385 Washington Street
We begin 2006 with distinct advantages. We have an impressive, broad national reach--built upon excellent relationships with our distributors at a local level--making us a "go-to" market in our agents' and brokers' offices. While our relationships are deep in many individual product lines, they do not always reflect the breadth of insurance products and services that we offer. Therefore, one of our best opportunities for growth lies in our ability to increase distributor access to our range of products, which is among the broadest in the industry. We are pursuing strategies designed to make it easier for distributors to tap into our many products and services. These strategies are based upon the foundation of offering quality products and services, delivered at competitive prices.
The St. Paul Travelers Companies, Inc. is Minnesota's oldest business corporation and one of the oldest insurance companies in the United States. Known as The St. Paul Companies, Inc. prior to its acquisition of Travelers Property Casualty Corp. in April 2004, the company is one of the leading providers of commercial and personal property and casualty insurance in the United States. St. Paul Travelers distributes its insurance products principally through U.S. independent agents and brokers, ranking as the second largest writer of automobile and homeowners insurance through this channel. The firm remains headquartered in Saint Paul, Minnesota, with a major secondary base in Hartford, Connecticut, where Travelers had its home; additional offices are located in the United Kingdom, Ireland, and Canada.
In the years preceding the founding of The St. Paul, people living in the Minnesota Territory were insured primarily by agents representing eastern insurance companies. Most wintertime claims and claim payments had to wait for spring, when travel and communication resumed.
In 1853 Alexander Wilkin, the secretary of the territory, and The St. Paul's first and youngest president, approached his neighbors, George and John Farrington, with the idea of starting a Saint Paul, Minnesota-based insurance company. The need for local fire insurance was particularly great, and George Farrington, a local banker, saw the opportunity to stem the flow of cash out of the territory. Farrington introduced a bill of incorporation in the territorial legislature that same year, and St. Paul Mutual Insurance Company was incorporated.
The St. Paul was to operate as a mutual company, but it also sold traditional, or stock, policies. Mutual policyholders were to share in both the profits and losses of the company; stock policyholders would not. The company's charter permitted it "to make insurance on all descriptions of property against loss or damage by fire," and "to make insurance on all descriptions of boats and vessels, the cargoes and freights thereof."
The company needed to sell $100,000 of insurance to raise the capital to begin business. To accomplish this end, the company's ten founders each applied for $10,000 policies on their own property. Shortly thereafter it was discovered that none of the founders possessed property worth $10,000. The members of the board rejected their own applications and rewrote them for $5,000 each. In February 1854 the company issued its first policy, a mutual policy for $800. It insured the home and furnishings of Robert A. Smith, the territory's librarian and private secretary to Governor Willis A. Gorman, who in turn purchased the company's first stock policy.
The St. Paul sustained its first fire loss in April 1855 when a row of offices and a bakery burned to the ground, resulting in $3,000 in claims. This loss was followed by a much greater problem, the panic of 1857, in which many New York companies folded. In Saint Paul all but three of the local banks were forced to close. The St. Paul and other insurance companies were forced to accept "notes of indebtedness" as premium payments. These notes could not be converted into cash to cover day-to-day operating expenses and, as a result, 47 fledgling insurance companies closed. The St. Paul, faced with severe cash flow problems, elected not to issue any new policies for a time and was forced to sell its office furniture to maintain operations.
A period of stagnation occurred starting in 1861, during the Civil War. The St. Paul's president, Alexander Wilkin, died on a Mississippi battlefield. He was succeeded by James C. Burbank, the company's first full-time president, in April 1865. Also in 1865, The St. Paul reorganized as a stock company and changed its name to St. Paul Fire and Marine Insurance Company. One of Burbank's first duties was to oversee The St. Paul's expansion into the Canadian market. By 1866 the company was writing business in Manitoba. A shareholder-elected board voted to pay semiannual dividends, and in July 1867 the company issued its first stock dividend, of $1.50 per share. Following the Civil War, The St. Paul grew. It constructed a new corporate headquarters. A model for fire-resistant structures of the future, the building was built of metal and stone.
Reputation Grows Out of the Great Chicago Fire of 1871 and the San Francisco Earthquake of 1906
In 1871 the Great Chicago Fire strained the company's resources. The fire left 275 people dead and 100,000 people homeless and destroyed more than 17,000 buildings. More than 200 insurance companies experienced fire-related losses and many were financially ruined; about one-quarter of the 200 companies went out of business and most that survived paid as little as four cents on the dollar to settle their claims. At a meeting of The St. Paul's board, it was agreed that all claims would be paid in full. President Burbank predicted that this decision ultimately would bring a return as word got out that the company was covering its losses. In that year claims submitted by policyholders exceeded by 165 percent the amount the company collected in premiums. The St. Paul paid a total of $140,000 to cover losses. The St. Paul's assets were greatly reduced, and it paid no dividends that year. The company's sales did improve as a result of the decision to pay all claims, however, and The St. Paul recouped its losses.
