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Committed. Competitive. Constructing our future.
The St. Paul Companies 2001 Annual Report

Table of contents

  • Page 1
    Committed. Competitive. Constructing our future. The St. Paul Companies 2001 Annual Report

  • Page 2
    ... managed accounts and closed-end exchange traded funds. The firm's risk-managed, tax-sensitive investment expertise is also provided in mutual funds and market-neutral portfolios. Leveraging two well-established distribution platforms in consultative services and syndicated products, Nuveen markets...

  • Page 3
    ... Six-Year Summary of Selected Financial Data Independent Auditors' Report, Management's Responsibility for Financial Statements Financial Statements Notes to Financial Statements Management Board of Directors Shareholder Information 41 45 74 75 76 The St. Paul Companies 2001 Annual Report 1

  • Page 4
    Building performance with a sense of urgency Jay S. Fishman Chairman and Chief Executive Officer 2 The St. Paul Companies 2001 Annual Report

  • Page 5
    ...2001 was a challenging year for The St. Paul Companies. We reported a net loss of $1.09 billion for the year, compared with net income of $993 million for 2000. The 2001 result includes more than $600 million in after-tax losses related to the September 11 terrorist attack on the World Trade Center...

  • Page 6
    ...that are well-positioned in their respective markets. The St. Paul is known for its underwriting specialties, which include Surety and Construction, Financial and Professional Services, Technology and Public Sector Services. These specialties are very good businesses that generate solid returns. Our...

  • Page 7
    ... significantly reward our best-performing employees. Fourth, by a commitment to our distribution force. We depend upon independent agents and brokers in our insurance operations and broker-dealers in our asset management business. Our goal is to make The St. Paul and Nuveen the preferred markets for...

  • Page 8
    ... our future. Great companies remain flexible and adjust their strategies to changing market and economic conditions. That's why we aim to be a nimble, agile company with a focus on building businesses that provide superior returns to our shareholders. 6 The St. Paul Companies 2001 Annual Report

  • Page 9
    ... of business customers. The company's long-term commitment to the middle market and its strong reputation for solid claim service, valuable risk control advice and competitive pricing have made The St. Paul one of the leading national insurers serving America's businesses. In 2002, small businesses...

  • Page 10
    ... unit spent part of 2001 "on the road," educating agents and brokers about Internet-related risks. The Public Sector business unit launched a web-based rating and quoting system to make it easier for agents and brokers to do business with The St. Paul. 8 The St. Paul Companies 2001 Annual Report

  • Page 11
    ... insurance in the United States, The St. Paul is uniquely positioned to offer its policyholders, agents and brokers an unmatched combination of experience, service and expertise. Contract surety products provide bid, performance, and payment bonds to a broad spectrum of clients specializing...

  • Page 12
    ... is repositioning itself to be more opportunistic and transactional. It focuses on four core areas of reinsurance where it has recorded consistently strong results over time: property catastrophe, excess-of-loss casualty, marine and finite business. 10 The St. Paul Companies 2001 Annual Report

  • Page 13
    ... year, representing half of the industry's total. The recent acquisition of Symphony Asset Management, specialists in institutional alternative investments, adds new expertise in market-neutral investing and enhances Nuveen's overall investment capability. The St. Paul Companies 2001 Annual Report...

  • Page 14
    ...-high product sales and a strategic acquisition, The John Nuveen Company, our majority-owned asset management subsidiary, posted its The 12% growth in revenues in both 2001 and 2000 was centered in our property-liability operations, where price increases, strong business retention rates and new...

  • Page 15
    ... Lines Group Surety and Construction Health Care Lloyd's and Other Total Primary Insurance Reinsurance Total $ september 11, 2001 terrorist attack On Sept. 11, 2001, terrorists hijacked four commercial passenger jets in the United States. Two of the jets were flown into the World Trade Center...

