-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bpvjw7UfgwwXrD4PrEVb+LIPaSUT4qxJmn+CeJc6l85xdMqs1MK7/NWtvdWD7t3Q tveUK+nbCeXg2A2fX3/Edw== 0000086312-95-000040.txt : 19951119 0000086312-95-000040.hdr.sgml : 19951119 ACCESSION NUMBER: 0000086312-95-000040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST PAUL COMPANIES INC /MN/ CENTRAL INDEX KEY: 0000086312 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [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: 95592287 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, 1995 ------------------ 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 10, 1995, was 84,531,679. 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, 1995 and 1994 3 Consolidated Balance Sheets, September 30, 1995 (Unaudited) and December 31, 1994 4 Consolidated Statements of Shareholders' Equity, Nine Months Ended September 30, 1995 (Unaudited) and Twelve Months Ended December 31, 1994 6 Consolidated Statements of Cash Flows (Unaudited), Nine Months Ended September 30, 1995 and 1994 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 25 EXHIBIT INDEX 26 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 ------------------ ------------------ 1995 1994 1995 1994 ---- ---- ---- ---- Revenues: Premiums earned $993,317 862,823 2,931,214 2,554,182 Net investment income 193,922 175,166 570,487 510,824 Insurance brokerage fees and commissions 83,549 85,004 227,662 225,752 Investment banking-asset management 55,091 54,639 162,969 161,438 Realized investment gains 25,736 14,018 38,060 50,698 Other 13,251 7,418 32,661 25,098 --------- --------- --------- --------- Total revenues 1,364,866 1,199,068 3,963,053 3,527,992 --------- --------- --------- --------- Expenses: Insurance losses and loss adjustment expenses 714,302 616,458 2,118,131 1,876,092 Policy acquisition expenses 215,863 193,101 642,785 577,920 Operating and administrative 256,596 224,308 732,632 667,582 --------- --------- --------- --------- Total expenses 1,186,761 1,033,867 3,493,548 3,121,594 --------- --------- --------- --------- Income before income taxes 178,105 165,201 469,505 406,398 Income tax expense (benefit): Federal current 53,825 37,280 145,085 100,130 Other (18,119) (1,887) (41,542) (15,739) --------- --------- --------- --------- Total income tax expense 35,706 35,393 103,543 84,391 --------- --------- --------- --------- Net income $142,399 129,808 365,962 322,007 ========= ========= ========= ========= Net income per common share: Primary $1.64 1.51 4.21 3.72 ========= ========= ========= ========= Fully diluted $1.54 1.45 4.00 3.59 ========= ========= ========= ========= Dividends declared on common stock $0.40 0.375 1.20 1.125 ========= ========= ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) September 30, December 31, ASSETS 1995 1994 - ------ ---------- ---------- (Unaudited) Investments: Fixed maturities, at estimated market value $9,916,552 8,828,684 Equities, at estimated market value 732,991 531,042 Real estate, at cost less accumulated depreciation of $69,270 (1994; $60,234) 614,652 528,144 Venture capital, at estimated market value 354,156 330,032 Other investments 50,828 46,539 Short-term investments, at cost 956,543 898,081 ---------- ---------- Total investments 12,625,722 11,162,522 Cash 28,662 46,664 Investment banking inventory securities 107,112 148,031 Reinsurance recoverables: Unpaid losses 1,517,660 1,533,250 Paid losses 84,176 88,900 Receivables: Underwriting premiums 1,305,224 1,107,788 Insurance brokerage activities 636,291 891,823 Interest and dividends 192,431 182,938 Other 103,202 88,657 Deferred policy acquisition expenses 364,313 324,358 Ceded unearned premiums 224,967 255,687 Deferred income taxes 601,308 790,508 Office properties and equipment, at cost less accumulated depreciation of $263,569 (1994: $243,945) 474,856 477,570 Goodwill 286,093 279,308 Other assets 207,933 117,816 ---------- ---------- Total assets $18,759,950 17,495,820 ========== ========== 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 1995 1994 - ------------------------------------ ------------ ----------- (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $9,817,471 9,423,429 Unearned premiums 2,325,602 2,109,170 ---------- ---------- Total insurance reserves 12,143,073 11,532,599 Debt 620,275 622,624 Payables: Insurance brokerage activities 911,423 1,191,089 Income taxes 177,080 183,659 Reinsurance premiums 146,505 155,833 Accrued expenses and other 602,360 600,211 Other liabilities 456,680 472,336 ---------- ---------- Total liabilities 15,057,396 14,758,351 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. 