UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
or
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File Number 001-10898
---------
THE ST. PAUL COMPANIES, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
------------------------------ -----------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
385 Washington St., Saint Paul, MN 55102
---------------------------------- ---------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (651) 310-7911
-------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
The number of shares of the Registrant's Common Stock, without par
value, outstanding at May 6, 2003, was 227,582,261.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION -------
Consolidated Statements of Income (Unaudited),
Three Months Ended March 31, 2003 and 2002 3
Consolidated Balance Sheets, March 31, 2003
(Unaudited) and December 31, 2002 4
Consolidated Statements of Shareholders' Equity,
Three Months Ended March 31, 2003
(Unaudited) and Twelve Months Ended
December 31, 2002 6
Consolidated Statements of Comprehensive Income
(Unaudited), Three Months Ended March 31, 2003
and 2002 7
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 2003 and 2002 8
Notes to Consolidated Financial Statements
(Unaudited) 9
Forward-Looking Statement Disclosure and Certain Risks 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 30
Qualitative and Quantitative Disclosures
about Market Risk 58
Controls and Procedures 58
PART II. OTHER INFORMATION
Item 1 through Item 6 59
Signatures 60
Certifications 61
EXHIBIT INDEX 63
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
------ --------------------
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited
For the three months ended March 31, 2003 and 2002
(In millions, except per share data)
2003 2002
------ ------
Revenues
Premiums earned $ 1,729 $ 1,958
Net investment income 281 293
Asset management 102 94
Realized investment losses (39) (38)
Other 40 27
------ ------
Total revenues 2,113 2,334
------ ------
Expenses
Insurance losses and loss
adjustment expenses 1,132 1,393
Policy acquisition expenses 407 433
Operating and administrative
expenses 323 312
------ ------
Total expenses 1,862 2,138
------ ------
Income from continuing
operations before cumulative
effect of accounting change
and income taxes 251 196
Income tax expense 70 48
------ ------
Income from continuing
operations before
cumulative effect of
accounting change 181 148
Cumulative effect of
accounting change, net of taxes - (6)
------ ------
Income from continuing
operations 181 142
Discontinued operations:
Loss on disposal, net of taxes - (9)
------ ------
Loss from discontinued
operations, net of taxes - (9)
------ ------
Net income $ 181 $ 133
====== ======
Basic earnings per share:
Income from continuing operations
before cumulative effect of
accounting change $ 0.78 $ 0.69
Cumulative effect of accounting
change, net of taxes - (0.03)
Loss from discontinued operations,
net of taxes - (0.04)
------ ------
Net income $ 0.78 $ 0.62
====== ======
Diluted earnings per share:
Income from continuing operations
before cumulative effect of
accounting change $ 0.75 $ 0.67
Cumulative effect of accounting
change, net of taxes - (0.03)
Loss from discontinued operations,
net of taxes - (0.04)
------ ------
Net income $ 0.75 $ 0.60
====== ======
Dividends declared on common stock $ 0.29 $ 0.29
====== ======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2003 (unaudited) and December 31, 2002
(In millions)
2003 2002
Assets ------- -------
Investments:
Fixed income $ 16,774 $ 17,188
Real estate and mortgage loans 866 874
Venture capital 545 581
Equities 384 394
Securities on loan 794 806
Other investments 779 738
Short-term investments 1,609 2,152
------- -------
Total investments 21,751 22,733
Cash 280 315
Reinsurance recoverables:
Unpaid losses 7,405 7,777
Paid losses 926 523
Ceded unearned premiums 843 813
Receivables:
Underwriting premiums 2,725 2,711
Interest and dividends 248 247
Other 182 170
Deferred policy acquisition costs 651 532
Deferred income taxes 1,332 1,267
Office properties and equipment 438 459
Goodwill and intangible assets 1,022 1,013
Other assets 2,229 1,399
------- -------
Total Assets $ 40,032 $ 39,959
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
March 31, 2003 (unaudited) and December 31, 2002
(In millions)
2003 2002
------- -------
Liabilities
Insurance reserves:
Losses and loss adjustment
expenses $21,339 $ 22,626
Unearned premiums 4,114 3,802
------- -------
Total insurance reserves 25,453 26,428
Debt 2,664 2,713
Payables:
Reinsurance premiums 982 1,010
Accrued expenses and other 945 963
Securities lending collateral 810 822
Other liabilities 2,389 1,388
------- -------
Total Liabilities 33,243 33,324
------- -------
Company-obligated mandatorily
redeemable preferred securities of
trusts holding solely subordinated
debentures of the company 889 889
------- -------
Shareholders' Equity
Preferred:
Stock Ownership Plan-
convertible preferred stock 103 105
Guaranteed obligation -
Stock Ownership Plan (33) (40)
------- -------
Total Preferred
Shareholders' Equity 70 65
------- -------
Common:
Common stock 2,624 2,606
Retained earnings 2,577 2,473
Accumulated other comprehensive
income, net of taxes:
Unrealized appreciation
of investments 678 671
Unrealized loss on foreign
currency translation (50) (68)
Unrealized gain (loss)
on derivatives 1 (1)
------- -------
Total accumulated
other comprehensive income 629 602
------- -------
Total Common
Shareholders' Equity 5,830 5,681
------- -------
Total Shareholders' Equity 5,900 5,746
------- -------
Total Liabilities,
Redeemable Preferred
Securities of Trusts and
Shareholders' Equity $ 40,032 $ 39,959
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended March 31, 2003 (unaudited) and
Twelve Months Ended December 31, 2002
(In millions)
2003 2002
------- -------
Preferred Shareholders' Equity
Stock Ownership Plan -
convertible preferred stock:
Beginning of period $ 105 $ 111
Redemptions during the period (2) (6)
------- -------
End of period 103 105
------- -------
Guaranteed obligation -
Stock Ownership Plan:
Beginning of period (40) (53)
Principal payments 7 13
------- -------
End of period (33) (40)
------- -------
Total Preferred
Shareholders' Equity 70 65
------- -------
Common Shareholders' Equity:
Common stock:
Beginning of period 2,606 2,192
Stock issued:
Net proceeds from stock offering - 413
Stock incentive plans 14 32
Present value of equity unit
forward purchase contracts - (46)
Preferred shares redeemed 4 13
Other - 2
------- -------
End of period 2,624 2,606
------- -------
Retained earnings:
Beginning of period 2,473 2,500
Net income 181 218
Dividends declared on
common stock (66) (252)
Dividends declared on
preferred stock, net of taxes (2) (9)
Reacquired common shares (1) -
Deferred compensation -
restricted stock (8) (5)
Tax benefit on employee stock
options, and other changes 2 28
Premium on preferred shares redeemed (2) (7)
------- -------
End of period 2,577 2,473
------- -------
Unrealized appreciation on
investments, net of taxes:
Beginning of period 671 442
Change during the period 7 229
------- -------
End of period 678 671
------- -------
Unrealized loss on foreign
currency translation, net of taxes:
Beginning of period (68) (76)
Currency translation adjustments 18 8
------- -------
End of period (50) (68)
------- -------
Unrealized gain (loss) on
derivatives, net of taxes:
Beginning of period (1) (2)
Change during the period 2 1
------- -------
End of period 1 (1)
------- -------
Total Common
Shareholders' Equity 5,830 5,681
------- -------
Total Shareholders' Equity $ 5,900 $ 5,746
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2003 and 2002
(Unaudited)
(In millions)
2003 2002
------- -------
Net income $ 181 $ 133
Other comprehensive income
(loss), net of taxes:
Change in unrealized
appreciation on investments 7 (118)
Change in unrealized loss on
foreign currency translation 18 4
Change in unrealized loss on
derivatives 2 -
------- -------
Other comprehensive
income (loss) 27 (114)
------- -------
Comprehensive income $ 208 $ 19
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002
(Unaudited)
(In millions)
2003 2002
Operating Activities ------- -------
Net income $ 181 $ 133
Adjustments:
Loss from discontinued operations - 9
Change in property-liability
insurance reserves (1,084) 97
Change in reinsurance balances 92 (26)
Change in deferred acquisition costs (117) (30)
Change in insurance premiums
receivable (4) (122)
Change in accounts payable
and accrued expenses (124) (96)
Change in income taxes
payable/refundable 82 46
Realized investment losses 39 38
Provision for federal
deferred tax expense (benefit) (63) 3
Depreciation and amortization 23 21
Cumulative effect of accounting change - 6
Other 70 17
------- -------
Net Cash Provided (Used)
by Operating Activities (905) 96
------- -------
Investing Activities
Net sales of short-term investments 533 504
Purchases of other investments (819) (2,419)
Proceeds from sales and
maturities of other investments 1,333 1,790
Change in open security transactions (21) (29)
Purchase of office property
and equipment (11) (16)
Sales of office property and equipment - 1
Acquisitions, net of cash acquired (3) (59)
Other 5 95
------- -------
Net Cash Provided (Used)
by Continuing Operations 1,017 (133)
Net Cash Used by
Discontinued Operations (15) (4)
------- -------
Net Cash Provided (Used)
by Investing Activities 1,002 (137)
------- -------
Financing Activities
Dividends paid on common and
preferred stock (68) (60)
Proceeds from issuance of debt 145 498
Repayment of debt (202) (368)
Subsidiary's repurchase of common shares (14) (57)
Stock options exercised and other 3 64
------- -------
Net Cash Provided (Used)
by Financing Activities (136) 77
------- -------
Effect of exchange rate changes
on cash 4 (2)
------- -------
Increase (decrease) in cash (35) 34
Cash at beginning of period 315 151
------- -------
Cash at end of period $ 280 $ 185
======= =======
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
March 31, 2003
Note 1 - Basis of Presentation
------------------------------
The financial statements include The St. Paul Companies, Inc. and
subsidiaries ("The St. Paul" or "the Company"), and have been
prepared in conformity with United States generally accepted
accounting principles ("GAAP").
These consolidated financial statements rely, in part, on
estimates. Our most significant estimates are those relating to
our reserves for losses and loss adjustment expenses. We
continually review our estimates and make adjustments as
necessary, but actual results could turn out to be significantly
different from what we expected when we made these estimates.
With respect to those underwriting lines of business that we have
placed in runoff, we believe the process of estimating required
reserves for losses and loss adjustment expenses has an increased
level of risk and uncertainty due to regulatory and other
business considerations. In the opinion of management, all
necessary adjustments, consisting of normal recurring
adjustments, have been reflected for a fair presentation of the
results of operations, financial position and cash flows in the
accompanying unaudited consolidated financial statements. The
results for the period are not necessarily indicative of the
results to be expected for the entire year.
Reference should be made to the "Notes to Consolidated Financial
Statements" in our annual report to shareholders for the year
ended Dec. 31, 2002. The amounts in those notes have not changed
materially except as a result of transactions in the ordinary
course of business or as otherwise disclosed in these notes.
In the first quarter of 2003, we eliminated the one-quarter
reporting lag for our operations at Lloyd's, the impact of which
is discussed in more detail in Note 7 of this report.
Some amounts in the 2002 consolidated financial statements have
been reclassified to conform to the 2003 presentation. In
particular, we reclassified certain commissions in our operations
at Lloyd's, which is discussed in more detail in Note 7 of this
report. These reclassifications had no effect on net income,
comprehensive income or shareholders' equity, as previously
reported.
New Accounting Policy - Goodwill and Intangible Assets
------------------------------------------------------
In the first quarter of 2002, we began implementing the
provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets," which established financial accounting and reporting for
acquired goodwill and other intangible assets. The statement
changed prior accounting practice in the way intangible assets
with indefinite useful lives, including goodwill, are tested for
impairment on an annual basis. Generally, it also required that
those assets meeting the criteria for classification as
intangible with finite useful lives be amortized to expense over
those lives, while intangible assets with indefinite useful lives
and goodwill are not to be amortized. In the second quarter of
2002, we completed an evaluation for impairment of our recorded
goodwill in accordance with the provisions of SFAS No. 142. That
evaluation concluded that none of our goodwill was impaired. In
connection with our reclassification of certain assets previously
accounted for as goodwill to other intangible assets in 2002, we
established a deferred tax liability of $6 million in the second
quarter of 2002. That provision was classified as a cumulative
effect of accounting change effective as of January 1, 2002. In
accordance with SFAS No. 142, we restated our previously reported
results for the first quarter of 2002, reducing net income for
that period from the originally reported $139 million, or $0.63
per common share (diluted) to $133 million, or $0.60 per common
share (diluted).
We will evaluate our goodwill for impairment on an annual basis.
If an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its
carrying amount, we will test for impairment between annual
tests.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation (continued)
------------------------------------------
Stock Option Accounting
-----------------------
We follow the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
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 utilizing the "intrinsic value method"
described in that literature. We also follow the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" for our option plans, as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure; an amendment of FASB Statement No. 123". These
require 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 those
Statements.
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.
Three Months
Ended March 31
----------------
(in millions, except per share data) 2003 2002
---------------------------------- ----- -----
Net income
As reported* $ 181 $ 133
Less: Additional stock-
based employee compensation expense
determined under fair value-based
method for all awards, net of
related tax effects (10) (7)
----- -----
Pro forma $ 171 $ 126
===== =====
Basic earnings per common share
-------------------------------
As reported $ 0.78 $ 0.62
===== =====
Pro forma $ 0.74 $ 0.58
===== =====
Diluted earnings per common share
---------------------------------
As reported $ 0.75 $ 0.60
===== =====
Pro forma $ 0.72 $ 0.57
===== =====
*As reported net income included $1 million and $3 million of
stock-based compensation expenses, net of related tax benefits,
for the first quarters of 2003 and 2002, respectively.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 2 - Earnings Per Common Share
----------------------------------
The following table provides the calculation of our earnings per
common share for the three months ended March 31, 2003 and 2002:
(in millions, except per share data) 2003 2002
---------------------------------- ---- ----
Earnings
Basic:
Net income, as reported $181 $133
Preferred stock dividends,
net of taxes (2) (2)
Premium on preferred
shares redeemed (2) (3)
---- ----
Net income available to
common shareholders $177 $128
==== ====
Diluted:
Net income available to
common shareholders $177 $128
Dilutive effect of affiliates (1) -
Effect of dilutive securities:
Convertible preferred stock 2 2
Zero coupon convertible notes 1 1
---- ----
Net income available to
common shareholders $179 $131
==== ====
Common Shares
Basic:
Weighted average common
shares outstanding 227 208
==== ====
Diluted:
Weighted average common
shares outstanding 227 208
Effect of dilutive securities:
Stock options 1 3
Convertible preferred stock 6 6
Zero coupon convertible notes 2 3
Equity unit stock
purchase contracts 1 -
---- ----
Total 237 220
==== ====
Earnings per Common Share
Basic $0.78 $0.62
==== ====
Diluted $0.75 $0.60
==== ====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 - Investments
--------------------
Investment Activity. Following is a summary of our investment
purchases, sales and maturities for continuing operations.
Three Months
Ended March 31
----------------
(in millions) 2003 2002
----------- ----- -----
Purchases:
Fixed income $ 568 $1,987
Equities 214 385
Real estate and mortgage loans - 3
Venture capital 30 37
Other investments 7 7
----- -----
Total purchases 819 2,419
----- -----
Proceeds from sales and
maturities:
Fixed income 1,086 1,263
Equities 214 500
Real estate and mortgage loans 8 13
Venture capital 9 12
Other investments 16 2
----- -----
Total sales and maturities 1,333 1,790
----- -----
Net purchases (sales) $ (514) $ 629
===== =====
Change in Unrealized Appreciation. The change in unrealized
appreciation or depreciation of investments recorded in common
shareholders' equity and other comprehensive income was as
follows:
Three Months Twelve Months
Ended Ended
March 31 December 31
------------ -------------
(in millions) 2003 2002
----------- ------------ -------------
Fixed income $ 20 $ 446
Venture capital (21) (88)
Equities 12 (17)
Other (3) 8
------ ------
Total change in pretax
unrealized appreciation 8 349
Change in deferred taxes (1) (120)
------ ------
Total change in unrealized
appreciation, net of taxes $ 7 $ 229
====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 4 - Income Taxes
---------------------
The components of income tax expense (benefit) on continuing
operations were as follows:
Three Months
Ended March 31
----------------
(in millions) 2003 2002
----------- ----- -----
Income tax expense (benefit):
Federal current expense $ 128 $ 38
Federal deferred expense (benefit) (63) 3
----- -----
Total federal income tax expense 65 41
Foreign income tax expense 3 4
State income tax expense 2 3
----- -----
Total income tax expense on
continuing operations $ 70 $ 48
===== =====
Note 5 - Commitments, Contingencies and Guarantees
--------------------------------------------------
Commitments - We have long-term commitments to fund venture
capital investments through one of our subsidiaries, St. Paul
Venture Capital VI, LLC, as well as through new and existing
partnerships and certain other venture capital entities. During
the first quarter of 2003, payments made in the ordinary course
of funding these venture capital investments reduced our total
future estimated obligations by $31 million from year-end 2002.
