-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, WjOPBY1ox0Ue5IX9xqD1KAOQV1SC+md4hY8SgLz5psAh+6kN1yScyvUKqZXhBfuF CETTT1j1h7/vFMqaYiDxUA== 0000086312-94-000017.txt : 19941111 0000086312-94-000017.hdr.sgml : 19941111 ACCESSION NUMBER: 0000086312-94-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941110 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST PAUL COMPANIES INC /MN/ CENTRAL INDEX KEY: 0000086312 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 410518860 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10898 FILM NUMBER: 94558834 BUSINESS ADDRESS: STREET 1: 385 WASHINGTON ST CITY: SAINT PAUL STATE: MN ZIP: 55102 BUSINESS PHONE: 6122217911 FORMER COMPANY: FORMER CONFORMED NAME: SAINT PAUL COMPANIES INC DATE OF NAME CHANGE: 19900730 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) X OF THE SECURITIES EXCHANGE ACT OF 1934 ---- For the quarterly period ended September 30, 1994 ------------------ or TRANSITION REPORT PURSUANT TO SECTION 13 OR ---- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission File Number 0-3021 -------- THE ST. PAUL COMPANIES, INC. - ---------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 ------------------------------------ ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 385 Washington St., Saint Paul, MN 55102 ------------------------------------ ------------------------------ (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (612) 221-7911 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- The number of shares of the Registrant's Common Stock, without par value, outstanding at November 7, 1994, was 84,147,519. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Consolidated Statements of Income (Unaudited), Three and Nine Months Ended September 30, 1994 and 1993 3 Consolidated Balance Sheets, September 30, 1994 (Unaudited) and December 31, 1993 4 Consolidated Statements of Common Shareholders' Equity, Nine Months Ended September 30,1994 (Unaudited) and Twelve Months Ended December 31, 1993 6 Consolidated Statements of Cash Flows (Unaudited), Nine Months Ended September 30, 1994 and 1993 7 Notes to Consolidated Financial Statements (Unaudited) 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 PART II. OTHER INFORMATION Item 1 through Item 6 24 Signatures 24 EXHIBIT INDEX 25 PART I FINANCIAL INFORMATION THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Income Unaudited (In thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1994 1993 1994 1993 ---- ---- ---- ---- Revenues: Premiums earned $862,823 780,654 2,554,182 2,328,444 Net investment income 175,166 167,189 510,824 499,634 Insurance brokerage fees and commissions 85,004 77,938 225,752 207,906 Investment banking-asset management 54,639 61,189 161,438 182,556 Realized investment gains 14,018 10,623 50,698 44,468 Other 7,418 7,382 25,098 25,333 --------- --------- --------- --------- Total revenues 1,199,068 1,104,975 3,527,992 3,288,341 --------- --------- --------- --------- Expenses: Insurance losses and loss adjustment expenses 616,458 551,770 1,876,092 1,698,403 Policy acquisition expenses 193,101 174,171 577,920 552,816 Operating and administrative 224,308 220,618 667,582 629,463 --------- --------- --------- --------- Total expenses 1,033,867 946,559 3,121,594 2,880,682 --------- --------- --------- --------- Income before income taxes 165,201 158,416 406,398 407,659 Income tax expense (benefit): Federal current 37,280 39,260 100,130 106,315 Other (1,887) (22,232) (15,739) (36,572) --------- --------- --------- --------- Total income tax expense 35,393 17,028 84,391 69,743 --------- --------- --------- --------- Net income $129,808 141,388 322,007 337,916 ========= ========= ========= ========= Net income per common share: Primary $1.51 1.63 3.72 3.90 ========= ========= ========= ========= Fully diluted $1.45 1.57 3.59 3.74 ========= ========= ========= ========= Dividends declared on common stock $0.375 0.35 1.125 1.05 ========= ========= ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) September 30, December 31, ASSETS 1994 1993 - ------ ---------- ---------- (Unaudited) Investments: Fixed maturities, at estimated market value $8,765,552 9,147,964 Equities, at estimated market value 528,590 548,682 Real estate, at cost less accumulated depreciation of $57,284 (1993; $48,847) 538,630 488,691 Venture capital, at estimated market value 308,482 297,982 Other investments 48,092 47,834 Short-term investments, at cost 1,079,987 725,261 ---------- ---------- Total investments 11,269,333 11,256,414 Cash 38,917 25,420 Investment banking inventory securities 59,787 305,804 Reinsurance recoverables: Unpaid losses 1,513,255 1,545,026 Paid losses 66,596 94,437 Receivables: Underwriting premiums 1,182,037 1,008,034 Insurance brokerage activities 842,650 805,209 Interest and dividends 178,684 174,852 Other 54,424 105,513 Deferred policy acquisition expenses 317,687 294,860 Ceded unearned premiums 266,898 238,633 Deferred income taxes 705,058 425,012 Office properties and equipment, at cost less accumulated depreciation of $245,071 (1993; $215,389) 462,999 455,861 Goodwill 283,590 284,276 Other assets 124,980 129,845 ---------- ---------- Total assets $17,366,895 17,149,196 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In thousands) September 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1993 - ------------------------------------ ------------ ----------- (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $9,387,256 9,185,191 Unearned premiums 2,089,439 1,875,635 ---------- ---------- Total insurance reserves 11,476,695 11,060,826 Debt 610,279 639,729 Payables: Insurance brokerage activities 1,142,376 1,083,845 Income taxes 171,917 162,645 Reinsurance premiums 175,155 138,150 Accrued expenses and other 587,616 593,205 Other liabilities 443,264 466,989 ---------- ---------- Total liabilities 14,607,302 14,145,389 ---------- ---------- Series B convertible preferred