Why did earnings improve so much in 1999 compared with 1998?

Most of the improvement reflects non-recurring 1998 charges and 1999 benefits. 1998 included a $215 million reserve strengthening provision after the USF&G merger, $292 million of merger charges, and other restructuring costs, totaling $582 million in pretax charges. In 1999, the company realized about $260 million of annual pretax expense savings from the merger, and the two reinsurance treaties added $261 million pretax. Note that 1999 still included a $60 million cost reduction charge and catastrophe losses of $257 million, and that the treaty benefit is a one-time cushion rather than recurring underwriting profit.

Is the underlying property-liability business profitable?

Not on a GAAP underwriting basis. The consolidated combined ratio was 107.9, meaning underwriting expenses and losses exceeded premiums earned. Excluding the reinsurance treaty benefit, the adjusted combined ratio was 112.4. Commercial Lines Group (adjusted 116.5) and Specialty Commercial (114.9) were unprofitable, while Surety (83.6) and Reinsurance (adjusted 108.5) were stronger or improving. Management guided to further underwriting improvement in 2000 through price increases and reduced unprofitable business, but it also said it would sacrifice premium volume to achieve that.

How adequate are the company's loss reserves?

Management states that reserves are adequate, but the filing shows an uneven history. Net loss and LAE reserves were $14.2 billion at year-end 1999. Cumulative redundancies on the ten-year development table narrowed from about $1.6 billion (1993) to $310 million (1998), and 1999 prior-year reserve releases were $208 million, lower than in earlier years. Environmental and asbestos reserves were $1.10 billion gross (about 6% of gross reserves). The filing cautions that these estimates may prove inaccurate, and the company faces litigation over the Weavers/LUI reinsurance matter, which it indemnified for Aon.

What are the main risks and pending transactions to watch?

Key items include: (1) the expected Q2 2000 closing of the nonstandard auto sale to Prudential, which carries an estimated $83 million after-tax loss and a transfer of about $290 million in investments; (2) the Q2 2000 closing of the MMI Companies acquisition, which adds a $1.0 billion fixed-income portfolio and is subject to regulatory approval; (3) catastrophe exposure, including earthquake and hurricane risk in the Cat Risk unit; (4) rising interest rates, which reduced bond unrealized appreciation to a $36 million depreciation position at year-end 1999; and (5) continued pricing pressure in commercial and reinsurance markets. Forward-looking statement risks are also disclosed in the filing.

How is the company's life insurance and asset management business performing?

Both showed growth. F&G Life's sales doubled to $1.0 billion in 1999 (from $501 million), driven by equity-indexed annuities ($686 million), and pretax earnings rose to $66 million from $21 million (1998 included a $41 million DPAC writedown). The John Nuveen Company, 79% owned, reported record 1999 pretax income of $123 million attributable to St. Paul (up from $104 million), with assets under management of $59.8 billion and net flows of $9.6 billion. Nuveen's growth is market-sensitive, and the filing notes that 66% of its managed assets are municipal securities.

TRV 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed August 18, 2000. Cited figures are marked; the original filing is the authoritative source.

Important note: this filing is not from Travelers Companies (TRV).

The document is the annual report of The St. Paul Companies, Inc. (NYSE: SPC), covering fiscal year 1999. The August 18, 2000 date corresponds to an amended report (Form 10-K/A) signed under Rule 12b-15; the original was signed March 29, 2000. The analysis below is based on the St. Paul filing.

The St. Paul's 1999 results rebounded sharply from a difficult 1998. Net income was $834 million^a ($3.41 diluted EPS), versus $89 million ($0.32) in 1998, and pretax income from continuing operations rose to $1,017 million from $120 million. Revenues fell 2% to $7,569 million.

Much of the improvement came from property-liability operations, which benefited from merger-related expense savings of about $260 million^b, a $261 million pretax benefit from two aggregate excess-of-loss reinsurance treaties, and the absence of 1998's $215 million reserve strengthening charge. The consolidated GAAP combined ratio improved to 107.9 from 117.4, although the company still posted a $425 million GAAP underwriting loss, and catastrophe losses of $257 million remained elevated. Excluding the reinsurance benefit, the underlying loss ratio deteriorated slightly, driven by Specialty Commercial.

The company is actively reshaping its portfolio toward specialty commercial and professional lines. It sold its standard personal lines business to Metropolitan (net proceeds $251 million^c), agreed to sell nonstandard auto to Prudential for $200 million (expected to close in Q2 2000, with an estimated $83 million loss on disposal), and agreed to acquire MMI Companies for about $320 million including assumed capital securities. Balance sheet metrics are mixed: book value per share rose to $28.68 from $28.32, but common equity fell 3% because of a $884 million after-tax decline in bond unrealized appreciation as interest rates rose.