Burbank died in 1876, and the company's secretary, Charles H. Bigelow, was elected president. Shortly thereafter The St. Paul was faced with the insurance price war of 1877. The insurance market was becoming more competitive as the country grew and prospered. The result was too many insurance companies offering lower prices to compete. Under Bigelow's leadership the company dropped unprofitable agencies, introduced new products such as cyclone insurance and crop hail coverage, and instituted more stringent guidelines in accepting new customers. The St. Paul rode out the price war intact, without lowering its rates. Insurance buyers were not only affected by the price; product and service diversity were also important to a successful business plan.
During the late 19th century, the company expanded into new types of insurance coverage. The San Francisco Earthquake and Fire of 1906 took a heavy toll on The St. Paul's new product development plans, however. Claims in excess of $1.2 million were paid, in full, and the company's reputation grew. In 1911 Charles Bigelow died, and his son, Frederic Bigelow, succeeded him as president. In the years following Frederic Bigelow's appointment, the United States prepared for World War I. The St. Paul adjusted its charter to include losses incurred resulting from acts of war. In 1917 The St. Paul covered the loss of 260 vessels, totaling more than $4 million, most of which was repaid by Germany over 50 years. During the war The St. Paul began overseas expansion in a modest fashion, when it began to issue policies in Great Britain to cover losses incurred as a result of bomb damage, but in a relatively short period of time the British government cut the rates charged by U.S. companies by about 50 percent. The St. Paul, however, continued to insure against bomb damage in England for the duration of the war. The St. Paul also added automobile insurance to its product line during this period.
As a result of massive losses incurred during World War I, most European insurance companies were all but paralyzed. The St. Paul became a charter member of the American Foreign Insurance Association (AFIA), a group of companies that pooled its resources, and with combined capital of $135 million, began to market insurance abroad. The company was soon doing business in 25 foreign markets, and another period of diversification and new product development began.
Throughout the 1920s The St. Paul introduced all-risk coverage for the jewelry trade and for other "priceless objects" of artistic and historical significance. The policy insured items in transit from almost every known risk, except theft, because fire and marine insurance companies were prohibited from writing liability coverage. The St. Paul's leadership decided, therefore, that a liability company was needed, and in 1926 a subsidiary, St. Paul Mercury Indemnity Company, was formed. The St. Paul also added aircraft insurance and surety bonds to its product line in 1929.
After serving as The St. Paul's president for 27 years, Frederic Bigelow became chairman in 1938, and Charles F. Codere became The St. Paul's fifth president. Shortly thereafter, the United States entered into World War II. At the onset of the war, U.S. insurance companies wrote marine insurance through a specially formed syndicate, but as losses grew, the U.S. government assumed the burden of covering the staggering war losses. The War Damage Corporation, a company financed by the federal government and run by private insurance companies, wrote more than nine million policies and collected close to $250 million in premiums by the war's end.
Continuing to Diversify in Postwar Period
In 1948 Codere became chairman, and A. B. Jackson was elected The St. Paul's new president. Codere and Jackson worked well together, and the company greatly expanded its product lines and services. Liability insurance was offered to real estate brokers, insurance agents, and hospitals. The St. Paul refined its package policy program, allowing its agents to offer more and diverse coverage in one policy. Package policies had been introduced during World War II to provide the military with an insurance package to cover liability, shipping, and fire insurance. This method of issuing coverage continued after the war, with The St. Paul offering packages for a variety of commercial risks. Jackson also was instrumental in the organization of two new associations to insure nuclear reactors.
In 1957, with the acquisition of the Western Life Insurance Company of Helena, Montana, The St. Paul broke into the life insurance market. By 1964 Western Life sales had more than doubled. The St. Paul's agents were now able to sell all forms of insurance, sales volume continued to increase, and The St. Paul acquired several general agencies, which sold the insurance products of many different companies, to work with its independent agents more effectively. Management training programs were also initiated in 1958, computers were installed in 1956 to speed up the handling and processing of information, and in 1961 The St. Paul rebuilt and enlarged its offices.