For further information regarding these and other commitments,
refer to Note 17 on pages 82 to 84 of our 2002 Annual Report to
Shareholders.
Contingencies - In the ordinary course of conducting business,
we (and certain of our subsidiaries) have been named
as defendants in various lawsuits. Some of these lawsuits
attempt to establish liability under insurance contracts issued
by our underwriting operations, including but not limited to
liability under environmental protection laws and for injury caused
by exposure to asbestos products. Plaintiffs in these and other lawsuits
are seeking money damages that in some cases are substantial or extra
contractual in nature or are seeking to have the court direct the
activities of our operations in certain ways.
Although the ultimate outcome of these matters is not presently
determinable, it is possible that the resolution of one or more
matters may be material to our results of operations. However,
we do not believe that the total amounts that we and our
subsidiaries may ultimately have to pay in all of these
lawsuits will have a material effect on our liquidity or overall
financial position.
Note 17 on page 83 of our 2002 Annual Report to Shareholders
includes a summary of certain litigation matters with
contingencies, including the following two matters for which
there were additional developments in the first quarter of 2003.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 5 - Commitments, Contingencies and Guarantees (continued)
-------------------------------------------------------------
Asbestos Settlement Agreement - On June 3, 2002, we announced
that we and certain of our subsidiaries had entered into an
agreement settling all existing and future claims arising from
any insuring relationship of United States Fidelity and Guaranty
Company ("USF&G"), St. Paul Fire and Marine Insurance Company
("Fire and Marine") and their affiliates and subsidiaries,
including us, with any of MacArthur Company, Western MacArthur
Company, and Western Asbestos Company (together, the "MacArthur
Companies"). There can be no assurance that this agreement will
receive bankruptcy court approval. For a full discussion of the
Western MacArthur settlement agreement, refer to Note 3 to the
financial statements on pages 68 and 69 of our 2002 Annual Report
to Shareholders.
In the first quarter of 2003, we made a payment of $747 million,
(which included $7 million interest), related to the Western
MacArthur settlement agreement. This amount, along with $60
million of an initial $235 million payment made in the second
quarter of 2002, is being held in escrow pending final bankruptcy
court approval of the settlement agreement as part of a broader
plan for the reorganization of the MacArthur Companies (the
"Plan"). The $60 million from the initial payment and the $747
million paid in 2003 would be returned to us if the Plan is not
approved by the bankruptcy court. Accordingly, as of March 31,
2003 we had recorded those payments of $807 million in both "Other
Assets" and "Other Liabilities," since the Plan had not yet been
approved.
Purported Class Action Shareholder Suits - In the fourth quarter
of 2002, several purported class action lawsuits were filed
against our chief executive officer, our chief financial officer,
and us. In the first quarter of 2003, the lawsuits were
consolidated into a single action which makes various allegations
relating to the adequacy of our previous public disclosures and
reserves relating to the Western MacArthur asbestos litigation,
and seeks unspecified damages and other relief. We view this
action as without merit and are contesting it vigorously.
Guarantees - In prior periods we provided certain guarantees for
agency loans, issuances of debt securities, third party loans
related to venture capital investments, and certain tax
indemnifications related to our swap agreements. In addition, we
provided various guarantees and indemnifications in the ordinary
course of selling business entities, as well as guarantees and
indemnifications in connection with the transfer of ongoing
reinsurance operations to Platinum Underwriters Holdings, Ltd.
See Note 2 in our Annual Report to Shareholders for a more
detailed description of the Platinum transfer. These guarantees
and indemnifications remain in effect and materially unchanged
from December 31, 2002. For a full description of the nature and
amount of these guarantees and indemnifications, refer to Note 17
on pages 82 to 84 of our 2002 Annual Report to Shareholders.
During the first quarter of 2003, we did not become party to any
new material guarantees that would require disclosure.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 6 - Debt
-------------
Debt consisted of the following at March 31, 2003 and
December 31, 2002:
March 31, 2003 December 31, 2002
--------------- -----------------
(in millions) Book Fair Book Fair
----------- Value Value Value Value
----- ----- ----- -----
Medium-term notes $ 505 $ 547 $ 523 $ 559
5.75% senior notes 499 524 499 515
5.25% senior notes 443 465 443 461
7.875% senior notes 250 274 249 274
8.125% senior notes 249 286 249 280
Commercial paper 193 193 379 379
Nuveen line of credit
borrowings 200 200 55 55
Zero coupon convertible
notes 109 111 107 110
7.125% senior notes 80 87 80 87
Variable rate borrowings 64 64 64 64
----- ----- ----- -----
Total debt
obligations 2,592 2,751 2,648 2,784
Fair value of interest
rate swap agreements 72 72 65 65
----- ----- ----- -----
Total debt reported
on balance sheet $2,664 $2,823 $2,713 $2,849
===== ===== ===== =====
In January 2003, we established a program providing for the
offering of up to $500 million of medium-term notes. As of May 6,
2003, we had not issued any notes under this program.
During the first quarter of 2003, Nuveen Investments repaid $145
million it had previously borrowed from The St. Paul under an
intercompany revolving line of credit, and The St. Paul used the
proceeds to repay a like amount of its commercial paper
outstanding. Nuveen Investments funded the repayment to us by
borrowing $145 million under its revolving bank line of credit.
At March 31, 2003, we were party to a number of interest rate
swap agreements related to several of our debt securities
outstanding. The notional amount of these swaps, all of which qualified
for hedge accounting, totaled $730 million. Their aggregate fair
value at March 31, 2003 was recorded as an asset of $72 million, with
the same amount included in the carrying value of our debt.
Note 7 - Segment Information
----------------------------
In the first quarter of 2003, we revised our property-liability
insurance business segment reporting structure to reflect the manner
in which those businesses are now managed. As of March 31, 2003,
our property-liability underwriting operations consist of two
segments constituting our ongoing operations (Specialty
Commercial and Commercial Lines), and one segment comprising our
runoff operations (Other). All data for 2002 included in this
report were restated to be consistent with the new reporting
structure in 2003. The following is a summary of changes made to
our segments in the first quarter of 2003.
- Our Surety & Construction operations, previously reported
together as a separate specialty segment, are now separate
components of our Specialty Commercial segment.
- Our ongoing International operations and our ongoing
operations at Lloyd's, previously reported together as a
separate specialty segment, are now separate components of our
Specialty Commercial segment.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
---------------------------------------
- Our Health Care, Reinsurance and Other operations, each
previously reported as a separate runoff business segment,
have been combined into a single Other runoff segment and are
now under common management. "Runoff" means that we have
ceased or plan to cease underwriting new business as soon as
possible.
- The results of our participation in voluntary insurance
pools (which include the majority of our environmental and
asbestos liability exposures), previously included in our
Commercial Lines segment, are now included in the Other
segment. The oversight of these exposures is the
responsibility of the same management team responsible
for oversight of the other components of the Other segment.
In accordance with provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," since Surety
& Construction, International & Lloyd's, Health Care, and
Reinsurance were reported as separate segments during 2002 and
are considered to be of continuing significance in analyzing the
results of our operations, we continue to separately present and discuss
(as appropriate) in this note to our consolidated financial statements
information about those businesses in 2003 and the corresponding
period of 2002.
In addition to our property-liability business segments, we also
have a property-liability investment operation segment, as well
as an asset management segment, consisting of our majority
ownership in Nuveen Investments.
The accounting policies of these segments are the same as those
described in Note 1 in our 2002 Annual Report to Shareholders.
We evaluate performance based on underwriting results for our
property-liability insurance segments, investment income and
realized gains for our investment operations segment, and on
pretax income for our asset management segment. Property-
liability underwriting assets are reviewed and managed in total
for purposes of decision-making. We do not allocate assets to
specific underwriting segments. Assets are specifically
identified for our asset management segment.
After the revisions to our segment structure described above, our
reportable segments in our property-liability operations
consisted of the following:
The Specialty Commercial segment includes our combined Surety &
Construction operation, our ongoing International & Lloyd's
operations, and the following nine specialty business centers
that in total comprise the "Specialty" component of this segment:
Technology, Financial and Professional Services, Marine, Personal
Catastrophe Risk, Public Sector Services, Discover Re, Excess &
Surplus Lines, Specialty Programs and Oil & Gas. These business
centers are considered specialty operations because each provides
products and services requiring specialty expertise and focuses
on the respective customer group served. Our Surety business
center 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
Construction business center offers a variety of products and
services, including traditional insurance and risk management
solutions, to a broad range of contractors and parties
responsible for construction projects. Our ongoing International
operations consist of our primary underwriting operations in
Canada (other than Surety), the United Kingdom and the Republic
of Ireland, and the international exposures of most U.S.
underwriting business. At Lloyd's, our ongoing operations are
comprised of the following types of insurance coverage we
underwrite through a single wholly-owned syndicate: Aviation,
Marine, Global Property and Personal Lines.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
---------------------------------------
The Commercial Lines segment includes our Small Commercial,
Middle Market Commercial and Property Solutions business centers,
as well as the results of our limited involvement in involuntary
insurance pools. The Small Commercial business center services
commercial firms that typically have between one and fifty
employees through its proprietary St. Paul Mainstreet (SM) and
St. Paul Advantage (SM) products, with a particular focus on
offices, wholesalers, retailers, artisan contractors and other
service risks. The Middle Market Commercial business center
offers comprehensive insurance coverages for a wide variety of
manufacturing, wholesale, service and retail exposures. This
business center also offers loss-sensitive casualty programs,
including significant deductible and self-insured retention
options, for the higher end of the middle market sector. The
Property Solutions business center combines our Large Accounts
Property business with the commercial portion of our catastrophe
risk business and allows us to take a unified approach to large
property risks.
The Other segment includes the results of the lines of business
we placed in runoff in late 2001 and early 2002, including our
former Health Care and Reinsurance segments, and the results of
the following international operations: our runoff operations at
Lloyd's; Unionamerica, the London-based underwriting unit
acquired as part of our purchase of MMI in 2000; and
international operations we decided to exit at the end of 2001.
This segment also includes the results of our participation in
voluntary insurance pools (which include the majority of our
environmental and asbestos liability exposures). Our Health Care
operation historically provided a wide range of medical liability
insurance products and services throughout the entire health care
delivery system. Our Reinsurance operations historically
underwrote treaty and facultative reinsurance for a wide variety
of property and liability exposures. As described in more detail
on page 24 of our 2002 Annual Report to Shareholders, in November
2002 we transferred our ongoing reinsurance operations to
Platinum Underwriters Holdings, Ltd.
The summary below presents revenue and pretax income from
continuing operations for our reportable segments. The revenues
of our asset management segment include investment income and
realized investment gains.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
---------------------------------------
Three Months
Ended March 31
----------------
(in millions) 2003 2002
----------- ----- -----
Revenues from Continuing Operations:
Underwriting:
Specialty Commercial:
Specialty $ 502 $ 429
Surety and Construction 312 275
International and Lloyd's 293 151
----- -----
Total Specialty Commercial 1,107 855
Commercial Lines 462 426
----- -----
Total Ongoing Insurance Operations 1,569 1,281
----- -----
Other:
Health Care 32 160
Reinsurance 104 377
Other Runoff 24 140
----- -----
Total Other 160 677
----- -----
Total Runoff Insurance Operations 160 677
----- -----
Total Underwriting 1,729 1,958
Investment operations:
Net investment income 280 290
Realized investment losses (32) (39)
----- -----
Total investment operations 248 251
Other 39 27
----- -----
Total property-liability insurance 2,016 2,236
Asset management 102 94
----- -----
Total reportable segments 2,118 2,330
Parent company and other
operations (5) 4
----- -----
Total revenues from
continuing operations $2,113 $2,334
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
---------------------------------------
Three Months
Ended March 31
----------------
(in millions) 2003 2002
----------- ----- -----
Income (Loss) from Continuing Operations
Before Income Taxes and Cumulative
Effect of Accounting Change:
Underwriting:
Specialty Commercial:
Specialty $ 59 $ 9
Surety and Construction 14 2
International and Lloyd's 45 (17)
----- -----
Total Specialty Commercial 118 (6)
Commercial Lines 38 (5)
----- -----
Total Ongoing Insurance Operations 156 (11)
----- -----
Other:
Health Care (17) 3
Reinsurance 18 16
Other Runoff (100) (19)
----- -----
Total Other (99) 0
----- -----
Total Runoff Insurance Operations (99) 0
----- -----
Total Underwriting 57 (11)
Investment operations:
Net investment income 280 290
Realized investment losses (32) (39)
----- -----
Total investment operations 248 251
Other (34) (26)
----- -----
Total property-liability insurance 271 214
----- -----
Asset management:
Pretax income, before minority interest 53 49
Minority interest (11) (11)
----- -----
Total asset management 42 38
----- -----
Total reportable segments 313 252
Parent company and other
operations (62) (56)
----- -----
Total income from continuing
operations before income taxes
and cumulative effect of
accounting change $ 251 $ 196
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 7 - Segment Information (continued)
---------------------------------------
Elimination of Reporting Lag
----------------------------
In the first quarter of 2003, we eliminated the one-quarter
reporting lag for our underwriting operations at Lloyd's to
coincide with the reporting timing of all of our other
international operations. As a result, our consolidated results
in the first quarter of 2003 include the results of those
operations for the fourth quarter of 2002 and the first quarter
of 2003. The incremental impact on our property-liability
operations of changing the reporting lag, which consists of the
results of these operations for the quarter ended March 31, 2003,
was as follows.
Quarter Ended
(In millions) March 31, 2003
----------- --------------
Net written premiums $ 237
Change in unearned premiums (126)
------
Net earned premiums 111
Incurred losses and
underwriting expenses 138
------
GAAP underwriting loss (27)
Net investment income 3
Other expenses (3)
------
Total pretax loss $ (27)
======
Reclassification of Lloyd's Commission Expenses
-----------------------------------------------
In the first quarter of 2003, we reclassified certain commission
expenses related to our operations at Lloyd's. In prior years,
we determined commission expense based on premiums reported by
the Lloyd's market (net of commissions) using an estimated
average commission rate. Until recently, gross premiums (prior
to reduction for commissions) were not available from the Lloyd's
market. That information is now available for current and prior
periods, and in the first quarter of 2003, we began recording
actual commission expense for our Lloyds' business. We
reclassified prior period results to record actual commission
expense on a basis consistent with that implemented in the first
quarter of 2003. There was no impact to net income or
shareholders' equity as previously reported for any prior
periods, because the reclassification had the impact of
increasing previously reported premiums and commission expense by
equal and offsetting amounts. In the first quarter of 2003, this
reclassification had the impact of increasing both net earned
premiums and policy acquisition costs by $25 million, compared
with what would have been recorded under our prior method of
estimation. In addition, net written premiums increased by $76
million (a portion of which was due to the elimination of the one-
quarter reporting lag). For the first quarter of 2002, the
impact was an increase to both net earned premiums and policy
acquisition costs of $23 million, and an increase to net written
premiums of $11 million.
Note 8 - Reinsurance
--------------------
Our consolidated financial statements reflect the effects of
assumed and ceded reinsurance transactions. Assumed reinsurance
refers to our acceptance of certain insurance risks that other
insurance companies have underwritten. Ceded reinsurance
involves transferring certain insurance risks (along with the
related written and earned premiums) we have underwritten to
other insurance companies who agree to share these risks. The
primary purpose of ceded reinsurance is to protect us against
earnings volatility and from potential losses in excess of the
amount we are prepared to accept.
