The St. Paul Co. announced second-quarter 2003 net income of $214 million, or 89 cents per share, up from a second-quarter 2002 net loss of $223 million, or $1.09 per share. Second-quarter 2003 operating earnings were $172 million, or 71 cents per share, up from an operating loss of $194 million, or 95 cents per share, for the comparable period of 2002.
Second-quarter 2003 net income and operating earnings included a previously announced after-tax surety loss of $56 million, or 23 cents per diluted share. Second-quarter 2002 net income and operating earnings included a $380 million after-tax loss, or $1.79 per share, related to the Western MacArthur asbestos settlement.
Second quarter 2003 compared to the second quarter of 2002:
—Ongoing segments’ net written premiums, excluding Lloyd’s, up 26.2 percent
—Net written premiums, excluding Lloyd’s, up 10.8 percent
—Net written premiums of $1.79 billion, down 2.7 percent
The company’s second-quarter annualized operating earnings return on average adjusted equity was 13.0 percent, and annualized net income return on average equity was 14.1 percent. The company’s year-to-date annualized operating earnings return on average adjusted equity was 14.5 percent, and annualized net income return on average equity was 13.2 percent.
Ongoing insurance segments’ net earned premiums grew 17.2 percent to $1.59 billion. The impact of eliminating the one-quarter reporting lag at Lloyd’s was immaterial to ongoing insurance segments’ net earned premium growth. Net earned premiums in the Other segment, primarily businesses being exited, declined from $598 million in second-quarter 2002 to $108 million in 2003. As a result of this decline, total earned premiums for the quarter were $1.70 billion, compared to $1.96 billion in 2002, and total revenues were $2.17 billion, down from $2.34 billion for second-quarter 2002.
The company’s ongoing insurance segments recorded second-quarter net written premiums of $1.71 billion, or 95.2 percent of total net written premiums. Excluding Lloyd’s premiums, ongoing insurance segments’ net written premiums grew 26.2 percent in the second quarter of 2003 over the prior-year period. Including Lloyd’s, net written premiums were up 13.4 percent over the same period of 2002.
In the Other segment, net written premiums declined to $86 million from $337 million in 2002, primarily due to the transfer of our ongoing reinsurance operations to Platinum Underwriters Holdings, Ltd. in November 2002. Total second-quarter net written premiums of $1.79 billion were down 2.7 percent from the same prior-year period. Excluding Lloyd’s premiums, total net written premiums grew 10.8 percent.
The company’s statutory combined ratio for ongoing segments for the second quarter of 2003, at 95.3, and the loss ratio at 66.9, both included 5.4 points from a previously announced surety loss. The expense ratio improved 1.3 points, to 28.4, from the prior-year second quarter. The ongoing segments’ combined ratio of 91.4 for the second quarter of 2002 reflected an unusually low level of weather-related losses. Catastrophe losses in the second quarter of both 2003 and 2002 were not meaningful. The overall statutory combined ratio was 97.8, consisting of a loss ratio of 69.4 and an expense ratio of 28.4, an improvement over 132.4 in the second quarter of 2002, which included 29.9 points attributable to the impact of the settlement of the Western MacArthur litigation.
Nuveen Investments contributed after-tax net income and operating earnings of $27 million in the quarter, compared to $24 million in the prior-year period. Assets under management grew to $88.26 billion at June 30, up 28.9 percent from a year ago.
The company’s common shareholders’ equity increased to $6.21 billion from $5.68 billion at the end of last year. Reported book value per common share at June 30, 2003, was $27.25, and $31.27 if adjusted to include the company’s investment in Nuveen Investments at market value. Reported book value per common share was $25.05 at year-end 2002. The company’s outstanding debt declined by $178 million compared to year-end 2002, resulting in a debt to capital ratio of 26.1 percent. The company’s capital base was $9.70 billion, up $352 million from Dec. 31, 2002.
The following discussion of second-quarter results relates to items that are included in both net income and operating earnings. Underwriting profits do not include net investment income.
Excluding Lloyd’s premiums from both periods, Specialty Commercial net written premiums grew 25.2 percent. Including Lloyd’s, net written premiums for Specialty Commercial increased 8.2 percent to $1.21 billion. The combined ratio of 96.6, which included 7.7 points related to the previously announced surety loss, compared to 91.8 for the same period in 2002. This segment yielded pretax underwriting profits of $12 million in the second quarter of 2003, which included the impact of the previously announced $86 million pretax loss in surety. The segment reported underwriting profits of $73 million in the comparable 2002 period.
Net written premiums for Commercial Lines—which includes Middle Market Commercial, Small Commercial and Property Solutions—increased 28.6 percent to $494 million. The combined ratio increased to 92.3 compared to 91.3 for the same period of 2002, which benefited from abnormally low weather losses. Second-quarter pretax underwriting profit for the segment, at $36 million, also reflected the impact of higher weather-related losses in 2003 vs. 2002. Underwriting profits for the comparable period last year were $48 million.
The Other segment primarily includes the businesses the company decided to exit, as well as development on most of our asbestos and environmental reserves. The company reported pretax underwriting losses of $49 million in this segment in the second quarter of 2003, compared with underwriting losses of $712 million in the second quarter of 2002, which included $585 million of losses related to the settlement of the Western MacArthur litigation. In the fourth quarter of 2002, the company revised its estimated impact of the Western MacArthur settlement from a $585 million pretax loss to a $472 million pretax loss after an extensive analysis of the relevant reinsurance contracts.
Net investment income was $274 million in the quarter, compared to $286 million in the second quarter of 2002 and $281 million in the first quarter of 2003. The decline from first quarter was attributable to a decline in invested asset levels (due to a previously disclosed $747 million payment, which included interest, that was made in mid-January 2003 related to the Western MacArthur settlement) and lower investment yields. The average fixed maturity portfolio yield has declined from 6.1 percent at the end of first-quarter 2003 to 6.0 percent at the end of second-quarter 2003. After-tax realized gains of $43 million were primarily driven by venture capital investments, and compared with after-tax realized losses of $24 million in the year-ago period. The average credit quality of the company’s fixed income investment portfolio remains AA+.
Nuveen contributed after-tax net income and operating earnings of $27 million in the quarter compared to $24 million in the prior-year period. During the second quarter, Nuveen Investments added $2.80 billion in exchange-traded closed-end funds. Total assets under management grew to $88.26 billion at the end of the quarter, an increase of 28.9 percent from $68.50 billion at June 30, 2002, and up 10.7 percent from $79.72 billion at Dec. 31, 2002. Nuveen Investments’ gross sales in the second quarter were a record $5.42 billion, with positive net asset flows of $3.09 billion.
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