207,000 - ---------- ---------- Shareholders' equity: Series B convertible preferred stock; 1,450 shares authorized; 1,003 shares outstanding (1,012 shares in 1994) 144,749 146,102 Guaranteed obligation - PSOP (133,293) (141,567) ---------- ---------- Total preferred equity 11,456 4,535 ---------- ---------- Common shareholders' equity: Common stock, 240,000 shares authorized; 84,643 shares outstanding (84,202 shares in 1994) 460,145 445,222 Retained earnings 2,620,215 2,362,286 Guaranteed obligation - ESOP (35,072) (44,410) Unrealized appreciation of investments 468,903 13,948 Unrealized loss on foreign currency translation (30,093) (44,112) ---------- ---------- Total common shareholders' equity 3,484,098 2,732,934 ---------- ---------- Total preferred and common shareholders' equity 3,495,554 2,737,469 ---------- ---------- Total liabilities, redeemable preferred securities and shareholders' equity $18,759,950 17,495,820 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In thousands) Nine Twelve Months Ended Months Ended September 30 December 31 ------------ ------------ 1995 1994 ---- ---- (Unaudited) Series B convertible preferred stock: Beginning of period $146,102 147,608 Change during the period (1,353) (1,506) ---------- ---------- End of period 144,749 146,102 ---------- ---------- Guaranteed obligation - PSOP: Beginning of period (141,567) (148,929) Change during the period 8,274 7,362 ---------- ---------- End of period (133,293) (141,567) ---------- ---------- Common stock: Beginning of period 445,222 438,559 Stock issued under stock option and other incentive plans 14,978 11,130 Reacquired common stock (55) (4,467) ---------- ---------- End of period 460,145 445,222 ---------- ---------- Retained earnings: Beginning of period 2,362,286 2,082,832 Net income 365,962 442,828 Dividends declared on common stock (100,622) (124,921) Dividends declared on preferred stock, net of taxes (6,444) (8,448) Reacquired common shares (967) (30,005) ---------- ---------- End of period 2,620,215 2,362,286 ---------- ---------- Guaranteed obligation - ESOP: Beginning of period (44,410) (56,005) Principal payments 9,338 11,595 ---------- ---------- End of period (35,072) (44,410) ---------- ---------- Unrealized appreciation of investments, net of taxes: Beginning of period 13,948 588,844 Change during the period 454,955 (574,896) ---------- ---------- End of period 468,903 13,948 ---------- ---------- Unrealized loss on foreign currency translation, net of taxes: Beginning of period (44,112) (49,102) Change during the period 14,019 4,990 ---------- ---------- End of period (30,093) (44,112) ---------- ---------- Total preferred and common shareholders' equity $3,495,554 2,737,469 ========== ========== 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 ----------------------- 1995 1994 ------ ------ OPERATING ACTIVITIES Underwriting: Net income $383,742 330,974 Adjustments: Change in net insurance reserves 625,146 409,372 Change in underwriting premiums receivable (208,381) (165,947) Provision for deferred taxes (47,024) (21,235) Realized gains (32,355) (45,718) Other (96,758) 116,727 ---------- ---------- Total underwriting 624,370 624,173 ---------- ---------- Insurance brokerage: Net loss (22,172) (19,384) Adjustments: Change in premium balances (28,041) 20,834 Change in accounts payable and accrued expenses (24,095) (25,754) Depreciation and goodwill amortization 20,438 15,484 Other 19,225 32,279 ---------- ---------- Total insurance brokerage (34,645) 23,459 ---------- ---------- Investment banking-asset management: Net income 37,997 33,509 Adjustments: Change in inventory securities 40,919 246,017 Change in short-term investments (104,401) (215,990) Change in open security transactions (2,810) 10,668 Change in short-term borrowings - (80,383) Other 52,353 47,748 ---------- ---------- Total investment banking-asset management 24,058 41,569 ---------- ---------- Parent company and consolidating eliminations: Net loss (33,605) (23,092) Realized gains (5,705) (4,980) Adjustments 42,016 724 ---------- ---------- Total parent company and consolidating eliminations 2,706 (27,348) ---------- ---------- Net cash provided by operating activities 616,489 661,853 ---------- ---------- INVESTING ACTIVITIES Purchase of investments (2,015,989) (1,531,623) Sales and maturities of investments 1,336,941 1,168,608 Change in short-term investments 56,399 (133,098) Change in open security transactions (28,876) (2,563) Net purchases of office properties and equipment (37,322) (37,852) Other (50,628) (12,872) ---------- ---------- Net cash used by investing activities (739,475) (549,400) ---------- ---------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (107,897) (101,576) Proceeds from issuance of company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. 207,000 - Proceeds from issuance of debt 192,900 73,718 Reacquired common shares (497) (34,150) Repayment of debt (185,844) (20,350) Other (818) (16,898) ---------- ---------- Net cash provided by (used in) financing activities 104,844 (99,256) ---------- ---------- Effect of exchange rate changes on cash 140 300 ---------- ---------- Increase (decrease) in cash (18,002) 13,497 Cash at beginning of period 46,664 25,420 ---------- ---------- Cash at end of period $28,662 38,917 ======= ======= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited September 30, 1995 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 45 to 60 of the Registrant's annual report to shareholders for the year ended December 31, 1994. 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 1994 consolidated financial statements have been reclassified to conform with the 1995 presentation. These reclassifications had no effect on net income or common shareholders' equity, as previously reported. 