-----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, I+0g22s4ccbtNyRvQwxzZRkn+xY4muigaZCUQ/QEtXuwvYLLT8xPdBeT5s82eqy5 saUqHoG8ecA8Nm9uaa4bEA== 0000086312-96-000006.txt : 19960502 0000086312-96-000006.hdr.sgml : 19960502 ACCESSION NUMBER: 0000086312-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960501 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: 96554575 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) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ---- EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 --------------------------------------- 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 No.) incorporation or organization) 385 Washington St., Saint Paul, MN 55102 - ---------------------------------- --------------------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (612) 310-7911 -------------- 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 April 26, 1996, was 83,779,934. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Consolidated Statements of Income, (Unaudited), Three Months Ended March 31, 1996 and 1995 3 Consolidated Balance Sheets, March 31, 1996 (Unaudited) and December 31, 1995 4 Consolidated Statements of Shareholders' Equity, Three Months Ended March 31, 1996 (Unaudited) and Twelve Months Ended 6 December 31, 1995 Consolidated Statements of Cash Flows (Unaudited), Three Months Ended March 31, 1996 and 1995 7 Notes to Consolidated Financial Statements (Unaudited) 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II. OTHER INFORMATION Item 1 through Item 6 22 Signatures 22 EXHIBIT INDEX 23 PART I FINANCIAL INFORMATION THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Income Unaudited (In thousands) Three Months Ended March 31 ----------------------- 1996 1995 ---- ---- Revenues: Premiums earned $1,030,576 946,070 Net investment income 200,500 186,389 Insurance brokerage fees and commissions 68,109 67,061 Investment banking-asset management 53,340 53,616 Realized investment gains 47,920 2,977 Other 8,246 11,346 --------- --------- Total revenues 1,408,691 1,267,459 --------- --------- Expenses: Insurance losses and loss adjustment expenses 755,460 680,439 Policy acquisition expenses 230,488 207,694 Operating and administrative 258,663 231,180 --------- --------- Total expenses 1,244,611 1,119,313 --------- --------- Income before income taxes 164,080 148,146 Income tax expense (benefit): Federal current 35,397 47,068 Other (138) (9,518) --------- --------- Total income tax expense 35,259 37,550 --------- --------- Net income $128,821 110,596 ========= ========= Earnings per common share: Primary $1.49 1.27 ========= ========= Fully diluted $1.40 1.23 ========= ========= Dividends declared on common stock $0.44 0.40 ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) March 31, December 31, ASSETS 1996 1995 - ------ ---------- ---------- (Unaudited) Investments: Fixed maturities, at estimated market value $10,335,291 10,372,890 Equities, at estimated market value 746,635 711,471 Real estate, at cost less accumulated depreciation of $71,951 (1995; $68,795) 607,987 611,656 Venture capital, at estimated market value 423,208 388,599 Other investments 46,459 42,776 Short-term investments, at cost 977,945 939,528 ---------- ---------- Total investments 13,137,525 13,066,920 Cash 33,243 34,440 Investment banking inventory securities 70,981 249,662 Reinsurance recoverables: Unpaid losses 1,806,347 1,853,817 Paid losses 94,851 74,568 Receivables: Underwriting premiums 1,222,304 1,316,560 Insurance brokerage activities 710,108 652,801 Interest and dividends 196,881 197,740 Other 90,773 81,885 Deferred policy acquisition expenses 361,063 372,174 Ceded unearned premiums 180,633 226,943 Deferred income taxes 607,145 528,805 Office properties and equipment, at cost less accumulated depreciation of $287,217 (1995; $277,759) 461,079 478,286 Goodwill 323,146 314,457 Other assets 175,534 207,444 ---------- ---------- Total assets $19,471,613 19,656,502 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In thousands) March 31, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995 - ------------------------------------ ------------ ----------- (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $10,276,100 10,247,070 Unearned premiums 2,217,602 2,361,028 ---------- ---------- Total insurance reserves 12,493,702 12,608,098 Debt 671,864 704,042 Payables: Insurance brokerage activities 1,004,703 979,964 Income taxes 216,117 179,249 Reinsurance premiums 140,140 139,058 Accrued expenses and other 535,999 618,903 Other liabilities 509,779 490,067 ---------- ---------- Total liabilities 15,572,304 15,719,381 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. 