We expect those with whom we have ceded reinsurance to honor
their obligations. In the event these companies are unable to
honor their obligations, we will pay these amounts. We have
established allowances for possible nonpayment of amounts due to
us.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Reinsurance (continued)
-------------------------------
The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses and loss adjustment expenses
was as follows:
Three Months
Ended March 31
----------------
(in millions) 2003 2002
----------- ----- -----
Premiums written
Direct $2,021 $1,973
Assumed 723 659
Ceded (767) (514)
----- -----
Net premiums written $1,977 $2,118
===== =====
Premiums earned
Direct $1,932 $1,815
Assumed 541 590
Ceded (744) (447)
----- -----
Net premiums earned $1,729 $1,958
===== =====
Insurance losses and loss
adjustment expenses
Direct $1,246 $1,512
Assumed 310 348
Ceded (424) (467)
----- -----
Net insurance losses
and loss adjustment expenses $1,132 $1,393
===== =====
In conjunction with the transfer of our continuing reinsurance
business (previously operating under the name "St. Paul Re") to
Platinum Underwriters Holdings, Ltd. ("Platinum") in November
2002, we entered into various agreements with Platinum and its
subsidiaries, including quota share reinsurance agreements by
which Platinum reinsured substantially all of the reinsurance
contracts entered into by St. Paul Re on or after January 1,
2002. This transfer (based on September 30, 2002 balances)
included $125 million of unearned premium reserves (net of ceding
commissions), $200 million of existing loss and loss adjustment
expense reserves and $24 million of other reinsurance-related
liabilities. The transfer of unearned premium reserves to
Platinum was accounted for as prospective reinsurance, while the
transfer of existing loss and loss adjustment expense reserves
was accounted for as retroactive reinsurance.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 8 - Reinsurance (continued)
-------------------------------
As noted above, the transfer of reserves to Platinum at the
inception of the quota share reinsurance agreements was based on
the September 30, 2002 balances. In March 2003, we transferred
to Platinum $137 million of additional insurance reserves,
consisting of $72 million in unearned premiums (net of ceding
commissions) and $65 million in existing reserves for losses and
loss adjustment expenses. We also transferred cash and other
assets having a value equal to the additional insurance reserves
transferred. This transfer of additional assets and liabilities
reflected business activity between September 30, 2002 and the
November 2, 2002 inception date of the quota share reinsurance
agreements, and our estimate of amounts due under the adjustment
provisions of the quota share reinsurance agreements. Our
insurance reserves at December 31, 2002 included our estimate, at
that time, of amounts due to Platinum under the quota share
reinsurance agreements, which totaled $54 million. The $83
million increase in our estimate of amounts due to Platinum under
the quota share reinsurance agreements resulted in a pretax
underwriting loss of $6 million in the first quarter of 2003.
Note 9 - Restructuring Charges
------------------------------
Fourth Quarter 2001 Strategic Review - In December 2001, we
announced the results of a strategic review of all of our
operations, which included a decision to exit a number of
businesses and countries. Note 5 in our 2002 Annual Report to
Shareholders provides more detailed information on this strategic
review. Related to this review, we recorded a pretax charge of
$62 million, including $46 million of employee-related costs
(related to the elimination of approximately 700 positions), $9
million of occupancy-related costs, $4 million of equipment
charges and $3 million of legal costs. Note 18 on pages 84 and
85 of our 2002 Annual Report to Shareholders provides more
information on this charge.
The following presents a rollforward of activity related to
this accrual:
(In millions)
----------- Original Reserve Reserve
Charges to Pre-tax at Dec. 31 at Mar. 31
earnings: Charge 2002 Payments Adjustments 2003
-------- ---------- -------- ----------- ----------
Employee-
related $ 46 $ 14 $ (1) $ - $ 13
Occupancy-
related 9 8 (1) - 7
Equipment
charges 4 N/A N/A N/A N/A
Legal costs 3 - - - -
----- ----- ----- ----- -----
Total $ 62 $ 22 $ (2) $ - $ 20
===== ===== ===== ===== =====
Other Restructuring Charges - Since 1997, we have recorded
several restructuring and other charges related to acquisitions,
mergers and actions taken to improve our operations. Note 18 in
our 2002 Annual Report to Shareholders also provides more
detailed information regarding these other charges. All actions
have been taken and all obligations had been met regarding these
other restructuring charges, with the exception of certain
remaining lease commitments. The lease commitment charges
related to excess space created by the elimination of employee
positions. We expect to be obligated under certain lease
commitments for approximately seven years.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 - Restructuring Charges (continued)
-----------------------------------------
The following presents a rollforward of activity related to these
lease commitments:
(In millions)
----------- Original Reserve Reserve
Pre-tax at Dec. 31 at Mar. 31
Charge 2002 Payments Adjustments 2003
-------- ---------- -------- ----------- ----------
Lease
commitments
charged to
earnings: $91 $24 $(2) $ - $22
=== === === === ===
Note 10 - Goodwill and Other Intangible Assets
----------------------------------------------
In the first quarter of 2002, we implemented the provisions of
SFAS No. 142, "Goodwill and Other Intangible Assets," which
established financial accounting and reporting for acquired
goodwill and other intangible assets. As a result of
implementing the provisions of this statement, we did not record
any goodwill expense in 2002 or 2003. Amortization expense
associated with intangible assets totaled $6 million for the
first quarter of 2003, compared with $3 million in the same 2002
period.
The following presents a summary of our acquired intangible
assets.
As of March 31, 2003
(In millions) ------------------------------------
----------- Gross
Amortizable intangible Carrying Accumulated Net
assets: Amount Amortization Amount
----------------------- -------- ------------ ---------
Present value
of future profits $ 70 $ 18 $ 52
Customer relationships 67 6 61
Renewal rights 29 7 22
Internal use software 2 1 1
----- ----- -----
Total $ 168 $ 32 $ 136
===== ===== =====
At March 31, 2003, we estimated our amortization expense for the
next five years to be $18 million in 2004, $16 million in 2005,
$14 million in 2006, $12 million in 2007, and $11 million in
2008.
The changes in the carrying value of goodwill on our balance
sheet were as follows.
(in millions)
----------- Balance at Goodwill Impairment Net
Goodwill by Segment Dec. 31, 2002 Acquired Losses Amount
------------------- ------------- -------- ---------- ------
Specialty Commercial $ 80 $ 1 $ - $ 81
Commercial Lines 33 - - 33
Asset Management 752 11 - 763
Property-Liability
Investment Operations 9 - - 9
----- ----- ----- -----
Total $ 874 $ 12 $ - $ 886
===== ===== ===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 10 - Goodwill and Other Intangible Assets (continued)
---------------------------------------------------------
The increase in goodwill in our Asset Management segment was a
result of Nuveen Investments' purchase of shares from minority
shareholders, as well as an additional payment of $3 million for
contingent consideration related to a prior period acquisition.
The increase in goodwill in our Specialty Commercial segment was
due to the effects of foreign exchange rates applied to existing
goodwill balances.
For further information regarding our accounting for goodwill
and intangible assets, refer to Note 1 on page 9 of this report.
Note 11 - Acquisitions
----------------------
In February 2003, we purchased the right to seek renewal of the
excess and umbrella business previously underwritten by Kemper
Insurance Companies ("Kemper"). The cost of this acquisition was
recorded as an intangible asset (characterized as renewal rights)
and will be amortized on an accelerated basis over four years.
In May 2003, we announced an agreement to acquire the right to seek
renewal of additional lines of insurance business underwritten by
Kemper. The portfolio of business involved in that transaction
includes the following lines: small commercial, middle market
commercial, inland and ocean marine, and architects' and
engineers' professional liability. The cost of this acquisition
will be recorded as an intangible asset in the second
quarter of 2003. For both of these acquisitions, we did not
assume any past liabilities, and we are unable to estimate the
amount of premium volume we will ultimately renew.
Note 12 - Discontinued Operations
---------------------------------
Standard Personal Insurance - In 1999, we sold our standard
personal insurance operations to Metropolitan Property and
Casualty Insurance Company ("Metropolitan"). Metropolitan
purchased Economy Fire & Casualty Company and subsidiaries
("Economy"), and the rights and interests in those non-Economy
policies constituting the remainder of our standard personal
insurance operations. Those rights and interests were
transferred to Metropolitan by way of a reinsurance and facility
agreement. We guaranteed the adequacy of Economy's loss and loss
expense reserves, and we remain liable for claims on non-Economy
policies that result from losses occurring prior to the September
30, 1999 closing date. Under the reserve-related agreements, we
agreed to pay for any deficiencies in those reserves and would
share in any redundancies that developed by September 30, 2002.
Any losses incurred by us under these agreements were reflected
in discontinued operations in the period during which they were
incurred. At December 31, 2002, our analysis indicated that we
owed Metropolitan $13 million related to the reserve agreements,
which was paid in April 2003. In the first quarters of 2003 and
2002, we recorded pretax losses of less than $100,000 and $2
million, respectively, in discontinued operations, related to
claims in respect of pre-sale losses.
Note 13 - Derivative Financial Instruments
------------------------------------------
We have the following derivative instruments, which have been
designated into one of three categories based on their intended
use:
Fair Value Hedges: We have several pay-floating, receive-fixed
interest rate swaps, with notional amounts totaling $730 million.
They are designated as fair value hedges for a portion of our
medium-term and senior notes, as they were entered into for the
purpose of managing the effect of interest rate fluctuations on
this debt. The terms of the swaps match those of the debt
instruments, and the swaps are therefore considered 100%
effective. The balance sheet impact related to the movements in
interest rates for the three months ended March 31, 2003 and
March 31, 2002 was a $7 million increase and a $1 million
decrease, respectively, in the fair value of the swaps and the
related debt on the balance sheet, with the statement of
operations' impacts offsetting.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 13 - Derivative Financial Instruments (continued)
-----------------------------------------------------
Cash Flow Hedges: We have purchased forward foreign currency
contracts that are designated as cash flow hedges. They are
utilized to reduce our exposure to fluctuations in foreign
exchange rates that result from our expected foreign currency
payments, and settlement of our foreign currency payables and
receivables. In the three months ended March 31, 2003, we
recognized a $1 million gain on the cash flow hedges, which is
included in "Other Comprehensive Income." The comparable amount
for the three months ended March 31, 2002 was a $1 million loss.
The amounts included in other comprehensive income will be
realized in earnings concurrent with the timing of the hedged
cash flows. We do not anticipate any of the "Other Comprehensive
Income" will be reclassified into earnings within the next twelve
months. In the three months ended March 31, 2003 and March 31,
2002, we recognized a gain of less than $1 million and a loss of
less than $1 million, respectively, representing the portions of
the forward contracts deemed ineffective.
Non-Hedge Derivatives: We have entered into a variety of other
financial instruments that are considered to be derivatives, but
which are not designated as hedges. These include our investment
in stock purchase warrants of Platinum Underwriters Holdings,
Ltd., received as partial consideration from the sale of our
reinsurance business in 2002, and stock warrants in our venture
capital business. We recorded a $7 million loss and less than $1
million of income in continuing operations for the three months
ended March 31, 2003 and March 31, 2002 respectively, relating to
the change in the market value of these derivatives during the
period. We also recorded a $7 million loss in discontinued
operations for the three months ended March 31, 2002 relating to
non-hedge derivatives associated with the sale of our life
business.
Note 14 - Variable Interest Entities
------------------------------------
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which
requires consolidation of all variable interest entities ("VIE")
by the primary beneficiary, as these terms are defined in FIN 46,
effective immediately for VIEs created after January 31, 2003.
The consolidation requirements apply to VIEs existing on January
31, 2003 for reporting periods beginning after June 15, 2003. In
addition, it requires expanded disclosure for all VIEs.
The following discusses VIE's which may be subject to the
consolidation or disclosure provisions of FIN 46 once compliance
with those provisions becomes required with respect to those
VIE's:
Municipal Trusts: We have purchased interests in certain
unconsolidated trusts holding highly rated municipal
securities that were formed for the purpose of enabling the
company to more flexibly generate investment income in a
manner consistent with our investment objectives and tax
position. As of March 31, 2003, there were 36 of such
trusts, which held a combined total market value of $448
million in municipal securities. We own approximately 100%
of 28 of these trusts, which are reflected in our financial
statements. The remaining 8 trusts, which represent $84
million in market value of securities, are not currently
consolidated in our results.
Joint Ventures: Our subsidiary, Fire and Marine, is a
party to five separate joint ventures, in each of which
Fire and Marine is a 50% owner of various real estate
holdings and does not exercise control over the joint
ventures, financed by non-recourse mortgage notes. Because
we own only 50% of the holdings, we do not consolidate
these entities and the joint venture debt does not appear
on our balance sheet. Our maximum exposure under each of
these joint ventures, in the event of foreclosure of a
property, is limited to our carrying value in the joint
venture, ranging individually from $8 million to $28
million, and cumulatively totaling $61 million at March 31,
2003. The total assets included in these joint ventures as
of March 31, 2003 were $56 million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 15 - Health Care Exposures
-------------------------------
During 2002, we concluded that the impact of settling Health Care
claims in a runoff environment was causing abnormal effects on
our average paid claims, average outstanding claims, and the
amount of average case reserves established for new claims - all
of which are traditional statistics used by our actuaries to
develop indicated ranges of expected loss. Considering these
changing statistics, we developed varying interpretations of the
underlying data, which added more uncertainty to our evaluation
of these reserves. It is our belief that this additional data,
when evaluated in light of the impact of our migration to a
runoff environment, supports our view that we will realize
significant savings on our ultimate Health Care claim costs.
In the fourth quarter of 2002, we established specific tools
and metrics to more explicitly monitor and validate our key
assumptions supporting our Health Care reserve conclusions since
we believe that our traditional statistics and reserving methods
needed to be supplemented in order to provide a more meaningful
analysis. The tools we developed track the three primary
indicators which are influencing our expectations and include:
a) newly reported claims, b) reserve development on known claims
and c) the "redundancy ratio," which compares the cost of
resolving claims to the reserve established for that individual
claim.
In the first quarter of 2003, we evaluated the adequacy of our
previously established medical malpractice reserves in the
context of the three indicators described above. The dollar
amount of newly reported claims in the quarter totaled $118
million, approximately 25% less than we anticipated in our
original estimate of the required level of redundancy at year-end
2002. With regard to development on known claims, loss activity
in the first quarter of 2003 was within our expectations. Case
development on incurred years 2001 and prior was minimal, and
case development on the 2002 incurred year totaled $39 million,
within our year-end 2002 estimate of no more than 3% of
development. For the first quarter of 2003, our redundancy ratio
was within our expected range of between 35% and 40%.
The three indicators described above are related such that if one
deteriorates, additional improvement on another is necessary for
us to conclude that further reserve strengthening is not
necessary. While the recent results of these indicators support
our current view that we have recorded a reasonable provision for
our medical malpractice exposures as of March 31, 2003, there is
a reasonable possibility that we may incur additional unfavorable
prior-year loss development if these indicators significantly
change from our current expectations. If these indicators
deteriorate, we believe that a reasonable estimate of an
additional loss provision could amount to up to $250 million.
However, our analysis as of this point in time continues to
support our belief that we will realize favorable effects in our
ultimate costs and that our current loss reserves will prove to
be a reasonable provision.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 16 - Subsequent Event - Surety Claims
------------------------------------------
We had previously disclosed that with regard to commercial surety
bonds issued on behalf of companies currently in bankruptcy, our
largest individual exposure, pretax and before estimated
reinsurance recoveries, approximated $120 million. This exposure
consists of bonds securing certain workers' compensation
obligations with an aggregate face amount of $80 million, and a
bond securing certain retiree health benefit obligations with a
face amount of $40 million. In April 2003, a bankruptcy court
approved the sale of substantially all of the assets of the
company in bankruptcy accounting for this exposure. Under the
terms approved by the court, the buyer will not assume that
company's obligations related to workers' compensation and
retiree health benefits. Following the bankruptcy court's
approval of the asset sale, we began receiving claim notices on
April 25, 2003 relating to a substantial portion of the bonds
securing the workers' compensation obligations. Given these
developments, we believe that we will continue to receive claim
notices related to the remaining workers' compensation bonds and,
separately, the bond securing the retiree health benefit
obligations. We are reviewing the claim notices to assess their
validity under the provisions of the relevant surety bonds. We
will record loss provisions when sufficient information is
available to fully review the claims and to estimate our ultimate
obligations under the bonds. Until this assessment is completed,
we are unable to estimate a reasonable range of our potential
ultimate losses after tax and after reinsurance in this matter.
However, based on preliminary information currently available to
us, we believe those losses may be somewhat lower than the face
amount of the bonds.
Forward-Looking Statement Disclosure and Certain Risks
------------------------------------------------------
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 intended to identify forward-looking statements.
Examples of these forward-looking statements include statements
concerning:
- market and other conditions and their effect on future
premiums, revenues, earnings, cash flow and investment
income;
- price increases, improved loss experience, and expense
savings resulting from the restructuring and other actions
and initiatives announced in recent years;
- statements concerning the anticipated bankruptcy court
approval of the Western MacArthur asbestos litigation
settlement;
- statements concerning our expectations of savings in our
Health Care operation as we settle claims in a runoff
environment; and
- statements concerning claims made on surety bonds and the
amounts we may ultimately pay with respect to these claims.
