to as facultative reinsurance. Through Discover Re, our Reinsurance segment underwrites primary insurance and reinsurance and provides related services to self- insured companies and insurance pools, in addition to ceding to and reinsuring captive insurers, all within the alternative risk transfer market. Through alternative risk transfer, a company self- insures, or insures through a captive insurer, the portion of its own losses which are predictable and purchases insurance for the less predictable, high-severity losses that could have a major financial impact on the company. According to the most recent data published by the Reinsurance Association of America, St. Paul Re's written premium volume through the first nine months of 2000 ranked it as the sixth- largest reinsurer in the United States. According to data published in "Business Insurance," St. Paul Re was ranked as the 17th-largest property-liability reinsurer in the world, based on 1999 written premiums. PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION Our Primary Insurance Operations in the United States are licensed to transact business in all 50 states, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. At least five percent of our 2000 U.S. property-liability written premiums were produced in each of Illinois, California, Florida, Texas and New York. Our primary insurance business in the United States is produced primarily through approximately 6,000 independent insurance agencies and insurance brokers. The needs of agents, brokers and policyholders are addressed through approximately 130 offices located throughout the United States. St. Paul Re produces reinsurance business from its New York headquarters, as well as from offices in London, Brussels, Chicago, Hong Kong, Miami, Morristown NJ, Munich, Singapore, Sydney and Tokyo. It underwrites business through brokers and, for certain types of reinsurance and in certain markets, on a direct basis. Discover Re underwrites alternative risk transfer business from its Farmington, CT headquarters, from regional U.S. offices in Atlanta, Pittsburgh, Dallas, Minneapolis and San Francisco, and from a correspondent office in London. Our International operations are headquartered in London and underwrite insurance primarily through domestic operations in 14 markets outside the United States (Argentina, Australia, Botswana, Canada, France, Germany, Ireland, Lesotho, Mexico, New Zealand, South Africa, Spain, The Netherlands and the United Kingdom). These operations distribute their products principally through independent brokers. Through its owned operations and partner companies, International's global network conducts business in more than 70 countries worldwide. Through its presence at Lloyd's, our International segment also has access to business markets in virtually every country of the world for its specialty products including aviation, kidnap and ransom, malicious product tampering, creditor/payment protection and personal accident. The Lloyd's managing agency, operating under the name St. Paul Syndicate Management Ltd., underwrites business for 11 syndicates, collectively representing approximately 4% of Lloyd's total capacity. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES General Information. When claims are made by or against policyholders, any amounts that our underwriting operations pay or expect to pay to the claimant are referred to as losses. The costs of investigating, resolving and processing these claims are referred to as loss adjustment expenses ("LAE"). We establish reserves that reflect the estimated unpaid total cost of these two items. The reserves for unpaid losses and LAE at Dec. 31, 2000 cover claims that were incurred not only in 2000 but also in prior years. They include estimates of the total cost of claims that have already been reported but not yet settled ("case" reserves), and those that have been incurred but not yet reported ("IBNR" reserves). Loss reserves are reduced for estimates of salvage and subrogation. Loss reserves for tabular workers' compensation business and certain assumed reinsurance contracts are discounted to present value. Additional information about these discounted liabilities is set forth in Note 1 to the consolidated financial statements on pages 51 through 54 of our 2000 Annual Report to Shareholders, and is incorporated herein by reference. During 2000, $7.9 million of discount was amortized and $2.9 million of additional discount was accrued. Management continually reviews loss reserves, using a variety of statistical and actuarial techniques to analyze current claim costs, frequency and severity data, and prevailing economic, social and legal factors. Management believes that the reserves currently established for losses and LAE are adequate to cover their eventual costs. However, final claim payments may differ from these reserves, particularly when these payments may not take place for several years. Reserves established in prior years are adjusted as loss experience develops and new information becomes available. Adjustments to previously estimated reserves are reflected in results in the year in which they are made. Ten-year Development. The table on page 9 presents a development of net loss and LAE reserve liabilities and payments for the years 1990 through 2000. The top line on the table shows the estimated liability for unpaid losses and LAE, net of reinsurance recoverables, recorded at the balance sheet date for each of the years indicated. The table excludes the reserves and activity of Economy Fire and Casualty Company and its subsidiaries ("Economy"), which were included in the sale of our standard personal insurance operations to Metropolitan Property and Casualty Insurance Company ("Metropolitan") in 1999. The table does, however, include reserves and activity for the non-Economy standard personal insurance business that was sold to Metropolitan, since we remain liable for claims on non-Economy standard personal insurance policies that result from losses occurring prior to Sept. 30, 1999 (the closing date of the sale). Also excluded from the table are the reserves and activity for our nonstandard auto business, which we sold to Prudential in the second quarter of 2000. Notes 8 and 14 to the consolidated financial statements on page 59, and pages 68 and 69, respectively, of our 2000 Annual Report to Shareholders, which include additional information regarding the sale of these operations and the related reserves, are incorporated herein by reference. In 1997, we changed the method by which we assign loss activity to a particular year for assumed reinsurance written by our U.K.-based reinsurance operation. Prior to 1997, that loss activity was assigned to the year in which the underlying reinsurance contract was written. In 1997, our analysis indicated that an excess amount of loss activity was being assigned to prior years because of this practice. As a result, we implemented an improved procedure in 1997 that more accurately assigns loss activity for this business to the year in which it occurred. This change had the impact of increasing favorable development on previously established reserves by approximately $110 million in 1997. There was no net impact on total incurred losses, however, because there was a corresponding increase in the provision for current year loss activity in 1997. Development data for individual years prior to 1997 in this table were not restated to reflect this new procedure because reliable data to do so was not available. The upper portion of the table, which shows the re-estimated amounts relating to the previously recorded liabilities, is based upon experience as of the end of each succeeding year. These estimates are either increased or decreased as further information becomes known about individual claims and as changes in the trend of claim frequency and severity become apparent. The "Cumulative redundancy" line on the table for any given year represents the aggregate change in the estimates for all years subsequent to the year the reserves were initially established. For example, the 1991 reserve of $12,838 million developed to $12,470 million, or a $368 million redundancy, by the end of 1993. By the end of 2000, the 1991 reserve had developed a redundancy of $1,107 million. The changes in the estimate of 1991 loss reserves were reflected in operations during the past nine years. In 1993, we adopted the provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." This statement required, among other things, that reinsurance recoverables on unpaid losses and LAE be shown as an asset, instead of the prior practice of netting this amount against insurance reserves for balance sheet reporting purposes. The middle portion of the table, which includes data for only those periods impacted since the adoption of SFAS No. 113 (the years 1992 through 2000), represents a reconciliation between the net reserve liability as shown on the top line of the table and the gross reserve liability as shown on our balance sheet. This portion of the table also presents the gross re-estimated reserve liability as of the end of the latest re-estimation period (Dec. 31, 2000) and the related re-estimated reinsurance recoverable. We did not restate data for years prior to 1992 in this table for presentation on a gross basis due to the impracticality of determining such gross data on a reliable basis for our foreign underwriting operations. The lower portion of the table presents the cumulative amounts paid with respect to the previously recorded liability as of the end of each succeeding year. For example, as of Dec. 31, 2000, $9,343 million of the currently estimated $11,731 million of losses and LAE that have been incurred for the years up to and including 1991 have been paid. Thus, as of Dec. 31, 2000, it is estimated that $2,388 million of incurred losses and LAE have yet to be paid for the years up to and including 1991. Caution should be exercised in evaluating the information shown on this table. It should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the portion of the development shown for year-end 1995 reserves that relates to 1990 losses is included in the cumulative redundancy (deficiency) for the years 1990 through 1995. In addition, the table presents calendar year data. It does not present accident or policy year development data, which some readers may be more accustomed to analyzing. The social, economic and legal conditions and other trends which have had an impact on the changes in the estimated liability in the past are not necessarily indicative of the future. Accordingly, readers are cautioned against extrapolating any conclusions about future results from the information presented in this table. Note 8 to the consolidated financial statements, on page 59 of our 2000 Annual Report to Shareholders, includes a reconciliation of beginning and ending loss reserve liabilities for each of the last three years and is incorporated herein by reference. Additional information about our reserves is contained in the "Loss and Loss Adjustment Expense Reserves" and "Environmental and Asbestos Claims" sections of "Management's Discussion and Analysis" on pages 35 and 36 of our 2000 Annual Report to Shareholders, which are incorporated herein by reference. ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE (LAE) DEVELOPMENT (In millions)
Year ended December 31 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 - ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Net liability for unpaid losses and LAE $11,875 12,838 13,195 12,970 12,997 13,464 14,689 14,704 14,813 14,042 13,545 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== Liability re-estimated as of: One year later 12,224 12,676 12,896 12,601 12,665 12,995 13,929 14,534 14,822 13,315 Two years later 12,124 12,470 12,574 12,227 12,227 12,289 13,703 14,534 14,097 Three years later 12,053 12,270 12,369 11,929 11,770 12,141 13,791 13,917 Four years later 11,926 12,213 12,129 11,567 11,621 12,195 13,395 Five years later 11,913 12,056 11,900 11,454 11,580 11,683 Six years later 11,845 11,936 11,802 11,404 11,197 Seven years later 11,863 11,890 11,763 11,112 Eight years later 11,839 11,823 11,640 Nine years later 11,827 11,731 Ten years later 11,678 Cumulative redundancy $197 1,107 1,555 1,858 1,800 1,781 1,294 787 716 727 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== Net liability for unpaid losses and LAE 13,195 12,970 12,997 13,464 14,689 14,704 14,813 14,042 13,545 Reinsurance recoverable on unpaid losses 3,904 2,581 2,533 2,824 2,864 3,051 3,199 3,678 4,651 ------ ------ ------ ------ ------ ------ ------ ------ ------ Gross liability 17,099 15,551 15,530 16,288 17,553 17,755 18,012 17,720 18,196 ====== ====== ====== ====== ====== ====== ====== ====== ====== Gross re-estimated liability: One year later 16,452 15,157 15,620 15,844 17,024 17,725 17,840 17,011 Two years later 16,128 15,181 15,257 15,105 16,787 17,466 16,813 Three years later 15,983 14,968 14,666 14,985 16,669 16,559 Four years later 15,810 14,500 14,675 14,743 15,881 Five years later 15,521 14,530 14,350 13,883 Six years later 15,549 14,234 13,688 Seven years later 15,406 13,813 Eight years later 15,187 Gross cumulative redundancy 1,912 1,738 1,842 2,405 1,672 1,196 1,199 709 ====== ====== ====== ====== ====== ====== ====== ====== Cumulative amount of net liability paid through: One year later $3,102 3,021 3,008 2,723 2,641 2,893 3,335 3,518 3,950 3,769 Two years later 5,103 5,018 4,958 4,506 4,491 4,827 5,657 6,144 6,476 Three years later 6,428 6,372 6,249 5,778 5,817 6,309 7,444 7,906 Four years later 7,366 7,268 7,159 6,693 6,851 7,390 8,698 Five years later 8,001 7,908 7,824 7,423 7,648 7,857 Six years later 8,465 8,415 8,314 8,020 7,940 Seven years later 8,870 8,803 8,684 8,247 Eight years later 9,191 9,082 8,988 Nine years later 9,411 9,343 Ten years later 9,602 Cumulative amount of gross liability paid through: One year later 4,064 3,316 3,241 3,408 3,702 3,943 4,392 4,297 Two years later 6,572 5,489 5,491 5,386 6,310 6,796 7,170 Three years later 8,164 7,054 6,842 7,074 8,316 8,657 Four years later 9,290 7,989 8,034 8,289 9,559 Five years later 9,994 8,831 8,942 8,870 Six years later 10,582 9,540 9,311 Seven years later 11,177 9,866 Eight years later 11,511
Ceded Reinsurance. Through ceded reinsurance, other insurers and reinsurers agree to share certain risks that our subsidiaries have underwritten. The purpose of reinsurance is to limit a ceding insurer's maximum net loss arising from large risks or catastrophes. Reinsurance also serves to increase the direct writing capacity of the ceding insurer. Amounts recoverable on ceded losses are recorded as an asset. In addition, through aggregate excess-of-loss treaties, reinsurance can serve to reduce the volatility often associated with the results of primary property-liability insurance underwriting entities. The collectibility of reinsurance is subject to the solvency of reinsurers. Our Reinsurance Credit Risk Committee, which has established financial standards to determine qualified, financially secure reinsurers, guides the placement of ceded reinsurance. Uncollectible reinsurance recoverables have not had a material adverse impact on our results of operations, liquidity or financial position. Our reported results in both 2000 and 1999 benefited from the impact of separate aggregate excess-of-loss reinsurance treaties that we entered into effective January 1 of each year (the "corporate program"). In addition, our Reinsurance segment results in both years benefited from separate aggregate excess-of-loss reinsurance treaties, unrelated to the corporate program. The combined impact of all of these treaties on our reported results was as follows: (In millions) 2000 1999 ----------- ----- ----- Ceded written premiums $ 474 $ 273 Ceded losses and loss adjustment expenses 831 534 Ceded earned premiums 474 273 ----- ----- Net pretax benefit $ 357 $ 261 ===== ===== Note 16 to the consolidated financial statements on pages 72 and 73 of our 2000 Annual Report to Shareholders, which provides a schedule of ceded reinsurance and additional information about the aggregate excess-of-loss reinsurance treaties, is incorporated herein by reference. Property - Liability Investment Operations Objectives. Our board of directors approves the overall investment plan for the companies within The St. Paul's property-liability operations. Each subsidiary develops its own specific investment policy tailored to comply with domestic laws and regulations and the overall corporate investment plan. The primary objectives of those plans are as follows: 1) to maintain a widely diversified fixed maturities portfolio structured to maximize investment returns while generating sufficient liquidity to fund operational cash requirements; 2) to minimize credit risk through investments in high-quality instruments; and 3) to provide for long-term growth in the market value of the investment portfolio and enhance shareholder value through investments in certain other investment classes, such as equity securities, venture capital and real estate. The following discussion provides more information on each of our invested asset classes. Fixed Maturities. Fixed maturities constituted 75% (at cost) of our property-liability insurance operations' investment portfolio at Dec. 31, 2000. The portfolio is primarily composed of high- quality, intermediate-term taxable U.S. government agency and corporate bonds and tax-exempt U.S. municipal bonds. The table on the following page presents information about the fixed maturities portfolio for the years 1998 through 2000 (dollars in millions). Estimated Weighted Weighted Amortized Fair Value Pretax Net Average Average Cost at at Year- Investment Pre-tax After-tax Year Year-end end Income Yield Yield - ----- -------- ---------- ---------- --------- --------- 2000 $15,366 $15,791 $1,162 6.8% 5.1% 1999 15,256 15,230 1,171 6.8% 5.1% 1998 15,966 16,942 1,204 6.8% 5.1% We determine the mix of our investments in taxable and tax-exempt securities based on our current and projected tax position and the relationship between taxable and tax-exempt investment yields at the time of purchase. Taxable, intermediate-term, investment-grade securities accounted for the majority of new bond purchases in each of the years 2000, 1999 and 1998. We carry the fixed maturities portfolio on our balance sheet at estimated fair value, with unrealized appreciation and depreciation (net of taxes) recorded in common shareholders' equity. The fixed maturities portfolio is managed conservatively to provide reasonable returns while limiting exposure to risks. Approximately 94% of the fixed maturities portfolio is rated at investment grade levels (BBB- or better). The remaining 6% of the portfolio is split between nonrated and non-investment grade (high-yield) securities. We believe the nonrated securities would be considered investment-grade in quality if rated. Equities. Equity securities comprised 5% of the property-liability operations' investments (at cost) at Dec. 31, 2000, and consist of a diversified portfolio of common stocks, which are held with the primary objective of achieving capital appreciation. Sales of equities generated $95 million of pretax realized investment gains in 2000, and dividend income totaled $15 million. The portfolio's carrying value at year-end included $326 million of pretax unrealized appreciation. Real Estate and Mortgage Loans. Our property-liability operations' real estate holdings consist of a diversified portfolio of commercial office and warehouse properties that we own directly or have partial interest in through joint ventures. The properties are geographically distributed throughout the United States and had an occupancy rate of 95% at Dec. 31, 2000. We also have a portfolio of real estate mortgage investments acquired in the merger with USF&G. The real estate and mortgage loan portfolio produced $103 million of pretax investment income in 2000 and generated $4 million of pretax realized gains. Venture Capital. Securities of small- to medium-sized companies spanning a variety of industries comprise our venture capital holdings, which accounted for 3% of property-liability investments (at cost) at Dec. 31, 2000. These investments are in the form of limited partnership interests or direct equity investments. Venture capital investments generated pretax realized investment gains of $554 million in 2000. The carrying value of venture capital investments at Dec. 31, 2000 included $406 million of pretax unrealized appreciation. Securities Lending Collateral. This investment class, which comprised 6% of property-liability investments at Dec. 31, 2000, consists of collateral held on certain fixed-maturity securities loaned to other institutions through a lending agent for short periods of time. The collateral is maintained at 102%, marked to market daily, of the fair value of the loaned securities. We retain full ownership of the loaned securities and are indemnified by the lending agent in the event a borrower becomes insolvent or fails to return the securities. Short-Term and Other Investments. Our portfolio also includes short-term securities and other miscellaneous investments, which in the aggregate comprised 6% of property-liability investments at Dec. 31, 2000. Derivatives. Our property-liability investment operations have had limited involvement with derivative financial instruments, primarily for purposes of hedging against fluctuations in foreign currency exchange rates and interest rates. Our investment operations have not participated in the derivatives market for trading or speculative purposes. Notes 1, 4, 5 and 7 to the consolidated financial statements, which are included in our 2000 Annual Report to Shareholders, provide additional information about our investment portfolio and are incorporated herein by reference. The "Investment Operations" and "Exposures to Market Risk" sections of "Management's Discussion and Analysis" in said Annual Report are also incorporated herein by reference. LIFE INSURANCE F&G Life markets many forms of annuity and life insurance products, including single premium and flexible premium deferred annuities (such as tax-sheltered annuities and equity-indexed annuities), structured settlement annuities and immediate annuities. F&G Life also underwrites traditional and universal life insurance products. The majority of F&G Life's products are sold throughout the United States through independent agents, managing general agents, specialty brokerage firms, and in selected institutional markets. Structured settlement annuities are sold predominantly to property- liability companies (primarily our U.S. underwriting operations) for use in settlement of certain of their insurance claims. Note 8 to the consolidated financial statements, on page 59 of our 2000 Annual Report to Shareholders, provides a table of F&G Life's future policy benefit reserves by type of product and is incorporated herein by reference. Life Insurance Investment Operations. F&G Life's investment portfolio totaled $5.0 billion at Dec. 31, 2000, consisting of investment grade government and corporate securities (63% of the total); asset-backed and mortgage-backed securities (20%); high- yield investments (7%); and real estate mortgage loans and other investments (10%). F&G Life uses derivative instruments in the form of over-the-counter indexed call options for the purpose of hedging interest credited on its equity-indexed annuity products. The cost of derivatives amounted to less than 1% of invested assets at Dec. 31, 2000. Note 7 on page 58 of The St. Paul's 2000 Annual Report to Shareholders, which includes additional information about F&G Life's involvement with derivative financial instruments, is incorporated herein by reference. ASSET MANAGEMENT The John Nuveen Company ("Nuveen") is our asset management subsidiary. The St. Paul and its largest property-liability insurance subsidiary, St. Paul Fire and Marine Insurance Company ("Fire and Marine") hold a combined 78% interest in Nuveen. Nuveen's principal businesses are asset management and the development, marketing and distribution of investment products and services for advisors to the affluent and high-net-worth market segments. Nuveen provides investment products, including individually managed accounts, mutual funds, exchange-traded funds (closed-end funds) and defined portfolios through registered representatives associated with unaffiliated firms, including broker-dealers, commercial banks, affiliates of insurance providers, financial planners, accountants, consultants, and investment advisers. Nuveen's primary business activities generate two principal sources of revenue: (1) ongoing advisory fees earned on assets under management, including individually managed accounts, mutual funds and exchange-traded funds; and (2) transaction-based revenue earned upon the sale of defined portfolio and mutual fund products. Nuveen's business is conducted through six subsidiaries: Nuveen Investments, a registered broker and dealer in securities under the Securities Exchange Act of 1934 and five investment advisory subsidiaries registered under the Investment Advisers Act of 1940. The five investment advisory subsidiaries are Nuveen Advisory Corp. (NAC), Nuveen Institutional Advisory Corp. (NIAC), Nuveen Asset Management Inc. (NAM), Rittenhouse Financial Services, Inc. (Rittenhouse) and Nuveen Senior Loan Asset Management, Inc. (NSLAM). Nuveen Investments provides investment product distribution and related services for Nuveen's managed funds and defined portfolios. NAC, NIAC and NSLAM provide investment management services for and administer the business affairs of the Nuveen managed funds. Rittenhouse and NAM provide investment management services for individually managed accounts, and Rittenhouse also acts as sub-adviser and portfolio manager for a mutual fund managed by NIAC. At Dec. 31, 2000, Nuveen's assets under management totaled $62.0 billion, consisting of $28.4 billion of exchange-traded funds, $21.7 billion of managed accounts, and $11.9 billion of mutual funds. Municipal securities accounted for 66% of the underlying managed assets. In 2000, Nuveen repurchased 1,175,916 of its outstanding common shares for a total cost of $51 million. In 1999, Nuveen repurchased 914,100 of its outstanding common shares for a total cost of $36 million. The repurchases in both years were solely from minority shareholders. Our ownership share in Nuveen did not materially change in either year as a result of these share repurchases, due to Nuveen's issuance of common shares related to stock option and other incentive plans. COMPETITION AND REGULATION The financial services industry in general continues to be affected by an intensifying competitive environment, as demonstrated by consolidation through mergers and acquisitions and competition from new entrants, as well as established competitors using new technologies, including the Internet, to establish or expand their business. The Gramm-Leach-Bliley Act, passed in 1999, which repealed U.S. laws that separated commercial banking, investment banking and insurance activities, together with changes to the industry resulting from previous reforms, has increased the number of companies competing for a similar customer base. Property-Liability Insurance. Our domestic and international underwriting subsidiaries compete with a large number of other insurers and reinsurers. In addition, many large commercial customers self-insure their risks or utilize large deductibles on purchased insurance. Our subsidiaries compete principally by attempting to offer a combination of superior products, underwriting expertise and services at a competitive, yet profitable, price. The combination of products, services, pricing and other methods of competition varies by line of insurance and by coverage within each line of insurance. We and our underwriting subsidiaries, are subject to regulation by certain states as an insurance holding company system. Such regulation generally provides that transactions between companies within the holding company system must be fair and equitable. Transfers of assets among such affiliated companies, certain dividend payments from underwriting subsidiaries and certain material transactions between companies within the system may be subject to prior notice to, or prior approval by, state regulatory authorities. During 2000, we received $483 million of cash dividends from our U.S. underwriting operations. Although $1.6 billion will be available for dividends in 2000, business and regulatory considerations may impact the amount of dividends actually paid. In addition, any change of control (generally presumed by the holding company laws to occur with the acquisition of 10% or more of an insurance holding company's voting securities) of The St. Paul and its underwriting subsidiaries is subject to prior approval by regulators. The underwriting subsidiaries are subject to licensing and supervision by government regulatory agencies in the jurisdictions in which they do business. The nature and extent of such regulation vary but generally have their source in statutes which delegate regulatory, supervisory and administrative powers to insurance regulators, which in the U.S. are state authorities. Such regulation, supervision and administration of the underwriting subsidiaries may relate, among other things, to the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; restrictions on the size of risk which may be insured under a single policy; deposits of securities for the benefit of policyholders; regulation of policy forms and premium rates; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; requirements regarding reserves for unearned premiums, losses and other matters; the nature of and limitations on dividends to policyholders and shareholders; the nature and extent of required participation in insurance guaranty funds; and the involuntary assumption of hard-to-place or high-risk insurance business, primarily in workers' compensation insurance lines. Loss ratio trends in property-liability insurance underwriting experience may be improved by, among other things, changing the kinds of coverages provided by policies, providing loss prevention and risk management services, increasing premium rates, purchasing reinsurance or by a combination of these. The ability of our insurance underwriting subsidiaries to meet emerging adverse underwriting trends may be delayed, from time to time, by the effects of laws which require prior approval by insurance regulatory authorities of changes in policy forms and premium rates. Our U.S. underwriting operations do business in all 50 states and the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands. Many of these jurisdictions require prior approval of most or all premium rates. Our insurance underwriting business in the United Kingdom is regulated by the Financial Services Authority (FSA). The FSA's principal objectives are to ensure that insurance companies are responsibly managed, that they have adequate funds to meet liabilities to policyholders and that they maintain required levels of solvency. In Canada, the conduct of insurance business is regulated under provisions of the Insurance Companies Act of 1992, which requires insurance companies to maintain certain levels of capital depending on the type and amount of insurance policies in force. The Lloyd's operation is currently regulated by the Council of Lloyd's, a self-regulatory organization, which will in due course be regulated by the FSA. We are also subject to regulations in the other countries and jurisdictions in which we underwrite insurance business. Life Insurance. Our life insurance subsidiaries operate in a competitive environment, with approximately 1,400 companies nationwide in the industry including stock and mutual companies. F&G Life ranked 117th based on 1999 statutory net premiums written, 120th based on 1999 statutory assets, and 174th based on 1999 statutory capital and surplus. In the life insurance industry, interest crediting rates, underwriting philosophy, policy features, financial stability, credit standing and service quality are important competitive factors. F&G Life's products compete not only with those offered by other life insurance companies, but also with other income accumulation-oriented products offered by other financial services companies. The life insurance industry has experienced considerable competitive and economic pressure in recent periods as a result of fluctuating interest rates and other factors. F&G Life is subject to licensing and supervision by government regulatory agencies in the jurisdictions in which it does business. The nature and extent of regulation vary but generally have their source in statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. Such regulation and supervision of F&G Life may relate, among other things, to the standards of solvency which must be met and maintained; the licensing of insurers and agents; the nature of and limitations on investments; deposits of securities for the benefit of policyholders; regulation of policy forms; periodic examination of the affairs of the company; annual and other reports required to be filed; requirements regarding reserves for policyholder benefits; fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values; the nature of and limitations on dividends to policyholders and shareholders; and the nature and extent of required participation in insurance guaranty funds. Asset Management. Nuveen is subject to substantial competition in all aspects of its business. Investment products are sold to the public by broker-dealers, banks, insurance companies and others. Nuveen competes with these other providers of products primarily on the basis of the range of products offered, the investment performance of such products, quality of service, fees charged, the level and type of broker compensation, the manner in which such products are marketed and distributed, and the services provided to investors. Nuveen is a publicly-traded company registered under the Securities Exchange Act of 1934 and listed on the New York Stock Exchange. One of its subsidiaries, Nuveen Investments, is a broker-dealer registered under the Securities Exchange Act of 1934, and is subject to regulation by the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and other federal and state agencies and self-regulatory organizations. It is also subject to net capital requirements that restrict its ability to pay dividends. Nuveen's other five subsidiaries are investment advisers registered under the Investment Advisers Act of 1940. As such, they are subject to regulation by the Securities and Exchange Commission. FORWARD-LOOKING STATEMENT DISCLOSURE This report contains certain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. Forward- looking statements are statements other than historical information or statements of current condition. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks" or "estimates," or variations of such words, and similar expressions are also intended to identify forward-looking statements. Examples of these forward-looking statements include statements concerning: market and other conditions and their effect on future premiums, revenues, earnings, cash flow and investment income; price increases, improved loss experience, and expense savings resulting from the restructuring actions announced in recent years. In light of the risks and uncertainties inherent in future projections, many of which are beyond our control, actual results could differ materially from those in forward-looking statements. These statements should not be regarded as a representation that anticipated events will occur or that expected objectives will be achieved. Risks and uncertainties include, but are not limited to, the following: competitive considerations, including the ability to implement price increases and possible actions by competitors; general economic conditions including changes in interest rates and the performance of financial markets; changes in domestic and foreign laws, regulations and taxes; changes in the demand for, pricing of, or supply of reinsurance or insurance; catastrophic events of unanticipated frequency or severity; loss of significant customers; 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. Item 2. Properties. - ------ ---------- Fire and Marine owns our corporate headquarters buildings, located at 385 Washington Street and 130 West Sixth Street, St. Paul, MN. These buildings are adjacent to one another and consist of approximately 1.1 million square feet of gross floor space. Fire and Marine also owns property in Woodbury, MN where its Administrative Services Building and off-site computer processing operations are located. Fire and Marine also owns the former USF&G headquarters campus known as Mount Washington Center, located in Baltimore, MD. The campus currently houses offices for certain executives of The St. Paul, as well as offices for certain underwriting, legal and claim personnel. A training and development center also resides on the Mount Washington campus. Fire and Marine has leased a substantial portion of one of the buildings on the campus to an outside party. St. Paul International Insurance Company Ltd. owns a building in London, England, which houses a portion of its operations. We retained ownership of another building in London subsequent to the sale of Minet to Aon in 1997, which we were leasing to an outside party at Dec. 31, 2000. In a transaction completed in March 2001, we sold a 50% interest in this building. Fire and Marine and its subsidiary, St. Paul Properties, Inc., own a portfolio of income-producing properties in various locations across the United States that they have purchased for investment. Our operating subsidiaries rent or lease office space in most cities in which they operate. Management considers the currently owned and leased office facilities of The St. Paul and its subsidiaries adequate for the current and anticipated future level of operations. Item 3. Legal Proceedings. - ------ ----------------- The information set forth in the "Legal Matters" section of Note 13 to the consolidated financial statements, and the "Environmental and Asbestos Claims" section of "Management's Discussion and Analysis," which are included in our 2000 Annual Report to Shareholders on pages 67 and 68, and 36, respectively, are incorporated herein by reference. In 1990, at the direction of the UK Department of Trade and Industry (DTI), five insurance underwriting subsidiaries of London United Investments PLC (LUI) suspended underwriting new insurance business. At the same time, four of those subsidiaries, being insolvent, suspended payment of claims and have since been placed in provisional liquidation. The fifth subsidiary, Walbrook Insurance Company, continued paying claims until May of 1992 but has now also been placed in provisional insolvent liquidation. Weavers Underwriting Agency (Weavers), an LUI subsidiary, managed these insurers. Minet, a former insurance brokerage subsidiary of ours, had brokered business to and from Weavers for many years. From 1973 through 1980, our UK-based underwriting operations, now called St. Paul International Insurance Company Ltd. (SPI), had accepted business from Weavers. A portion of that business was ceded by SPI to reinsurers. Certain of those reinsurers have challenged the validity of certain reinsurance contracts relating to the Weavers pool, of which SPI was a member, in an attempt to avoid liability under those contracts. SPI and other members of the Weavers pool are seeking enforcement of the reinsurance contracts. Minet may also become the subject of legal proceedings arising from its role as one of the major brokers for Weavers. When we sold Minet in May 1997, we agreed to indemnify the purchaser for most of Minet's preclosing liabilities, including liabilities relating to the Weavers matter. We will vigorously contest any proceedings relating to the Weavers matter and we recognize that the final outcome of these proceedings, if adverse to us, may materially impact the results of operations in the period in which that outcome occurs, but we believe it will not have a materially adverse effect on our liquidity or overall financial position. Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- No matter was submitted to a vote of security holders during the quarter ended Dec. 31, 2000. EXECUTIVE OFFICERS OF THE REGISTRANT All of the following persons are regarded as executive officers of The St. Paul Companies, Inc. because of their responsibilities and duties as elected officers of The St. Paul, Fire and Marine, St. Paul International Underwriting or St. Paul Re. There are no family relationships between any of our executive officers and directors, and there are no arrangements or understandings between any of these officers and any other person pursuant to which the officer was selected as an officer. The officers listed in the chart below, except Thomas A. Bradley, Robert J. Lamendola, Stephen W. Lilienthal, Paul J. Liska, John A. MacColl and David R. Nachbar, have held positions with The St. Paul or one or more of its subsidiaries for more than five years, and have been employees of The St. Paul or a subsidiary for more than five years. Messrs. Thomas A. Bradley, Stephen W. Lilienthal, John A. MacColl and Robert J. Lamendola held positions and were employees of USF&G Corporation or one of its subsidiaries for five or more years prior to its merger with The St. Paul in April of 1998. Paul J. Liska joined The St. Paul in January of 1997. For three years prior to that date, Mr. Liska held various management positions with Specialty Foods Corporation, including the position of president and chief executive officer from January 1996 to January 1997. David R. Nachbar joined The St. Paul in August 1998. For two years prior to that date, Mr. Nachbar was employed as vice president, human resources and chief of staff-Asia for Citibank. From 1995 to 1996 he was the area human resources director for Frito-Lay, a PepsiCo unit. From 1989 through 1995, Mr. Nachbar was employed in various capacities in the human resources area by the Pizza Hut division of PepsiCo. Positions Presently Term of Office and Name Age Held Period of Service - ------------ --- ------------------- ------------------ Douglas W. Chairman, President Serving at the Leatherdale 64 and Chief Executive pleasure of the Officer Board from 5-90 (The St. Paul Companies, Inc.) Paul J. Liska 45 Executive Vice Serving at the President and Chief pleasure of the Financial Officer Board from 1-97 (The St. Paul Companies, Inc.) James F. Duffy 57 Chairman, Serving at the Reinsurance Group pleasure of the (St. Paul Re) Board from 7-00 John A. MacColl 52 Executive Vice Serving at the President and pleasure of the General Counsel Board from 5-99 (The St. Paul Companies, Inc.) Michael J. Conroy 59 Executive Vice Serving at the President, Chief pleasure of the Administrative Board from 8-95 Officer and Chief Privacy Officer (Fire and Marine) Positions Presently Term of Office and Name Age Held Period of Service - ----------- --- ------------------- ------------------ Stephen W. Executive Vice Serving at the Lilienthal 51 President (Fire and pleasure of the Marine) Board from 4-98 Robert J. Lamendola 56 President and Chief Serving at the Executive Officer - pleasure of the Surety and Board from 10-99 Construction (Fire and Marine) Michael J. Schell 50 President and Chief Serving at the Operating Officer - pleasure of the Global Reinsurance Board from 7-00 (St. Paul Re) T. Michael Miller 42 Senior Vice Serving at the President - Global pleasure of the Specialty Practices Board from 10-99 (Fire and Marine) Kent D. Urness 52 Senior Vice Serving at the President - Global pleasure of the Specialty Practices Board from 10-99 (Fire and Marine) Bruce A. Backberg 52 Senior Vice Serving at the President and pleasure of the Corporate Secretary Board from 11-97 (The St. Paul Companies, Inc.) Thomas A. Bradley 43 Senior Vice Serving at the President - Finance pleasure of the (The St. Paul Board from 5-98 Companies, Inc.) Karen L. Himle 45 Senior Vice Serving at the President - pleasure of the Corporate Affairs Board from 11-97 (The St. Paul Companies, Inc.) David R. Nachbar 38 Senior Vice Serving at the President - Human pleasure of the Resources Board from 8-98 (The St. Paul Companies, Inc.) Laura C. Gagnon 39 Vice President - Serving at the Finance and pleasure of the Investor Relations Board from 7-99 (The St. Paul Companies, Inc.) Management Changes. On March 9, 2001, the following management changes were announced by The St. Paul. Effective April 1, 2001, Paul J. Liska will resign from all positions held at The St. Paul. On that date, Thomas A. Bradley, currently Senior Vice President - Finance, will become Chief Financial Officer, with responsibility for all of The St. Paul's finance and accounting activities. Michael R. Wright, 44, currently Senior Vice President - Global Equities, was named Chief Investment Officer, with responsibility for all of The St. Paul's investment operations. John C. Treacy, 37, currently Vice President and Controller of Fire and Marine, was named Vice President and Corporate Controller of The St. Paul, assuming the role of principal accounting officer for The St. Paul. Part II ------- Item 5. Market for the Registrant's Common Equity and - ------ Related Stockholder Matters. --------------------------- Our common stock is traded on the New York Stock Exchange, where it is assigned the symbol SPC. The stock is also listed on the London Stock Exchange under the symbol SPA. The number of holders of record, including individual owners, of our common stock was 18,409 as of March 1, 2001. The "Stock Trading" and "Stock Price and Dividend Rate" portions of the "Shareholder Information" section on page 82 of our 2000 Annual Report to Shareholders are incorporated herein by reference. Item 6. Selected Financial Data. - ------ ----------------------- The "Six-Year Summary of Selected Financial Data" on page 45 of our 2000 Annual Report to Shareholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial - ------ Condition and Results of Operations. ----------------------------------- The "Management's Discussion and Analysis" on pages 18 through 44 of our 2000 Annual Report to Shareholders is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. - -------- ---------------------------------------------------------- The "Exposures to Market Risk" section of "Management's Discussion and Analysis" on pages 43 and 44 of our 2000 Annual Report to Shareholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. - ------ ------------------------------------------- The "Independent Auditors' Report," "Management's Responsibility for Financial Statements," Consolidated Balance Sheets, Consolidated Statements of Income, Comprehensive Income, Shareholders' Equity and Cash Flows, and Notes to Consolidated Financial Statements on pages 46 through 76 of our 2000 Annual Report to Shareholders are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on - ------ Accounting and Financial Disclosure. ----------------------------------- None. Part III -------- Item 10. Directors and Executive Officers of the Registrant. - ------- -------------------------------------------------- The "Election of Directors - Nominees for Directors" section, which provides information regarding our directors, on pages 4 and 5 of the Proxy Statement relating to the Annual Meeting of Shareholders to be held May 1, 2001, is incorporated herein by reference. W. John Driscoll, 71 and Anita M. Pampusch, 62, are currently directors of The St. Paul, but are not standing for re-election at the 2001 Annual Meeting of Shareholders. The "Section 16(a) Beneficial Ownership Reporting Compliance" section on page 36 of the Proxy Statement relating to the Annual Meeting of Shareholders to be held May 1, 2001, is incorporated herein by reference. Item 11. Executive Compensation. - ------- ---------------------- The "Executive Compensation" section on pages 21 to 31 and the "Election of Directors - Board of Directors Compensation" section on pages 6 to 8 of the Proxy Statement relating to the Annual Meeting of Shareholders to be held May 1, 2001, are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. - -------- -------------------------------------------------------------- The "Security Ownership of Certain Beneficial Owners and Management" section on pages 33 to 35 of the Proxy Statement relating to the Annual Meeting of Shareholders to be held May 1, 2001, is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- The "Indebtedness of Management" section on page 32 of the Proxy Statement relating to the Annual Meeting of Shareholders to be held May 1, 2001, is incorporated herein by reference. Part IV ------- Item 14. Exhibits, Financial Statements, Financial Statement - ------- Schedules and Reports on Form 8-K. --------------------------------- (a) Filed documents. The following documents are filed as part of this report: 1. Financial Statements. Incorporated by reference into Part II of this report: The St. Paul Companies, Inc. and Subsidiaries: Consolidated Statements of Income - Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Comprehensive Income - Years Ended December 31, 2000, 1999 and 1998 Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows - Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Independent Auditors' Report The foregoing documents are incorporated by reference to The St. Paul's 2000 Annual Report to Shareholders. 2. Financial Statement Schedules. The St. Paul Companies, Inc. and Subsidiaries: Independent Auditors' Report on Financial Statement Schedules I. Summary of Investments - Other than Investments in Related Parties II. Condensed Financial Information of Registrant III. Supplementary Insurance Information IV. Reinsurance V. Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, not required, or the information is included elsewhere in the Consolidated Financial Statements or Notes thereto. 