207,000 207,000 ---------- ---------- Shareholders' equity: Preferred: Series B convertible preferred stock; 1,450 shares authorized; 996 shares outstanding (999 shares in 1995) 143,788 144,165 Guaranteed obligation - PSOP (130,523) (133,293) ---------- ---------- Total preferred shareholders' equity 13,265 10,872 ---------- ---------- Common: Common stock, 240,000 shares authorized; 83,734 shares outstanding (83,976 shares in 1995) 462,893 460,458 Retained earnings 2,776,401 2,704,075 Guaranteed obligation - ESOP (29,516) (32,294) Unrealized appreciation of investments 512,698 627,791 Unrealized loss on foreign currency translation (43,432) (40,781) ---------- ---------- Total common shareholders' equity 3,679,044 3,719,249 ---------- ---------- Total shareholders' equity 3,692,309 3,730,121 ---------- ---------- Total liabilities, redeemable preferred securities and shareholders' equity $19,471,613 19,656,502 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In thousands) Three Twelve Months Ended Months Ended March 31 December 31 ------------ ------------ 1996 1995 ---- ---- (Unaudited) Preferred shareholders' equity: Series B convertible preferred stock: Beginning of period 144,165 146,102 Change during period (377) (1,937) --------- --------- End of period 143,788 144,165 --------- --------- Guaranteed obligation - PSOP: Beginning of period (133,293) (141,567) Principal payments 2,770 8,274 --------- --------- End of period (130,523) (133,293) --------- --------- Total preferred shareholders' equity 13,265 10,872 --------- --------- Common shareholders' equity: Common stock: Beginning of period 460,458 445,222 Stock issued under stock option and other incentive plans 4,482 19,481 Reacquired common shares (2,047) (4,245) --------- --------- End of period 462,893 460,458 --------- --------- Retained earnings: Beginning of period 2,704,075 2,362,286 Net income 128,821 521,209 Dividends declared on common stock (36,641) (133,956) Dividends declared on preferred stock, net of taxes (2,165) (8,582) Reacquired common shares (18,367) (38,291) Tax benefit on employee stock options and awards 678 1,409 --------- --------- End of period 2,776,401 2,704,075 --------- --------- Guaranteed obligation - ESOP: Beginning of period (32,294) (44,410) Principal payments 2,778 12,116 --------- --------- End of period (29,516) (32,294) --------- --------- Unrealized appreciation of investments, net of taxes: Beginning of period 627,791 13,948 Change during the period (115,093) 613,843 --------- --------- End of period 512,698 627,791 --------- --------- Unrealized gain (loss)loss on foreign currency translation, net of taxes: Beginning of period (40,781) (44,112) Change during the period (2,651) 3,331 --------- --------- End of period (43,432) (40,781) --------- --------- Total common shareholders' equity 3,679,044 3,719,249 --------- --------- Total shareholders' equity $3,692,309 3,730,121 ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (In thousands) Three Months Ended March 31 ----------------------- 1996 1995 ------ ------ OPERATING ACTIVITIES Underwriting: Net income $137,466 123,472 Adjustments: Change in net insurance reserves (11,594) 85,445 Change in underwriting premiums receivable 92,293 46,237 Provision for deferred taxes (7,226) (14,557) Realized investment gains (42,298) (1,551) Other 43,355 (36,842) --------- --------- Total underwriting 211,996 202,204 --------- --------- Insurance brokerage: Net loss (14,978) (16,061) Adjustments: Change in premium balances (34,000) 12,750 Change in accounts payable and accrued expenses (24,337) (21,994) Depreciation and goodwill amortization 7,932 5,988 Other 8,561 18,949 --------- --------- Total insurance brokerage (56,822) (368) --------- --------- Investment banking-asset management: Net income 13,288 12,011 Adjustments: Change in inventory securities 180,066 11,282 Change in short-term investments (180,973) (45,854) Change in short-term borrowings (25,000) - Change in open security transactions 1,784 6,260 Other 26,627 29,871 --------- --------- Total investment banking-asset management 15,792 13,570 --------- --------- Parent company and consolidating eliminations: Net loss (6,955) (8,826) Realized investment gains (5,355) (1,426) Other adjustments (3,601) 21,822 --------- --------- Total parent company and consolidating eliminations (15,911) 11,570 --------- --------- Net cash provided by operating activities 155,055 226,976 --------- --------- INVESTING ACTIVITIES Purchases of investments (732,306) (505,862) Proceeds from sales and maturities of investments 528,421 406,841 Change in short-term investments 130,147 (93,817) Change in open security transactions (32,926) (9,999) Net purchases of office properties and equipment (6,477) (10,776) Other 15,848 2,102 --------- --------- Net cash used in investing activities (97,293) (211,511) --------- --------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (36,487) (34,517) Proceeds from issuance of debt - 9,139 Reacquired common shares (20,206) (497) Other (2,309) (273) --------- --------- Net cash used in financing activities (59,002) (26,148) --------- --------- Effect of exchange rate changes on cash 43 120 --------- --------- Decrease in cash (1,197) (10,563) Cash at beginning of period 34,440 46,664 --------- --------- Cash at end of period $33,243 36,101 ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited March 31, 1996 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 consolidated 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 51 to 67 of the Registrant's annual report to shareholders for the year ended December 31, 1995. 