-----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, IeaSbSf1Bq0IhH3GzKeueBOmLQ07XznCC4B4GFZ85BBituW0ZYe7ZW8f2edhK1D0 8kWL+j0Ns2VA103GneGaIQ== 0000086312-96-000011.txt : 19960814 0000086312-96-000011.hdr.sgml : 19960814 ACCESSION NUMBER: 0000086312-96-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 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: 96610392 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 June 30, 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 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) 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 August 8, 1996, was 83,281,695. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Consolidated Statements of Income (Unaudited), Three and Six Months Ended June 30, 1996 and 1995 3 Consolidated Balance Sheets, June 30, 1996 (Unaudited) and December 31, 1995 4 Consolidated Statements of Shareholders' Equity, Six Months Ended June 30, 1996 (Unaudited) and Twelve Months Ended December 31, 1995 6 Consolidated Statements of Cash Flows (Unaudited), Six Months Ended June 30, 1996 and 1995 7 Notes to Consolidated Financial Statements (Unaudited) 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II. OTHER INFORMATION Item 1 through Item 6 22 Signatures 24 EXHIBIT INDEX 25 PART I FINANCIAL INFORMATION THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Income Unaudited (In thousands) Three Months Ended Six Months Ended June 30 June 30 ------------------ ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Revenues: Premiums earned $1,055,384 991,827 2,085,960 1,937,897 Net investment income 204,051 190,176 404,551 376,565 Insurance brokerage fees and commissions 74,979 77,052 143,088 144,113 Investment banking-asset management 52,584 54,262 105,924 107,878 Realized investment gains 47,505 9,347 95,425 12,324 Other 16,618 8,064 24,864 19,410 --------- --------- --------- ---------- Total revenues 1,451,121 1,330,728 2,859,812 2,598,187 --------- --------- --------- ---------- Expenses: Insurance losses and loss adjustment expenses 778,801 723,390 1,534,261 1,403,829 Policy acquisition expenses 231,791 219,228 462,279 426,922 Operating and administrative 272,078 244,856 530,741 476,036 --------- --------- --------- --------- Total expenses 1,282,670 1,187,474 2,527,281 2,306,787 --------- --------- --------- --------- Income before income taxes 168,451 143,254 332,531 291,400 Income tax expense (benefit): Federal current 37,170 44,192 72,567 91,260 Other 1,228 (13,905) 1,090 (23,423) --------- --------- --------- --------- Total income tax expense 38,398 30,287 73,657 67,837 --------- --------- --------- --------- Net income $130,053 112,967 258,874 223,563 ========= ========= ========= ========= Earnings per common share: Primary $1.51 1.30 3.00 2.57 ========= ========= ========= ========= Fully diluted $1.42 1.24 2.83 2.47 ========= ========= ========= ========= Dividends declared on common stock $0.44 0.40 0.88 0.80 ========= ========= ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) June 30, December 31, ASSETS 1996 1995 - ------ ---------- ---------- (Unaudited) Investments: Fixed maturities, at estimated market value $10,257,774 10,372,890 Equities, at estimated market value 802,117 711,471 Real estate, at cost less accumulated depreciation of $75,114 (1995; $68,795) 611,614 611,656 Venture capital, at estimated market value 442,236 388,599 Other investments 49,210 42,776 Short-term investments, at cost 1,022,983 939,528 ---------- ---------- Total investments 13,185,934 13,066,920 Cash 33,159 34,440 Investment banking inventory securities 64,937 249,662 Reinsurance recoverables: Unpaid losses 1,789,508 1,853,817 Paid losses 70,301 74,568 Receivables: Underwriting premiums 1,317,428 1,316,560 Insurance brokerage activities 687,816 652,801 Interest and dividends 196,660 197,740 Other 113,140 81,885 Deferred policy acquisition expenses 371,383 372,174 Ceded unearned premiums 184,246 226,943 Deferred income taxes 640,356 528,805 Office properties and equipment, at cost less accumulated depreciation of $300,366 (1995; $277,759) 455,531 478,286 Goodwill 313,666 314,457 Other assets 184,416 207,444 ---------- ---------- Total assets $19,608,481 19,656,502 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In thousands) June 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995 - ------------------------------------ ------------ ----------- (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $10,354,052 10,247,070 Unearned premiums 2,242,500 2,361,028 ---------- ---------- Total insurance reserves 12,596,552 12,608,098 Debt 695,552 704,042 Payables: Insurance brokerage activities 983,041 