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. Three Months Ended Nine Months Ended September 30 September 30 ---------------- ---------------- 1995 1994 1995 1994 ------ ------ ------ ------ (In thousands) PRIMARY Net income, as reported $142,399 129,808 365,962 322,007 PSOP preferred dividends declared (net of taxes) (2,159) (2,129) (6,444) (6,343) -------- -------- -------- -------- Net income, as adjusted $140,240 127,679 359,518 315,664 ======== ======== ======== ======== FULLY DILUTED Net income, per financial statements $142,399 129,808 365,962 322,007 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (867) (944) (2,612) (2,841) Dividend on monthly income preferred securities (net of taxes)(see Note 8) 2,018 - 3,027 - -------- -------- -------- -------- Net income, as adjusted $143,550 128,864 366,377 319,166 ======== ======== ======== ======== ADJUSTED AVERAGE COMMON SHARES OUTSTANDING Primary 85,566 84,696 85,373 84,816 ======== ======== ======== ======== Fully diluted 93,414 88,696 91,570 88,872 ======== ======== ======== ======== Adjusted average common 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 PSOP preferred stock and the monthly income preferred securities issued by St. Paul Capital L.L.C. (see Note 8). 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 ------------------------------ 1995 1994 ------ ------ (In thousands) Purchases: Fixed maturities $1,206,888 872,016 Equities 648,154 533,010 Real estate 108,589 64,666 Venture capital 46,938 52,817 Other investments 5,420 9,114 --------- --------- Total purchases 2,015,989 1,531,623 --------- --------- Proceeds from sales and maturities: Fixed maturities: Sales 240,652 195,665 Maturities and redemptions 433,306 396,995 Equities 588,601 542,960 Venture capital 64,260 19,744 Real estate 7,520 202 Other investments 2,602 13,042 --------- --------- Total sales and maturities 1,336,941 1,168,608 --------- --------- Net purchases $679,048 363,015 ========= ========= 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, 1995 December 31, 1994 ------------------ ------------------- (In thousands) Fixed maturities $543,472 (847,554) Equities 105,758 (30,106) Venture capital 42,423 (4,064) -------- ------- Total change in pretax unrealized appreciation 691,653 (881,724) Increase (decrease) in deferred tax asset due to change in unrealized appreciation (236,698) 306,828 -------- -------- Total change in unrealized appreciation, net of taxes $454,955 (574,896) ======== ======== 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 $361 million at September 30, 1995, and $385 million at December 31, 1994. 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 ------------------ ------------------ 1995 1994 1995 1994 ------ ------ ------ ------ (In thousands) Federal current tax expense $53,825 37,280 145,085 100,130 Federal deferred tax benefit (19,190) (6,710) (50,207) (28,338) ------- ------- ------- ------- Total federal income tax expense 34,635 30,570 94,878 71,792 Foreign income taxes (260) 3,479 4,875 8,940 State income taxes 1,331 1,344 3,790 3,659 ------- ------- ------- ------- Total income tax expense $35,706 35,393 103,543 84,391 ======= ======= ======= ======= Note 5 Contingent Liabilities - ------------------------------ In the ordinary course of conducting business, the company and some of its 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 and its subsidiaries will ultimately have to pay in all of these lawsuits will have no material effect on the company's overall financial position. In some cases, plaintiffs seek to establish coverage for their liability under environmental protection laws. See "Environmental Pollution and Asbestos 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, 1995 1994 ------------------ ----------------- Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- (In thousands) Medium-term notes $397,435 402,500 204,433 189,400 9 3/8% notes 99,979 103,500 99,971 102,800 Commercial paper 88,742 88,742 275,635 275,635 Guaranteed ESOP debt 27,779 29,100 36,112 37,200 Pound sterling loan notes 6,340 6,340 6,473 6,473 ------- ------- ------- ------- Total debt $620,275 630,182 622,624 611,508 ======= ======= ======= ======= 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, the company will pay these amounts. The company has established allowances for possible nonpayment of amounts due to it. 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 -------------------- --------------------- 1995 1994 1995 1994 ---- ---- ---- ---- (In thousands) Premiums written: Direct $1,076,797 1,023,153 2,828,803 2,593,853 Assumed 224,685 173,122 750,207 610,598 Ceded (143,854) (187,459) (409,893) (469,945) --------- --------- --------- --------- Net premiums written $1,157,628 1,008,816 3,169,117 2,734,506 ========= ========= ========= ========= Premiums earned: Direct $928,783 852,270 2,715,737 2,447,687 Assumed 222,705 175,025 656,450 540,412 Ceded (158,171) (164,472) (440,973) (433,917) --------- --------- --------- --------- Net premiums earned $993,317 862,823 2,931,214 2,554,182 ========= ========= ========= ========= Insurance losses and loss adjustment expenses: Direct $652,304 565,799 1,894,286 1,617,135 Assumed 181,845 121,689 557,391 481,222 Ceded (119,847) (71,030) (333,546) (222,265) --------- --------- --------- --------- Net insurance losses and loss adjustment expenses $714,302 616,458 2,118,131 1,876,092 ========= ========= ========= ========= Note 8 Company-obligated Mandatorily Redeemable Preferred Securities of St. Paul Capital L.L.C. - ---------------------------------------------------------- On May 16, 1995, the company issued, through St. Paul Capital L.L.C.