  • Page 16
    ... personal insurance minet: Loss on disposal, net of taxes Total Minet Total Discontinued Operations $ 19 (74) (55) - (5) (5) - (13) (13) (6) (6) (79) $ 43 - 43 - (9) (9) - (11) (11) - - 23 $ 44 - 44 13 (83) (70) (22) 177 155 - - 129 $ $ $ 14 The St. Paul Companies 2001 Annual Report

  • Page 17
    ... of these operations for the three months ended Dec. 31, 2001, was as follows. Year ended December 31 (In millions) 2001 $ 71 86 (45) 14 (31) Net written premiums Net earned premiums GAAP underwriting loss Net investment income Total pretax loss The St. Paul Companies 2001 Annual Report 15

  • Page 18
    ... of municipality insurance business from Willis North America Inc. for a total consideration of $3.5 million. The cost was recorded as an intangible asset and is expected to be amortized over five years. In April 2000, we acquired MMI, an international health care risk services company that provides...

  • Page 19
    ... consistent with the new reporting structure in 2001. critical accounting policies Overview - The St. Paul Companies, Inc. is a holding company with subsidiaries operating in the property-liability insurance industry and the asset management industry. We combine our financial statements with those...

  • Page 20
    ... treaties." Under the terms of the reinsurance treaties, we transfer, or "cede," insurance losses and loss adjustment expenses to our reinsurers, along with the related written and earned premiums. For the corporate program, we paid the ceded earned premiums shortly after coverage under the treaties...

  • Page 21
    ... Commercial Lines Group Surety and Construction Health Care Lloyd's and Other Total Primary Insurance Reinsurance Total Property-Liability Insurance $ $ $ $ $ $ We did not cede any losses to the corporate program in 2001. The $9 million written and earned premiums ceded in 2001 represent...

  • Page 22
    ... believe our broad underwriting expertise, strong financial ratings and solid agent relationships will enable us to reap the benefits of a hardening commercial insurance market. Further, an increase in customer appreciation for risk management products and services is expanding opportunities for us...

  • Page 23
    ... and management liability coverages; financial products coverages for corporations and nonprofit organizations; and errors' and omissions' coverages for a variety of professionals such as lawyers, insurance agents and real estate agents. Public Sector Services markets insurance products and services...

  • Page 24
    ... business in the United Kingdom, Canada and Ireland. • Public Sector Services - Written premiums totaled $227 million in 2001, 29% higher than 2000 premiums of $176 million. In early 2001, we acquired the right to seek to renew a book of municipality insurance business from Willis North America...

  • Page 25
    ... the Small Commercial business center, which serves small businesses, such as retailers, wholesalers, service companies, professional offices, manufacturers and contractors; the Middle Market Commercial business center, which provides comprehensive property and liability insurance for a wide variety...

  • Page 26
    ... surety bond underwriter in Mexico. Based on 2000 premium volume, our surety operations are the largest in North America, and the largest in the world. The Construction business center delivers value-added products and services, including traditional insurance and financial and risk management...

  • Page 27
    ...property-liability insurance company focused on providing surety products, and management liability, bond, and professional indemnity products. London Guarantee, headquartered in Toronto, generated approximately $53 million (Canadian) in surety net written premiums in 2001. In addition, late in 2001...

  • Page 28
    ... to our long-term care and major accounts lines of business. The reserve increases in 2000 were prompted by an increase in the severity of losses driven by the rapidly escalating amounts that were awarded by juries in professional liability lawsuits. 26 The St. Paul Companies 2001 Annual Report

  • Page 29
    ..., marine, financial and professional services, property, kidnap and ransom, accident and health, creditor, specialist London market reinsurance, and other personal specialty products. We anticipate additional significant price increases on business written through Lloyd's, as worldwide insurance...

  • Page 30
    ...over prior year GAAP underwriting result Loss and loss adjustment expense ratio Underwriting expense ratio Combined ratio 2001 vs. 2000 - The increase in written premiums in 2001 was driven by new business growth in St. Paul Re's North American casualty and property lines and strong price increases...

  • Page 31
    ...2001 which had resulted from net sales of investments to fund operational cash requirements (primarily insurance claim payments). We carry bonds on our balance sheet at market value, with the corresponding appreciation or depreciation recorded in shareholders' equity, net of taxes. The market values...

  • Page 32
    ... in information technology, health care and consumer products. In 2001, we invested $289 million in this asset class, compared with $296 million in 2000. Our total return on average net venture capital investments (encompassing dividend income, realized gains and losses, and the change in...

  • Page 33
    ... development in our Ocean Marine operation and certain commercial business centers. property-liability underwriting Environmental and Asbestos Claims We continue to receive claims alleging injury or damage from environmental pollution or seeking payment for the cost to clean up polluted sites...