979,964 Income taxes 192,639 179,249 Reinsurance premiums 137,337 139,058 Accrued expenses and other 574,533 618,903 Other liabilities 523,874 490,067 ---------- ---------- Total liabilities 15,703,528 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; 992 shares outstanding (999 shares in 1995) 143,336 144,165 Guaranteed obligation - PSOP (130,523) (133,293) ---------- ---------- Total preferred shareholders' equity 12,813 10,872 ---------- ---------- Common: Common stock, 240,000 shares authorized; 83,445 shares outstanding (83,976 shares in 1995) 464,844 460,458 Retained earnings 2,848,500 2,704,075 Guaranteed obligation - ESOP (25,909) (32,294) Unrealized appreciation of investments 444,241 627,791 Unrealized loss on foreign currency translation (46,536) (40,781) ---------- ---------- Total common shareholders' equity 3,685,140 3,719,249 ---------- ---------- Total shareholders' equity 3,697,953 3,730,121 ---------- ---------- Total liabilities, redeemable preferred securities and shareholders' equity $19,608,481 19,656,502 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In thousands) Six Twelve Months Ended Months Ended June 30, December 31, 1996 1995 ------------ ------------ Preferred shareholders' equity: (Unaudited) Series B convertible preferred stock: Beginning of period $144,165 146,102 Change during period (829) (1,937) ---------- ---------- End of period 143,336 144,165 ---------- ---------- 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 12,813 10,872 ---------- ---------- Common shareholders' equity: Common stock: Beginning of period 460,458 445,222 Stock issued under stock option and other incentive plans 8,707 19,481 Reacquired common shares (4,321) (4,245) ---------- ---------- End of period 464,844 460,458 ---------- ---------- Retained earnings: Beginning of period 2,704,075 2,362,286 Net income 258,874 521,209 Dividends declared on common stock (73,155) (133,956) Dividends declared on preferred stock, net of taxes (4,324) (8,582) Reacquired common shares (37,737) (38,291) Tax benefit on employee stock options and awards 767 1,409 ---------- ---------- End of period 2,848,500 2,704,075 ---------- ---------- Guaranteed obligation - ESOP: Beginning of period (32,294) (44,410) Principal payments 6,385 12,116 ---------- ---------- End of period (25,909) (32,294) ---------- ---------- Unrealized appreciation of investments, net of taxes: Beginning of period 627,791 13,948 Change during the period (183,550) 613,843 ---------- ---------- End of period 444,241 627,791 ---------- ---------- Unrealized loss on foreign currency translation, net of taxes: Beginning of period (40,781) (44,112) Change during the period (5,755) 3,331 ---------- ---------- End of period (46,536) (40,781) ---------- ---------- Total common shareholders' equity 3,685,140 3,719,249 ---------- ---------- Total shareholders' equity $3,697,953 3,730,121 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (In thousands) Six Months Ended June 30 -------------------------- 1996 1995 ------ ------ OPERATING ACTIVITIES Underwriting: Net income $276,543 244,253 Adjustments: Change in net insurance reserves 123,419 334,822 Change in underwriting premiums receivable (5,246) (130,344) Provision for deferred taxes (18,464) (31,570) Realized investment gains (88,473) (9,133) Other 85,277 (102,901) ---------- ---------- Total underwriting 373,056 305,127 ---------- ---------- Insurance brokerage: Net loss (23,307) (23,061) Adjustments: Change in premium balances (31,635) 22,410 Change in accounts payable and accrued expenses (32,046) (19,988) Depreciation and goodwill amortization 16,032 12,241 Other 9,456 23,970 ---------- ---------- Total insurance brokerage (61,500) 15,572 ---------- ---------- Investment banking-asset management: Net income 26,679 24,165 Adjustments: Change in inventory securities 186,110 88,413 Change in short-term investments (163,827) (115,154) Change in short-term borrowings (25,000) - Change in open security transactions 4,381 (17,195) Other (13,689) 37,742 ---------- ---------- Total investment banking-asset management 14,654 17,971 ---------- ---------- Parent company and consolidating eliminations: Net loss (21,041) (21,794) Realized investment gains (6,952) (3,191) Other adjustments (4,712) 29,931 ---------- ---------- Total parent company and consolidating eliminations (32,705) 4,946 ---------- ---------- Net cash provided by operating activities 293,505 343,616 ---------- ---------- INVESTING ACTIVITIES Purchase of investments (1,437,458) (1,272,747) Proceeds from sales and maturities of investments 1,158,798 850,757 Change in short-term investments 77,654 (33,468) Change