("SPCLLC"), 4,140,000 company-obligated mandatorily redeemable preferred securities, generating proceeds of $207 million. These securities are also known as convertible monthly income preferred securities (MIPS). The MIPS pay a monthly dividend at an annual rate of 6% of the liquidation preference of $50 per security. The company directly or indirectly owns all of the common shares of SPCLLC, a special purpose limited liability company which was formed for the sole purpose of issuing these MIPS. The company has effectively fully and unconditionally guaranteed SPCLLC's obligations under the MIPS. The MIPS are convertible into 0.8475 shares of the company's common stock (equivalent to a conversion price of $59 per share). The MIPS are redeemable after four years but may be redeemed by the company before four years upon the occurrence of certain events. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued SPCLLC used the proceeds of the MIPS sale and capital contributions from the company (together totaling $262 million) to purchase 6% convertible subordinated debentures issued by the company. These debentures are due May 31, 2025 and interest is payable monthly. The debentures are the sole asset of SPCLLC and are eliminated in the company's consolidated balance sheet. Note 9 Reclassification of Net Convertible Preferred Stock - ----------------------------------------------------------- In the third quarter of 1995, the company reclassified the net convertible preferred stock balance associated with its Preferred Stock Ownership Plan (PSOP) to permanent shareholders' equity. The company had previously classified this item on its balance sheet between liabilities and common shareholders' equity. The PSOP trust, which holds the preferred shares, may at any time convert any or all preferred shares into shares of the company's common stock at a rate of four shares of common stock for each preferred share. The company's board of directors had, at the inception of the PSOP, reserved a sufficient number of its authorized common shares to satisfy the conversion of all preferred shares issued to the PSOP trust. In addition, preferred shares may be redeemed by the trust to meet employee distribution requirements. The company, at its option, may make the payment required, upon redemption of the preferred shares, in the form of cash or through the issuance of its common shares. Until August 1995, the company's intent and practice had been to pay for the preferred share redemptions with cash. Beginning in September 1995, the company's intent and practice has been and will continue to be to issue shares of the company's common stock to the trust to fulfill the redemption obligations. As a result of the company's intent to exclusively issue common shares to the trust in the future, its net convertible preferred stock balance is classified as permanent equity. The company reclassified the Dec. 31, 1994, preferred stock balance to conform to the 1995 presentation. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1995 Consolidated Results - -------------------- Third quarter consolidated pretax earnings of $178 million in 1995 increased 8% over comparable 1994 earnings of $165 million. Improved results in the underwriting segment were the primary factor in the growth in earnings over 1994. Insurance brokerage and investment banking-asset management earnings also improved over the third quarter of 1994. Year-to-date pretax income in 1995 of $470 million was significantly higher than 1994 nine-month earnings of $406 million, driven by reduced underwriting losses and an increase in investment income in the underwriting segment. Consolidated revenues of $1.36 billion in the third quarter of 1995 increased 14% over the comparable period of 1994, largely due to strong growth in insurance premiums earned. Year-to-date revenues of $3.96 billion were more than $400 million higher than 1994's nine-month total. Results by Segment - ------------------ Results by industry segment were as follows (in millions): Three Months EndedNine Months Ended September 30 September 30 ----------------------------------- 1995 1994 1995 1994 Pretax income (loss): ---- ---- ---- ---- Underwriting: GAAP underwriting result $ (25) (20) (66) (117) Net investment income 184 169 543 498 Realized investment gains 23 12 32 46 Other (11) (2) (33) (19) ---- ---- ---- ---- Total underwriting 171 159 476 408 Insurance brokerage 5 2 (14) (11) Investment banking-asset management 22 19 61 54 Parent and other (20) (15) (53) (45) ---- ---- ---- ---- Income before income taxes 178 165 470 406 Income tax expense 36 35 104 84 ---- ---- ---- ---- Net income $ 142 130 366 322 ==== ==== ==== ==== Net income per common share $1.54 1.45 4.00 3.59 ==== ==== ==== ==== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Underwriting - ------------ The underwriting segment's pretax earnings of $171 million in the third quarter were 7% higher than earnings of $159 million in the same quarter of 1994. Growth in investment income and realized investment gains more than offset the catastrophe-driven deterioration in underwriting results and an increase in other expenses compared to 1994. The following summarizes key financial results by underwriting operation: Three Months Nine Months % of 1995 Ended Sept. 30 Ended Sept. 30 Written --------------- --------------- ($ in Millions) Premiums 1995 1994 1995 1994 - --------------- -------- ---- ---- ---- ---- Specialized Commercial: Written Premiums 31% $336 280 975 820 Underwriting Result $(26) (21) (73) (77) Combined Ratio 107.4 107.2 106.6 108.0 Medical Services: Written Premiums 16% $242 214 508 510 Underwriting Result $14 28 66 98 Combined Ratio 86.6 78.1 85.1 78.6 Personal Insurance: Written Premiums 16% $178 168 508 481 Underwriting Result $(8) (8) (18) (25) Combined Ratio 104.1 104.6 103.1 104.9 Commercial: Written Premiums 14% $166 151 454 392 Underwriting Result $(5) (15) (20) (63) Combined Ratio 101.1 108.3 103.8 115.9 ---- ----- ----- ----- ----- Total St. Paul Fire and Marine: Written Premiums 77% $922 813 2,445 2,203 Underwriting Result $(25) (16) (45) (67) Combined Ratio 100.7 99.9 100.9 101.9 Reinsurance: Written Premiums 18% $170 132 570 408 Underwriting Result $2 2 (2) (29) Combined Ratio 99.9 99.2 99.4 107.9 International: Written Premiums 5% $66 64 154 124 Underwriting Result $(2) (6) (19) (21) Combined Ratio 98.8 106.9 112.6 115.6 ---- ----- ----- ----- ----- Total: Written Premiums 100% $1,158 1,009 3,169 2,735 GAAP Underwriting Result $(25) (20) (66) (117) Statutory Combined Ratio: Loss and Loss Expense Ratio 71.9 71.4 72.3 73.5 Underwriting Expense Ratio 28.5 28.5 29.0 29.9 ----- ----- ----- ----- Combined Ratio 100.4 99.9 101.3 103.4 ===== ===== ===== ===== Combined Ratio Including Policyholders' Dividends 100.7 100.0 101.4 103.4 ===== ===== ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued In the first quarter of 1995, the commercial underwriting operations of the company's business center previously known as St. Paul Personal & Business Insurance were transferred to the Commercial business center. The company's Personal Insurance business center, as renamed, now consists exclusively of personal insurance coverages for individuals. Amounts for 1994 have been reclassified to conform to the 1995 presentation. Third quarter written premiums of $1.16 billion increased 15% over 1994's third quarter total of $1.01 billion. All major reporting lines of business experienced premium growth over 1994. Specialized Commercial volume was $56 million higher than 1994, driven by new business in the National Accounts, Financial Services and Ocean Marine business centers. Premium volume for Medical Services increased $28 million over the third quarter of 1994, reflecting the transition to annual policy terms for the remainder of its physicians and surgeons book of business. Reinsurance premiums grew 29% over the same period of 1994, primarily due to approximately $29 million in incremental premiums from the renewal of certain reinsurance business acquired from a subsidiary of the CIGNA Corporation in 1994. Year-to-date written premiums in 1995 of $3.17 billion were 16% higher than the first nine months of 1994, primarily due to growth in Reinsurance, Specialized Commercial and Commercial premiums. The third quarter GAAP underwriting loss of $25 million was $5 million worse than the same period of 1994. Several hurricanes contributed to catastrophe losses of $28 million in the quarter, which offset improvement in underlying loss experience in several lines of business. Catastrophe losses in the same period of 1994 were $10 million. The following business centers were factors in the change in third quarter underwriting losses compared to 1994: - Medical Services - $14 million worse than 1994 - The magnitude of favorable prior year loss development has diminished compared to 1994, resulting in a smaller underwriting profit. - Specialized Commercial - $5 million worse than 1994 - Increased losses from the company's participation in insurance pools and less favorable loss experience in the National Accounts and Construction lines offset improvement in several other Specialized Commercial business sectors. - Commercial - $10 million better than 1994 - Improved loss experience in the general liability sector drove the decline in underwriting loss in 1995. - International - $4 million better than 1994 - Favorable loss experience on personal and commercial business in the United Kingdom was the major factor in the improvement over 1994. - Reinsurance - level with 1994 - Improvement in noncatastrophe loss experience offset an $18 million increase in catastrophe losses in 1995. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued The nine-month GAAP underwriting loss of $66 million was $51 million better than the 1994 loss of $117 million. Underwriting results in the Commercial line improved $43 million from 1994, due to improved results from several types of commercial coverages. Reinsurance underwriting losses were $27 million less than 1994, primarily due to improved noncatastrophe loss experience. Losses from involuntary workers' compensation coverages in several lines of business have also declined in 1995. Medical Services' underwriting profit for the first nine months of 1995 was $32 million less than the same period of 1994. While still performing strongly, the extent of Medical Services' favorable prior year loss development was not as great as in the first nine months of 1994. The underwriting segment's total catastrophe losses of $99 million through the first nine months of 1995 were level with the same period of 1994. The company estimates that it will incur approximately $25 million to $30 million of pretax losses in the fourth quarter from Hurricane Opal, which struck in October 1995. The underwriting segment's pretax investment income for the third quarter and nine months of 1995 was 9% higher than the same periods of 1994. Continued strong cash flows from operations in 1995 have resulted in a net increase of $439 million in fixed-maturity investments since the end of 1994. The weighted average pretax yield on the long-term fixed maturities portfolio was 7.3% on Sept. 30, 1995, virtually level with the 7.4% yield at the same time in 1994. The majority of investment purchases in 1995 have consisted of taxable fixed maturities; however, tax-exempt securities have dominated investment purchases in recent months due to growing yields on those securities and changes in the company's tax position. Environmental Pollution and Asbestos Claims - ------------------------------------------- The company's underwriting operations continue to receive claims under policies written many years ago alleging injuries from environmental pollution or alleging covered property damages for the cost to clean up polluted sites. The company has also received asbestos claims arising out of product liability coverages under general liability policies. Significant legal issues, primarily pertaining to issues of coverage, exist with regard to the company's alleged liability for both pollution and asbestos 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 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. Estimating the ultimate liability for asbestos claims is equally difficult. The primary factors influencing the estimate of the total cost of these claims are case law and a history of prior claim development, both of which are still developing. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Because of the significant uncertainties associated with pollution and asbestos 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 at this time. However, the company is continually evaluating its exposure to these claims in an effort to quantify such a range. The company's results of operations in future periods may be materially impacted by these claims, but 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 for pollution or asbestos claims of its IBNR (incurred but not reported) reserves, but rather identified reserves for only reported claims (case reserves). In the third quarter of 1994, the company specifically allocated for pollution and asbestos claims a portion of previously established IBNR reserves. The following table represents a reconciliation of total gross and net pollution reserve development for the nine months ended September 30, 1995, and the years ended Dec. 31, 1994 and 1993. Amounts in the "net" column are reduced by reinsurance recoverable. 1995 1994 1993 Pollution (nine months) ---- ---- - --------- ------------ (in millions) Gross Net Gross Net Gross Net ----- ----- ----- ----- ----- ----- Beginning reserves $275 200 105 73 88 62 Incurred losses 49 49 71 56 32 22 IBNR allocation - - 132 95 - - Paid losses (36) (19) (33) (24) (15) (11) --- --- --- --- --- --- Ending reserves $288 230 275 200 105 73 === === === === === === Many significant pollution claims currently being brought against insurance companies arise out of contamination that occurred 20 to 30 years ago. Since 1970, the company's Commercial General Liability policy form has included a specific pollution exclusion, and, since 1986, an industry standard absolute pollution exclusion for policies underwritten in the United States. The following table represents a reconciliation of total gross and net reserve development for asbestos claims for the nine months ended September 30, 1995, and the years ended Dec. 31, 1994 and 1993: THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued 1995 1994 1993 Asbestos (nine months) ---- ---- - -------- ------------ (in millions) Gross Net Gross Net Gross Net ----- ---- ----- ---- ----- ---- Beginning reserves $185 145 62 48 70 54 Incurred losses 10 9 13 14 17 15 IBNR allocation - - 127 95 - - Paid losses (12) (8) (17) (12) (25) (21) --- --- --- --- --- --- Ending reserves $183 146 185 145 62 48 === === === === === === Most of the asbestos claims the company has received pertain to policies written prior to 1986. Since 1986, for policies underwritten in the United States, the company's Commercial General Liability policy has used the industry standard absolute pollution exclusion, which the company believes applies to asbestos claims. The company has previously reported on its involvement with Weavers Underwriting Agency ("Weavers"), a subsidiary of London United Investments PLC ("LUI"). Weavers managed five of LUI's insurance underwriting subsidiaries which eventually became insolvent in the early 1990's. From 1973 through 1980, a predecessor of the company's UK-based underwriting operation, St. Paul International Insurance Company Limited, was a member of the Weavers pool and accepted business from Weavers. Because of insufficient information, the company has had difficulty in determining a reasonable estimate of a range of possible pollution and asbestos losses relating to Weavers business. Late in the third quarter of 1995, the company obtained new information concerning such possible losses and continues its evaluation of such information for