  • Page 34
    .... Nuveen's core businesses are asset management, and the development, marketing and distribution of investment products and services for the affluent, high net worth and institutional market segments. Nuveen distributes its investment products and services, including mutual funds, exchange-traded...

  • Page 35
    ... risk through market-neutral and other strategies in several equity and fixed-income asset classes for institutional investors. In 2001, gross sales of investment products increased 32% to $14.2 billion, driven by continuing success with exchange-traded funds. Nuveen launched 20 new municipal funds...

  • Page 36
    ... 23 $ 2,130 26% - $ 1,647 18% - $ 1,466 18% 2001 vs. 2000 - Proceeds from the net issuance of $468 million of additional commercial paper in 2001 were used to fund a portion of operational cash requirements, common stock repurchases, and 34 The St. Paul Companies 2001 Annual Report

  • Page 37
    ...the Old Mutual common shares for one year after the closing date of the sale. These shares had a market value of $242 million on Dec. 31, 2001. The sale proceeds may be adjusted based on the market value of the shares one year after the closing date of the sale as described on page 15 of this report...

  • Page 38
    ... Health Care and Lloyd's and Other business segments, and premium payments totaling $345 million related to our corporate reinsurance program. Our underwriting cash flows in 1999 were negatively impacted by the reductions in written premium volume 36 The St. Paul Companies 2001 Annual Report the st...

  • Page 39
    ... deemed necessary. Foreign Currency Exposure - Our exposure to market risk for changes in foreign exchange rates is concentrated in our invested assets, and insurance reserves, denominated in foreign currencies. Cash flows from our foreign operations are the primary source of funds for our purchase...

  • Page 40
    ... year from the Sept. 28, 2001 sale date. To mitigate our exposure to price risk on this investment, we entered into a collar (embedded in the sale agreement), as discussed in more detail on page 15 of this report. During the one-year holding period, changes in the fair value of the Old Mutual stock...

  • Page 41
    ... per common share data Income (loss) from continuing operations Year-end book value Year-end market price Cash dividends declared property-liability insurance Written premiums Pretax income (loss) from continuing operations GAAP underwriting result Statutory combined ratio: Loss and loss adjustment...

  • Page 42
    ... ethical climate. This responsibility is addressed in the company's written code of conduct. KPMG LLP Minneapolis, Minnesota January 23, 2002 Jay S. Fishman Chairman, President and Chief Executive Officer Thomas A. Bradley Chief Financial Officer 40 The St. Paul Companies 2001 Annual Report

  • Page 43
    ... of Operations the st. paul companies Year ended December 31 (In millions, except per share data) 2001 2000 1999 revenues Premiums earned Net investment income Asset management Realized investment gains (losses) Other Total revenues expenses Insurance losses and loss adjustment expenses Policy...

  • Page 44
    ... the st. paul companies December 31 (In millions) 2001 2000 assets Investments: Fixed maturities Equities Real estate and mortgage loans Venture capital Securities on loan Short-term investments Other investments Total investments Cash Reinsurance recoverables: Unpaid losses Paid losses Ceded...

  • Page 45
    ...of year Change for the year End of year Unrealized loss on foreign currency translation, net of taxes: Beginning of year Currency translation adjustments End of year Unrealized loss on derivatives, net of taxes: Beginning of year Change during the period End of year Total Common Shareholders' Equity...

  • Page 46
    ... the st. paul companies Year ended December 31 (In millions) 2001 2000 1999 operating activities Net income (loss) Adjustments: Loss (income) from discontinued operations Change in property-liability insurance reserves Change in reinsurance balances Realized investment losses (gains) Change in...

  • Page 47
    ... and ceded transactions when risk transfer requirements have been met. These requirements involve significant assumptions being made related to the amount and timing of expected cash flows, as well as the interpretation of underlying contract terms. The St. Paul Companies 2001 Annual Report 45

  • Page 48
    ...-tax) in the first quarter of 1999 representing the cumulative effect of adopting the provisions of this SOP related to our property-liability insurance business. The accrual is expected to be disbursed as assessed during a period of up to 30 years. 46 The St. Paul Companies 2001 Annual Report

  • Page 49
    ...closed-end (exchange-traded) managed funds, defined portfolios (unit investment trusts) and individual managed accounts. Nuveen's core businesses are asset management, and the development, marketing and distribution of investment products and services for advisors to the affluent, high net worth and...