stock; 1,450 shares authorized; 1,015 shares outstanding (1,023 shares in 1993) 146,508 147,608 Guaranteed obligation - PSOP (141,567) (148,929) ---------- ---------- Net convertible preferred stock 4,941 (1,321) ---------- ---------- Common shareholders' equity: Common stock, 240,000 shares authorized; 84,095 shares outstanding (84,715 shares in 1993) 441,783 438,559 Retained earnings 2,274,929 2,082,832 Guaranteed obligation - ESOP (47,188) (56,005) Unrealized appreciation of investments 120,171 588,844 Unrealized loss on foreign currency translation (35,043) (49,102) ---------- ---------- Total common shareholders' equity 2,754,652 3,005,128 ---------- ---------- Total liabilities, preferred stock and common shareholders' equity $17,366,895 17,149,196 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Common Shareholders' Equity (In thousands) Nine Twelve Months Ended Months Ended September 30 December 31 ------------ ------------ 1994 1993 ---- ---- (Unaudited) Common stock: Beginning of period $438,559 422,249 Stock issued under stock option and other incentive plans 7,691 16,334 Reacquired common stock (4,467) (24) ---------- ---------- End of period 441,783 438,559 ---------- ---------- Retained earnings: Beginning of period 2,082,832 1,781,113 Net income 322,007 427,609 Dividends declared on common stock (93,648) (116,962) Dividends declared on preferred stock, net of taxes (6,343) (8,395) Reacquired common shares (29,919) (533) ---------- ---------- End of period 2,274,929 2,082,832 ---------- ---------- Guaranteed obligation - ESOP: Beginning of period (56,005) (67,452) Principal payments 8,817 11,447 ---------- ---------- End of period (47,188) (56,005) ---------- ---------- Unrealized appreciation of investments, net of taxes: Beginning of period 588,844 63,669 Change during the period (468,673) 23,193 Change due to adoption of SFAS 115 - 501,982 ---------- ---------- End of period 120,171 588,844 ---------- ---------- Unrealized gain (loss) on foreign currency translation, net of taxes: Beginning of period (49,102) 2,920 Change during the period 14,059 (52,022) ---------- ---------- End of period (35,043) (49,102) ---------- ---------- Total common shareholders' equity $2,754,652 3,005,128 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (In thousands) Nine Months Ended September 30 ----------------------- 1994 1993 ------ ------ OPERATING ACTIVITIES Underwriting: Net income $330,974 334,119 Adjustments: Change in net insurance reserves 409,372 222,244 Change in underwriting premiums receivable (165,947) 84,008 Provision for deferred taxes (21,235) (35,522) Realized gains (45,718) (35,754) Other 116,727 69,194 ---------- ---------- Total underwriting 624,173 638,289 ---------- ---------- Insurance brokerage: Net loss (19,384) (21,259) Adjustments: Change in premium balances 20,834 9,893 Change in accounts payable and accrued expenses (25,754) (43,845) Depreciation and goodwill amortization 15,484 15,108 Other 32,279 (2,891) ---------- ---------- Total insurance brokerage 23,459 (42,994) ---------- ---------- Investment banking-asset management: Net income 33,509 39,053 Adjustments: Change in inventory securities 246,017 (24,009) Change in short-term investments (215,990) (36,061) Change in open security transactions 10,668 17,811 Change in short-term borrowings (80,383) (20,000) Other 47,748 40,355 ---------- ---------- Total investment banking-asset management 41,569 17,149 ---------- ---------- Parent company and consolidating eliminations: Net loss (23,092) (13,997) Realized gains (4,980) (8,714) Adjustments 724 (11,193) ---------- ---------- Total parent company and consolidating eliminations (27,348) (33,904) ---------- ---------- Net cash provided by operating activities 661,853 578,540 ---------- ---------- INVESTING ACTIVITIES Purchase of investments (1,531,623) (1,679,375) Sales and maturities of investments 1,168,608 1,379,000 Purchase of Economy Fire & Casualty, net of cash - (267,451) acquired Change in short-term investments (133,098) 22,678 Change in open security transactions (2,563) 45,792 Net purchases of office properties and equipment (37,852) (33,989) Other (12,872) (6,819) ---------- ---------- Net cash used by investing activities (549,400) (540,164) ---------- ---------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (101,576) (96,617) Proceeds from issuance of debt 73,718 76,681 Reacquired common shares (34,150) (207) Repayment of debt (20,350) (23,106) Other (16,898) 2,845 ---------- ---------- Net cash used by financing activities (99,256) (40,404) ---------- ---------- Effect of exchange rate changes on cash 300 (930) ---------- ---------- Increase (decrease) in cash 13,497 (2,958) Cash at beginning of period 25,420 26,648 ---------- ---------- Cash at end of period $38,917 23,690 ========== ========== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited September 30, 1994 Note 1 Basis of Presentation - ----------------------------- The consolidated financial statements include The St. Paul Companies, Inc. and subsidiaries, and have been prepared in conformity with generally accepted accounting principles. These financial statements rely, in part, on estimates. In the opinion of management, all necessary adjustments have been reflected for a fair presentation of the results of operations, financial position and cash flows in the accompanying unaudited consolidated financial statements. The results for the period are not necessarily indicative of the results to be expected for the entire year. Reference should be made to the "Notes to Consolidated Financial Statements" on pages 49 to 63 of the Registrant's annual report to shareholders for the year ended December 31, 1993. The amounts in those notes have not changed except as a result of transactions in the ordinary course of business or as otherwise disclosed in these notes. Some figures in the 1993 consolidated financial