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:
- changes in the demand for, pricing of, or supply of our
products;
- our ability to effectively implement price increases;
- general economic conditions, including changes in interest
rates and the performance of financial markets;
- additional statement of operations charges if our loss
reserves are insufficient;
- our exposure to natural catastrophic events, which are
unpredictable, with a frequency or severity exceeding our
estimates, resulting in material losses;
- the possibility that claims cost trends that we anticipate
in our businesses may not develop as we expect;
- the impact of the September 11, 2001 terrorist attack and
the ensuing global war on terrorism on the insurance and
reinsurance industry in general, the implementation of the
Terrorism Risk Insurance Act and potential further
intervention in the insurance and reinsurance markets to
make available insurance coverage for acts of terrorism;
- risks relating to our potential exposure to losses arising
from acts of terrorism and sabotage;
- risks relating to our continuing ability to obtain
reinsurance covering catastrophe, surety and other exposures
at appropriate prices and/or in sufficient amounts;
- risks relating to the collectibility of reinsurance and
adequacy of reinsurance to protect us against losses;
- risks relating to actual and potential credit exposures,
including to derivatives counterparties and related to co-
surety arrangements;
- risks and uncertainties relating to international political
developments, including the possibility of warfare, and
their potential effect on economic conditions;
- changes in domestic and foreign laws, tax laws and changes
in the regulation of our businesses, which affect our
profitability and our growth;
- the possibility of downgrades in our ratings significantly
adversely affecting us, including, but not limited to,
reducing the number of insurance policies we write,
generally, or causing clients who require an insurer with a
certain rating level to use higher-rated insurers or causing
us to borrow at higher interest rates;
- the risk that our investment portfolio suffers reduced
returns or investment losses, which could reduce our
profitability;
- the effect of financial market and interest rate conditions
on pension plan assumptions and contribution levels;
- the impact of assessments and other surcharges for guaranty
funds and second-injury funds and other mandatory pooling
arrangements;
- risks related to the business underwritten on our policy
forms on behalf of Platinum Underwriters Holdings, Ltd.
("Platinum") and fully reinsured to Platinum pursuant to the
quota share reinsurance agreements entered into in
connection with the transfer of our ongoing reinsurance
operations to Platinum in 2002;
- loss of significant customers;
- risks relating to the decision of the bankruptcy court with
respect to the approval of the settlement of the Western
MacArthur matter;
- changes in our estimate of insurance industry losses
resulting from the September 11, 2001 terrorist attack;
- unfavorable developments in non-Western MacArthur related
asbestos litigation (including claims that certain asbestos-
related insurance policies are not subject to aggregate
limits);
- unfavorable developments in environmental litigation involving
policy coverage and liability issues;
- the effects of emerging claim and coverage issues on our
business, including developments relating to issues such as
mold conditions, construction defects and changes in
interpretation of the named insured provision with respect
to the uninsured/underinsured motorist coverage in
commercial automobile policies;
- the growing trend of plaintiffs targeting property-liability
insurers, including us, in purported class action litigation
relating to claim-handling and other practices;
- the inability of our subsidiaries to pay dividends to us in
sufficient amounts to enable us to meet our obligations and
pay future dividends;
- the cyclicality of the property-liability insurance industry
causing fluctuations in our results;
- risks relating to our asset management business, including
the risk of material reductions to assets under management
if we experience poor investment performance;
- our dependence on the business provided to us by agents and
brokers;
- our implementation of new strategies and initiatives;
- and various other matters.
Item 2. Management's Discussion and Analysis of Financial
------ Condition and Results of Operations.
-----------------------------------
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
March 31, 2003
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 products and services. We also have a
presence in the asset management industry through our 79%
majority ownership of Nuveen Investments, Inc. As a management
company, we oversee the operations of our subsidiaries and
provide them with capital, management and administrative
services. Based on total revenues in 2002, we ranked No. 207 on
the Fortune 500 list of the largest companies in the United
States. Our Internet website address is stpaul.com. We make
available, free of charge, on or through our website, annual
reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
Securities and Exchange Commission. Our website address is an
inactive textual reference only and the contents of the website
are not part of this report.
Consolidated Highlights
-----------------------
The following table summarizes our results for the three
months ended March 31, 2003 and 2002.
(In millions, except per 2003 2002
share data) ------ ------
------------------------
Pretax income (loss) before
cumulative effect of
accounting change:
Property-liability insurance:
Underwriting result $ 57 $ (11)
Net investment income 280 290
Realized investment losses (32) (39)
Other (34) (26)
------ ------
Total property-liability insurance 271 214
Asset management 42 38
Parent and other operations (62) (56)
------ ------
Pretax income from continuing
operations before cumulative effect
of accounting change 251 196
Income tax expense 70 48
------ ------
Income from continuing operations
before cumulative effect of
accounting change 181 148
Cumulative effect of accounting
change, net of taxes - (6)
------ ------
Income from continuing operations 181 142
Discontinued operations, net of taxes - (9)
------ ------
Net income $ 181 $ 133
====== ======
Net income per share (diluted) $ 0.75 $ 0.60
====== ======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
Consolidated Results
--------------------
Our pretax income from continuing operations of $251 million in
the first quarter of 2003 was $55 million higher than comparable
2002 pretax income of $196 million, driven by a significant
improvement in our property-liability insurance underwriting
results. In addition, pretax earnings from our asset management
subsidiary, Nuveen Investments, Inc., were $4 million higher than
the first quarter of 2002, driven by an increase in investment
product sales and strong growth in assets under management.
Pretax losses in "Parent and other operations" exceeded
comparable first-quarter 2002 losses due to an increase in
realized investment losses, primarily related to our investment
in an option to acquire Platinum Underwriters Holdings, Ltd.
stock (described in more detail on pages 32 and 33 of this
report).
Presentation of Certain Information Based on Statutory
Accounting Principles
---------------------
Our U.S. property-liability insurance operations comprise the
majority of our operations. These operations are required under
applicable state insurance legislation and regulations to
publicly report information on the basis of Statutory Accounting
Principles ("SAP"), including net written premiums, statutory
loss and loss adjustment expense ratio, and statutory
underwriting expense ratio information. We provide in this
report selected SAP information for all of our property-liability
underwriting operations, as well as certain GAAP information for
such operations. The SAP information included herein are common
measures of the performance of a property-liability insurer, and
we believe the inclusion of such information will aid investors
in comparing our results with those of our peers in the industry.
In addition, management uses this SAP information to monitor our
financial performance. Definitions of the statutory information
included herein are included under the "Definitions of Certain
Statutory Accounting Terms" on page 57 of this report.
Elimination of Reporting Lag - Lloyd's
--------------------------------------
In the first quarter of 2003, we eliminated the one-quarter
reporting lag for our underwriting operations at Lloyd's to
coincide with the reporting timing of all of our other
international operations. As a result, our consolidated results
in the first quarter of 2003 included the results of those
operations for the fourth quarter of 2002 and the first quarter
of 2003. The incremental impact on our property-liability
operations of changing the reporting lag, which consists of the
results of these operations for the quarter ended March 31, 2003,
was as follows.
Quarter Ended
(In millions) March 31, 2003
----------- --------------
Net written premiums $ 237
Change in unearned premiums (126)
-----
Net earned premiums 111
Incurred losses and
underwriting expenses 138
-----
GAAP underwriting loss (27)
Net investment income 3
Other expenses (3)
-----
Total pretax loss $ (27)
=====
As elimination of the one-quarter reporting lag in our Lloyd's
operations makes the information for the first quarter of 2003
not comparable to the information for the first quarter of 2002,
we present information adjusted to remove the effect of the
elimination in this Management's Discussion and Analysis. We
believe that investors will find it helpful to have this
information, as well as information prepared in accordance with
United States generally accepted accounting principles ("GAAP"),
when reviewing our results for the first quarter. Such adjusted
information is reconciled to the information reported in
accordance with GAAP whenever it is presented.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
Reclassification of Lloyd's Commission Expenses
-----------------------------------------------
In the first quarter of 2003, we reclassified certain commission
expenses related to our operations at Lloyd's. In prior years,
we determined commission expense based on premiums reported by
the Lloyd's market (net of commissions) using an estimated
average commission rate. Until recently, gross premiums (prior
to reduction for commissions) were not available from the Lloyd's
market. That information is now available for current and prior
periods, and in the first quarter of 2003, we began recording
actual commission expense for our Lloyd's business. We
reclassified prior period results to record actual commission
expense on a basis consistent with that implemented in the first
quarter of 2003. There was no impact to net income or
shareholders' equity as previously reported for any prior
periods, because the reclassification had the impact of
increasing previously reported premiums and commission expense in
equal and offsetting amounts. In the first quarter of 2003, this
reclassification had the impact of increasing both net earned
premiums and policy acquisition costs by $25 million, compared
with what would have been recorded under our prior method of
estimation. In addition, net written premiums increased by $76
million (a portion of which was due to the elimination of the one-
quarter reporting lag). For the first quarter of 2002, the
impact was an increase to both net earned premiums and policy
acquisition costs of $23 million, and an increase to net written
premiums of $11 million.
Sale of Baltimore Office Campus
-------------------------------
In April 2003, we completed the sale our 68-acre office campus in
Baltimore, MD. We recorded a pretax impairment writedown of $14
million in the first quarter of 2003 related to the sale, which
was recorded as an operating expense in our property-liability
operations. On an after-tax basis, the writedown totaled $9
million, or $0.04 per common share (diluted).
Transfer of Ongoing Reinsurance Operations to Platinum
Underwriters Holdings, Ltd.
------------------------------------------------------
On November 1, 2002, we completed the transfer of our continuing
reinsurance business (previously operating under the name "St.
Paul Re") and certain related assets, including renewal rights,
to Platinum Underwriters Holdings, Ltd. ("Platinum"), a recently
formed Bermuda company that underwrites property and casualty
reinsurance on a worldwide basis.
As part of this transaction, we contributed $122 million of cash
to Platinum and transferred $349 million in assets relating to
the insurance reserves that we also transferred. In exchange, we
acquired six million common shares, representing a 14% equity
ownership interest in Platinum, and a ten-year option to buy up
to six million additional common shares at an exercise price of
$27 per share, which represents 120% of the initial public
offering price of Platinum's shares.
In conjunction with the transfer of our continuing reinsurance
business to Platinum, we entered into various agreements with
Platinum and its subsidiaries, including quota share reinsurance
agreements by which Platinum reinsured substantially all of the
reinsurance contracts entered into by St. Paul Re on or after
January 1, 2002. This transfer (based on September 30, 2002
balances) included $125 million of unearned premium reserves (net
of ceding commissions), $200 million of existing loss and loss
adjustment expense reserves and $24 million of other reinsurance-
related liabilities. The transfer of unearned premium reserves
to Platinum was accounted for as prospective reinsurance, while
the transfer of existing loss and loss adjustment expense
reserves was accounted for as retroactive reinsurance.
As noted above, the transfer of reserves to Platinum at the
inception of the quota share reinsurance agreements was based on
the September 30, 2002 balances. In March 2003, we transferred
to Platinum $137 million of additional insurance reserves,
consisting of $72 million in unearned premiums (net of ceding
commissions) and $65
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
million in existing reserves for losses and loss adjustment
expenses. We also transferred cash and other assets having a
value equal to the additional insurance reserves transferred.
This transfer of additional assets and liabilities reflected
business activity between September 30, 2002 and the November 2,
2002 inception date of the quota share reinsurance agreements,
and our estimate of amounts due under the adjustment provisions
of the quota share reinsurance agreements. Our insurance
reserves at December 31, 2002 included our estimate, at that
time, of amounts due to Platinum under the quota share
reinsurance agreements, which totaled $54 million. The $83
million increase in our estimate of amounts due to Platinum under
the quota share reinsurance agreements resulted in a pretax
underwriting loss of $6 million in the first quarter of 2003.
For business underwritten in the United States and the United
Kingdom, until October 31, 2003, Platinum has the right to
underwrite specified reinsurance business on our behalf in cases
where Platinum is unable to underwrite that business because it
has yet to obtain necessary regulatory licenses or approval to do
so, or Platinum has not yet been approved as a reinsurer by the
ceding company. We entered into this agreement solely as a means
to accommodate Platinum through a transition period. Any
business written by Platinum on our policy forms during this
transition period is being fully ceded to Platinum under the
quota share reinsurance agreements.
Our investment in Platinum is included in "Other investments."
The estimated income from our 14% proportionate equity ownership
in Platinum is included in our statement of operations as a
component of "Net investment income." Our option to purchase
additional Platinum shares is carried at market value ($55
million at March 31, 2003), with changes in its fair value
recorded as other realized gains or losses in our statement of
operations. In the first quarter of 2003, we recorded a realized
loss of $7 million related to this option.
Revisions to Business Segment Reporting Structure
-------------------------------------------------
In the first quarter of 2003, we revised our property-liability
insurance business segment reporting structure to reflect the
manner in which those businesses are now managed. As of March
31, 2003, our property-liability underwriting operations consist
of two segments constituting our ongoing operations (Specialty
Commercial and Commercial Lines), and one segment comprising our
runoff operations (Other). The composition of those respective
segments is described in greater detail in the analysis of their
results on pages 42 through 51 of this discussion. All data for
2002 included in this report were restated to be consistent with
the new reporting structure in 2003. The following is a summary
of changes made to our segments in the first quarter of 2003.
- Our Surety & Construction operations, previously reported
together as a separate specialty segment, are now separate
components of our Specialty Commercial segment.
- Our ongoing International operations and our ongoing
operations at Lloyd's, previously reported together as a
separate specialty segment, are now separate components of our
Specialty Commercial segment.
- Our Health Care, Reinsurance and Other operations, each
previously reported as a separate runoff business segment,
have been combined into a single Other runoff segment and are
under common management. "Runoff" means that we have ceased
or plan to cease underwriting business as soon as possible.
- The results of our participation in voluntary insurance
pools (which include the majority of our environmental and
asbestos liability exposures), previously included in our
Commercial Lines segment, are now included in the Other
segment. The oversight of these exposures is the
responsibility of the same management team responsible for
oversight of the other components of the Other segment.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
In accordance with provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," since Surety
& Construction, International & Lloyd's, Health Care, and
Reinsurance were reported as separate segments during 2002 and
are considered to be of continuing significance in analyzing the
results of our operations, we continue to separately present and
discuss (as appropriate) in Note 7 to our consolidated financial
statements and in Management's Discussion and Analysis,
information about those businesses in 2003 and the corresponding
period of 2002.
Our operations in runoff do not qualify as "discontinued
operations" for accounting purposes. For the three months ended
March 31, 2003, these runoff operations collectively accounted
for $160 million, or 9%, of our reported net earned premiums, and
generated underwriting losses totaling $99 million (an amount
that does not include investment income from the assets
maintained to support these operations). For the three months
ended March 31, 2002, these runoff operations collectively
accounted for $677 million, or 35%, of our net earned premiums,
and generated underwriting profits totaling $0.3 million.
Terrorism Risk and Legislation
------------------------------
On November 26, 2002, President Bush signed into law the
Terrorism Risk Insurance Act of 2002, or TRIA. TRIA establishes
a temporary federal program which requires U.S. and other
insurers to offer coverage in their commercial property and
casualty policies for losses resulting from terrorists' acts
committed by foreign persons or interests in the United States or
with respect to specified U.S. air carriers, vessels or missions
abroad. The coverage offered may not differ materially from the
terms, amounts and other coverage limitations applicable to other
policy coverages.
Under TRIA, the U.S. Secretary of the Treasury determines whether
an act is a covered terrorist act, and if it is covered, losses
resulting from that act ultimately are shared among insurers, the
federal government and policyholders. Generally, insurers pay
all losses to policyholders, retaining a defined "deductible" and
10% of losses above that deductible. The federal government will
reimburse insurers for 90% of losses above the deductible and,
under certain circumstances, the federal government will require
insurers to levy surcharges on policyholders to recoup for the
federal government its reimbursements paid. An insurer's
deductible in 2003 is 7% of the insurer's 2002 direct earned
premiums, and rises to 10% of 2003 direct earned premiums in 2004
and, if the program continues in 2005, 15% of 2004 direct earned
premiums in 2005. The program terminates at the end of 2004
unless the Secretary of the Treasury extends it to 2005. Federal
reimbursement of the insurance industry is limited to
$100 billion in each of 2003, 2004 and 2005, and no insurer that
has met its deductible shall be liable for the payment of its
portion of the aggregate industry insured loss that exceeds
$100 billion, thereby capping the insurance industry's and each
insurer's ultimate exposure to terrorist acts covered by TRIA.
TRIA voided terrorist exclusions in policies in-force on
November 26, 2002 to the extent of the TRIA coverage required to
be offered and imposed requirements on insurers to offer the TRIA
coverage to policyholders at rates chosen by the insurers on
policies in-force on November 26, 2002 and all policies renewed
or newly offered thereafter. Policyholders may accept or decline
coverage at the offered rate and, with respect to policies in-
force on November 26, 2002, TRIA coverage remains in effect until
the policyholder fails to purchase the coverage within a
specified period following the insurer's rate quotation for the
TRIA coverage. We have fully implemented our interim rating plans
in all states. In addition, long-term rating plans have been
developed and will be filed in each state. Fifteen states have
questioned our interim filing, and we continue to work with
those states to resolve their questions about our filings.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
We believe it is too early to determine TRIA's impact on the
insurance industry generally or on us. Our domestic insurance
subsidiaries are subject to TRIA and, in the event of a terrorist
act covered by TRIA, coverage would attach after losses of
approximately $430 million (calculated based on 7% of our TRIA-
qualifying calendar year 2002 direct earned premium total)
Accordingly, TRIA's federal reimbursement provisions alone do not
protect us from losses from foreign terrorist acts that could be
material to our results of operations or financial condition.