potential additional losses arising from its involvement with Weavers. Based on this new information, the company is also evaluating the collectibility of reinsurance recoverables associated with these losses. The company expects that this evaluation is likely to be concluded in the fourth quarter of 1995 and may result in additional specific allocation of previously established IBNR reserves. The company believes that, although it is possible that an additional loss provision may result from this evaluation, any such provision would not materially impact its results of operations, liquidity or financial position. Total gross pollution and asbestos reserves at September 30, 1995, of $471 million represented approximately 5% of gross consolidated reserves of $9.8 billion. Insurance Brokerage - ------------------- The company's insurance brokerage segment (Minet) posted third quarter 1995 pretax earnings of $5 million, compared with earnings of $2 million in the same period of 1994. The improvement over 1994 resulted from an increase in investment income and a decline in the rate of expense THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued growth. Minet's year-to-date pretax loss was $14 million, compared with a loss of $11 million in the first nine months of 1994. Brokerage fees and commissions for both the third quarter and nine months of 1995 were virtually level with the same periods of 1994, reflecting the competitive worldwide market environment for insurance brokerage services. Investment Banking-Asset Management - ----------------------------------- The company's portion of The John Nuveen Company's pretax earnings in the third quarter of 1995 was $22 million, compared with $19 million in the same period of 1994. Year-to-date, the company's portion was $61 million, an increase of $7 million over the first nine months of 1994. The company currently owns 77% of Nuveen. The growth in Nuveen's earnings over 1994 resulted from a combination of flat expenses and a slight increase in revenues. The municipal bond market remains challenging in 1995, although it has stabilized somewhat compared to 1994. Nuveen's asset management revenues for the quarter and nine months were near 1994 levels. Total assets under management were $31.5 billion at Sept. 30, 1995, an increase of $1.8 billion since the end of 1994. Nuveen's underwriting and distribution revenues increased in 1995 due to inventory positioning profits resulting from the favorable market conditions in 1995. Unit Investment Trust sales for the first nine months of 1995 were $870 million, down slightly from 1994 sales of $901 million. Capital Resources - ----------------- Common shareholders' equity at September 30, 1995 totaled $3.48 billion, an increase of $751 million, or 27%, since the end of 1994. The company's strong earnings and a significant increase in the market value of its fixed maturities portfolio were the primary factors driving the increase in equity. A rally in the bond market, fueled by a general decline in interest rates since the end of 1994, has resulted in an increase of nearly $360 million (net of taxes) in the unrealized appreciation of the company's fixed maturities portfolio. In the second quarter of 1995, the company, through St. Paul Capital L.L.C., completed the sale of 4,140,000 convertible monthly income preferred securities (MIPS) paying a monthly dividend at an annual rate of 6%. Each preferred security is convertible at the option of the holder into 0.8475 shares of the company's common stock. Proceeds from the sale were $207 million. A portion of the proceeds was used to reduce the company's commercial paper debt, with the remainder invested in fixed maturity securities and available for general corporate purposes. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued At Sept. 30, 1995, debt outstanding totaled $620 million, virtually unchanged from the year-end 1994 total of $623 million. Under a shelf registration with the Securities and Exchange Commission, the company has issued $193 million in medium-term notes in 1995. This increase in debt was offset by a $187 million decrease in the amount of commercial paper outstanding. The ratio of debt to total capitalization fell to 14% at Sept. 30, 1995, down from 19% at year-end 1994 due to the significant growth in capital. The MIPS are included in the company's total capital. In October 1995, the company announced that it may repurchase and retire up to one million of its outstanding common shares on the open market and through private transactions. The company's ratio of earnings to fixed charges was 9.12 for the first nine months of 1995, compared with 9.18 for the same period of 1994. The company's ratio of earnings to combined fixed charges and preferred stock dividends was 6.93 for the first nine months of 1995, compared with 7.19 for the same period of 1994. 