3. Exhibits. An Exhibit Index is set forth at page 35 of this report. (3) (a) The current articles of incorporation of The St. Paul are incorporated by reference to Form 10-K for the year ended December 31, 1998. (b) The current bylaws of The St. Paul are filed herewith. (4) (a) A specimen certificate of The St. Paul's common stock is incorporated by reference to Form 10-K for the year ended December 31, 1998. There are no long-term debt instruments in which the total amount of securities authorized exceeds 10% of the total assets of The St. Paul and its subsidiaries on a consolidated basis. The St. Paul agrees to furnish a copy of any of its long-term debt instruments to the Securities and Exchange Commission upon request. (10) (a) The Deferred Stock Plan for Non-Employee Directors is filed herewith. (b) The Senior Executive Severance Policy is filed herewith. (c) The Amended and Restated 1994 Stock Incentive Plan is filed herewith. (d) The Directors' Charitable Award Program, as Amended, is filed herewith. (e) The Amendment to the Amended and Restated Special Severance Policy is filed herewith. (f) Amended and Restated Letter Agreement between The St. Paul and Mr. Stephen W. Lilienthal dated as of August 5, 1999 related to terms of his employment is incorporated by reference to Form 10-K for the year ended December 31, 1999. (g) The 1988 Stock Option Plan as in effect for options granted prior to June 1994, as amended, is incorporated by reference to Form 10-K for the year ended December 31, 1998. (h) The Non-Employee Director Stock Retainer Plan is incorporated by reference to Form 10-K for the year ended December 31, 1998. (i) The Amended and Restated Special Severance Policy is incorporated by reference to Form 10-K for the year ended December 31, 1998. (j) The Annual Incentive Plan is incorporated by reference to the Proxy Statement relating to the 1999 Annual Meeting of Shareholders that was held on May 4, 1999. (k) The Deferred Management Incentive Awards Plan is incorporated by reference to Form 10-K for the year ended December 31, 1997. (l) The Directors' Deferred Compensation Plan is incorporated by reference to Form 10-K for the year ended December 31, 1997. (m) The Benefit Equalization Plan - 1995 Revision is incorporated by reference to Form 10-K for the year ended December 31, 1997. (n) First Amendment to Benefit Equalization Plan - 1995 Revision is incorporated by reference to Form 10-K for the year ended December 31, 1997. (o) Executive Post-Retirement Life Insurance Plan - Summary Plan Description is incorporated by reference to Form 10-K for the year ended December 31, 1997. (p) Executive Long-Term Disability Plan - Summary Plan Description is incorporated by reference to Form 10-K for the year ended December 31, 1997. (q) The St. Paul Re Long-Term Incentive Plan is incorporated by reference to the Form S-8 Registration Statement filed March 17, 1998 (Commission File No. 333-48121). (r) Letter Agreement between The St. Paul and Mr. Paul J. Liska dated May 8, 1997 relating to the terms of his employment is incorporated by reference to Form 10-Q for the quarter ended March 31, 1997. (s) Letter Agreement, agreed to January 20, 1997 between The St. Paul and Mr. Paul J. Liska relating to severance benefits is incorporated by reference to Form 10-Q for the quarter ended March 31, 1997. (t) The Special Leveraged Stock Purchase Plan is incorporated by reference to Form 10-Q for the quarter ended March 31, 1997. (u) The summary description of the Outside Directors' Retirement Plan is incorporated by reference to the Proxy Statement relating to the 2001 Annual Meeting of Shareholders to be held May 1, 2001. (v) The summary description of the Key Executive Special Incentive Arrangement is incorporated by reference to Form 10-Q for the quarter ended September 30, 1999. (11) A statement regarding the computation of per share earnings is filed herewith. (12) A statement regarding the computation of the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends is filed herewith. (13) The St. Paul's 2000 Annual Report to Shareholders is furnished to the Commission in paper format pursuant to Rule 14a-3(c). The following portions of such annual report, representing those portions expressly incorporated by reference in this report on Form 10-K, are filed as an exhibit to this report: Location of Portions of Annual Report Information for the Year Ended Incorporated December 31, 2000 by Reference ------------------------- ------------ Consolidated Financial Statements Item 8 Notes to Consolidated Financial Statements Item 1,8 Independent Auditors' Report Item 8 Management's Discussion and Analysis Item 1,3,7 Six-Year Summary of Selected Financial Data Item 6 Shareholder Information Item 5 (21) List of subsidiaries of The St. Paul Companies, Inc. is filed herewith. (23) Consent of independent auditors to incorporation by reference of certain reports into Registration Statements on Form S-8 (SEC File No. 33-15392, No. 33-23446, No. 33-23948, No. 33-24220, No. 33-24575, No. 33-26923, No. 33-49273, No. 33-56987, No. 333-01065, No. 333-22329, No. 333-25203, No. 333-28915, No. 333-48121, No. 333-50941, No. 333-50943 and No. 333-67983) and Form S-3 (SEC File No. 333-44122) is filed herewith. (24) Power of attorney is filed herewith. (b) Reports on Form 8-K. A Form 8-K Current Report dated March 9, 2001 was filed related to the announcement of the resignation of Paul J. Liska as Executive Vice President and Chief Financial Officer of The St. Paul, effective April 1, 2001. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The St. Paul Companies, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE ST. PAUL COMPANIES, INC. --------------------------- (Registrant) Date: March 28, 2001 By /s/ Bruce A. Backberg -------------- --------------------- Bruce A. Backberg Senior Vice President and Corporate Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The St. Paul Companies, Inc. and in the capacities and on the dates indicated. Date: March 28, 2001 By /s/ Douglas W. Leatherdale -------------- -------------------------- Douglas W. Leatherdale, Director, Chairman of the Board, President and Chief Executive Officer Date: March 28, 2001 By /s/ Paul J. Liska -------------- ----------------- Paul J. Liska, Executive Vice President and Chief Financial Officer Date: March 28, 2001 By /s/ Thomas A. Bradley -------------- --------------------- Thomas A. Bradley, Senior Vice President - Finance Date: March 28, 2001 By /s/ John C. Treacy -------------- ------------------ John C. Treacy, Vice President and Corporate Controller Date: March 28, 2001 By /s/ H. Furlong Baldwin -------------- ---------------------- H. Furlong Baldwin*, Director Date: March 28, 2001 By /s/ John H. Dasburg -------------- ------------------- John H. Dasburg*, Director Date: March 28, 2001 By /s/ W. John Driscoll -------------- -------------------- W. John Driscoll*, Director Date: March 28, 2001 By /s/ Kenneth M. Duberstein -------------- ------------------------- Kenneth M. Duberstein*, Director Date: March 28, 2001 By /s/ Pierson M. Grieve -------------- --------------------- Pierson M. Grieve*, Director Date: March 28, 2001 By /s/ Thomas R. Hodgson -------------- --------------------- Thomas R. Hodgson*, Director Date: March 28, 2001 By /s/ David G. John -------------- ----------------- David G. John*, Director Date: March 28, 2001 By /s/ William H. Kling -------------- -------------------- William H. Kling*, Director Date: March 28, 2001 By /s/ Bruce K. MacLaury -------------- --------------------- Bruce K. MacLaury*, Director Date: March 28, 2001 By /s/ Glen D. Nelson, M.D. -------------- ----------------------- Glen D. Nelson, M.D.*, Director Date: March 28, 2001 By /s/ Anita M. Pampusch -------------- --------------------- Anita M. Pampusch*, Director Date: March 28, 2001 By /s/ Gordon M. Sprenger -------------- ---------------------- Gordon M. Sprenger*, Director Date: March 28, 2001 *By /s/ Bruce A. Backberg -------------- --------------------- Bruce A. Backberg, Attorney- in-fact INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES The Board of Directors and Shareholders The St. Paul Companies, Inc.: Under date of January 23, 2001, we reported on the consolidated balance sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2000, as contained in the 2000 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2000. In connection with our audits of the aforementioned consolidated financial statements we also have audited the related financial statement schedules I through V, as listed in the index in Item 14(a)2. of said Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, based on our audits such financial statement schedules I through V, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Minneapolis, Minnesota /s/ KPMG LLP March 28, 2001 -------- KPMG LLP THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2000 (In millions) 2000 ----------------------------------- Amount at which shown in the Cost* Value* balance sheet ------- ------- ------------- Type of investment: Fixed maturities: - ---------------- United States Government and government agencies and authorities $ 1,900 $ 2,000 $ 2,000 States, municipalities and political subdivisions 5,104 5,361 5,361 Foreign governments 1,020 1,051 1,051 Corporate securities 8,685 8,581 8,581 Asset-backed securities 890 902 902 Mortgage-backed securities 2,541 2,575 2,575 ------- ------- ------- Total fixed maturities 20,140 20,470 20,470 ------- ------- ------- Equity securities: - ----------------- Common stocks: Public utilities 12 13 13 Banks, trusts and insurance companies 130 195 195 Industrial, miscellaneous and all other 983 1,258 1,258 ------- ------- ------- Total equity securities 1,125 1,466 1,466 ------- ------- ------- Venture capital 657 1,064 1,064 ------- ------- ------- Real estate and mortgage loans 1,256** 1,249 Securities lending collateral 1,233 1,233 Other investments 353 353 Short-term investments 1,264 1,264 ------- ------- Total investments $ 26,028 $ 27,099 ======= ======= * See Notes 1, 4, 5 and 7 to the consolidated financial statements included in our 2000 Annual Report to Shareholders. ** The cost of real estate represents the cost of properties before valuation provisions. (See Schedule V on page 34). THE ST. PAUL COMPANIES, INC. (Parent Only) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET INFORMATION December 31, 2000 and 1999 (In millions) Assets: 2000 1999 ------ ------ Investment in subsidiaries $ 8,797 $ 8,116 Investments: Fixed maturities 218 109 Equity securities 70 78 Short-term investments 41 33 Cash - 4 Deferred income taxes 428 301 Refundable income taxes 81 152 Other assets 210 233 ------ ------ Total assets $ 9,845 $ 9,026 ====== ====== Liabilities: Debt $ 2,123 $ 2,060 Dividends payable to shareholders 59 58 Other liabilities 436 436 ------ ------ Total liabilities 2,618 2,554 ------ ------ Shareholders' Equity: Preferred: Convertible preferred stock 117 129 Guaranteed obligation - PSOP (68) (105) ------ ------ Total preferred shareholders' equity 49 24 ------ ------ Common: Common stock, authorized 480 shares; issued 218 shares (225 in 1999) 2,238 2,079 Retained earnings 4,243 3,827 Accumulated other comprehensive income: Unrealized appreciation of investments 765 568 Unrealized loss on foreign currency translation (68) (26) ------ ------ Total accumulated other comprehensive income 697 542 ------ ------ Total common shareholders' equity 7,178 6,448 ------ ------ Total shareholders' equity 7,227 6,472 ------ ------ Total liabilities and shareholders' equity $ 9,845 $ 9,026 ====== ====== See accompanying notes to condensed financial information. THE ST. PAUL COMPANIES, INC. (Parent Only) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENT OF INCOME INFORMATION Years Ended December 31, 2000, 1999 and 1998 (In millions) 2000 1999 1998 ------ ------ ------ Revenues: Net investment income $ 29 $ 17 $ 18 Realized investment gains 8 10 6 ------ ------ ------ Total revenues 37 27 24 ------ ------ ------ Expenses: Interest expense 165 145 67 Administrative and other expenses 97 51 66 ------ ------ ------ Total expenses 262 196 133 ------ ------ ------ Loss before income tax benefit (225) (169) (109) Income tax benefit (89) (59) (80) ------ ------ ------ Loss from continuing operations - parent company only (136) (110) (29) Equity in net income of subsidiaries 1,149 889 228 ------ ------ ------ Income from continuing operations before cumulative effect of accounting change 1,013 779 199 Cumulative effect of accounting change - (30) - ------ ------ ------ Income from continuing operations 1,013 749 199 Gain (loss) from discontinued operations (20) 85 (110) ------ ------ ------ Consolidated net income $ 993 $ 834 $ 89 ====== ====== ====== See accompanying notes to condensed financial information. THE ST. PAUL COMPANIES, INC. (Parent Only) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENT OF CASH FLOWS INFORMATION Years Ended December 31, 2000, 1999 and 1998 (In millions) 2000 1999 1998 ------ ------ ------ Operating Activities: Net loss - parent only $ (136) $ (110) $ (29) Cash dividends from subsidiaries 510 320 223 Tax payments from subsidiaries 339 69 71 Net federal income tax refund (payments) (110) (71) 54 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred tax expense (benefit) - operations 44 38 (78) Pretax realized investment gains (8) (10) (6) Other (68) (38) (4) ------ ------ ------ Cash provided by operating activities 571 198 231 ------ ------ ------ Investing Activities: Purchases of investments (278) (155) (47) Proceeds from sales and maturities of investments 168 153 81 Capital contributions and loans to subsidiaries (119) (4) (178) Proceeds received upon assumption of subsidiary debt 123 - - Proceeds from repayment of intercompany loans - 294 - Discontinued operations (9) (10) (20) Purchase of property and equipment (18) - - Other (1) 6 10 ------ ------ ------ Cash provided (used) by investing activities (134) 284 (154) ------ ------ ------ Financing Activities: Dividends paid to shareholders (241) (246) (210) Proceeds from issuance of debt 498 204 239 Repayment of debt and capital securities (259) (121) (25) Repurchase of common shares (536) (356) (135) Stock options exercised and other 97 32 63 ------ ------ ------ Cash used in financing activities (441) (487) (68) ------ ------ ------ Change in cash (4) (5) 9 Cash at beginning of year 4 9 - ------ ------ ------ Cash at end of year $ - $ 4 $ 9 ====== ====== ====== See accompanying notes to condensed financial information. THE ST. PAUL COMPANIES, INC. (Parent Only) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION 1. The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes included in our 2000 Annual Report to Shareholders. The Annual Report includes our Consolidated Statements of Shareholders' Equity and Comprehensive Income. Some data in the accompanying condensed financial information for the years 1999 and 1998 were reclassified to conform with the 2000 presentation. 2. Debt of the parent company consisted of the following (in millions): December 31, ------------------- 2000 1999 ----- ----- External: Medium-term notes $ 617 $ 617 7-7/8% senior notes 249 - 8-1/8% senior notes 249 - 8-3/8% senior notes 150 150 Commercial paper 138 400 Zero coupon convertible notes 98 94 7-1/8% senior notes 80 80 Variable rate borrowings 64 64 ----- ----- Total external debt 1,645 1,405 ----- ----- Intercompany (1): Subordinated debentures 353 492 Guaranteed PSOP debt 68 105 Notes payable to subsidiaries 57 58 ----- ----- Total intercompany debt 478 655 ----- ----- Total debt $2,123 $2,060 ===== ===== (1) Eliminated in consolidation. The intercompany subordinated debentures are payable to subsidiary trusts holding solely convertible subordinated debentures of the company. These trusts issued external financing in the form of company-obligated mandatorily redeemable preferred securities. See Note 10 to the consolidated financial statements included in the 2000 Annual Report to Shareholders for further information on debt outstanding at Dec. 31, 2000. The amount of debt, other than commercial paper and debt eliminated in consolidation, that becomes due during each of the next five years (including the debt discussed in Note 3 below) is as follows: $195 in 2001; 2002, $51 million; 2003, $67 million; 2004, $55 million; and 2005, $433 million. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (In millions) At December 31, ---------------------------------------------- Other Gross loss, policy Deferred loss adjustment claims policy expense reserves Gross and acquisition and policy unearned benefits expenses benefits premiums payable ---------- -------------- -------- -------- 2000 - ---- Property-Liability Insurance: Commercial Lines Group $ 140 $ 5,948 $ 813 $ - Global Surety 92 308 319 - Global Healthcare 50 2,642 428 - Other Global Specialty 126 3,045 720 - International 69 2,060 640 - ------- ------- ------- ------- Total Primary Underwriting 477 14,003 2,920 - Reinsurance 100 3,698 434 - ------- ------- ------- ------- Total Property-Liability Insurance 577 17,701 3,354 - Life Insurance 511 5,460 - 98 ------- ------- ------- ------- Total from continuing operations 1,088 23,161 3,354 98 Discontinued operations N/A 495 293 N/A ------- ------- ------- ------- Total $ 1,088 $23,656 $ 3,647 $ 98 ======= ======= ======= ======= 1999 - ---- Property-Liability Insurance: Commercial Lines Group $ 126 $ 6,545 $ 657 $ - Global Surety 88 289 303 - Global Healthcare 53 2,173 354 - Other Global Specialty 115 3,603 488 - International 23 688 422 - ------- ------- ------- ------- Total Primary Underwriting 405 13,298 2,224 - Reinsurance 98 3,925 436 - ------- ------- ------- ------- Total Property-Liability Insurance 503 17,223 2,660 - Life Insurance 439 4,885 - 122 ------- ------- ------- ------- Total from continuing operations 942 22,108 2,660 122 ------- ------- ------- ------- Discontinued operations N/A 497 388 N/A ------- ------- ------- ------- Total $ 942 $22,605 $ 3,048 $ 122 ======= ======= ======= ======= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (In millions) Insurance losses loss adjustment expenses, Amortization Net and of policy Other Premiums investment policy acquisition operating Premiums 2000 earned income benefits expenses expenses written - ---- -------- --------- ---------- ----------- -------- -------- Property-Liability Insurance: Commercial Lines Group $ 1,585 $ - $ 970 $ 362 $ 154 $ 1,657 Global Surety 410 - 130 177 50 426 Global Healthcare 626 - 699 110 61 600 Other Global Specialty 1,347 - 895 339 121 1,579 International 434 - 353 145 38 451 ------- ------- ------- ------- ------- ------- Total Primary Underwriting 4,402 - 3,047 1,133 424 4,713 Reinsurance 1,190 - 866 263 168 1,171 Net investment income - 1,247 - - - - Other - - - - 189 - ------- ------- ------- ------- ------- ------- Total Property- Liability Insurance 5,592 1,247 3,913 1,396 781 5,884 Life Insurance 306 354 494 46 44 - ------- ------- ------- ------- ------- ------- Total $ 5,898 $ 1,601 $ 4,407 $ 1,442 $ 825 $ 5,884 ======= ======= ======= ======= ======= ======= 1999 - ---- Property-Liability Insurance: Commercial Lines Group $ 1,516 $ - $ 1,104 $ 502 $ 82 $ 1,450 Global Surety 387 - 125 123 100 419 Global Healthcare 645 - 567 87 61 545 Other Global Specialty 1,354 - 1,158 296 142 1,389 International 282 - 235 96 10 344 ------- ------- ------- ------- ------- ------- Total Primary Underwriting 4,184 - 3,189 1,104 395 4,147 Reinsurance 919 - 531 217 92 965 Net investment income - 1,256 - - - - Other - - - - 207 - ------- ------- ------- ------- ------- ------- Total Property- Liability Insurance 5,103 1,256 3,720 1,321 694 5,112 Life Insurance 187 298 367 4 39 - ------- ------- ------- ------- ------- ------- Total $ 5,290 $ 1,554 $ 4,087 $ 1,325 $ 733 $ 5,112 ======= ======= ======= ======= ======= ======= 1998 - ---- Property-Liability Insurance: Commercial Lines Group $ 1,856 $ - $ 1,802 $ 552 $ 94 $ 1,714 Global Surety 345 - 82 141 47 386 Global Healthcare 606 - 590 107 35 518 Other Global Specialty 1,339 - 1,100 321 106 1,319 International 249 - 207 84 16 282 ------- ------- ------- ------- ------- ------- Total Primary Underwriting 4,395 - 3,781 1,205 298 4,219 Reinsurance 1,039 - 684 226 121 1,057 Net investment income - 1,293 - - - - Other - - - - 366 - ------- ------- ------- ------- ------- ------- Total Property- Liability Insurance 5,434 1,293 4,465 1,431 785 5,276 Life Insurance 119 276 273 56 43 - ------- ------- ------- ------- ------- ------- Total $ 5,553 $ 1,569 $ 4,738 $ 1,487 $ 828 $ 5,276 ======= ======= ======= ======= ======= ======= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE IV - REINSURANCE Years Ended December 31, 2000, 1999 and 1998 (In millions) Percentage Ceded to Assumed of amount Gross other from other Net assumed to amount companies companies amount net ------- ---------- ---------- -------- ---------- 2000 - ---- Life insurance in force $17,073 $ 8,649 $ 95 $ 8,519 1.1% ======= ======= ======= ======= ======= Premiums earned: Life insurance 392 87 1 306 0.3% Property-liability insurance 5,819 2,246 2,019 5,592 36.0% ------- ------- ------- ------- Total premiums $ 6,211 $ 2,333 $ 2,020 $ 5,898 34.2% ======= ======= ======= ======= ======= 1999 - ---- Life insurance in force $12,284 $ 4,452 $ 114 $ 7,946 1.4% ======= ======= ======= ======= ======= Premiums earned: Life insurance 202 16 1 187 0.5% Property-liability insurance 4,621 1,055 1,537 5,103 30.1% ------- ------- ------- ------- Total premiums $ 4,823 $ 1,071 $ 1,538 $ 5,290 29.1% ======= ======= ======= ======= ======= 1998 - ---- Life insurance in force $10,637 $ 2,305 $ 137 $ 8,469 1.6% ======= ======= ======= ======= ======= Premiums earned: Life insurance 131 13 1 119 1.2% Property-liability insurance 4,796 734 1,372 5,434 25.2% ------- ------- ------- ------- Total premiums $ 4,927 $ 747 $ 1,373 $ 5,553 24.7% ======= ======= ======= ======= ====== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2000, 1999 and 1998 (In millions) Additions --------------------- Additions Balance at Charged to due to Balance beginning costs and acqui- Deduc- at end Description of year expenses sitions tions(1) of year - ----------- ---------- ---------- --------- -------- ------- 2000 - ---- Real estate valuation adjustment $7 - - - $ 7 ======= ======= ======= ======= ======= Allowance for uncollectible: Agency loans $ 5 1 - - $ 6 ======= ======= ======= ======= ======= Premiums receivable from underwriting activities $ 45 16 - 19 $ 42 ======= ======= ======= ======= ======= Reinsurance $ 28 1 5 3 $ 31 ======= ======= ======= ======= ======= Uncollectible deductibles $ 23 - - 2 $ 21 ======= ======= ======= ======= ======= 1999 - ---- Real estate valuation adjustment $ 16 - - 9 $ 7 ======= ======= ======= ======= ======= Allowance for uncollectible: Agency loans $ 3 2 - - $ 5 ======= ======= ======= ======= ======= Premiums receivable from underwriting activities $ 42 8 - 5 $ 45 ======= ======= ======= ======= ======= Reinsurance $ 28 1 - 1 $ 28 ======= ======= ======= ======= ======= Uncollectible deductibles $ 23 - - - $ 23 ======= ======= ======= ======= ======= 1998 - ---- Real estate valuation adjustment $ 12 4 - - $ 16 ======= ======= ======= ======= ======= Allowance for uncollectible: Agency loans $ 2 1 - - $ 3 ======= ======= ======= ======= ======= Premiums receivable from underwriting activities $ 41 8 - 7 $ 42 ======= ======= ======= ======= ======= Reinsurance $ 30 - - 2 $ 28 ======= ======= ======= ======= ======= Uncollectible deductibles $ 19 8 - 4 $ 23 ======= ======= ======= ======= ======= (1)Deductions include write-offs of amounts determined to be uncollectible, unrealized foreign exchange gains and losses and, for certain properties in real estate, a reduction in the valuation allowance for properties sold during the year. EXHIBIT INDEX* ------------- Exhibit - ------- (2) Plan of acquisition, reorganization, arrangement, liquidation, or succession**...................................................... (3) Articles of incorporation and by-laws (a) Articles of Incorporation***.................................... (b) By-laws.........................................................(1) (4) Instruments defining the rights of security holders, including indentures (a) Specimen Common Stock Certificate***............................. (9) Voting trust agreements**........................................... (10) Material contracts.................................................. (a) Deferred Stock Plan for Non-Employee Directors...................(1) (b) Senior Executive Severance Policy................................(1) (c) The Amended and Restated 1994 Stock Incentive Plan...............(1) (d) The Directors' Charitable Award Program, as Amended..............(1) (e) Amendment to the Amended and Restated Special Severance Policy......................................(1) (f) Amended and Restated Letter Agreement between The St. Paul and Mr. Stephen W. Lilienthal dated as of August 5, 1999 related to terms of his employment***......................... (g) 1988 Stock Option Plan***........................................ (h) Non-Employee Director Stock Retainer Plan***..................... (i) The Amended and Restated Special Severance Policy***............. (j) The Annual Incentive Plan***..................................... (k) The Deferred Management Incentive Awards Plan***................. (l) The Directors' Deferred Compensation Plan***..................... (m) Benefit Equalization Plan - 1995 Revision***..................... (n) First Amendment to Benefit Equalization Plan - 1995 Revision***................................................... (o) Executive Post-Retirement Life Insurance Plan - Summary Plan Description***........................................... (p) Executive Long-Term Disability Plan - Summary Plan Description***................................................ (q) The St. Paul Re Long-Term Incentive Plan***...................... (r) Letter Agreement dated May 8, 1997 between The St. Paul and Mr. Paul J. Liska related to the terms of his employment***................................................. (s) Letter Agreement, agreed to January 20, 1997 between The St. Paul and Mr. Paul J. Liska related to severance benefits***................................................... (t) The Special Leveraged Stock Purchase Plan***..................... (u) Outside Directors' Retirement Plan -Summary Description***....... (v) Key Executive Special Incentive Arrangement***................... (11) Statements re computation of per share earnings.....................(1) (12) Statements re computation of ratios.................................(1) (13) Annual report to security holders...................................(1) (16) Letter re change in certifying accountant**......................... (18) Letter re change in accounting principles**......................... (21) Subsidiaries of The St. Paul........................................(1) (22) Published report regarding matters submitted to vote of security holders**............................................. (23) Consents of experts and counsel..................................... (a) Consent of KPMG LLP..............................................(1) (24) Power of attorney...................................................(1) (27) Financial data schedule**........................................... (99) Additional exhibits**............................................... * The exhibits are included only with the copies of this report that are filed with the Securities and Exchange Commission. However, copies of the exhibits may be obtained from The St. Paul for a reasonable fee by writing to the Corporate Secretary, The St. Paul Companies, Inc., 385 Washington Street, St. Paul, Minnesota 55102. ** These items are not applicable. *** These items are incorporated by reference as described in Item 14(a)(3) of this report. (1) Filed herewith. EX-3 2 0002.txt EXHIBIT 3(B) EXHIBIT 3(b) BYLAWS OF THE ST. PAUL COMPANIES, INC. ARTICLE I Offices ------- Section 1. Registered Office. The registered office of the corporation required by Chapter 302A of the Minnesota Statutes ("Chapter 302A") to be maintained in the State of Minnesota is 385 Washington Street, St. Paul, Minnesota 55102. Section 2. Principal Executive Office. The principal executive office of the corporation, where the chief executive officer of the corporation has an office, is 385 Washington Street, St. Paul, Minnesota 55102. ARTICLE II Meetings of Shareholders ------------------------ Section 1. Place of Meeting. All meetings of the shareholders shall be held at the registered office of the corporation or, except for a meeting called by or at the demand of a shareholder, at such other place as may be fixed from time to time by the board of directors (the "board"). Section 2. Regular Annual Meeting. A regular annual meeting of shareholders shall be held on the first Tuesday of May of each year for the purpose of electing directors and for the transaction of any other business appropriate for action by the shareholders. Section 3. Special Meetings. Special meetings of the shareholders may be called at any time by the Chief Executive Officer or the Chief Financial Officer or by two or more directors or by a shareholder or shareholders holding ten percent or more of the voting power of all shares entitled to vote; except that a special meeting called by shareholders for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or otherwise affect the composition of the board of directors for that purpose, must be called by twenty-five percent or more of the voting power of all shares entitled to vote. A shareholder or shareholders holding the requisite voting power may demand a special meeting of shareholders only by giving the written notice of demand required by law. Special meetings shall be held on the date and at the time and place fixed as provided by law. Section 4. Notice. Notice of all meetings of shareholders shall be given to every holder of voting shares in the manner and pursuant to the requirements of Chapter 302A. Section 5. Record Date. The board shall fix a record date not more than 60 days before the date of a meeting of shareholders as the date for the determination of the holders of voting shares entitled to notice of and to vote at the meeting. Section 6. Quorum. The holders of a majority of the voting power of the shares entitled to vote at a meeting present in person or by proxy at the meeting are a quorum for the transaction of business. If a quorum is present when a meeting is convened, the shareholders present may continue to transact business until adjournment sine die, even though the withdrawal of a number of shareholders originally present leaves less than the proportion otherwise required for a quorum. Section 7. Voting Rights. Unless otherwise provided in the terms of the shares, a shareholder has one vote for each share held on a record date. A shareholder may cast a vote in person or by proxy. Such vote shall be by written ballot unless the chairman of the meeting determines to request a voice vote on a particular matter. Section 8. Proxies. The chairman of the meeting shall, after shareholders have had a reasonable opportunity to vote and file proxies, close the polls after which no further ballots, proxies, or revocations shall be received or considered. Section 9. Act of the Shareholders. Except as otherwise provided by Chapter 302A of the restated articles of incorporation of the corporation, the shareholders shall take action by the affirmative vote of the holders of a majority of the voting power of the shares present at the time a vote is cast. Section 10. Business of the Meeting. At any annual meeting of shareholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the board or (ii) by any shareholder who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this section 10. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the corporate secretary. To be timely, a shareholder's notice must be delivered or mailed to and received at the principal executive office of the corporation not less than 60 days prior to the date of the annual meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholders to be timely must be received not later than the close of business on the 10th day following the day of which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder's notice to the corporate secretary shall set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting (ii) the name and address, as they appear on the corporation's share register, of the shareholder proposing such business; (iii) the class and number of shares of the corporation's capital stock that are beneficially owned by such shareholder and (iv) any material interest of such shareholder in such business. No shareholder proposal will be eligible for inclusion in the corporation's proxy materials or form of proxy for any annual meeting of shareholders unless received by the corporate secretary of the corporation on or before the first day of December next preceding the date of the annual meeting. Notwithstanding anything in the bylaws to the contrary, no business shall be brought before or conducted at the annual meeting except in accordance with the provisions of this section 10. The officer of the corporation or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this section 10 and, if he shall so determine, he shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted. At any special meeting of shareholders, the business transacted shall be limited to the purposes stated in the notice of the meeting. With respect to a special meeting held pursuant to the demand of a shareholder or shareholders, the purposes shall be limited to those specified in the demand in the event that the shareholder or shareholders are entitled by law to call the meeting because the board does not do so. Section 11. Nomination of Directors. Only persons who are nominated in accordance with the procedures set forth in these bylaws shall be eligible for election as directors. Nominations of persons for election to the board of the corporation may be made at a meeting of shareholders at which directors are to be elected only (i) by or at the direction of the board or (ii) by any shareholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this section 11. Such nominations, other than those made by or at the direction of the board, shall be made by timely notice in writing to the corporate secretary. To be timely, a shareholder's notice shall be delivered or mailed to and received at the principal executive office of the corporation not less than 60 days prior to the date of the meeting, provided, however, that in the event that less than 70 days' notice or prior disclosure of the date of this meeting is given or made to shareholders, notice by the shareholders to be timely must be so received not later than the close of business on the 10th day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth (i) as to each person whom such shareholder proposes to nominate for election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected), and (ii) as to the shareholder giving the notice (a) the name and address, as they appear on the corporation's share register, of such shareholder and (b) the class and number of shares of the corporation's capital stock that are beneficially owned by such shareholder, and shall be accompanied by the written consent of each such person to serve as a director of the corporation, if elected. At the request of the board any person nominated by the board for election as a director shall furnish to the corporate secretary that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the provisions of this section 11. The officer of the corporation or other person presiding at the meeting shall, if the facts so warrant, determine and declare to the meeting that a nomination was not made in accordance with such provisions and, if he shall so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III Board of Directors ------------------ Section 1. Board to Manage. The business and affairs of the corporation shall be managed by or under the direction of the board. Section 2. Number and Term of Office. The number of directors shall be at least ten (10) but not more than eighteen (18), as determined from time to time by the board. Each director shall be elected to serve for a term that expires at the next regular annual meeting of the shareholders and when a successor is elected and has qualified, or at the time of the earlier death, resignation, removal or disqualification of the director. [Amended on 5/3/94.] Section 3. Meetings of the Board. The board may hold meetings either within or without the State of Minnesota at such places as the board may select. If the board fails to select a place for a meeting, the meeting shall be held at the principal executive office of the corporation. Four regular meetings of the board shall be held each year. One shall be held immediately following the regular annual meeting of the shareholders. The other three regular meetings shall be held on dates and at times determined by the board. No notice of a regular meeting is required if the date, time and place of the meeting has been announced at a previous meeting of the board. A special meeting of the board may be called by any director or by the chief executive officer by giving, or causing the corporate secretary to give at least twenty-four hours notice to all directors of the date, time and place of the meeting. Section 4. Advance Action by Absent Directors. A director may give advance written consent or opposition to a proposal to be acted on at a board meeting. Section 5. Electronic Communications. A board meeting may be held and participation in a meeting may be effected by means of communications permitted by Chapter 302A. Section 6. Quorum. At all meetings of the board, a majority of the directors then holding office is a quorum for the transaction of business. In the absence of a quorum, a majority of the directors present may adjourn a meeting from time to time until a quorum is present. If a quorum is present when a meeting is convened, the directors present may continue to transact business until adjournment sine die even though the withdrawal of a number of directors originally present leaves less than the proportion otherwise required for a quorum. Section 7. Act of the Board. The board shall take action by the affirmative vote of at least a majority of the directors present at a meeting. In addition, the board may act without a meeting by written action signed by all of the directors then holding office. Section 8. Board-Appointed Committees. A resolution approved by the affirmative vote of a majority of the directors then holding office may establish committees having the authority of the board in the management of the business of the corporation to the extent provided in the resolution and each such committee is subject at all times to the direction and control of the board except as provided by Chapter 302A with respect to a committee of disinterested persons. ARTICLE IV Officers -------- Section 1. Required Officers. The corporation shall have officers who shall serve as chief executive officer and chief financial officer and such other officers as the board shall determine from time to time. Section 2. Chairman. The board shall at its regular meeting each year immediately following the regular annual shareholders meeting elect from its number a chairman who shall serve until the next regular meeting of the board immediately following the regular annual shareholders meeting. The chairman shall be the chief executive officer of the corporation and shall (a) have general policy level responsibility for the management of the business and affairs of the corporation; (b) have responsibility for development and implementation of long range plans for the corporation; (c) preside at all meetings of the board and of the shareholders; (d) see that all the orders and resolutions of the board are carried into effect; (e) perform other duties prescribed by the board or these bylaws. In the absence of the president, the chairman shall assume the duties of the president. Section 3. President. The board shall at its regular meeting each year immediately following the regular annual shareholders meeting elect a president who shall serve until the next regular meeting of the board immediately following the regular annual meeting of the shareholders. The president shall be the chief operating officer of the corporation and shall (a) have responsibility for the operational aspects of the business and affairs of the corporation; (b) have responsibility to direct and guide operations to achieve corporate profit, growth and social responsibility objectives; and (c) perform other duties prescribed by the board and these bylaws. In the absence of the chairman, the president shall assume the duties of chairman. In the event of the inability of both the chairman and the president to act, then the executive vice president with the greatest seniority in office, if any, the senior vice president with the greatest seniority in office, if any, or if neither of the foregoing is available, then the vice president with the greatest seniority in that office shall perform the duties and exercise the powers of the chairman and the president during the period of their inability or until the next meeting of the executive committee or the board. Section 4. Chief Financial Officer. The board shall elect one or more officers, however denominated, to serve at the pleasure of the board who shall together share the function of chief financial officer. The function of chief financial officer shall be to (a) cause accurate financial records to be maintained for the corporation; (b) cause all funds belonging to the corporation to be deposited in the name of and to the credit of the corporation in banks and other depositories selected pursuant to general and specific board resolutions; (c) cause corporate funds to be disbursed as appropriate in the ordinary course of business; (d) cause appropriate internal control systems to be developed, maintained, improved and implemented; and (e) perform other duties prescribed by the board, the chairman or the president. Section 5. Corporate Secretary. The board shall elect a corporate secretary who shall serve at the pleasure of the board. The corporate secretary shall (a) be present at and maintain records of and certify proceedings of the board and the shareholders and, if requested, of the executive committee and other board committees; (b) serve as custodian of all official corporate records other than those of a financial nature; (c) cause the corporation to maintain appropriate records of share transfers and shareholders; and (d) perform other duties prescribed by the board, the chairman or the president. In the absence of the corporate secretary, a secretary, assistant secretary or other officer shall be designated by the president to carry out the duties of corporate secretary. ARTICLE V Share Certificates/Transfer --------------------------- Section 1. Certificate. Certificated shares of this corporation shall be in such form as prescribed by law and adopted by the board. Section 2. Transfer of Shares. Transfer of shares on the books of the corporation shall be made by the transfer agent and registrar in accordance with procedures adopted by the board. Section 3. Lost, Stolen or Destroyed Certificates. No certificate for shares of the corporation shall be issued in place of one claimed to be lost, stolen or destroyed except in compliance with Section 336.8-405, Minnesota Statutes, as amended from time to time, and the corporation may require a satisfactory bond of indemnity protecting the corporation against any claim by reason of the lost, stolen or destroyed certificate. ARTICLE VI General Provisions ------------------ Section 1. Voting of Shares. The chairman, president, any vice president or the corporate secretary, unless some other person is appointed by the board, may vote shares of any other corporation held or owned by the corporation and may take any required action with respect to investments in other types of legal entities. Section 2. Execution of Documents. Deeds, mortgages, bonds, contracts and other documents and instruments pertaining to the business and affairs of the corporation may be signed and delivered on behalf of the corporation by the chairman, president, any vice president or corporate secretary or by such other person or by such other officers as the board may specify. Section 3. Transfer of Assignment of Securities. The chairman, the president, the chief financial officer, the treasurer, or any vice president, corporate secretary, secretary or assistant secretary of the corporation shall execute the transfer and assignment of any securities owned by or held in the name of the corporation. The transfer and assignment of securities held in the name of a nominee of the corporation may be accomplished pursuant to the contract between the corporation and the nominee. Section 4. Fiscal Year. The fiscal year of the corporation shall end on December 31 of each year. Section 5. Seal. The corporation shall have a circular seal bearing the name of the corporation and an impression of a man at a plow, a gun leaning against a stump and an Indian on horseback. Section 6. Indemnification. Subject to the limitations of the next sentence, the corporation shall indemnify and make permitted advances to a person made or threatened to be made a party to a proceeding by reason of his former or present official capacity against judgments, penalties, fines (including without limitation excise taxes assessed against the person with respect to an employee benefit plan), settlements and reasonable expenses (including without limitation attorneys' fees and disbursements) incurred by him in connection with the proceeding in the manner and to the fullest extent permitted or required by Section 302A.521, Minnesota Statutes 1981 Supplement, as amended from time to time. Notwithstanding the foregoing, the corporation shall neither indemnify nor make advances under Section 302A.521 to any person who at the time of the occurrence or omission claimed to have given rise to the matter which is the subject of the proceeding only had an agency relationship to the corporation and was not at that time an officer, director or employee thereof unless such person and the corporation were at that time parties to a written contract for indemnification or advances with respect to such matter or unless the board specifically authorizes such indemnification or advances. EX-10 3 0003.txt EXHIBIT 10(A) EXHIBIT 10(a) THE ST. PAUL COMPANIES, INC. DEFERRED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS 1. PURPOSE. The purpose of The St. Paul Companies, Inc. Deferred Stock Plan for Non-Employee Directors (the "Plan") is to link a portion of the compensation of the non-employee directors (the "Non-Employee Directors") of the Board of Directors of The St. Paul Companies, Inc. (the "Company") to the performance of the Company's common stock (the "Common Stock"). In addition, the Plan permits Non-Employee Directors to elect to transfer the present value of their accrued benefits under the Company's Directors' Retirement Plan (the "Retirement Plan") to this Plan. 2. DEFINITIONS. When used in the Plan, the following terms have the meanings set forth below unless the context clearly requires a different meaning. Nouns in the singular shall include the plural, and the masculine pronoun shall include the feminine. (a) Account. The bookkeeping account established and maintained by the Company in the Participant's name to record the amounts credited to the Participant under this Plan. Each Participant shall have a nonforfeitable right to the amount credited to his Account. (b) Accrued Retirement Benefit. With respect to any Participant on the Effective Date, the amount of the present value of that Participant's accrued retirement benefit under the Retirement Plan, calculated as of February 5, 2001 and determined based on the actuarial assumptions specified by the Committee. (c) Board. The Board of Directors of the Company. (d) Cessation of Service. The date on which a Participant ceases to be a Director for any reason. (e) Committee. The Board Governance Committee of the Board. (f) Director. A member of the Board of Directors of the Company. (g) Distribution Date. With respect to any Participant, the last day of the month during which that Participant's Cessation of Service occurred. (h) Effective Date. May 1, 2001. (i) Grant Amount. $25,000 (j) Grant Date. The business day immediately following the annual meeting of the Company's shareholders. (k) Participant. Each Non-Employee Director of the Company serving on the Effective Date who, pursuant to the terms of this Plan, elects to participate in this Plan and, with respect to all Directors elected and qualified after the Effective Date, each Non-Employee Director of the Company. (l) Rule 16b-3. Rule 16b-3 of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934, as amended. A reference in the Plan to Rule 16b-3 shall include a reference to any corresponding rule (or number redesignation) or any amendments to Rule 16b-3 enacted after the Effective Date. 3. CREDITS TO ACCOUNTS. (a) Each Participant as of each Grant Date will have the Grant Amount credited to his Account on the Grant Date. Any person who becomes a Non-Employee Director after a Grant Date and prior to the next Grant Date will have credited to his Account, on the business day immediately following the date on which such person becomes a Non-Employee Director, a pro rata Grant Amount based on the number of full calendar months elapsed since the last Grant Date preceding the date on which such person became a Non-Employee Director. (b) Each Non-Employee Director who has elected, in accordance with the terms of the Retirement Plan, to have his Accrued Retirement Benefit transferred to this Plan will have 25% of the amount of his Accrued Retirement Benefit credited to his Account on the Effective Date and on each of the three business days immediately following the Effective Date. (c) All Grant Amounts, as well as any Accrued Retirement Benefit amounts transferred to a Participant's Account and dividends, will be deemed invested in The St. Paul Companies, Inc. Common Stock. Participants will be credited with dividends as if all amounts credited to the Participant's Account were actually invested in Common Stock. 