When Codere retired in 1963, Jackson succeeded him and Ronald M. Hubbs became The St. Paul's next president. During the 1960s the emphasis was on customer service. Hubbs was instrumental in the development of more than 40 property and liability service centers nationwide. Each center was self-contained; it had its own underwriters, risk management staff, marketing, claims and policy services, and office support personnel. The company believed decentralization would bring it closer to its customers.
In 1968 The St. Paul reorganized. St. Paul Fire and Marine Insurance Company became The St. Paul Companies, Inc. The name St. Paul Fire and Marine Insurance Company was retained for the property-liability insurance subsidiary. In the years following the reorganization, The St. Paul Companies diversified its insurance-related business and branched into other areas of consumer and business services.
In 1970 St. Paul Guardian Insurance Company was formed to market personal lines of insurance. Two years later St. Paul Investment Management Company, an investment management firm, was started, and in 1973 St. Paul Life Insurance Company, whose purpose was to market life insurance through independent agents representing St. Paul Fire and Marine, was formed.
In 1973 Jackson retired as chairman. He was succeeded by Hubbs, and Carl B. Drake became the eighth president of The St. Paul Companies. Less than one year later, The St. Paul acquired John Nuveen & Co., a trader, marketer, underwriter, and distributor of securities. Nuveen was founded in Chicago in 1898 and had been a pioneer in tax-exempt bonds for individual investors, which it introduced in 1961. The St. Paul also added St. Paul Risk Services Inc., which provided consulting services to self-insure institutions and firms, and St. Paul Surplus Lines, which again broadened the coverage offered by St. Paul Fire and Marine.
In the midst of this growth the public was becoming more concerned about the quality of the products and services it was receiving. This concern, combined with changes in the medical field--in particular, new drugs, transplants, the growth of large group medical practices and group medical plans, and less personal doctor-patient relationships--contributed to an increased number of medical liability claims. Insurance companies selling malpractice coverage began to suffer massive losses. Medical cases often took years to settle, and court awards continued to grow.
The St. Paul, the largest carrier of medical liability insurance, stopped accepting new policies for a short time. When the company began to write new business again, it based premiums on the practitioners' past record. This "claims made" standard had been used in other types of liability for many years. It led to more accurate pricing and seemed to stabilize the market. The company also raised its malpractice premiums. The company later created a medical services division, which brought together The St. Paul's underwriting, marketing, and administrative expertise in healthcare-related fields. The company introduced simplified language policies, starting with its personal liability catastrophe coverage, with the hope that it would reduce claims.
Period of Retrenchment
In 1980 Chairman Drake refocused mainly on insurance-related businesses. The company began to divest most non-insurance subsidiaries (with the exception of the John Nuveen asset management and investment banking unit) and resumed expansion of its insurance-related interests. Under a new president, Robert J. Haugh, these divestitures were completed by 1984, when The St. Paul's net loss was $210 million. The company then undertook a new series of acquisitions. Among these purchases were Seaboard Surety Company, a provider of fidelity and surety bonds, and Swett & Crawford Group, a Los Angeles-based wholesale broker in excess and surplus lines. Atwater McMillian (renamed St. Paul Specialty Underwriting in 1988), a company handling specialty risk accounts and surplus lines, was formed in 1981.
During the 1980s more demanding consumers, an evolving marketplace, and government deregulation resulted in another price war that hurt The St. Paul's liability business. During the same years The St. Paul also expanded its involvement in European markets. The company acquired the London-based Minet Holdings PLC in 1988, making The St. Paul the seventh largest insurance brokerage firm in the world. Shortly after the Minet acquisition, The St. Paul established St. Paul (U.K.) Limited.
On May 1, 1990, Haugh retired and was replaced by The St. Paul's new chairman, president, and CEO, Douglas W. Leatherdale, who continued the company's strategy for an increasing presence in the European market. The St. Paul also formed Minet Europe Holdings Limited, as part of the Minet Group, to manage the expansion of The St. Paul's European market.
After two and a half bitter years of litigation and regulatory oversight, The St. Paul in mid-1990 successfully ended an attempted hostile takeover by Alleghany Corporation. In May 1992 The St. Paul completed an initial public offering for the highly successful, and newly renamed, The John Nuveen Company, selling eight million shares at $18 per share and leaving The St. Paul with a 74 percent stake (which increased to 77 percent by mid-1997). For the year, John Nuveen enjoyed record revenues of $221 million, 23 percent higher than the previous year, but The St. Paul as a whole did not fare as well. Record catastrophic storms that year, including Hurricanes Andrew and Iniki and Typhoon Omar, led to a record $445 million in catastrophe losses, which when coupled with a $365 million write-down on the goodwill associated with the continuously troubled Minet Group subsidiary, resulted in the worst operating loss in company history: $333.8 million.