in open security transactions (16,666) 60,929 Net purchases of office properties and equipment (16,090) (22,544) Other 28,417 (44,759) ---------- ---------- Net cash used in investing activities (205,345) (461,832) ---------- ---------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (76,217) (71,184) Proceeds from issuance of company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. - 207,000 Proceeds from issuance of debt 22,586 65,500 Reacquired common shares (41,619) (497) Repayment of debt - (95,306) Other 5,748 3,170 ---------- ---------- Net cash provided by (used in) financing activities (89,502) 108,683 ---------- ---------- Effect of exchange rate changes on cash 61 140 ---------- ---------- Increase (decrease) in cash (1,281) (9,393) Cash at beginning of period 34,440 46,664 ---------- ---------- Cash at end of period $33,159 37,271 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited June 30, 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 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 net income, as adjusted, by the adjusted average common shares outstanding. Three Months Ended Six Months Ended June 30 June 30 ---------------- ---------------- 1996 1995 1996 1995 ------ ------ ------ ------ (In thousands) PRIMARY Net income, as reported $130,053 112,967 258,874 223,563 PSOP preferred dividends declared (net of taxes) (2,159) (2,139) (4,324) (4,285) Premium on preferred shares redeemed (232) - (440) - -------- ------- ------- ------- Net income, as adjusted $127,662 110,828 254,110 219,278 ======== ======= ======= ======= FULLY DILUTED Net income, as reported $130,053 112,967 258,874 223,563 Dividends on monthly income preferred securities (net of taxes) 2,019 1,009 4,037 1,009 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (755) (871) (1,513) (1,745) Premium on preferred shares redeemed (232) - (440) - -------- ------- ------- ------- Net income, as adjusted $131,085 113,105 260,958 222,827 ======== ======= ======= ======= ADJUSTED AVERAGE COMMON SHARES OUTSTANDING Primary 84,510 85,362 84,838 85,277 ======== ======= ======= ======= Fully diluted 92,011 91,157 92,258 90,231 ======== ======= ======= ======= 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 - ------------------- Investment Activity. A summary of investment transactions is presented below. Six Months Ended June 30 ------------------------------ 1996 1995 ------ ------ (In thousands) Purchases: Fixed maturities $857,188 761,513 Equities 503,952 376,182 Real estate 12,338 102,426 Venture capital 50,554 27,344 Other investments 13,426 5,282 --------- --------- Total purchases 1,437,458 1,272,747 --------- --------- Proceeds from sales and maturities: Fixed maturities: Sales 174,459 126,205 Maturities and redemptions 413,100 352,244 Equities 480,694 334,704 Venture capital 85,525 30,598 Real estate 3,308 4,839 Other investments 1,712 2,167 --------- --------- Total sales and maturities 1,158,798 850,757 --------- --------- Net purchases $278,660 421,990 ========= ========= 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: Six Months Ended Twelve Months Ended June 30, 1996 December 31, 1995 ------------------ ------------------- (In thousands) Fixed maturities $(352,325) 742,626 Equities 20,750 130,247 Venture capital 51,212 59,880 -------- ------- Total change in pretax unrealized appreciation (280,363) 932,753 Increase (decrease) in deferred tax asset due to change in unrealized appreciation 96,813 (318,910) -------- -------- Total change in unrealized appreciation, net of taxes $(183,550) 613,843 ======== ======== 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 $348 million at June 30, 1996, and $380 million at December 31, 1995. 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 Six Months Ended June 30 June 30 ------------------ ------------------ 1996 1995 1996 1995 ------ ------ ------ ------ (In thousands) Federal current tax expense $37,170 44,192 72,567 91,260 Federal deferred tax benefit (8,784) (17,396) (16,231) (31,017) ------- ------- ------- ------- Total federal income tax expense 28,386 26,796 56,336 60,243 Foreign income taxes 8,568 2,265 14,461 5,135 State income taxes 1,444 1,226 2,860 2,459 ------- ------- ------- ------- Total income tax expense $38,398 30,287 73,657 67,837 ======= ======= ======= ======= 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: June 30, December 31, 1996 1995 ------------------ ----------------- Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- (In thousands) Medium-term notes $397,430 393,900 397,433 419,500 Commercial paper 171,799 171,799 149,629 149,629 9 3/8% notes 99,988 102,900 99,982 105,300 Guaranteed