Why did The St. Paul report a loss in 2001 but a profit in 2002?

The 2001 loss of $1.088 billion reflected roughly $941 million of pretax losses from the September 11, 2001 terrorist attack and $735 million of prior-year reserve strengthening in the Health Care segment. In 2002 the company had no comparable terrorist loss, the Health Care charge was much smaller at $97 million, and underwriting improved as price increases took hold. The 2002 result still included the $472 million Western MacArthur asbestos charge.

What is the status of the Western MacArthur asbestos settlement and what cash obligations remain?

The settlement, agreed June 3, 2002, covers all existing and future claims against The St. Paul and USF&G related to the MacArthur Companies. The MacArthur Companies filed Chapter 11 in November 2002, and consummation depends on bankruptcy court approval of a reorganization plan, which the filing describes as uncertain. The company paid $235 million in June 2002 and $740 million in January 2003, and $60 million of the earlier payment plus the $740 million would be returned if the plan is not approved.

What are the main risks to the company's reserves and earnings going forward?

Key risks include Health Care medical malpractice reserves, where management estimates possible additional provisions of up to $250 million if claim indicators deteriorate; Surety & Construction, which absorbed $217 million of adverse prior-year development in 2002; environmental and asbestos claims with $1.6 billion gross reserves; and September 11 loss estimates that could change if courts rule the attack constitutes two occurrences rather than one. Catastrophe exposure to hurricanes and earthquakes also remains.

How exposed is The St. Paul to terrorism losses after its reinsurance expires?

The company's terrorism reinsurance treaties expire in April 2003, and management had not determined whether it would renew them. Under the Terrorism Risk Insurance Act of 2002, the company's deductible alone for 2003 was estimated at about $460 million for a $1 billion event, and TRIA does not cover all lines or domestic terrorism exclusions the company has not applied. Management states that losses could be material to results and financial condition.

Is the company's capital position and dividend capacity sufficient?

Shareholders' equity was $5.75 billion at year-end 2002, and debt-to-total-capital rose to 29% from 26%. Fire and Marine can pay about $505 million in ordinary dividends in 2003 without prior approval, but the parent received no cash dividends from U.S. insurance subsidiaries in 2002. The company maintains an $800 million commercial paper program and established a $500 million medium-term note program in January 2003, while the common dividend was held at $0.29 per quarter.

TRV 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 20, 2003. Cited figures are marked; the original filing is the authoritative source.

The St. Paul Companies, Inc. (SPC), a Minnesota-incorporated management company dating to 1853, reported a 2002 return to profitability after a severe 2001.

Net income was $218 million^a ($0.92 diluted EPS) versus a net loss of $1.088 billion ($5.22 per share) in 2001, and pretax income from continuing operations was $176 million versus a $1.43 billion pretax loss. The 2002 result absorbed a $472 million net pretax provision to settle the Western MacArthur asbestos litigation, which is pending bankruptcy court approval. Excluding that charge and other notable items, management cites pretax income of $648 million, against $245 million in 2001 excluding the September 11 losses and the Health Care reserve charge.

Core property-liability underwriting improved markedly: the adjusted ongoing-segment statutory combined ratio was roughly 105%, and written premiums in the ongoing segments grew about 22% to $5.89 billion^b, while runoff segments (Health Care, Reinsurance, Other) shrank about 60% as the company exits those lines. The balance sheet and liquidity picture carries clear risks for investors. Shareholders' equity rose to $5.75 billion after a $720 million common equity raise (stock and equity units) and a $1.0 billion rebound in unrealized appreciation, and the company paid $740 million to the bankruptcy trustee in January 2003.

Parent-company debt rose to $2.7 billion^c, and A.M. Best and Standard & Poor's downgraded certain ratings in 2002 while Moody's placed ratings under review in February 2003. Management also flags material exposures: continued Health Care reserve uncertainty (up to $250 million of possible additional provisions), asbestos and environmental claims, surety losses, a terrorism reinsurance program expiring April 2003, and ongoing shareholder class actions tied to the MacArthur disclosures.