  • Page 50
    ... No. 133 in 2001, related to our use of forward contracts to hedge the foreign currency exposure to our net investment in our foreign operations, we reflected the movements of foreign currency exchange rates as unrealized gains or losses, net of tax, as part of our common shareholders' equity. If...

  • Page 51
    ... in 1999. Non-cash Investing and Financing Activities - In September 2001, related to the sale of our life insurance subsidiary to Old Mutual plc, we received approximately 190 million shares of Old Mutual common stock as partial consideration. The shares were valued at $300 million at the time of...

  • Page 52
    ... to underwrite aviation, marine, financial and professional services, property insurance, kidnap and ransom, accident and health, creditor and other personal specialty products. • We will also exit those countries where we are not likely to achieve competitive scale, and are pursuing the sale of...

  • Page 53
    ...of business renewed, we may be obligated to make an additional payment to Fireman's Fund in early 2003 (see Note 15). Penco - In January 2001, we acquired the right to seek to renew a book of municipality insurance business from Penco, a program administrator for Willis North America Inc., for total...

  • Page 54
    ... and St. Paul Re-U.K. are required, as accredited U.S. reinsurers, to hold certain investments in trust in the United States. These trust funds had a fair value of $514 million at Dec. 31, 2001. Additionally, Unionamerica has funds deposited with third parties to be used as collateral to secure...

  • Page 55
    ... Equities Real estate and mortgage loans Venture capital Securities on loan Other investments Short-term investments Total Investment expenses Net investment income (340) 156 (347) 26 (9) 63 (22) (173) 61 17 $ (323) $ 41 197 (112) $ (459) The St. Paul Companies 2001 Annual Report 53

  • Page 56
    ... embedded collar on Old Mutual common stock received as partial consideration from the sale of our life insurance business (see Note 15), foreign currency put options on British Pounds Sterling to hedge currency risk associated with our position in Old Mutual stock and stock warrants in our venture...

  • Page 57
    ..., was partially offset by adverse development in our Ocean Marine operation and certain commercial business centers. The "activity on reserves of discontinued operations" represents certain activity related to the 1999 sale of our standard personal insurance business. The reserve balances associated...

  • Page 58
    ... of operations (385) common shareholders' equity Expense (benefit) relating to stockbased compensation and the change in unrealized appreciation and unrealized foreign exchange Total income tax expense (benefit) included in financial statements Federal income tax expense (benefit) at statutory rate...

  • Page 59
    ... securities in the market that have terms similar to ours. Medium-Term Notes - The medium-term notes bear interest rates ranging from 5.9% to 8.4%, with a weighted average rate of 6.8%. Maturities range from five to 15 years after the issuance dates. The St. Paul Companies 2001 Annual Report 57

  • Page 60
    ... gross proceeds of $575 million. St. Paul Capital Trust I had been formed for the sole purpose of issuing these securities. The proceeds were used to buy The St. Paul's junior subordinated debentures. The Trust Preferred Securities pay a quarterly distribution at an annual rate of 7.6% of each...

  • Page 61
    ... million undesignated shares. The board of directors may designate the type of shares and set the terms thereof. The board designated 1,450,000 shares as Series B Convertible Preferred Stock in connection with the formation of our Stock Ownership Plan. The St. Paul Companies 2001 Annual Report 59

  • Page 62
    ... their cash balance pension account. Our pension plans are noncontributory. This means that employees do not pay anything into the plans. Our funding policy is to contribute amounts sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act and any additional...

  • Page 63
    ... of plan assets at beginning of year Actual return on plan assets Foreign currency exchange rate change Acquisition Employer contribution Benefits paid Fair value of plan assets at end of year Funded status Unrecognized transition asset Unrecognized prior service cost Unrecognized net actuarial loss...

  • Page 64
    ... prior to May 1994 may be exercised at any time up to ten years after the grant date. At the end of 2001, approximately 14,300,000 shares remained available for grant under our stock incentive plan. Allocated Committed to be released Unallocated Total 62 The St. Paul Companies 2001 Annual Report

  • Page 65
    ...certain employees of our non-U.S. operations. The options granted under these plans were priced at the market price of our common stock on the grant date. Generally, they can be exercised from three to 10 years after the grant date. Approximately 250,000 option shares were available at Dec. 31, 2001...