In May 1993 The St. Paul launched a restructuring of its U.S. underwriting businesses (known collectively as St. Paul Fire and Marine Insurance), partly in response to the losses of the previous year. Nearly two dozen departments were streamlined into three new entities: St. Paul Specialty, which housed such niche underwriting operations as medical services; St. Paul Personal & Business, responsible for underwriting personal insurance for individuals and commercial insurance for small business owners; and St. Paul Commercial, responsible for midsized commercial customers. In August 1993 the St. Paul Personal & Business unit was bolstered through the $420 million purchase of Economy Fire & Casualty from Kemper Corporation. With no repeat of the spate of catastrophic 1992 storms, The St. Paul returned to profitability in 1993, posting record operating earnings of $386.6 million, with records following for 1994 ($413.9 million) and 1995 ($464.9 million) as well.
Results for 1996 were not nearly so rosy, as the company suffered its second worst catastrophe losses in history, $207 million, stemming in large part from an East Coast blizzard, flooding in the West and Southwest, and Hurricane Fran. In July of that year, St. Paul Fire and Marine strengthened its position in the small to midsized commercial underwriting market with the purchase of Northbrook Holdings, Inc. from Allstate Insurance Company for $190 million. Then in December The St. Paul decided to sell its loss-making Minet Group, finally unloading it in May 1997 to the insurance brokerage firm Aon, based in Chicago. Meanwhile, John Nuveen added $13.6 billion to its assets under management through the acquisitions of Flagship Resources in January 1997 and of Rittenhouse Financial Services in July 1997. St. Paul International Underwriting, the underwriter of non-U.S. property and liability insurance, was active as well, opening new offices in France, Germany, Canada, Mexico, and South Africa and acquiring the Botswana General Insurance Company of South Africa in October 1997.
In the rapidly consolidating insurance industry of the 1990s, The St. Paul Companies continued to be on the side of the acquirers. With the company's strong balance sheet backing him, Leatherdale next engineered a blockbuster deal: the April 1998 acquisition of USF&G Corporation for approximately $3.9 billion in stock and assumed debt. In buying the Baltimore-based USF&G, a firm founded in 1896, The St. Paul propelled itself from the 13th to the eighth largest property and casualty insurer in the nation. The companies' operations meshed well geographically, with The St. Paul's strength in the Midwest, and USF&G's in the South and Northeast. To integrate the USF&G operations, The St. Paul launched an 18-month plan to slash 2,600 jobs from the combined workforce.
The St. Paul barely eked out a profit of $89.3 million in 1998 as it again suffered catastrophic losses--$418.7 million pretax from a battery of hurricanes, tornadoes, and other storms. In the wake of these results, Leatherdale elected to focus the company on the more profitable commercial side of its business, and more specifically the specialty commercial sector, jettisoning several individual insurance units over a two-year period. The St. Paul sold its personal property and casualty lines to MetLife Auto & Home for $600 million in 1999, its nonstandard auto insurance unit to the Prudential Insurance Company of America in 2000 for $200 million, and its Fidelity & Guaranty Life Insurance unit to the U.K.-based Old Mutual PLC for $635 million in 2001. In the meantime, The St. Paul bolstered its healthcare business in April 2000 by acquiring MMI Companies for $320 million in cash and debt. MMI, based in Deerfield, Illinois, specialized in services for the healthcare industry, including clinical risk management, operational-consulting services, and insurance and reinsurance in the United States and London. Later in 2000 The St. Paul elected to sell an unprofitable subsidiary of MMI, Unionamerica Insurance Co., a London-based unit focusing on medical-liability reinsurance. In what turned out to be the final deal of the Leatherdale era, The St. Paul acquired Toronto-based London Guarantee Insurance Company, Canada's second largest specialty property and casualty insurer, for $80 million in late 2001.
2001 and Beyond: The Fishman/Travelers Era
As a result of the terrorist attacks on the United States of September 11, 2001, The St. Paul incurred claims totaling approximately $941 million. This propelled the firm into a net loss for the year of $1.09 billion. Shortly after 9/11, in the middle of the following month, Jay S. Fishman was brought onboard as chairman and CEO, succeeding Leatherdale. Fishman had been the head of Travelers Insurance Group, a unit of Citigroup Inc., but elected to leave for an opportunity to run his own company rather than wait for a chance to succeed Citigroup's Chairman and CEO Sanford Weill.