statements have been reclassified to conform with the 1994 presentation. These reclassifications had no effect on net income or common shareholders' equity, as previously reported. All references in the consolidated financial statements and related footnotes to per share amounts and to the number of shares of common stock for both 1994 and 1993 reflect the effect of the 2-for-1 stock split which occurred on June 6, 1994 (see Note 9). THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 2 Earnings Per Share - -------------------------- Earnings per common share (EPS) amounts were calculated by dividing net income, as adjusted, by the adjusted average common shares outstanding. The common shares outstanding were adjusted for the 2-for-1 stock split (see Note 9). Three Months Ended Nine Months Ended September 30 September 30 ---------------- ---------------- 1994 1993 1994 1993 ------ ------ ------ ------ (In thousands) PRIMARY Net income, as reported $129,808 141,388 322,007 337,916 Preferred dividends declared (net of taxes) (2,129) (2,038) (6,343) (6,234) -------- -------- -------- -------- Net income, as adjusted $127,679 139,350 315,664 331,682 ======== ======== ======== ======== FULLY DILUTED Net income, per financial statements $129,808 141,388 322,007 337,916 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (944) (988) (2,841) (3,062) -------- -------- -------- -------- Net income, as adjusted $128,864 140,400 319,166 334,854 ======== ======== ======== ======== AVERAGE SHARES OUTSTANDING Primary 84,696 85,342 84,816 85,091 ======== ======== ======== ======== Fully diluted 88,696 89,509 88,872 89,430 ======== ======== ======== ======== Average shares outstanding include the common and common equivalent shares outstanding for the period and, for fully diluted EPS, common shares that would be issuable upon conversion of preferred stock. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 3 Investments - ------------------- Investment Activity. A summary of investment transactions is presented below. Nine Months Ended September 30 ------------------------------ 1994 1993 ------ ------ (In thousands) Purchases: Fixed maturities $872,016 1,289,984 Equities 533,010 293,025 Real estate 64,666 34,916 Venture capital 52,817 59,077 Other investments 9,114 2,373 --------- --------- Total purchases 1,531,623 1,679,375 --------- --------- Proceeds from sales and maturities: Fixed maturities: Sales 195,665 154,889 Maturities and redemptions 396,995 853,543 Equities 542,960 316,349 Venture capital 19,744 40,199 Real estate 202 8,879 Other investments 13,042 5,141 --------- --------- Total sales and maturities 1,168,608 1,379,000 --------- --------- Net purchases $363,015 300,375 ========= ========= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Change in Unrealized Appreciation. The increase (decrease) in unrealized appreciation of investments recorded in common shareholders' equity was as follows: Nine Months Ended Twelve Months Ended September 30, 1994 December 31, 1993 ------------------ ------------------- (In thousands) Fixed maturities $(666,883) 771,598 Equities (31,672) (23,993) Venture capital (13,576) 52,550 -------- ------- Total change in pretax unrealized appreciation (712,131) 800,155 Increase (decrease) in deferred tax asset due to change in unrealized appreciation 243,458 (274,980) -------- -------- Total change in unrealized appreciation, net of taxes $(468,673) 525,175 ======== ======== Prior to the company's adoption of SFAS No. 115 on Dec. 31, 1993, the company did not record unrealized appreciation or depreciation of fixed maturities on the consolidated balance sheet. Consequently, the unrealized appreciation of fixed maturities in the twelve-month column in the table represents the cumulative unrealized appreciation recorded upon the company's adoption of SFAS No. 115. The actual increase in pretax unrealized appreciation of fixed maturities for the twelve months ended Dec. 31, 1993 was $257.8 million. Restricted Funds. Premiums collected by the brokerage operations from insureds, but not yet remitted to insurance carriers, are restricted as to use by business practices. These restricted funds are included in short-term investments and totaled $411 million at September 30, 1994, and $393 million at December 31, 1993. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 4 Income Taxes - -------------------- The components of the income tax provision are as follows: Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1994 1993 1994 1993 ------ ------ ------ ------ (In thousands) Federal current tax expense $37,280 39,260 100,130 106,315 Federal deferred tax benefit (6,710) (26,193) (28,338) (49,497) ------- ------- ------- ------- Total federal income tax expense 30,570 13,067 71,792 56,818 Foreign income taxes 3,479 2,302 8,940 7,936 State income taxes 1,344 1,659 3,659 4,989 ------- ------- ------- ------- Total income tax expense $35,393 17,028 84,391 69,743 ======= ======= ======= ======= In the third quarter of 1993, the company recorded a net year-to-date tax benefit of $15 million, or $0.17 per share, as a result of the change in the corporate federal tax rate from 34% to 35%, which resulted in an increase of $15 million in the company's deferred tax asset. Note 5 Contingent Liabilities - ------------------------------ In the ordinary course of conducting business, some of the company's subsidiaries have been named as defendants in various lawsuits. Some of these lawsuits attempt to establish liability under insurance contracts issued by those companies. Plaintiffs in these lawsuits are asking for money damages or to have the court direct the activities of our operations in certain ways. Although it is possible that the settlement of a contingency may be material to the company's results of operations and liquidity in the period in which the settlement occurs, the company believes that the total amounts that it or its subsidiaries will ultimately have to pay in all of these lawsuits will have no material effect on its overall financial position. In some cases, plaintiffs seek to establish coverage for their liability under environmental protection laws. See "Environmental Claims" in Management's Discussion and Analysis for information on these claims. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 6 Debt - ------------ Debt consists of the following: September 30, December 31, 1994 1993 ---------------- --------------- Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- (In thousands) Commercial paper $260,709 260,709 201,384 201,384 Medium-term notes 204,432 192,800 210,780 221,100 9 3/8% notes 99,968 104,700 99,959 113,400 Guaranteed ESOP debt 38,890 40,900 47,223 52,200 Pound sterling loan notes 6,280 6,280 - - Short-term borrowings - - 80,383 80,383 ------- ------- ------- ------- Total debt $610,279 605,389 639,729 668,467 ======= ======= ======= ======= The medium-term notes mature on various dates beginning in 1998 and continuing through 2004. The 9 3/8% notes mature in June 1997. The guaranteed ESOP debt is due in March 1998. The loan notes were issued by Minet and are due in 2004. Note 7 Reinsurance - ------------------- The company's consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the company's acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks the company has underwritten to other insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to protect the company from potential losses in excess of the amount it is prepared to accept. The company expects those with whom it has ceded reinsurance to honor their obligations. In the event these companies are unable to honor their obligations in full, the company will pay the shortfall. The company has established allowances for possible nonpayment of amounts due to it from these companies. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses and loss adjustment expenses is as follows: Three Months Ended Nine Months Ended September 30 September 30 -------------------- --------------------- 1994 1993 1994 1993 ---- ---- ---- ---- (In thousands) Premiums written: Direct $1,023,153 798,133 2,593,853 2,170,723 Assumed 173,122 164,260 610,598 533,295 Ceded (187,459) (147,588) (469,945) (368,464) --------- --------- --------- --------- Net premiums written $1,008,816 814,805 2,734,506 2,335,554 ========= ========= ========= ========= Premiums earned: Direct $852,270 745,376 2,447,687 2,185,290 Assumed 175,025 156,606 540,412 498,510 Ceded (164,472) (121,328) (433,917) (355,356) --------- --------- --------- --------- Net premiums earned $862,823 780,654 2,554,182 2,328,444 ========= ========= ========= ========= Insurance losses and loss adjustment expenses: Direct $565,799 496,406 1,617,135 1,418,985 Assumed 121,689 126,732 481,222 470,007 Ceded (71,030) (71,368) (222,265) (190,589) --------- --------- --------- --------- Net insurance losses and loss adjustment expenses $616,458 551,770 1,876,092 1,698,403 ========= ========= ========= ========= Note 8 New Accounting Standard - ------------------------------- Effective January 1, 1994, the company adopted Statement of Financial Accounting Standards (SFAS) No. 112, "Employers Accounting for Postemployment Benefits." The company now recognizes the obligation for postemployment benefits on the accrual basis. The company's previous practice was to record employees' workers' compensation benefits on the accrual basis and record all other postemployment benefits on the cash basis. The cumulative effect of adopting SFAS No. 112 was a non-recurring charge of $4.0 million, which was recorded as an operating expense in the first quarter of 1994. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 9 Shareholders' Equity - ---------------------------- The company's Restated Articles of Incorporation were amended by vote of the shareholders at the 1994 Annual Meeting of Shareholders to increase the authorized common shares of the company from 120 million to 240 million. Subsequent to this action, the Board of Directors approved a 2-for-1 stock split, which resulted in the issuance of one additional share of common stock for each outstanding share to shareholders of record on May 17, 1994. The additional shares were issued on June 6, 1994. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1994 Consolidated Results - -------------------- Consolidated pretax earnings of $165 million in the third quarter increased 4% over third quarter 1993 earnings of $158 million. The underwriting segment accounted for the improvement over 1993. Insurance brokerage and investment banking-asset management results in the third quarter were below 1993 levels. Year-to-date pretax income in 1994 of $406 million was near 1993 income of $408 million. Net income in the third quarter was $130 million, or $1.45 per share, compared with net income of $141 million, or $1.57 per share, in the third quarter of 1993. Net income in the third quarter of 1993 included a net tax benefit of $15 million, or $0.17 per share, resulting from an increase in the federal tax rate. Net income of $322 million, or $3.59 per share, for the first nine months of 1994 declined from 1993 net income of $338 million, or $3.74 per share. All per share figures reflect the 2-for-1 stock split that occurred in June 1994. Results by Segment - ------------------ Pretax results by industry segment were as follows (in millions): Three Months Nine Months Ended Sept. 30 Ended Sept. 30 ------------- ------------- 1994 1993 1994 1993 ---- ---- ---- ---- Pretax income (loss): Underwriting: GAAP underwriting results ($20) (15) (117) (117) Net investment income 169 165 498 490 Realized investment gains 12 7 46 36 Other (2) (11) (19) (14) --- --- --- --- Total underwriting 159 146 408 395 Insurance brokerage 2 4 (11) (13) Investment banking-asset management 19 21 54 62 Parent and