Furthermore, there is substantial uncertainty in determining the
appropriate rates for offering TRIA coverage (and coverage for
terrorist acts generally), and our quoted rates could be too low
and attract poor risks or, alternatively, could be higher than
our competitors and result in the loss of business. There are
numerous interpretive issues in connection with TRIA's
implementation by the Secretary of the Treasury that remain to be
resolved, including the timing of federal reimbursement for TRIA
losses, the standards for obtaining the federal reimbursement,
the mechanisms for allocating losses exceeding insurers'
deductibles and the participation by captive insurers in TRIA
coverages. We currently have property reinsurance that would
cover only a portion of our deductible. In April 2003, we
renewed our terrorism reinsurance coverage, as described in the
following discussion. There can be no assurance TRIA will
achieve its objective of creating a viable private insurance
market for terrorism coverage prior to TRIA's expiration, and
rates and forms used by us and our competitors may vary widely in
the future.
Regardless of TRIA, some state insurance regulators do not permit
terrorism exclusions in various coverages we write, and
currently, we have not excluded coverage for terrorist acts by
domestic terrorists (e.g., the Oklahoma bombing) in our domestic
coverages, or resulting from terrorist acts occurring outside the
United States from our international coverages. Accordingly, our
exposure to losses from terrorist acts is not limited to TRIA
coverages. Losses from terrorists' acts, whether arising under
TRIA coverages or otherwise, could be material to our results of
operations and financial condition.
Purchase of Terrorism Coverage and Exposure to Future Terrorist Events
----------------------------------------------------------------------
After the terrorist attacks in September 2001, reinsurers, in
general, specifically excluded terrorism coverage from property
reinsurance treaties that subsequently renewed. As a result, in
the second quarter of 2002, we purchased limited specific
terrorism coverage in the form of two separate property
reinsurance treaties. Those treaties expired on April 1, 2003,
on which date we renewed our coverage in the form of a combined
per-risk and catastrophe terrorism occurrence treaty. The treaty
provides both certified and non-certified TRIA coverage. (To be
TRIA certified, the terrorist act must be sponsored by an
international group or state and damage caused must exceed a
financial threshold, whereas non-certified coverage refers to
acts of domestic terrorism). In addition, we secured non-
certified TRIA terrorism coverage in our standard property
reinsurance treaty renewals in April 2003 as part of our overall
ceded reinsurance program. We renewed the majority of our
reinsurance treaties covering workers' compensation and general
liability business in 2002; those renewals include coverage for
terrorism. Our reinsurance treaties do not cover acts of
terrorism involving nuclear, biological or chemical events.
There can be no assurance that we will be able to secure
terrorism reinsurance coverage on expiring treaties each year.
Asbestos Settlement Agreement
-----------------------------
On June 3, 2002, we announced that we and certain of our
subsidiaries had entered into an agreement settling all existing
and future claims arising from any insuring relationship of
United States Fidelity and Guaranty Company ("USF&G"), St. Paul
Fire and Marine Insurance Company and their affiliates and
subsidiaries, including us (collectively, the "USF&G Parties")
with any of MacArthur Company, Western MacArthur Company
("Western MacArthur"), and Western Asbestos Company ("Western
Asbestos") (together, the "MacArthur Companies"). For a full
description of the circumstances leading up to the agreement,
refer to Note 3 on pages 68 and 69 of our 2002 Annual Report to
Shareholders.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
Pursuant to the provisions of the settlement agreement, on
November 22, 2002, the MacArthur Companies filed voluntary
petitions under Chapter 11 of the Bankruptcy Code to permit the
channeling of all current and future asbestos-related claims
solely to a trust to be established pursuant to Section 524(g) of
the Bankruptcy Code. Consummation of most elements of the
settlement agreement is contingent upon bankruptcy court approval
of the settlement agreement as part of a broader plan for the
reorganization of the MacArthur Companies (the "Plan"). Approval
of the Plan involves substantial uncertainties that include the
need to obtain agreement among existing asbestos plaintiffs, a
person who has been appointed to represent the interests of
unknown, future asbestos plaintiffs, the MacArthur Companies and
the USF&G Parties as to the terms of such Plan. Accordingly,
there can be no assurance that bankruptcy court approval of the
Plan will be obtained.
Upon final approval of the Plan, the MacArthur Companies will
release the USF&G Parties from any and all asbestos-related
claims for personal injury, and all other claims in excess of $1
million in the aggregate, that may be asserted relating to or
arising from directly or indirectly, any alleged coverage
provided by any of the USF&G Parties to any of the MacArthur
Companies, including any claim for extra contractual relief.
The after-tax impact on our 2002 net income, net of expected
reinsurance recoveries and the re-evaluation and application of
asbestos and environmental reserves, was approximately $307
million. This calculation reflected payments of $235 million
during the second quarter of 2002, and $747 million on January
16, 2003 (including interest). The $747 million payment,
together with $60 million of the original $235 million, shall be
returned to USF&G Parties if the Plan is not finally approved.
Accordingly, as of March 31, 2003 we had recorded those payments
of $807 million in both "Other Assets" and "Other Liabilities," since
the Plan had not yet been approved. The settlement agreement
also provided for the USF&G Parties to pay $13 million and to
advance certain fees and expenses incurred in connection with the
settlement, bankruptcy proceedings, finalization of the Plan and
efforts to achieve approval of the Plan, subject to a right of
reimbursement in certain circumstances of amounts advanced. That
amount was paid in the second quarter of 2002.
As a result of the settlement, pending litigation with the
MacArthur Companies has been stayed pending final approval of the
Plan. Whether or not the Plan is approved, $175 million of the
$235 million will be paid to counsel for the MacArthur Companies,
and persons holding judgments against the MacArthur Companies as
of June 3, 2002 and their counsel, and the USF&G Parties will be
released from claims by such holders to the extent of $110
million paid to such holders.
Cumulative Effect of Accounting Change
--------------------------------------
In the first quarter of 2002, we began implementing the
provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets," which established financial accounting and reporting for
acquired goodwill and other intangible assets. The statement
changed prior accounting practice in the way intangible assets
with indefinite useful lives, including goodwill, are tested for
impairment on an annual basis. Generally, it also required that
those assets meeting the criteria for classification as
intangible with finite useful lives be amortized to expense over
those lives, while intangible assets with indefinite useful lives
and goodwill are not to be amortized. In the second quarter of
2002, we completed an evaluation for impairment of our recorded
goodwill in accordance with provisions of SFAS No. 142. That
evaluation concluded that none of our goodwill was impaired. In
connection with our reclassification of certain assets previously
accounted for as goodwill to other intangible assets in 2002, we
established a deferred tax liability of $6 million in the second
quarter of 2002. That provision was classified as a cumulative
effect of accounting change effective as of January 1, 2002. In
accordance with SFAS No. 142, we restated our previously reported
results for the first quarter of 2002, reducing net income for
that period from the originally reported $139 million, or $0.63
per common share (diluted) to $133 million, or $0.60 per common
share (diluted).
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
As a result of implementing the provisions of this statement, we
no longer amortize our goodwill assets. Amortization expense
associated with intangible assets totaled $6 million in the first
quarter of 2003, compared with $3 million in the same 2002
period.
September 11, 2001 Terrorist Attack
-----------------------------------
In 2001, we recorded estimated net pretax losses totaling $941
million related to the September 11, 2001 terrorist attack in the
United States. We regularly evaluate the adequacy of our
estimated net losses related to the attack, weighing all factors
that may impact the total net losses we will ultimately incur.
During 2002, we recorded an additional loss provision of $20
million, and a $33 million reduction in our estimated provision
for uncollectible reinsurance related to the attack. In the
first quarter of 2003, we did not record any additions or
reductions to our estimated loss provision related to the attack.
Through March 31, 2003, we have made net loss payments totaling
$415 million related to the attack since it occurred, of which
$108 million were made in the first quarter of 2003. For further
information regarding the impact of the terrorist attack on our
operations, refer to Note 4 on page 69 of our 2002 Annual Report
to Shareholders.
Discontinued Operations
-----------------------
Standard Personal Insurance - In 1999, we sold our standard
personal insurance operations to Metropolitan Property and
Casualty Insurance Company ("Metropolitan"). Metropolitan
purchased Economy Fire & Casualty Company and subsidiaries
("Economy"), and the rights and interests in those non-Economy
policies constituting the remainder of our standard personal
insurance operations. Those rights and interests were
transferred to Metropolitan by way of a reinsurance and facility
agreement. We guaranteed the adequacy of Economy's loss and loss
expense reserves, and we remain liable for claims on non-Economy
policies that result from losses occurring prior to the September
30, 1999 closing date. Under the reserve-related agreements, we
agreed to pay for any deficiencies in those reserves and would
share in any redundancies that developed by September 30, 2002.
Any losses incurred by us under these agreements were reflected
in discontinued operations in the period during which they were
incurred. At December 31, 2002, our analysis indicated that we
owed Metropolitan $13 million related to the reserve agreements,
which was paid in April 2003. In the first quarters of 2003 and
2002, we recorded pretax losses of less than $100,000 and $2
million, respectively, in discontinued operations, related to
claims in respect of pre-sale losses.
Critical Accounting Policies
----------------------------
Overview - On pages 30 through 32 of our 2002 Annual Report to
Shareholders, we identified and described the critical accounting
policies related to accounting estimates that 1) require us to
make assumptions about highly uncertain matters and 2) could
materially impact our consolidated financial statements if we
made different assumptions. Those policies were unchanged at
March 31, 2003. The following discussion provides an update to
various financial disclosures related to critical accounting
policies pertaining to our investments.
We continually monitor the difference between our cost and the
estimated fair value of our investments, which involves
uncertainty as to whether declines in value are temporary in
nature. If we believe a decline in the value of a particular
investment is temporary, we record the decline as an unrealized
loss in our common shareholders' equity. If we believe the
decline is "other than temporary," we write down the carrying
value of the investment and record a realized loss on our
statement of operations. Our assessment of a decline in value
includes our current judgment as to the financial position and
future prospects of the entity that issued the investment
security. If that judgment changes in the future we may
ultimately record a realized loss after having originally
concluded that the decline in value was temporary. The following
table summarizes the total pretax gross unrealized loss recorded
in our common shareholders' equity at March 31, 2003 and Dec. 31,
2002, by invested asset class.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
(in millions) 2003 2002
----------- ----- -----
Fixed income (including securities
on loan) $ 44 $ 52
Equities 28 37
Venture capital 119 119
----- -----
Total unrealized loss $191 $208
===== =====
At March 31, 2003 and December 31, 2002, the carrying value of
our consolidated invested asset portfolio included $1.04 billion
and $1.03 billion of net pretax unrealized appreciation,
respectively.
The following table summarizes, for all securities in an
unrealized loss position at March 31, 2003 and Dec. 31, 2002, the
aggregate fair value and gross unrealized loss by length of time
those securities have been continuously in an unrealized loss
position.
March 31, 2003 December 31, 2002
------------------ ------------------
(in millions) Gross Gross
----------- Fair Unrealized Fair Unrealized
Value Loss Value Loss
----- ---------- ----- ----------
Fixed income (including
securities on loan):
0 - 6 months $ 728 $ 16 $ 673 $ 27
7 - 12 months 81 16 198 9
Greater than 12 months 145 12 198 16
----- ----- ----- -----
Total 954 44 1,069 52
----- ----- ----- -----
Equities:
0 - 6 months 152 19 144 15
7 - 12 months 33 7 80 20
Greater than 12 months 5 2 4 2
----- ----- ----- -----
Total 190 28 228 37
----- ----- ----- -----
Venture capital:
0 - 6 months 10 10 60 49
7 - 12 months 77 66 39 25
Greater than 12 months 42 43 44 45
----- ----- ----- -----
Total 129 119 143 119
----- ----- ----- -----
Total $1,273 $ 191 $1,440 $ 208
===== ===== ===== =====
At March 31, 2003, our fixed income investment portfolio included
non-investment grade securities and nonrated securities that in
total comprised approximately 3% of the portfolio. Included in
those categories at that date were securities in an unrealized
loss position that, in the aggregate, had an amortized cost of
$135 million and a fair value of $116 million, resulting in a net
pretax unrealized loss of $19 million. These securities
represented 1% of the total amortized cost and fair value of the
fixed income portfolio at March 31, 2003, and accounted for 43%
of the total pretax unrealized loss in the fixed income
portfolio. Included in those categories at Dec. 31, 2002 were
securities in an unrealized loss position that, in the aggregate,
had an amortized cost of $160 million and a fair value of $140
million, resulting in a net pretax unrealized loss of $20
million. These securities represented 1% of the total amortized
cost and fair value of the fixed income portfolio at Dec. 31,
2002, and accounted for 38% of the total pretax unrealized loss
in the fixed income portfolio.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Consolidated Highlights (continued)
----------------------------------
The following table presents information regarding those fixed
income investments, by remaining period to maturity date, that
were in an unrealized loss position at March 31, 2003.
March 31, 2003
------------------------
(in millions) Amortized Estimated
----------- Cost Fair Value
--------- ----------
Remaining period to maturity date:
One year or less $ 113 $ 112
Over one year through five years 200 195
Over five years through ten years 315 301
Over ten years 168 161
Asset/mortgage-backed
securities with various maturities 202 185
------- -------
Total $ 998 $ 954
======= =======
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance
----------------------------
Overview
--------
Our first-quarter 2003 consolidated net written premiums of $1.98
billion were 7% below comparable 2002 premiums of $2.12 billion.
Strong growth in our ongoing Specialty Commercial and Commercial
Lines segments was more than offset by an 84% decline in premium
volume in our Other segment that was primarily due to the
transfer of our ongoing reinsurance operations to Platinum in
November 2002. Net written premium volume in our ongoing
segments of $1.87 billion grew 32% over the first-quarter 2002
total of $1.41 billion, driven by $234 million of incremental
premiums recorded as a result of eliminating the one-quarter
reporting lag for our operations at Lloyd's and continued strong
price increases throughout the business centers comprising these
segments. Excluding the $234 million incremental Lloyd's volume
in 2003, ongoing segments' net written premiums of $1.63 billion
were 16% higher than first-quarter 2002.
Our consolidated statutory loss ratio, which measures insurance
losses and loss adjustment expenses as a percentage of earned
premiums, was 65.5 for the first quarter of 2003, compared with a
loss ratio of 71.2 in the same 2002 period. In our ongoing
segments, the 2003 first-quarter loss ratio of 60.7 was nearly
ten points better than the comparable 2002 loss ratio of 70.6.
The significant improvement reflected the impact of price
increases in recent years and the success of our efforts to
improve the quality of our business through underwriting
discipline. In our runoff Other segment, the first-quarter 2003
loss ratio of 111.9 was significantly worse than the 2002 first-
quarter ratio of 72.3, primarily due to declining earned premiums
and unfavorable prior-year loss development in certain underwriting
syndicates in our runoff operations at Lloyd's.
Effective January 1, 2003, we changed our disclosure regarding
catastrophe losses. We no longer classify all losses from
Insurance Services Office (ISO)-defined catastrophes as
"catastrophe losses." We revised our definition of losses
reported as "catastrophes" to include only those events that
generate losses beyond a level normally expected in our business.
This revised definition has no impact on recorded results for
either the current or prior period. Catastrophe losses reported
in prior periods have been reclassified to conform to our new
definition. Our catastrophe losses, as newly defined, were
minimal in the first quarter of 2003. In the first quarter of
2002, we recorded an $11 million reduction in the provision for
catastrophes incurred in prior years.
Our consolidated statutory expense ratio, measuring underwriting
expenses as a percentage of net written premiums, was 31.7 for
the first quarter of 2003, compared with the 2002 first-quarter
ratio of 28.3. Our ongoing segments' expense ratio of 30.3 in
the first quarter of 2003 included 2.8 points attributable to the
impact of the reclassification of commission expense on certain
Lloyd's business, and the impact on that commission expense of
eliminating the one-quarter reporting lag. Excluding that 2.8
point detriment, our first-quarter 2003 ongoing segments' expense
ratio of 27.5 improved by over one point over the same 2002
period, reflecting the impact of price increases and the cost
savings realized throughout our operations as a result of our
efficiency initiatives.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Prior-Year Loss Development
---------------------------
"Prior-year loss development" refers to the calendar year income
statement impact of changes in the provision for losses and loss
adjustment expenses for claims incurred in prior accident years.
The following table summarizes net loss and loss adjustment
expense reserves at December 31, 2002 and March 31, 2003 for each
of our property-liability segments (and the material components
thereof), and the amount of unfavorable (favorable) prior-year
loss development recorded in those respective operations in the
first quarter of 2003.