ESOP debt 19,446 20,100 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 $695,552 695,588 704,042 732,626 ======= ======= ======= ======= 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 Six Months Ended June 30 June 30 -------------------- --------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (In thousands) Premiums written: Direct $910,911 947,804 1,693,621 1,752,006 Assumed 292,249 307,008 515,859 525,522 Ceded (125,234) (159,686) (196,943) (266,039) --------- --------- --------- --------- Net premiums written $1,077,926 1,095,126 2,012,537 2,011,489 ========= ========= ========= ========= Premiums earned: Direct $927,064 921,372 1,845,185 1,786,954 Assumed 249,887 239,556 479,646 433,745 Ceded (121,567) (169,101) (238,871) (282,802) --------- --------- --------- --------- Net premiums earned $1,055,384 991,827 2,085,960 1,937,897 ========= ========= ========= ========= Insurance losses and loss adjustment expenses: Direct $672,799 666,432 1,296,288 1,241,982 Assumed 190,023 170,814 379,422 375,546 Ceded (84,021) (113,856) (141,449) (213,699) --------- --------- --------- --------- Net insurance losses and loss adjustment expenses $778,801 723,390 1,534,261 1,403,829 ========= ========= ========= ========= Note 8 Acquisition of Northbrook Holdings Inc. - ----------------------------------------------- In June 1996, the company announced an agreement with The Allstate Corporation to purchase Northbrook Holdings Inc., an Allstate subsidiary which underwrites various commercial insurance products throughout the United States. The acquisition of Northbrook was completed on July 31, 1996, for a total cost of $184 million, which was provided from internal funds. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations June 30, 1996 Consolidated Results - -------------------- Consolidated pretax earnings of $168 million in the second quarter of 1996 were 18% higher than comparable 1995 earnings of $143 million. The improvement over 1995 was primarily due to a significant increase in realized investment gains in the underwriting segment, largely resulting from sales of venture capital investments and equity securities. These gains more than offset an increase in other expenses in the underwriting segment during the quarter. Year-to-date pretax earnings of $333 million increased 14% over 1995's six-month earnings, primarily due to an $83 million increase in pretax realized investment gains, which was partially offset by a catastrophe- driven $40 million deterioration in underwriting results. Net income in the second quarter was $130 million, or $1.42 per share, compared with net income of $113 million, or $1.24 per share, in the second quarter of 1995. Net income of $259 million, or $2.83 per share, for the first six months of 1996 increased 16% over comparable 1995 net income of $224 million, or $2.47 per share. Consolidated revenues in the second quarter totaled $1.45 billion, an increase of 9% over second quarter 1995 revenues of $1.33 billion. Year-to-date revenues in 1996 were 10% higher than the same period of 1995. Growth in insurance premiums earned, realized investment gains and investment income drove the increased revenue in 1996. Results by Segment - ------------------ Pretax results by industry segment were as follows (in millions): Three Months Six Months Ended June 30 Ended June 30 ------------- ------------- 1996 1995 1996 1995 ---- ---- ---- ---- Pretax income (loss): Underwriting: GAAP underwriting results ($39) (26) (81) (41) Net investment income 194 181 383 359 Realized investment gains 46 8 88 9 Other (32) (18) (48) (22) ---- ---- ---- ---- Total underwriting 169 145 342 305 Insurance brokerage (5) (4) (18) (18) Investment banking-asset management 22 20 43 39 Parent and other (18) (18) (34) (35) ---- ---- ---- ---- Income before income taxes $168 143 333 291 ==== ==== ==== ==== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Underwriting - ------------ The following summarizes key financial results by underwriting operation: % of Three Months Six Months 1996 Ended June 30 Ended June 30 Written -------------- -------------- ($ in Millions) Premiums 1996 1995 1996 1995 - --------------- -------- ---- ---- ---- ---- Specialized Commercial: Written Premiums 30% $340 355 604 639 Underwriting Results $19 (26) 9 (46) Combined Ratio 94.1 106.0 99.5 106.2 Personal Insurance: Written Premiums 18% $189 179 353 329 Underwriting Results ($61) (3) (89) (10) Combined Ratio 134.0 101.1 125.5 102.7 Commercial: Written Premiums 15% $155 142 310 289 Underwriting Results ($2) (11) (11) (15) Combined Ratio 102.7 107.9 104.4 105.2 Medical Services: Written Premiums 