other (15) (13) (45) (36) --- --- --- --- Income before income taxes $165 158 406 408 === === === === THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Underwriting - ------------ Third quarter pretax earnings of $159 million in the Underwriting segment improved 9% over comparable pretax earnings of $146 million in 1993. A reduction in other expenses, together with increases in investment income and realized investment gains, more than offset deterioration in GAAP underwriting results compared to the third quarter of 1993. The following summarizes key financial results by underwriting operation: % of Three Months Nine Months 1994 Ended Sept. 30 Ended Sept. 30 Written -------------- -------------- ($ in Millions) Premiums 1994 1993 1994 1993 - --------------- -------- ---- ---- ---- ---- Specialized Commercial: Written Premiums 30% $280 211 820 738 Underwriting Results ($21) (26) (77) (85) Combined Ratio 107.2 114.8 108.0 111.7 St. Paul Personal & Business Insurance: Written Premiums 21% $200 126 567 306 Underwriting Results ($10) (3) (38) (31) Combined Ratio 104.6 101.9 106.5 109.9 Medical Services: Written Premiums 19% $214 212 510 539 Underwriting Results $28 25 98 107 Combined Ratio 78.1 82.2 78.6 78.8 Reinsurance: Written Premiums 15% $132 115 408 318 Underwriting Results $2 10 (29) (21) Combined Ratio 99.2 88.9 107.9 105.7 St. Paul Commercial: Written Premiums 11% $119 92 306 290 Underwriting Results ($12) (12) (50) (42) Combined Ratio 109.5 113.7 116.0 114.6 International: Written Premiums 4% $64 59 124 145 Underwriting Results ($7) (9) (21) (45) Combined Ratio 106.9 113.6 115.6 131.1 Total: Written Premiums 100% $1,009 815 2,735 2,336 GAAP Underwriting Results ($20) (15) (117) (117) Statutory Combined Ratio: Loss and Loss Expense Ratio 71.4 70.7 73.5 72.9 Underwriting Expense Ratio 28.5 30.5 29.9 31.7 ----- ----- ----- ----- Combined Ratio 99.9 101.2 103.4 104.6 ===== ===== ===== ===== Combined Ratio Including Policyholders' Dividends 100.0 101.3 103.4 104.8 ===== ===== ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued The preceding table represents the company's reporting format effective as of June 1994. Specialized Commercial includes the following lines of business: Construction, Technology, National Accounts, Surety, Financial Services, Professional Liability, Surplus Lines, Ocean Marine and Public Sector. St. Paul Personal & Business Insurance markets personal insurance products and coverages for small commercial customers. St. Paul Commercial serves midsize commercial customers. The company's Medical Services, Reinsurance and International underwriting operations were largely unaffected by this change in reporting format. Third quarter written premiums totaled $1.0 billion, an increase over comparable 1993 premiums of $815 million. St. Paul Personal & Business Insurance premium volume increased 58% over 1993, primarily due to the inclusion of a full quarter of premiums from Economy Fire & Casualty Company, acquired in September 1993. Excluding the impact of Economy in both years, St. Paul Personal & Business Insurance written premiums increased 4% over the third quarter of 1993. Increased participation in insurance pools and growth in ocean marine business contributed to the increase in Specialized Commercial volume over 1993. Written premiums in St. Paul Commercial increased over 1993, primarily the result of new business. Year-to-date written premiums in 1994 increased over the first nine months of 1993, primarily due to premium growth in St. Paul Personal & Business Insurance and Reinsurance. Price increases and a higher level of retentions on existing reinsurance contracts accounted for the growth in Reinsurance volume in 1994. The GAAP underwriting loss in the third quarter was $20 million, compared with 1993's third quarter loss of $15 million. Key factors in the increase in third quarter underwriting losses compared to 1993 were as follows: - Reinsurance - $8 million worse than 1993 - An increase in underwriting expenses contributed to the deterioration from 1993. - St. Paul Personal & Business - $7 million worse than 1993 - An increase in catastrophe losses was the primary factor in the deterioration from 1993. The year-to-date GAAP underwriting loss of $117 million was level with the 1993 loss. Pretax catastrophe losses of $98 million in 1994 were $40 million higher than comparable 1993 losses (primarily due to the Los Angeles earthquake and winter storms, which both occurred in the first quarter). However, a $24 million improvement in year-to-date International results and improvements in non-catastrophe loss experience in several lines served to offset the increase in catastrophe losses. In the second quarter of 1994, the company was added as a defendant to Weatherford Roofing Company, et al. v. Employers National Insurance Company, et al., a purported class action, which was commenced in 1991 in the District Court of Dallas County, Texas and in which the plaintiffs claim (among other things) that approximately 300 insurance companies have overcharged customers for retrospectively-rated workers' compensation insurance in Texas between 1987 and 1992. In the course of responding to the complaint, the company determined that in certain instances it made charges for retrospectively-rated workers' compensation insurance which were in excess of the regulated rates which were filed and approved, both in Texas and other states. The company has decided to make refunds with interest in all affected states and has entered into an agreement to settle the Texas case, which is subject to court approval. The results for the third quarter ended Sept. 30, 1994 reflect a charge of approximately $36 million to create an accrual sufficient in the opinion of the company to cover the costs of all such refunds plus ancillary expenses. The majority of this accrual related to the Specialized Commercial underwriting