Net Reserves
----------------------------------
Dec. 31, March 31, Loss
(in millions) 2002 2003 Development
----------- ------- -------- -----------
Ongoing operations:
Specialty Commercial:
Specialty $2,043 $2,145 $ 1
Surety & Construction 1,369 1,395 -
International & Lloyd's 987 1,040 (14)
------ ------ ------
Total Specialty
Commercial 4,399 4,580 (13)
------ ------ ------
Commercial Lines 2,495 2,479 -
------ ------ ------
Total Ongoing
Operations 6,894 7,059 (13)
------ ------ ------
Runoff Operations:
Other:
Health Care 1,970 1,761 -
Reinsurance 3,043 2,739 (27)
Other Runoff 2,942 2,375 66
------ ------ ------
Total Runoff
Operations 7,955 6,875 39
------ ------ ------
Total Underwriting $14,849 $13,934 $ 26
====== ====== ======
Specific circumstances leading to the reserve development
recorded in the first quarter of 2003 are discussed in more
detail in the respective segment discussions that follow.
The table on the following page summarizes key financial results
(from continuing operations) by property-liability underwriting
business segment (underwriting results are presented on a GAAP
basis; combined ratios are presented on a statutory accounting
basis). In the first quarter of 2003, we implemented a new
segment reporting structure for our property-liability
underwriting operations. Data for first-quarter 2002 in the
table have been reclassified to be consistent with the new
segment reporting structure.
Following the table is a detailed discussion of the results for
each segment for the first quarters of 2003 and 2002. In
addition to "prior-year loss development," we sometimes refer to
"current-year loss development" or "current accident year loss
activity," which refers to the calendar year income statement
impact of recording the provision for losses and LAE for losses
incurred in the current accident year.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Three Months
% of Total Ended March 31
Premiums --------------
($ in millions) ---------- 2003 2002
------------- ----- -----
Specialty Commercial
Net written premiums 67% $1,332 $911
Underwriting result $118 $(6)
Combined ratio 91.4 99.1
Commercial Lines
Net written premiums 27% $535 $499
Underwriting result $38 $(5)
Combined ratio 90.3 99.4
Other
Net written premiums 6% $110 $708
Underwriting result $(99) $ -
Combined ratio 167.4 99.7
--- ----- -----
Total Property-
Liability Insurance
Net written premiums 100% $1,977 $2,118
=== ===== =====
Underwriting result $ 57 $ (11)
===== =====
Statutory combined ratio:
Loss and loss adjustment
expense ratio 65.5 71.2
Underwriting expense ratio 31.7 28.3
----- -----
Combined ratio 97.2 99.5
===== =====
Specialty Commercial
--------------------
The Specialty Commercial segment includes our combined Surety &
Construction operation, our ongoing International & Lloyd's
operations, and the following nine specialty business centers
that in total comprise the "Specialty" component of this segment:
Technology, Financial and Professional Services, Marine, Personal
Catastrophe Risk, Public Sector Services, Discover Re, Excess &
Surplus Lines, Specialty Programs and Oil & Gas. These business
centers are considered specialty operations because each provides
products and services requiring specialty expertise and focuses
on the respective customer group served. Our Surety business
center 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
Construction business center offers a variety of products and
services, including traditional insurance and risk management
solutions, to a broad range of contractors and parties
responsible for construction projects. Our ongoing International
operations consist of our primary underwriting operations in
Canada (other than surety), the United Kingdom and the Republic
of Ireland, and the international exposures of most U.S.
underwriting business. At Lloyd's, our ongoing operations are
comprised of the following types of insurance coverage we
underwrite through a single wholly-owned syndicate: Aviation,
Marine, Global Property and Personal Lines. The following table
provides supplemental information for this segment for the first
quarters of 2003 and 2002.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Three Months
Ended March 31
--------------
(Dollars in millions) 2003 2002
------------------- ---- ----
Specialty:
Net written premiums $532 $473
Percentage increase over 2002 13%
Underwriting result $59 $9
Statutory combined ratio:
Loss and loss adjustment expense ratio 62.3 72.1
Underwriting expense ratio 25.0 24.7
---- ----
Combined ratio 87.3 96.8
==== ====
Surety & Construction:
Net written premiums $332 $345
Percentage decline from 2002 (4%)
Underwriting result $14 $2
Statutory combined ratio:
Loss and loss adjustment expense ratio 62.5 63.6
Underwriting expense ratio 33.2 31.4
---- ----
Combined ratio 95.7 95.0
==== ====
International & Lloyd's:
Net written premiums $468 $93
Percentage increase over 2002 403%
Underwriting result $45 $(17)
Statutory combined ratio:
Loss and loss adjustment expense ratio 54.2 79.0
Underwriting expense ratio 36.7 38.2
---- -----
Combined ratio 90.9 117.2
==== =====
Specialty
---------
In our Specialty operations, virtually all business centers
contributed to the 13% growth in premium volume over the first
quarter of 2002. Price increases throughout these specialty
operations were significant in the first quarter of 2003, and
business retention levels remained stable. Net written premium
growth compared to the same 2002 period in this segment was
negatively impacted by a change in emphasis in our ceded
reinsurance program from excess-of-loss coverages to quota share
arrangements. In addition, ceded reinsurance costs increased
over the first quarter of 2002 as a result of price increases on
property and casualty treaties renewed in April and July 2002.
Financial & Professional Services' first-quarter 2003 premiums of
$124 million were 27% higher than those in the same 2002 period,
driven by price increases and new business principally generated
by our December 2002 acquisition of the right to seek to renew
the professional and financial risk practice business of Royal &
SunAlliance. Specialty Programs recorded written premiums of $53
million in the first quarter of 2003, 48% higher than comparable
2002 premiums of $36 million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
The primary contributors to Specialty's $50 million improvement
in underwriting profit over the first quarter of 2002 were
Financial & Professional Services, with a $13 million
improvement, and Technology, with a $12 million improvement.
Current accident year results were favorable throughout the
Specialty business centers, driven by strong pricing and
improvement in the quality of our book of business.
Surety & Construction
---------------------
Net written premiums generated by our Surety business center
totaled $93 million in the first quarter of 2003, down 14% from
the comparable 2002 total of $107 million. The decline was
primarily due to $25 million of premiums ceded under a new
reinsurance contract effective as of January 1, 2003. Excluding
that $25 million cession, premiums of $118 million increased by
$11 million over the first quarter of 2002, reflecting
incremental premiums generated from our March 2002 acquisition of
London Guarantee Insurance Company (subsequently renamed "St.
Paul Guarantee"). In our Construction business center, written
premiums of $239 million were virtually level with premium volume
of $238 million in the first quarter of 2002, as price increases
during the quarter were largely offset by a reduction in new
business.
The Surety underwriting loss totaled $10 million in 2003's first
quarter, compared with an underwriting profit of $1 million in
the same 2002 period. In the first quarter of 2002, favorable
prior-year development totaled $13 million, whereas in the first
quarter of 2003, we experienced negligible prior-year development
in our Surety operation. Construction's first-quarter 2003
underwriting profit of $24 million was significantly higher than
the comparable 2002 profit of $1 million, primarily due to an
improvement in current-year loss experience.
In our Surety operation, we continue to experience an increase in
the frequency of reported losses, primarily resulting from the
continuing economic downturn in North America. Certain segments
of our commercial surety business tend to be characterized by low
frequency but potentially high severity losses. In October of
2000, we made a strategic decision to significantly reduce the
exposures in these segments. Since that time, we have reduced
our total commercial surety gross open bond exposure by over 45%
as of March 31, 2003.
Within these segments, we have exposures related to a small
number of accounts, which are now in various stages of bankruptcy
proceedings. In addition, certain other accounts have
experienced deterioration in creditworthiness since we issued
bonds to them. Given the current economic climate and its impact
on these companies, we may experience an increase in claims and,
possibly, incur high severity losses. Such losses would be
recognized in the period in which the claims are filed and
determined to be a valid loss under the provisions of the surety
bond issued.
With regard to commercial surety bonds issued on behalf of
companies operating in the energy trading sector, our aggregate
pretax exposure, net of facultative reinsurance, is with six
companies for a total of approximately $418 million ($347 million
of which is from gas supply bonds), an amount which will decline
over the contract periods. The largest individual exposure
approximates $190 million (pretax and before reinsurance). These
companies all continue to perform their bonded obligations and,
therefore, no claims have been filed.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
With regard to commercial surety bonds issued on behalf of
companies currently in bankruptcy, our largest individual
exposure, pretax and before estimated reinsurance recoveries,
approximated $120 million as of March 31, 2003. This exposure
consists of bonds securing certain workers' compensation
obligations with an aggregate face amount of $80 million, and a
bond securing certain retiree health benefit obligations with a
face amount of $40 million. In April 2003, a bankruptcy court
approved the sale of substantially all of the assets of the
company in bankruptcy accounting for this exposure. Under the
terms approved by the court, the buyer will not assume that
company's obligations related to workers' compensation and
retiree health benefits. Following the bankruptcy court's
approval of the asset sale, we began receiving claim notices on
April 25, 2003 relating to a substantial portion of the bonds
securing the workers' compensation obligations. Given these
developments, we believe that we will continue to receive claim
notices related to the remaining workers' compensation bonds and,
separately, the bond securing the retiree health benefit
obligations. We are reviewing the claim notices to assess their
validity under the provisions of the relevant surety bonds. We
will record loss provisions when sufficient information is
available to fully review the claims and to estimate our ultimate
obligations under the bonds. Until this assessment is completed,
we are unable to estimate a reasonable range of our potential
ultimate losses after tax and after reinsurance in this matter.
However, based on preliminary information currently available to
us, we believe those losses may be somewhat lower than the face
amount of the bonds.
In addition to the exposures discussed above with respect to
energy trading companies and companies in bankruptcy, our
commercial surety business as of March 31, 2003 included seven
accounts with gross pretax bond exposures greater than $100
million each, before reinsurance. The majority of these accounts
have investment grade ratings, and all accounts continue to
perform their bonded obligations.
We continue with our intention to exit the segments of the
commercial surety market discussed above by ceasing to write new
business and, where possible, terminating the outstanding bonds.
We will continue to be a market for traditional commercial surety
business, which includes low-limit business such as license and
permit, probate, public official, and customs bonds.
International & Lloyds
----------------------
Written premium volume in the first quarter of 2003 included $234
million of additional premiums recorded as a result of our
elimination of the one-quarter reporting lag for our operations
at Lloyd's (the remaining $3 million of incremental premiums
described on page 31 of this report was recorded in our runoff
Other segment). Excluding that $234 million additional amount,
premium volume in 2003 of $234 million was more than double the
first-quarter 2002 total of $93 million. At Lloyd's, premium
volume excluding the $234 million quarter-lag impact totaled $132
million in the first quarter of 2003, compared with $24 million
in the same 2002 period. Price increases on all coverages
underwritten through Lloyd's were a major factor contributing to
premium growth. The growth was concentrated in our Personal
Lines business, reflecting significant price increases, as well
as an increase in our participation in these coverages following
the consolidation of most of our Lloyd's operations into one
wholly-owned syndicate in 2002. In addition, premium volume
recorded in the first quarter of 2002 was negatively impacted by
delayed policy renewals and reinstatement premiums paid following
the September 11, 2001 terrorist attack. In our International
operations, first-quarter 2003 written premiums of $102 million
were 47% higher than first-quarter 2002 premiums of $69 million,
driven by price increases and new business.
Underwriting results for our International & Lloyd's operations
in the first quarter of 2003 included $10 million in additional
profits attributable to the elimination of the one-quarter
reporting lag. Excluding the $10 million impact of the quarter
lag elimination, the first-quarter 2003 underwriting profit was
$35 million, driven by strong results from our operations in
Canada and the United Kingdom, and our Aviation business at
Lloyd's. The underwriting loss of $17 million in the first
quarter of 2002 was driven by provisions to increase prior-year
loss reserves in our operations at Lloyd's.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Commercial Lines
----------------
The Commercial Lines segment includes our Small Commercial,
Middle Market Commercial and Property Solutions business centers,
as well as the results of our limited involvement in insurance
pools. The Small Commercial business center services commercial
firms that typically have between one and fifty employees through
its proprietary St. Paul Mainstreet (SM) and St. Paul Advantage
(SM) products, with a particular focus on offices, wholesalers,
retailers, artisan contractors and other service risks. The
Middle Market Commercial business center offers comprehensive
insurance coverages for a wide variety of manufacturing,
wholesale, service and retail exposures. This business center
also offers loss-sensitive casualty programs, including
significant deductible and self-insured retention options, for
the higher end of the middle market sector. The Property
Solutions business center combines our Large Accounts Property
business with the commercial portion of our catastrophe risk
business and allows us to take a unified approach to large
property risks. The following table summarizes key financial
data for this segment for the first three months of 2003 and
2002.
Three Months
Ended March 31
--------------
(Dollars in millions) 2003 2002
------------------- ---- ----
Net written premiums $535 $499
Percentage increase over 2002 7%
Underwriting result $38 $(5)
Statutory combined ratio:
Loss and loss adjustment expense ratio 62.0 70.6
Underwriting expense ratio 28.3 28.8
---- ----
Combined ratio 90.3 99.4
==== ====
The 7% growth in net written premiums over the first quarter of
2002 reflected significant price increases throughout the
segment, the impact of which was partially offset by an increase
in ceded reinsurance costs related to our property reinsurance
treaties that were renewed on April 1, 2002. As expected, the
pace of price increases began to slow in the first quarter of
2003, but those increases continued to be the primary factor in
premium growth over the comparable 2002 period as our business
retention levels remained stable. Written premiums of $161
million in the Small Commercial business center were 7% below
comparable first-quarter 2002 volume, due to our concerted
efforts to shed unprofitable accounts and focus on expanding our
core profitable business. In the Middle Market Commercial
business center, premium volume of $351 million in the first
quarter was 12% higher than the same period of 2002. Property
Solutions' written premiums of $16 million in the first quarter
of 2003 grew 47% over comparable premium volume in the same
period of 2002.
The significant improvement in underwriting profitability
compared with the first quarter of 2002 was centered in our
current accident year results in each of the business centers
comprising this segment, reflecting the impact of price increases
and an improvement in the quality of our business. We remain
selective in pursuing new business, focusing on opportunities
that meet our pricing and underwriting criteria. In addition, we
continue to achieve efficiencies in our claim handling
procedures, further contributing to our improved results.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Other
-----
This segment includes the results of the lines of business we
placed in runoff in late 2001 and early 2002, including our
former Health Care and Reinsurance segments, and the results of
the following operations: our runoff operations at Lloyd's;
Unionamerica, the London-based underwriting unit acquired as part
of our purchase of MMI in 2000; and international operations we
decided to exit at the end of 2001. We have a management team in
place for these operations, seeking to ensure that our
outstanding claim obligations are settled in an expeditious and
economical manner. This segment also includes the results of our
participation in voluntary insurance pools (which include the
majority of our environmental and asbestos liability exposures).
The oversight of these exposures is the responsibility of the
same management team responsible for oversight of the other
components of the Other segment. Our Health Care operation
historically provided a wide range of medical liability insurance
products and services throughout the entire health care delivery
system. Our Reinsurance operations historically underwrote
treaty and facultative reinsurance for a wide variety of property
and liability exposures. As described in more detail on pages 32
and 33 of this report, in November 2002 we transferred our
ongoing reinsurance operations to Platinum Underwriters Holdings,
Ltd. The following table summarizes key financial data for the
Other segment for the first quarters of 2003 and 2002. The table
excludes statutory ratios, as they are less meaningful in a
runoff environment because of the significant decline in net
written and earned premiums.
Three Months
Ended March 31
--------------
(Dollars in millions) 2003 2002
------------------- ---- ----
Health Care:
Net written premiums $19 $110
Percentage decline from 2002 (83%)
Underwriting result $(17) $4
Reinsurance:
Net written premiums $65 $462
Percentage decline from 2002 (86%)
Underwriting result $18 $15
Other Runoff:
Net written premiums $26 $136
Percentage decline from 2002 (81%)
Underwriting result $(100) $(19)
Other Segment Overview
----------------------
Our Other segment in total reported an underwriting loss of $99
million in the first quarter of 2003, compared with breakeven
results in the same 2002 period. As described in more detail in
the following discussion, the segment loss in 2003 included net
unfavorable prior-period loss development of $39 million. The
remainder of the first-quarter underwriting loss was primarily
the result of provisions for losses on current accident year
business, and expenses associated with the runoff lines of
business in this segment.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Health Care
-----------
We announced our decision to exit the medical liability insurance
market at the end of 2001. Written premiums of $110 million in
the first quarter of 2002 primarily consisted of premiums
generated by extended reporting endorsements and professional
liability coverages underwritten prior to our nonrenewal
notifications becoming effective in several states. In the first
quarter of 2003, reporting endorsements related to physicians'
and surgeons' coverages accounted for the majority of written
premium volume. We are required to offer reporting endorsements
to claims-made policyholders at the time their policies are
nonrenewed. These endorsements cover losses incurred in prior
periods that have not yet been reported. Unlike typical
policies, premiums on these endorsements are fully earned, and
the expected losses are recorded, at the time the endorsement is
written.
