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Building
performance with a sense of urgency |
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Jay S. Fishman
Chairman and Chief Executive Officer |
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TO OUR SHAREHOLDERS:
2001 was a challenging year for The St. Paul
Companies.
We reported a net loss of $1.09 billion
for the year, compared with net income of $993 million for 2000. The
2001 result includes more than $600 million in after-tax losses related
to the September 11 terrorist attack on the World Trade Center and
Pentagon. It also includes $612 million after-tax for reserve strengthening,
restructuring charges and the write-down of goodwill, primarily related
to our planned exit of the medical malpractice business and most of
the company’s international operations. Our asset management
operation, The John Nuveen Company, reported a seventh consecutive
year of record earnings.
The St. Paul’s common shareholders’
equity fell to $5.06 billion, or $24.35 per share, at the end of 2001,
down from equity of $7.18 billion, or $32.88 per share, a year earlier.
The financial losses incurred by The St. Paul on September 11, however,
pale in comparison to the scope of human tragedy suffered by the thousands
whose lives were lost or forever changed on that day. I am proud of
the efforts of our employees, in New York and elsewhere, who showed
courage, compassion and professionalism under extraordinary circumstances.
In my first letter to you as chairman of The St. Paul I want to outline
how we intend to return this company to profitability and build shareholder
value.
Strategic Actions
In the fourth quarter of 2001 we undertook
a comprehensive review of the performance and prospects of each of
our business operations. We looked at the market dynamics, current
financial results and the prospects for appropriate future returns
of each business. Of particular concern were those operations that
have generated significant underwriting losses in recent years. Our
objective was to take actions by the end of 2001 that would best position
The St. Paul for success in 2002 and beyond.
As a result of this review, we announced in December a number of steps
to return our company to profitability:
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We began to exit the medical malpractice
business. Medical malpractice has been highly unprofitable for
us in recent years and is not likely to return to profitability.
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We plan to shut down most of our international
underwriting operations, with the exception of offices in locations
where we believe we have sufficient scale to be competitive
and profitable: the United Kingdom, Canada and Ireland. In addition,
we remain committed to our surety underwriting company in Mexico,
where we have a leading market share in that product line.
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We significantly reduced 2002 exposure
and expenses in our Reinsurance and Lloyd’s underwriting
operations by exiting unprofitable lines, eliminating duplicated
lines of business between the two organizations and sharply
reducing the number of reinsurance branch offices we maintain
outside the United States.
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We have begun to improve efficiency and shrink our cost structure
through staff and expense reductions. Our cost-cutting efforts
so far will result in $130 million of expense savings in 2002.
That’s approximately 10 percent of our total 2001 fixed
expense. We are confident that we will achieve additional
savings during the year.
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These actions will result in our exit from
lines of business that have little prospect of profitability. We recognize
that these actions impact the lives of many dedicated employees, and
they represent a marked change from the past for this company. Nonetheless,
they are the right actions for The St. Paul.
“We are optimistic as we look to 2002. We have addressed the key strategic business issues that confronted the company, have positioned ourselves
for significant profitability and have aggressively addressed our cost structure. And we have done all this with a great sense of urgency.”
Competitive Strengths
The St. Paul has many successful business
franchises that are well-positioned in their respective markets.
The St. Paul is known for its underwriting specialties, which include
Surety and Construction, Financial and Professional Services, Technology
and Public Sector Services. These specialties are very good businesses
that generate solid returns. Our approach is to create a competitive
advantage in serving targeted customer groups by packaging our expertise
in underwriting, claim and risk control services. We will continue
to capitalize on this success and invest in new specialties when profitable
opportunities emerge.
Our Commercial Lines Group underwrites predominantly midsize commercial
enterprises, the largest market for commercial insurance. During 2002,
we will invest additional resources in this segment—especially
in products and services aimed at the small commercial market. Small
business owners are the principal driver of growth in the United States,
and we intend to expand our presence significantly among these customers.
Although property-liability insurance is our primary business, The
St. Paul also owns 77 percent of Nuveen, an asset management company
with more than $68 billion in assets under management. Nuveen specializes
in serving the needs of high net worth individual investors through
financial advisors and, with its 2001 acquisition of Symphony Asset
Management, an increasing number of institutional clients.
For many years Nuveen has provided a stable source of earnings for
The St. Paul. In 2001 it reported its seventh consecutive year of
record earnings, of which The St. Paul’s share totaled $84.2
million after-tax. We intend to enhance and leverage Nuveen’s
strong position in the asset management business.
Our Commitment: To Create Shareholder Value
The St. Paul’s overriding objective
is to create shareholder value. This means we will continuously review
our businesses to assure that each is generating an attractive return,
is likely to continue to do so and has an appropriate amount of capital
allocated to it. We will also maintain a relentless focus on long-term
profitability. We recognize that creating shareholder value is not
an accidental byproduct of business — it’s our job.
We believe there are five operational keys to building shareholder
value in our organization:
First, by achieving excellence in execution throughout our organization.
Excellence in our day-to-day work — underwriting and claims handling
in our insurance operations and, at Nuveen, in the delivery of consistent,
superior investment returns — is the first step to delivering
superior financial results.
Second, by building a high degree of efficiency in everything we
do. To generate competitive returns we must achieve and maintain
an expense profile that is among the best in the industry. To do otherwise
would place us at a competitive disadvantage.
Third, by attracting, retaining and rewarding the best talent.
Ultimately, our competitive advantage lies in the quality of our leadership
and the people who work throughout our organization. We have already
restructured our compensation program to significantly reward our
best-performing employees.
Fourth, by a commitment to our distribution force. We depend
upon independent agents and brokers in our insurance operations and
broker-dealers in our asset management business. Our goal is to make
The St. Paul and Nuveen the preferred markets for their distributors
through better and more profitable relationships.
And fifth, by continuously exploring strategic opportunities in
our businesses. Risks change, market conditions fluctuate and
new opportunities emerge. Companies that are committed to building
shareholder value are nimble and agile, able to spot opportunities
and capitalize on them.
Looking Ahead
We are optimistic as we look to 2002. We
have addressed the key strategic business issues that confronted the
company, have positioned ourselves for significant profitability and
have aggressively addressed our cost structure. And we have done all
this with a great sense of urgency. The St. Paul will continue to
benefit from the accelerating price increases in the commercial insurance
marketplace, and I am extremely confident in the leadership team we
have in place.
In closing this letter, I would like to acknowledge and thank my predecessor,
Doug Leatherdale, who will retire from the board of directors in May.
Doug provided nearly 30 years of distinguished service to the company
and left the organization with a legacy of strong values and ethics,
superb community relationships, and — most important — strong
businesses from which we can deliver shareholder value.
I also want to welcome two new directors who joined the board in May
of 2001: Carolyn Byrd, chairman and chief executive officer of GlobalTech
Financial, a financial services company, in Atlanta; and Janet Dolan,
president and chief executive officer of Tennant Company, a manufacturer
of floor maintenance equipment, in Minneapolis. They are serving our
board and our company very well. Finally, I would like to note that
Lawrence G. Graev, president and chief executive officer of the GlenRock
Group, LLC, a private equity investment firm, in New York City; and
John A. MacColl, The St. Paul’s general counsel, have been nominated
as candidates for election to the company’s board of directors.
Jay S. Fishman
Chairman and Chief Executive Officer
March 1, 2002 |
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