operation where it was offset primarily by a reduction in prior year loss and underwriting expense reserves for involuntary business. Pretax investment income in the Underwriting segment for the third quarter totaled $169 million, up slightly from $165 million in 1993. Year-to-date investment income was also up slightly from 1993. Investment income levels have been stagnant over the last several years, as increases in invested assets were offset by declining fixed maturity yields. This situation THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued began to change in 1994, as interest rates have started to increase. The weighted average pretax yield on the Underwriting investment portfolio at Sept. 30, 1994 was 7.4%, nearly level with the same time in 1993. However, the new money rate on taxable fixed-maturity securities was 7.4% at quarter-end, up 100 basis points from six months ago. Fixed maturities purchased in the first nine months of 1994 were almost exclusively taxable securities, in consideration of the company's consolidated tax position. The company uses derivative instruments on a limited basis for the purpose of income generation and hedging. The company does not speculate in derivative instruments. Insurance Brokerage - ------------------- The Insurance Brokerage segment posted pretax earnings of $2 million in the third quarter of 1994, down from comparable 1993 earnings of $4 million. Brokerage fees and commissions increased 9% over the third quarter of 1993; however, salaries and related expenses increased 15% due to increased staffing levels associated with the implementation of new business initiatives. The year-to-date pretax loss was $11 million, compared with a loss of $13 million in the first nine months of 1993. Investment Banking-Asset Management - ----------------------------------- The company's portion of The John Nuveen Company's third quarter pretax earnings was $19 million, compared with $21 million in 1993. Year-to- date, the company's portion was $54 million, compared with $62 million in 1993. The company owns 76% of Nuveen. Nuveen's distribution and underwriting revenues were down 62% in the third quarter and 76% for the year compared to 1993 levels. The Federal THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Reserve Board has raised interest rates on five separate occasions in 1994, actions which, at least temporarily, have made Nuveen's tax-exempt products less attractive to investors. Net long-term managed fund sales of $745 million in the first nine months of 1994 were $3.7 billion less than 1993, and Unit Investment Trust sales of $901 million were down 25% from 1993. Municipal new issue volume also was down in 1994, negatively impacting Nuveen's investment banking revenues. Investment advisory fees earned on assets under Nuveen's management increased seven percent to $138 million over the first nine months of 1993. Assets under management of $30.6 billion at Sept. 30, 1994 declined $2 billion from year-end 1993 as rising interest rates during 1994 drove down the value of managed fund assets. Environmental Claims - -------------------- The company's underwriting operations continue to receive claims under policies written many years ago alleging injuries from hazardous waste substances or alleging covered property damages for the cost to clean up hazardous waste sites. Significant legal issues, primarily pertaining to issues of coverage, exist with regard to the alleged liability of the company's underwriting operations for these claims. In the company's opinion, court decisions in certain jurisdictions have tended to expand insurance coverage beyond the intent of the original policies. The company's ultimate liability for environmental pollution claims is extremely difficult to estimate. Insured parties have submitted claims for losses not covered in the insurance policy, and the ultimate resolution of these claims may be subject to lengthy litigation, making it difficult to estimate the company's potential liability. In addition, variables, such as the length of time necessary to clean up a polluted site, and controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of a pollution claim. Because of the significant uncertainties associated with pollution claims, and the likelihood that they will not be resolved in the near future, the company is unable to estimate its ultimate exposure to these claims, and cannot quantify a range of reasonably possible losses in addition to recorded reserves. As a result, the company's results of operations in future periods may be materially impacted by these claims. However, the company believes it is unlikely that such claims will materially impact its financial position or liquidity. Prior to 1994, the company made no specific allocation of its IBNR (incurred but not reported) reserves for environmental pollution claims, but rather identified reserves only for reported environmental claims (case reserves). The company's total gross IBNR reserves at Sept. 30, 1994 were $4.41 billion. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued In the third quarter of 1994, $132 million of these previously established gross IBNR reserves was specifically allocated for environmental claims. The following table represents a reconciliation of total gross and net environmental pollution reserve development for the nine months ended Sept. 30, 1994, and each of the years in the three-year period ended Dec. 31, 1993. Amounts in the "net" column are reduced by reinsurance recoverable on unpaid losses. 