The St. Paul Companies Reports Second-Quarter Results

July 25, 2001

The St. Paul Companies announced second-quarter 2001 operating earnings from continuing operations of $90.8 million, or $0.39 per diluted share, compared with $144.5 million, or $0.63 per share, in the second quarter of 2000.

As previously announced, adverse prior-year development in the company’s Health Care segment, along with higher-than-expected catastrophe losses, lowered second-quarter earnings. The company recorded a $107 million pretax increase to Health Care reserves to cover increasing claim severity for accident years 1997 through 1999 due to worse than anticipated jury awards and settlements.

Total pretax catastrophe losses in the second quarter were $69 million.

Chairman and Chief Executive Officer Douglas W. Leatherdale stated that, apart from Health Care, the other segments of the company’s business are performing extremely well as a result of aggressive re-underwriting and pricing initiatives throughout our U.S. He added that, excluding second-quarter adverse Health Care development, the company’s statutory combined ratio is 100. Leatherdale also indicated the company expects continued premium growth of 20 percent to 25 percent over the course of 2001, driven by accelerating price increases combined with stable retention rates.

BUSINESS SEGMENT HIGHLIGHTS

The St. Paul’s overall property-liability business results improved in the second quarter. The combined ratio of 106.5 included 4 points of catastrophe losses and 6.1 points of adverse development in Health Care.

The expense ratio improved by 3.6 points from second quarter 2000, the result of a continued focus on expense management and premium growth.

Price increases continued to accelerate in almost every line of business and averaged 15 percent for the company’s U.S. primary insurance business during the second quarter.

Net written premium growth remained strong, up 24.3 percent over last year’s second quarter and 28 percent over last year’s first half.

Commercial Lines Group:
The Commercial Lines Group’s premium growth of 10.1 percent was driven by average price increases of 12.5 percent in the quarter, combined with strong renewal retentions.

The retention level indicates that price increases continue to be accepted by the market.

The expense ratio improved by 4.1 points to 29.2 in the second quarter, compared with the same quarter last year.

Global Surety: Global Surety continues to be profitable. Combined ratios are expected to continue to run in the mid- to high-80s.

Growth has slowed as a result of tighter underwriting standards, based on the potential for a slowdown in the U.S. economy.

Over the last two years, The St. Paul has taken steps that position this business to withstand economic pressures.

Global Health Care: The St. Paul has obtained approval for rate increases averaging more than 20 percent in physicians and surgeons business in 23 of 28 states thus far where it has sought pricing action.

New business is now generating positive returns, although not yet meeting profitability targets.

Severity has continued to increase for 1997 through 1999 claims, primarily for large hospital and nursing home claims. The St. Paul no longer underwrites insurance for most of these policyholders. This severity trend resulted in a second-quarter reserve increase of $107 million.

Aggressive actions in Health Care have significantly changed the profile of that business since 1997. Among these initiatives are substantially exiting the long-term care business and underwriting only the best facilities, reshaping the large hospital book of business, and increasing prices.

Highlights of Other Specialties: Construction net written premiums of $148.5 million grew 37.1 percent over second quarter 2000, resulting from U.S. year-to-date average price increases of 17 percent. The expense ratio was 4.6 points better than second-quarter 2000, at 25.7. The company continues to reposition its U.S. business to capitalize on The St. Paul’s lead market position in serving large, profitable accounts.

Technology net written premiums of $107 million grew 37 percent over the second quarter of 2000, driven by several factors, including U.S. year-to-date price increases averaging 12.4 percent, renewal retention and new business attained due to favorable market conditions, and The St. Paul’s leadership in this area. Expenses were flat.

Financial and Professional Services net written premiums of $95 million grew by 21 percent, with healthy demand in the United States and success in its professional indemnity business in Australia. U.S. year-to-date price increases averaged 9.8 percent. The expense ratio, at 30, improved by 2.8 points compared with second-quarter 2000.

Public Sector net written premiums of $41 million grew 34 percent, with the recent purchase of the renewal rights to PENCO’s public sector contributing to its success, along with continued double-digit price increases.

Excess and Surplus Lines, with $31 million in net written premiums; Global Marine, with $29 million; and Oil & Gas, with $24 million are also successfully increasing prices and lowering combined ratios.

International: The International segment’s combined ratio improved 10.8 points, chiefly due to price increases. Premium growth was driven by price increases and increased capacity in The St. Paul at Lloyd’s syndicates.

The second-quarter expense ratio improved by 6.7 points, to 20.4, compared with the same quarter last year, with The St. Paul at Lloyd’s reorganization contributing to operational efficiency. The plan to consolidate its existing 11 syndicates and sub-syndicates into a single structure with seven specialist business units is moving forward.

The St. Paul’s ongoing commitment to acquire 100 percent capacity for all its syndicates will continue with the capacity auctions that take place in fall 2001.

Reinsurance: The St. Paul’s Reinsurance segment reported a combined ratio improvement of 5.7 points for the quarter and 10 points for the first half, as underwriting initiatives and price increases take hold.

Premium growth is primarily being driven by rate increases, which averaged 30 percent to 35 percent on international business renewing April 1.

July rate increases averaged 30 percent on international business, 22 percent on North American casualty treaty business and 20 percent on North American property treaty business.

The higher expense ratio, at 36, was primarily driven by contingent commissions in the financial solutions business. Contingent commissions are based on profitability and reflect the fact that the loss ratio on this business is performing very well.

Losses from second-quarter catastrophe events totaled $30 million, with $20 million of those losses arising from Tropical Storm Allison. Total losses were more than three times what would normally be expected.

The benefit of a reinsurance-specific stop-loss treaty was $38 million pretax in the second quarter, compared with $49 million pretax in the second quarter of 2000.

Asset Management Financial Summary: Nuveen continues its excellent track record and continues to be an outstanding investment.

Gross sales in the quarter were $3.3 billion – up 19 percent from the year-ago period.

Second-quarter sales of equity and fixed-income retail managed accounts grew to $2.0 billion, a 38 percent increase over second quarter 2000.

In July, Nuveen announced the completion of its acquisition of Symphony Asset Management LLC, a leading institutional money manager specializing in market-neutral and other alternative investment strategies.

Approximately one-third of Nuveen’s assets under management are common equities, reflecting its shift to a full-service asset management company. Year to date, 60 percent of new sales were equities.

For additional information about The St. Paul’s quarterly results, visit www.stpaul.com.

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