In 2000 and 2001, we recorded cumulative prior-year reserve
charges of $225 million and $735 million, respectively, in our
Health Care operations, ultimately leading to our decision at the
end of 2001 to exit this market. In general, the reserve
increases primarily resulted from claim payments being greater
than anticipated due to the recent escalation of large jury
awards, which included substantially higher than expected pain
and suffering awards. This affected our view of not only those
cases going to trial, but also our view of all cases where
settlements are negotiated and the threat of a large jury verdict
aids the plaintiff bar in the negotiation process. The recent
escalation in claim costs that resulted from these developments
was significantly higher than originally projected trends (which
had not forecasted the change in the judicial environment), and
has now been considered in our actuarial analysis and the
projection of ultimate loss costs. In addition, a portion of the
reserve increase in the fourth quarter of 2001 resulted from
information obtained from the work of a Health Care Claims Task
Force, created during the first half of 2001, which focused
resolution efforts on our largest claims with the intent of
lowering our ultimate loss costs.
The following presents a summary of trends we observed within our
Health Care operation for each quarter of 2002 and the first
quarter of 2003. For a discussion of quarterly trends observed
in 2000 and 2001, refer to page 40 of our 2002 Annual Report to
Shareholders.
2002
----
Following the cumulative prior-year reserve charges of $735
million in 2001, activity in the first quarter of 2002 developed
according to projections. Average paid claims for the full year
of 2001 for medical malpractice lines had been $117,000,
including a fourth quarter average of $124,000. The phrase
"average paid claims" as used herein excludes claims which were
settled or closed for which no loss or loss expense was paid. In
the first quarter of 2002, the average paid loss was down to
$111,000. We interpreted this as a positive sign that prior year
reserve charges up to this point had been adequate. The average
outstanding case reserve increased slightly from $141,000 in the
fourth quarter of 2001 to $144,000 in the first quarter of 2002,
but this was interpreted as a relatively benign change, given
inflation and the promising decrease in average payment amounts.
No additional reserve action was taken.
In the second quarter of 2002, average paid claims for medical
malpractice lines were again somewhat above expectations, rising
to $130,000 for the quarter. This, coupled with an additional
increase in the average outstanding case reserve to $148,000,
prompted management to reflect these new increased averages in
its reserve analysis and record a reserve increase of $97
million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Throughout 2002, we initiated significant changes to our Health
Care claims organization and resolution process. During the
third quarter of 2002, we began to see the results of executing
this strategy. Specifically, caseloads per adjuster had begun to
decline substantially and the process for providing oversight on
high exposure cases had been streamlined, enabling a more
expeditious approach to our handling of these medical malpractice
claims - including the establishment of stronger case reserves.
We also added staff with expertise in high exposure litigation
management to assist claim handlers in aggressively pursuing
appropriate resolutions on a file-by-file basis. This allowed us
to establish more effective resolution strategies to either
resolve claims prior to going to trial or, for those claims
deemed as non-meritorious, maintain an aggressive defense. We
have also become more selective in determining which cases are
taken to trial and more willing to make use of our right to
select defense counsel in those instances that we decide to
litigate. This has caused our ratio of defense verdicts to
plaintiff verdicts to improve over prior years. We began to more
effectively manage our claim disposition strategies to limit the
number of catastrophic verdicts. We believe that executing this
strategy has increased our ability to reduce our ultimate
indemnity losses.
As noted above, as part of our focus on claim resolution, we have
increased our emphasis on routinely reviewing our case reserves
and have put in place a process where managers actively review
each adjuster's entire inventory of pending files to assure,
among other things, that case reserves are adequate to support
settlement values. In addition, as we have moved further into
runoff, our mix of paid and outstanding claims has changed and we
expect that our statistical data will reflect fewer new claims.
We expect our claim counts will go down and the average size of
our outstanding and paid claims will go up since newly reported
claims are often settled at minimal loss or loss expense cost.
In the third quarter of 2002, although our average paid claim
decreased slightly to $126,000, our average outstanding claim
reserve increased to $166,000. We believed that increases in the
average outstanding claim reserve were due to both the claim mix
and case strengthening as described above and were not unexpected
in a runoff environment. Accordingly, we did not record any
reserve charge given the favorable effects we anticipate
realizing in future ultimate payments.
In the fourth quarter of 2002, the average paid claim increased
to $153,000 and the average outstanding case reserve increased to
$181,000, which we believe was attributable to the previously
described observations and was reasonable relative to our
expectations.
Also during the fourth quarter, we determined that our claim
inventory had been reduced considerably and had matured to a
level at which we appropriately began to consider other more
relevant data and statistics suitable for evaluating reserves in
a runoff environment.
During 2002, and as described above, we concluded that the impact
of settling claims in a runoff environment was causing abnormal
effects on our average paid claims, average outstanding claims,
and the amount of average case reserves established for new
claims - all of which are traditional statistics used by our
actuaries to develop indicated ranges of expected loss. Taking
these changing statistics into account, we developed varying
interpretations of our data, which implied added uncertainty to
our evaluation of these reserves. It is our belief that this
data, when appropriately evaluated in light of the impact of our
migration to a runoff environment, supports our view that we will
realize significant savings on our ultimate claim costs.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
In the fourth quarter of 2002, we established specific tools and
metrics to more explicitly monitor and validate our key
assumptions supporting our reserve conclusions since we believe
that our traditional statistics and reserving methods needed to
be supplemented in order to provide a more meaningful analysis.
The tools we developed track the three primary indicators which
are influencing our expectations and include: a) newly reported
claims, b) reserve development on known claims and c) the
"redundancy ratio," comparing the cost of resolving claims to the
reserve established for that individual claim.
Emergence of newly reported claims - Our Health Care book of
business was put into runoff at the end of 2001, and our
outstanding exposure has rapidly dropped, as expected. Since
the majority of coverage we offered was on a claims-made
basis and notification of the claim must be made within the
policy period, the potential for unreported claims has
decreased significantly. We expect that the emergence of
newly reported medical malpractice claims, with incurred
years of 2002 or prior, would not exceed 40% of our current
outstanding case reserve amount.
Development on known claims - As part of executing our runoff
claims strategy, the inventory of claim-specific case
reserves was reviewed during 2002 in an effort to reserve
each claim as appropriately as possible. This effort is in
its advanced stages, and our expectations for additional
reserve strengthening on known claims is considered to be
minimal. We do not expect additional case development on
medical malpractice claims to exceed 3% of existing case
reserves.
Case redundancy - While there were claims settlements which
exceeded the claim-specific reserve that had been
established, on the whole, claims are being settled at a
level significantly less than the individual case reserve
previously carried. During 2001, the amount of excess
reserves above settled amounts as a percentage of previously
established reserves (referred to as a redundancy ratio) were
in the range of 25% to 30%. By the end of 2002, the
redundancy ratio had increased to between 35% and 40%. We
expect this ratio to stay within this range to support our
best estimate of a reasonable provision for our loss
reserves.
2003
----
In the first quarter of 2003, we evaluated the adequacy of our
previously established medical malpractice reserves in the
context of the three indicators described above. The dollar
amount of newly reported claims in the quarter totaled $118
million, approximately 25% less than we anticipated in our
original estimate of the required level of redundancy at year-end
2002. With regard to development on known claims, loss activity
in the first quarter of 2003 was within our expectations. Case
development on incurred years 2001 and prior was minimal, and
case development on the 2002 incurred year totaled $39 million,
within our year-end 2002 estimate of no more than 3% of
development. For the first quarter of 2003, our redundancy ratio
was within our expected range of between 35% and 40%.
The three indicators described above are related such that if one
deteriorates, additional improvement on another is necessary for
us to conclude that further reserve strengthening is not
necessary. While the recent results of these indicators support
our current view that we have recorded a reasonable provision for
our medical malpractice exposures as of March 31, 2003, there is
a reasonable possibility that we may incur additional unfavorable
prior year loss development if these indicators significantly
change from our current expectations. If these indicators
deteriorate, we believe that a reasonable estimate of an
additional loss provision could amount to up to $250 million.
However, our analysis as of this point in time continues to
support our belief that we will realize favorable effects in our
ultimate costs and that our current loss reserves will prove to
be a reasonable provision.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
Reinsurance
-----------
In November 2002, we transferred our ongoing reinsurance
operations to Platinum Underwriters Holdings, Ltd. ("Platinum")
while retaining liabilities generally for reinsurance contracts
incepting prior to January 1, 2002. Written premium volume
recorded in the first quarter of 2003 consisted entirely of
premium adjustments relating to reinsurance business underwritten
in prior years. The underwriting profit of $18 million recorded
in the first quarter of 2003 was driven by $27 million of
favorable development on losses incurred in prior years. As part
of our actuarial analysis completed during the first quarter, we
observed a notable change in reported prior-year loss activity,
which caused us to reassess our assumptions being used for
determining the expected timing and amount of future reported
losses. Accordingly, by changing these assumptions, our analysis
concluded that prior-year loss reserves were redundant and a
favorable adjustment was recorded. The $27 million favorable
adjustment represented less than 1% of our net reinsurance
reserves at Dec. 31, 2002.
The first-quarter 2003 result also included a $6 million
underwriting loss related to the transfer of additional assets
and reserves to Platinum. In the first quarter of 2002, the
underwriting profit reflected the impact of price increases, as
well as a reduction in the provision for catastrophe losses
incurred in prior years.
Other Runoff
------------
This category includes the results of the following operations:
our runoff operations at Lloyd's; Unionamerica, the London-based
underwriting unit acquired as part of our purchase of MMI in
2000; and international operations we decided to exit at the end
of 2001. The $100 million underwriting loss in the first quarter
of 2003 in this category included $35 million of loss
provisions to increase prior-year reserves in our runoff
syndicates at Lloyd's in the first quarter of 2003. The
unfavorable development was concentrated in North American
casualty coverages, as well as specific lines associated with
Financial Institutions and Professional coverages. We
experienced deterioration in those same syndicates throughout
2002, leading us to increase reserve levels. In the first
quarter of 2003, further analysis undertaken by an independent
party on our behalf in connection with Lloyds' compliance with
annual regulatory requirements provided us with additional
information and analyses which led us to record the $35 million
loss provision.
Also contributing to the first-quarter underwriting loss in this
segment in 2003 was $31 million of unfavorable prior-year
development primarily related to several specific large losses in
a number of countries within our exited international operations
where we have ceased underwriting business. The
remainder of the first-quarter underwriting loss was
the result of provisions for losses on current accident year
business, and expenses associated with the runoff lines of
business in this segment.
Investment Operations
---------------------
First-quarter 2003 pretax net investment income in our property-
liability insurance operations totaled $280 million, $10 million
below the same period of 2002. Our investment income in recent
quarters has been negatively impacted by declining yields on new
investments and a reduction in funds available for investment due
to significant cash payments for insurance losses and loss
adjustment expenses, including payments related to our runoff
operations. In addition, we made a planned payment of $747
million (including interest) in mid-January 2003 related to the
settlement of the Western MacArthur asbestos litigation, further
reducing our invested asset base. Since the end of 1999, average
new money rates on taxable and tax-exempt securities have fallen
from 7.2% and 5.4%, respectively, to 4.5% and 3.5%, respectively,
at March 31, 2003.
Net pretax realized investment losses in our property-liability
insurance operations totaled $32 million in the first quarter of
2003, compared with realized losses of $39 million in the same
2002 period. In the first quarter of 2003, we sold fixed income
securities with a cumulative amortized cost of $280 million,
generating gross pretax gains of $16 million. These gains were
largely offset by impairment writedowns totaling $9 million. Net
pretax realized losses generated by sales from our equity
portfolio totaled $20 million in the first quarter of 2003. In
our venture capital portfolio, pretax realized gains from the
sale of securities totaled $22 million in the first quarter of
2003, an amount that was more than offset by impairment
writedowns totaling $28 million.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Property-Liability Insurance (continued)
---------------------------------------
In the first quarter of 2002, we sold fixed income securities
with a cumulative amortized cost of $566 million, generating
gross pretax gains of $13 million. In our venture capital
portfolio, impairment writedowns totaled $17 million in the first
quarter of 2002.
The market value of our $15.6 billion fixed income portfolio
exceeded its cost by $1.03 billion at March 31, 2003.
Approximately 96% of that portfolio is rated at investment grade
(BBB or above). The weighted average pretax yield on those
investments was 6.1% at March 31, 2003, down from 6.5% a year
earlier.
Environmental and Asbestos Claims
---------------------------------
We continue to receive claims, including through lawsuits,
alleging injury or damage from environmental pollution or seeking
payment for the cost to clean up polluted sites. We also receive
asbestos injury claims, including through lawsuits, arising out
of coverages under general liability policies. Most of these
claims arise from policies written many years ago. Significant
legal issues, primarily pertaining to the scope of coverage,
complicate the determination of our alleged liability for both
environmental and asbestos claims. In our opinion, court
decisions in certain jurisdictions have tended to broaden
insurance coverage for both environmental and asbestos matters
beyond the intent of the original insurance policies.
Our ultimate liability for environmental claims is difficult to
estimate because of these legal issues. Insured parties have
submitted claims for losses that in our view are not covered in
their respective insurance policies, and the final 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 also
very difficult. The primary factors influencing our estimate of
the total cost of these claims are case law and a history of
prior claim development, both of which continue to evolve and are
complicated by aggressive litigation against insurers, including
us. Estimating ultimate liability is also complicated by the
difficulty of assessing what rights, if any, we may have to seek
contribution from other insurers of any policyholder.
Late in 2001, we hired a new Executive Vice President of Claims,
with extensive experience with environmental and asbestos claims
handling and environmental and asbestos reserves, who conducted a
summary level review of our environmental and asbestos reserves.
As a result of observations made in this review, we undertook
more detailed actuarial and claims analyses of environmental
reserves. No adjustment to reserves was made in the fourth
quarter of 2001, since management did not have a sufficient basis
for making an adjustment until such supplemental analyses were
completed, and we believed our environmental and asbestos
reserves were adequate as of December 31, 2001.
Our historical methodology (through first quarter 2002) for
reviewing the adequacy of environmental and asbestos reserves
utilized a survival ratio method, which considers ending reserves
in relation to calendar year paid losses. When the environmental
reserve analyses were completed in the second quarter of 2002, we
supplemented our survival ratio analysis with the detailed
additional analyses referred to above, and concluded that our
environmental reserves were redundant by approximately $150
million. Based on our additional analyses, we released
approximately $150 million of environmental reserves in the
second quarter of 2002. Had we continued to rely solely on our
survival ratio analysis, we would have recorded no adjustment to
our environmental reserves through the six months ended June 30,
2002.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Environmental and Asbestos Claims (continued)
--------------------------------------------
In the second quarter of 2002, we also supplemented our survival
ratio analysis of asbestos reserves with a detailed claims
analysis. We determined that, excluding the impact of the
Western MacArthur settlement, our asbestos reserves were
adequate; however, including that impact, we determined that our
asbestos reserves were inadequate.
As a result of developments in the asbestos litigation
environment generally, we determined in the first quarter of 2002
that it would be desirable to seek earlier and ultimately less
costly resolutions of certain pending asbestos-related
litigations. As a result, we have decided where possible to seek
to resolve these matters while continuing to vigorously assert
defenses in pending litigations. We are taking a similar
approach to environmental litigations. As discussed in more
detail on pages 35 and 36 of this report, in the second quarter
of 2002 we entered into a definitive agreement to settle asbestos
claims for a total gross cost of $995 million arising from any
insuring relationship we and certain of our subsidiaries may have
had with MacArthur Company, Western MacArthur Company or Western
Asbestos Company.
The table below represents a reconciliation of total gross and
net environmental reserve development for the three months ended
March 31, 2003, and the years ended December 31, 2002 and 2001.
Amounts in the "net" column are reduced by reinsurance
recoverables. The disclosure of environmental reserve
development includes all claims related to environmental
exposures. Additional disclosure has been provided to separately
identify loss payments and reserve amounts related to policies
that were specifically underwritten to cover environmental
exposures, referred to as "Underwritten," as well as amounts
related to environmental exposures that were not specifically
underwritten, referred to as "Not Underwritten." In 1988, we
completed our implementation of a pollution exclusion in our
commercial general liability policies; therefore, activity
related to accident years after 1988 generally relates to
policies underwritten to include environmental exposures.