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 1995 consolidated financial statements have been reclassified to conform with the 1996 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 operating earningsnet income, as adjusted, by the adjusted average common shares outstanding. Three Months Ended March 31 ------------------ 1996 1995 ------ ------ (In thousands) PRIMARY Net income, as reported $128,821 110,596 PSOP preferred dividends declared (net of taxes) (2,165) (2,146) Premium on preferred shares redeemed (208) - ------- ------- Net income, as adjusted $126,448 108,450 ======= ======= FULLY DILUTED Net income, as reported $128,821 110,596 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (758) (874) Dividends on monthly income preferred securities (net of taxes) 2,018 - Premium on preferred shares redeemed (208) - ------- ------- Net income, as adjusted $129,873 109,722 ======= ======= ADJUSTED AVERAGE COMMON SHARES OUTSTANDING Primary 85,150 85,191 ======= ======= Fully diluted 92,596 89,321 ======= ======= 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 company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. (monthly income preferred securities). THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 3 Investments - ------------------- A summary of investment transactions is presented below. Three Months Ended March 31 ------------------------------ 1996 1995 ------ ------ (In thousands) Purchases: Fixed maturities $490,613 233,719 Equities 207,698 169,040 Real estate 3,488 92,588 Venture capital 25,992 9,705 Other investments 4,515 810 -------- --------- Total purchases 732,306 505,862 -------- --------- Proceeds from sales and maturities: Fixed maturities: Sales 63,830 21,541 Maturities and redemptions 209,549 222,294 Equities 211,586 151,470 Real estate 1,466 236 Venture capital 41,428 9,494 Other investments 562 1,806 -------- --------- Total sales and maturities 528,421 406,841 -------- --------- Net purchases $203,885 99,021 ======== ========= The increase (decrease) in unrealized appreciation of investments was as follows: Three Months Ended Twelve Months Ended March 31, 1996 December 31, 1995 ------------------ ------------------- (In thousands) Fixed maturities $(230,671) 742,626 Equities 10,886 130,247 Venture capital 32,621 59,880 -------- ------- Total change in pretax unrealized appreciation (187,164) 932,753 Increase (decrease) in deferred tax asset 72,071 (318,910) -------- ------- Total change in unrealized appreciation, net of taxes $(115,093) 613,843 ======== ======= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 $342 million at March 31, 1996, and $380 million at December 31, 1995. Note 4 Income Taxes - -------------------- The components of income tax expense are as follows: Three Months Ended March 31 ------------------- 1996 1995 ------ ------ (In thousands) Federal current tax expense $35,397 47,068 Federal deferred tax benefit (7,447) (13,621) ------ ------ Total federal income tax expense 27,950 33,447 Foreign income taxes 5,893 2,870 State income taxes 1,416 1,233 ------ ------ Total income tax expense $35,259 37,550 ====== ====== 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 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 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: March 31, December 31, 1996 1995 ---------------- ---------------- Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- (In thousands) Medium-term notes $397,432 400,000 397,433 419,500 Commercial paper 145,335 145,335 149,629 149,629 9 3/8% notes 99,985 103,800 99,982 105,300 Guaranteed ESOP debt 22,223 23,100 25,001 26,200 Pound sterling loan notes 6,889 6,889 6,997 6,997 Short-term borrowings - - 25,000 25,000 ------- ------- ------- ------- Total debt $671,864 679,124 704,042 732,626 ======= ======= ======= ======= 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 March 31 -------------------- 1996 1995 ------ ------ (In thousands) Premiums written: Direct $782,710 804,202 Assumed 223,610 218,514 Ceded (71,709) (106,353) --------- ------- Net premiums written $934,611 916,363 ========= ======= Premiums earned: Direct $918,121 865,582 Assumed 229,759 194,189 Ceded (117,304) (113,701) --------- ------- Net premiums earned $1,030,576 946,070 ========= ======= Insurance losses and loss adjustment expenses: Direct $623,489 575,550 Assumed 189,399 204,732 Ceded (57,428) (99,843) ------- ------- Net insurance losses and loss adjustment expenses $755,460 680,439 ======= ======= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations March 31, 1996 Consolidated Results - -------------------- Pretax earnings in the first quarter of 1996 were $164 million, 11% higher than 1995 first quarter earnings of $148 million. The improvement over 1995 occurred primarily in the underwriting segment and was largely due to a $40 million increase in realized investment gains, which offset a catastrophe-driven deterioration in underwriting results. The company's insurance brokerage operation posted a first quarter pretax loss of $13 million, $2 million less than the comparable 1995 loss. Investment banking-asset management earnings increased $3 million over the first quarter of 1995. Net income for the first quarter totaled $129 million, or $1.40 per share, compared with net income of $111 million, or $1.23 per share, in the first quarter of 1995. Consolidated revenues of $1.41 billion for the quarter increased 11% over 1995 first quarter revenues of $1.27 billion. An increase in insurance premiums earned and realized investment gains were the primary factors in the growth over 1995. Results by Segment - ------------------ Pretax results by industry segment were as follows (in millions): Three Months Ended March 31 -------------------- 1996 1995 Pretax income (loss): ---- ---- Underwriting: GAAP underwriting result $(42) (15) Net investment income 189 178 Realized investment gains 42 2 Other (16) (5) --- --- Total underwriting 173 160 Insurance brokerage (13) (15) Investment banking-asset management 22 19 Parent company and consolidating eliminations (18) (16) --- --- Income before income taxes $164 148 === === THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Underwriting - ------------ First quarter pretax earnings of $173 million in the underwriting segment increased $13 million over 1995 earnings of $160 million, primarily due to an increase in realized investment gains generated from the equity and venture capital portfolios. The following summarizes key financial results by underwriting operation: Three Months % of 1996 Ended March 31 Written ------------------- ($ in Millions) Premiums 1996 1995 - --------------- --------- ----- ---- Specialized Commercial: Written Premiums 28% $263 284 Underwriting Result $(10) (20) Combined Ratio 105.5 106.7 Personal Insurance: Written Premiums 17% $164 151 Underwriting Result $(28) (7) Combined Ratio 116.9 104.5 Commercial: Written Premiums 17% $155 146 Underwriting Result $(9) (4) Combined Ratio 106.3 102.6 Medical Services: Written Premiums 11% $103 136 Underwriting Result $20 26 Combined Ratio 94.4 85.2 ---- ----- ----- Total St. Paul Fire and Marine: Written Premiums 73% $685 717 Underwriting Result $(27) (5) Combined Ratio 106.1 101.1 Reinsurance: Written Premiums 21% $193 156 Underwriting Result $(9) (5) Combined Ratio 104.7 104.5 International: Written Premiums 6% $57 43 Underwriting Result $(6) (5) Combined Ratio 112.2 113.5 ---- ----- ----- Total: Written Premiums 100% $935 916 GAAP Underwriting Result $(42) (15) Statutory Combined Ratio: Loss and Loss Expense Ratio 73.3 71.9 Underwriting Expense Ratio 32.8 30.4 ----- ----- Combined Ratio 106.1 102.3 ===== ===== Combined Ratio Incl. Policyholders' Dividends 106.3 102.4 ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued First quarter written premiums of $935 million increased 2% over comparable 1995 premiums of $916 million. Incremental premiums from the company's 1994 acquisition from CIGNA Corporation of renewal rights for certain international reinsurance business were the primary reason for the 24% growth in Reinsurance premiums in the first quarter. CIGNA- related premiums totaled $42 million in the first quarter of 1996, compared with $18 million in the same period of 1995. Personal Insurance premiums increased 9% over 1995, driven by growth in the package line of business, which combines several personal coverages into one policy. Medical Services premium volume was down $33 million, or 25%, from 1995. Approximately $27 million of this decline resulted from the quarter-to-quarter comparative distortions arising from the transition to annual policy terms for physicians and surgeons' business. That transition was completed in the third quarter of 1995, so those accounts that would have previously been due for renewal in the first quarter will now renew until the third quarter of this year. Specialized Commercial volume was down $21 million from 1995, largely due to the company's withdrawal from a large insurance pool arrangement, which reduced premiums