10% $98 129 200 266 Underwriting Results $20 25 40 51 Combined Ratio 94.2 85.8 94.3 85.5 ---- ----- ----- ----- ----- Total St. Paul Fire & Marine: Written Premiums 73% $782 805 1,467 1,523 Underwriting Results ($24) (15) (51) (20) Combined Ratio 104.5 101.3 105.3 101.2 International: Written Premiums 6% $56 46 113 88 Underwriting Results ($6) (12) (12) (17) Combined Ratio 112.0 127.5 112.1 120.8 ---- ----- ----- ----- ----- Total Worldwide Insurance: Written Premiums 79% $838 851 1,580 1,611 Underwriting Results ($30) (27) (63) (37) Combined Ratio 105.0 102.9 105.8 102.4 Reinsurance: Written Premiums 21% $240 244 433 400 Underwriting Results ($9) 1 (18) (4) Combined Ratio 102.0 95.5 103.2 99.4 ---- ----- ----- ----- ----- Total: Written Premiums 100% $1,078 1,095 2,013 2,011 GAAP Underwriting Results ($39) (26) (81) (41) Statutory Combined Ratio: Loss and Loss Expense Ratio 73.8 72.9 73.6 72.4 Underwriting Expense Ratio 30.5 28.5 31.6 29.3 ----- ----- ----- ----- Combined Ratio 104.3 101.4 105.2 101.7 ===== ===== ===== ===== Combined Ratio Including Policyholders' Dividends 104.4 101.6 105.3 101.9 ===== ===== ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued In May 1996, the company formed a new worldwide insurance underwriting group, which includes St. Paul Fire and Marine, the company's flagship domestic underwriting operation, and St. Paul International Underwriting. This new structure is reflected in the table on the preceding page. The underwriting segment posted pretax earnings of $169 million in the second quarter, 17% higher than pretax earnings of $145 million in the same quarter of 1995. A $38 million increase in realized investment gains more than offset the $13 million deterioration in underwriting results and a $14 million increase in other expenses, which resulted from the company's agreement to settle a lawsuit (see "Legal Matters" section on page 20). Year- to-date pretax earnings of $342 million grew 12% over the first half of 1995, primarily due to a $79 million increase in realized investment gains. Second quarter 1996 written premiums of $1.08 billion were 2% below comparable 1995 premiums of $1.10 billion. Medical Services premium volume of $98 million for the quarter was down 25% from the same period of 1995, reflecting the impact of the transition to annual policy terms in the second half of last year, as well as the increasingly competitive medical insurance market. Specialized Commercial premiums were down 4% compared to the second quarter of 1995, primarily due to a decline in volume in the Construction line of business. Personal Insurance and Commercial premiums increased over the second quarter of 1995, due to new business. Written premiums for the first half of 1996 were level with those in the same period of 1995. Premium declines of $66 million and $35 million in Medical Services and Specialized Commercial, respectively, were offset by premium growth in all other underwriting segments. The second quarter 1996 GAAP underwriting loss was $39 million, compared with 1995's second quarter loss of $26 million. Catastrophe losses in the second quarter of 1996 totaled $52 million, largely resulting from Midwestern storms in April and May. Catastrophe losses in last year's second quarter were $55 million. Key factors in the increase in second quarter underwriting losses compared to 1995 were as follows: - Specialized Commercial - $45 million better than 1995 - A significant decline in losses resulting from the company's reduced participation in insurance pool arrangements was the primary factor in the improvement over 1995. - Commercial - $8 million better than 1995 - Favorable current year loss experience accounted for the reduction in losses from the second quarter of 1995. - Personal Insurance - $58 million worse than 1995 - A $26 million increase in catastrophe losses and other adverse current year loss experience on monoline personal coverages were the primary contributors to the deterioration from 1995. - Reinsurance - $10 million worse than 1995 - An increase in noncatastrophe losses drove the decline from 1995. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued The year-to-date GAAP underwriting loss of $81 million was almost twice the 1995 six-month loss of $41 million. Catastrophe losses in the first half of 1996 totaled $115 million, compared with $71 million for the same period of 1995. This increase in catastrophe losses, coupled with a significant increase in noncatastrophe losses in Personal Insurance, more than offset the $55 million improvement in Specialized Commercial results compared to the first half of 1995. Pretax investment income in the underwriting segment for the second quarter was $194 million, up 7% from $181 million in 1995. Year-to-date investment income was $24 million ahead of last year. The increase over 1995 was primarily due to strong investment cash flows, which have fueled a $735 million increase in fixed-maturity investments over the last twelve months. Fixed maturities purchased in the first half of 1996 were predominantly tax-exempt securities. The weighted average pretax yield on the underwriting segment's fixed maturities portfolio was 7.2% at June 30, 1996, and approximately 96% of that portfolio was 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 six months ended June 30, 1996, and the years ended Dec. 31, 1995 and 1994. Amounts in the "net" column are reduced by reinsurance recoverable. 1996 Pollution (six months) 1995 1994 - --------- ----------- ----------- ----------- (in millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Beginning reserves $528 319 275 200 105 73 Incurred losses 15 10 59 68 71 56 Reserve reallocation - - 233 79 132 95 Paid losses (14) (11) (39) (28) (33) (24) --- --- --- --- --- --- Ending reserves $529 318 528 319 275 200 === === === === === === 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 six months ended June 30, 1996, and the years ended Dec. 31, 1995 and 1994: 1996 Asbestos (six months) 1995 1994 -------- ----------- ----------- ----------- (in millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Beginning reserves $283 158 185 145 62 48 Incurred losses (5) 2 (13) (9) 13 14 Reserve reallocation - - 127 34 127 95 Paid losses (12) (6) (16) (12) (17) (12) --- --- --- --- --- --- Ending reserves $266 154 283 158 185 145 === === === === === === 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 ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued 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 June 30, 1996, of $795 million represented 8% of gross consolidated reserves of $10.4 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 sought 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. During the second quarter of 1996, the company, pursuant to an oral understanding with the plaintiffs, recorded an expense of $16 million, which, in addition to a previously recorded provision of $9 million, would settle all claims associated with this lawsuit. The defendants and plaintiffs recently entered into a written agreement, which is subject to approval by the Texas court with jurisdiction over the case, to settle all claims and related expenses associated with this lawsuit for approximately $25 million. Insurance Brokerage - ------------------- The insurance brokerage segment (Minet) incurred a pretax loss of $5 million in the second quarter, slightly worse than the comparable 1995 loss of $4 million. Minet's pretax loss for the first half of 1996 was $18 million, level with the first six months of 1995. Brokerage fees and commissions for the quarter were 4% below 1995. Year-to-date fees and commissions were level with 1995. The competitive market environment for brokerage services worldwide has negatively impacted Minet's efforts to increase revenues. The company is in the process of examining a number of near-term strategic options for Minet. Investment Banking-Asset Management - ----------------------------------- The company's portion of The John Nuveen Company's second quarter pretax earnings was $22 million, compared with $20 million in 1995. For the first half of 1996, the company's portion was $43 million, compared with $39 million in 1995. The company currently owns 78% of Nuveen. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Asset management fees of $46 million for the quarter were level with the same period of 1995, but operating expenses were down 14%. Assets under management totaled $31.4 billion at June 30, down slightly from year-end 1995 due to a decline in the value of underlying fund investments. Unit Investment Trust sales in the first half of 1996 were $491 million, down from sales of $570 for the same period of 1995. Second quarter sales of $276 million, however, were slightly higher than the comparable 1995 total. Capital Resources - ----------------- Common shareholders' equity totaled $3.69 billion at the end of the second quarter, down slightly from year-end 1995 despite $259 million of net income for the first half of 1996. The after-tax appreciation of the company's fixed maturities investment portfolio has declined $230 million in 1996, reflecting the impact of rising interest rates on the bond markets. The company's equity and venture capital portfolios experienced a $47 million increase in their after-tax