1994 (nine months) 1993 1992 1991 ----------- ---------- ---------- ---------- (in millions) Gross Net Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- ----- --- Beginning reserves $105 73 88 62 76 55 70 50 Incurred losses 22 17 32 22 30 20 24 20 IBNR allocation 132 95 - - - - - - Paid losses (17) (13) (15) (11) (18) (13) (18) (15) --- --- --- --- --- --- --- --- Ending reserves $242 172 105 73 88 62 76 55 === === === === === === === === At Sept. 30, 1994, approximately 60% of the company's total gross environmental pollution reserves represented reserves for claims on direct business written in the United States by the company's principal domestic underwriting subsidiary. Many significant environmental pollution claims currently being brought against insurance companies arise out of contamination that occurred 20 to 30 years ago, a time frame during which the company's domestic underwriting operations' commercial book of business was largely composed of small- to medium- sized businesses without significant exposure to pollution liability. In addition, the company believes that its current mix of domestic commercial business carries a relatively low risk of significant pollution liability. Finally, since 1970, the company's Commercial General Liability policy form has included a specific pollution exclusion, and, since 1986, an absolute pollution exclusion. The balance of the company's environmental reserves consist of estimated losses on reinsurance assumed by the company. Total gross environmental reserves at Sept. 30, 1994 of $242 million represented less than three percent of gross consolidated reserves of $9.39 billion. Asbestos Claims - --------------- Asbestos-related claims brought against the company are subject to significant uncertainties that are not generally present for other types of claims, making the company's ultimate liability for such claims extremely difficult to estimate. Case law and a history of prior claim development are the primary THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued factors which determine the total cost of asbestos claims. Both of these items are still developing, making it difficult to estimate the company's ultimate exposure to such claims. Asbestos-related claims have generally arisen out of product liability coverages under general liability policies written prior to 1986. Since 1986, the company's Commercial General Liability policy has used the industry standard absolute pollution exclusion which greatly limits coverage. We believe this exclusion applies to asbestos claims. Prior to 1994, the company made no specific allocation of its IBNR reserves for asbestos claims, but rather identified only case reserves for asbestos claims. In the third quarter of 1994, $127 million of previously established gross IBNR reserves was specifically allocated for unreported asbestos claims. The following table represents a reconciliation of total gross and net reserve development for asbestos claims for the nine months ended Sept. 30, 1994, and each of the years in the three-year period ended Dec. 31, 1993: 1994 (nine months) 1993 1992 1991 ----------- ---------- ---------- ---------- (in millions) Gross Net Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- ----- --- Beginning reserves $ 62 48 70 54 65 54 29 25 Incurred losses 10 8 17 15 25 17 52 44 IBNR allocation 127 95 - - - - - - Paid losses (15) (12) (25) (21) (20) (17) (16) (15) --- --- --- --- --- --- --- --- Ending reserves $184 139 62 48 70 54 65 54 === === === === === === === === Total gross asbestos reserves at Sept. 30, 1994 of $184 million represented approximately two percent of gross consolidated reserves of $9.39 billion. Capital Resources - ----------------- Common shareholders' equity at Sept. 30, 1994 of $2.8 billion was down 8% from year-end 1993. The unrealized appreciation of the company's investment portfolio declined by $469 million (net of taxes) in the first nine months of 1994 primarily due to the impact of rising interest rates on the carrying value of the company's fixed maturities portfolio. The company also repurchased 846,000 of its outstanding common shares (as adjusted for the 2-for-1 stock split) in the first six months of 1994 for a total cost of $34 million. The company did not repurchase any shares during the third quarter. Total debt outstanding at Sept. 30, 1994 was $610 million, down from $640 million at year-end 1993 primarily due to a decline in Nuveen's short-term borrowings. The company issued an additional $14 million of medium-term notes THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued under an existing shelf registration during 1994, and has also funded medium-term note maturities of $20 million. The ratio of total debt to total capitalization at quarter-end was 18%, unchanged from year-end 1993. The company currently has no significant capital commitments planned for the remainder of 1994 and beyond. The company's ratio of earnings to fixed charges was 9.18 for the first nine months of 1994, compared with 8.86 for the same period of 1993. The company's ratio of earnings to combined fixed charges and preferred stock dividends was 7.19 for the first nine months of 1994, compared with 6.99 for the same period of 1993. Fixed charges consist of interest expense before reduction for capitalized interest and one-third of rental expense, which is considered to be representative of an interest factor. Liquidity - --------- Liquidity refers to the company's ability to generate sufficient funds to meet the cash requirements of its business operations. Net cash provided by operations was $662 million in the first nine months of 1994, compared to $579 million in 1993. The increase over 1993 was primarily the result of increased cash flows in the insurance brokerage and investment banking-asset management segments. The underwriting segment's cash flows from operations were near 1993 levels. Impact of Accounting Pronouncement to be Adopted in the Future - -------------------------------------------------------------- In October 1994, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." Provisions of this statement will require expanded disclosures about derivative financial instruments, defined as futures, forward, swap, or option contracts, or other financial instruments with similar characteristics. The statement is effective for fiscal years ending after Dec. 15, 1994. The company does not speculate in derivative instruments, and therefore the provisions of this statement will not require significant new disclosures by the company. PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements, and in the "Underwriting" section of Management's Discussion and Analysis, both included in Part I of this report, is incorporated herein by reference. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. An Exhibit Index is set forth on page 25 of this report. (b) Reports on Form 8-K. 1) The Registrant filed a Form 8-K Current Report dated July 25, 1994, pertaining to the Registrant's press release of second quarter 1994 financial results. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE ST. PAUL COMPANIES, INC. (Registrant) Date: November 10, 1994 By /s/ Bruce A. Backberg --------------------- Bruce A. Backberg Vice President and Corporate Secretary (Authorized Signatory) Date: November 10, 1994 By /s/ Howard E. Dalton -------------------- Howard E. Dalton Senior Vice President Chief Accounting Officer EXHIBIT INDEX ------------- How Exhibit Filed - ------- ----- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession*.............................. (4) Instruments defining the rights of security holders, including indentures*................................... (10) Material contracts*........................................ (11) Statement re computation of per share earnings**........... (1) (12) Statement re computation of ratios**....................... (1) (15) Letter re unaudited interim financial information*......... (18) Letter re change in accounting principles*................. (19) Report furnished to security holders*...................... (22) Published report regarding matters submitted to vote of security holders*............................... (23) Consents of experts and counsel*........................... (24) Power of attorney*......................................... (27) Financial data schedule**.................................. (1) (99) Additional exhibits*....................................... * These items are not applicable. ** This exhibit is included only with the copies of this report that are filed with the Securities and Exchange Commission. However, a copy of the exhibit may be obtained from the Registrant for a reasonable fee by writing to Legal Services, The St. Paul Companies, 385 Washington Street, Saint Paul, MN 55102. (1) Filed electronically under Operational EDGAR Program. EX-11 2 EXHIBIT 11 Exhibit 11 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings Per Share (In thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1994 1993 1994 1993 ----- ----- ----- ----- EARNINGS: Primary: Net income, as reported $129,808 141,388 322,007 337,916 Preferred dividends declared (net of taxes) (2,129) (2,038) (6,343) (6,234) -------- -------- -------- -------- Net income, as adjusted $127,679 139,350 315,664 331,682 ======== ======== ======== ======== Fully diluted: Net income, as reported $129,808 141,388 322,007 337,916 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (944) (988) (2,841) (3,062) -------- -------- -------- -------- Net income, as adjusted $128,864 140,400 319,166 334,854 ======== ======== ======== ======== SHARES: Primary: Weighted average number of common shares outstanding, per consolidated financial statements 84,042 84,493 84,195 84,332 Additional dilutive effect of outstanding stock options (based on treasury stock method using average market price) 654 849 621 759 -------- -------- -------- -------- Weighted average, as adjusted 84,696 85,342 84,816 85,091 ======== ======== ======== ======== Fully diluted: Weighted average number of common shares outstanding, per consolidated financial statements 84,042 84,493 84,195 84,332 Additional dilutive effect of: Convertible preferred stock 4,068 4,100 4,078 4,111 Outstanding stock options (based on treasury stock method using market price at end of period) 586 916 599 987 -------- -------- -------- -------- Weighted average, as adjusted 88,696 89,509 88,872 89,430 ======== ======== ======== ======== EARNINGS PER COMMON SHARE: Primary $1.51 1.63 3.72 3.90 Fully diluted $1.45 1.57 3.59 3.74 EX-12 3 EXHIBIT 12 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Exhibit 12 Computation of Ratios (In thousands, except ratios) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1994 1993 1994 1993 ----- ----- ----- ----- EARNINGS: Income before income taxes $165,201 158,416 406,398 407,659 Add: fixed charges 16,782 17,529 49,652 51,892 ------- ------- ------- ------- Income, as adjusted $181,983 175,945 456,050 459,551 ======= ======= ======= ======= FIXED CHARGES: Interest costs $10,640 10,887 30,852 32,501 Rental expense (1) 6,142 6,642 18,800 19,391 ------- ------- ------- ------- Total fixed charges $16,782 17,529 49,652 51,892 ======= ======= ======= ======= FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Fixed charges $16,782 17,529 49,652 51,892 Preferred stock dividends 4,578 4,759 13,772 13,875 ------- ------- ------- ------- Total fixed charges and preferred stock dividends $21,360 22,288 63,424 65,767 ======= ======= ======= ======= Ratio of earnings to fixed charges 10.84 10.04 9.18 8.86 ======= ======= ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends 8.52 7.89 7.19 6.99 ======= ======= ======= ======= (1) Interest portion deemed implicit in total rent expense. EX-27 4 EXHIBIT 27
7 1,000 9-MOS DEC-31-1994 SEP-30-1994 8,765,552 0 0 528,590 0 538,630 11,269,333 38,917 66,596 317,687 17,366,895 9,387,256 2,089,439 0 0 610,279 441,783 0 4,941 2,312,869 17,366,895 2,554,182 510,824 50,698 412,288 1,876,092 577,920 667,582 406,398 84,391 322,007 0 0 0 322,007 3.72 3.59 0 0 0 0 0 0 0
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