4. PAYMENT OF ACCOUNTS. (a) The Company will distribute to the Participant the number of whole shares of Common Stock in which the Participant's Account is deemed invested as of the Distribution Date pursuant to Section 3. Such shares of Common Stock will be distributed to the Participant in the form of a single distribution or in the form of installments, as elected by the Participant. Notwithstanding the foregoing, a Participant may make a one-time election with respect to his Account to change a previously elected form of payment, provided, however, that any election under this Section 4 is conditioned upon the approval of the Committee and shall not be effective unless the Committee approves the election at least one year and one day before the date of the Participant's Cessation of Service. A Participant who makes an election pursuant to this Section 4 to receive payment of his Account in the form of installments shall designate the number of years, up to a maximum of ten years, over which the installments will be paid. (b) If a Participant's Account is to be distributed in a single distribution, the number of whole shares of Common Stock in which the Participant's Account is deemed invested as of the Distribution Date pursuant to Section 3 shall be distributed to the Participant within 30 days after the Distribution Date. (c) (i) If a Participant's Account is to be distributed in the form of installments, then the Participant's Account shall be distributed to him in substantially equal annual installments over the period that he has elected. The initial installment shall be distributed to him within 30 days after the Distribution Date. Subsequent installments shall be distributed within 30 days after each anniversary of the Distribution Date thereafter until the Participant's Account has been fully distributed. (ii) Each installment pursuant to Section 4(c)(i) shall equal (x) that number of whole shares of Common Stock in which the Participant's Account is deemed invested as of the Distribution Date pursuant to Section 3 (in the case of the first installment payment) and as of the applicable anniversary of that Distribution Date (in the case of subsequent installments), divided by (y) the number of remaining installments, including the current installment. (d) In lieu of distributing any fractional share of Common Stock in which a Participant's Account is deemed invested as of the Distribution Date, the Company shall pay the Participant, within 30 days after the Distribution Date, the cash value of any such fractional share based on the closing sale price of the Common Stock on the New York Stock Exchange on the Distribution Date. (e) Notwithstanding any other provision of this Plan to the contrary, the Company shall not be required to issue or deliver any certificate for shares of Common Stock distributable under this plan prior to (i) the admission of such shares to listing on any stock exchange on which the Common Stock may then be listed, (ii) the effectiveness of any required registration and/or other qualification of such shares under any state or federal law or regulation that counsel for the Company shall determine is necessary or advisable, and (iii) the Company shall have been advised by counsel that all applicable legal requirements have been fulfilled. Until the Participant has been issued a certificate for the shares of Common Stock that are distributable to him under the terms of this Plan, the Participant shall possess no shareholder rights with respect to such shares. 5. INTERPRETATION AND ADMINISTRATION OF THE PLAN. The Plan shall be administered, construed and interpreted by the Committee. Any decision of the Committee with respect to the Plan shall be final, conclusive and binding upon all Participants. The Committee may consult with counsel who may be counsel for the Company, and the Committee shall not incur any liability for any action taken in good faith after reasonable deliberation and in reliance upon the advice of counsel. The Corporate Secretary of the Company is authorized to take or cause to be taken such actions of a ministerial nature as shall be necessary to effectuate the intent and purposes of the Plan, including maintaining records of the Accounts of Participants and arranging for distributions pursuant to the terms and conditions of this Plan. 6. TERM OF THE PLAN. The Plan shall become effective on the Effective Date. The Plan shall terminate on the date when all amounts credited to Participants' Accounts have been distributed; provided, however, that the Board may resolve to terminate the Plan at any time prior to that date. Subject to the terms and conditions of this Plan, termination of the Plan by the Board shall not adversely alter or impair any of the rights of a Participant under this Plan unless the Participant consents to such termination in writing. 7. STOCK RESERVED FOR THE PLAN. The aggregate number of shares of Common Stock authorized for issuance under the Plan is three hundred thousand (300,000). Shares of Common Stock distributed under the terms of this Plan shall be authorized but unissued shares. 8. EFFECT OF CHANGES TO COMMON STOCK. Upon changes in the Common Stock by a stock dividend, stock split, reverse split, subdivision, recapitalization, merger, consolidation (whether or not the Company is a surviving corporation), combination or exchange of shares, separation, reorganization or liquidation, the number and class of shares of Common Stock available under the Plan shall be correspondingly adjusted by the Board; provided, however, no such adjustments shall be made in the case of stock dividends aggregating in any fiscal year of the Company not more than 10% of the Common Stock issued and outstanding at the beginning of such year or in the case of one or more splits, subdivisions or combinations of the Common Stock during any fiscal year of the Company resulting in an increase or decrease of not more than 10% of the Common Stock issued and outstanding at the beginning of such year. 9. AMENDMENTS. The Board may from time to time make such changes in and additions to the Plan as it deems appropriate. The Board may unilaterally amend the Plan as it deems appropriate to ensure compliance with Rule 16b-3. Except as provided in the preceding sentence, any change or addition to the Plan shall not, without the written consent of a Participant who is adversely affected thereby, alter any rights or benefits of the Participant pursuant to the Plan. 10. RIGHTS UNDER THE PLAN. (a) The Plan is an unfunded deferred compensation arrangement. Participation in the Plan and the right to receive payments hereunder shall not give a Participant any proprietary interest in the Company or any subsidiary of the Company, or in any of their assets. A Participant shall, for all purposes under the Plan, be a general creditor of the Company. (b) During the lifetime of a Participant, the interest of the Participant under the Plan may not be assigned, anticipated, sold, encumbered or pledged and shall not be subject to the claims of the Participant's creditors. In the event of a Participant's death, the value of the Participant's Account shall, within one year after the Participant's death, be paid to the Participant's beneficiary, as designated in accordance with Section 10. 11. BENEFICIARY. A Participant may designate in writing on a form provided by and delivered to the Company, one or more beneficiaries to receive any distribution under the Plan after the death of the Participant. If a Participant fails to designate a beneficiary, or no designated beneficiary survives the Participant, any distribution to be made with respect to the Participant's Account after his death shall be made to the Participant's estate. When a provision of this Plan refers to the distribution of an Account to a Participant, the term 'Participant' shall include the Participant's beneficiary designated pursuant to this Section 11. 12. NOTICE. All notices and other communications required or permitted to be given under the Plan shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows: (a) if to the Company, at its principal business address, to the attention of its Corporate Secretary, and (b) if to any Participant, at his last address known to the sender at the time the notice or other communication is sent. 13. INTERPRETATION AND CONSTRUCTION. This Plan is intended to comply with the provisions of Rule 16b-3 and shall be construed in a manner consistent therewith. To the extent not inconsistent with the requirements of Rule 16b-3, the Plan shall be construed and enforced according to the laws of the State of Minnesota. Headings and captions are for convenience of reference only and have no substantive meaning. EX-10 4 0004.txt EXHIBIT 10(B) EXHIBIT 10(b) The St. Paul Companies, Inc. Senior Executive Severance Policy Effective Date -------------- This Policy is effective as of February 4, 2001. Covered Executives ------------------ The executives of the Company covered by the Policy are those executives selected by the Personnel & Compensation Committee from time to time and listed on Exhibit A, as updated annually. Eligibility for Benefits ------------------------ A covered executive is eligible for benefits under the Policy if the executive's employment is terminated by the Company without Cause or by the executive for Good Reason. Definition of Cause ------------------- "Cause" means (A) the willful and continued failure of the executive to perform substantially his/her duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the executive which specifically identifies the manner in which the executive has not substantially performed his/her duties, or (B) the willful engaging by the executive in illegal conduct or gross misconduct which is demonstrably and materially injurious to the Company or its affiliates. Definition of Good Reason ------------------------- "Good Reason" means (A) any change in the duties or responsibilities (including reporting responsibilities) of the executive that is inconsistent in any material and adverse respect with the executive's position(s), duties, responsibilities or status with the Company or a material and adverse change in the executive's titles or offices with the Company; (B) any reduction in the executive's rate of annual base salary or annual target bonus opportunity; or (C) any requirement of the Company that the executive (1) be based anywhere more than thirty (30) miles from the office where the executive is located, or (2) travel on Company business to an extent substantially greater than the previous travel obligations of the executive. Benefits -------- The benefits under the Policy consist of the following: Severance Payment. A lump sum severance payment equal to twice of the sum of the executive's annual base salary and target bonus immediately prior to termination of employment. Health Benefits. Continuation of coverage under medical and dental plans for two years. Stock Options. All unvested stock options, other than stock options granted within one year before the termination date and "mega-grants", will become fully vested and, along with previously vested options, will be exercisable for three years after the date of termination, so long as no options are extended more than ten years beyond the date they were granted. Restricted Stock. All restrictions will end, except for restricted shares awarded less than one year before the termination date and stock which serves as collateral for a loan from the Company. Except as otherwise provided by contract, this Policy shall not apply to any executive who has an employment contract with the Company. Withholding ----------- All payments shall be subject to deductions for required withholding of income and employment taxes. Amendment and Termination ------------------------- This Policy may be amended or terminated at any time by the Personnel & Compensation Committee. EX-10 5 0005.txt EXHIBIT 10(C) EXHIBIT 10(c) THE ST. PAUL COMPANIES, INC. AMENDED AND RESTATED 1994 STOCK INCENTIVE PLAN 1. Purpose. The purposes of The St. Paul Companies, Inc. 1994 Stock Incentive Plan (the "Plan") are (i) to promote the interests of The St. Paul Companies, Inc. (the "Company") and its shareholders by attracting and retaining key employees and Non-Employee Directors of the Company and its subsidiaries upon whom major responsibilities rest for the successful administration and management of the Company's business, (ii) to provide such employees and Non-Employee Directors with incentive-based compensation in the form of Company stock, which is supplemental to any other compensation or benefit plans, based upon the Company's sustained financial performance, (iii) to encourage decision making based upon long-term goals and (iv) to align the interest of such employees and Non-Employee Directors with that of the Company's shareholders by encouraging them to acquire a greater ownership position in the Company. 2. Definitions. Wherever used herein, the following terms shall have the respective meanings set forth below: "Award" means an award to a Participant made in accordance with the terms of the Plan. "Board" means the Board of Directors of the Company. "Committee" means the Personnel and Compensation Committee of the Board, or a subcommittee of that committee. "Common Stock" means the common stock of the Company. "Disinterested Person" means "disinterested person" as defined in Rule 16b-3 of the Securities and Exchange Commission, as amended from time to time, and, generally, means any member of the Board who is not at the time of acting on a matter, and within the previous year has not been, an officer of the Company or a subsidiary. "Participant" means a key employee of the Company or its subsidiaries who is selected by the Committee to participate in the Plan or a Non-Employee Director who is granted options under the provisions of Section 20 and/or Section 21 of the Plan. 3. Shares Subject to the Plan. Subject to adjustment as provided in Section 16, the number of shares of Common Stock which shall be available and reserved for grant of Awards under the Plan shall not exceed nineteen million nine hundred thousand (19,900,000). Subject to approval of an amendment to this Plan by the shareholders at the 2001 Annual Meeting, the number of shares of Common Stock available and reserved for grants of Awards under this Plan will be increased to thirty-three million four hundred thousand (33,400,000) shares. The shares of Common Stock issued under the Plan will come from authorized and unissued shares. Shares of Common Stock subject to an Award that expires unexercised, that is forfeited, terminated or canceled, in whole or in part, shall thereafter again be available for grant under the Plan. No more than twenty per cent (20%) of all shares subject to the Plan may be granted to Participants as restricted stock. 4. Administration. The Plan shall be administered by the Committee. A majority of the Committee shall constitute a quorum, and the acts of a majority shall be the acts of the Committee. Subject to the provisions of the Plan and except where inconsistent with the provisions of Section 20, 21 and 22 of the Plan, the Committee shall (i) select the Participants, determine the type of Awards to be made to Participants, determine the shares subject to Awards, and (ii) have the authority to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the administration of the Plan, to determine the terms and provisions of any agreements entered into hereunder, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent it shall deem desirable to carry it into effect. The determinations of the Committee in the administration of the Plan, as described herein, shall be final and conclusive. 5. Eligibility. Non-Employee Directors shall become Participants under the provisions of Section 20 of the Plan and may become Participants under Section 21 of the Plan. In addition, the Committee shall select from time to time as Participants in the Plan such key employees of the Company or its subsidiaries who are responsible for the management of the Company or a subsidiary or who are expected to contribute in a substantial measure to the successful performance of the Company. No employee shall have at any time the right (i) to be selected as a Participant, (ii) to be entitled to an Award, or (iii) having been selected for an Award, to receive any further Awards. 6. Awards. Awards under the Plan may consist of: stock options (either incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, or nonstatutory stock options), Rights and restricted stock. Awards of restricted stock may provide the Participant with dividends or dividend equivalents and voting rights prior to vesting (whether based on a period of time or based on attainment of specified performance conditions). 7. Stock Options. The Committee shall establish the option price at the time each stock option is granted, which price shall not be less than the closing price of a share of the Common Stock on the New York Stock Exchange on the date of grant, or the fair market value of a share of the Common Stock if it is not so listed, as determined by the Committee. Stock options shall be exercisable for such period as specified by the Committee, but in no event may options become exercisable less than one year after the date of grant (unless specifically approved by the Committee to attract a key executive to join the Company and except in the case of a Change of Control) or be exercisable for a period of more than ten (10) years after their date of grant. The option price of each share as to which a stock option is exercised shall be paid in full at the time of such exercise. Such payment shall be made in cash (including check, bank draft or money order), by tender of shares of Common Stock owned by the Participant valued at fair market value as of the date of exercise, subject to such guidelines for the tender of Common Stock as the Committee may establish, in such other consideration as the Committee deems appropriate, or by a combination of cash, shares of Common Stock and such other consideration. No Participant may be granted Awards of stock options with respect to more than 20% of the shares of Common Stock subject to the Plan, subject to adjustment as provided in Section 16. The Committee may, with the consent of the Participant, cancel any outstanding stock option in consideration of a cash payment in an amount not in excess of the difference between the aggregate fair market value (on the date of such cancellation) of the shares subject to the stock option and the aggregate option price of such shares. 8. [deleted February 6, 2001.] 9. Termination of Stock Options. Each option shall terminate: If the Participant is then living, at the earliest of the following times: (i) ten (10) years after the date of grant of the option; (ii) ninety (90) days after termination of employment other than termination because of retirement or through discharge for cause provided, however, that if any option is not fully exercisable at the time of such termination of employment, such option shall expire on the date of such termination of employment to the extent not then exercisable unless different terms are specifically approved by the Committee in the provisions of a stock option agreement designed to attract a key executive to join the Company; (iii) immediately upon termination of employment through discharge for cause; or (iv) any other time set forth in the agreement describing and setting the terms of the Award, which time shall not exceed ten (10) years after the date of grant. Notwithstanding the prior provisions of this Section 9, options held by any senior executive officer of the Company or any subsidiary who is a participant in any senior executive severance policy and whose employment is terminated in a manner that causes benefits under such a policy to become payable, shall not terminate until the earlier of three years after the date of such employment termination or ten years after the date the options were granted. If the Participant dies while employed by the Company or any subsidiary, or if no longer so employed dies prior to termination of the entire option under Section 9 (ii) or (iii) hereof, the Participant's options and Rights shall terminate one (1) year after the date of death, but subject to earlier termination pursuant to Section 9 (i) or (iv). However, notwithstanding the provisions of Section 9 (iv), to the extent an option is exercisable on the date of the Participant's death, it shall remain exercisable until the earlier of one hundred eighty (180) days following the date of death or ten (10) years after the date of grant. To the extent an option is exercisable after the death of the Participant, it may be exercised by the person or persons to whom the Participant's rights under the agreement have passed by will or by the applicable laws of descent and distribution. 10. Restricted Stock. Restricted stock may be granted in the form of actual shares of Common Stock which shall be evidenced by a certificate registered in the name of the Participant but held by the Company until the end of the restricted period. Any employment conditions, performance conditions and the length of the period for vesting of restricted stock shall be established by the Committee in its discretion. In no event will Awards of restricted stock to any one Participant total more than 2.5% of the shares of Common Stock available under this Plan during the term of the Plan, subject to adjustment as provided in Section 16. Any performance conditions applied to any Award of restricted stock may include earnings per share, net income, operating income, total shareholder return, market share, return on equity, achievement of profit or revenue targets by a business unit, or any combination thereof. No Award of restricted stock may vest earlier than one year from the date of grant (unless specifically approved by the Committee to attract a key executive to join the Company and except in the case of a Change of Control or in the event that the Participant dies, retires or terminates employment due to disability). The Committee may, on behalf of the Company, approve the purchase by the Company of any shares subject to an award of restricted stock, to the extent vested, for an amount equal to the aggregate fair market value of such shares on the date of purchase. 11. Term Sheets or Agreements. Each Award under the Plan shall be evidenced by a term sheet or an agreement setting forth the terms and conditions, as determined by the Committee, which shall apply to such Award, in addition to the terms and conditions specified in the Plan. 12. Change of Control. In the event of a Change of Control, as hereinafter defined, (i) the restrictions applicable to all shares of restricted stock shall lapse and such shares shall be deemed fully vested and (ii) subject to any limitations set forth in agreements documenting any stock option Awards, all stock options shall become immediately exercisable in full. The Committee may, in its discretion, include such further provisions and limitations in any agreement documenting such Awards as it may deem equitable and in the best interests of the Company. "Change of Control" means a change of control of the Company of a nature that would be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of the Current Report on Form 8-K, as in effect on May 3, 1994, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934; provided that, without limitation, such a change in control shall be deemed to have occurred at such time as (a) any "person" within the meaning of Section 14(d) of the Securities Exchange Act of 1934, other than the Company, a subsidiary or any employee benefit plan(s) sponsored by the Company or any subsidiary is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of fifty per cent (50%) or more of the Common Stock; or (b) individuals who constitute the Board on May 3, 1994, cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to May 3, 1994, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three quarters of the directors comprising the Board on May 3, 1994 (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (b), considered as though such person were a member of the Board on May 3, 1994. 13. Withholding. The Company and its subsidiaries shall have the right to deduct from any payment to be made pursuant to the Plan, or to require prior to the issuance or delivery of any shares of Common Stock or the payment of cash under the Plan, any taxes required by law (whether federal, state, local or foreign) to be withheld therefrom. The Committee may, in its discretion, permit a Participant to elect to satisfy such withholding obligation by having the Company retain the number of shares of Common Stock whose fair market value equals the amount required to be withheld. Any fraction of a share of Common Stock required to satisfy such obligation shall be disregarded and the amount due shall instead be paid in cash to the Participant. 14. Nontransferability. No amount payable or other right under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind nor in manner be subject to the debts or liabilities of any person, except by will or the laws of descent and distribution, and any attempt to so alienate or subject any such amount, whether presently or thereafter payable, or any such right shall be void. Notwithstanding the foregoing, a Participant who is a current or former Director of the Company may, upon notice to the Company's Corporate Secretary, transfer nonstatutory stock options through gift or a domestic relations order to (i) a Family Member (as defined below), (ii) a trust in which the Participant and/or the Participant's Family Members have more than fifty percent of the beneficial interest, (iii) a foundation in which the Participant and/or the Participant's Family Members control the management of assets, or (iv) any other entity in which the Participant and/or the Participant's Family Members own more than fifty percent of the voting interest. A sale or other transfer of a nonstatutory stock option for value shall not be treated as a "gift" for purposes of this paragraph; provided, however, that neither of the following types of transfers shall be treated as a prohibited transfer for value: (1) a transfer under a domestic relations order, and (2) a transfer to an entity described in clause (iv) of the preceding sentence in exchange for an interest in such entity. For purposes of the preceding paragraph, a "Family Member" means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in- law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the Participant (including any adoptive relationships) and any person sharing the Participant's household (other than a tenant or employee of the Participant). 15. No Right to Employment. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continue in the employ of the Company or its subsidiaries. Further, the Company and its subsidiaries expressly reserve the right at any time to dismiss a Participant without any liability, or any claim under the Plan, except as provided herein or in any agreement entered into hereunder. 16. Adjustment of and Changes in Common Stock. In the event of any stock dividend or split, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other change in the corporate structure or shares of stock of the Company, or any distributions to common shareholders other than regular cash dividends, the Committee may make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of shares of Common Stock or other securities issued or reserved for issuance pursuant to the Plan and to outstanding Awards. 17. Amendment. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that (i) no amendment shall be made without stockholder approval if such approval is necessary in order for the Plan to continue to comply with Rule 16b-3 under the Securities Exchange Act of 1934 and (ii) no amendment, suspension or termination may adversely affect any outstanding Award without the consent of the Participant to whom such Award was made. 18. Governing Law. The Plan shall be construed and its provisions enforced and administered in accordance with the laws of the State of Minnesota. 19. Effective Date. The Plan shall be effective as of May 4, 1994. Subject to earlier termination pursuant to Section 17, the Plan shall have a term of ten (10) years from its effective date. 20. Automatic Grant to Non-Employee Directors. Commencing with the first meeting of the Board in November 1998, each year on the date of the first meeting of the Board in November of each such year, each Non-Employee Director who is a director of the Company as of such date shall, without any Committee action, automatically be granted a stock option to purchase six thousand (6000) shares of Common Stock (subject to adjustment upon changes in capitalization of the Company as provided in Section 16 of the Plan). Each such option shall be evidenced by and subject to the provisions of an agreement setting forth the terms described in Section 22 and such additional terms of the Plan as are not inconsistent with the terms of Section 22. 21. Discretionary Grant to Non-Employee Directors. The Board may, subsequent to the effective date of the Plan, permit Non-Employee Directors to choose to receive all or a portion of their basic annual retainer in the form of stock options valued in accordance with a method deemed appropriate by the Committee. Each such option shall be evidenced by and subject to the provisions of an agreement setting forth the terms described in Section 22 and such additional terms of the Plan as are not inconsistent with the terms of Section 22. 22. Non-Employee Director Options. Options granted pursuant to Section 20 or 21 shall have an exercise price per share equal to 100% of the fair market value of one (1) share of Common Stock on the date the option is granted, shall become exercisable in full one (1) year after the date of grant, and shall remain exercisable until terminated in accordance with Section 9 of the Plan, provided that (i) Section 9(iii) shall be applied without regard to the words "or through discharge for cause," (ii) Sections 9(iv) and (v) shall not be applicable and (iii) references in Section 9 to "employment" and "termination of employment" shall, for the purposes of Sections 20 and 21, refer to "service as a director" and "termination of service as a director." Payment of the exercise price of the shares to be purchased under options granted under Sections 20 and 21 must be made in cash only (including check, bank draft or money order) at the time of exercise of such option. The provisions of Sections 20 and 21 shall control with respect to options granted under either Section 20 or 21, respectively, over any other inconsistent provisions of the Plan. It is intended that the provisions of Sections 20 and 21 shall not cause the Non-Employee Directors to cease to be considered Disinterested Persons and, as a result, the provisions of Sections 20 and 21 shall be interpreted to be consistent with the foregoing intent. Non-Employee Directors may not be granted options under the Plan other than pursuant to the provisions of Sections 20 and 21. No Rights may be granted to Non-Employee Directors. EX-10 6 0006.txt EXHIBIT 10(D) EXHIBIT 10(d) THE ST. PAUL COMPANIES, INC. DIRECTORS CHARITABLE AWARD PROGRAM Amended November 9, 2000 1. PURPOSE OF THE PROGRAM The St. Paul Companies, Inc. Directors Charitable Award Program (the "Program") allows each eligible Director of The St. Paul Companies, Inc. (the "Company") to recommend that the Company make a donation of up to $1,000,000 to the eligible tax-exempt organization(s) (the "Donee(s)") selected by the Director, with the donation to be made, in the Director's name, in ten equal annual installments, with the first installment to be made as soon as is practicable after the Director's death. The purpose of the Program is to recognize the interest of the Company and its Directors in supporting worthy educational institutions and other charitable organizations. 2. ELIGIBILITY All persons serving as Directors of the Company as of February 7, 1995, shall be eligible to participate in the Program upon their completion of enrollment in the Program. All Directors who join the Company's Board of Directors after that date shall be immediately eligible to participate in the Program upon election to the Board and completion of enrollment in the Program. 3. RECOMMENDATION OF DONATION When a Director becomes eligible to participate in the Program, he or she shall make a written recommendation to the Company, on a form approved by the Company for this purpose, designating the Donee(s) which he or she intends to be the recipient(s) of the Company donation to be made on his or her behalf. A Director may revise or revoke any such recommendation prior to his or her death by signing a new recommendation form and submitting it to the Company. 4. AMOUNT AND TIMING OF DONATION Each eligible Director may choose one organization to receive a Company donation of up to $1,000,000, or up to four organizations to receive donations aggregating up to $1,000,000. Each recommended organization must be recommended to receive a donation of at least $100,000. The donation will be made by the Company in ten equal annual installments, with the first installment to be made as soon as is practicable after the Director's death. If a Director recommends more than one organization to receive a donation, each will receive a prorated portion of each annual installment. Each annual installment payment will be divided among the recommended organizations in the same proportions as the total donation amount has been allocated among the organizations by the Director. 5. DONEES In order to be eligible to receive a donation, a recommended organization must initially, and at the time a donation is to be made, qualify to receive tax-deductible donations under the Internal Revenue Code, and be reviewed and approved by the Board Governance Committee. A recommendation will be approved unless it is determined, in the exercise of good faith judgment, that a donation to the organization would be detrimental to the best interests of the Company. A Director's private foundation is not eligible to receive donations under the Program. If an organization recommended by a Director ceases to qualify as a Donee, and if the Director does not submit a form to change the recommendation before his or her death, the amount recommended to be donated to the organization will instead be donated to the Director's remaining recommended qualified Donee(s) on a prorated basis. If none of the recommended organizations qualify, the donation will be made to the organization(s) selected by the Company. 6. VESTING The amount of the donation made on a Director's behalf will be determined based on the Director's months of Board service, in accordance with the following vesting schedule: VESTING DATE DONATION AMOUNT ------------ --------------- Upon first $200,000 anniversary of date first elected a director by shareholders (Election Date) Upon second $400,000 anniversary of Election Date Upon third $600,000 anniversary of Election Date Upon fourth $800,000 anniversary of Election Date Upon fifth $1,000,000 anniversary of Election Date Notwithstanding this vesting schedule, a Director will be entitled to a donation amount of $1,000,000 in the event (a) he or she dies or becomes disabled while serving as a Director, (b) if not an employee of the Company, he or she retires at the mandatory retirement age for non-employee Directors, (c) if an employee of the Company, he or she retires on or after his or her normal retirement date, or (d) of a Change of Control of the Company. "Change of Control" means a change of control of the Company of a nature that would be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of the Current Report on Form 8-K, as in effect on November 9, 2000, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934; provided that, without limitation, such a change in control shall be deemed to have occurred at such time as (a) any "person" within the meaning of Section 14(d) of the Securities Exchange Act of 1934, other than the Company, a subsidiary or any employee benefit plan(s) sponsored by the Company or any subsidiary is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of fifty per cent (50%) or more of the Company's outstanding common stock; or (b) individuals who constitute the Board on November 9, 2000, cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to November 9, 2000, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three quarters of the directors comprising the Board on November 9, 2000 (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (b), considered as though such person were a member of the Board on November 9, 2000. For persons serving as Directors on February 7, 1995, Board service prior to that date will count as vesting service. If a Director recommends more than one organization to receive aggregate donations of up to $1,000,000, and if the applicable vested donation amount is less than $1,000,000, the actual donation amount will be divided among those organizations in the same proportions as the total donation amount has been allocated among the organizations by the Director. 7. FUNDING AND PROGRAM ASSETS The Company may fund the Program or it may choose not to fund the Program. If the Company elects to fund the Program in any manner, neither the Directors nor their recommended Donee(s) shall have any rights or interests in any assets of the Company identified for such purpose. Nothing contained in the Program shall create, or be deemed to create, a trust, actual or constructive, for the benefit of a Director or any Donee recommended by a Director to receive a donation, or shall give, or be deemed to give, any Director or recommended Donee any interest in any assets of the Program through life insurance policies, a participating Director agrees to cooperate and fulfill the enrollment requirements necessary to obtain insurance on his or her life. 8. AMENDMENT OR TERMINATION The Board of Directors of the Company may, at any time, without the consent of the Directors participating in the Program amend, suspend, or terminate the program. Notwithstanding the foregoing, the Program cannot be amended, suspended, or terminated following a Change of Control of the Company in any manner without the consent of the participating Directors. 9. ADMINISTRATION The Program shall be administered by the Board Governance Committee. The Committee shall have authority, in its discretion, but subject to the provisions of the Program, to prescribe, amend, and rescind rules, regulations and procedures relating to the Program. The determinations of the Committee on the foregoing matters shall be conclusive and binding on all interested parties. 10. GOVERNING LAW The Program shall be construed and enforced according to the laws of the State of Minnesota and all provisions thereof shall be administered according to the laws of said state. 11. EFFECTIVE DATE The Program shall become effective when all Directors, as of February 7, 1995, have completed the Program enrollment requirements. EX-10 7 0007.txt EXHIBIT 10(E) EXHIBIT 10(e) Amendment to the Amended and Restated Special Severance Policy Effective February 1, 2001, Sections 1.(r) and 3.(2)(B) of The St. Paul Companies, Inc. Amended and Restated Special Severance Policy were amended to read as follows: Section 1.(r) "Tier 2 Employee" means an Employee who is serving the Company or St. Paul Fire and Marine Insurance Company as Vice President or above, other than a Tier 1 Employee, and any other Employee who has substantially equivalent responsibilities and is designated by the Chief Executive Officer of the Company as a Tier 2 Employee. and Section 3.(2)(B) For a Tier 3 Employee, severance pay at the Employee's Compensation Rate, payable biweekly, equal to two weeks for each year of "vesting service" (as defined in the Employer's retirement plan, as in effect immediately prior to the Change in Control) with the Employer; provided, however, that no Employee shall receive such severance pay for less than 8 weeks or more than 52 weeks and, provided, further, that, if any such biweekly payment is not timely paid, all remaining biweekly payments shall immediately become due and payable in full. EX-11 8 0008.txt EXHIBIT 11 EXHIBIT 11 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings per Common Share (In millions, except per share amounts) Twelve Months Ended December 31, ---------------------------- 2000 1999 1998 ------- ------- ------- EARNINGS: Basic: Net income as reported $ 993 $834 $89 Preferred stock dividends, net of taxes (8) (8) (9) Premium on preferred shares redeemed (11) (4) (3) ----- ----- ----- Net income available to common shareholders 974 822 77 ===== ===== ===== Diluted: Net income available to common shareholders 974 822 77 Effect of dilutive securities: Convertible preferred stock 6 6 - Zero coupon convertible notes 3 3 - Convertible monthly income preferred securities 5 8 - ----- ----- ----- Net income available to common shareholders $ 988 $ 839 $ 77 ===== ===== ===== COMMON SHARES: Basic: Weighted average common shares outstanding 217 228 235 ===== ===== ===== Diluted: Weighted average common shares outstanding 217 228 235 Effect of dilutive securities: Stock options 3 2 4 Convertible preferred stock 7 7 - Zero coupon convertible notes 2 2 - Convertible monthly income preferred securities 4 7 - ----- ----- ----- Weighted average, as adjusted 233 246 239 ===== ===== ===== EARNINGS PER COMMON SHARE: Basic $4.50 $3.61 $0.33 Diluted $4.24 $3.41 $0.32 The assumed conversion of preferred stock, zero coupon notes and monthly income preferred securities were each anti-dilutive to The St. Paul's net income for the year ended Dec. 31, 1998. As a result, the potentially dilutive effect of those securities is not considered in the calculation of EPS amounts. EX-12 9 0009.txt EXHIBIT 12 EXHIBIT 12 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Ratios (In millions, except ratios) Twelve Months Ended December 31, ----------------------------------------- 2000 1999 1998 1997 1996 ----- ----- ----- ----- ----- EARNINGS: Income from continuing operations before income taxes and cumulative effect of accounting change $1,453 $1,017 $ 120 $1,433 $1,323 Add: fixed charges 175 175 154 150 139 ----- ----- ----- ----- ----- Income as adjusted $1,628 $1,192 $ 274 $1,583 $1,462 ===== ===== ===== ===== ===== FIXED CHARGES AND PREFERRED DIVIDENDS: Fixed charges: Interest expense and amortization $ 116 $ 99 $ 75 $ 86 $ 87 Dividends on redeemable preferred securities 31 36 38 33 13 Rental expense (1) 28 40 41 31 39 ----- ----- ----- ----- ----- Total fixed charges 175 175 154 150 139 Preferred stock dividend requirements 15 17 13 20 38 ----- ----- ----- ----- ----- Total fixed charges and preferred stock dividend requirements $ 190 $ 192 $ 167 $ 170 $ 177 ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 9.32 6.80 1.78 10.56 10.51 ===== ===== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred stock dividend requirements 8.59 6.22 1.64 9.33 8.25 ===== ===== ===== ===== ===== (1) Interest portion deemed implicit in total rent expense. Amount for 1999 includes an $11 million provision representative of interest included in charge for future lease buy-outs recorded as a result of The St. Paul's cost reduction program. Amount for 1998 includes an $11 million provision representative of interest included in charge for future lease buy-outs recorded as a result of The St. Paul's merger with USF&G Corporation. EX-13 10 a2042092zex-13.txt EXHIBIT 13 Six-Year Summary of Selected Financial Data THE ST. PAUL COMPANIES
2000 1999 1998 1997 1996 1995 (In millions, except ratios and per share data) CONSOLIDATED Revenues from continuing operations $8,608 $ 7,569 $ 7,708 $ 8,308 $ 7,893 $ 7,273 Income from continuing operations 1,013 749 199 1,062 1,049 855 INVESTMENT ACTIVITY Net investment income 1,616 1,557 1,571 1,573 1,509 1,471 Pretax realized investment gains 607 277 201 423 262 91 OTHER SELECTED FINANCIAL DATA (as of December 31) Total assets 41,075 38,555 37,453 36,684 34,598 32,741 Debt 1,647 1,466 1,260 1,304 1,171 1,304 Capital securities 337 425 503 503 307 207 Common shareholders' equity 7,178 6,448 6,621 6,591 5,631 5,342 Common shares outstanding 218.3 224.8 233.7 233.1 230.9 235.4 PER COMMON SHARE DATA Income from continuing operations 4.32 3.07 0.78 4.22 4.07 3.29 Year-end book value 32.88 28.68 28.32 28.27 24.39 22.69 Year-end market price 54.31 33.69 34.81 41.03 29.31 27.81 Cash dividends declared 1.08 1.04 1.00 0.94 0.88 0.80 PROPERTY-LIABILITY INSURANCE Written premiums 5,884 5,112 5,276 5,682 5,683 5,561 Pretax income from continuing operations 1,467 971 298 1,488 1,257 1,040 GAAP underwriting loss (309) (425) (881) (139) (35) (127) Statutory combined ratio: Loss and loss expense ratio 70.0 72.9 82.2 69.8 68.9 71.5 Underwriting expense ratio 34.8 35.0 35.2 33.5 31.9 30.6 ------ ------ ----- ----- ----- ------ Combined ratio 104.8 107.9 117.4 103.3 100.8 102.1 LIFE INSURANCE Product sales 1,123 1,000 501 446 427 348 Premium income 306 187 119 137 145 174 Net income (loss) 43 44 13 51 (5) 19
Independent Auditors' Report THE BOARD OF DIRECTORS AND SHAREHOLDERS THE ST. PAUL COMPANIES, INC.: We have audited the accompanying consolidated balance sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The St. Paul Companies, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, in 1999 the Company changed its method of accounting for insurance-related assessments. /s/ KPMG LLP KPMG LLP Minneapolis, Minnesota January 23, 2001 Management's Responsibility for Financial Statements Scope of Responsibility - Management prepares the accompanying financial statements and related information and is responsible for their integrity and objectivity. The statements were prepared in conformity with United States generally accepted accounting principles. These financial statements include amounts that are based on management's estimates and judgments, particularly our reserves for losses and loss adjustment expenses. We believe that these statements present fairly the company's financial position and results of operations and that the other information contained in the annual report is consistent with the financial statements. Internal Controls - We maintain and rely on systems of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized and recorded. We continually monitor these internal accounting controls, modifying and improving them as business conditions and operations change. Our internal audit department also independently reviews and evaluates these controls. We recognize the inherent limitations in all internal control systems and believe that our systems provide an appropriate balance between the costs and benefits desired. We believe our systems of internal accounting controls provide reasonable assurance that errors or irregularities that would be material to the financial statements are prevented or detected in the normal course of business. Independent Auditors - Our independent auditors, KPMG LLP, have audited the consolidated financial statements. Their audit was conducted in accordance with auditing standards generally accepted in the United States of America, which includes the consideration of our internal controls to the extent necessary to form an independent opinion on the consolidated financial statements prepared by management. Audit Committee - The audit committee of the board of directors, composed solely of outside directors, assists the board of directors in overseeing management's discharge of its financial reporting responsibilities. The committee meets with management, our director of internal audit and representatives of KPMG LLP to discuss significant changes to financial reporting principles and policies and internal audit controls and procedures proposed or contemplated by management, our internal auditors or KPMG LLP. Additionally, the committee assists the board of directors in the selection, evaluation and, if applicable, replacement of our independent auditors; and in the evaluation of the independence of the independent auditors. Both internal audit and KPMG LLP have access to the audit committee without management's presence. Code of Conduct - We recognize our responsibility for maintaining a strong ethical climate. This responsibility is addressed in the company's written code of conduct. /s/ Douglas W. Leatherdale /s/ Thomas A. Bradley Douglas W. Leatherdale Thomas A. Bradley Chairman, President and Chief Financial Officer Chief Executive Officer Consolidated Statements of Income THE ST. PAUL COMPANIES
Year ended December 31 2000 1999 1998 (In millions, except per share data) REVENUES Premiums earned $ 5,898 $ 5,290 $ 5,553 Net investment income 1,616 1,557 1,571 Asset management 356 340 302 Realized investment gains 607 277 201 Other 131 105 81 ----- ----- ----- Total revenues 8,608 7,569 7,708 ----- ----- ----- EXPENSES Insurance losses and loss adjustment expenses 3,913 3,720 4,465 Life policy benefits 494 367 273 Policy acquisition expenses 1,442 1,325 1,487 Operating and administrative expenses 1,306 1,140 1,363 ----- ----- ----- Total expenses 7,155 6,552 7,588 ----- ----- ----- Income from continuing operations before income taxes 1,453 1,017 120 Income tax expense (benefit) 440 238 (79) ----- ----- ----- Income from continuing operations before cumulative effect of accounting change 1,013 779 199 Cumulative effect of accounting change, net of taxes -- (30) -- ----- ----- ----- Income from continuing operations 1,013 749 199 ----- ----- ----- Discontinued operations: Operating loss, net of taxes -- (9) (110) Gain (loss) on disposal, net of taxes (20) 94 -- ----- ----- ----- Gain (loss) from discontinued operations (20) 85 (110) ----- ----- ----- Net Income $ 993 $ 834 $ 89 ----- ----- ----- ----- ----- ----- BASIC EARNINGS PER COMMON SHARE Income from continuing operations before cumulative effect $ 4.59 $ 3.37 $ 0.79 Cumulative effect of accounting change, net of taxes -- (0.13) -- Gain (loss) from discontinued operations, net of taxes (0.09) 0.37 (0.46) ----- ----- ----- Net Income $ 4.50 $ 3.61 $ 0.33 ----- ----- ----- ----- ----- ----- DILUTED EARNINGS PER COMMON SHARE Income from continuing operations before cumulative effect $ 4.32 $ 3.19 $ 0.78 Cumulative effect of accounting change, net of taxes -- (0.12) -- Gain (loss) from discontinued operations, net of taxes (0.08) 0.34 (0.46) ----- ----- ----- Net Income $ 4.24 $ 3.41 $ 0.32 ----- ----- ----- ----- ----- -----
See notes to consolidated financial statements. Consolidated Balance Sheets THE ST. PAUL COMPANIES