appreciation in the first half of 1996. The company has repurchased and retired 782,000 shares of its common stock for a total cost of $42 million in 1996. In June 1996, the company announced an agreement with The Allstate Corporation to purchase Northbrook Holdings Inc., an Allstate subsidiary which underwrites various commercial insurance products throughout the United States. The Northbrook purchase was completed on July 31, 1996, for a total cost of $184 million, which was provided from internal funds. Total debt outstanding at the end of the quarter was $696 million, down slightly from $704 million at the end of 1995. The ratio of debt to total capitalization at June 30, 1996, was 15%, unchanged from year-end 1995. In June 1996, the company filed a shelf registration statement with the Securities and Exchange Commission which will give the company the capacity to issue $275 million of additional debt in the future. In July 1996, The John Nuveen Company, in which the company holds a 78% majority interest, announced its intention to repurchase up to 3.5 million of its outstanding common shares. The repurchases will be proportioned between minority shareholders and the company in order to maintain the company's 78% ownership. If Nuveen were to complete the repurchase of those shares at the current market price, the total proceeds to the company would be approximately $70 million. The company's ratio of earnings to fixed charges was 10.58 for the first six months of 1996, compared with 8.93 for the same period of 1995. The company's ratio of earnings to combined fixed charges and preferred stock dividends was 7.36 for the first six months of 1996, compared with 6.93 for the same period of 1995. 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. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued 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 $294 million in the first half of 1996, compared with $344 million in 1995. The company's 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 is incorporated herein by reference. In May 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 allegedly paid $400 million from 1983 through 1985 for interests in certain limited partnerships that Damson Oil Corporation ("Damson") served as general partner. The complaint in this lawsuit (Olin Nelson, et al. v. St. Paul Fire and Marine Insurance Company, St. Paul Surplus Lines Insurance Company ("Surplus Lines") and St. Paul Specialty Underwriting, Inc.) alleged, among other things, that the defendants conspired with Damson to mislead the investors as to the protection afforded by certain insurance policies issued by Surplus Lines in violation of the Texas Deceptive Trade Practices Act and other laws. The plaintiffs sought unspecified actual damages, treble damages, punitive damages, attorney fees, costs, and pre- and post-judgment interest. During the second quarter of 1996, the company, pursuant to an oral understanding with the plaintiffs, recorded an expense of $16 million, which, in addition to a previously recorded provision of $9 million, would settle all claims associated with this lawsuit. The defendants and plaintiffs recently entered into a written agreement, which is subject to approval by the Texas court with jurisdiction over the case, to settle all claims and related expenses associated with this lawsuit for approximately $25 million. 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. The Registrant's annual shareholders' meeting was held on May 7, 1996. (1) All twelve persons nominated for directors by management were named in proxies for the meeting which were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the proxy statements. All twelve nominees were elected by the following votes: In favor Withheld -------- -------- Michael R. Bonsignore 74,435,964 318,551 John H. Dasburg 74,344,441 410,074 W. John Driscoll 74,383,632 370,883 Pierson M. Grieve 74,393,753 360,762 Ronald James 74,423,368 331,147 William H. Kling 74,360,893 393,622 Douglas W. Leatherdale 74,351,405 403,110 Bruce K. MacLaury 74,420,698 333,817 Glen D. Nelson 74,424,692 329,823 Anita M. Pampusch 74,418,508 336,007 Gordon M. Sprenger 74,416,523 337,992 Patrick A. Thiele 74,418,520 335,995 (2) By a vote of 74,204,593 in favor, 298,205 against and 251,717 abstaining, the shareholders ratified the selection of KPMG Peat Marwick LLP as the independent auditors for the Registrant. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. An Exhibit Index is set forth on page 25 of this report. (b) Reports on Form 8-K. The Registrant filed a Form 8-K Current Report dated June 18, 1996, pertaining to the press release of the announcement of the Registrant's agreement to acquire Northbrook Holdings Inc. from The Allstate Corporation. The Registrant filed a Form 8-K Current Report dated July 29, 1996, pertaining to the Registrant's press release of second quarter 1996 financial results. The Registrant filed a Form 8-K Current Report dated August 7, 1996, pertaining to exhibits filed in connection with the Registration Statement on Form S-3 (File No. 333-06456) filed by the Registrant covering debt securities issuable under an indenture, dated as of March 31, 1990, between the Registrant and The Chase Manhattan Bank. 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: August 12, 1996 By /s/ Bruce A. Backberg --------------------- Bruce A. Backberg Vice President and Corporate Secretary (Authorized Signatory) Date: August 12, 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 Legal Services, The St. Paul Companies, 385 Washington Street, Saint Paul, MN 55102. (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 Six Months Ended June 30 June 30 ------------------ ----------------- 1996 1995 1996 1995 ----- ----- ----- ----- EARNINGS: Primary: Net income, as reported $130,053 112,967 258,874 223,563 PSOP preferred dividends declared (net of taxes) (2,159) (2,139) (4,324) (4,285) Premium on preferred shares redeemed (232) - (440) - -------- -------- -------- -------- Net income, as adjusted $127,662 110,828 254,110 219,278 ======== ======== ======== ======== Fully diluted: Net income, as reported $130,053 112,967 258,874 223,563 Dividends on monthly income preferred securities (net of taxes) 2,019 1,009 4,037 1,009 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (755) (871) (1,513) (1,745) Premium on preferred shares redeemed (232) - (440) - -------- -------- -------- -------- Net income, as adjusted $131,085 113,105 260,958 222,827 ======== ======== ======== ======== SHARES: Primary: Weighted average number of common shares outstanding, per consolidated financial statements 83,522 84,414 83,749 84,340 Additional dilutive effect of assumed exercise of outstanding stock options (based on treasury stock method using average market price) 988 948 1,089 937 -------- -------- -------- -------- Weighted average, as adjusted 84,510 85,362 84,838 85,277 ======== ======== ======== ======== Fully diluted: Weighted average number of common shares outstanding, per consolidated financial statements 83,522 84,414 83,749 84,340 Additional dilutive effect of: Assumed conversion of PSOP preferred stock 3,977 4,034 3,984 4,040 Assumed conversion of monthly income preferred securities 3,509 1,774 3,509 892 Assumed exercise of outstanding stock options (based on treasury stock method using market price at end of period) 1,003 935 1,016 959 -------- -------- -------- -------- Weighted average, as adjusted 92,011 91,157 92,258 90,231 ======== ======== ======== ======== EARNINGS PER COMMON SHARE: Primary $1.51 1.30 3.00 2.57 Fully diluted $1.42 1.24 2.83 2.47 EX-12 3 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Exhibit 12 Computation of Ratios (In thousands, except ratios) Three Months Ended Six Months Ended June 30 June 30 ------------------ ------------------ 1996 1995 1996 1995 ----- ----- ----- ----- EARNINGS: Income before income taxes $168,451 143,254 332,531 291,400 Add: fixed charges 17,584 19,291 34,703 36,736 ------- ------- ------- ------- Income, as adjusted $186,035 162,545 367,234 328,136 ======= ======= ======= ======= FIXED CHARGES: Interest costs $12,724 13,740 25,148 25,357 Rental expense (1) 4,860 5,551 9,555 11,379 ------- ------- ------- ------- Total fixed charges $17,584 19,291 34,703 36,736 ======= ======= ======= ======= FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Fixed charges $17,584 19,291 34,703 36,736 PSOP preferred stock dividends 4,474 4,538 8,963 9,092 Dividends on monthly income preferred securities 3,105 1,553 6,210 1,553 ------- ------- ------- ------- Total fixed charges and preferred stock dividends $25,163 25,382 49,876 47,381 ======= ======= ======= ======= Ratio of earnings to fixed charges 10.58 8.43 10.58 8.93 ======= ======= ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends 7.39 6.40 7.36 6.93 ======= ======= ======= ======= (1) Interest portion deemed implicit in total rent expense. EX-27 4
7 1,000 6-MOS DEC-31-1996 JUN-30-1996 10,257,774 0 0 802,117 0 611,614 13,185,934 33,159 70,301 371,383 19,608,481 10,354,052 2,242,500 0 0 695,552 464,844 0 12,813 3,220,296 19,608,481 2,085,960 404,551 95,425 273,876 1,534,261 462,279 530,741 332,531 73,657 258,874 0 0 0 258,874 3.00 2.83 0 0 0 0 0 0 0
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