Fishman quickly put his stamp on The St. Paul. In a reversal of one of his predecessor's moves, The St. Paul once again began seeking out general commercial property and casualty business, concentrating on small and midsize businesses, ones with revenues under $500 million. The company also substantially reduced its international operations, retaining only its businesses in the United Kingdom, Canada, and Mexico, and in December 2001 began a gradual pullout from medical-malpractice insurance, a business in which it was paying out more in claims than it was collecting in premiums. In reinsurance, the company narrowed the types of reinsurance it offered and then converted the remaining reinsurance operation into a separate Bermuda company with The St. Paul as a major investor. Fishman also slashed about 1,100 jobs from the workforce. On the downside, The St. Paul reached a settlement in a legacy asbestos case inherited through the takeover of USF&G. In mid-2002 the company settled a case involving Western Asbestos, agreeing to a $987 million payment, which resulted in a net charge of $380 million for 2002.
Fishman's blockbuster move, however, was the $17.9 billion stock-swap acquisition of Travelers Property Casualty Corp., Fishman's old company, which Citigroup had spun off into a separate company in 2002. Announced in November 2003 and completed in April 2004, the deal created the second biggest commercial property and casualty insurer in the United States, trailing only American International Group, Inc. It also brought homeowners and auto insurance back into The St. Paul fold and combined Travelers' more extensive general commercial lines with The St. Paul's stronger specialty insurance business. Upon the deal's completion The St. Paul changed its name to The St. Paul Travelers Companies, Inc. and retained its Saint Paul headquarters, and Travelers became a subsidiary while staying based in Hartford, Connecticut. Fishman remained CEO but temporarily relinquished the chairmanship to Robert I. Lipp, head of Travelers. In late 2005 Fishman succeeded Lipp as chairman.
As St. Paul Travelers moved ahead with integration plans that included cutting 3,000 jobs from the combined workforce of 30,000 and aims to save $350 million in annual operating costs, the merger got off to a rough start. In July 2004 the company announced a reserve charge of $1.625 billion, a charge about twice as large as analysts had been expecting, that officials said was needed to reconcile differing accounting treatments at the two merged entities. The company also lost some commercial business as independent agents who had been selling products of The St. Paul chafed at the more stringent underwriting policies and sales practices of Travelers. Moreover, the string of major storms that hit the southeastern United States in 2004 resulted in before-tax claims of $612 million at St. Paul Travelers. Net income thus totaled just $955 million on revenues of $22.54 billion.
In 2005 the combination of catastrophic claims and special charges was even higher than the previous year. The former figure, largely attributable to the devastation wrought by Hurricane Katrina, amounted to $1.5 billion after-tax, while the company also added $548 million to its asbestos reserves. Needing to raise cash, St. Paul Travelers elected to sell off its majority stake in Nuveen, garnering $2.4 billion in the process. Coupled with improving performance in the company's core operations, the Nuveen divestment helped St. Paul Travelers bump up its net income for the year to $1.62 billion.
The year 2006 started out inauspiciously, as a U.S. Circuit Court of Appeals ruling exposed the company to potential additional asbestos liabilities of more than $1 billion in a case involving ACandS Inc., a former distributor and installer of asbestos products. As St. Paul Travelers continued to wrestle with its asbestos claims and made plans for the prospect of another round of devastating hurricanes and tropical storms, surprising speculation about another merger emerged. In March 2006 the Wall Street Journal reported that St. Paul Travelers was in the early stages of discussing a takeover of Zurich Financial Services, one of Europe's largest insurers and a firm that was also a major U.S. property and casualty insurer. Any such deal promised to be highly complex and take months to complete, but in the meantime St. Paul Travelers issued a denial that any such talks were taking place.
Travelers Property Casualty Corp.; The Standard Fire Insurance Company; The Travelers Indemnity Company; The Northland Company; The Phoenix Insurance Company; Travelers Casualty and Surety Company; St. Paul Guarantee Insurance Company (Canada); St. Paul Fire and Marine Insurance Company; St. Paul Mercury Insurance Company; United States Fidelity and Guaranty Company; St. Paul Reinsurance Company Limited (U.K.); USF&G Financial Services Corporation.
Commercial Lines; Specialty Lines; Personal Lines.
American International Group, Inc.; The Chubb Corporation; The Hartford Financial Services Group, Inc.; Nationwide Mutual Insurance Company; Allianz AG; Zurich Financial Services; AXA; ING Groep N.V.