December 31 2000 1999 (In millions) ASSETS Investments: Fixed maturities $ 20,470 $ 19,080 Equities 1,466 1,617 Real estate and mortgage loans 1,249 1,504 Venture capital 1,064 866 Securities lending 1,233 1,216 Short-term investments 1,264 1,347 Other investments 353 299 --------- -------- Total investments 27,099 25,929 Cash 83 158 Reinsurance recoverables: Unpaid losses 5,197 4,331 Paid losses 327 190 Ceded unearned premiums 814 639 Receivables: Underwriting premiums 2,956 2,292 Interest and dividends 356 356 Other 181 223 Deferred policy acquisition costs 1,088 942 Deferred income taxes 898 1,262 Office properties and equipment 520 499 Goodwill 510 399 Asset management securities held for sale 29 45 Other assets 1,017 1,290 --------- -------- Total Assets $ 41,075 $ 38,555 --------- -------- --------- -------- LIABILITIES Insurance reserves: Losses and loss adjustment expenses $18,196 $ 17,720 Future policy benefits 5,460 4,885 Unearned premiums 3,647 3,048 --------- -------- Total insurance reserves 27,303 25,653 Debt 1,647 1,466 Payables: Reinsurance premiums 1,060 654 Income taxes 172 311 Accrued expenses and other 1,185 1,138 Securities lending 1,233 1,216 Other liabilities 911 1,220 --------- -------- Total Liabilities 33,511 31,658 --------- -------- Company-obligated mandatorily redeemable preferred securities of subsidiaries or trusts holding solely subordinated debentures of the company 337 425 SHAREHOLDERS' EQUITY Preferred: SOP convertible preferred stock 117 129 Guaranteed obligation - SOP (68) (105) --------- -------- Total Preferred Shareholders' Equity 49 24 --------- -------- Common: Common stock 2,238 2,079 Retained earnings 4,243 3,827 Accumulated other comprehensive income, net of taxes: Unrealized appreciation 765 568 Unrealized loss on foreign currency translation (68) (26) --------- -------- Total accumulated other comprehensive income 697 542 --------- -------- Total Common Shareholders' Equity 7,178 6,448 --------- -------- Total Shareholders' Equity 7,227 6,472 --------- -------- Total Liabilities, Redeemable Preferred Securities of Subsidiaries or Trusts and Shareholders' Equity $ 41,075 $ 38,555 --------- -------- --------- --------
See notes to consolidated financial statements. Consolidated Statements of Shareholders' Equity THE ST. PAUL COMPANIES
Year ended December 31 2000 1999 1998 (In millions) PREFERRED SHAREHOLDERS' EQUITY SOP convertible preferred stock: Beginning of year $ 129 $ 134 $ 138 Redemptions during the year (12) (5) (4) ------- ------- ------- End of year 117 129 134 ------- ------- ------- Guaranteed obligation - SOP: Beginning of year (105) (119) (121) Principal payments 37 14 2 ------- ------- ------- End of year (68) (105) (119) ------- ------- ------- Total Preferred Shareholders' Equity 49 24 15 ------- ------- ------- COMMON SHAREHOLDERS' EQUITY Common stock: Beginning of year 2,079 2,128 2,057 Stock issued: Stock incentive plans 95 37 70 Preferred shares redeemed 23 9 8 Conversion of company-obligated preferred securities 207 -- -- Reacquired common shares (170) (102) (35) Other 4 7 28 ------- ------- ------- End of year 2,238 2,079 2,128 ------- ------- ------- Retained earnings: Beginning of year 3,827 3,480 3,720 Net income 993 834 89 Dividends declared on common stock (232) (235) (223) Dividends declared on preferred stock, net of taxes (8) (8) (9) Reacquired common shares (366) (254) (100) Tax benefit on employee stock options, and other changes 40 14 6 Premium on preferred shares redeemed (11) (4) (3) ------- ------- ------- End of year 4,243 3,827 3,480 ------- ------- ------- Unrealized appreciation, net of taxes: Beginning of year 568 1,027 846 Change for the year 197 (459) 181 ------- ------- ------- End of year 765 568 1,027 ------- ------- ------- Unrealized loss on foreign currency translation, net of taxes: Beginning of year (26) (14) (24) Currency translation adjustments (42) (12) 10 ------- ------- ------- End of year (68) (26) (14) ------- ------- ------- Total Common Shareholders' Equity 7,178 6,448 6,621 ------- ------- ------- Total Shareholders' Equity $ 7,227 $ 6,472 $ 6,636 ------- ------- ------- ------- ------- -------
Consolidated Statements of Comprehensive Income THE ST. PAUL COMPANIES
Year ended December 31 2000 1999 1998 (In millions) Net income $ 993 $ 834 $ 89 Other comprehensive income (loss), net of taxes: Change in unrealized appreciation 197 (459) 181 Change in unrealized loss on foreign currency translation (42) (12) 10 ------- ------- ------- Other comprehensive income (loss) 155 (471) 191 ------- ------- ------- Comprehensive income $ 1,148 $ 363 $ 280 ------- ------- ------- ------- ------- -------
See notes to consolidated financial statements. Consolidated Statements of Cash Flows THE ST. PAUL COMPANIES
Year ended December 31 2000 1999 1998 (In millions) OPERATING ACTIVITIES Net income $ 993 $ 834 $ 89 Adjustments: Loss (income) from discontinued operations 20 (85) 110 Change in insurance reserves (86) (181) (146) Change in reinsurance balances (803) (502) 25 Change in premiums receivable (450) (290) 53 Change in accounts payable and accrued expenses 21 151 50 Provision for federal deferred tax expense (benefit) 380 120 (114) Change in asset management balances 9 31 (32) Depreciation and amortization 113 122 133 Realized investment gains (607) (277) (201) Cumulative effect of accounting change -- 30 -- Other (145) (9) 177 ------- ------ ------ Net Cash Provided (Used) by Continuing Operations (555) (56) 144 Net Cash Provided (Used) by Discontinued Operations (8) 6 (75) ------- ------ ------ Net Cash Provided (Used) by Operating Activities (563) (50) 69 ------- ------ ------ INVESTING ACTIVITIES Purchases of investments (6,414) (6,153) (4,866) Proceeds from sales and maturities of investments 6,949 6,152 4,810 Sales (purchases) of short-term investments 239 (539) (15) Net proceeds from sale of subsidiaries 201 251 -- Change in open security transactions (65) 23 (8) Venture capital distributions 57 63 50 Purchase of office property and equipment (104) (172) (95) Sales of office property and equipment 10 70 2 Acquisitions, net of cash acquired (212) -- (98) Other (18) 78 74 ------- ------ ------ Net Cash Provided (Used) by Continuing Operations 643 (227) (146) Net Cash Provided (Used) by Discontinued Operations 17 (52) 64 ------- ------ ------ Net Cash Provided (Used) by Investing Activities 660 (279) (82) ------- ------ ------ FINANCING ACTIVITIES Deposits on universal life and investment contracts 905 934 518 Withdrawals on universal life and investment contracts (507) (101) (186) Dividends paid on common and preferred stock (241) (246) (226) Proceeds from issuance of debt 498 250 239 Repayment of debt (363) (52) (225) Repurchase of common shares (536) (356) (135) Retirement of company-obligated mandatorily redeemable preferred securities of subsidiaries or trusts -- (79) -- Stock options exercised and other 72 11 25 ------- ------ ------ Net Cash Provided (Used) by Financing Activities (172) 361 10 ------- ------ ------ Increase (Decrease) in Cash (75) 32 (3) ------- ------ ------ Cash at beginning of year 158 126 129 ------- ------ ------ Cash at End of Year $ 83 $ 158 $ 126 ------- ------ ------ ------- ------ ------
See notes to consolidated financial statements. Notes to Consolidated Financial Statements THE ST. PAUL COMPANIES 1 Summary of Significant Accounting Policies Accounting Principles - We prepare our financial statements in accordance with United States generally accepted accounting principles ("GAAP"). We follow the accounting standards established by the Financial Accounting Standards Board ("FASB") and the American Institute of Certified Public Accountants ("AICPA"). Consolidation - We combine our financial statements with those of our subsidiaries and present them on a consolidated basis. The consolidated financial statements do not include the results of material transactions between our parent company and our subsidiaries or among our subsidiaries. Certain of our foreign underwriting operations' results are recorded on a one-month to one-quarter lag due to time constraints in obtaining and analyzing such results for inclusion in our consolidated financial statements on a current basis. In the event that significant events occur during the lag period, the impact is included in the current period results. Discontinued Operations - In 2000, we sold our nonstandard auto business. In 1999, we sold our standard personal insurance business. Accordingly, the results of operations for all years presented reflect the results for these businesses as discontinued operations. Reclassifications - We reclassified certain amounts in our 1999 and 1998 financial statements and notes to conform with the 2000 presentation. These reclassifications had no effect on net income, or common or preferred shareholders' equity, as previously reported for those years. Use of Estimates - We make estimates and assumptions that have an effect on the amounts that we report in our financial statements. Our most significant estimates are those relating to our reserves for property-liability losses and loss adjustment expenses and life policy benefits. We continually review our estimates and make adjustments as necessary, but actual results could turn out to be significantly different from what we expected when we made these estimates. Stock Split - In May 1998, we declared a 2-for-1 stock split. All references in these financial statements and related notes to per-share amounts and to the number of shares of common stock reflect the effect of this stock split on all periods presented. ACCOUNTING FOR OUR PROPERTY-LIABILITY UNDERWRITING OPERATIONS Premiums Earned - Premiums on insurance policies are our largest source of revenue. We recognize the premiums as revenues evenly over the policy terms using the daily pro rata method or, in the case of our Lloyd's business, the one-eighths method. We record the premiums that we have not yet recognized as revenues as unearned premiums on our balance sheet. Assumed reinsurance premiums are recognized as revenues proportionately over the contract period. Premiums earned are recorded in our statement of income, net of our cost to purchase reinsurance. Insurance Losses and Loss Adjustment Expenses - Losses represent the amounts we paid or expect to pay to claimants for events that have occurred. The costs of investigating, resolving and processing these claims are known as loss adjustment expenses ("LAE"). We record these items on our statement of income net of reinsurance, meaning that we reduce our gross losses and loss adjustment expenses incurred by the amounts we have recovered or expect to recover under reinsurance contracts. Insurance Reserves - We establish reserves for the estimated total unpaid cost of losses and LAE, which cover events that occurred in 2000 and prior years. These reserves reflect our estimates of the total cost of claims that were reported to us, but not yet paid, and the cost of claims incurred but not yet reported to us ("IBNR"). Our estimates consider such variables as past loss experience, current claim trends and the prevailing social, economic and legal environments. We reduce our loss reserves for estimated amounts of salvage and subrogation recoveries. Estimated amounts recoverable from reinsurers on unpaid losses and LAE are reflected as assets. We believe that the reserves we have established are adequate to cover the ultimate costs of losses and LAE. Final claim payments, however, may differ from the established reserves, particularly when these payments may not occur for several years. Any adjustments we make to reserves are reflected in the results for the year during which the adjustments are made. Our liabilities for unpaid losses and LAE related to tabular workers' compensation and certain assumed reinsurance coverage are discounted to the present value of estimated future payments. Prior to discounting, these liabilities totaled $890 million and $820 million at Dec. 31, 2000 and 1999, respectively. The total discounted liability reflected on our balance sheet was $681 million and $633 million at Dec. 31, 2000 and 1999, respectively. The liability for workers' compensation was discounted using rates of up to 3.5%, based on state-prescribed rates. The liability for certain assumed reinsurance coverage was discounted using rates up to 7.5%, based on our return on invested assets or, in many cases, on yields contractually guaranteed to us on funds held by the ceding company, as permitted by the state of domicile. Lloyd's - We participate in Lloyd's as an investor in underwriting syndicates and as the owner of a managing agency. We record our pro rata share of syndicate assets, liabilities, revenues and expenses, after making adjustments to convert Lloyd's accounting to U.S. GAAP. The most significant U.S. GAAP adjustments relate to income recognition. Lloyd's syndicates determine underwriting results by year of account at the end of three years. We record adjustments to recognize underwriting results as incurred, including the expected ultimate cost of losses incurred. These adjustments to losses are based on actuarial analysis of syndicate accounts, including forecasts of expected ultimate losses provided by the syndicates. Financial information is available on a timely basis for the syndicates controlled by the managing agency that we own, which make up the majority of our investment in Lloyd's syndicates. Syndicate results are recorded on a one-quarter lag due to time constraints in obtaining and analyzing such results for inclusion in our consolidated financial statements on a current basis. Policy Acquisition Expenses - The costs directly related to writing an insurance policy are referred to as policy acquisition expenses and consist of commissions, state premium taxes and other direct underwriting expenses. Although these expenses are incurred when we issue a policy, we defer and amortize them over the same period as the corresponding premiums are recorded as revenues. On a regular basis, we perform an analysis of the deferred policy acquisition costs in relation to the expected recognition of revenues, including anticipated investment income, and reflect adjustments, if any, as period costs. Guarantee Fund and Other Insurance-Related Assessments - Effective Jan. 1, 1999, we adopted the provisions of the AICPA Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." We record our estimated future payments related to guarantee fund assessments and our estimated ultimate exposure related to second-injury fund assessments in accordance with the SOP. We recorded a pretax expense of $46 million ($30 million after-tax) in the first quarter of 1999 representing the cumulative effect of adopting the provisions of the SOP, with the majority related to our property-liability insurance business. The accrual is expected to be disbursed as assessed during a period of up to 30 years. ACCOUNTING FOR OUR LIFE INSURANCE OPERATIONS Premiums - Premiums on life insurance policies with fixed and guaranteed premiums and benefits, premiums on annuities with significant life contingencies and premiums on structured settlement annuities are recognized when due. Premiums received on universal life policies and investment-type annuity contracts are not recorded as revenues; instead, they are recognized as deposits on our balance sheet. Policy charges and surrender penalties are recorded as revenues when incurred. Policy Benefits - Ordinary life insurance reserves are computed under the net level premium method, which makes no allowance for higher first-year expenses. A uniform portion of each year's premium is used for calculating the reserve. The reserves also reflect assumptions we make for future investment yields, mortality and withdrawal rates. These assumptions reflect our experience, modified to reflect anticipated trends, and provide for possible adverse deviation. Reserve interest rate assumptions are graded and range from 2.5% to 6.0%. Universal life and deferred annuity reserves are computed on the retrospective deposit method, which produces reserves equal to the cash value of the contracts. Such reserves are not reduced for charges that would be deducted from the cash value of policies surrendered. Reserves on immediate annuities with guaranteed payments are computed on the prospective deposit method, which produces reserves equal to the present value of future benefit payments. Policy Acquisition Expenses - The costs of acquiring new business, principally commissions and certain expenses related to underwriting, policy issuance and sales, which vary with and are primarily related to the production of new business, have been capitalized as deferred policy acquisition costs. We consider anticipated policy benefits, remaining costs of servicing the policies and anticipated investment income in determining the recoverability of deferred acquisition costs for interest-sensitive life and annuity products. Deferred policy acquisition costs on ordinary life business are amortized over their assumed premium paying periods based on assumptions consistent with those used for computing policy benefit reserves. Universal life and investment annuity acquisition costs are amortized in proportion to the present value of their estimated gross profits over the products' assumed durations, which we regularly evaluate and adjust as appropriate. Equity-Indexed Annuities - Interest on our equity-indexed annuities is credited to the equity portion of these annuities on specified policy anniversaries based on formulas dictated by the policy contract, and calculated using the average change in the indices during the specified period (one or two years). The interest credited is subject to minimums guaranteed in the annuity contract. We manage our exposure by purchasing one-and two-year options with similar terms as the index component to provide us with the same return as we guarantee to the annuity contract holder, subject to minimums guaranteed in the annuity contract. We carry a reserve on these annuities at an amount equal to the premium deposited, plus the change in the market value of the option purchased, subject to minimums guaranteed in the annuity contract, plus the amortization of the original purchase price of the option. The options are included in other investments at market value, with changes in unrealized gains or losses reflected in our statement of income. ACCOUNTING FOR OUR ASSET MANAGEMENT OPERATIONS The results of The John Nuveen Company are reflected as our asset management segment. We held a 78% and 79% interest in Nuveen on Dec. 31, 2000 and 1999, respectively. Nuveen's core businesses are asset management, and the development, marketing and distribution of investment products and services for advisors to the affluent and high-net-worth market segments. Nuveen provides investment products, including individually managed accounts, mutual funds, exchange-traded funds and defined portfolios through registered representatives associated with unaffiliated firms including broker-dealers, commercial banks, affiliates of insurance providers, financial planners, accountants, consultants and investment advisors. Nuveen regularly purchases and holds for resale municipal securities and defined portfolio units. The level of inventory maintained by Nuveen will fluctuate daily and is dependent upon the need to support on-going sales. These inventory securities are carried at market value. Prior to the sale of their investment banking operation in the third quarter of 1999, Nuveen also underwrote and traded municipal bonds and maintained inventories of such securities in connection with that business. Nuveen's revenues include investment advisory fees, revenues from the distribution of defined portfolios and managed fund investment products, interest income, gains and losses from the sale of inventory securities, and gains and losses from changes in the market value of investment products and securities held temporarily. We consolidate 100% of Nuveen's assets, liabilities, revenues and expenses, with reductions on the balance sheet and statement of income for the minority shareholders' proportionate interest in Nuveen's equity and earnings. Minority interest of $88 million and $74 million was recorded in other liabilities at the end of 2000 and 1999, respectively. Nuveen repurchased and retired 1.2 million and 0.9 million of its common shares from minority shareholders in 2000 and 1999, respectively, for a total cost of $51 million in 2000 and $36 million in 1999. No shares were repurchased from The St. Paul in those years; however our percentage ownership fell from 79% in 1999 to 78% in 2000 due to Nuveen's issuance of additional shares under various stock option and incentive plans. ACCOUNTING FOR OUR INVESTMENTS Fixed Maturities - Our fixed maturity portfolio is composed primarily of high-quality, intermediate-term taxable U.S. government, corporate and mortgage-backed bonds, and tax-exempt U.S. municipal bonds. Our entire fixed maturity investment portfolio is classified as available for sale. Accordingly, we carry that portfolio on our balance sheet at estimated fair value. Fair values are based on quoted market prices, where available, from a third-party pricing service. If quoted market prices are not available, fair values are estimated using values obtained from independent pricing services or a cash flow estimate is used. Equities - Our equity securities are also classified as available for sale and carried at estimated fair value, which is based on quoted market prices obtained from a third-party pricing service. Real Estate and Mortgage Loans - Our real estate investments include apartments and office buildings and other commercial land and properties that we own directly or in which we have a partial interest through joint ventures with other investors. Our mortgage loan investments consist of fixed-rate loans collateralized by apartment, warehouse and office properties. For direct real estate investments, we carry land at cost and buildings at cost less accumulated depreciation and valuation adjustments. We depreciate real estate assets on a straight-line basis over 40 years. Tenant improvements are amortized over the term of the corresponding lease. The accumulated depreciation of our real estate investments was $133 million and $125 million at Dec. 31, 2000 and 1999, respectively. We use the equity method of accounting for our real estate joint ventures, which means we carry these investments at cost, adjusted for our share of earnings or losses, and reduced by cash distributions from the joint ventures and valuation adjustments. We carry our mortgage loans at the unpaid principal balances less any valuation adjustments, which approximates fair value. Valuation allowances are recognized for loans with deterioration in collateral performance that is deemed other than temporary. The estimated fair value of mortgage loans at Dec. 31, 2000 was $355 million. Venture Capital - Our venture capital investments are interests in small- to medium-sized companies. These investments are made through limited partnerships or direct ownership. The limited partnerships are carried at our equity in the estimated market value of the investments held by these limited partnerships. The investments we own directly are carried at estimated fair value. Fair values are based on quoted market prices obtained from third-party pricing services for publicly traded stock, or an estimate of value as determined by an internal management committee for privately-held stock. Certain publicly traded stock may be carried at a discount of 10-35% of the quoted market price, due to the impact of various restrictions which limit our ability to sell the stock. Securities Lending - We participate in a securities lending program whereby certain securities from our portfolio are loaned to other institutions for short periods of time. We receive a fee from the borrower in return. Our policy is to require collateral equal to 102% of the fair value of the loaned securities. We maintain full ownership rights to the securities loaned. In addition, we have the ability to sell the securities while they are on loan. We have an indemnification agreement with the lending agents in the event a borrower becomes insolvent or fails to return securities. We record securities lending collateral as an asset, with a corresponding liability for the same amount. Realized Investment Gains and Losses - We record the cost of each individual investment so that when we sell any of them, we are able to identify and record that transaction's gain or loss on our statement of income. We continually monitor the difference between the cost and estimated fair value of our investments. If any of our investments experience a decline in value that we believe is other than temporary, we establish a valuation allowance for the decline and record a realized loss on the statement of income. Unrealized Appreciation or Depreciation - For investments we carry at estimated fair value, we record the difference between cost and fair value, net of deferred taxes, as a part of common shareholders' equity. This difference is referred to as unrealized appreciation or depreciation. In our life insurance operations, deferred policy acquisition costs and certain reserves are adjusted for the impact on estimated gross margins as if the net unrealized gains and losses on securities had actually been realized. The change in unrealized appreciation or depreciation during the year is a component of comprehensive income. CASH RESTRICTIONS Lloyd's solvency requirements call for certain funds to be held in trust in amounts sufficient to meet claims. These funds amounted to $102 million and $20 million at Dec. 31, 2000 and 1999, respectively. At Dec. 31, 1999, we were bound by reinsurance contracts with third parties to restrict cash in the amount of $31 million. There were no such restrictions at Dec. 31, 2000. GOODWILL Goodwill is the excess of the amount we paid to acquire a company over the fair value of its net assets, reduced by amortization and any subsequent valuation adjustments. We amortize goodwill over periods of up to 40 years. The accumulated amortization of goodwill was $216 million and $180 million at Dec. 31, 2000 and 1999, respectively. IMPAIRMENTS OF LONG-LIVED ASSETS AND INTANGIBLES We monitor the value of our long-lived assets to be held and used for recoverability based on our estimate of the future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition considering any events or changes in circumstances which indicate that the carrying value of an asset may not be recoverable. We monitor the value of our goodwill based on our estimates of discounted future earnings. If either estimate is less than the carrying amount of the asset, we reduce the carrying value to fair value with a corresponding charge to expense. We monitor the value of our long-lived assets, and certain identifiable intangibles, to be disposed of and report them at the lower of carrying value or fair value less our estimated cost to sell. OFFICE PROPERTIES AND EQUIPMENT We carry office properties and equipment at depreciated cost. We depreciate these assets on a straight-line basis over the estimated useful lives of the assets. The accumulated depreciation for office properties and equipment was $464 million and $431 million at the end of 2000 and 1999, respectively. INTERNALLY DEVELOPED SOFTWARE COSTS Effective Jan. 1, 1999, we adopted SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," issued by the AICPA. This SOP provides guidance for determining when computer software developed or obtained for internal use should be capitalized and what costs should be capitalized. It also provides guidance on the amortization of capitalized costs and the recognition of impairment. At Dec. 31, 2000 and 1999, respectively, we had $42 million and $27 million in unamortized internally developed computer software costs and have charged to income $3 million and $2 million in amortization expense during 2000 and 1999, respectively. FOREIGN CURRENCY TRANSLATION We assign functional currencies to our foreign operations, which are generally the currencies of the local operating environment. Foreign currency amounts are remeasured to the functional currency, and the resulting foreign exchange gains or losses are reflected in the statement of income. Functional currency amounts are then translated into U.S. dollars. The unrealized gain or loss from this translation, net of tax, is recorded as a part of common shareholders' equity. The change in unrealized foreign currency translation gain or loss during the year, net of tax, is a component of comprehensive income. Both the remeasurement and translation are calculated using current exchange rates for the balance sheets and average exchange rates for the statements of income. FOREIGN CURRENCY HEDGE ACCOUNTING We may use forward contracts to hedge our exposure to net investments in our foreign operations from adverse movements in foreign currency exchange rates. The effects of movements in foreign currency exchange rates on the hedging instrument are recorded as unrealized gains or losses, net of tax, as part of common shareholders' equity. If unrealized gains or losses on the foreign currency hedge exceed the offsetting currency translation gain or loss on the investments in the foreign operations, they are included in the statements of income. SUPPLEMENTAL CASH FLOW INFORMATION Interest and Income Taxes Paid - We paid interest on debt and dividends on capital securities of $134 million in 2000, $128 million in 1999 and $109 million in 1998. We paid federal income taxes of $161 million in 2000, $73 million in 1999 and $68 million in 1998. Noncash Financing Activities - In August 2000, we issued 7,006,954 common shares in connection with the conversion of over 99% of the $207 million of 6% Convertible Monthly Income Preferred Securities issued by St. Paul Capital L.L.C. (our wholly-owned subsidiary). 2 Acquisitions MMI - In April 2000, we closed on our acquisition of MMI Companies, Inc. ("MMI"), a Deerfield, IL-based provider of medical services-related insurance products and consulting services. The transaction was accounted for as a purchase, with a total purchase price of approximately $206 million, in addition to the assumption of $165 million in capital securities and debt. The purchase price resulted in goodwill of approximately $101 million, which we are amortizing on a straight-line basis over 15 years. Related to the purchase, we recorded a charge of $28 million, including $4 million of employee-related costs and $24 million of occupancy-related costs. The employee-related costs represented 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 Dec. 31, 2000, 94 employees had been terminated. The occupancy-related costs represented 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 following presents a rollforward of 2000 activity related to this charge.
Reserve Pretax at Dec. 31, Charge Payments 2000 (In millions) Charges to earnings: Employee-related $ 4 $(3) $ 1 Occupancy-related 24 (1) 23 --- --- ---- Total $28 $(4) $24 --- --- ---- --- --- ----
MMI's results of operations from the date of purchase were included in our 2000 consolidated results. The following table presents the pro forma results of our operations for the year ended Dec. 31, 2000 and 1999, as though we had purchased MMI at the beginning of each of the years presented. The pro forma data is provided for illustrative purposes only, and does not purport to be indicative of the results that would have actually occurred if the purchase of MMI had been consummated at the beginning of the periods presented, or that may be obtained in the future.
2000 1999 (In millions, except per share data) Total revenues $8,711 $8,064 Net income 873 728 Diluted earnings per common share $ 3.73 $ 2.98
Prior to the acquisition, MMI recorded a $93 million provision to strengthen their loss reserves, with $77 million reflected in their domestic operations and $16 million reflected in Unionamerica, their U.K.-based international operations. During 2000, we experienced severe prior year loss development on the reserves acquired from MMI, primarily related to their major accounts business. This was consistent with the adverse prior year development experienced on the remainder of our Global Healthcare major accounts business. The major accounts business serves large healthcare entities, which have recently suffered from increasingly significant amounts awarded in jury verdicts relating to professional liability lawsuits. As a result of this overall deterioration, we are in the process of performing a comprehensive review of our entire major accounts business. This review, as well as our evaluation of the strategic value of the Unionamerica entity going forward, will be considered in our assessment of the recoverability of the goodwill we recorded as part of the MMI purchase. Until this review and evaluation are completed, we cannot reasonably estimate to what extent, if any, impairment of the goodwill has occurred. Pacific Select - In February 2000, we closed on our acquisition 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. We recorded goodwill of approximately $11 million, which we are amortizing on a straight-line basis over 10 years. Pacific Select's results of operations from the date of purchase are included in our 2000 consolidated results. USF&G - In April 1998, we issued 66.5 million of our common shares in a tax-free exchange for all of the outstanding common stock of USF&G Corporation ("USF&G"), a holding company for property-liability and life insurance operations. This business combination was accounted for as a pooling of interests; accordingly, the consolidated financial statements for all periods prior to the combination were restated to include the accounts and results of operations of USF&G. There were no material intercompany transactions between The St. Paul and USF&G prior to the merger. Prior to the merger, USF&G discounted all of its workers' compensation reserves to present value, whereas The St. Paul did not discount any of its loss reserves. Subsequent to the merger, The St. Paul and USF&G on a combined basis discounted tabular workers' compensation reserves using an interest rate of up to 3.5%. An adjustment was made, which represented the net reduction in insurance losses and loss adjustment expenses, to conform the discounting policies of the two companies with regard to these reserves. 3 Earnings Per Common Share
Year ended December 31 2000 1999 1998 (In millions) EARNINGS Basic Net income, as reported $993 $834 $ 89 Preferred stock dividends, net of taxes (8) (8) (9) Premium on preferred shares redeemed (11) (4) (3) ----- ---- ---- Net income available to common shareholders $974 $822 $ 77 ----- ---- ---- ----- ---- ---- Diluted Net income available to common shareholders $974 $822 $ 77 Effect of dilutive securities: Convertible preferred stock 6 6 -- Zero coupon convertible notes 3 3 -- Convertible monthly income preferred securities 5 8 -- ----- ---- ---- Net income available to common shareholders, as adjusted $988 $839 $ 77 ----- ---- ---- ----- ---- ---- COMMON SHARES Basic Weighted average common shares outstanding 217 228 235 ----- ---- ---- ----- ---- ---- Diluted Weighted average common shares outstanding 217 228 235 Effects of dilutive securities: Stock options 3 2 4 Convertible preferred stock 7 7 -- Zero coupon convertible notes 2 2 -- Convertible monthly income preferred securities 4 7 -- ----- ---- ---- Total 233 246 239 ----- ---- ---- ----- ---- ----
The assumed conversion of preferred stock, zero coupon notes and monthly income preferred securities are each anti-dilutive to our net income per share for the year ended Dec. 31, 1998, and therefore not included in the EPS calculation. 4 Investments Valuation of Investments - The following presents the cost, gross unrealized appreciation and depreciation, and estimated fair value of our investments in fixed maturities, equities and venture capital.
Gross Gross Unrealized Unrealized Estimated December 31, 2000 Cost Appreciation Depreciation Fair Value (In millions) Fixed maturities: U.S. government $ 1,900 $ 101 $ (1) $ 2,000 State and political subdivisions 5,104 258 (1) 5,361 Foreign governments 1,020 39 (8) 1,051 Corporate securities 8,685 175 (279) 8,581 Asset-backed securities 890 28 (16) 902 Mortgage-backed securities 2,541 48 (14) 2,575 ------- -------- ------ -------- Total fixed maturities 20,140 649 (319) 20,470 Equities 1,125 418 (77) 1,466 Venture capital 657 438 (31) 1,064 ------- -------- ------ -------- Total $21,922 $ 1,505 $(427) $23,000 ------- -------- ------ -------- ------- -------- ------ --------
Gross Gross Unrealized Unrealized Estimated December 31, 1999 Cost Appreciation Depreciation Fair Value (In millions) Fixed maturities: U.S. government $ 2,139 $ 29 $ (14) $ 2,154 State and political subdivisions 5,239 145 (58) 5,326 Foreign governments 904 28 (5) 927 Corporate securities 7,920 45 (304) 7,661 Asset-backed securities 666 2 (21) 647 Mortgage-backed securities 2,414 14 (63) 2,365 ------- ------- -------- -------- Total fixed maturities 19,282 263 (465) 19,080 Equities 1,077 600 (60) 1,617 Venture capital 399 529 (62) 866 ------- ------- -------- -------- Total $20,758 $ 1,392 $ (587) $21,563 ------- ------- -------- -------- ------- ------- -------- --------
Statutory Deposits - At Dec. 31, 2000, our property-liability and life insurance operations had investments in fixed maturities with an estimated fair value of $693 million on deposit with regulatory authorities as required by law. Restricted Investments - Unionamerica, MMI's international subsidiary, is required as an accredited U.S. reinsurer to hold certain investments in trust in the United States. These trust funds had a fair value of $258 million at Dec. 31, 2000. Additionally, Unionamerica has funds deposited with third parties to be used as collateral to secure various liabilities on behalf of insureds, cedants and other creditors. These funds had a fair value of $79 million at Dec. 31, 2000. Fixed Maturities by Maturity Date - The following table presents the breakdown of our fixed maturities by years to maturity. Actual maturities may differ from those stated as a result of calls and prepayments.
Amortized Estimated December 31, 2000 Cost Fair Value (In millions) One year or less $ 1,478 $ 1,489 Over one year through five years 5,189 5,286 Over five years through 10 years 5,266 5,275 Over 10 years 4,776 4,943 Asset-backed securities with various maturities 890 902 Mortgage-backed securities with various maturities 2,541 2,575 ------- ------- Total $20,140 $20,470 ------- ------- ------- -------
5 Investment Transactions Investment Activity - Following is a summary of our investment purchases, sales and maturities.
Year ended December 31 2000 1999 1998 (In millions) PURCHASES Fixed maturities $ 3,676 $ 4,317 $ 3,152 Equities 2,169 1,403 1,250 Real estate and mortgage loans 12 171 211 Venture capital 446 218 153 Other investments 111 44 100 ------- ------- ------- Total purchases 6,414 6,153 4,866 ------- ------- ------- PROCEEDS FROM SALES AND MATURITIES Fixed maturities: Sales 2,185 2,195 957 Maturities and redemptions 1,550 2,002 2,012 Equities 2,183 1,438 1,341 Real estate and mortgage loans 285 182 339 Venture capital 663 283 64 Other investments 83 52 97 ------- ------- ------- Total sales and maturities 6,949 6,152 4,810 ------- ------- ------- Net purchases (sales) $ (535) $ 1 $ 56 ------- ------- ------- ------- ------- -------
Net Investment Income - Following is a summary of our net investment income.
Year ended December 31 2000 1999 1998 (In millions) Fixed maturities $ 1,427 $ 1,375 $ 1,365 Equities 16 17 16 Real estate and mortgage loans 103 108 121 Venture capital (1) (1) -- Securities lending 5 2 1 Other investments 3 12 20 Short-term investments 88 71 75 ------- ------- ------- Total 1,641 1,584 1,598 Investment expenses (25) (27) (27) ------- ------- ------- Net investment income $ 1,616 $ 1,557 $ 1,571 ------- ------- ------- ------- ------- -------
Realized and Unrealized Investment Gains (Losses) - The following summarizes our pretax realized investment gains and losses, and the change in unrealized appreciation of investments recorded in common shareholders' equity and in comprehensive income.
Year ended December 31 2000 1999 1998 (In millions) PRETAX REALIZED INVESTMENTS GAINS (LOSSES) Fixed maturities: Gross realized gains $ 45 $ 13 $ 9 Gross realized losses (99) (50) (21) ----- ----- ------ Total fixed maturities (54) (37) (12) ----- ----- ------ Equities: Gross realized gains 296 224 241 Gross realized losses (201) (97) (77) ----- ----- ------ Total equities 95 127 164 ----- ----- ------ Real estate and mortgage loans 4 27 14 Venture capital 554 158 25 Other investments 8 2 10 ----- ----- ------ Total pretax realized investment gains $ 607 $ 277 $ 201 ----- ----- ------ ----- ----- ------ CHANGE IN UNREALIZED APPRECIATION Fixed maturities $ 532 $(1,322) $200 Equities (199) 223 69 Venture capital (61) 255 45 Life deferred policy acquisition costs and policy benefits (12) 122 (1) Single premium immediate annuity reserves -- 44 (17) Other 47 (13) (17) ----- ----- ------ Total change in pretax unrealized appreciation on continuing operations 307 (691) 279 ----- ----- ------ Change in deferred taxes (110) 241 (100) ----- ----- ------ Total change in unrealized appreciation on continuing operations, net of taxes 197 (450) 179 ----- ----- ------ Change in pretax unrealized appreciation on discontinued operations -- (14) 3 Change in deferred taxes -- 5 (1) ----- ----- ------ Total change in unrealized appreciation on discontinued operations, net of taxes -- (9) 2 ----- ----- ------ Total change in unrealized appreciation, net of taxes $ 197 $(459) $ 181 ----- ----- ------ ----- ----- ------
6 Deferred Policy Acquisition Costs The following table presents the amortization of deferred policy acquisition costs ("DPAC") for our property-liability and life insurance operations for each of the last three years.
Year ended December 31 2000 1999 1998 (In millions) Property-liability $1,396 $1,321 $1,431 Life 46 4 56 ------ ------ ------ Total $1,442 $1,325 $1,487 ------ ------ ------ ------ ------ ------
Life - On a regular basis, our Life insurance operation performs an analysis of the recoverability of DPAC for interest-rate-sensitive life insurance and annuity products. This analysis takes into consideration anticipated policy benefits, remaining costs of servicing the policies and anticipated investment income in estimating future profits on these products, which can be impacted by economic conditions during the period. DPAC related to ordinary life business is amortized on a straight-line basis over their assumed premium paying periods, while DPAC related to universal life and investment annuity business is amortized in proportion to the present value of their estimated gross profits over the products' assumed duration. This ongoing analysis caused us to revise assumptions on interest rates and estimated future profits during each of the years presented, resulting in accelerated DPAC amortization in 1998, with the opposite impact in 1999 and, to a lesser extent, in 2000. The 1999 DPAC benefited from increased profitability from policy charges on our universal life business as well as improved investment spreads on our universal life and annuity products. Improved investment spreads also benefited 2000 DPAC, but were offset by higher than assumed surrenders on our annuities. The 2000 amortization also includes additional amortization from a larger DPAC asset, reflecting our recent sales growth. Included in the 1998 life insurance amortization is a $41 million charge to reduce the carrying value of deferred policy acquisition costs, comprised of three components. First, the persistency of certain in-force business, particularly universal life and flexible premium annuities, sold through some USF&G distribution channels, had begun to deteriorate after the USF&G merger announcement. To mitigate this, management decided, in the second quarter of 1998, to increase credited rates on certain universal life business. This change lowered the estimated future profits on this business, which triggered $19 million in accelerated DPAC amortization. Second, the low interest rate environment during the first half of 1998 led to assumption changes as to the future "spread" on certain interest sensitive products, lowering gross profit expectations and triggering a $16 million DPAC charge. The remaining $6 million of the charge resulted from a change in annuitization assumptions for certain tax-sheltered annuity products. Property-Liability - By contrast, our property-liability insurance operation's deferred acquisition costs are less susceptible to changing economic conditions and are amortized on a straight-line basis over the same period as the corresponding premiums are recorded as revenues. 7 Derivative Financial Instruments Derivative financial instruments are defined as futures, forward, swap or option contracts and other financial instruments with similar characteristics. We have had limited involvement with these instruments for purposes of hedging against fluctuations in foreign currency exchange rates and interest rates. All investments, including derivative instruments, have some degree of market and credit risk associated with them. However, the market risk on our derivatives substantially offsets the market risk associated with fluctuations in interest rates, foreign currency exchange rates and market indices. We seek to reduce our credit risk exposure by conducting derivative transactions only with reputable, investment-grade counterparties. Additionally, with respect to the options hedging our equity-indexed annuity product, we establish limits on options purchased from each counterparty. We purchase foreign exchange forward contracts to minimize the impact of fluctuating foreign currencies on our results of operations. We enter into interest rate swap agreements for the purpose of managing the effect of interest rate fluctuations on some of our debt and investments. Our reinsurance operation has entered into certain swap agreements as a means of providing nontraditional insurance protection to its customers. Individually, and in the aggregate, the impact of these transactions on our financial position and results of operations is not material. Our Life operation manages its exposure on equity-indexed annuity products by purchasing one- and two-year options tied to the performance of leading market indices. At Dec. 31, 2000, we held options with a notional amount of $1.14 billion and a market value of $32 million, which had gross unrealized depreciation of $30 million. Effective Jan. 1, 2001, we will adopt the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 (SFAS No. 133). The statement requires the recognition of all derivatives as either assets or liabilities on the balance sheet, carried at fair value. The adoption of SFAS No. 133 is not expected to have a material impact on our financial position at the date of adoption, or on our results of operations for the period of adoption. 8 Reserves for Losses, Loss Adjustment Expenses and Life Policy Benefits Reconciliation of Loss Reserves - The following table represents a reconciliation of beginning and ending consolidated property-liability insurance loss and loss adjustment expense ("LAE") reserves for each of the last three years.
Year ended December 31 2000 1999 1998 (In millions) Loss and LAE reserves at beginning of year, as reported $ 17,720 $ 18,012 $ 17,755 Less reinsurance recoverables on unpaid losses at beginning of year (3,678) (3,199) (3,051) -------- -------- -------- Net loss and LAE reserves at beginning of year 14,042 14,813 14,704 Activity on reserves of discontinued operations: Losses incurred (4) 279 657 Losses paid (141) (473) (617) -------- -------- -------- Net activity (145) (194) 40 -------- -------- -------- Net reserves of acquired companies 984 -- -- -------- -------- -------- Provision for losses and LAE for claims incurred on continuing operations: Current year 4,178 3,928 4,682 Prior years (265) (208) (217) -------- -------- -------- Total incurred 3,913 3,720 4,465 -------- -------- -------- Losses and LAE payments for claims incurred on continuing operations: Current year (970) (959) (1,136) Prior years (4,138) (3,411) (3,245) -------- -------- -------- Total paid (5,108) (4,370) (4,381) -------- -------- -------- Unrealized foreign exchange loss (gain) (141) 73 (15) -------- -------- -------- Net loss and LAE reserves at end of year 13,545 14,042 14,813 Plus reinsurance recoverables on unpaid losses at end of year 4,651 3,678 3,199 -------- -------- -------- Loss and LAE reserves at end of year, as reported $ 18,196 $ 17,720 $ 18,012 -------- -------- -------- -------- -------- --------
The "activity on reserves of discontinued operations" represents certain activity related to the sale of our standard personal insurance business. The reserve balances associated with certain portions of the business sold are included in our total reserves, but the related incurred losses are excluded from continuing operations in our statements of income for all periods presented. In 1998, we recorded a pretax provision of $215 million to reflect the application of our loss reserving policies to USF&G's loss and LAE reserves subsequent to the merger. In the above table, $50 million of the charge is reflected in the provision for current year losses and LAE, and the remaining $165 million is reflected in the provision for prior year losses and LAE. An additional charge of $35 million related to our standard personal insurance business is reflected in 1998 activity on reserves for discontinued operations. Prior to the merger, both companies, in accordance with generally accepted accounting principles, recorded their best estimate of reserves within a range of estimates bounded by a high point and a low point. Subsequent to the consummation of the merger in April 1998, we obtained the raw data underlying, and documentation supporting, USF&G's Dec. 31, 1997 reserve analysis. Our actuaries reviewed such information and concurred with the reasonableness of USF&G's range of estimates for their reserves. However, applying their judgment and interpretation to the range, our actuaries, who would be responsible for setting reserve amounts for the combined entity, concluded that strengthening the reserves would be appropriate, resulting in the $215 million adjustment. The adjustment was allocated to the following business segments: Commercial Lines Group ($159 million); Global Healthcare ($1 million); and Other Global Specialty ($55 million). In 1996, we acquired Northbrook Holdings, Inc. and its three insurance subsidiaries ("Northbrook") from Allstate Insurance Company. In the Northbrook purchase agreement, we agreed to pay Allstate additional consideration of up to $50 million in the event a redundancy developed on the acquired Northbrook reserves between the purchase date and July 31, 2000. During 2000, we made a payment to Allstate in the amount of $50 million under this agreement. This amount was included in "Other liabilities" on our Dec. 31, 1999 balance sheet. Life Benefit Reserves - The following table shows our life insurance operation's future policy benefit reserves by type.