  • Page 66
    ...2.8 years. 14 Discontinued Operations Life Insurance - On September 28, 2001, our subsidiary, St. Paul Fire and Marine Insurance Company ("Fire and Marine"), closed on the sale of its life insurance subsidiary, Fidelity and Guaranty Life Insurance Company ("F&G Life") to Old Mutual plc ("Old Mutual...

  • Page 67
    ... our discontinued operations, including our life insurance business, our standard personal insurance business, our nonstandard auto business and our insurance brokerage business, Minet (sold in 1997), for the threeyear period ended Dec. 31, 2001. The St. Paul Companies 2001 Annual Report 65

  • Page 68
    ... common shares valued at $300 million, which we are required to hold for one year following the closing. The proceeds from the sale of F&G Life are subject to possible adjustment, by means of a collar embedded in the sale agreement, based on the movement of the market price of Old Mutual's stock...

  • Page 69
    ...Parent company, other operations and consolidating eliminations" in the table titled "Income (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Change" in Note 19. The employee-related costs represent severance and related benefits such as outplacement services...

  • Page 70
    ... and administrative expenses" in the 1999 statement of operations and in "Property-liability insurance - other" in the table titled "Income (Loss) from Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Change" in Note 19. Late in the fourth quarter of 1998, we recorded...

  • Page 71
    ... corporate-wide incurred insurance losses and LAE exceeded accident year attachment loss ratios specified in the contract. We paid the ceded earned premiums shortly after the coverage under the treaties was invoked. We will recover the ceded losses and LAE from our reinsurer as we settle the related...

  • Page 72
    ... Technology, Public Sector Services, Umbrella/Excess & Surplus Lines, Ocean Marine, Discover Re, National Programs, Oil & Gas, Transportation, and Catastrophe Risk, as well as our International Specialties. We have aggregated these business centers because they meet our specialty definition, as well...

  • Page 73
    ... Commercial Lines Group Surety and Construction Health Care Lloyd's and Other Total primary insurance operations Reinsurance Total underwriting Investment operations: Net investment income Realized investment gains (losses) Total investment operations Other Total property-liability insurance Asset...

  • Page 74
    ...) 2001 2000 Year ended December 31, 2000 (In millions) Pretax Income Tax Effect After-Tax identifiable assets Property-liability insurance Asset management Total reportable segments Parent company, other operations, consolidating eliminations and discontinued operations Total assets $36...

  • Page 75
    ... foreign countries, which resulted in a $31 million increase to our pretax loss from continuing operations. Also impacting the quarter were $71 million of tax benefits we were not able to recognize related to underwriting losses in international operations. The St. Paul Companies 2001 Annual Report...

  • Page 76
    ... Chief Financial Officer David R. Nachbar Human Resources Laura C. Gagnon Investor Relations John C. Treacy Corporate Controller Wayne L. Hoeschen Chief Information Officer Michael R. Wright Chief Investment Officer John A. MacColl General Counsel 74 The St. Paul Companies 2001 Annual Report

  • Page 77
    ... John Chairman, Premier Oil PLC and Chairman (retired), The BOC Group PLC William H. Kling President, Minnesota Public Radio and American Public Media Group Douglas W. Leatherdale Chairman and Chief Executive Officer (retired), The St. Paul Companies The St. Paul Companies 2001 Annual Report 75

  • Page 78
    ... management through its subsidiary The John Nuveen Company. The St. Paul reported 2001 revenues from continuing operations of $8.9 billion and total assets of $38.3 billion. For more information about The St. Paul and its products and services, visit the company's Web site, www.stpaul.com. annual...

  • Page 79
    ... companies St. Paul Fire and Marine Insurance Company 385 Washington Street Saint Paul, MN 55102 Tel: 651.310.7911 www.stpaul.com St. Paul International Underwriting 122 Leadenhall Street London EC3V 4QH England Tel: London + 207.645.6852 www.stpaulinternational.com St. Paul Re 195 Broadway New York...

  • Page 80
    corporate headquarters The St. Paul Companies, Inc. 385 Washington Street Saint Paul, MN 55102 Tel: 651.310.7911 www.stpaul.com Form No. 58682