For investors, the thesis is a recovering commercial property-liability franchise with strong pricing momentum, offset by reserve-adequacy questions, a deleveraging-dependent capital position, and near-term cash outflows from the asbestos settlement and September 11 claims. The 79% stake in asset manager Nuveen Investments, which reported record results and $79.7 billion^d of assets under management, provides a steady earnings contributor.

02—Key points

Key Highlights

Net income rebounded to $218 million ($0.92 diluted EPS) in 2002 from a $1.088 billion net loss ($5.22 per share) in 2001.
Pretax income from continuing operations was $176 million after a $472 million net pretax Western MacArthur asbestos settlement charge; excluding notable items, pretax income was $648 million versus $245 million in 2001.
Ongoing commercial property-liability segments grew written premiums about 22% to $5.89 billion, driven by price increases averaging roughly 23-30% in key segments, while runoff segments fell 60% to $1.16 billion.
The St. Paul paid $740 million to the bankruptcy trustee on January 16, 2003 for the Western MacArthur settlement, which remains subject to bankruptcy court approval of the broader reorganization plan.
Common equity raised about $842 million net in July 2002 through a stock offering and equity units, with $750 million contributed to insurance subsidiaries; shareholders' equity rose to $5.75 billion.
Rating agencies took action in 2002 (A.M. Best lowered ratings, S&P lowered ratings and retained a negative outlook) and Moody's placed ratings under review for possible downgrade in February 2003, raising funding cost and business retention risk.
Asset management subsidiary Nuveen Investments (79% owned) reported record 2002 pretax income of $207 million and $79.7 billion in assets under management, contributing $162 million to The St. Paul's pretax income.

03—Questions

Frequently Asked Questions

Why did The St. Paul report a loss in 2001 but a profit in 2002?
The 2001 loss of $1.088 billion reflected roughly $941 million of pretax losses from the September 11, 2001 terrorist attack and $735 million of prior-year reserve strengthening in the Health Care segment. In 2002 the company had no comparable terrorist loss, the Health Care charge was much smaller at $97 million, and underwriting improved as price increases took hold. The 2002 result still included the $472 million Western MacArthur asbestos charge.
What is the status of the Western MacArthur asbestos settlement and what cash obligations remain?
The settlement, agreed June 3, 2002, covers all existing and future claims against The St. Paul and USF&G related to the MacArthur Companies. The MacArthur Companies filed Chapter 11 in November 2002, and consummation depends on bankruptcy court approval of a reorganization plan, which the filing describes as uncertain. The company paid $235 million in June 2002 and $740 million in January 2003, and $60 million of the earlier payment plus the $740 million would be returned if the plan is not approved.
What are the main risks to the company's reserves and earnings going forward?
Key risks include Health Care medical malpractice reserves, where management estimates possible additional provisions of up to $250 million if claim indicators deteriorate; Surety & Construction, which absorbed $217 million of adverse prior-year development in 2002; environmental and asbestos claims with $1.6 billion gross reserves; and September 11 loss estimates that could change if courts rule the attack constitutes two occurrences rather than one. Catastrophe exposure to hurricanes and earthquakes also remains.
How exposed is The St. Paul to terrorism losses after its reinsurance expires?
The company's terrorism reinsurance treaties expire in April 2003, and management had not determined whether it would renew them. Under the Terrorism Risk Insurance Act of 2002, the company's deductible alone for 2003 was estimated at about $460 million for a $1 billion event, and TRIA does not cover all lines or domestic terrorism exclusions the company has not applied. Management states that losses could be material to results and financial condition.
Is the company's capital position and dividend capacity sufficient?
Shareholders' equity was $5.75 billion at year-end 2002, and debt-to-total-capital rose to 29% from 26%. Fire and Marine can pay about $505 million in ordinary dividends in 2003 without prior approval, but the parent received no cash dividends from U.S. insurance subsidiaries in 2002. The company maintains an $800 million commercial paper program and established a $500 million medium-term note program in January 2003, while the common dividend was held at $0.29 per quarter.

04—Continue

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