December 31 2000 1999 (In millions) Single premium annuities: Deferred $3,513 $3,093 Immediate 1,356 1,173 Universal/term/group life 591 619 ------ ------ Gross balance 5,460 4,885 Less reinsurance recoverables on unpaid losses 546 653 ------ ------ Total net reserves $4,914 $4,232 ------ ------ ------ ------
Environmental and Asbestos Reserves - Our underwriting operations continue to receive claims under policies written many years ago alleging injury or damage from environmental pollution or seeking payment for the cost to clean up polluted sites. We have also received asbestos injury claims arising out of product liability coverages under general liability policies. The following table summarizes the environmental and asbestos reserves reflected in our consolidated balance sheet at Dec. 31, 2000 and 1999. Amounts in the "net" column are reduced by reinsurance.
2000 1999 December 31 Gross Net Gross Net (In millions) Environmental $ 665 $ 563 $ 698 $ 599 Asbestos 397 299 398 298 ------ ------ ------ ------ Total environmental and asbestos reserves $1,062 $ 862 $1,096 $ 897 ------ ------ ------ ------ ------ ------ ------ ------
9 Income Taxes Method for Computing Income Tax Expense (Benefit) - We are required to compute our income tax expense under the liability method. This means deferred income taxes reflect what we estimate we will pay or receive in future years. A current tax liability is recognized for the estimated taxes payable for the current year. Income Tax Expense (Benefit) - Income tax expense or benefits are recorded in various places in our financial statements. A summary of the amounts and places follows.
Year ended December 31 2000 1999 1998 (In millions) STATEMENTS OF INCOME Expense (benefit) on continuing operations $ 440 $ 238 $ (79) Benefit on operating loss of discontinued operations -- (4) (57) Expense (benefit) on gain or loss on disposal of discontinued operations (5) 90 -- ----- ----- ----- Total income tax expense (benefit) included in statements of income 435 324 (136) STATEMENTS OF SHAREHOLDERS' EQUITY Expense (benefit) relating to stock-based compensation and the change in unrealized appreciation and unrealized foreign exchange 86 (253) 87 ----- ----- ----- Total income tax expense (benefit) included in financial statements $ 521 $ 71 $ (49) ----- ----- ----- ----- ----- -----
Components of Income Tax Expense (Benefit) - The components of income tax expense (benefit) on continuing operations are as follows.
Year ended December 31 2000 1999 1998 (In millions) Federal current tax expense $ 21 $ 105 $ 13 Federal deferred tax expense (benefit) 380 120 (114) ----- ----- ----- Total federal income tax expense (benefit) 401 225 (101) Foreign income taxes 26 2 14 State income taxes 13 11 8 ----- ----- ----- Total income tax expense (benefit) on continuing operations $ 440 $ 238 $ (79) ----- ----- ----- ----- ----- -----
Our Tax Rate Is Different from the Statutory Rate - Our total income tax expense on income from continuing operations differs from the statutory rate of 35% of income from continuing operations before income taxes as shown in the following table.
Year ended December 31 2000 1999 1998 (In millions) Federal income tax expense at statutory rate $ 509 $ 356 $ 42 Increase (decrease) attributable to: Nontaxable investment income (95) (103) (112) Valuation allowance -- 2 (35) Nondeductible merger expense -- -- 31 Other 26 (17) (5) ----- ----- ----- Total income tax expense (benefit) on continuing operations $ 440 $ 238 $ (79) ----- ----- ----- ----- ----- ----- Effective tax rate on continuing operations 30.3% 23.4% NM ----- ----- ----- ----- ----- -----
NM = Not meaningful Major Components of Deferred Income Taxes on Our Balance Sheet - Differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years are called temporary differences. The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are presented in the following table.
December 31 2000 1999 (In millions) DEFERRED TAX ASSETS Loss reserves $ 800 $ 1,032 Unearned premium reserves 160 147 Alternative minimum tax credit carryforwards 265 168 Net operating loss carryforwards 159 232 Deferred compensation 121 115 Other 632 547 ------- ------- Total gross deferred tax assets 2,137 2,241 Less valuation allowance (32) (8) ------- ------- Net deferred tax assets 2,105 2,233 ------- ------- ------- ------- DEFERRED TAX LIABILITIES Unrealized appreciation of investments 393 295 Deferred acquisition costs 345 281 Real estate 128 137 Prepaid compensation 88 73 Other 253 185 ------- ------- Total gross deferred tax liabilities 1,207 971 ------- ------- Deferred income taxes $ 898 $ 1,262 ------- ------- ------- -------
If we believe that all of our deferred tax assets will not result in future tax benefits, we must establish a valuation allowance for the portion of these assets that we think will not be realized. The net change in the valuation allowance for deferred tax assets was an increase of $24 million in 2000 as part of our purchase of MMI, and an increase of $2 million in 1999, both relating to our foreign underwriting operations. Based upon a review of our anticipated future earnings and all other available evidence, both positive and negative, we have concluded it is "more likely than not" that our net deferred tax assets will be realized. Net Operating Loss ("NOL") and Foreign Tax Credit ("FTC") Carryforwards - For tax return purposes, as of Dec. 31, 2000, we had NOL carryforwards that expire, if unused, in 2004-2020 and FTC carryforwards that expire, if unused, in 2001-2005. The amount and timing of realizing the benefits of NOL and FTC carryforwards depends on future taxable income and limitations imposed by tax laws. The approximate amounts of those NOLs on a regular tax basis and an alternative minimum tax ("AMT") basis were $454 million and $293 million, respectively. The approximate amounts of the FTCs on a regular tax basis and an AMT basis were $58 million and $56 million, respectively. The benefits of the NOL and FTC carryforwards have been recognized in our financial statements. Undistributed Earnings of Subsidiaries - U.S. income taxes have not been provided on $69 million of our foreign operations' undistributed earnings as of Dec. 31, 2000, as such earnings are intended to be permanently reinvested in those operations. Furthermore, any taxes paid to foreign governments on these earnings may be used as credits against the U.S. tax on any dividend distributions from such earnings. We have not provided taxes on approximately $289 million of undistributed earnings related to our majority ownership of The John Nuveen Company as of Dec. 31, 2000, because we currently do not expect those earnings to become taxable to us. IRS Examinations - The IRS is currently examining USF&G's pre-merger consolidated returns for the years 1992 through 1997. The IRS has examined The St. Paul's pre-merger consolidated returns through 1994 and is currently examining the years 1995 through 1997. During 2000, we reached a partial settlement with the IRS regarding certain issues that were raised during the course of their audit. We believe that this settlement, when combined with any additional taxes assessed as a result of any further adjustments for these examinations, would not materially affect our overall financial position, results of operations or liquidity. 10 Capital Structure The following summarizes our capital structure.
December 31 2000 1999 (In millions) Debt $1,647 $1,466 Company-obligated mandatorily redeemable preferred securities of subsidiaries or trusts holding solely subordinated debentures of the Company 337 425 Preferred shareholders' equity 49 24 Common shareholders' equity 7,178 6,448 ------- ------ Total capital $9,211 $8,363 ------- ------ ------- ------ Ratio of debt to total capital 18% 18%
Debt Debt consisted of the following.
2000 1999 Book Fair Book Fair December 31 Value Value Value Value (In millions) Medium-term notes $617 $ 619 $ 617 $ 598 7 7/8% senior notes 249 261 -- -- 8 1/8% senior notes 249 267 -- -- 8 3/8% senior notes 150 151 150 153 Commercial paper 138 138 400 400 Zero coupon convertible notes 98 95 94 93 7 1/8% senior notes 80 82 80 78 Variable rate borrowings 64 64 64 64 Real estate mortgages 2 2 15 15 Floating rate notes -- -- 46 46 ------ ------ ------ ------ Total debt $1,647 $1,679 $1,466 $1,447 ------ ------ ------ ------ ------ ------ ------ ------
Fair Value - The fair value of our commercial paper borrowings approximated their book value because of their short-term nature. The fair values of our variable rate borrowings and floating rate notes approximated their book values due to the floating interest rates of these instruments. For our other debt, which has longer terms and fixed interest rates, our fair value estimate was based on current interest rates available on debt securities in the market that have terms similar to ours. At Dec. 31, 2000, we were party to eight interest rate swap agreements related to several of our debt securities outstanding. The notional amount of these swaps totaled $380 million, and their aggregate fair value at Dec. 31, 2000, which was not recorded in our financial statements, was an asset totaling $15 million. Medium-Term Notes - The medium-term notes bear interest rates ranging from 5.9% to 8.3%, with a weighted average rate of 6.9%. Maturities range from five to 15 years after the issuance date. 7 7/8% Senior Notes - On April 17, 2000, we issued $250 million of senior notes due April 15, 2005. Proceeds were used to repay commercial paper debt and for general corporate purposes. 8 1/8% Senior Notes - On April 17, 2000, we issued $250 million of senior notes due April 15, 2010. Proceeds were used to repay commercial paper debt and for general corporate purposes. 8 3/8% Senior Notes - The senior notes mature in June 2001. Commercial Paper - Our commercial paper is supported by a $400 million credit agreement that expires in 2002. The credit agreement requires us to meet certain provisions. We were in compliance with all provisions of the agreement as of Dec. 31, 2000 and 1999. Interest rates on commercial paper issued in 2000 ranged from 5.5% to 6.7%; in 1999 the range was 4.6% to 6.6%; and in 1998 the range was 4.5% to 6.3%. Zero Coupon Convertible Notes - The zero coupon convertible notes are redeemable beginning in 1999 for an amount equal to the original issue price plus accreted original issue discount. In addition, on March 3, 1999 and March 3, 2004, the holders of the zero coupon convertible notes had/have the right to require us to purchase their notes for the price of $640.82 and $800.51, respectively, per $1,000 of principal amount due at maturity. In 1999, we repurchased approximately $34 million face amount of the zero coupon convertible notes, for a total cash consideration of $21 million. These notes mature in 2009. 7 1/8% Senior Notes - The senior notes mature in 2005. Variable Rate Borrowings - A number of our real estate entities are parties to variable rate loan agreements aggregating $64 million. The borrowings mature in the year 2030, with principal paydowns starting in the year 2006. The interest rate is set weekly by a third party, and was 5.05% at Dec. 31, 2000. Real Estate Mortgage - The real estate mortgage represents a portion of the purchase price of one of our investments. The mortgage bears a fixed rate of 8.1% and matures in February 2002. During 2000, we repaid $13 million of mortgage debt associated with two of our real estate investments. Floating Rate Notes - A special purpose offshore subsidiary of The St. Paul was a party to a reinsurance agreement under which it issued $46 million of floating rate notes and certificates on Feb. 18, 1999. These amounts were paid in full on Feb. 18, 2000. Interest Expense - Our interest expense on debt was $115 million in 2000, $96 million in 1999 and $75 million in 1998. Maturities - The amount of debt, other than commercial paper, that becomes due in each of the next five years is as follows: 2001, $195 million; 2002, $51 million; 2003, $67 million; 2004, $55 million; and 2005, $433 million. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARIES OR TRUSTS HOLDING SOLELY SUBORDINATED DEBENTURES OF THE COMPANY In 1995, we issued, through St. Paul Capital L.L.C. (SPCLLC), 4,140,000 company-obligated mandatorily redeemable preferred securities, generating proceeds of $207 million. These securities were also known as convertible monthly income preferred securities ("MIPS"). The MIPS paid a monthly dividend at an annual rate of 6% of the liquidation preference of $50 per security. During 2000, SPCLLC provided notice to the holders of the MIPS that it was exercising its right to cause the conversion rights of the owners of the MIPS to expire. The MIPS were convertible into 1.6950 shares of our common stock (equivalent to a conversion price of $29.50 per share). Prior to the expiration date, holders of over 99% of the MIPS exercised their conversion rights and, in August 2000, we issued 7,006,954 common shares in connection with the conversion. The remaining MIPS were redeemed for cash at $50 per security, plus accumulated preferred dividends. In conjunction with our purchase of MMI in April 2000, we assumed all obligations under their preferred capital securities. In December 1997, MMI issued $125 million 30-year mandatorily redeemable preferred capital securities through MMI Capital Trust I, formed for the sole purpose of issuing the securities. The capital securities pay a preferred dividend of 7 5/8% semi-annually in arrears, and have a mandatory redemption date of Dec. 15, 2027. In 1997 and 1996, USF&G issued three series of capital securities. After consummation of the merger with USF&G in 1998, The St. Paul assumed all obligations relating to these capital securities. These Series A, Series B and Series C Capital Securities were issued through separate wholly-owned business trusts ("USF&G Capital I," "USF&G Capital II" and "USF&G Capital III," respectively) formed for the sole purpose of issuing the securities. We have effectively fully and unconditionally guaranteed all obligations of the three business trusts. In December 1996, USF&G Capital I issued 100,000 shares of 8.5% Series A Capital Securities, generating proceeds of $100 million. The proceeds were used to purchase $100 million of USF&G Corporation 8.5% Series A subordinated debentures, which mature on Dec. 15, 2045. The debentures are redeemable under certain circumstances related to tax events at a price of $1,000 per debenture. The proceeds of such redemptions will be used to redeem a like amount of the Series A Capital Securities. In January 1997, USF&G Capital II issued 100,000 shares of 8.47% Series B Capital Securities, generating proceeds of $100 million. The proceeds were used to purchase $100 million of USF&G Corporation 8.47% Series B subordinated debentures, which mature on Jan. 10, 2027. The debentures are redeemable at our option at any time beginning in January 2007 at scheduled redemption prices ranging from $1,042 to $1,000 per debenture. The debentures are also redeemable prior to January 2007 under certain circumstances related to tax and other special events. The proceeds of such redemptions will be used to redeem a like amount of the Series B Capital Securities. In July 1997, USF&G Capital III issued 100,000 shares of 8.312% Series C Capital Securities, generating proceeds of $100 million. The proceeds were used to purchase $100 million of USF&G Corporation 8.312% Series C subordinated debentures, which mature on July 1, 2046. The debentures are redeemable under certain circumstances related to tax events at a price of $1,000 per debenture. The proceeds of such redemptions will be used to redeem a like amount of the Series C Capital Securities. Under certain circumstances related to tax events, we have the right to shorten the maturity dates of the Series A, Series B and Series C debentures to no earlier than June 24, 2016, July 10, 2016 and April 8, 2012, respectively, in which case the stated maturities of the related Capital Securities will likewise be shortened. During 1999, The St. Paul repurchased and retired approximately $79 million (principal amount) of its company-obligated mandatorily redeemable preferred securities of subsidiaries in open market transactions. The amount retired included $27 million of 8.5% Series A, $22 million of 8.47% Series B, and $30 million of 8.312% Series C securities. PREFERRED SHAREHOLDERS' EQUITY The preferred shareholders' equity on our balance sheet represents the par value of preferred shares outstanding that we issued to our Stock Ownership Plan ("SOP") Trust, less the remaining principal balance on the SOP Trust debt. The SOP Trust borrowed funds from a U.S. underwriting subsidiary to finance the purchase of the preferred shares, and we guaranteed the SOP debt. The SOP Trust may at any time convert any or all of the preferred shares into shares of our common stock at a rate of eight shares of common stock for each preferred share. Our board of directors has reserved a sufficient number of our authorized common shares to satisfy the conversion of all preferred shares issued to the SOP Trust and the redemption of preferred shares to meet employee distribution requirements. Upon the redemption of preferred shares, we issue shares of our common stock to the trust to fulfill the redemption obligations. COMMON SHAREHOLDERS' EQUITY Common Stock and Reacquired Shares - We are governed by the Minnesota Business Corporation Act. All authorized shares of voting common stock have no par value. Shares of common stock reacquired are considered unissued shares. The number of authorized shares of the company is 480 million. Our cost for reacquired shares in 2000, 1999 and 1998 was $536 million, $356 million and $135 million, respectively. We reduced our capital stock account and retained earnings for the cost of these repurchases. A summary of our common stock activity for the last three years is as follows.
Year ended December 31 2000 1999 1998 (Shares) Outstanding at beginning of year 224,830,894 233,749,778 233,129,721 Shares issued: Stock incentive plans and other 3,686,827 1,896,229 4,243,354 Conversion of preferred stock 661,523 287,951 204,765 Conversion of MIPS 7,006,954 -- -- Acquisition -- 27,936 -- Reacquired shares (17,878,182) (11,131,000) (3,828,062) ----------- ----------- ----------- Outstanding at end of year 218,308,016 224,830,894 233,749,778 ----------- ----------- ----------- ----------- ----------- -----------
Undesignated Shares - Our articles of incorporation allow us to issue five million undesignated shares. The board of directors may designate the type of shares and set the terms thereof. The board designated 1,450,000 shares as Series B Convertible Preferred Stock in connection with the formation of our Stock Ownership Plan. Dividend Restrictions - We primarily depend on dividends from our subsidiaries to pay dividends to our shareholders, service our debt and pay expenses. Various state laws and regulations limit the amount of dividends we may receive from our U.S. property-liability underwriting subsidiaries and our life insurance subsidiary. Although $1.6 billion will be available for dividends in 2001, business and regulatory considerations may impact the amount of dividends actually paid. During 2000, we received cash dividends of $483 million from our U.S. underwriting subsidiaries. 11 Retirement Plans Pension Plans - We maintain funded defined benefit pension plans for most of our employees. Benefits are based on years of service and the employee's compensation while employed by the company. Pension benefits generally vest after five years of service. Our pension plans are noncontributory. This means that employees do not pay anything into the plans. Our funding policy is to contribute amounts sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act and any additional amounts that may be necessary. This may result in no contribution being made in a particular year. Plan assets are invested primarily in equities and fixed maturities, and included 804,035 shares of our common stock with a market value of $44 million and $27 million at Dec. 31, 2000 and 1999, respectively. We maintain noncontributory, unfunded pension plans to provide certain company employees with pension benefits in excess of limits imposed by federal tax law. Postretirement Benefits Other than Pension - We provide certain healthcare and life insurance benefits for retired employees and their eligible dependents. We currently anticipate that most of our employees will become eligible for these benefits if they retire while working for us. The cost of these benefits is shared with the retiree. The benefits are generally provided through our employee benefits trust, to which periodic contributions are made to cover benefits paid during the year. We accrue postretirement benefits expense during the period of the employee's service. A healthcare inflation rate of 5.82% was assumed to change to 10.00% in 2001, decrease annually to 5.00% in 2006 and then remain at that level. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects.
1-Percentage- 1-Percentage- Point Increase Point Decrease (In millions) Effect on total of service and interest cost components $3 $(2) Effect on postretirement benefit obligation 29 (23)
The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ended Dec. 31, 2000, and a statement of the funded status as of Dec. 31, 2000 and 1999. For the year ended Dec. 31, 1999, the plans' benefit obligations included the impact of curtailment gains related to employee terminations under the third quarter 1999 cost reduction action and the sale of standard personal insurance.
Pension Benefits Postretirement Benefits 2000 1999 2000 1999 (In millions) Change in benefit obligation: Benefit obligation at beginning of year $ 777 $ 1,006 $ 189 $ 214 Service cost 27 38 5 8 Interest cost 61 60 14 14 Plan amendment -- -- -- 16 Actuarial loss (gain) 129 (197) 27 (37) Foreign currency exchange rate change (1) -- -- -- Acquisition 14 -- -- -- Benefits paid (46) (100) (14) (9) Curtailment gain -- (30) -- (17) ------- ------- ----- ----- Benefit obligation at end of year $ 961 $ 777 $ 221 $ 189 ------- ------- ----- ----- ------- ------- ----- ----- Change in plan assets: Fair value of plan assets at beginning of year $ 1,226 $ 1,135 $ 20 $ 22 Actual return on plan assets 8 187 3 (2) Foreign currency exchange rate change (2) -- -- -- Acquisition 19 -- -- -- Employer contribution 1 4 14 9 Benefits paid (46) (100) (14) (9) ------- ------- ----- ----- Fair value of plan assets at end of year $ 1,206 $ 1,226 $ 23 $ 20 ------- ------- ----- ----- ------- ------- ----- ----- Funded status $ 245 $ 449 $(198) $(169) Unrecognized transition asset (2) (3) -- -- Unrecognized prior service cost (gain) (4) (7) 9 10 Unrecognized net actuarial loss (gain) 36 (208) 4 (22) ------- ------- ----- ----- Prepaid (accrued) benefit cost $ 275 $ 231 $(185) $(181) ------- ------- ----- ----- ------- ------- ----- -----
Pension Benefits Postretirement Benefits 2000 1999 2000 1999 Weighted average assumptions as of December 31: Discount rate 6.75% 7.25% 7.25% 7.50% Expected return on plan assets 10.00% 10.00% 7.00% 8.00% Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
The following table provides the components of our net periodic benefit cost for the years 2000, 1999 and 1998.
Pension Benefits Postretirement Benefits 2000 1999 1998 2000 1999 1998 (In millions) Components of net periodic benefit cost: Service cost $ 27 $ 38 $ 31 $ 5 $ 8 $ 6 Interest cost 61 60 58 14 14 13 Expected return on plan assets (123) (114) (98) (2) (2) (2) Amortization of transition asset (2) (1) (2) -- -- -- Amortization of prior service cost (3) (4) (4) 1 1 -- Recognized net actuarial loss (gain) (2) -- 6 -- -- -- ----- ----- ---- ----- ---- ---- Net periodic pension cost (income) (42) (21) (9) 18 21 17 ----- ----- ---- ----- ---- ---- Curtailment gain -- (32) -- -- (15) -- ----- ----- ---- ----- ---- ---- Net periodic benefit cost (income) after curtailment $ (42) $ (53) $ (9) $ 18 $ 6 $ 17 ----- ----- ---- ----- ---- ---- ----- ----- ---- ----- ---- ----
During 2000, employees hired prior to May 2000 were given the choice of remaining in our defined benefit pension plan and postretirement healthcare benefits plan, or switching to a new cash balance pension plan and/or cash balance retiree health plan. Employees choosing to switch to the cash balance plan(s) were credited with opening balances effective Jan. 1, 2001. For 2001 and thereafter, the cash balance plans will be accounted for under, and included in the results of, the defined benefit pension plan. STOCK OWNERSHIP PLAN As of Jan. 1, 1998, the Preferred Stock Ownership Plan ("PSOP") and the Employee Stock Ownership Plan ("ESOP") were merged into The St. Paul Companies, Inc. Stock Ownership Plan ("SOP"). The plan allocates preferred shares semiannually to those employees participating in our Savings Plus Plan. Under the SOP, we match 100% of employees' contributions up to a maximum of 4% of their salary plus shares equal to the value of dividends on previously allocated shares. Additionally, this plan now provides an annual allocation to qualified U.S. employees based on company performance. To finance the preferred stock purchase for future allocation to qualified employees, the SOP (formerly the PSOP) borrowed $150 million at 9.4% from our U.S. underwriting subsidiary. As the principal and interest of the trust's loan is paid, a pro rata amount of our preferred stock is released for allocation to participating employees. Each share pays a dividend of $11.72 annually and is currently convertible into eight shares of common stock. Preferred stock dividends on all shares held by the trust are used to pay this SOP obligation. In addition to dividends paid to the trust, we make additional cash contributions to the SOP as necessary in order to meet the SOP's debt obligation. The SOP (formerly the ESOP) borrowed funds to finance the purchase of common stock for future allocation to qualified participating U.S. employees. The final principal payment on the trust's loan was made in the first quarter of 1998. As the principal of the trust loan was paid, a pro rata amount of our common stock was released for allocation to eligible participants. Starting in the second quarter of 1998 common stock dividends on shares allocated under the former ESOP are paid directly to participants. All common shares and the common stock equivalent of all preferred shares held by the SOP are considered outstanding for diluted EPS computations and dividends paid on all shares are charged to retained earnings. We follow the provisions of Statement of Position 76-3, "Accounting Practices for Certain Employee Stock Ownership Plans," and related interpretations in accounting for this plan. We recorded expense of $14 million, $26 million and $8 million for the years 2000, 1999 and 1998, respectively. The following table details the shares held in the SOP.
2000 1999 December 31 Common Preferred Common Preferred (Shares) Allocated 5,546,251 448,819 6,578,570 370,122 Committed to be released -- 49,646 -- 130,896 Unallocated -- 309,663 -- 393,248 --------- ------- --------- ------- Total 5,546,251 808,128 6,578,570 894,266 --------- ------- --------- ------- --------- ------- --------- -------
The SOP allocated 83,585 preferred shares in 2000, 183,884 preferred shares in 1999 and 53,949 preferred shares in 1998. Unallocated preferred shares had a fair market value of $135 million and $107 million at Dec. 31, 2000 and 1999, respectively. The remaining unallocated preferred shares at Dec. 31, 2000, will be released for allocation annually through Jan. 31, 2005. 12 Stock Incentive Plans We have made fixed stock option grants to certain U.S.-based employees, certain employees of our non-U.S. operations, and outside directors. These were considered "fixed" grants because the measurement date for determining compensation costs was fixed on the date of grant. We have also made variable stock option grants to certain company executives. These were considered "variable" grants because the measurement date is contingent upon future increases in the market price of our common stock. We follow the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," FASB Interpretation 44, "Accounting for Certain Transactions involving Stock Compensation (an interpretation of APB Opinion No. 25)," and other related interpretations in accounting for our stock option plans. We also follow the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" for our option plans. SFAS No. 123 requires pro forma net income and earnings per share information, which is calculated assuming we had accounted for our stock option plans under the "fair value" method described in that Statement. Since the exercise price of our fixed options equals the market price of our stock on the day the options are granted there is no related compensation cost. We have recorded compensation cost associated with our variable options and restricted stock awards, and the former USF&G's Long-Term Incentive Program, of $28 million, $8 million and $10 million in 2000, 1999 and 1998, respectively. FIXED OPTION GRANTS U.S.-Based Plans - Our fixed option grants for certain U.S.-based employees and outside directors give these individuals the right to buy our stock at the market price on the day the options were granted. Fixed stock options granted under the stock incentive plan adopted by our shareholders in May 1994 (as subsequently amended) become exercisable no less than one year after the date of grant and may be exercised up to ten years after grant date. Options granted under our option plan in effect prior to May 1994 may be exercised at any time up to 10 years after the grant date. At the end of 2000, approximately 5,300,000 shares were available for grant under our stock incentive plan. Non-U.S. Plans - We also have separate stock option plans for certain employees of our non-U.S. operations. The options granted under these plans were priced at the market price of our common stock on the grant date. Generally, they can be exercised from three to 10 years after the grant date. Approximately 511,000 option shares were available at Dec. 31, 2000 for future grants under our non-U.S. plans. Global Stock Option Plan ("GSOP") - We have a separate fixed stock option plan for employees who are not eligible to participate in the U.S. and non-U.S. plans described above. Options granted to eligible employees under the GSOP are contingent upon the company achieving threshold levels of profitability, and the number of options granted is determined by the level of profitability achieved. Generally, options granted under this plan can be exercised from three to 10 years after the grant date. At Dec. 31, 2000, approximately 1,500,000 option shares were available for future grants under the GSOP. The following table summarizes the activity for our fixed option plans for the last three years. All grants were made at fair value on the date of grant.
Weighted Average Option Exercise Shares Price Outstanding Jan. 1, 1998 12,542,811 $ 25.76 Granted 3,693,511 42.65 Exercised (3,663,620) 23.04 Canceled (1,428,810) 37.23 ---------- --------- Outstanding Dec. 31, 1998 11,143,892 30.78 Granted 3,531,418 30.16 Exercised (1,578,903) 22.63 Canceled (1,033,435) 39.07 ---------- --------- Outstanding Dec. 31, 1999 12,062,972 30.96 Granted 6,539,436 33.94 Exercised (3,372,916) 26.42 Canceled (919,110) 36.41 ---------- --------- Outstanding Dec. 31, 2000 14,310,382 $ 33.04 ---------- --------- ---------- ---------
The following table summarizes the options exercisable at the end of the last three years and the weighted average fair value of options granted during those years. The fair value of options is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions used for grants in 2000, 1999 and 1998, respectively: dividend yield of 3.0%, 2.8% and 3.0%; expected volatility of 41.0%, 23.8% and 18.9%; risk-free interest rates of 6.5%, 5.3% and 5.6%; and an expected life of 6.5 years, 6.5 years and 5.9 years.
2000 1999 1998 Options exercisable at year-end 5,751,780 7,940,793 8,078,734 Weighted average fair value of options granted during the year $ 12.96 $ 7.59 $ 8.91
The following tables summarize the status of fixed stock options outstanding and exercisable at Dec. 31, 2000.
Options Outstanding Weighted Average Weighted Remaining Average Range of Number of Contractual Exercise Exercise Prices Options Life Price $11.13-29.00 2,374,824 3.8 years $23.77 29.19-29.31 1,623,058 9.0 years 29.30 29.63-30.19 2,315,010 8.2 years 29.98 31.27-35.00 1,090,170 6.9 years 33.08 35.25-35.31 4,460,681 9.3 years 35.25 35.73-50.44 2,446,639 7.2 years 43.33 ---------- --------- ------ $11.13-50.44 14,310,382 7.6 years $33.04 ---------- --------- ------ ---------- --------- ------
Options Exercisable Weighted Average Range of Number of Exercise Exercise Prices Options Price $11.13-29.00 2,374,824 $23.77 29.19-29.31 -- -- 29.63-30.19 493,283 29.98 31.27-35.00 810,295 33.39 35.25-35.31 -- -- 35.73-50.44 2,073,378 42.94 --------- ------ $11.13-50.44 5,751,780 $32.57 --------- ------ --------- ------
VARIABLE STOCK OPTION GRANT In 1999, we made a variable option grant of 375,000 shares from our 1994 stock incentive plan to one of our key executives. This was in addition to 1,966,800 option shares granted prior to 1998. One-half of the options vested when the market price of our stock reached a 20-consecutive-trading-day average of $50 per share, which occurred in November 2000. The remaining options will vest when our stock price reaches a 20-consecutive-trading-day average of $55 per share. The exercise price of each option is equal to the market price of our stock on the grant date. Any of these options not exercised prior to Dec. 1, 2001 will expire on that date. The following table summarizes the activity for our variable option grants for the last three years.
Weighted Average Option Exercise Shares Price Outstanding Jan. 1, 1998 1,966,800 $30.05 Canceled (468,600) 29.38 --------- ------ Outstanding Dec. 31, 1998 1,498,200 30.26 --------- ------ Granted 375,000 29.63 Canceled (152,400) 29.38 --------- ------ Outstanding Dec. 31, 1999 1,720,800 30.20 --------- ------ Exercised (134,300) 29.38 Canceled (594,525) 30.47 --------- ------ Outstanding Dec. 31, 2000 991,975 $30.15 --------- ------ --------- ------
The weighted average fair value of options granted during 1999 was $2.66 per option. The fair value of the variable options was estimated on the date of grant using a variable option-pricing model with the following weighted average assumptions: dividend yield of 2.8%; expected volatility of 22.9%; risk-free interest rate of 4.7%; and an expected life of 2.8 years. RESTRICTED STOCK AND DEFERRED STOCK AWARDS Up to 20% of the 19.9 million shares authorized under our 1994 stock incentive plan may be granted as restricted stock awards. The stock is restricted because recipients receive the stock only upon completing a specified objective or period of employment, generally one to five years. The shares are considered issued when awarded, but the recipient does not own and cannot sell the shares during the restriction period. During the restriction period, the recipient receives compensation in an amount equivalent to the dividends paid on such shares. Up to 3,200,000 shares were available for restricted stock awards at Dec. 31, 2000. We also have a Deferred Stock Award Plan for stock awards to non-U.S. employees. Deferred stock awards are the same as restricted stock awards, except that shares granted under the deferred plan are not issued until the vesting conditions specified in the award are fulfilled. Up to 20,000 shares were available for deferred stock awards at Dec. 31, 2000. PRO FORMA INFORMATION Had we calculated compensation expense on a combined basis for our stock option grants based on the "fair value" method described in SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts as indicated.
Year ended December 31 2000 1999 1998 (In millions, except per share data) NET INCOME As reported $993 $834 $89 Pro forma 986 825 76 BASIC EARNINGS PER SHARE As reported 4.50 3.61 0.33 Pro forma 4.46 3.57 0.27 DILUTED EARNINGS PER SHARE As reported 4.24 3.41 0.32 Pro forma 4.23 3.38 0.27
13 Commitments and Contingencies Investment Commitments - We have long-term commitments to fund venture capital investments totaling $228 million as of Dec. 31, 2000. We estimate these commitments will be paid as follows: $77 million in 2001; $81 million in 2002; $52 million in 2003 and $18 million in 2004. Financial Guarantees - We are contingently liable for a financial guarantee issued by our reinsurance operation in the form of a credit enhancement, with total exposure of approximately $21 million as of Dec. 31, 2000. Lease Commitments - A portion of our business activities is conducted in rented premises. We also enter into leases for equipment, such as office machines and computers. Our total rental expense was $83 million in 2000, $82 million in 1999 and $88 million in 1998. Certain leases are noncancelable, and we would remain responsible for payment even if we stopped using the space or equipment. On Dec. 31, 2000, the minimum annual rents for which we would be liable under these types of leases are as follows: $118 million in 2001, $106 million in 2002, $80 million in 2003, $68 million in 2004, $55 million in 2005 and $220 million thereafter. We are also the lessor under various subleases on our office facilities. The minimum rentals to be received under noncancelable subleases are as follows: $20 million in 2001, $18 million in 2002, $18 million in 2003, $15 million in 2004, $13 million in 2005 and $41 million thereafter. Legal Matters - In the ordinary course of conducting business, we and some of our subsidiaries have been named as defendants in various lawsuits. Some of these lawsuits attempt to establish liability under insurance contracts issued by our underwriting operations. Plaintiffs in these lawsuits are asking for money damages or to have the court direct the activities of our operations in certain ways. In May 1997, we completed the sale of our insurance brokerage, Minet, to Aon Corporation. We agreed to indemnify Aon against any future professional liability claims for events that occurred prior to the sale. Since this indemnification relates to claims that had not yet been discovered or reported, it is not possible to estimate a range of the potential liability. The company monitors its exposure under these claims on a regular basis. We believe reserves for reported claims are adequate, but the company does not have information on unreported claims to estimate a range of additional liability. We purchased insurance to cover a portion of our exposure to such claims. It is possible that the settlement of these lawsuits or payments for Minet-related liability claims may be material to our results of operations and liquidity in the period in which they occur. However, we believe the total amounts that we and our subsidiaries will ultimately have to pay in all of these matters will have no material effect on our overall financial position. 14 Discontinued Operations Standard Personal Insurance Business - In June 1999, we made a decision to sell our standard personal insurance business and on July 12, 1999, reached an agreement to sell this business to Metropolitan Property and Casualty Insurance Company ("Metropolitan"). On Sept. 30, 1999, we completed the sale of this business to Metropolitan. As a result, the standard personal insurance operations through June 1999 have been accounted for as discontinued operations for all periods presented herein, and the results of operations subsequent to that period have been included in the gain on sale of discontinued operations. 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 Dec. 31, 2000, we had determined that we could not reasonably estimate to any probable certainty whether any deficiency or redundancy existed in the pre-sale reserves, and we have not recorded a liability or a 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 year ended Dec. 31, 2000, we recorded a pretax loss of $9 million in discontinued operations. We have no other contingent liabilities related to the sale. As a result of the sale, approximately 1,600 standard personal insurance employees of The St. Paul effectively transferred to Metropolitan on Oct. 1, 1999. We received gross proceeds on the sale of $597 million, less the payment of the reinsurance premium of $325 million, for net proceeds of $272 million. We recognized a pretax gain on disposal of $130 million, after adjusting for a $26 million pension and postretirement curtailment gain and disposition costs of $32 million. The gain on disposal combined with a $128 million pretax gain on discontinued operations (subsequent to our decision to sell), resulting in a total pretax gain of $258 million. Included in the pretax gain on discontinued operations was a $145 million reduction in loss and loss adjustment expense reserves. In the third quarter of 1999, based on favorable trends noted in the standard personal insurance reserve analysis, and considering the pending sale and its economic consequences, we concluded that this reserve reduction was appropriate. The $26 million pretax curtailment gain represented the impact of a reduced number of employees in the pension and post-retirement plans due to the sale of the standard personal insurance business. The $32 million pretax disposition costs netted against the gain represented costs directly associated with the decision to dispose of the standard personal insurance segment and included $14 million of employee-related costs, $8 million of occupancy-related costs, $7 million of transaction costs, $2 million of record separation costs and $1 million of equipment charges. The employee-related costs related to the expected termination of 385 employees due to the sale of the personal insurance segment. Approximately 350 employees were terminated related to this action. In 2000, we reduced the employee-related reserve by $3 million due to a number of voluntary terminations, which reduced the expected severance to be paid. The following presents a rollforward of 2000 activity related to this charge.
Original Reserve Reserve Pretax at Dec. 31, at Dec. 31, Charge 1999 Payments Adjustments 2000 (In millions) Charges to earnings: Employee-related $14 $ 9 $ (6) $(3) $-- Occupancy-related 8 8 (1) -- 7 Transaction costs 7 5 (5) -- -- Record separation costs 2 N/A N/A N/A N/A Equipment charges 1 N/A N/A N/A N/A --- ---- ---- --- --- Total $32 $ 22 $(12) $(3) $ 7 --- ---- ---- --- --- --- ---- ---- --- ---
Nonstandard Auto Business - In December 1999, we decided to sell our nonstandard auto business marketed under the Victoria Financial and Titan Auto brands. On Jan. 4, 2000, we announced an agreement to sell this business to The Prudential Insurance Company of America ("Prudential") for $200 million in cash, subject to certain balance sheet adjustments at closing. As a result, the nonstandard auto business results of operations were accounted for as discontinued operations for the year ended Dec. 31, 1999. Included in "discontinued operations -- gain on disposal, net of tax" in our 1999 statement of income was an estimated loss on the sale of approximately $83 million, which included the estimated results of operations through the disposal date. All prior period results of nonstandard auto have been reclassified to discontinued operations. 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). During 2000, we recorded an additional pretax loss of $16 million relating to this business. The following table summarizes our discontinued operations, including our standard personal insurance business and nonstandard auto business, for the three-year period ended Dec. 31, 2000.
Year ended December 31 2000 1999 1998 (In millions) Operating loss, before income taxes $-- $ (13) $(167) Income tax benefit -- (4) (57) ----- ----- ----- Operating loss, net of taxes -- (9) (110) ----- ----- ----- Gain/(loss) on disposal, before income taxes (25) 184 -- Income tax expense (benefit) (5) 90 -- ----- ----- ----- Gain/(loss) on disposal, net of taxes (20) 94 -- ----- ----- ----- Gain/(loss) from discontinued operations $ (20) $ 85 $(110) ----- ----- ----- ----- ----- -----
15 Restructuring and Other Charges Third Quarter 1999 Charge - In August 1999, we announced a cost reduction program designed to enhance our efficiency and effectiveness in a highly competitive environment. In the third quarter of 1999, we recorded a pretax charge of $60 million related to this program, including $25 million in employee-related costs, $33 million in occupancy-related costs and $2 million in equipment charges. The charge was included in "Operating and administrative expenses" in the 1999 statement of income and in "Property-liability insurance - -- other" in the table titled "Income (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Change" in Note 18. The employee-related costs represented severance and related benefits such as outplacement counseling, vacation buy-out and medical coverage to be paid to terminated employees. The charge related to the anticipated termination of approximately 700 employees at all levels throughout the Company. Approximately 590 employees were terminated under this action. The occupancy-related costs represented excess space created by the cost reduction action. The charge was calculated by determining the percentage of anticipated excess space, by location, and the current lease costs over the remaining lease period. The amounts payable under the existing leases were not discounted, and sublease income was included in the calculation only for those locations where sublease agreements were in place. The equipment charges represented the elimination of personal computers directly related to the number of employees being severed under this cost reduction action and the elimination of network servers and other equipment resulting from this action. The amount was calculated as the net book value of this equipment less estimated sale proceeds. All actions to be taken under this plan were completed in 2000. The following presents a rollforward of 2000 activity related to this charge.
Original Reserve Reserve Pretax at Dec. 31, at Dec. 31, Charge 1999 Payments 2000 (In millions) Charges to earnings: Employee-related $ 25 $ 14 $(14) $-- Occupancy-related 33 31 (7) 24 Equipment charges 2 N/A N/A N/A ---- ---- ---- ---- Total $ 60 $ 45 $(21) $ 24 ---- ---- ---- ---- ---- ---- ---- ----
Fourth Quarter 1998 Charge - Late in the fourth quarter of 1998, we recorded a pretax restructuring charge of $34 million. The majority of the charge, $26 million, related to the anticipated termination of approximately 520 employees in the following operations, Claims, Commercial Lines Group, Information Systems, Global Healthcare and Other Global Specialty. The remaining charge of $8 million related to costs to be incurred to exit lease obligations. The charge was reflected in "Operating and administrative expenses" in the 1998 statement of income and in "Property-liability insurance -- other" in the table titled "Income (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Change" in Note 18. Approximately 500 employees were terminated under this restructuring plan. Termination actions taking place under this plan were substantially completed by the end of 1999. The following table provides information about the components of the charge taken in the fourth quarter of 1998, the balance of accrued amounts at Dec. 31, 2000 and 1999, and payment activity during the year ended Dec. 31, 2000. The table also reflects adjustments made to the reserve during 2000. We reduced the severance reserve by $2 million due to a number of voluntary terminations, which reduced the expected severance and outplacement payments to be made.