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 $616 million in the first nine months of 1995, compared to $662 million in 1994. The company's consolidated liquidity position remains strong due to the Underwriting segment's cash flows from underwriting and investment activities. PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements included in Part I of this report is incorporated herein by reference. In its Form 10-Q for the quarter ended June 30, 1995, the company reported that in late May of 1995, a purported class action lawsuit brought in the District Court of Brazoria County, Texas was served on three subsidiaries of the company on behalf of persons who from 1983 through 1985 purchased interests in certain limited partnerships for which Damson Oil Corporation served as general partner. While the complaint seeks unspecified actual damages, treble damages, punitive damages, attorney fees, costs, and pre- and post-judgment interests, plaintiffs have sent the defendants (three of the company's subsidiaries) a demand letter under the Texas Deceptive Trade Practices Act seeking damages of $400 million. At the time of that report, the defendants had removed the case to the U.S. District Court for the Southern District of Texas, and plaintiffs were seeking to have the case remanded to Texas State Court. In September of 1995, the case was remanded to Texas State Court. These proceedings are being vigorously contested by the defendants, and the company recognizes that the final outcome of these proceedings, if adverse to the defendants, may materially impact the results of operations of the company in the period in which that outcome occurs, but believes it should not have a material adverse effect on its liquidity or overall financial position. 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 26 of this report. (b) Reports on Form 8-K. 1) The Registrant filed a Form 8-K Current Report, dated July 24, 1995, pertaining to the Registrant's press release of second quarter 1995 financial results. 2) The Registrant filed a Form 8-K Current Report, dated October 23, 1995, pertaining to the Registrant's press release of third quarter 1995 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 13, 1995 By /s/ Bruce A. Backberg --------------------- Bruce A. Backberg Vice President and Corporate Secretary (Authorized Signatory) Date: November 13, 1995 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 EDGAR Operational Program. EX-11 2 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 ------------------ ----------------- 1995 1994 1995 1994 ----- ------ ----- ------ EARNINGS: Primary: Net income, as reported $142,399 129,808 365,962 322,007 PSOP preferred dividends declared (net of taxes) (2,159) (2,129) (6,444) (6,343) ------- ------- ------- ------- Net income, as adjusted $140,240 127,679 359,518 315,664 ======= ======= ======= ======= Fully diluted: Net income, as reported $142,399 129,808 365,962 322,007 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (867) (944) (2,612) (2,841) Dividend on monthly income preferred securities (net of taxes) 2,018 - 3,027 - ------- ------- ------- ------- Net income, as adjusted $143,550 128,864 366,377 319,166 ======= ======= ======= ======= SHARES: Primary: Weighted average number of common shares outstanding, per consolidated financial statements 84,559 84,042 84,413 84,195 Additional dilutive effect of outstanding stock options (based on treasury stock method using average market price) 1,007 654 960 621 ------ ------ ------ ------ Weighted average, as adjusted 85,566 84,696 85,373 84,816 ====== ====== ====== ====== Fully diluted: Weighted average number of common shares outstanding, per consolidated financial statements 84,559 84,042 84,413 84,195 Additional dilutive effect of: Convertible preferred stock 4,022 4,068 4,034 4,078 Monthly income preferred securities 3,509 - 1,774 - Outstanding stock options (based on treasury stock method using market price at end of period) 1,324 586 1,349 599 ------ ------ ------ ------ Weighted average, as adjusted 93,414 88,696 91,570 88,872 ====== ====== ====== ====== EARNINGS PER COMMON SHARE: Primary $1.64 1.51 4.21 3.72 Fully diluted $1.54 1.45 4.00 3.59 EX-12 3 Exhibit 12 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Ratios (In thousands, except ratios) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1995 1994 1995 1994 ----- ----- ----- ----- EARNINGS: Income before income taxes $178,105 165,201 469,505 406,398 Add: fixed charges 21,073 16,782 57,809 49,652 ------- ------- ------- ------- Income, as adjusted $199,178 181,983 527,314 456,050 ======= ======= ======= ======= FIXED CHARGES: Interest costs $15,703 10,640 41,060 30,852 Rental expense (1) 5,370 6,142 16,749 18,800 ------ ------ ------ ------ Total fixed charges $21,073 16,782 57,809 49,652 ====== ====== ====== ====== FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Fixed charges $21,073 16,782 57,809 49,652 PSOP preferred stock dividends 4,523 4,578 13,615 13,772 Dividends on monthly income preferred securities 3,105 - 4,658 - ------ ------ ------ ------ Total fixed charges and preferred stock dividends $28,701 21,360 76,082 63,424 ====== ====== ====== ====== Ratio of earnings to fixed charges 9.45 10.84 9.12 9.18 ====== ====== ====== ====== Ratio of earnings to combined fixed charges and preferred stock dividends 6.94 8.52 6.93 7.19 ====== ====== ====== ====== (1) Interest portion deemed implicit in total rent expense. EX-27 4
7 1,000 9-MOS DEC-31-1995 SEP-30-1995 9,916,552 0 0 732,991 0 614,652 12,625,722 28,662 84,176 364,313 18,759,950 9,817,471 2,325,602 0 0 620,275 460,145 207,000 11,456 3,023,953 18,759,950 2,931,214 570,487 38,060 423,292 2,118,131 642,785 732,632 469,505 103,543 365,962 0 0 0 365,962 4.21 4.00 0 0 0 0 0 0 0
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