The amounts presented for paid losses in the following table as
"Underwritten" include primarily exposures related to accident
years after 1988 for policies which the underwriter contemplated
providing environmental coverage. In addition, certain pre-1988
exposures, primarily first party losses, are included since, they
too, were contemplated by the underwriter to include
environmental coverage. "Not Underwritten" primarily represents
exposures related to accident years 1988 and prior for policies
which were not contemplated by the underwriter to include
environmental coverage.
Environmental 2003 2002 2001
------------- (first quarter) ------------ ------------
(In millions) Gross Net Gross Net Gross Net
----------- ----- ---- ----- ---- ----- ----
Beginning reserves $370 $298 $604 $519 $684 $573
Incurred losses 25 (1) (2) (3) 6 21
Reserve reduction - - (150) (150) - -
Paid losses:
Not underwritten (61) (37) (70) (56) (74) (63)
Underwritten (2) (2) (12) (12) (12) (12)
----- ---- ----- ---- ----- ----
Ending reserves $332 $258 $370 $298 $604 $519
===== ==== ===== ==== ===== ====
The $150 million reduction of environmental reserves in 2002
discussed previously was included in the gross and net incurred
losses for 2002.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Environmental and Asbestos Claims (continued)
--------------------------------------------
For 2001, the year-end gross and net environmental "underwritten"
reserves were both $28 million, and at December 31, 2002 and
March 31, 2003 such gross and net reserves were both $36 million.
These reserves relate to policies, which were specifically
underwritten to include environmental exposures. These
"underwritten" reserve amounts are included in the total reserve
amounts in the preceding table.
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 December 31, 2002. No
policies have been underwritten to specifically include asbestos
exposure.
Asbestos 2003 2002 2001
-------- (first quarter) ------------ ------------
(In millions) Gross Net Gross Net Gross Net
----------- ----- ---- ----- ---- ----- ----
Beginning reserves $1,245 $778 $577 $387 $471 $315
Incurred losses 20 3 846 482 167 116
Reserve increase - - 150 150 - -
Paid losses (809) (484) (328) (241) (61) (44)
----- ---- ----- ---- ----- ----
Ending reserves $456 $297 $1,245 $778 $577 $387
===== ==== ===== ==== ===== ====
Paid losses in 2003 include $740 million related to the Western
MacArthur litigation settlement. Included in gross incurred
losses in 2002 were $995 million of losses related to the Western
MacArthur settlement. Also included in the gross and net
incurred losses for the year ended December 31, 2002, but
reported separately in the above table, was a $150 million
increase in asbestos reserves. Gross paid losses in 2002 include
the $248 million Western MacArthur payment made in June 2002.
Our reserves for environmental and asbestos losses at March 31,
2003 represent our best estimate of our ultimate liability for
such losses, based on all information currently available.
Because of the inherent difficulty in estimating such losses,
however, we cannot give assurances that our ultimate liability
for environmental and asbestos losses will, in fact, match
current reserves. We continue to evaluate new information and
developing loss patterns, as well as the potential impact of our
determination to seek earlier and, we believe, ultimately less
costly resolutions of certain pending asbestos and environmental
related litigations. Future changes in our estimates of our
ultimate liability for environmental and asbestos claims may be
material to our results of operations, but we do not believe they
will materially impact our liquidity or overall financial
position.
In 2001, we completed a periodic analysis of environmental and
asbestos reserves at one of our subsidiaries in the United
Kingdom. The analysis was based on a policy-by-policy review of
our known and unknown exposure to damages arising from
environmental pollution and asbestos litigation. The analysis
concluded that loss experience for environmental exposures was
developing more favorably than anticipated, while loss experience
for asbestos exposures was developing less favorably than
anticipated. The divergence in loss experience had an offsetting
impact on respective reserves for environmental and asbestos
exposures; as a result, we recorded a $48 million reduction in
net incurred environmental losses in 2001, and an increase in net
incurred asbestos losses for the same amount.
Total gross environmental and asbestos reserves at March 31,
2003, of $788 million represented approximately 4% of gross
consolidated reserves of $21.3 billion.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Asset Management
----------------
Our asset management segment consists of our 79% majority
ownership interest in Nuveen Investments, Inc. ("Nuveen
Investments," formerly The John Nuveen Company). Nuveen
Investments provides individually managed accounts, closed-end
exchange-traded funds and mutual funds to the affluent and high-
net-worth market segments through unaffiliated intermediary
firms. Nuveen Investments also provides managed account services
to several institutional market segments and channels.
Highlights of Nuveen Investments' performance for the first
quarters of 2003 and 2002 were as follows.
Three Months
Ended March 31
--------------
(In millions) 2003 2002
----------- ----- -----
Revenues $102 $ 94
Expenses 49 45
----- -----
Pretax income 53 49
Minority interest (11) (11)
----- -----
The St. Paul's share of
pretax income $ 42 $ 38
===== =====
Assets under management $81,360 $69,538
====== ======
Nuveen Investments' total revenues in the first quarter of 2003
grew 9% over the same period of 2002, primarily due to an
increase in investment advisory fees. Gross investment product
sales of $4.2 billion in the first quarter of 2003 included $2.1
billion of retail and institutional managed accounts, $1.7
billion of closed-end exchange-traded funds and $0.4 billion of
mutual funds. Total gross sales in the first quarter of 2002
totaled $3.4 billion. Strong investor demand for Nuveen
Investments' tax-free and taxable fixed-income products fueled
the increase in product sales over 2002. Nuveen's net flows
(equal to the sum of sales, reinvestments and exchanges, less
redemptions) during the first quarter of 2003 totaled $2.1
billion, compared with net flows of $1.9 billion in the first
quarter of 2002.
Managed assets at the end of the first quarter consisted of $41.6
billion of exchange-traded funds, $19.3 billion of retail managed
accounts, $8.6 billion of institutional managed accounts and
$11.9 billion of mutual funds. The significant increase in
managed assets over the same time a year ago was driven by Nuveen
Investments' acquisition of NWQ Investment Management Company
Inc. in August 2002, positive net flows and municipal market
appreciation. These increases were partially offset by
significant equity market depreciation over the last twelve
months. Assets under management at the end of 2002 totaled $79.7
billion.
Capital Resources
-----------------
Common shareholders' equity of $5.83 billion at March 31, 2003
grew $149 million over the year-end 2002 total of $5.68 billion,
driven by our net income of $181 million in the first quarter.
Total debt outstanding at March 31, 2003 of $2.66 billion
declined by $49 million from the year-end 2002 total of $2.71
billion, largely due to a net $186 million reduction in
commercial paper outstanding. During the first quarter, Nuveen
Investments repaid $145 million it had previously borrowed from
The St. Paul under an intercompany revolving line of credit, and
we used the proceeds to repay a like amount of our commercial
paper outstanding. Nuveen Investments funded its repayment to us
by borrowing $145 million under its revolving bank line of
credit. Our ratio of total debt obligations to total
capitalization (defined as the sum of debt obligations,
shareholders' equity
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Capital Resources (continued)
----------------------------
and redeemable preferred securities) of 28% at the end of the
first quarter declined slightly from the year-end 2002 ratio of
29%. Net interest expense related to debt totaled $28 million in
the first quarter of 2003, compared with $25 million in the same
period of 2002. The increase was primarily due to our issuance
in March 2002 of $500 million of 5.75% Senior Notes.
We made no major capital improvements in the first quarter of
2003, and none are anticipated during the remainder of the year.
Our ratio of earnings to fixed charges was 5.56 in the first
three months of 2003, compared with 4.90 for the same period of
2002. Our ratio of earnings to combined fixed charges and
preferred stock dividend requirements was 5.25 for the first
three months of 2003, compared with 4.58 for the same period of
2002. Fixed charges consist of interest expense, dividends on
preferred capital securities and that portion of rental expense
deemed to be representative of an interest factor.
Liquidity
---------
Liquidity is a measure of our ability to generate sufficient cash
flows to meet the short- and long-term cash requirements of our
business operations. In our insurance operations, short-term
cash needs primarily consist of funds to pay insurance losses and
loss adjustment expenses and day-to-day operating expenses.
Those needs are met through cash provided from operations, which
primarily consist of insurance premiums collected and investment
income.
Net cash flows used by continuing operations totaled $905 million
in the first quarter of 2003, compared with cash provided from
continuing operations of $96 million in the same period of 2002.
Operational cash outflows in 2003 were dominated by our January
2003 payment of $747 million related to the Western MacArthur
asbestos litigation settlement. In addition, loss payments from
our operations in runoff, particularly Health Care and
Reinsurance, contributed to the negative operational cash flows
in 2003. Net loss payments related to the September 11, 2001
terrorist attack totaled $108 million in the first quarter of
2003, compared with payments of $85 million in the same 2002
period.
We expect operational cash flows during the remainder of 2003 to
continue to be negatively impacted by insurance losses and loss
adjustment expenses payable related to our operations in runoff.
In our ongoing underwriting operations, however, we expect
further improvement in operational cash flows as a result of
continuing price increases and the improving quality of our
ongoing book of business.
In April 2003, Moody's Investors Services, Inc. lowered certain
of our financial ratings and those of our insurance underwriting
subsidiaries and established a stable outlook on the ratings
going forward. We believe our financial strength continues to
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 continue to maintain an $800 million
commercial paper program with $600 million of back-up liquidity,
consisting of bank credit agreements totaling $540 million and
$60 million of highly liquid, high-quality fixed income
securities. In January 2003, we established a program providing
for the offering of up to $500 million of medium-term notes. As
of May 6, 2003, we had not issued any notes under this program.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Impact of Accounting Pronouncements to be Adopted in the Future
---------------------------------------------------------------
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which
requires consolidation of all variable interest entities ("VIE")
by the primary beneficiary, as these terms are defined in FIN 46,
effective immediately for VIEs created after January 31, 2003.
The consolidation requirements apply to VIEs existing on January
31, 2003 for reporting periods beginning after June 15, 2003. In
addition, it requires expanded disclosure for all VIEs. We do
not expect the adoption of FIN 46 to have a material impact on
our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which
provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based
employee compensation. This statement requires additional
disclosures in the event of a voluntary change. It also no
longer permits the use of the original prospective method of
transition for changes to the fair value based method for fiscal
years beginning after December 15, 2003. We currently account
for stock-based compensation under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", using the intrinsic
value method, and have not made a determination regarding any
change to the fair value method.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than the current
practice of recognizing those costs at the date of a commitment
to exit or a disposal plan. The provisions of SFAS No. 146 are
to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We did not initiate any such
activities in the first quarter of 2003. Applying the provisions
of SFAS No. 146 will result in changes to the timing only of
recognition of such costs associated with these activities.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 ("SFAS No. 149"), "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," which amends
and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under Statement 133. In particular, this
Statement clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative
and clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows.
This Statement is generally effective for contracts entered into
or modified after June 30, 2003 and is to be applied
prospectively. We do not expect the adoption of SFAS No. 149 to
have a material impact on our consolidated financial statements.
Definitions of Certain Statutory Accounting Terms
-------------------------------------------------
Expense Ratio - We use the statutory definition of expenses in
calculating expense ratios disclosed in this report. Expenses
are divided by net written premiums to arrive at the expense
ratio. "Statutory" expenses differ from "GAAP" expenses
primarily with regard to policy acquisition costs, which
are not deferred and amortized for statutory purposes, but
rather recognized as incurred.
Written and Earned Premiums - Net "written" premiums are a
statutory measure of premium volume that differs from the net
"earned" premiums reported in our GAAP statement of operations.
Written premiums for a period can be reconciled to earned
premiums by adding or subtracting the change in unearned premium
reserves in the period.
Loss Ratio - We use the statutory definition of loss ratio. This
ratio is calculated by dividing the sum of losses and loss
adjustment expenses incurred by net earned premiums. Net earned
premiums, and losses and loss adjustment expenses, are also
GAAP measures.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Definitions of Certain Statutory Accounting Terms (continued)
------------------------------------------------------------
Combined Ratio - This ratio is the sum of the expense ratio and
the loss ratio.
Underwriting Result - We calculate underwriting results using
statutory financial information adjusted for certain items (such as
the amortization of deferred policy acquisition costs) to arrive
at GAAP information. Our reported GAAP underwriting result is
calculated by subtracting incurred losses and loss adjustment expenses
and underwriting expenses (as adjusted for items such as the impact of
deferred acquisition costs) from net earned premiums. The GAAP
underwriting result represents our best measure of profitability
for our property-liability underwriting business segments. We do
not allocate net investment income to our respective underwriting
segments. A reconciliation of statutory underwriting results to
our reported GAAP underwriting results can be found on our web
site, stpaul.com. Our website address is an inactive textual
reference only and the contents of the website are not part of
this report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
------ ----------------------------------------------------------
For a description of our risk management policies and procedures,
see the "Exposures to Market Risk" section of Management's
Discussion and Analysis on pages 54 and 55 of our 2002 Annual
Report to Shareholders.
Item 4. Controls and Procedures.
------ -----------------------
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the
participation of the Company's management, including our Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of these disclosure controls and
procedures were effective. No significant changes were made in
our internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.
In the course of finalizing this Quarterly Report on Form 10-Q,
the Company's management became aware of possible noncompliance
with existing internal controls and with the Foreign Corrupt
Practices Act, in both cases relating to our Mexican subsidiary.
We promptly commenced an investigation, which has not yet
been completed. This matter does not affect the conclusions
expressed in the preceding paragraph.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in the "Contingencies"
section (which updates information in our Annual
Report on Form 10-K for the year ended December 31,
2002 pertaining to the Western MacArthur settlement
agreement and certain purported class action
shareholder lawsuits) of Note 5 to the consolidated
financial statements is incorporated herein by
reference.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth as the
last page in this document.
(b) Reports on Form 8-K.
1) The St. Paul filed a Form 8-K Current Report dated
January 27, 2003 related to the announcement of financial
results for the fourth quarter and twelve months ended
December 31, 2002.
2) The St. Paul filed a Form 8-K Current Report dated
January 29, 2003 containing documents related to The
St. Paul's $500 million, Series D Medium-Term Note
Program.
3) The St. Paul filed a Form 8-K Current Report dated March 5,
2003, containing the following documents for The St. Paul
for the year ended December 31, 2002: Management's Discussion
and Analysis of Financial Condition and Results of Operations;
Six-year Summary of Selected Financial Data; Statement
Regarding Management's Responsibility for Financial
Statements; Independent Auditors' Report; Consolidated
Financial Statements; Notes to Consolidated Financial
Statements; and Consent of Independent Auditors.
4) The St. Paul filed a Form 8-K Current Report dated April 30,
2003 related to the announcement of claim notices being
received for our largest individual exposure regarding
commercial surety bonds issued on behalf of companies
now in bankruptcy.
5) The St. Paul filed a Form 8-K Current Report dated April 30,
2003 related to the announcement of financial results for the
quarter ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
---------------------------
(Registrant)
Date: May 15, 2003 By Bruce A. Backberg
------------ -----------------
Bruce A. Backberg
Senior Vice President
(Authorized Signatory)
Date: May 15, 2003 By John C. Treacy
------------ --------------
John C. Treacy
Vice President and
Corporate Controller
(Principal Accounting Officer)
CERTIFICATION
I, Jay S. Fishman, Chairman and Chief Executive Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of The
St. Paul Companies, Inc.
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and
procedures to ensure that material information
related to the registrant, including its
consolidated subsidiaries, is made known to us
by others within those entities, particularly
during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and procedures
as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that
involves management or other employees who have
a significant role in the registrant's internal
controls.
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 By: Jay S. Fishman
------------ --------------
Jay S. Fishman
Chairman and
Chief Executive Officer
CERTIFICATION
I, Thomas A. Bradley, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The
St. Paul Companies, Inc.
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and
procedures to ensure that material information
related to the registrant, including its
consolidated subsidiaries, is made known to us
by others within those entities, particularly
during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and procedures
as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that
involves management or other employees who have
a significant role in the registrant's internal
controls.
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 By: Thomas A. Bradley
------------ -----------------
Thomas A. Bradley
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX
Exhibit
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession*......................................
(3) (i) Articles of incorporation*.....................................
(ii) By-laws*......................................................
(4) Instruments defining the rights of security holders,
including indentures*...........................................
(10) Material contracts*................................................
(11) Statement re computation of per share earnings**...................(1)
(12) Statement re computation of ratios**...............................(1)
(15) Letter re unaudited interim financial information*.................
(18) Letter re change in accounting principles*.........................
(19) Report furnished to security holders*..............................
(22) Published report regarding matters submitted to
vote of security holders*.......................................
(23) Consents of experts and counsel*...................................
(24) Power of attorney*.................................................
(99) Additional exhibits*...............................................
* These items are not applicable.
** This exhibit is included only with the copies of this
report that are filed with the Securities and Exchange
Commission. However, a copy of the exhibit may be obtained
from the Registrant for a reasonable fee by writing to The
St. Paul Companies, Inc., 385 Washington Street, Saint
Paul, MN 55102, Attention: Corporate Secretary.
(1) Filed herewith.