Debt-to-capital increased to 18% from 15%, and the company repurchased $356 million^d of its own shares during 1999. Investors should watch underwriting discipline, reserve adequacy (net loss reserves of $14.2 billion, with redundancies narrowing over time), and whether the planned divestitures and acquisition close as expected.

02—Key points

Key Highlights

Net income of $834 million ($3.41 diluted EPS) in 1999, up sharply from $89 million ($0.32) in 1998; pretax income from continuing operations was $1,017 million versus $120 million.
Property-liability combined ratio improved to 107.9 from 117.4, but a GAAP underwriting loss of $425 million persisted; catastrophe losses were $257 million.
Two aggregate excess-of-loss reinsurance treaties contributed a $261 million pretax benefit to 1999 results; excluding them, the adjusted combined ratio was 112.4.
Strategic portfolio shift: sold standard personal lines to Metropolitan (net proceeds $251 million), agreed to sell nonstandard auto to Prudential for $200 million, and agreed to acquire MMI Companies (about $320 million including assumed capital securities).
Total revenues declined 2% to $7,569 million, largely due to a $331 million drop in property-liability premiums earned, over 80% of which reflected premiums ceded under the reinsurance treaties.
Shareholders' equity of $6,472 million; book value per share of $28.68 (up from $28.32), though common equity fell 3% due to rising interest rates reducing bond unrealized appreciation by $884 million after tax.
Debt-to-total-capitalization rose to 18% from 15%; the company repurchased 11.1 million shares for $356 million and raised its quarterly dividend to $0.27 per share in 2000.

03—Questions

Frequently Asked Questions

Why did earnings improve so much in 1999 compared with 1998?
Most of the improvement reflects non-recurring 1998 charges and 1999 benefits. 1998 included a $215 million reserve strengthening provision after the USF&G merger, $292 million of merger charges, and other restructuring costs, totaling $582 million in pretax charges. In 1999, the company realized about $260 million of annual pretax expense savings from the merger, and the two reinsurance treaties added $261 million pretax. Note that 1999 still included a $60 million cost reduction charge and catastrophe losses of $257 million, and that the treaty benefit is a one-time cushion rather than recurring underwriting profit.
Is the underlying property-liability business profitable?
Not on a GAAP underwriting basis. The consolidated combined ratio was 107.9, meaning underwriting expenses and losses exceeded premiums earned. Excluding the reinsurance treaty benefit, the adjusted combined ratio was 112.4. Commercial Lines Group (adjusted 116.5) and Specialty Commercial (114.9) were unprofitable, while Surety (83.6) and Reinsurance (adjusted 108.5) were stronger or improving. Management guided to further underwriting improvement in 2000 through price increases and reduced unprofitable business, but it also said it would sacrifice premium volume to achieve that.
How adequate are the company's loss reserves?
Management states that reserves are adequate, but the filing shows an uneven history. Net loss and LAE reserves were $14.2 billion at year-end 1999. Cumulative redundancies on the ten-year development table narrowed from about $1.6 billion (1993) to $310 million (1998), and 1999 prior-year reserve releases were $208 million, lower than in earlier years. Environmental and asbestos reserves were $1.10 billion gross (about 6% of gross reserves). The filing cautions that these estimates may prove inaccurate, and the company faces litigation over the Weavers/LUI reinsurance matter, which it indemnified for Aon.
What are the main risks and pending transactions to watch?
Key items include: (1) the expected Q2 2000 closing of the nonstandard auto sale to Prudential, which carries an estimated $83 million after-tax loss and a transfer of about $290 million in investments; (2) the Q2 2000 closing of the MMI Companies acquisition, which adds a $1.0 billion fixed-income portfolio and is subject to regulatory approval; (3) catastrophe exposure, including earthquake and hurricane risk in the Cat Risk unit; (4) rising interest rates, which reduced bond unrealized appreciation to a $36 million depreciation position at year-end 1999; and (5) continued pricing pressure in commercial and reinsurance markets. Forward-looking statement risks are also disclosed in the filing.
How is the company's life insurance and asset management business performing?
Both showed growth. F&G Life's sales doubled to $1.0 billion in 1999 (from $501 million), driven by equity-indexed annuities ($686 million), and pretax earnings rose to $66 million from $21 million (1998 included a $41 million DPAC writedown). The John Nuveen Company, 79% owned, reported record 1999 pretax income of $123 million attributable to St. Paul (up from $104 million), with assets under management of $59.8 billion and net flows of $9.6 billion. Nuveen's growth is market-sensitive, and the filing notes that 66% of its managed assets are municipal securities.

04—Continue

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