Travelers 2002 Annual Report Download - page 85

of additional capital to a new venture capital fund or agree to contribute
an additional $150 million (not reflected in the table above) to Fund VI.
Letters of Credit — In the normal course of business, we enter into
letters of credit as collateral, as required in certain of our operations.
As of December 31, 2002, we had entered into letters of credit with
an aggregate amount of $1.08 billion.
Lease Commitments — A portion of our business activities is con-
ducted in rented premises. We also enter into leases for equipment,
such as office machines and computers. Our total rental expense was
$86 million in 2002, $83 million in 2001 and $83 million in 2000.
Certain leases are noncancelable, and we would remain responsible
for payment even if we stopped using the space or equipment. On
December 31, 2002, the minimum rents for which we would be liable
under these types of leases are as follows: $122 million in 2003,
$100 million in 2004, $76 million in 2005, $66 million in 2006, $58 mil-
lion in 2007 and $140 million thereafter. We are also the lessor under
various subleases on our office facilities. The minimum rentals to be
received under noncancelable subleases are as follows: $22 million in
2003, $17 million in 2004, $16 million in 2005, $15 million in 2006,
$12 million in 2007 and $25 million thereafter.
Sale of Minet — In May 1997, we completed the sale of our insur-
ance brokerage operation, Minet, to Aon Corporation. We agreed to
indemnify Aon against any future claims for professional liability and
other specified events that occurred or existed prior to the sale. We
monitor our exposure under these claims on a regular basis. We
believe reserves for reported claims are adequate, but we do not have
information on unreported claims to estimate a range of additional lia-
bility. We purchased insurance to cover a portion of our exposure to
such claims.
Under the sale agreement, we also committed to pay Aon commis-
sions representing a minimum level of annual reinsurance brokerage
business through 2012. We also have commitments under lease
agreements through 2015 for vacated space (included in our lease
commitment totals above), as well as a commitment to make pay-
ments to a former Minet executive.
Acquisitions — Our asset management subsidiary, Nuveen
Investments, Inc., may be required to make additional payments of up
to $180 million related to their acquisition of Symphony, based on
Symphony reaching specified performance and growth targets.
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 ven-
ture, ranging individually from $8 million to $29 million, and cumulatively
totaling $62 million at December 31, 2002.
Legal Matters — 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 liabil-
ity under insurance contracts issued by our underwriting operations,
including liability under environmental protection laws and for injury
caused by exposure to asbestos products. Plaintiffs in these 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 will ulti-
mately have to pay in all of these lawsuits will have a material effect
on our liquidity or overall financial position.
The following is a summary of certain litigation matters with
contingencies:
• 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, St. Paul Fire and Marine Insurance
Company and their affiliates and subsidiaries, including us, with
any of MacArthur Company, Western MacArthur Company, and
Western Asbestos Company. There can be no assurance that
this agreement will receive bankruptcy court approval. See dis-
cussion in Note 3.
• Petrobras Oil Rig Construction — In September 2002, the United
States District Court for the Southern District of New York
entered a judgment in the amount of approximately $370 million
to Petrobras, an energy company that is majority-owned by the
government of Brazil, in a claim related to the construction of two
oil rigs. One of our subsidiaries provided a portion of the surety
coverage for that construction. As a result, we recorded a pretax
loss of $34 million ($22 million after-tax) in 2002 in our Surety &
Construction business segment. The loss recorded was net of
reinsurance and previously established case reserves for this
exposure, and prior to any possible recoveries related to indem-
nity. We are actively pursuing an appeal of this judgment.
• Purported Class Action Shareholder Lawsuits — In the fourth
quarter of 2002, several purported class action lawsuits were
filed against our chief executive officer, our chief financial officer
and us.The lawsuits make various allegations relating to the ade-
quacy of our previous public disclosures and reserves relating to
the Western MacArthur asbestos litigation, and seek unspecified
damages and other relief. We view these lawsuits as without
merit and intend to contest them vigorously.
• Boson v. Union Carbide Corp., et al. — Lawsuits have been filed
in Texas against one of our subsidiaries, USF&G, and other
insurers and non-insurer corporate defendants asserting liability
for failing to warn of the dangers of asbestos. It is difficult to pre-
dict the outcome or financial exposure represented by this type
of litigation in light of the broad nature of the relief requested and
the novel theories asserted. We believe, however, that the cases
are without merit and we intend to contest them vigorously.
Agency Loans — We have provided guarantees for certain agency
loans in order to enhance the business operations and opportunities
of several of the insurance agencies with which we do business. As of
December 31, 2002, these loans had an aggregate outstanding bal-
ance of approximately $9 million. We have guaranteed the lending
institutions that we will pay up to the entire principal amount outstand-
ing in case of any agency defaults, plus any reasonable costs associ-
ated with the default. There are varying terms on the loans, and the
guarantees are in place until the loans are paid in full.
Corporate Securities — Through the issuance of our debt securi-
ties, we have guaranteed to indemnify the financial institutions against
any loss, liability, claim, damage, or expense, including taxes that may
arise out of the administration of the debt arrangement. There are no
contractual monetary limits placed on these guarantees, and they sur-
vive until the applicable statutes of limitation expire.
Venture Capital — Our subsidiary, St. Paul Venture Capital VI, LLC
has guaranteed third party loans in the aggregate amount of approx-
imately $4 million. In the event that the borrower would default,
St. Paul Venture Capital has guaranteed payment up to the aforemen-
tioned limits, plus any costs, fees, and expenses that the lending insti-
tution might incur in the administration of the default on the loans.
These guarantees are in place until the loans are paid in full.
Swap Agreements — We are party to a number of interest rate
swaps. Each party to a standard swap agreement agrees to indemnify
the other for tax liabilities that may arise out of the swap transactions.
We have no way to value the potential liability or asset that may arise
due to these tax issues, and there are no contractual monetary limits
placed on these indemnifications.
Platinum Transaction — In connection with the Platinum transac-
tion, we entered into a series of servicing agreements with Platinum
relating to the transfer of our 2002 reinsurance business. Such agree-
ments provide general indemnification obligations on each of the par-
ties with respect to representations, warranties and covenants made
under the terms of each of the agreements. Generally, the indemnifi-
cation obligations of each party are capped at the aggregate of all
The St. Paul Companies 2002 Annual Report 83