Interview with the chairman
Q:
In light of your 1998 financial results, was the merger with USF&G a good idea for The St. Paul?
A:
Yes, absolutely. I believe the merger was an excellent strategic move despite our disappointing 1998 results. We undertook the transaction to gain additional size so that we could compete more efficiently in the property-liability insurance business. USF&G was an excellent fit. It had complementary specialty operations; substantial books of commercial, small commercial and personal insurance business; and successful reinsurance and life insurance operations. We gained additional market presence in states where we weren't prominent before. The merger clearly gave us the size we needed. And, we added valuable expertise and leadership from the infusion of talented employees.
Q:
How has the merger with USF&G benefited the corporation to date?
A:
I believe the merger was a prudent use of our capital from the beginning. As a result of the merger, we are in a unique position to improve profitability by shedding unprofitable business and paring expenses without fundamentally altering our market position or disrupting our ever-critical relationship with our distribution force.
Q:
How will The St. Paul endure the relentless competition in the U.S. property-liability insurance market?
A:
This is the toughest market we've seen in decades, particularly on the commercial insurance side. As we have identified deterioration in our book of business due to the price competition, we have taken a number of steps to address the situation.
We have taken necessary actions to lower our fixed expenses. But we're also looking at classes of business that are unprofitable and are mapping out plans to correct those situations. We're evaluating, on an individual basis, many accounts that have not been profitable. As I've said in the past, we will not underwrite business that isn't profitable.
As a result of all this, we will be smaller in the short term to restore profitability in order to become larger and more profitable over the long term. That is the prudent action to take in this marketplace. I also believe that our expertise in various specialty areas -- such as medical, technology, surety and financial institutions -- gives us value-added capability that helps us compete in those customer segments.
Q:
Reinsurance premiums have declined. What's happening in that segment and what can we expect for 1999?
A:
The reinsurance market is becoming even more competitive. Price competition is shrinking this business. Expense management, together with underwriting and pricing discipline, will be very important to our Reinsurance operation in 1999.
In general, though, I'm very pleased with the prospects for our Reinsurance operation in the current market. We have a well-balanced book of reinsurance business, from both a product and a geographic perspective. Our underwriting discipline is strong. This operation has been nicely profitable for the past five years, and I expect 1999 will be a good year, too.
Q:
What's the outlook for International, where you're continuing to grow?
A:
We are in an international growth mode, and that strategy is working.
We have made the investment necessary to build the infrastructure to support our International operation. We now have the people and systems in place to dedicate ourselves to producing profitable growth in select markets.
I expect continued strong growth in our international business in 1999. A key for us will be to maintain, or increase, the profitability we're seeing in our more mature operations.
Q:
What is your strategy to address the underwriting losses you've experienced in the commercial segment of your business?
A:
This is the most intensely competitive segment of the U.S. insurance market right now, and it's where we are undertaking significant corrective actions. As I said earlier, in addition to reducing our expenses, we are re-underwriting unprofitable business, shoring up our underwriting discipline, and holding the line on prices. We expect that we will lose some of this premium volume in 1999 as these actions take hold, but I believe these actions will restore profitability.
But even with that, we will continue to be a significant carrier for middle market commercial business. The merger with USF&G added a substantial book of business to this segment.
Q:
Are The St. Paul's systems Y2K compliant?
A:
We are confident that our systems will be Y2K compliant. Since the late 1980s, we've required all of our internal computer systems to use a four-digit date field. This has reduced the number of systems requiring correction. We completed our correction work of internal systems by the end of 1998 -- on schedule -- and are now in the initial testing phase, which will continue through the first quarter of 1999. Additionally, all subsidiaries not headquartered in Saint Paul, Minn., or in Baltimore, Md., are scheduled to complete initial validation testing of their operating systems prior to June 30, 1999.
Q:
What kind of liability do you expect to incur from Y2K-related claims?
A:
We expect that we will receive claims arising from both our insurance and reinsurance policies. Whether coverage exists under any given policy will depend upon the type of coverage and the specific facts of the claim.
We have concluded that most, if not all, Y2K-related losses will not be covered under our property and inland marine policies. That conclusion is consistent with our coverage intent. To reinforce our coverage intent, we have developed and are implementing a Y2K exclusion endorsement for our property and inland marine policies.
We continue to assess our exposure to claims resulting from our liability policies. We are taking a number of actions to address these exposures -- for example, communications with policyholders, the use of exclusions in certain types of policies, and classifying some exposures as high hazard and, thus, unacceptable risks.
In any case, we don't believe insurance or reinsurance claims arising from Y2K will have a material adverse impact on the financial position of our company.