Original Reserve Reserve Pretax at Dec. 31, at Dec. 31, Charge 1999 Payments Adjustments 2000 (In millions) Charges to earnings: Employee-related $26 $ 3 $(1) $(2) $-- Occupancy-related 8 2 -- -- 2 --- --- --- --- --- Total $34 $ 5 $(1) $(2) $ 2 --- --- --- --- --- --- --- --- --- ---
Second Quarter 1998 Charge - Related to our merger with USF&G (as discussed in Note 2), we recorded a pretax charge to earnings of $292 million in 1998, primarily consisting of severance and other employee-related costs, facilities exit costs, asset impairments and transaction costs. We estimated that approximately 2,000 positions would be eliminated due to the combination of the two organizations, resulting from efficiencies to be realized by the larger organization and the elimination of redundant functions. All levels of employees, from technical staff to senior management, were affected by the reductions. Approximately 2,200 positions were eliminated, and the cost of termination benefits paid was $137 million. Termination actions taking place under this plan have been completed. The following table provides information about the components of the charge taken in the second quarter of 1998, the balance of accrued amounts at Dec. 31, 2000 and 1999, and payment activity during the year ended Dec. 31, 2000. The table also reflects a $2 million adjustment to the executive severance reserve since certain executives covered under the USF&G Senior Executive Severance Plan remained with the Company and were no longer eligible to receive the amounts accrued.
Original Pretax Charge (In millions) Charges to earnings: USF&G Corp. headquarters $36 Long-lived assets 23 Software depreciation acceleration 10 Computer leases and equipment 10 Other equipment and furniture 8 --- Subtotal $87 --- ---
Original Reserve Reserve Pretax at Dec. 31, at Dec. 31, Charge 1999 Payments Adjustments 2000 (In millions) Accrued charges subject to rollforward: Executive severance $ 89 $ 3 $ (1) $ (2) $-- Other severance 52 1 (1) -- -- Branch lease exit costs 34 24 (7) -- 17 Transaction costs 30 -- -- -- -- ---- ---- ---- ---- ---- Subtotal 205 28 (9) (2) 17 ---- ---- ---- ---- ---- Total $292 $ 28 $ (9) $ (2) $ 17 ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
On our 1998 Statement of Income, $269 million of the charge was recorded in the "Operating and administrative" expense caption and $23 million was recorded in the "Realized investment gains" revenue caption. The charge was recorded in the following captions in the table titled "Income (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Change" in Note 18: $143 million in Property-liability insurance -- other; $14 million in Property-liability insurance -- realized gains; $9 million in Life insurance; and $126 million in Parent company, other operations and consolidating eliminations. The following discussion provides more information regarding the rationale for, and calculation of, each component of the 1998 merger-related charge. USF&G Corporate Headquarters - The Founders Building had been one of USF&G's headquarters buildings in Baltimore, MD. Upon consummation of the merger, it was determined that the headquarters for the combined entity would reside in St. Paul, MN, and that a significant number of personnel working in Baltimore would be terminated, thus vacating a substantial portion of the Founders Building. We developed a plan to lease that space to outside parties and thus categorized it as an "asset to be held or used" as defined in SFAS No. 121 for purposes of evaluating the potential impairment of its $64 million carrying value. That evaluation, based on the anticipated undiscounted future cash flows from potential lessees, indicated that an impairment in the carrying value had occurred, and the building was written down by $36 million to its fair value of $28 million. The writedown was reflected in our 1998 "Parent and other" results. We continue to depreciate this building over its estimated remaining life. Long-Lived Assets - Upon consummation of the merger, we determined that several of USF&G's real estate investments were not consistent with our real estate investment strategy. A plan was developed to sell a number of apartment buildings and various other miscellaneous holdings, with an expected disposal date in 1999. In applying the provisions of SFAS No. 121 we determined that four of these miscellaneous investments should be written down to fair value, based on our plan to sell them. Fair value was determined based on a discounted cash flow analysis, or based on market prices for similar assets. The impairment writedown was reflected in our 1998 Statement of Income in "Realized investment gains." The investments are as follows: 1. Description of investment: Percentage rents retained after sale of a portfolio of stores to a third party. Carrying amount: $22 million prior to writedown of $17 million; after adjusting for payments received since the writedown, the current amount is $3 million, with $2.4 million held in our Property-liability Investment segment and $0.4 million held in our Life Insurance segment. We are currently in negotiations with a potential buyer for this asset. 2. Description of investment: 138-acre land parcel in New Jersey, with farm buildings being rented out. Carrying amount: $5 million prior to writedown of $2 million; sold in 1999 with a pretax realized loss of $1 million. 3. Description of investment: Receivable representing cash flow guarantee payments related to real estate partnerships. Carrying amount: $5 million prior to writedown of $2 million; sold in 1999 with no further gain or loss. 4. Description of investment: Limited partnership interests in three citrus groves. Carrying amount: $5 million prior to writedown of $2 million; two of the partnership interests have been exchanged for an investment in a new partnership, with one of the original citrus grove partnership interests remaining. This partnership is carried at a current balance of less than $1 million, held in Parent company and other operations. These investment writedowns are reflected in the following 1998 segment results in the table titled "Income (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Change" in Note 18: $14 million in Property-liability investment; $6 million in Parent company and other; and $3 million in Life. Acceleration of Software Depreciation - We conducted an extensive technology study upon consummation of the merger as part of the business plan to integrate our two companies. The resulting strategy to standardize technology throughout the combined entity and maintain one data center in St. Paul, MN, resulted in the identification of duplicate software applications. As a result, the estimated useful life for that software was shortened, resulting in an additional charge to earnings. Computer Leases and Equipment - The technology study also identified redundant computer hardware, resulting in lease buy-out transactions and disposals of computer equipment. Other Equipment and Furniture - The decision to combine all corporate headquarters in St. Paul, MN created excess equipment and furniture in Baltimore, MD. The charge was calculated based on the book value of assets at that location. Executive Severance - Represented the obligations The St. Paul was required to pay in accordance with the USF&G Senior Executive Severance Plan in place at the time of the merger. The plan provided for payments to participants in the event the participant was terminated without cause by the company or for good reason by the participant within two years of the effective date of a transaction covered by the plan. Other Severance - Represented severance and related benefits such as outplacement counseling, vacation buy-out and medical coverage to be paid to terminated employees not covered under the USF&G Senior Executive Severance Plan. Branch Lease Exit Costs - As a result of the merger, excess space was created in several locations due to the anticipated staff reduction in the combined organization. The charge for branch lease exit costs was calculated by determining the percentage of anticipated excess space at each site and the current lease costs over the remaining lease period. In certain locations, the lease was expected to be terminated. For leases not expected to be terminated, the amount of expenses included in the charge was calculated as the percentage of excess space (20% to 100%) multiplied by the net of: remaining rental payments plus capitalized leasehold improvements less actual sub-lease income. No amounts were discounted to present value in the calculation. Transaction Costs - This amount consisted of registration fees, costs of furnishing information to stockholders, consultant fees, investment banker fees, and legal and accounting fees. 16 Reinsurance Our 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 means other insurance companies agree to share certain risks with us. The primary purpose of our ceded reinsurance program, including the aggregate excess-of-loss coverages discussed below, is to protect us from potential losses in excess of what we are prepared to accept. We expect the companies to which we have ceded reinsurance to honor their obligations. In the event these companies are unable to honor their obligations to us, we will pay these amounts. We have established allowances for possible nonpayment of amounts due to us. We report balances pertaining to reinsurance transactions "gross" on the balance sheet, meaning that reinsurance recoverables on unpaid losses and ceded unearned premiums are not deducted from insurance reserves but are recorded as assets. The largest concentrations of our total reinsurance recoverables and ceded unearned premiums at Dec. 31, 2000 were with General Reinsurance Corporation ("Gen Re") and Metropolitan Property and Casualty Insurance Company ("Metropolitan"). Gen Re (with approximately 28% of our recoverables) is rated "A+ +" by A.M. Best, "Aaa" by Moody's and "AAA" by Standard & Poor's for its financial strength. Metropolitan (with approximately 10% of our recoverables) is rated "A" by A.M. Best, "Aa3" by Moody's and "AA" by Standard & Poor's for its financial strength. During each of the years 2000 and 1999, we entered into two aggregate excess-of-loss reinsurance treaties. One of these treaties in each year was corporate-wide, with coverage triggered when our insurance losses and LAE across all lines of business reached a certain level, as prescribed by terms of the treaty (the "corporate program"). Additionally, our Reinsurance segment benefited from cessions made under a separate treaty in each year unrelated to the corporate treaty. The combined impact of these treaties (together, the "reinsurance treaties") is included in the table that follows.
Year ended December 31 2000 1999 (In millions) Corporate program: Ceded written premiums $419 $211 Ceded losses and loss adjustment expenses 709 384 Ceded earned premiums 419 211 ---- ---- Net pretax benefit 290 173 ---- ---- Reinsurance segment treaty: Ceded written premiums 55 62 Ceded losses and loss adjustment expenses 122 150 Ceded earned premiums 55 62 ---- ---- Net pretax benefit 67 88 ---- ---- Combined total: Ceded written premiums 474 273 Ceded losses and loss adjustment expenses 831 534 Ceded earned premiums 474 273 ---- ---- Net pretax benefit $357 $261 ---- ---- ---- ----
The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses, loss adjustment expenses and life policy benefits is as follows (including the impact of the reinsurance treaties).
Year ended December 31 2000 1999 1998 (In millions) PREMIUMS WRITTEN Direct $ 6,219 $ 4,622 $ 4,569 Assumed 2,064 1,645 1,380 Ceded (2,399) (1,155) (673) ------- ------- ------- Net premiums written $ 5,884 $ 5,112 $ 5,276 ------- ------- ------- ------- ------- ------- PREMIUMS EARNED Direct $ 5,819 $ 4,621 $ 4,796 Assumed 2,019 1,537 1,372 Ceded (2,246) (1,055) (734) ------- ------- ------- Net premiums earned 5,592 5,103 5,434 Life 306 187 119 ------- ------- ------- Total premiums earned $ 5,898 $ 5,290 $ 5,553 ------- ------- ------- ------- ------- ------- INSURANCE LOSSES, LOSS ADJUSTMENT EXPENSES AND POLICY BENEFITS Direct $ 4,068 $ 3,532 $ 4,095 Assumed 1,798 1,124 910 Ceded (1,953) (936) (540) ------- ------- ------- Net insurance losses and loss adjustment expenses 3,913 3,720 4,465 Life policy benefits 494 367 273 ------- ------- ------- Total net insurance losses, loss adjustment expenses and policy benefits $ 4,407 $ 4,087 $ 4,738 ------- ------- ------- ------- ------- -------
17 Statutory Accounting Practices Our underwriting operations are required to file financial statements with state and foreign regulatory authorities. The accounting principles used to prepare these statutory financial statements follow prescribed or permitted accounting principles, which differ from GAAP. Prescribed statutory accounting practices include state laws, regulations and general administrative rules issued by the state of domicile as well as a variety of publications and manuals of the National Association of Insurance Commissioners ("NAIC"). Permitted statutory accounting practices encompass all accounting practices not so prescribed, but allowed by the state of domicile, none of which are material to statutory surplus at Dec. 31, 2000. On a statutory accounting basis, our property-liability underwriting operations reported net income of $1.2 billion in 2000, $945 million in 1999 and $196 million in 1998. Our life insurance operations reported statutory net income (loss) of $(20) million, $(28) million and $24 million in 2000, 1999 and 1998, respectively. Statutory surplus (shareholder's equity) of our property- liability underwriting operations was $6.3 billion and $5.5 billion as of Dec. 31, 2000 and 1999, respectively. Statutory surplus of our life insurance operation was $244 million and $206 million as of Dec. 31, 2000 and 1999, respectively. The NAIC has published revised statutory accounting policies in connection with its codification project which became effective Jan. 1, 2001. We cannot at this time reasonably estimate the impact of codification on our combined statutory surplus or statutory net income, however we do not expect the implementation of codification to impair our risk-based capital or dividend-paying ability. 18 Segment Information We have eight reportable segments in our insurance operations, which consist of Commercial Lines Group, Global Healthcare, Global Surety, Other Global Specialty, International, Reinsurance, Property-Liability Investment Operations, and Life Insurance. The insurance operations are managed separately because each targets different customers and requires different marketing strategies. We also have an Asset Management segment, consisting of our majority ownership in The John Nuveen Company. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on underwriting results for our property-liability insurance segments, investment income and realized gains for our investment operations, and on pretax operating results for the life insurance and asset management segments. Property-liability underwriting assets are reviewed in total by management for purposes of decision-making. We do not allocate assets to these specific underwriting segments. Assets are specifically identified for our life insurance and asset management segments. Geographic Areas - The following summary presents financial data of our continuing operations based on their location.
Year ended December 31 2000 1999 1998 (In millions) REVENUES U.S. $7,428 $6,762 $6,914 Non-U.S. 1,180 807 794 ------ ------ ------ Total revenues $8,608 $7,569 $7,708 ------ ------ ------ ------ ------ ------
Segment Information - The summary on the next page presents revenues and pretax income from continuing operations for our reportable segments. In the first quarter of 2000, we implemented a new segment reporting structure for our property-liability insurance business following the fourth-quarter 1999 realignment of our primary insurance underwriting operations into a Global Specialty Practices organization. As part of that realignment, a portion of our non-U.S. primary insurance business is now included in the respective business segment to which it pertains, which differs from our prior practice of including all non-U.S. business in the International segment. Our Global Specialty segments are managed on a global basis. Under our new segment structure, our International segment includes our operations at Lloyd's, insurance business that we do not manage on a global basis (primarily standard commercial business in international markets) and Unionamerica, MMI's international business. Also, our Global Healthcare underwriting operation is now reported as a separate business segment, which differs from its prior classification as a component of the Specialty Commercial segment. This change reflects the increasing size of this business, including MMI's U.S. business, relative to our total underwriting operations. Finally, we reclassified our Construction business center, previously included in the Commercial Lines Group segment, to our Other Global Specialty segment, to reflect the more specialized nature of this business. All prior periods presented have been revised to reflect these reclassifications. In 1999, we sold our standard personal insurance business. In 2000, we sold our nonstandard auto business. For 1998, as originally reported, these two operations were combined and reported as the Personal Insurance segment. Both of these operations have been accounted for as discontinued operations for all periods presented and are not included in our segment data. The revenues of our Life Insurance and Asset Management segments include their respective investment income and realized investment gains. The table also presents identifiable assets for our property-liability underwriting operations in total, and our Life Insurance and Asset Management segments. Included in the table amounts are Life Insurance segment revenues of $149 million, $92 million and $47 million for the years ended Dec. 31, 2000, 1999 and 1998, respectively, related to structured settlement annuities sold primarily to our Commercial Lines Group segment.
Year ended December 31 2000 1999 1998 (In millions) REVENUES FROM CONTINUING OPERATIONS Underwriting: Commercial Lines Group $1,585 $1,516 $1,856 Global Healthcare 626 645 606 Global Surety 410 387 345 Other Global Specialty 1,347 1,354 1,339 International 434 282 249 ------ ------ ------ Total primary insurance operations 4,402 4,184 4,395 Reinsurance 1,190 919 1,039 ------ ------ ------ Total underwriting 5,592 5,103 5,434 Investment operations: Net investment income 1,247 1,256 1,293 Realized investment gains 624 274 188 ------ ------ ------ Total investment operations 1,871 1,530 1,481 Other 95 73 64 ------ ------ ------ Total property-liability insurance 7,558 6,706 6,979 Life insurance 636 476 393 Asset management 376 353 308 ------ ------ ------ Total reportable segments 8,570 7,535 7,680 Parent company, other operations and consolidating eliminations 38 34 28 ------ ------ ------ Total revenues $8,608 $7,569 $7,708 ------ ------ ------ ------ ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE Underwriting: Commercial Lines Group $ 99 $ (172) $ (592) Global Healthcare (244) (70) (126) Global Surety 51 40 76 Other Global Specialty (9) (243) (188) International (100) (59) (58) ------ ------ ------ Total primary insurance operations (203) (504) (888) Reinsurance (106) 79 7 ------ ------ ------ Total underwriting (309) (425) (881) Investment operations: Net investment income 1,247 1,256 1,293 Realized investment gains 624 274 188 ------ ------ ------ Total investment operations 1,871 1,530 1,481 Other (95) (134) (302) ------ ------ ------ Total property-liability insurance 1,467 971 298 Life insurance 53 66 21 Asset management 135 123 104 ------ ------ ------ Total reportable segments 1,655 1,160 423 Parent company, other operations and consolidating eliminations (202) (143) (303) ------ ------ ------ Total income from continuing operations before income taxes and cumulative effect of accounting change $1,453 $1,017 $ 120 ------ ------ ------ ------ ------ ------
December 31 2000 1999 (In millions) IDENTIFIABLE ASSETS Property-liability insurance $33,508 $31,823 Life insurance 6,290 5,624 Asset management 650 591 ------- ------- Total reportable segments 40,448 38,038 Parent company, other operations, consolidating eliminations and discontinued operations 627 517 ------- ------- Total assets $41,075 $38,555 ------- ------- ------- -------
Note 15, "Restructuring and Other Charges," describes charges we recorded during 1999 and 1998, and where they are included in the above tables. The $215 million 1998 provision to strengthen loss reserves is recorded as follows: $159 million in Commercial Lines Group; $1 million in Global Healthcare; and $55 million in Other Global Specialty. Also included in the 1998 life insurance caption is a $41 million charge to reduce the carrying value of deferred policy acquisition costs, as discussed in more detail in Note 6 "Deferred Policy Acquisition Costs." 19 Comprehensive Income Comprehensive income is defined as any change in our equity from transactions and other events originating from nonowner sources. In our case, those changes are comprised of our reported net income, changes in unrealized appreciation and changes in unrealized foreign currency translation adjustments. The following summaries present the components of our comprehensive income, other than net income, for the last three years.
Income Tax Year ended December 31, 2000 Pretax Effect After-Tax (In millions) Unrealized appreciation arising during period $ 902 $ 318 $ 584 Less: reclassification adjustment for realized gains included in net income 595 208 387 ----- ----- ----- Net change in unrealized appreciation 307 110 197 ----- ----- ----- Net change in unrealized loss on foreign currency translation (41) 1 (42) ----- ----- ----- Total other comprehensive income $ 266 $ 111 $ 155 ----- ----- ----- ----- ----- ----- Income Tax Year ended December 31, 1999 Pretax Effect After-Tax (In millions) Unrealized depreciation arising during period $(457) $(159) $(298) Less: reclassification adjustment for realized gains included in net income 248 87 161 ----- ----- ----- Net change in unrealized appreciation (705) (246) (459) ----- ----- ----- Net change in unrealized loss on foreign currency translation (10) 2 (12) ----- ----- ----- Total other comprehensive loss $(715) $(244) $(471) ----- ----- ----- ----- ----- ----- Income Tax Year ended December 31, 1998 Pretax Effect After-Tax (In millions) Unrealized appreciation arising during period $ 459 $ 163 $ 296 Less: reclassification adjustment for realized gains included in net income 177 62 115 ----- ----- ----- Net change in unrealized appreciation 282 101 181 ----- ----- ----- Net change in unrealized loss on foreign currency translation 8 (2) 10 ----- ----- ----- Total other comprehensive income $ 290 $ 99 $ 191 ----- ----- ----- ----- ----- -----
20 Quarterly Results of Operations (Unaudited) The following is an unaudited summary of our quarterly results for the last two years.
First Second Third Fourth 2000 Quarter Quarter Quarter Quarter (In millions, except per share data) Revenues $2,253 $2,105 $2,031 $2,219 Income from continuing operations 362 219 230 202 Discontinued operations (4) (7) 1 (10) Net income 358 212 231 192 Earnings per common share: Basic: Income from continuing operations 1.62 1.01 1.04 0.90 Discontinued operations (0.02) (0.03) -- (0.03) Net income 1.60 0.98 1.04 0.87 Diluted: Income from continuing operations 1.53 0.95 0.98 0.86 Discontinued operations (0.02) (0.03) -- (0.03) Net income 1.51 0.92 0.98 0.83
First Second Third Fourth 1999 Quarter Quarter Quarter Quarter (In millions, except per share data) Revenues $1,909 $1,933 $1,785 $1,942 Income from continuing operations after effect of accounting change 167 219 137 226 Discontinued operations (2) (15) 190 (88) Net income 165 204 327 138 Earnings per common share: Basic: Income from continuing operations after effects of accounting change 0.71 0.96 0.59 0.98 Discontinued operations (0.01) (0.07) 0.84 (0.38) Net income 0.70 0.89 1.43 0.60 Diluted: Income from continuing operations after effects of accounting change 0.68 0.90 0.56 0.93 Discontinued operations (0.01) (0.06) 0.78 (0.36) Net income 0.67 0.84 1.34 0.57
MANAGEMENT'S DISCUSSION AND ANALYSIS Consolidated Overview Earnings increase in 2000 as competitive landscape improves In recent years, The St. Paul has taken aggressive and wide-ranging actions to establish a specialty identity in the global insurance marketplace, while improving efficiency and building the foundation for profitable growth through a renewed commitment to quality in our pursuit of new business. In 2000, the success of those actions was evident in our ability to capitalize on our competitive advantages in a rapidly improving pricing environment. We achieved premium growth in virtually all of our underwriting segments in 2000, as we continued to identify new opportunities to apply our focused, specialty underwriting approach in commercial insurance markets worldwide. The following table summarizes our results for each of the last three years.
Year ended December 31 2000 1999 1998 (In millions, except per share data) Pretax income (loss): Property-liability insurance $ 1,467 $ 971 $ 298 Life insurance 53 66 21 Asset management 135 123 104 Parent company and other operations (202) (143) (303) ------- ------- ------- Pretax income from continuing operations 1,453 1,017 120 Income tax expense (benefit) 440 238 (79) ------- ------- ------- Income from continuing operations before cumulative effect of accounting change 1,013 779 199 Cumulative effect of accounting change, net of taxes -- (30) -- ------- ------- ------- Income from continuing operations 1,013 749 199 Discontinued operations, net of taxes (20) 85 (110) ------- ------- ------- Net income $ 993 $ 834 $ 89 ------- ------- ------- ------- ------- ------- Per share (diluted) $ 4.24 $ 3.41 $ 0.32 ------- ------- ------- ------- ------- -------
The 43% growth in pretax income from continuing operations in 2000 was driven by a significant increase in realized investment gains and an improvement in property-liability underwriting results. Our property-liability results in 2000 and 1999 included pretax benefits of $357 million and $261 million, respectively, from aggregate excess-of-loss reinsurance treaties, as described on page 23 of this report. Pretax income in 1999 was reduced by a $60 million charge related to a cost reduction program. In our life insurance operation ("F&G Life"), where investment impairment losses resulted in a decline in pretax income from 1999, product sales in excess of $1 billion nonetheless led to another year of strong operating results. The diverse range of high-quality investment products offered by The John Nuveen Company, our asset management subsidiary, became increasingly attractive to affluent investors in a volatile market environment in 2000, contributing to record earnings for the sixth consecutive year. The increase in the "parent company and other operations" pretax loss in 2000 was largely due to expenses associated with a stock compensation plan for certain corporate executives and an increase in advertising and interest expenses. In 1998, our pretax income from continuing operations was reduced by earnings charges totaling $582 million, which consisted of the following components: - - $292 million of charges related to our merger with USF&G Corporation ("USF&G"); - - a $215 million provision to strengthen loss reserves; - - a $41 million writedown of F&G Life's deferred acquisition cost asset; and - - $34 million of expenses related to the restructuring of our commercial insurance operations. These charges were recorded in our 1998 results as follows: $406 million in property-liability insurance operations; $50 million in our life insurance segment; and $126 million in "parent company and other operations." Excluding the impact of these charges in 1998, our 1999 pretax income from continuing operations was $315 million, or 45%, higher than the 1998 total, reflecting the benefit of reinsurance treaties, efficiencies realized from the USF&G merger and marked improvement in several of our property-liability underwriting segments. CONSOLIDATED REVENUES The following table summarizes the source of our consolidated revenues from continuing operations for the last three years.
Year ended December 31 2000 1999 1998 (In millions) Insurance premiums earned: Property-liability $ 5,592 $ 5,103 $ 5,434 Life 306 187 119 Net investment income 1,616 1,557 1,571 Realized investment gains 607 277 201 Asset management 356 340 302 Other 131 105 81 ------- ------- ------- Total revenues $ 8,608 $ 7,569 $ 7,708 ------- ------- ------- Change from prior year 14% (2%)
The strong growth in revenues over 1999 was centered in our property-liability operations, where price increases, new business and two acquisitions were the primary factors driving a 10% increase in insurance premiums earned. Excluding the impact of the aggregate excess-of-loss reinsurance treaties in both 2000 and 1999, property-liability insurance premiums in 2000 grew 13% over 1999. Strong returns generated by our venture capital investments accounted for the $330 million increase in realized investment gains over 1999. The slight increase in net investment income in 2000 was due to 19% growth in our life insurance segment, which more than offset a slight decline in our property-liability operations. In 1999, the 2% decline in consolidated revenues from 1998 was almost entirely due to $273 million of premiums ceded under the reinsurance treaties. 2000 ACQUISITIONS In April 2000, we completed our acquisition of MMI Companies, Inc. ("MMI"), an international healthcare risk services company that provides integrated products and services in operational consulting, clinical risk management, and insurance in the U.S. and London markets. The acquisition was accounted for as a purchase for a total cost of approximately $206 million in cash and the assumption of $165 million of MMI debt and capital securities. Approximately $101 million of the purchase price represented goodwill. We recorded a pretax charge of $28 million related to the purchase, consisting of $24 million of occupancy-related costs for leased space to be vacated and $4 million of employee-related costs for the anticipated termination of approximately 130 positions. The results of MMI's domestic U.S. operations are reported in our Global Healthcare segment, and the results of MMI's U.K.-based operation, Unionamerica Insurance Company Limited ("Unionamerica"), are included in our International segment. MMI added the following amounts to our property-liability results of operations in 2000.
2000 (In millions) Written premiums $ 197 Earned premiums 264 GAAP underwriting loss (319) Net investment income 55
In February 2000, we completed our acquisition of Pacific Select Insurance Holdings, Inc. ("Pacific Select"), a California company that sells earthquake insurance coverages to homeowners in that state. We accounted for the acquisition as a purchase at a cost of approximately $37 million. Pacific Select's results of operations from the date of acquisition are included in the Catastrophe Risk business center of our Commercial Lines Group segment. Pacific Select contributed $21 million of net written premiums and $17 million of GAAP underwriting profits to our 2000 results. DISCONTINUED OPERATIONS In May 2000, we completed the sale of our nonstandard auto insurance operations to Prudential Insurance Company of America ("Prudential"). In 1999, we sold our standard personal insurance operations to Metropolitan Property and Casualty Insurance Company ("Metropolitan"). The results of the operations sold are reflected as discontinued operations for all periods presented in this report. The following table presents the components of discontinued operations reported in our consolidated statement of income for each of the last three years.
Year ended December 31 2000 1999 1998 (In millions) NONSTANDARD AUTO INSURANCE: Operating income, net of taxes $ -- $ 13 $ 10 Loss on disposal, net of taxes (9) (83) -- ---- ---- ----- Total nonstandard auto insurance (9) (70) 10 ---- ---- ----- STANDARD PERSONAL INSURANCE: Operating loss, net of taxes -- (22) (120) Gain (loss) on disposal, net of taxes (11) 177 -- ---- ---- ----- Total standard personal insurance (11) 155 (120) ---- ---- ----- Total discontinued operations $(20) $ 85 $(110) ---- ---- ----- ---- ---- -----
Nonstandard Auto Insurance - Prudential purchased the nonstandard auto insurance business marketed under the Victoria Financial and Titan Auto brands for $175 million in cash (net of a $25 million dividend paid by these operations to our property-liability insurance operations prior to closing). We recorded an estimated after-tax loss of $83 million on the sale in 1999, representing the estimated excess of carrying value of these entities at closing date over proceeds to be received from the sale, plus estimated income through the disposal date. This excess primarily consisted of goodwill. We recorded an additional after-tax loss on disposal of $9 million in 2000, primarily representing additional losses incurred through the disposal date in May. Standard Personal Insurance - In 1999, Metropolitan purchased Economy Fire & Casualty Company and subsidiaries ("Economy"), as well as the rights and interests in those policies constituting our remaining standard personal insurance operations. Those rights and interests were transferred to Metropolitan by way of a reinsurance and facility agreement (the "Reinsurance Agreement"), pursuant to which we transferred assets of approximately $325 million to Metropolitan, representing the estimated unearned premium on the policies in force. The Reinsurance Agreement related 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 Dec. 31, 2000, we had determined that we could not reasonably estimate to any probable certainty whether any deficiency or redundancy existed in the pre-sale reserves and we have not recorded a liability or receivable related to those reserves. Any losses we incur under these agreements will be reflected in discontinued operations in the period they are incurred. We have no other contingent liabilities related to the sale. We recorded a pretax gain of $258 million on the sale in 1999, consisting of the following components: a gain on disposal of $130 million and a $128 million pretax gain on discontinued operations, which included a $145 million reduction in insurance loss and loss adjustment reserves. The reserve reduction in 1999 was caused by a number of factors. During 1999, we had begun to see the favorable impact of certain corrective actions taken during 1998 in these operations. The loss reserving process and evaluation in 1999 was also influenced by the integration of The St. Paul and USF&G claim operations and practices, as well as the related consolidation of loss reserve data, systems and actuarial staff. Additionally, considering the pending sale and its economic consequences, these reserves were evaluated at a more detailed level prior to the sale. All of these factors influenced our conclusion to change our best estimate of required reserves at Sept. 30, 1999. Included in the calculation of our gain on disposal in 1999 was a pretax charge of $32 million for costs directly associated with the decision to dispose of these operations. These costs included $14 million of employee-related costs, $8 million of occupancy-related costs, $7 million of transaction costs and $3 million of other miscellaneous costs. In 2000, we recorded an $11 million reduction in the after-tax gain on disposal, representing $7 million of additional development on non-Economy losses occurring prior to closing, and $4 million of adjustments to the tax expense recorded on the gain on disposal. ELIMINATION OF ONE-QUARTER REPORTING LAG FOR ST. PAUL RE - UK In the first quarter of 2000, we eliminated the one-quarter reporting lag for our reinsurance operations based in the United Kingdom ("St. Paul Re - UK") and now report the results of those operations on a current basis. As a result, our consolidated results for 2000 include St. Paul Re - UK's results for the fourth quarter of 1999 and all of 2000. The incremental impact on our operations of eliminating the reporting lag, which consists of St. Paul Re - UK's results for the three months ended Dec. 31, 2000, was not material to our results of operations for the year ended Dec. 31, 2000. USF&G MERGER CHARGES In April 1998, we merged with USF&G, a Baltimore, Md.-based insurance holding company, in a tax-free exchange of stock accounted for as a pooling of interests. We recorded $292 million of merger-related charges in 1998, resulting from management's comprehensive review of the two companies as part of formulating an integration plan to merge their respective operations. The review identified redundant job functions, staffing levels, geographical locations, leased space and technology platforms. The merger-related charges consisted of the following components. - - $141 million of severance and other employee-related expenses. We estimated that approximately 2,000 positions would be eliminated due to the combination of the two organizations, affecting all levels of employees from senior management to technical staff. Approximately 2,200 positions were eliminated, and $137 million in severance and other employee-related costs were paid. - - $70 million of facilities exit costs, consisting of a $36 million writedown in the carrying value of a former USF&G headquarters building in Baltimore and $34 million of expenses related to the consolidation of redundant branch office locations. Through Dec. 31, 2000, we had paid $17 million of branch lease exit costs. - - $81 million of other costs, including $30 million of transaction costs; a $23 million writedown in the carrying value of several USF&G real estate investments; $10 million of accelerated depreciation expense on redundant software; $10 million of expense for writedowns and lease buy-outs of redundant computer equipment; and an $8 million writedown in the carrying value of excess furniture and equipment. CUMULATIVE EFFECT OF ACCOUNTING CHANGE Our net income in 1999 included a pretax expense of $46 million ($30 million after-tax), representing the cumulative effect of adopting the AICPA's Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments." The SOP provides guidance for recognizing and measuring liabilities for guaranty and other insurance-related assessments. In the third quarter of 1999, the State of New York enacted a law which changed its assessment method from a loss-based assessment method to a written premium-based method. As a result, we reduced our previously recorded pretax accrual by $12 million, which was recorded in income from continuing operations. The accrual is expected to be disbursed as assessed during a period of up to 30 years. GLOBAL SPECIALTY REPORTING STRUCTURE At the beginning of 2000, we implemented a new segment reporting structure for our property-liability insurance business following the fourth-quarter 1999 realignment of our primary insurance underwriting operations into a "Global Specialty Practices" organization. The most significant change involved the inclusion of certain non-U.S. primary business in the respective business segment to which it pertains, which differed from our prior practice of including all non-U.S. business in our International segment. In addition, our Construction business center was moved from the Commercial Lines Group segment to the Other Global Specialty segment, and our Global Healthcare operations are now reported as a separate business segment. The new reporting format is more closely aligned with the global management of the majority of our specialty insurance products and services. Our International segment includes our operations at Lloyd's and insurance business that we do not manage on a global basis, primarily standard commercial business in international markets. The International segment also includes the results of MMI's U.K.-based operation, Unionamerica. All data for 1999 and 1998 is presented on a basis consistent with our new reporting structure. The following pages include a detailed discussion of the 2000 results produced by our six distinct business segments that underwrite property-liability insurance and provide related services for particular market sectors. We also review the performance of our property-liability underwriting operations' investment segment. After the property-liability discussion, we discuss the results for F&G Life and The John Nuveen Company. Property-Liability Insurance Overview Price increases, underwriting discipline lead to better results in 2000; success of specialty focus evident in new business growth and improved efficiency After many years of intense competitive pressures, during which pricing levels throughout the property-liability industry failed to keep pace with rising loss costs, the pricing environment improved in virtually all market sectors in 2000. As operating conditions improved, we capitalized on the specialty underwriting focus we have honed over the last several years, achieving significant business growth in many of our targeted specialty commercial market sectors. At the same time, the efficiencies realized from our new global organizational structure, streamlined field operations and cost-reduction efforts were also evident in our 2000 results. Our corporate reinsurance program also played a role in our improvement over 1999. WRITTEN PREMIUMS The following table summarizes our reported written premiums for the last three years.
Year ended December 31 2000 1999 1998 (Dollars in millions) Written premiums $ 5,884 $ 5,112 $ 5,276 Percentage change from prior year 15% (3%)
Our reported totals in 2000 and 1999 were reduced by $474 million and $273 million, respectively, for premiums transferred, or "ceded," under specific reinsurance treaties described in more detail below. Excluding the impact of those cessions, 2000 written premiums totaled $6.36 billion, 18% higher than comparable 1999 premium volume of $5.38 billion. The nearly $1 billion increase over 1999 was primarily due to price increases and new business throughout most of our underwriting segments and the addition of MMI, which accounted for $197 million of written premiums subsequent to its acquisition in April. The adjusted 1999 total was 2% higher than 1998 premium volume, due to new business in our International and Global Surety segments, which offset premium declines in our Commercial Lines Group. UNDERWRITING RESULT The GAAP underwriting result, a common measurement of a property-liability insurer's performance, represents premiums earned less losses incurred and underwriting expenses. The statutory combined ratio, representing the sum of the loss ratio and expense ratio, is also a common measure of underwriting performance. The lower the ratio, the better the result. The following table summarizes our reported underwriting results and combined ratios for the last three years.
Year ended December 31 2000 1999 1998 (Dollars in millions) GAAP underwriting result $ (309) $ (425) $ (881) Loss and loss adjustment expense ratio 70.0 72.9 82.2 Underwriting expense ratio 34.8 35.0 35.2 ------ ------ ------ Statutory combined ratio 104.8 107.9 117.4 ------ ------ ------ ------ ------ ------
Our reported underwriting results in both 2000 and 1999 benefited from the impact of separate aggregate excess-of-loss reinsurance treaties that we entered into effective Jan. 1 of each year (the "corporate program"). Coverage under the corporate program treaties was triggered when our insurance losses and loss adjustment expenses spanning all segments of our business reached a certain level prescribed by terms of the treaties. In addition, our Reinsurance segment results in both years benefited from separate aggregate excess-of-loss reinsurance treaties unrelated to the corporate program. All of these treaties are collectively referred to hereafter as the "reinsurance treaties." Under terms of the reinsurance treaties, we transferred, or "ceded," insurance losses and loss adjustment expenses to our reinsurers, along with the related written and earned premiums. For the corporate program, we paid the ceded earned premiums shortly after coverage under the treaties was invoked. We will recover the ceded losses and loss adjustment expenses from our reinsurer as we settle the related claims, which may occur over several years. For the separate Reinsurance segment treaties, we remit the premiums ceded (plus accrued interest) to our counterparty when the related losses and loss adjustment expenses are settled. The reinsurance treaties impacted our reported results as follows.
Year ended December 31 2000 1999 (In millions) CORPORATE PROGRAM: Ceded written premiums $419 $211 Ceded losses and loss adjustment expenses 709 384 Ceded earned premiums 419 211 ---- ---- Net pretax benefit 290 173 ---- ---- REINSURANCE SEGMENT TREATY: Ceded written premiums 55 62 Ceded losses and loss adjustment expenses 122 150 Ceded earned premiums 55 62 ---- ---- Net pretax benefit 67 88 ---- ---- COMBINED TOTAL: Ceded written premiums 474 273 Ceded losses and loss adjustment expenses 831 534 Ceded earned premiums 474 273 ---- ---- Net pretax benefit $357 $261 ---- ---- ---- ----
The combined pretax benefit (detriment) of the reinsurance treaties was allocated to our business segments as follows.
Year ended December 31 2000 1999 (In millions) Commercial Lines Group $ (18) $ 98 Global Healthcare 42 -- Global Surety 18 -- Other Global Specialty 92 -- International 96 -- ----- ----- Total Primary Insurance 230 98 Reinsurance 127 163 ----- ----- Total Property-Liability Insurance $ 357 $ 261 ----- ----- ----- -----
Excluding the reinsurance treaty benefits from both years, our 2000 underwriting loss of $666 million was slightly better than the 1999 loss of $686 million. Significant improvements in our Commercial Lines Group and Other Global Specialty segments were offset by deterioration in our Global Healthcare, International and Reinsurance segments. Our reported underwriting loss of $881 million in 1998 included a $215 million provision to strengthen loss reserves after our merger with USF&G, as discussed in more detail on page 35 of this report. The reinsurance treaties and several other factors had a significant impact on our reported loss and expense ratios, as detailed in the following discussion. Loss Ratio - The loss ratio measures insurance losses and loss adjustment expenses incurred as a percentage of earned premiums. Excluding the reinsurance treaty benefits, our 2000 reported loss ratio of 70.0 rises to an adjusted ratio of 78.2, and our 1999 reported loss ratio of 72.9 rises to an adjusted ratio of 79.1. Three additional factors impacted the adjusted loss ratio in 2000 when compared with 1999. First, we recorded a $102 million reduction in workers' compensation loss reserves during the year as the result of favorable development on losses incurred in prior years. Second, we reduced our estimate of ultimate losses on certain reinsurance business by $56 million (as discussed on page 32 of this report). Finally, the adjusted 2000 loss ratio included substantial losses incurred by MMI, primarily resulting from provisions to strengthen loss reserves in certain lines of business subsequent to our acquisition. Excluding all of these factors in 2000, our adjusted loss ratio of 76.3 was 2.8 points better than the adjusted 1999 ratio. The improvement was centered in our Commercial Lines Group and Other Global Specialty segments. Our 2000 adjusted loss ratio also benefited from a decline in pretax catastrophe losses compared with 1999. Those losses totaled $165 million in 2000, down from losses of $257 million in 1999. Approximately $75 million of the 2000 total resulted from additional loss development arising from severe windstorms that struck portions of Europe in late 1999. In addition, we incurred $30 million of losses from flooding in the United Kingdom near the end of 2000. Major events contributing to catastrophe losses in 1999 included Hurricane Floyd, earthquakes in Taiwan and Turkey, and European windstorms. In 1998, the provision to strengthen loss reserves accounted for 4.0 points of the reported loss ratio of 82.2. Our 1999 adjusted loss ratio of 79.1 was slightly worse than the 1998 ratio of 78.2 (as adjusted to remove the reserve provision), with the deterioration centered in several of our specialty commercial insurance business centers. Catastrophe losses of $267 million in 1998 were $10 million higher than those incurred in 1999; the majority of 1998 losses resulted from numerous storms across the United States. Expense Ratio - The expense ratio measures underwriting expenses as a percentage of premiums written. No underwriting expenses were ceded under the reinsurance treaties. However, our reported expense ratios in both 2000 and 1999 included effects of the reinsurance treaties due to the ceded written premiums. The 2000 ratio also reflected the impact of the MMI acquisition and a $66 million increase in the estimate of contingent commission expenses (discussed on page 32 of this report). Excluding all of these factors in both years, our adjusted expense ratio of 31.2 was over two points better than the adjusted 1999 expense ratio of 33.3. The improvement was partially due to our substantial premium growth in 2000. More significantly, it was an indication of the success of our extensive efforts over the last two years to reduce expenses and improve efficiency throughout our underwriting operations. Those efforts included our 1999 cost reduction program, which involved the consolidation of field office locations and the elimination of approximately 590 employee positions. We recorded a pretax charge of $60 million related to this program in 1999, consisting of $33 million of occupancy-related expenses, $25 million of employee-related expenses and $2 million of equipment charges. Through Dec. 31, 2000, we had paid $25 million of severance and other employee-related expenses. We also paid $9 million in occupancy-related expenses. All actions to be taken under this plan were completed in 2000. Also included in our efficiency initiatives was the 1998 restructuring of our Commercial Lines Group and Specialty Commercial underwriting segments. We recorded a pretax charge of $34 million in 1998, the majority of which ($26 million) related to the anticipated elimination of approximately 520 employee positions. The remainder represented the estimated costs to exit lease contracts as part of our plan to streamline field office operations. Approximately 500 employees were terminated and the cost of termination benefits paid totaled $19 million. Termination actions under this restructuring plan have been completed. In 1999 we reduced the remaining severance accrual by $5 million due to voluntary terminations that had reduced our estimate of future severance and out-placement payments. In 2000, with substantially all payments having been made to terminated employees, we reduced the remaining $2 million severance accrual. In 1999, we reduced the lease accrual by $6 million to reflect subleases entered into on vacated spaces. PROPERTY-LIABILITY OUTLOOK FOR 2001 We will remain aggressive in implementing additional price increases in 2001 while continuing to exert underwriting discipline in our risk selection throughout all of our operations. We believe our global specialty focus and organizational efficiency provide opportunities for profitable growth. As part of our overall ceded reinsurance program, we will continue to enter into aggregate excess-of-loss reinsurance treaties as we deem appropriate. PROPERTY-LIABILITY UNDERWRITING RESULTS BY SEGMENT The following table summarizes written premiums, underwriting results and combined ratios for each of our property-liability underwriting business segments for the last three years. All data for 1999 and 1998 were reclassified to conform to our new Global Specialty reporting format implemented in 2000. Following the table are detailed analyses of our 2000 segment results and a look ahead to 2001 for each segment.