by $32 million compared with the first quarter of 1995. Several business centers within Specialized Commercial, including Construction and National Accounts, experienced premium growth over 1995. The first quarter GAAP underwriting loss was $42 million, compared with a loss of $15 million in the first quarter of 1995. Total pretax catastrophe losses in 1996 were $62 million, compared with losses of $16 million in 1995's first quarter. The East Coast blizzard and other winter storms were the primary sources of catastrophe losses in 1996. The expense ratio was 2.4 points worse than 1995, reflecting a higher commission ratio and the impact of other underwriting expenses growing at a faster rate than written premiums. Key factors in the change in underwriting results from 1995 were as follows: - Personal Insurance - $21 million worse than 1995 - A $7 million increase in catastrophe losses and other unfavorable loss experience accounted for the deterioration from 1995. - Medical Services - $6 million worse than 1995 - The decline from 1995 reflects the combined impact of reduced earned premiums and underwriting expenses that were level with 1995. - Commercial - $5 million worse than 1995 - Catastrophe losses in 1996 were $12 million higher than 1995, more than offsetting an improvement in prior year loss experience. - Specialized Commercial - $10 million better than 1995 - A significant decline in losses from the company's involvement in insurance pools drove the improvement over 1995, offsetting the impact of $27 million in catastrophe losses in the quarter. Catastrophe losses in 1995's first quarter were $4 million. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued First quarter pretax investment income in the underwriting segment was $189 million, 6% higher than first quarter 1995 investment income of $178 million. Total fixed maturity investments in the segment have grown by nearly $900 million in the last twelve months, primarily the result of strong investment cash flows. Fixed maturities purchased in the first quarter were predominantly tax-exempt securities. The new money rate on tax-exempt fixed maturities in the first quarter of 1996 was 5.4%, compared with 7.4% on taxable securities. Tax-exempt securities comprised 38% of the total underwriting investment portfolio at March 31, 1996, up from 35% a year ago. The weighted average pretax yield on the fixed maturities portfolio at March 31, 1996 was 7.1%, and the portfolio had an average life of 8.5 years. Approximately 96% of that portfolio is rated at investment grade levels (BBB or better). Environmental 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 environmental 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 environmental claims is 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 an environmental 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 claims, both of which are still developing. In 1994, the company specifically reallocated, for environmental and asbestos claims, a portion of previously established IBNR (incurred but not reported) reserves. Prior to that, the company made no specific allocation of its IBNR reserves for environmental or asbestos claims, but rather identified reserves only for reported claims (case reserves). THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued In the fourth quarter of 1995, the company recorded additional gross reserves of $360 million and specifically reallocated $113 million of previously recorded net reserves for North American environmental and asbestos losses on policies written in the United Kingdom prior to 1980. The following table represents a reconciliation of total gross and net environmental reserve development for the three months ended March 31, 1996, and the years ended Dec. 31, 1995 and 1994. Amounts in the "net" column are reduced by reinsurance recoverable. 1996 1995 1994 Pollution (three ---- ---- --------- months) ----------- (in millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Beginning reserves $528 319 275 200 105 73 Incurred losses 8 7 59 68 71 56 Reserve reallocation - - 233 79 132 95 Paid losses (7) (6) (39) (28) (33) (24) --- --- --- --- --- --- Ending reserves $529 320 528 319 275 200 === === === === === === Many significant environmental 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 three months ended March 31, 1996, and the years ended Dec. 31, 1995 and 1994: 1996 1995 1994 Asbestos (three ---- ---- -------- months) ----------- (in millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Beginning reserves $283 158 185 145 62 48 Incurred losses (4) 3 (13) (9) 13 14 Reserve reallocation - - 127 34 127 95 Paid losses (6) (4) (16) (12) (17) (12) --- --- --- --- --- --- Ending reserves $273 157 283 158 185 145 === === === === === === THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued 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 included the industry standard absolute pollution exclusion, which the company believes applies to asbestos claims. The company believes its current reserves for environmental and asbestos losses represent the best estimate of its ultimate liability for such losses. Because of the difficulty inherent in estimating those losses, however, there is no assurance that the company's ultimate liability will, in fact, match current reserves. The company continues to evaluate new information and developing loss patterns, but it believes any additional loss provisions for environmental and asbestos claims will not materially impact its results of operations, liquidity or financial position. Total gross environmental and asbestos reserves at March 31, 1996, of $802 million represented approximately 8% of gross consolidated reserves of $10.3 billion. Legal Matters - ------------- In May 1995, a purported class action lawsuit brought in the District Court of Brazoria County, Texas, was served on three of the company's subsidiaries on behalf of persons who, from 1983 through 1985, purchased interests in certain limited partnerships for which Damson Oil Corporation served as general partner. The complaint seeks unspecified actual damages, treble damages, punitive damages, attorneys' fees, costs, and pre- and post-judgment interest. In April 1995, plaintiffs sent the company's subsidiaries a letter under the Texas Deceptive Trade Practices Act demanding $400 million of alleged actual damages plus unspecified attorneys' fees in settlement of their claims. The subsidiaries rejected the plaintiffs' demand and are vigorously contesting these proceedings. If the final outcome of these proceedings is adverse, it might materially impact the results of the company's operations and liquidity in the period in which that outcome occurs, but the company believes it should not have a material adverse effect on the company's overall financial position. Insurance Brokerage - ------------------- The insurance brokerage segment (Minet) posted a pretax loss of $13 million for the quarter, compared with a loss of $15 million in 1995. Brokerage fees and commissions increased $2 million over the first quarter of 1995, and investment income grew $1 million. Salary and THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued related expenses increased $2 million over the first quarter of 1995, primarily due to Minet's expansion of its specialty broker staff. Conditions in many insurance brokerage market sectors remain unfavorable, hindering Minet's ability to significantly improve its results. Investment Banking-Asset Management - ----------------------------------- The company's portion of pretax earnings from The John Nuveen Company (Nuveen) was $22 million in the first quarter of 1996, compared with $19 million in 1995's first quarter. The company holds a 78% interest in Nuveen. Fees earned from investment advisory services provided on assets under Nuveen's management grew $3 million, or 6%, over the first quarter of 1995. Total assets under management at March 31, 1996 of $31.6 billion were $500 million higher than the same time in 1995. Managed assets were down slightly from year-end 1995 as a result of a decline in the market value of underlying fund investments. Nuveen's underwriting and distribution revenues declined $4 million from the comparable 1995 total, due to a decline in profits recognized on securities held in inventory. Unit investment trust sales of $215 million in the quarter decreased 28% compared with the first quarter of 1995, reflecting investor uncertainty about interest rate trends. Capital Resources - ----------------- Common shareholders' equity of $3.68 billion at March 31, 1996 fell slightly from year-end 1995 equity of $3.72 billion. First quarter net income was offset by a $143 million decline (net of taxes) in the unrealized appreciation of the company's fixed maturities portfolio. Heightened concerns about the state of the U.S. economy negatively impacted bond values in the first quarter. The after-tax unrealized appreciation on the company's equity and venture capital portfolios grew by $28 million since the end of 1995. Total debt outstanding at quarter-end of $672 million was down 5% from year-end 1995 due to a decline in short-term borrowings by Nuveen. The ratio of total debt to total capitalization of 15% was unchanged from year-end 1995. The company repurchased and retired 372,000 of its common shares during the quarter for a total cost of $20.2 million, which was funded internally. The company anticipates that any major capital expenditures during the remainder of 1996 would involve acquisitions of existing businesses or further stock repurchases; there are no major capital improvements planned for 1996. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued The company's ratio of earnings to fixed charges was 10.58 for the first three months of 1996, compared with 9.49 for the same period of 1995. The company's ratio of earnings to combined fixed charges and preferred stock dividends was 7.33 for the first three months of 1996, compared with 7.53 for the same period of 1995. Fixed charges consist of interest expense 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 short- and long-term cash requirements of its business segments. Net cash provided by operations was $155 million in the first three months of 1996, compared to $227 million in 1995. The insurance brokerage segment was the primary source of the decline from 1995, due to timing differences between the receipt of premiums due from customers and the remittance of premiums to insurance carriers. The company's consolidated liquidity position remains strong due to cash flows from the underwriting segment. PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements, and the "Legal Matters" section of Management's Discussion and Analysis included in Part I of this report, are 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 as the last page in this document. (b) Reports on Form 8-K. 1) The Registrant filed a Form 8-K Current Report dated January 29, 1996, pertaining to the Registrant's press release of fourth 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: April 30, 1996 By /s/ Bruce A.Backberg -------------------- Bruce A. Backberg Vice President and Corporate Secretary (Authorized Signatory) Date: April 30, 1996 By /s/ Howard E. Dalton -------------------- Howard E. Dalton Senior Vice President Chief Accounting Officer EXHIBIT INDEX ------------- Exhibit How - ------- 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 The St. Paul Companies, 385 Washington Street, Saint Paul, MN 55102, Attention: Corporate Secretary. (1) Filed electronically. EX-11 2 Exhibit 11 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings Per Share (In thousands) Three Months Ended March 31 ------------------ 1996 1995 EARNINGS: ------ ------ Primary: Net income, as reported $128,821 110,596 PSOP preferred dividends declared (net of taxes) (2,165) (2,146) Premium on preferred shares redeemed (208) - ------- ------- Net income, as adjusted $126,448 108,450 ======= ======= Fully diluted: Net income, as reported $128,821 110,596 Dividends on monthly income preferred securities (net of taxes) 2,018 - Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (758) (874) Premium on preferred shares redeemed (208) - ------- ------- Net income, as adjusted $129,873 109,722 ======= ======= SHARES: Primary: Weighted average number of common shares outstanding, per consolidated financial statements 83,977 84,264 Additional dilutive effect of outstanding stock options (based on treasury stock method using average market price) 1,173 927 ------- ------- Weighted average, as adjusted 85,150 85,191 ======= ======= Fully diluted: Weighted average number of common shares outstanding, per consolidated financial statements 83,977 84,264 Additional dilutive effect of: Assumed conversion of PSOP preferred stock 3,990 4,045 Assumed conversion of monthly income preferred securities 3,509 - Outstanding stock options (based on treasury stock method using market price at end of period) 1,120 1,012 ------- ------- Weighted average, as adjusted 92,596 89,321 ======= ======= EARNINGS PER COMMON SHARE: Primary $1.49 1.27 Fully diluted $1.40 1.23 EX-12 3 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Exhibit 12 Computation of Ratios (In thousands, except ratios) Three Months Ended March 31 -------------------- 1996 1995 ------ ------ EARNINGS: Income before income taxes $164,080 148,146 Add: fixed charges 17,119 17,445 ------- ------- Income, as adjusted $181,199 165,591 ======= ======= FIXED CHARGES: Interest costs $12,424 11,617 Rental expense (1) 4,695 5,828 ------- ------- Total fixed charges $17,119 17,445 ======= ======= FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Fixed charges $17,119 17,445 PSOP preferred stock dividends 4,489 4,554 Dividends on monthly income preferred securities 3,105 - ------- ------- Total fixed charges and preferred stock dividends $24,713 21,999 ======= ======= Ratio of earnings to fixed charges 10.58 9.49 ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends 7.33 7.53 ======= ======= (1) Interest portion deemed implicit in total rent expense. EX-27 4
7 1,000 3-MOS DEC-31-1996 MAR-31-1996 10,335,291 0 0 746,635 0 607,987 13,137,525 33,243 94,851 361,063 19,471,613 10,276,100 2,217,602 0 0 671,864 207,000 13,265 462,893 3,216,151 19,471,613 1,030,576 200,500 47,920 129,695 755,460 230,488 258,663 164,080 35,259 128,821 0 0 0 128,821 1.49 1.40 0 0 0 0 0 0 0
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