% of 2000 Year ended Written December 31 Premiums 2000 1999 1998 (Dollars in millions) PRIMARY INSURANCE: Commercial Lines Group Written premiums 28% $ 1,657 $ 1,450 $ 1,714 Underwriting result $ 99 $ (172) $ (592) Combined ratio 93.9 110.6 134.1 Adjusted combined ratio* 92.7 115.7 125.5 Global Healthcare Written premiums 10% $ 600 $ 545 $ 518 Underwriting result $ (244) $ (70) $ (126) Combined ratio 139.8 114.8 123.4 Adjusted combined ratio* 142.5 -- 123.2 Global Surety Written premiums 7% $ 426 $ 419 $ 386 Underwriting result $ 51 $ 40 $ 76 Combined ratio 85.8 83.1 78.1 Adjusted combined ratio* 91.0 -- -- Other Global Specialty Written premiums 27% $ 1,579 $ 1,389 $ 1,319 Underwriting result $ (9) $ (243) $ (188) Combined ratio 97.6 117.1 114.5 Adjusted combined ratio* 104.3 -- 110.4 International Written premiums 8% $ 451 $ 344 $ 282 Underwriting result $ (100) $ (59) $ (58) Combined ratio 120.5 117.3 119.4 Adjusted combined ratio* 133.1 -- -- TOTAL PRIMARY INSURANCE Written premiums 80% $ 4,713 $ 4,147 $ 4,219 Underwriting result $ (203) $ (504) $ (888) Combined ratio 103.3 111.4 121.7 Adjusted combined ratio* 108.2 113.4 116.7 Reinsurance Written premiums 20% $ 1,171 $ 965 $ 1,057 Underwriting result $ (106) $ 79 $ 7 Combined ratio 110.0 92.0 98.7 Adjusted combined ratio* 118.5 108.5 -- TOTAL PROPERTY-LIABILITY INSURANCE Written premiums 100% $ 5,884 $ 5,112 $ 5,276 Underwriting result $ (309) $ (425) $ (881) Statutory combined ratio: Loss and loss expense ratio 70.0 72.9 82.2 Underwriting expense ratio 34.8 35.0 35.2 -------- -------- -------- Combined ratio 104.8 107.9 117.4 -------- -------- -------- Adjusted combined ratio* 110.4 112.4 113.4 -------- -------- -------- -------- -------- --------
* For purposes of comparison, adjusted 2000 and 1999 combined ratios exclude the benefit of the reinsurance treaties (described on page 23 of this report), and adjusted 1998 combined ratios exclude the impact of a $215 million provision to strengthen loss reserves subsequent to The St. Paul's merger with USF&G (described on page 35 of this report). PROPERTY-LIABILITY INSURANCE Primary Insurance Operations Our primary insurance underwriting operations consist of five business segments which underwrite property-liability insurance and provide insurance-related products and services to commercial and professional customers. We utilize a network of independent insurance agents and brokers to distribute the majority of our insurance products. Based on 1999 premium volume, The St. Paul ranked as the 14th-largest U.S. property-liability underwriter. Commercial Lines Group The Commercial Lines Group segment includes our standard and nonstandard commercial operations, as well as our catastrophe risk business center. In our Standard Commercial operation, the Middle Market business center serves midsize and large commercial enterprises, and the Small Commercial business center serves small businesses, such as retailers, wholesalers, service companies, professional offices, manufacturers and contractors. Our Nonstandard Commercial operation offers complete insurance programs through its Large Accounts and National Programs business centers and also serves the trucking industry through its Transportation business center. Catastrophe Risk underwrites property insurance focused on catastrophe exposures for large commercial customers, as well as certain coverages for homeowners. The Commercial Lines Group segment also includes the results of our limited involvement in insurance pools. The following table summarizes key financial data for each of the last three years in the Commercial Lines Group ("CLG") segment. Data for 2000 and 1999 exclude the impact of the corporate reinsurance program. In 2000, the corporate program resulted in an $11 million increase in reported written premiums and an $18 million reduction in reported underwriting profits, due to a reallocation among our segments of benefits derived from the 1999 corporate treaty. In 1999, the corporate program reduced reported written premiums by $119 million and improved reported underwriting results by $98 million. Data for 1998 exclude $159 million of the provision to strengthen reserves after the USF&G merger.
Year ended December 31 2000 1999 1998 (Dollars in millions) Written premiums $ 1,646 $ 1,569 $ 1,714 Percentage change from prior year 5% (8%) GAAP underwriting result $ 117 $ (270) $ (433) Statutory combined ratio: Loss ratio 59.8 80.8 88.5 Expense ratio 32.9 34.9 37.0 -------- -------- -------- Combined ratio 92.7 115.7 125.5 -------- -------- -------- -------- -------- --------
2000 vs. 1999 - The growth in written premium volume in 2000 was driven by significant price increases throughout the CLG segment. In our Standard Commercial operations, the largest sector of this segment with 2000 written premiums of $1.3 billion, price increases averaged 9% for the year and renewal retention ratios remained strong. In our Nonstandard Commercial operations, price increases averaging 17% for the year were largely offset by a decline in retention ratios, reflecting our ongoing efforts to remove unprofitable accounts from these operations. Catastrophe Risk written premiums of $96 million for the year were 23% higher than in 1999, due to our acquisition of Pacific Select in February 2000. The considerable improvement in underwriting results in 2000 was centered in our Standard Commercial operations and reflected the impact of profit improvement initiatives implemented since the merger with USF&G in 1998. The Standard Commercial loss ratio on business written in 2000 improved 13.7 points over the comparable 1999 ratio. During the last two years, we have implemented significant price increases and tightened underwriting standards aimed at eliminating underperforming accounts from our book of business. Favorable loss development on reserves established in prior years was also a major factor in Standard Commercial's improvement over 1999. Our Catastrophe Risk business center, benefiting from the lack of significant catastrophe losses and the addition of Pacific Select during the year, was also a strong contributor to the improvement in CLG. Results for the CLG segment in total included $69 million of the reduction in previously established workers' compensation reserves. The two-point improvement in the CLG expense ratio in 2000 was a result of our aggressive efforts over the last two years to reduce expenses and improve efficiency. Fixed expenses, consisting primarily of salaries and related costs, declined $12 million in 2000 despite the increase in premium volume. 1999 vs. 1998 - The 8% decline in premium volume compared with 1998 was centered in our Middle Market business center and reflected our efforts, begun in late 1998, to reduce our business volume in this sector because of a deteriorating pricing environment. Those efforts resulted in a $200 million reduction in Middle Market written premiums compared with 1998, which was partially offset by an increase in Small Commercial volume. CLG's underwriting loss declined markedly from 1998 as our pricing and efficiency efforts began to have a positive effect on segment results. Favorable prior year loss development and a decline in catastrophe losses were also factors contributing to the improvement over 1998. Outlook for 2001 - With the majority of our restructuring and re-underwriting efforts completed, we are optimistic about further growth and continued profitability in the CLG segment in 2001. We will continue to emphasize quality in our risk selection. We expect the rate of price increases recorded in 2000 to continue in 2001. We will be actively engaged in developing our new product distribution strategy, which will open direct access to customers and enable strategic partnership opportunities with companies, banks and other financial institutions, as well as independent agents. GLOBAL SPECIALTY PRACTICES Global Healthcare The Global Healthcare segment provides a wide range of insurance products and services throughout the entire healthcare delivery system, including individual physicians and other providers, physician groups, hospitals, managed care organizations and long-term care facilities. The results of MMI's U.S. operations are included in this segment. The following table summarizes key financial data for each of the last three years in this segment. Data for 2000 exclude the impact of the corporate reinsurance treaty, which reduced written premiums by $60 million and improved GAAP underwriting results by $42 million. Data for 1998 exclude $1 million of the post-USF&G merger provision to strengthen loss reserves.
Year ended December 31 2000 1999 1998 (Dollars in millions) Written premiums $ 660 $545 $ 518 Percentage change from prior year 21% 5% GAAP underwriting result $(286) $(70) $(125) Statutory combined ratio: Loss ratio 116.8 87.8 97.2 Expense ratio 25.7 27.0 26.0 ----- ----- ----- Combined ratio 142.5 114.8 123.2 ----- ----- ----- ----- ----- -----
2000 vs. 1999 - Global Healthcare premium volume in 2000 included $98 million of premiums from MMI's domestic operations. The $545 million premium total in 1999 included a one-time premium of $37 million recorded on one three-year policy. Excluding that premium and MMI's incremental contribution in 2000, premium volume in 2000 was 11% higher than 1999. The increase was driven by price increases, new business in selected coverages and higher renewal retention ratios on accounts targeted for renewal. New business volume was centered in coverages for individual physicians and other healthcare providers, where price increases averaged 7% for the year. We recorded virtually no new business in our major accounts operation, which serves large healthcare entities. The significant deterioration in underwriting results compared with 1999 was driven by losses incurred in our long-term care and major accounts books of business, including business acquired in the MMI purchase. Amounts awarded in jury verdicts against the large entities served by the major accounts business center increased sharply in 2000, causing us to strengthen previously established loss reserves for these coverages. MMI's domestic operations accounted for $256 million of the Global Healthcare underwriting loss in 2000, a substantial portion of which resulted from losses in its major accounts business. Excluding MMI's underwriting losses, results from the remainder of the Global Healthcare segment improved slightly over 1999, due to the corrective pricing and underwriting initiatives implemented over the last several years. Major accounts notwithstanding, neither the market environment nor loss cost trends in our remaining Global Healthcare business centers deteriorated significantly in 2000. 1999 vs. 1998 - Premium growth in 1999 was largely due to the one-time $37 million premium on one policy. Excluding that transaction, written premiums declined 2% from 1998, primarily due to the nonrenewal of certain unprofitable business in our major accounts operation. In addition, new business volume in other coverages declined from 1998 due to our unwillingness to compete in markets where pricing was inadequate. Underwriting results improved markedly over 1998, driven by a decline in the severity of losses incurred in professional liability coverages other than major accounts and long-term care facilities. In those two lines, adverse prior year loss development led us to severely restrict new and renewal business volume. Global Healthcare results in 1999 also benefited from certain changes in premium accrual estimates. Outlook for 2001 - As a result of the overall deterioration in our major accounts results in 2000, including a portion of the business acquired from MMI, we are performing a comprehensive review of our strategic options regarding these operations. The results of this review will be considered in our assessment of the recoverability of the related goodwill we recorded as part of the MMI purchase. Until this review is completed, we cannot reasonably estimate to what extent, if any, impairment of that goodwill has occurred. We believe the other lines of business offer a reasonable opportunity for profitability with the necessary price increases we are currently pursuing. We will continue to leverage our longstanding expertise in the domestic medical liability market by pursuing new business and profitable growth in selected non-U.S. markets. GLOBAL SPECIALTY PRACTICES Global Surety The Global Surety segment underwrites surety bonds, which guarantee that third parties will be indemnified against the nonperformance of contractual obligations. This segment includes our subsidiary Afianzadora Insurgentes, the largest surety bond underwriter in Mexico, with a market share of nearly 40%. Based on 1999 premium volume, our surety operations are the largest in North America and in the world. The following table summarizes results for this segment for the last three years. Results presented for 2000 exclude the impact of the corporate reinsurance program, which reduced reported written premiums by $27 million and improved underwriting results by $18 million.
Year ended December 31 2000 1999 1998 (Dollars in millions) Written premiums $ 453 $ 419 $ 386 Percentage change from prior year 8% 9% GAAP underwriting result $ 33 $ 40 $ 76 Statutory combined ratio: Loss ratio 40.2 32.2 23.7 Expense ratio 50.8 50.9 54.4 ------ ------ ----- Combined ratio 91.0 83.1 78.1 ------ ------ ----- ------ ------ -----
2000 vs. 1999 - The 8% increase in premium volume over 1999 was driven by strong economic conditions in both the United States and Mexico, which fueled growth in the construction industry and, in turn, the demand for contract surety products. The pace of premium growth in 2000 was slightly below prior year levels, reflecting tightened underwriting standards implemented during the year in anticipation of a potential economic slowdown. The underwriting profit declined from 1999, due to increased claim activity on two large accounts in Mexico. Results in our domestic U.S. operations improved over 1999, however, primarily as the result of favorable development on losses incurred in prior years. 1999 vs. 1998 - Premium growth in 1999 was also driven by economic expansion in the U.S. and Mexico. In addition, 1999 premium volume reflected the successful retention of targeted key accounts in an increasingly competitive marketplace. The underwriting profit in 1998 was significantly higher than in 1999, primarily due to a reduction in reserves established in prior years which did not occur to the same extent in 1999. The 3.5 point improvement in the expense ratio from 1998 to 1999 reflected the efficiencies realized subsequent to the 1998 merger with USF&G. Outlook for 2001 - With the potential for an economic slowdown in 2001 that could reduce public construction levels, we will remain aggressive in managing the composition of our book of surety business. Continuing a process begun in 2000, we will not pursue selected classes of surety business considered to be "at-risk" in a slowing economy, and we will strive to ensure that our pricing on new and renewal business is commensurate with the risk assumed. Corrective underwriting initiatives are underway aimed at improving our results in Mexico. In January 2001, we completed the acquisition of Australian Pacific Surety Corporation Limited, an underwriting agency specializing in surety bonding in the Australian and New Zealand markets. We believe our underwriting expertise and leadership position in the global surety marketplace provide a strong foundation for continued profitable results in 2001 and beyond. GLOBAL SPECIALTY PRACTICES Other Global Specialty The Other Global Specialty segment is composed of the following business centers that serve specific commercial customer groups. Construction delivers value-added products and services, including traditional insurance and financial and risk management solutions, to a broad range of contractors and owners of construction projects. Technology offers a comprehensive portfolio of specialty products and services to companies involved in telecommunications, information technology, medical and biotechnology, and electronics manufacturing. Financial and Professional Services ("FPS") provides all coverages for financial institutions, including property, liability, professional liability and management liability coverages; financial products coverages for corporations and nonprofit organizations; and errors and omissions coverages for a variety of professionals such as lawyers, insurance agents and real estate agents. Public Sector Services markets insurance products and services to cities, counties, townships and special governmental districts. Global Marine provides insurance related to ocean and inland waterways traffic. Excess & Surplus Lines underwrites liability insurance, umbrella and excess liability coverages, and coverages for unique risks. Oil and Gas provides specialized property and casualty products for customers involved in the exploration and production of oil and gas. The following table summarizes results for this segment for the last three years. Data for 2000 exclude the impact of the corporate reinsurance program in 2000, which reduced reported written premiums by $133 million and improved reported GAAP underwriting results by $92 million. Data for 1998 exclude $55 million of the post-merger provision to strengthen loss reserves.
Year ended December 31 2000 1999 1998 (Dollars in millions) Written premiums $1,712 $1,389 $1,319 Percentage change from prior year 23% 5% GAAP underwriting result $ (101) $ (243) $ (133) Statutory combined ratio: Loss ratio 75.7 85.6 78.1 Expense ratio 28.6 31.5 32.3 ------- ------- ------- Combined ratio 104.3 117.1 110.4 ------- ------- ------- ------- ------- -------
2000 vs. 1999 - Virtually every business center in this segment posted written premium increases over 1999, but the most significant growth occurred in our Technology and FPS operations. Technology written premiums of $346 million were 52% ahead of the comparable 1999 total, driven by substantial new business volume, price increases averaging 9.5% and a strong renewal retention rate. In FPS, a significant increase in non-U.S. business pushed 2000 written premiums to $390 million, 41% higher than 1999's total of $277 million. Early in the year, our underwriting subsidiary in the United Kingdom was appointed by the Law Society of England and Wales as its professional indemnity insurance provider. By year-end 2000, we had generated $65 million of FPS written premiums from this business. In our Construction business center, premium volume of $488 million grew 10% over 1999, reflecting price increases that averaged 15% for the year. Public Sector Services' written premiums of $237 million grew 23% over 1999, driven by price increases averaging 9% and strong growth in international business. The Construction and Global Marine business centers were the most significant contributors to the marked improvement in underwriting results over 1999. Construction recorded a $65 million reduction in underwriting losses in 2000, which included $33 million of the reduction in prior year workers' compensation reserves. Favorable prior year loss development and the nonrenewal of under-performing accounts also contributed to the improvement over 1999. In Global Marine, where underwriting results were $59 million better than 1999, the improvement was largely the result of our late-1999 withdrawal from unprofitable river transportation business in the Midwest. Our fast-growing Technology business center posted an underwriting profit of $19 million, $23 million better than the comparable 1999 result. Favorable current and prior year loss experience accounted for 2000's profitable performance. The FPS underwriting result was $43 million worse than 1999, primarily due to adverse prior year loss development in our U.S. operations and an increase in losses in our international operations. The nearly three-point improvement in the expense ratio over 1999 was an indication of the strides in efficiency achieved in this segment in 2000 as a result of our new global specialty organization. The 12% increase in underwriting expenses was significantly less than the 23% increase in premium volume for the year. 1999 vs. 1998 - The 5% increase in premium volume over 1998 was centered in the Technology business center, where 1999 premiums of $227 million were 21% higher than 1998 premiums of $188 million. Technology's growth in 1999 was a result of new product offerings, strong renewal retention rates and a stable pricing environment. Written premiums in the Construction business center grew $33 million, or 8%, over 1998, due to price increases averaging 5% and a strong domestic construction industry. Global Marine's 1999 premium volume of $99 million fell 16% below 1998 levels, reflecting a weak ship-building market and the nonrenewal of unprofitable business. The significant deterioration in underwriting results in 1999 was primarily due to an increase in losses in our Global Marine, Technology and Excess & Surplus Lines operations, and less underwriting profit in FPS. Global Marine was plagued by losses in the Midwest river transportation business in 1999, which we ceased writing at the end of the year when we sold the renewal rights to that book of business. Technology incurred several large losses and an increase in catastrophe losses in 1999, leading to a $25 million deterioration in underwriting results. Excess & Surplus Lines' results in 1999 suffered from several large losses and adverse prior year loss development in certain lines of business. In FPS, the underwriting profit of $9 million fell short of the 1998 profit of $45 million, due to a decline in the magnitude of favorable prior year development in 1999. Outlook for 2001 - We expect further growth and improvement throughout this segment in 2001, driven by additional price increases and our continued focus on quality risk selection. We believe our Construction business center is well-positioned to weather a potential economic slowdown, due to pricing and underwriting actions implemented over the last two years. We expect strong domestic and international growth in our Technology operations, building on our strong market position through the addition of underwriting staff and the development of new products to meet the emerging needs of Internet technology firms. In FPS, where our underlying performance remains solid, the priority will be continuing our growth and obtaining price increases where needed to maintain the profitability of this business. In January 2001, we completed our purchase of the right to seek to renew PENCO's book of municipality insurance, which is expected to lead to growth in our Public Sector Services operation. PENCO is a program administrator for Willis North America Inc., with annual municipality insurance premiums of approximately $60 million in 2000. International Our International segment consists of our operations at Lloyd's; specialty business that is not managed on a global basis; and, beginning in April 2000, MMI's London-based insurance operation, Unionamerica. Our International operations have a specialty commercial focus with particular emphasis on liability coverages. At Lloyd's, we provide capital to 11 underwriting syndicates and own a managing agency. We have built a local market presence in 14 countries that account for nearly 80% of the world's insurance market. In addition to Canada, we underwrite insurance in Europe, Africa, Australia and Latin America. This segment also provides coverage for the non-U.S. risks of U.S. corporate policyholders and vice versa. The following table summarizes results for this segment for the last three years. Data for 2000 exclude the impact of the corporate reinsurance program, which reduced our reported written premiums by $129 million and improved reported underwriting results by $96 million.
Year ended December 31 2000 1999 1998 (Dollars in millions) Written premiums $ 580 $ 344 $ 282 Percentage change from prior year 69% 22% GAAP underwriting result $(196) $ (59) $ (58) Statutory combined ratio: Loss ratio 102.5 83.4 83.1 Expense ratio 30.6 33.9 36.3 ------- ------- ------- Combined ratio 133.1 117.3 119.4 ------- ------- ------- ------- ------- -------
2000 vs. 1999 - The addition of Unionamerica accounted for $99 million of written premium volume in 2000. Excluding Unionamerica, International's 40% increase in premiums over 1999 was driven by growth in our Lloyd's operations, where we expanded our investment in several specialty underwriting syndicates. Premiums generated at Lloyd's in 2000 totaled $331 million, compared with $201 million in 1999. We also achieved modest growth in standard commercial business in several international markets, most notably in the United Kingdom and Canada. Underwriting results in the International segment in 2000 suffered from significant adverse prior year loss development at Unionamerica and deterioration in certain Lloyd's syndicate results. Subsequent to our acquisition of MMI, we strengthened Unionamerica's loss reserves and ceased writing new business in that entity. Underwriting losses at Unionamerica since the acquisition totaled $63 million. At Lloyd's, our underwriting losses totaled $87 million for the year compared with losses of $37 million in 1999. The 2000 losses were centered in a syndicate specializing in financial and professional liability coverages, and an aviation syndicate which incurred significant losses from a number of airline accidents, including the Concorde crash in July. The improvement in the expense ratio in 2000 reflects efficiencies achieved in our International operations and a decline in start-up costs associated with establishing a presence in our targeted markets in the late 1990's. 1999 vs. 1998 - In 1999, premium growth was also centered at Lloyd's, as we selectively expanded our underwriting capacity in several syndicates offering the potential for profitable growth. Underwriting results in 1999 were virtually level with 1998, with deterioration in several Lloyd's syndicate results largely offset by significant improvement in standard commercial results in Canada. Outlook for 2001 - We have implemented aggressive corrective measures in this segment in an effort to rebound from 2000's disappointing results, and we expect significant improvement as 2001 progresses. At Lloyd's, we have enhanced our underwriting expertise through the addition of new personnel in several of our syndicates, and we have sharply reduced our aviation exposures. We have no current plans for further geographical expansion in 2001 but rather will focus on profitable growth in those markets where we currently operate. Despite our cessation of underwriting new business at Unionamerica in 2000, we are evaluating the strategic value of this entity going forward and its relevance to the recoverability of the related goodwill recorded as part of the MMI purchase. Until that evaluation is complete, we cannot reasonably estimate to what extent, if any, impairment of that goodwill has occurred. REINSURANCE St. Paul Re Our Reinsurance segment, St. Paul Re, underwrites traditional treaty and facultative reinsurance for property, liability, ocean marine, surety and certain specialty classes of coverage and also underwrites "nontraditional" reinsurance, which combines traditional underwriting risk with financial risk protection. St. Paul Re underwrites reinsurance for leading property-liability insurance companies worldwide. Through Discover Re, our Reinsurance segment also underwrites primary insurance and reinsurance and provides related insurance products and services to self-insured companies and insurance pools, in addition to ceding to and reinsuring captive insurers, all within the alternative risk transfer market. Based on written premium volume through the first nine months of 2000, our reinsurance operations ranked as the 6th-largest reinsurer in the United States. The following table summarizes results for this segment for the last three years. Data for 2000 and 1999 exclude the impact of the reinsurance treaties, which reduced our reported written premiums by $135 million and $154 million, respectively, and improved reported GAAP underwriting results by $127 million and $163 million, respectively.
Year ended December 31 2000 1999 1998 (Dollars in millions) Written premiums $1,306 $1,119 $1,057 Percentage change from prior year 17% 6% GAAP underwriting result $ (233) $ (84) $ 7 Statutory combined ratio: Loss ratio 85.1 79.0 65.9 Expense ratio 33.4 29.5 32.8 ------- ------- ------- Combined ratio 118.5 108.5 98.7 ------- ------- ------- ------- ------- -------
2000 vs. 1999 - Premium growth in 2000 was driven by new business opportunities in the nontraditional reinsurance market and significant price increases across virtually all lines of traditional reinsurance coverages. The operating environment in global reinsurance markets continued to improve in 2000, as demand for reinsurance products grew and price increases took hold. In July 2000, St. Paul Re created a new Financial Solutions business center to focus on the rapidly growing nontraditional market, in which elements of traditional underwriting risk are combined with financial risk protection to meet specific financial objectives of corporate customers. Nontraditional business accounted for $142 million of the premium growth over 1999 at St. Paul Re. In addition, price increases and new business fueled an $84 million increase in North American casualty premium volume in 2000. The deterioration in underwriting results was due to significant adverse loss development from years prior to 2000. Catastrophe losses incurred in 2000 totaled $135 million, of which $115 million represented additional losses on events occurring in 1999 and prior years. Major catastrophes in 1999 included severe windstorms in Europe, earthquakes in Taiwan and Turkey, and Hurricane Floyd. Flooding in the United Kingdom, which accounted for $20 million of Reinsurance segment losses, was the only major event in 2000 contributing to the 2000 catastrophe total. Adverse prior year loss development on retrocessional business written in St. Paul Re's London operations also played a significant role in 2000's underwriting loss. In addition, our North American casualty business accounted for approximately $130 million of underwriting losses in 2000. The elimination of the one-quarter reporting lag for St. Paul Re's U.K.-based operations added $10 million to underwriting losses in 2000. During 2000, St. Paul Re reduced its estimate of ultimate losses on certain nontraditional reinsurance business by $56 million, and made a corresponding increase in its estimate of reserves for contingent commissions by $66 million. Although these changes in estimate did not have a significant impact on underwriting results for the year, they did distort the components of the combined ratio in the table above. Excluding these changes, the loss ratio would have been 89.4, and the expense ratio would have been 28.3 (both excluding the benefits of the reinsurance treaties). 1999 vs. 1998 - The 6% increase in 1999 written premiums over 1998 resulted from a change in the method we used to estimate reinsurance premiums that have been earned, but not reported ("EBNR"), which added $61 million of written premiums to St. Paul Re's reported total. Excluding that change, premium volume in 1999 was level with 1998. Excess capacity and inadequate pricing levels plagued the traditional reinsurance marketplace in 1999, leading to a reduction in St. Paul Re's traditional premium volume. New business opportunities in the nontraditional market, however, substantially offset that decline. The deterioration in underwriting results compared with 1998 was primarily due to an increase in catastrophe losses, from $86 million in 1998 to $143 million in 1999. In addition, the change in the method of estimating EBNR had a net result of increasing underwriting losses by $9 million. Outlook for 2001 - We anticipate improvement in St. Paul Re's results in 2001. Price increases on business renewed in January 2001 averaged 17% across the entire segment and exceeded 50% for certain coverages. We are also aggressively addressing the factors that contributed to 2000's disappointing results. In our North American casualty business, we have sharply reduced our business volume in those market sectors where pricing remains inadequate. We have virtually eliminated our involvement in the London retrocessional reinsurance market. We have also implemented significant price increases on our catastrophe coverages, particularly in Europe. We expect further growth in St. Paul Re's Financial Solutions business in 2001. PROPERTY-LIABILITY INSURANCE Investment Operations The primary objective of our investment strategy is to maximize investment returns while generating sufficient liquidity to fund our cash requirements, primarily consisting of claim payments. The funds we invest are generated by underwriting cash flows, consisting of the excess of premiums collected over losses and expenses paid, and by investment cash flows, which consist of income received on existing investments and proceeds from sales and maturities of investments. We maintain a high-quality portfolio of investment instruments. The majority of funds available for investment are deployed in a widely diversified portfolio of predominantly investment-grade fixed maturities. We also invest lesser amounts in equity securities, venture capital and real estate with the goal of producing long-term growth in the value of our invested asset base and ultimately enhancing shareholder value. The latter three investment classes have the potential for higher returns but also involve a greater degree of risk, including less stable rates of return and less liquidity. In 2000 our property-liability investment portfolio generated pretax investment income of $1.25 billion, virtually level with 1999 pretax income of $1.26 billion. In 1998, pretax investment income totaled $1.29 billion. Our acquisition of MMI in April 2000, which added approximately $1 billion of fixed maturity investments to our operations, accounted for $55 million of pretax investment income in 2000. Excluding the MMI impact and $11 million of additional investment income resulting from the elimination of the quarter reporting lag for our U.K.-based reinsurance operations, pretax investment income in 2000 fell approximately 5% short of the 1999 total. Negative underwriting cash flows in 2000, including ceded premium payments totaling $326 million related to our corporate reinsurance program, resulted in net sales of fixed maturity investments during the year to fund operational cash flow requirements. In 1999 and 1998, negative underwriting cash flows, combined with merger-related and restructuring payments, also resulted in net sales of fixed maturity investments. The following table summarizes the composition and carrying value of our property-liability investment segment's portfolio at the end of 2000 and 1999. More information on each investment class follows the table.
December 31 2000 1999 (In millions) CARRYING VALUE Fixed maturities $15,791 $15,230 Equities 1,396 1,536 Real estate and mortgage loans 1,025 1,268 Venture capital 1,064 866 Securities lending collateral 1,231 1,216 Short-term investments 992 1,167 Other investments 183 107 ------- ------- Total investments $21,682 $21,390 ------- ------- ------- -------
Fixed Maturities - Our fixed maturities portfolio is composed of high-quality, intermediate-term taxable U.S. government, corporate and mortgage-backed bonds and tax-exempt U.S. municipal bonds. We manage our bond portfolio conservatively, investing almost exclusively in investment-grade (BBB- or better) securities. Approximately 94% of our portfolio at the end of 2000 was rated investment grade, with the remaining 6% split between high yield and nonrated securities, most of which we believe would be considered investment-grade if rated. Fixed maturity investments produced pretax investment income of $1.16 billion in 2000, compared with $1.17 billion and $1.20 billion in 1999 and 1998, respectively. Our decision whether to purchase taxable or tax-exempt securities is driven by corporate tax considerations and the relationship between taxable and tax-exempt yields at the time of purchase. In 2000, as in 1999 and 1998, a significant majority of our new purchases consisted of taxable bonds. The average yield on taxable bonds purchased in 2000 was 7.7%, compared with 7.2% in 1999 and 6.4% in 1998. Taxable bonds accounted for 68% of our fixed maturity portfolio at year-end 2000. The bond portfolio in total carried a weighted average pretax yield of 6.8% at Dec. 31, 2000, unchanged from year-end 1999. The amortized cost of our bond portfolio at the end of 2000 was $15.37 billion, compared with $15.26 billion at the end of 1999. The increase was primarily due to the addition of $1 billion in bonds from MMI, which offset the net sale of bonds in 2000 to fund our cash flow requirements. We carry bonds on our balance sheet at market value, with the corresponding appreciation or depreciation recorded in shareholders' equity, net of taxes. The market values of our bonds fluctuate with changes in market interest rates and changes in yield differentials between fixed-maturity asset classes. At the end of 2000, the pretax unrealized appreciation of our bond portfolio was $424 million, compared with unrealized depreciation of $26 million at the end of 1999. During the first half of 2000, the Federal Reserve raised short-term interest rates three times to address inflationary pressures. As the year progressed, however, emphasis shifted to preserving growth amid building signs of an economic slowdown. By the fourth quarter, it was widely anticipated in financial markets that the Federal Reserve would act to reduce interest rates in the first half of 2001. As a result, the market value of our bond portfolio increased as the year came to a close. Equities - Our equity holdings consist of a diversified portfolio of common stocks which accounted for 5% of total investments (at cost) at Dec. 31, 2000. Equity values in the United States retreated in 2000, led by declines in the technology sector, the same market sector that had driven market indices to record levels a year earlier. In 2000, the total return on our domestic equity portfolio, although negative, outperformed the leading market index. Despite the decline in equity values during the year, the $1.40 billion carrying value of our portfolio at Dec. 31, 2000 included $326 million of pretax unrealized appreciation. At the end of 1999, the pretax unrealized appreciation included in the $1.54 billion carrying value totaled $516 million. Real Estate and Mortgage Loans - Real estate ($840 million) and mortgage loans ($185 million) comprised 5% of our total property-liability investments at the end of 2000. Our real estate holdings primarily consist of commercial office and warehouse properties that we own directly or in which we have a partial interest through joint ventures. Our properties are geographically distributed throughout the United States and had an occupancy rate of 95% at year-end 2000. These investments produced pretax income of $63 million in 2000 and generated cash flows totaling $90 million. We did not make any significant real estate purchases in 2000. We acquired the portfolio of mortgage loans in the 1998 merger with USF&G. The loans, which are collateralized by income-producing real estate, produced investment income of $27 million in 2000. Net paydowns and repayments of the loans totaled $204 million in 2000. We did not originate any new loans during the year. Venture Capital - Venture capital comprised 3% of our invested assets (at cost) at the end of 2000. These private investments span a variety of industries but are concentrated in communications, business Internet, consumer technology and healthcare. In 2000, we invested $296 million in this asset class, compared with $237 million in 1999. Our portfolio produced a total pretax return on beginning of the year net assets of 52%, primarily the result of pretax realized gains totaling $554 million for the year. The combined 2000 and 1999 total return on our venture capital investments was $920 million. The carrying value of the venture capital portfolio at year-end 2000 and 1999 included unrealized appreciation of $406 million and $468 million, respectively. Securities Lending Collateral - These investments are collateral for our securities lending operations. Through our lending agent, we loan certain securities from our fixed-maturity portfolio to other approved institutions. We receive a fee from the borrower in return, as well as collateral equal to 102% of the fair value of our securities on loan. We retain full ownership of these securities and are indemnified by the lending agent in the event a borrower becomes insolvent or fails to return securities. We record securities lending collateral as an asset, with a corresponding liability for the same amount. Realized Investment Gains and Losses - The following table summarizes our property-liability operations' realized gains and losses by investment class for each of the last three years.
Year ended December 31 2000 1999 1998 (In millions) PRETAX REALIZED INVESTMENT GAINS (LOSSES) Fixed maturities $ (29) $ (19) $ 1 Equities 87 118 158 Real estate and mortgage loans 4 18 8 Venture capital 554 158 25 Other investments 8 (1) (4) ------ ------ ------ Total $ 624 $ 274 $ 188 ------ ------ ------ ------ ------ ------
Venture capital gains in 2000 and 1999 were primarily driven by sales of and distributions from investments in technology-related companies. The single largest gain in 2000, $117 million, resulted from the sale of our direct investment in Flycast Communications Corp., a leading provider of Internet direct response solutions. 2001 Investment Outlook - We do not expect our investment income to increase in 2001. Significant negative underwriting cash flows over the last several years, including premium payments totaling a combined $474 million in 2000 and 1999 related to our corporate reinsurance program, have resulted in net sales of fixed maturity investments to fund operational cash requirements. In 2001, we expect underwriting cash flows to improve due to price increases throughout our continuing operations; however, that improvement is not expected to be significant due to anticipated cash payments associated with the run-off of reserves in discontinued lines of business. With funds provided from maturing securities in 2001, our new investment purchases are expected to focus on investment-grade, taxable bonds, with additional funds allocated to our other asset classes as market conditions warrant. We expect the reduction in interest rates to have a positive impact on equity markets as the year progresses, and our equity investment activities will be responsive to opportunities that develop. We do not expect venture capital realized gains to approach 2000's record level, but we remain confident in our ability to generate superior returns in this asset class over the long-term. PROPERTY-LIABILITY UNDERWRITING Loss and Loss Adjustment Expense Reserves Our loss reserves reflect estimates of total losses and loss adjustment expenses we will ultimately have to pay under insurance policies and reinsurance treaties. These include losses that have been reported but not settled and losses that have been incurred but not reported to us ("IBNR"). Loss reserves for certain workers' compensation business and certain assumed reinsurance contracts are discounted to present value. We reduce our loss reserves for estimates of salvage and subrogation. For reported losses, we establish reserves on a "case" basis within the parameters of coverage provided in the insurance policy or reinsurance agreement. For IBNR losses, we estimate reserves using established actuarial methods. Our case and IBNR reserve estimates consider such variables as past loss experience, changes in legislative conditions, changes in judicial interpretation of legal liability and policy coverages, and inflation. We consider not only monetary increases in the cost of what we insure, but also changes in societal factors that influence jury verdicts and case law and, in turn, claim costs. Because many of the coverages we offer involve claims that may not ultimately be settled for many years after they are incurred, subjective judgments as to our ultimate exposure to losses are an integral and necessary component of our loss reserving process. We record our reserves by considering a range of estimates bounded by a high and low point. Within that range, we record our best estimate. We continually review our reserves, using a variety of statistical and actuarial techniques to analyze current claim costs, frequency and severity data, and prevailing economic, social and legal factors. We adjust reserves established in prior years as loss experience develops and new information becomes available. Adjustments to previously estimated reserves are reflected in our financial results in the periods in which they are made. After the consummation of our merger with USF&G in April 1998, we recorded a $250 million loss provision to reflect the application of The St. Paul's reserving policies to USF&G's loss reserves. Our actuaries reviewed the raw data underlying, and documentation supporting, USF&G's year-end 1997 reserve analysis and concurred with the reasonableness of USF&G's range of estimates for those reserves. However, applying their judgment and interpretation to the range, The St. Paul's actuaries, who would be responsible for setting reserve amounts for the merged entity, concluded that strengthening of the reserves would be appropriate, resulting in the $250 million adjustment. Of that provision, $35 million was allocated to the standard personal insurance operations that were sold in 1999, and that amount is included in discontinued operations for 1998. Note 8 to the financial statements, on page 59 of this report, includes a reconciliation of our beginning and ending loss and loss adjustment expense reserves for each of the years 2000, 1999 and 1998. That reconciliation shows that we have recorded reductions in the loss provision from continuing operations for claims incurred in prior years totaling $265 million, $208 million and $217 million in 2000, 1999 and 1998, respectively. In 2000, the favorable prior year loss development was widespread across lines of business with the exception of the Global Healthcare segment. In 1999, favorable prior year loss development in several lines of business, including workers' compensation and assumed reinsurance, was offset by adverse development in our Global Marine operation and certain commercial business centers. In 1998, the reduction in prior year losses was impacted by the provision to strengthen loss reserves subsequent to our merger with USF&G. In our Global Healthcare operation, while there were favorable adjustments to prior year losses in 1999 and 1998, we recorded an increase in our estimate of prior year losses in 2000. Loss activity has indicated an increase in the severity of claims incurred in the years 1995 through 1997. Accordingly, we have continued to hold a cautious view of ultimate loss provision for those years, resulting in an increase in the prior year loss provision in 2000. The favorable prior year development recorded on workers' compensation coverages in recent years reflected the impact of legal and regulatory reforms throughout the country in the early 1990's that caused us to reduce our estimate of ultimate loss costs. PROPERTY-LIABILITY UNDERWRITING Environmental and Asbestos Claims We continue to receive claims alleging injury or damage from environmental pollution or seeking payment for the cost to clean up polluted sites. We also receive asbestos injury claims arising out of product liability coverages under general liability policies. The vast majority of these claims arise from policies written many years ago. Our alleged liability for both environmental and asbestos claims is complicated by significant legal issues, primarily pertaining to the scope of coverage. In our opinion, court decisions in certain jurisdictions have tended to broaden insurance coverage beyond the intent of original insurance policies. Our ultimate liability for environmental claims is difficult to estimate because of these legal issues. Insured parties have submitted claims for losses not covered in their respective insurance policies, and the ultimate resolution of these claims may be subject to lengthy litigation, making it difficult to estimate our potential liability. In addition, variables, such as the length of time necessary to clean up a polluted site and controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of an environmental claim. Estimating our ultimate liability for asbestos claims is equally difficult. The primary factors influencing our estimate of the total cost of these claims are case law and a history of prior claim development, both of which are still developing. The following table represents a reconciliation of total gross and net environmental reserve development for each of the years in the three-year period ended Dec. 31, 2000. Amounts in the "net" column are reduced by reinsurance recoverables.
2000 1999 1998 Gross Net Gross Net Gross Net (In millions) ENVIRONMENTAL Beginning reserves $ 698 $ 599 $ 783 $ 645 $ 867 $ 677 Incurred losses 25 14 (33) 1 (16) 26 Paid losses (58) (50) (52) (47) (68) (58) ------ ------ ------ ------ ------ ------ Ending reserves $ 665 $ 563 $ 698 $ 599 $ 783 $ 645 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
The following table represents a reconciliation of total gross and net reserve development for asbestos claims for each of the years in the three-year period ended Dec. 31, 2000.
2000 1999 1998 Gross Net Gross Net Gross Net (In millions) ASBESTOS Beginning reserves $ 398 $ 298 $ 402 $ 277 $ 397 $ 279 Incurred losses 41 33 28 51 44 13 Paid losses (42) (32) (32) (30) (39) (15) ------ ------ ------ ------ ------ ------ Ending reserves $ 397 $ 299 $ 398 $ 298 $ 402 $ 277 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Our reserves for environmental and asbestos losses at Dec. 31, 2000, represent our best estimate of our ultimate liability for such losses, based on all information currently available to us. 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 our current reserves. We continue to evaluate new information and developing loss patterns, but we believe any future additional loss provisions for environmental and asbestos claims will not materially impact the results of our operations, liquidity or financial position. Total gross environmental and asbestos reserves of $1.06 billion at Dec. 31, 2000, represented approximately 6% of gross consolidated reserves of $18.20 billion. Sales surpass $1 billion again in 2000; diverse product portfolio provides stability in volatile market environment LIFE INSURANCE F&G Life Our life insurance segment consists of Fidelity and Guaranty Life Insurance Company and subsidiaries ("F&G Life"). F&G Life's products include deferred annuities (including tax-sheltered annuities and equity-indexed annuities), structured settlement annuities and immediate annuities. F&G Life also underwrites traditional and universal life insurance products. F&G Life's products are sold throughout the United States through independent agents, managing general agents, specialty brokerage firms and in selected institutional markets. Highlights of F&G Life's financial performance for the last three years were as follows.
Year ended December 31 2000 1999 1998 (In millions) Sales (annualized premiums) $ 1,123 $ 1,000 $ 501 Premiums and policy charges 306 187 119 Policy surrenders 435 217 207 Net investment income 354 298 276 Pretax earnings 53 66 21 Life insurance in force 17,169 12,398 10,774
F&G Life's pretax earnings in both 2000 and 1999 benefited from an increase in assets under management, driven by product sales in excess of $1 billion in both years, improved yields on investments and strong operating cash flows. These benefits were partially offset, however, by increases in product development and distribution channel expansion expenses, surrender costs and realized investment losses. Net investment income grew 19% in 2000, as a result of improved yields on an increasing asset base generated by strong cash flows. Pretax earnings in 2000 and 1999 included realized investment losses of $25 million and $9 million, respectively, which were largely attributable to impairment losses in the fixed maturities portfolio. Pretax earnings in 2000 also include $2.6 million of interest expense on an intercompany note payable to The St. Paul's property-liability operations. Excluding realized investment losses in both years and the intercompany interest in 2000, pretax earnings of $80 million in 2000 were $5 million higher than comparable 1999 earnings. After-tax earnings on a similar basis improved even more significantly over 1999 levels, reflecting the impact of F&G Life's strategy to allocate 1% of its investment portfolio to tax-favored securities. These investments, while typically contributing little or no operating earnings, lowered F&G Life's effective tax rate from 29% in 1999 to 24% in 2000. The following table shows life insurance and annuity sales (premiums and deposits) by product type and distribution system.
Year ended December 31 2000 1999 1998 (In millions) PRODUCT TYPE: Single premium deferred annuities $ 459 $ 78 $ 134 Equity-indexed annuities 307 686 209 Structured settlement annuities 177 95 49 Single premium immediate annuities 69 54 19 Tax-sheltered annuities 45 49 64 Other annuities 19 16 11 Life insurance 47 22 15 ------ ------ ------ Total $1,123 $1,000 $ 501 ------ ------ ------ ------ ------ ------ DISTRIBUTION SYSTEM: Brokerage $ 795 $ 822 $ 367 Structured settlement brokers 198 113 55 Institutional markets 66 -- -- Tax-sheltered annuity distributors 45 49 68 Other 19 16 11 ------ ------ ------ Total $1,123 $1,000 $ 501 ------ ------ ------ ------ ------ ------
The 12% increase in sales volume over 1999 resulted from growth in fixed interest rate annuity sales, which was partially offset by a decline in equity-indexed annuity ("EIA") sales. Sales of fixed interest rate annuities in 2000 continued their momentum from late 1999, as the overall level of market interest rates increased and volatility in equity markets resulted in a shift away from EIA sales. The demand for annuity products is affected by fluctuating interest rates and the relative attractiveness of alternate financial products, particularly equity-based products. Credited interest rates on EIA products are based on formulas tied to leading market indices. The significant EIA sales in 1999 were concentrated in the first half of the year and were driven by the popularity of F&G Life's first-generation portfolio of EIA products introduced in mid-1998. Traditional life insurance sales in 2000 more than doubled over 1999 sales levels, reflecting the continued success of a new term life product line launched in 1999 targeted at the mortgage protection market. This new product line was the primary factor contributing to the 38% increase in life insurance in force in 2000. Premiums and policy charges in 2000 increased 64% over 1999, resulting from growth in the sale of structured settlement annuities and life-contingent single premium immediate annuities ("SPIA"). Structured settlement annuities are sold primarily to property-liability insurers to fund the settlement of insurance claims. The continued expansion of the structured settlement program into The St. Paul's property-liability claim organization accounted for the increase in 2000 sales volume. The growth in SPIA sales resulted from an increase in marketing emphasis on this product. Policy charges from surrenders on tax-sheltered and equity-indexed annuities also contributed to the overall increase in premiums and policy charges in 2000. Sales of structured settlement annuities, annuities with life contingencies and term life insurance are recognized as premiums earned under GAAP. Investment-type contracts, however, such as our equity-indexed, deferred and tax-sheltered annuities, and our universal life-type contracts, are recorded directly to our balance sheet on a deposit accounting basis and are not recognized as premium revenue under GAAP. F&G Life manages its exposure on its EIA products by purchasing options with terms similar to the market index component to provide the same return as F&G Life guarantees to the annuity contract holder, subject to minimums guaranteed in the annuity contract. At Dec. 31, 2000, F&G Life held options with a notional amount of $1.14 billion and a market value of $32 million. Deferred annuities and universal life products are subject to surrender by policyholders. Nearly all of our surrenderable annuity policies allow a refund of the cash value balance less a surrender charge. Several products contributed to the increase in surrender activity in 2000. Surrenders on tax-sheltered annuities increased due to F&G Life's transition from one exclusive distribution partner to a new network of approximately 15 distributors. EIA surrenders have increased naturally, as a result of the significant growth in the size of the EIA book of business. F&G Life has written more than $1.2 billion of EIA business since these products were introduced in mid-1998. In addition, surrenders have increased on fixed interest rate annuities as a larger amount of these annuity policies have reached the end of their interest rate guarantee periods. 1999 vs. 1998 - Pretax earnings in 1999 grew significantly over comparable 1998 earnings, due to growth in assets under management, driven by strong product sales. In addition, an increase in interest rates favorably impacted net investment spreads in 1999 which, combined with greater estimated future gross profits, resulted in lower amortization of deferred policy acquisition costs ("DPAC"). Pretax earnings in 1998 were reduced by a $41 million writedown of DPAC and $9 million of merger-related charges. Product sales of $1 billion in 1999 doubled over the 1998 total due to the success of the EIA product first introduced in mid-1998. Premium and policy charges of $187 million grew 57% over 1998 primarily due to an increase in structured settlement annuity sales, resulting from the expansion of F&G Life's structured settlement program into The St. Paul's property-liability claim organization. Net investment income grew 8% in 1999. Outlook for 2001 - F&G Life expects the life insurance and annuity products introduced in 2000, combined with new product introductions planned in 2001, to lead to continued sales growth in 2001. F&G Life will continue to focus on innovative new product development to maintain its competitive edge. It expects to broaden the depth and penetration of its existing distribution channels, striving for a balanced mix of production. F&G Life anticipates that the continued development of its e-commerce platform, SalesLink,(SM) will lead to enhanced sales processes and service levels for its producers. Nuveen posts sixth-consecutive year of record earnings in a challenging environment ASSET MANAGEMENT The John Nuveen Company We hold a 78% interest in The John Nuveen Company ("Nuveen"), which constitutes our asset management segment. Nuveen's core businesses are asset management and the development, marketing and distribution of investment products and services for advisors to the affluent and high-net-worth market segments. Nuveen provides investment products, including individually managed accounts, mutual funds, exchange-traded funds and defined portfolios through registered representatives associated with unaffiliated firms including broker-dealers, commercial banks, affiliates of insurance providers, financial planners, accountants, consultants and investment advisors. Nuveen is listed on the New York Stock Exchange, trading under the symbol "JNC." The following table summarizes Nuveen's key financial data for the last three years.
Year ended December 31 2000 1999 1998 (In millions) Revenues $ 376 $ 353 $ 308 Expenses 201 193 171 -------- -------- -------- Pretax income 175 160 137 Minority interest (40) (37) (33) -------- -------- -------- The St. Paul's share of pretax income $ 135 $ 123 $ 104 -------- -------- -------- -------- -------- -------- Assets under management $62,011 $59,784 $55,267
Nuveen provides consultative services to financial advisors on managed assets for fee-based customers and structured investment services for transaction-based advisors. These activities generate two principal sources of revenue: ongoing advisory fees earned on assets under management, including individually managed accounts, mutual funds and exchange-traded funds; and distribution revenues earned upon the sale of defined portfolio and mutual fund products. In 2000, an increase in average assets under management resulted in a 3% increase in advisory fee revenue, while a significant increase in defined portfolio sales drove a 40% increase in distribution revenue. These increases were partially offset by a decline in revenue attributable to Nuveen's sale of its investment banking operations in the third quarter of 1999. The increase in expenses over 1999 was largely due to advertising expenses associated with Nuveen's new brand awareness campaign. Expenses in total, however, increased at a slower rate than revenues in 2000. Gross sales of investment products of $10.8 billion in 2000 were 23% lower than 1999 sales of $14.1 billion. Managed account sales declined in 2000, primarily due to investors' shifting from large-cap core growth stocks to aggressive growth stocks in the first half of the year and concerns about market volatility in the second half of the year. Tax-exempt municipal mutual fund sales also declined in 2000 as a result of an increase in interest rates, which made higher-yielding taxable securities more attractive to investors. Defined portfolio sales of $4.0 billion, however, grew 52% over 1999, driven by increased demand for technology and other sector products, as well as the success of Nuveen's Peroni Mid-Year and Top Ten trusts, which together generated $900 million of new sales by the end of the year. Nuveen's consolidated net flows (equal to the sum of sales, reinvestments and exchanges less redemptions) totaled $4.7 billion in 2000, compared with $9.6 billion in 1999. At the end of 2000, managed assets consisted of $28.4 billion of exchange-traded funds, $21.7 billion of managed accounts and $11.9 billion of mutual funds. Municipal securities accounted for 66% of assets under management at the end of 2000, unchanged from Dec. 31, 1999. Including defined portfolios, Nuveen managed or oversaw approximately $73 billion in assets at Dec. 31, 2000. Nuveen repurchased common shares from minority shareholders in 2000, 1999 and 1998 for total costs of $51 million, $36 million and $27 million, respectively. No shares were repurchased from The St. Paul in those years. However our percentage ownership fell from 79% in 1999 to 78% in 2000 due to Nuveen's issuance of additional shares under various stock option and incentive plans. As part of an ongoing repurchase program, Nuveen had authority from its board of directors at Dec. 31, 2000, to repurchase up to approximately 1.6 million additional common shares. 1999 vs. 1998 - In 1999, Nuveen's revenues grew 16% over 1998 as a result of an increase in average assets under management and significant growth in defined portfolio sales during the year. Gross sales of investment products of $14.1 billion in 1999 were 81% higher than 1998 sales of $7.8 billion, driven by significant additions to managed accounts and strong growth in equity defined portfolio sales. The $4.5 billion increase in assets under management at Dec. 31, 1999, compared with a year earlier, was primarily the result of an increase in net flows. Outlook for 2001 - Following the significant market volatility of 2000, Nuveen's high quality products and long-term investing discipline are expected to attract more financial advisors and investors seeking balance and consistent growth in 2001. In this environment, Nuveen anticipates renewed investor interest in individually managed accounts and exchange-traded products. In addition to new exchange-traded closed-end municipal bond funds, Nuveen expects to introduce its first equity exchange-traded product and a series of open-end exchange-traded funds that are expected to be the first in the industry to track Treasury indices. Common equity surpasses $7 billion; share repurchases continue to enhance shareholder value THE ST. PAUL COMPANIES Capital Resources Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources at the end of each of the last three years.
Year ended December 31 2000 1999 1998 (In millions) Shareholders' equity: Common equity: Common stock and retained earnings $6,481 $5,906 $5,608 Unrealized appreciation of investments and other 697 542 1,013 ------- ------- ------- Total common shareholders' equity 7,178 6,448 6,621 Preferred shareholders' equity 49 24 15 ------- ------- ------- Total shareholders' equity 7,227 6,472 6,636 Debt 1,647 1,466 1,260 Capital securities 337 425 503 ------- ------- ------- Total capitalization $9,211 $8,363 $8,399 ------- ------- ------- ------- ------- ------- Ratio of debt to total capitalization 18% 18% 15% ------- ------- ------- ------- ------- -------
Common Equity - The 11% increase in common shareholders' equity over year-end 1999 was driven by our strong net income of just under $1 billion for the year, the conversion of capital securities into common stock and an increase in the unrealized appreciation of our bond portfolio. The following summarizes the major transactions impacting our common shareholders' equity in the last three years. - - Conversion of Capital Securities - In 2000, our wholly owned subsidiary, St. Paul Capital LLC, provided notice to the holders of its $207 million, 6% Convertible Monthly Income Preferred Securities ("MIPS") that it was exercising its right to cause the conversion rights of the owners of the MIPS to expire. Each of the 4,140,000 MIPS outstanding was convertible into 1.695 shares of our common stock. The MIPS were classified on our balance sheet as "Company-obligated mandatorily redeemable preferred capital securities of subsidiaries or trusts holding solely subordinated debentures of the Company," as a separate line between liabilities and shareholders' equity. Prior to the expiration date, almost all of the MIPS holders exercised their conversion rights, resulting in the issuance of 7.0 million of our common shares and an increase to our common equity of $207 million. The remaining MIPS were redeemed for cash at $50 per security plus accumulated dividends. - - Common Share Repurchases - In 2000, we repurchased and retired 17.9 million of our common shares for a total cost of $536 million, or an average cost of approximately $30 per share. The shares repurchased in 2000 represented 8% of our total shares outstanding at the beginning of the year. In 1999, we repurchased 11.1 million shares for a total cost of $356 million (approximately $32 per share), and in 1998, our share repurchases totaled 3.8 million shares for a total cost of $135 million (approximately $35 per share). The share repurchases in each year were financed through a combination of internally generated funds and new debt issuances. Since our issuance of 66.5 million shares in April 1998 to consummate the merger with USF&G, we had repurchased and retired 32.8 million shares for a total cost of $1.03 billion through Dec. 31, 2000. - - Common Dividends - We declared common dividends totaling $232 million in 2000, $235 million in 1999 and $226 million in 1998. In February 2001, The St. Paul's board of directors increased our quarterly dividend rate to $0.28 per share, a 4% increase over the 2000 quarterly rate of $0.27 per share. We have paid dividends in every year since 1872. During those 129 years of uninterrupted dividend payments, our dividend rate has increased in 69 years, including the last 15 consecutive years. Preferred Equity - Preferred shareholders' equity consisted of the par value of the Series B preferred shares we issued to our Stock Ownership Plan (SOP) Trust, less the remaining principal balance of the SOP Trust debt. During 2000, we made $37 million in principal payments on the Trust. Debt - Total debt outstanding at the end of 2000 of $1.65 billion was 12% higher than the year-end 1999 total of $1.47 billion. During 2000, we issued $500 million of senior notes, the proceeds of which were used to repay commercial paper and for other general corporate purposes. Of the $500 million issued, $250 million bears an interest rate of 7.875% and is due in April 2005, and $250 million bears an interest rate of 8.125% and is due in April 2010. Commercial paper borrowings declined from $400 million at the end of 1999 to $138 million at Dec. 31, 2000. In addition, we repaid $46 million of floating rate notes in 2000 that had been issued by a special purpose offshore reinsurance entity we had created in 1999, and also repaid $13 million of mortgage debt associated with two of our real estate investments. At Dec. 31, 2000, medium-term notes, bearing a weighted average interest rate of 6.9%, accounted for $617 million, or 37%, of our consolidated debt outstanding. No medium-term notes matured during the year. At Dec. 31, 1999, consolidated debt outstanding was $206 million higher than the year-end 1998 total of $1.26 billion. The increase was primarily due to the issuance of additional commercial paper throughout the year, which brought the year-end 1999 outstanding balance to $400 million, compared with $257 million at Dec. 31, 1998. In addition, several of our real estate investment entities entered into variable rate borrowings in 1999 totaling $64 million, and the special purpose reinsurance entity issued the $46 million of floating rate notes. In March 1999, we purchased $34 million (principal amount) of our zero coupon convertible notes from note holders for a total cash consideration of $21 million, representing the original issue price plus the original issue discount accrued to the date of purchase. We purchased these notes at the option of the note holders. The zero coupon note repurchases, along with several medium-term note maturities totaling $20 million during the first half of the year, were primarily funded by commercial paper borrowings. Our total interest expense was $115 million in 2000, $96 million in 1999 and $75 million in 1998. Capital Securities - These securities consist of company-obligated mandatorily redeemable preferred securities issued by four business trusts wholly owned by The St. Paul. Three of the trusts, acquired in the USF&G merger, each issued $100 million of preferred securities bearing dividend rates of 8.5%, 8.47% and 8.312%, respectively. In 1999, we repurchased and retired securities from these three trusts with an aggregate principal value of $79 million, comprised of the following components: $27 million at 8.5%; $22 million at 8.47%; and $30 million at 8.312%. The repurchases were made in open market transactions and were primarily funded by commercial paper borrowings. The fourth trust was acquired in our purchase of MMI in 2000. In 1997, MMI issued $125 million of 30-year mandatorily redeemable preferred securities through MMI Capital Trust I, formed for the sole purpose of issuing those securities. The securities bear a 7.625% dividend rate and have a mandatory redemption date of Dec. 15, 2027. Our total dividend expense on capital securities was $31 million in 2000, $36 million in 1999 and $38 million in 1998. Acquisitions and Divestitures - We purchased MMI in April 2000 for approximately $206 million in cash and the assumption of $165 million of short-term debt and capital securities. The short-term debt of $45 million was retired subsequent to the acquisition. The cash portion of this transaction and the repayment of debt was financed with internally generated funds. In addition, our purchase of Pacific Select in February 2000 for approximately $37 million in cash was financed with internally generated funds. In May 2000, we completed the sale of our nonstandard auto operations for a total cash consideration of approximately $175 million (net of a $25 million dividend paid by these operations to our property-liability operations prior to closing). In September 1999, we completed the sale of our standard personal insurance operations to Metropolitan for net proceeds of approximately $272 million. Proceeds from both transactions were used for general corporate purposes. Our merger with USF&G in 1998 was a tax-free exchange accounted for as a pooling-of-interests. We issued 66.5 million of our common shares for all of the outstanding shares of USF&G. The transaction was valued at $3.7 billion, which included the assumption of USF&G's debt and capital securities. Capital Commitments - We have no current plans for major capital expenditures in 2001, other than possible additional repurchases of our common stock. If any other expenditures were to occur, they would likely involve acquisitions consistent with our specialty commercial focus. From Jan. 1, 2001, through Feb. 6, 2001, we repurchased 1.8 million common shares at a total cost of $86 million. As of Feb. 6, 2001, we had the capacity to make up to $89 million in additional share repurchases under a repurchase program authorized by our board of directors in May 2000. In February 2001, our board of directors authorized us to repurchase up to an additional $500 million of common shares in private transactions or on the open market. We made no major capital improvements during any of the last three years. THE ST. PAUL COMPANIES 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. Our underwriting operations' short-term cash needs primarily consist of paying insurance loss and loss adjustment expenses and day-to-day operating expenses. Those needs are met through cash receipts from operations, which consist primarily of insurance premiums collected and investment income. Our investment portfolio is also a source of additional liquidity, through the sale of readily marketable fixed maturities, equity securities and short-term investments, as well as longer-term investments such as real estate and venture capital holdings. After satisfying our cash requirements, excess cash flows from these underwriting and investment activities are used to build the investment portfolio and thereby increase future investment income. Cash outflows from continuing operations totaled $555 million in 2000, compared with outflows of $56 million in 1999 and cash inflows of $144 million in 1998. The deterioration in 2000 was primarily due to significant loss payments in our Reinsurance, Global Healthcare and International business segments and premium payments totaling $345 million related to our corporate reinsurance program. Our underwriting cash flows in 1999 and 1998 were negatively impacted by the reductions in written premium volume and investment receipts in our property-liability operations, as well as cash disbursements associated with our merger with USF&G and the restructuring of our commercial insurance operations. Also in 1999, we made premium payments totaling $129 million related to our corporate reinsurance program. The sale of fixed-maturity investments to fund operational cash flow requirements resulted in lower levels of investment cash flows in each of the last three years. On a long-term basis, we believe our operational cash flows in our property-liability operations will continue to benefit from the corrective pricing and underwriting actions that we have implemented over the last several years in our property-liability operations. In addition, the restructuring and expense reduction initiatives implemented in 1999 and 1998 are expected to continue to benefit our operational cash flow position. 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. We are not aware of any current recommendations by regulatory authorities that, if implemented, might have a material impact on our liquidity, capital resources or operations. THE ST. PAUL COMPANIES Exposures to Market Risk Interest Rate Risk - Our exposure to market risk for changes in interest rates is concentrated in our investment portfolio, and to a lesser extent, our debt obligations. However, changes in investment values attributable to interest rate changes are mitigated by corresponding and partially offsetting changes in the economic value of our insurance reserves and debt obligations. We monitor this exposure through periodic reviews of our asset and liability positions. Our estimates of cash flows, as well as the impact of interest rate fluctuations relating to our investment portfolio and insurance reserves, are modeled and reviewed quarterly. The following table provides principal runoff estimates by year for our Dec. 31, 2000, inventory of interest-sensitive financial instrument assets. Also provided are the weighted average interest rates associated with each year's runoff. Principal runoff projections for collateralized mortgage obligations were prepared using third-party prepayment analyses. Runoff estimates for mortgage passthroughs were prepared using average prepayment rates for the prior three months. Principal runoff estimates for callable bonds are either to maturity or to the next call date depending on whether the call was projected to be "in the money" assuming no change in interest rates. No projection of the impact of reinvesting the estimated cash flow runoff is included in the table, regardless of whether the runoff source is a short-term or long-term fixed maturity security. We have assumed that our "available for sale" securities are similar enough to aggregate those securities for purposes of this disclosure.
Weighted Principal Average December 31, 2000 Cash Flows Interest Rate (In millions) FIXED MATURITIES, SHORT-TERM INVESTMENTS AND MORTGAGE LOANS 2001 $4,376 5.7% 2002 1,981 7.2% 2003 1,916 7.3% 2004 1,686 7.8% 2005 1,773 6.5% Thereafter 10,949 6.7% ------- Total $22,681 ------- ------- Fair Value at Dec. 31, 2000 $22,089
The following table provides principal runoff estimates by year for our Dec. 31, 2000, inventory of interest-sensitive debt obligations and related weighted average interest rates by stated maturity dates.
Weighted Principal Average December 31, 2000 Cash Flows Interest Rate (In millions) MEDIUM-TERM NOTES, ZERO COUPON NOTES AND SENIOR NOTES 2001 $195 8.1% 2002 49 7.5% 2003 67 6.5% 2004 55 7.1% 2005 428 7.5% Thereafter 694 6.8% ------- Total $1,488 ------- ------- Fair Value at Dec. 31, 2000 $1,475
Foreign Currency Exposure - Our exposure to market risk for changes in foreign exchange rates is concentrated in our invested assets denominated in foreign currencies. Cash flows from our foreign operations are the primary source of funds for our purchase of these investments. We purchase these investments primarily to hedge insurance reserves and other liabilities denominated in the same currency, effectively reducing our foreign currency exchange rate exposure. At Dec. 31, 2000, approximately 7.2% of our invested assets were denominated in foreign currencies, with no individual currency accounting for more than 4% of that total. Equity Price Risk - Our portfolio of marketable equity securities, which we carry on our balance sheet at market value, has exposure to price risk. This risk is defined as the potential loss in market value resulting from an adverse change in prices. Our objective is to earn competitive relative returns by investing in a diverse portfolio of high-quality, liquid securities. Portfolio characteristics are analyzed regularly and market risk is actively managed through a variety of modeling techniques. Our holdings are diversified across industries, and concentrations in any one company or industry are limited by parameters established by senior management. Our portfolio of venture capital investments also has exposure to market risks, primarily relating to the viability of the various entities in which we have invested. These investments by their nature involve more risk than other investments, and we actively manage our market risk in a variety of ways. First, we allocate a comparatively small amount of funds to venture capital. At the end of 2000, the cost of these investments accounted for only 3% of total invested assets. Second, the investments are diversified to avoid concentration of risk in a particular industry. Third, we perform extensive research prior to investing in a new venture to gauge prospects for success. Fourth, we regularly monitor the operational results of the entities in which we have invested. Finally, we generally sell our holdings in these firms soon after they become publicly traded, thereby reducing exposure to further market risk. At Dec. 31, 2000, our marketable equity securities and venture capital investments were recorded at their fair value of $2.53 billion. A hypothetical 10% decline in each stock's price would have resulted in a $253 million impact on fair value. Equity-Indexed Annuity Products - F&G Life's equity-indexed annuity products are tied to the performance of leading market indices. Interest is credited to the equity portion of these annuities on specified policy anniversaries, based on the formulas dictated by the policy contract, and calculated using the average change in the indices during the specified period (one or two years). F&G Life hedges its exposure by purchasing options with terms similar to the index component to provide it with the same return as it guarantees to the annuity contract holder, subject to minimums guaranteed in the annuity contract. At Dec. 31, 2000, F&G Life held options with a notional amount of $1.14 billion, with a market value of $32 million. THE ST. PAUL COMPANIES Impact of Accounting Pronouncements to Be Adopted in the Future In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which amended SFAS No. 133 to make it effective for all quarters of fiscal years beginning after June 15, 2000, and prohibits retroactive application to financial statements of prior periods. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," as an additional amendment to SFAS No. 133, to address a limited number of issues causing implementation difficulties. We intend to implement the provisions of SFAS No. 133, as amended, in the first quarter of 2001. Our property-liability operations currently have limited involvement with derivative instruments, primarily for purposes of hedging against fluctuations in market indices, foreign currency exchange rates and interest rates. Our life insurance operation purchases options to hedge its obligation to pay credited rates on equity-indexed annuity products. We expect the impact of adoption to be immaterial to our financial position and results of operations for the period of adoption. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125." The Statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it retains most of the provisions of SFAS No. 125 without reconsideration. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, with the collateral and disclosure requirements effective for fiscal years ending after Dec. 15, 2000. We intend to implement SFAS No. 140 in the periods during which its provisions become effective, and we expect the impact of adoption to be immaterial to our financial position and results of operations for future periods. 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 actions announced in recent years. In light of the risks and uncertainties inherent in future projections, many of which are beyond our control, actual results could differ materially from those in forward-looking statements. These statements should not be regarded as a representation that anticipated events will occur or that expected objectives will be achieved. Risks and uncertainties include, but are not limited to, the following: competitive considerations, including the ability to implement price increases and possible actions by competitors; general economic conditions including changes in interest rates and the performance of financial markets; changes in domestic and foreign laws, regulations and taxes; changes in the demand for, pricing of, or supply of insurance or reinsurance; catastrophic events of unanticipated frequency or severity; loss of significant customers; judicial decisions and rulings; 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. BAR GRAPHS + PIE CHART INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE (In dollars) Record realized investment gains, improved underwriting results in our property-liability operations and earnings growth at The John Nuveen Company all contributed to the solid increase in our earnings in 2000.
96 97 98 99 00 $4.07 4.22 0.78 3.07 4.32
COMBINED RATIO The improvement in our 2000 combined ratio primarily reflects the progress we've made in reducing insurance loss costs and improving operational efficiencies.
96 97 98 99 00 Loss Ratio 68.9 69.8 82.2 72.9 70.0 Expense Ratio 31.9 33.5 35.2 35.0 34.8 ----- ----- ----- ----- ----- 100.8 103.3 117.4 107.9 104.8
NET INVESTMENT INCOME (Dollars in millions) Our purchase of MMI in 2000 added approximately $1.1 billion of high-quality bonds to our property-liability investment portfolio. Investment income on those bonds, coupled with higher yields on new investments, served to substantially offset a decline in investment income resulting from the sale of bonds during the year to fund a portion of our operational cash needs.
96 97 98 99 00 $1,234 1,319 1,293 1,256 1,247
PROPERTY-LIABILITY BOND PORTFOLIO RATINGS Our high-quality bond portfolio produced pretax investment income of $1.2 billion in 2000. Taxable securities, which comprised 68% of our portfolio at year-end 2000, have accounted for the majority of new bond purchases in recent years.
AAA AA A BBB Other 51% 18% 16% 9% 6%
COMMON SHAREHOLDERS' EQUITY (Dollars in billions) Our strong net income of just under $1 billion in 2000 pushed equity past the $7 billion mark at the end of the year -- a record high for The St. Paul.
96 97 98 99 00 $5.6 6.6 6.6 6.4 7.2
TOTAL CAPITALIZATION (Dollars in billions) A strong capital base and conservative levels of debt have long been a hallmark of The St. Paul, providing the flexibility to respond to new opportunities that emerge in the marketplace.
96 97 98 99 00 Debt $1.2 1.3 1.3 1.5 1.6 Redeemable Preferred Securities and Equity 6.1 7.1 7.1 6.9 7.6 --- --- --- --- --- $7.3 8.4 8.4 8.4 9.2
DIVIDENDS PAID PER COMMON SHARE (In dollars) We have paid a common dividend every year since 1872; in 69 of those years, including each of the last 15, we've increased our dividend.
96 97 98 99 00 $0.86 0.925 0.985 1.03 1.07
SHAREHOLDER INFORMATION CORPORATE PROFILE The St. Paul is a group of companies providing commercial property-liability and life insurance and nonlife reinsurance products and services worldwide. YOUR DIVIDENDS A quarterly dividend of $0.28 per share was declared on Feb. 6, 2001, payable April 17, 2001, to shareholders of record as of March 31, 2001. Dividends have been paid every year since 1872. During those 129 years of uninterrupted dividend payments, total payments have been increased in 69 years. The chart at the lower right contains dividend information for 2000 and 1999. AUTOMATIC DIVIDEND REINVESTMENT PROGRAM This program provides a convenient way for shareholders to increase their holding of company stock. Approximately 55 percent of shareholders of record participate. An explanatory brochure and enrollment card may be obtained by calling our stock transfer agent -- Wells Fargo Bank Minnesota, N.A. at 888-326-5102, or contact them at the address below. STOCK TRANSFER AGENT AND REGISTRAR For address changes, dividend checks, direct deposits of dividends, account consolidations, registration changes, lost stock certificates, stock holdings and the Dividend Reinvestment Program, please contact: Wells Fargo Bank Minnesota, N.A. Shareowner Services Department P.O. Box 64854 Saint Paul, MN 55164-0854 Telephone: 888-326-5102 www.wellsfargo.com/com/shareowner_services STOCK TRADING The company's stock is traded nationally on the New York Stock Exchange, where it is assigned the symbol SPC. The stock is also listed on the London Stock Exchange under the symbol SPA. The number of holders of record, including individual owners, of our common stock was 18,470 as of Feb. 1, 2001. Options on the company's stock trade on the Chicago Board Options Exchange under the symbol SPQ. ANNUAL SHAREHOLDERS' MEETING The annual shareholders' meeting will be at 2:00 p.m., Tuesday, May 1, 2001, at the corporate headquarters, 385 Washington Street, Saint Paul, Minn. A proxy statement will be sent around March 30 to each shareholder of record on March 15, 2001. FORM 10-K AVAILABLE The Form 10-K report filed with the Securities and Exchange Commission is available without charge to shareholders upon request. Write to our corporate secretary: Bruce Backberg, The St. Paul Companies, 385 Washington Street, Saint Paul, MN 55102. ADDITIONAL INFORMATION For additional investor relations information, shareholders may contact Laura Gagnon, vice president - finance and investor relations at (651) 310-7696. Or, general information about the company is available on our Web site (www.stpaul.com). STOCK PRICE AND DIVIDEND RATE The table below sets forth the amount of cash dividends declared per share and the high and low closing sales prices of company stock for each quarter during the past two years.
Cash Dividend 2000 High Low Declared 1st Quarter $34 1/4 $21 3/4 $0.27 2nd Quarter 39 3/16 29 7/8 0.27 3rd Quarter 50 5/8 34 5/8 0.27 4th Quarter 56 3/8 44 1/16 0.27
Cash dividend paid in 2000 was $1.07.
Cash Dividend 1999 High Low Declared 1st Quarter $35 3/4 $28 9/16 $0.26 2nd Quarter 36 3/4 28 11/16 0.26 3rd Quarter 33 3/4 27 1/2 0.26 4th Quarter 36 1/16 25 9/16 0.26
Cash dividend paid in 1999 was $1.03. EX-21 11 0011.txt EXHIBIT 21 EXHIBIT 21 Subsidiaries of The St. Paul Companies, Inc. State or - ------------------------------------------- Other Jurisdiction of Name Incorporation - ---- --------------- (1) St. Paul Fire and Marine Insurance Company Minnesota Subsidiaries: (i) St. Paul Mercury Insurance Co. Minnesota (ii) St. Paul Guardian Insurance Co. Minnesota (iii) The St. Paul Insurance Co. Texas (iv) The St. Paul Insurance Co. of Illinois Illinois (v) St. Paul Fire and Casualty Insurance Co. Wisconsin (vi) St. Paul Property and Casualty Insurance Co. Nebraska (vii) St. Paul Lloyds Holdings, Inc. Texas (viii) St. Paul Management Services, Inc. Minnesota (ix) Seaboard Surety Company New York Subsidiary: (a) Northern Indemnity, Inc. Canada (x) St. Paul Insurance Co. of North Dakota North Dakota (xi) St. Paul Specialty Underwriting, Inc. Delaware Subsidiaries: (a) St. Paul Surplus Lines Insurance Co. Delaware (b) Athena Assurance Co. Minnesota (c) St. Paul Medical Liability Insurance Co. Minnesota (d) Octagon Risk Services, Inc. Minnesota (xii) Northbrook Holdings, Inc. Delaware Subsidiaries: (a) Discover Property & Casualty Insurance Co. Illinois (b) Northbrook Property and Casualty Insurance Co. Illinois (xiii) St. Paul Venture Capital IV, L.L.C. Delaware (xiv) St. Paul Venture Capital V, L.L.C. Delaware (xv) St. Paul Properties, Inc. Delaware Subsidiaries: (a) St. Paul Interchange, Inc. Minnesota (b) 350 Market Street, Inc. Minnesota (xvi) United States Fidelity and Guaranty Co. Maryland Subsidiaries: (a) Fidelity and Guaranty Insurance Underwriters, Inc. Wisconsin (b) Fidelity and Guaranty Insurance Co. Iowa (c) USF&G Insurance Company of Mississippi Mississippi (d) Discover Specialty Insurance Company Illinois (e) USF&G Specialty Insurance Co. Maryland (f) USF&G Business Insurance Co. Maryland (g) USF&G Family Insurance Co. Maryland (h) GeoVera Insurance Co. Maryland (i) Charter House Underwriters, Inc. Maryland (j) Afianzadora Insurgentes, S.A. De C.V. Mexico (k) F&G Specialty Insurance Services, Inc. California (l) Discover Re Managers, Inc. Delaware Subsidiaries: (i) Discovery Reinsurance Co. Indiana (ii) Discovery Managers, Ltd. Indiana (xvii) American Continental Insurance Company Missouri Subsidiary: (a) American Continental Life Insurance Company Missouri (xviii) Unionamerica Holdings plc United Kingdom (xviv) Fidelity and Guaranty Life Insurance Co. Maryland Subsidiary: (a) Thomas Jefferson Life Insurance Co. New York (2) The John Nuveen Company* Delaware Subsidiaries: (i) Nuveen Investments Delaware Subsidiaries: (a) Nuveen Advisory Corp. Delaware (b) Nuveen Institutional Advisory Corp. Delaware (ii) Nuveen Asset Management, Inc. Delaware (iii) Rittenhouse Financial Services, Inc. Delaware (iv) Nuveen Senior Loan Asset Management, Inc. Delaware (3) St. Paul Re, Inc. New York (4) Camperdown Corporation Delaware (5) St. Paul Venture Capital, Inc. Delaware (6) St. Paul London Properties, Inc. Minnesota (7) St. Paul London Investments, Inc. Minnesota (8) St. Paul Multinational Holdings, Inc. Delaware Subsidiaries: (i) St. Paul Insurance Company (S.A.) Limited South Africa (ii) Seguros St. Paul de Mexico, S.A. de C.V. Mexico (iii) Botswana Insurance Company Limited Botswana (iv) St. Paul Argentina Compania De Seguros S.A. Argentina (v) SPC Insurance Agency, Inc. Minnesota (9) St. Paul Bermuda Holdings, Inc. Delaware Subsidiaries: (i) St. Paul (Bermuda), Ltd. Bermuda (ii) St. Paul Re (Bermuda), Ltd. Bermuda (iii) Captiva, Ltd. Bermuda (10)St. Paul Holdings Limited United Kingdom Subsidiaries: (i) St. Paul Reinsurance Company Limited United Kingdom (ii) St. Paul International Insurance Company Limited United Kingdom (iii) St. Paul Insurance Espana Seguros Y Reaseguros, S.A. Spain (iv) New World Insurance Company Ltd. Guernsey (v) Lesotho National Insurance Holdings Limited Lesotho (vi) St. Paul Syndicate Holdings, Ltd. United Kingdom Subsidiary: (i) F&G Overseas, Ltd. Cayman Islands (11) Camperdown UK Limited United Kingdom (12) USF&G Financial Services Corporation Maryland (13) Mountain Ridge Insurance Co. Vermont (14) St. Paul Aviation Inc. Minnesota *The John Nuveen Company is a majority-owned subsidiary jointly owned by The St. Paul, which holds a 65% interest, and Fire and Marine, which holds a 13% interest. The remaining 22% is publicly held. EX-23 12 0012.txt EXHIBIT 23(A) EXHIBIT 23(a) CONSENT OF INDEPENDENT AUDITORS The Board of Directors The St. Paul Companies, Inc.: We consent to incorporation by reference in the Registration Statements on Form S-8 (SEC File No. 33-15392, No. 33-23446, No. 33- 23948, No. 33-24220, No. 33-24575, No. 33-26923, No. 33-49273, No. 33- 56987, No. 333-01065, No. 333-22329, No. 333-25203, No. 333-28915, No. 333-48121, No. 333-50941, No. 333-50943 and No. 333-67983), and Form S-3 (SEC File No. 333-44122) of The St. Paul Companies, Inc., of our reports dated January 23, 2001, relating to the consolidated balance sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2000, and related schedules I through V, which reports appear or are incorporated by reference in the December 31, 2000 annual report on Form 10-K of The St. Paul Companies, Inc. Minneapolis, Minnesota /s/ KPMG LLP March 28, 2001 -------- KPMG LLP EX-24 13 0013.txt EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned, a director of The St. Paul Companies, Inc., a Minnesota corporation ("The St. Paul"), do hereby make, nominate and appoint John A. MacColl and Bruce A. Backberg, or either of them, to be my attorney-in-fact, with full power and authority to sign on my behalf a Form 10-K for the year ended December 31, 2000, to be filed by The St. Paul with the Securities and Exchange Commission, and any amendments thereto, and shall have the same force and effect as though I had manually signed the Form 10-K or amendments. Dated: February 6, 2001 Signature: /s/ H. Furlong Baldwin ---------------- ---------------------- Name: H. Furlong Baldwin Dated: February 6, 2001 Signature: /s/ John H. Dasburg ---------------- ------------------- Name: John H. Dasburg Dated: February 6, 2001 Signature: /s/ W. John Driscoll ---------------- -------------------- Name: W. John Driscoll Dated: February 6, 2001 Signature: /s/ Kenneth M. Duberstein ---------------- ------------------------- Name: Kenneth M. Duberstein Dated: February 6, 2001 Signature: /s/ Pierson M. Grieve ---------------- --------------------- Name: Pierson M. Grieve Dated: February 6, 2001 Signature: /s/ Thomas R. Hodgson ---------------- --------------------- Name: Thomas R. Hodgson Dated: February 6, 2001 Signature: /s/ David G. John ---------------- ----------------- Name: David G. John Dated: February 6, 2001 Signature: /s/ William H. Kling ---------------- -------------------- Name: William H. Kling Dated: February 6, 2001 Signature: /s/ Bruce K. MacLaury ---------------- --------------------- Name: Bruce K. MacLaury Dated: February 6, 2001 Signature: /s/ Glen D. Nelson ---------------- ------------------ Name: Glen D. Nelson Dated: February 6, 2001 Signature: /s/ Anita M. Pampusch ---------------- --------------------- Name: Anita M. Pampusch Dated: February 6, 2001 Signature: /s/ Gordon M. Sprenger ---------------- ---------------------- Name: Gordon M. Sprenger -----END PRIVACY-ENHANCED MESSAGE-----