-----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, EjNqZ9pfN4dmWfWSy83ZLnZ33XRmCWZaK2HQrka8FnewN6t1fijlorl3wLUzmVim Y+ExrGF8hHD8MgtiWybuvA== 0000086312-97-000026.txt : 19970815 0000086312-97-000026.hdr.sgml : 19970815 ACCESSION NUMBER: 0000086312-97-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97661848 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 June 30, 1997 ------------- 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 incorporation or organization) Identification 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, 1997, was 83,864,479. 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, 1997 and 1996 3 Consolidated Balance Sheets, June 30, 1997 (Unaudited) and December 31, 1996 4 Consolidated Statements of Shareholders' Equity, Six Months Ended June 30, 1997 (Unaudited) and Twelve Months Ended December 31, 1996 6 Consolidated Statements of Cash Flows (Unaudited), Six Months Ended June 30, 1997 and 1996 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 23 EXHIBIT INDEX 24 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 ------------------- ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Premiums earned $1,165,297 1,055,384 2,336,750 2,085,960 Net investment income 217,570 196,801 436,232 389,180 Realized investment gains 167,914 47,505 263,506 95,425 Investment banking-asset management 59,755 52,584 118,360 105,924 Other 10,175 12,200 23,066 17,876 --------- --------- --------- --------- Total revenues 1,620,711 1,364,474 3,177,914 2,694,365 --------- --------- --------- --------- Expenses: Insurance losses and loss adjustment expenses 845,485 778,801 1,714,363 1,534,261 Policy acquisition expenses 272,714 231,791 527,474 462,279 Operating and administrative 194,135 180,907 382,490 347,362 --------- --------- --------- --------- Total expenses 1,312,334 1,191,499 2,624,327 2,343,902 --------- --------- --------- --------- Income from continuing operations before income taxes 308,377 172,975 553,587 350,463 Income tax expense (benefit): Federal current 92,773 37,427 157,444 73,082 Other (14,920) 253 (26,680) (2,325) --------- --------- --------- -------- Total income tax expense 77,853 37,680 130,764 70,757 --------- --------- --------- -------- Income from continuing operations 230,524 135,295 422,823 279,706 Discontinued operations: Operating loss, net of taxes - (5,242) - (20,832) Loss on disposal, net of taxes - - (67,750) - --------- --------- --------- -------- Loss from discontinued operations - (5,242) (67,750) (20,832) --------- --------- --------- -------- Net income $230,524 130,053 355,073 258,874 ========= ========= ========= ======== Primary earnings per common share: Income from continuing operations $2.68 1.57 4.94 3.24 Loss from discontinued operations - (0.06) (0.81) (0.24) -------- --------- --------- -------- Net income $2.68 1.51 4.13 3.00 ======== ========= ========= ======== Fully diluted earnings per common share: Income from continuing operations $2.50 1.48 4.59 3.05 Loss from discontinued operations - (0.06) (0.73) (0.22) -------- --------- --------- -------- Net income $2.50 1.42 3.86 2.83 ======== ========= ========= ======== Dividends declared on common stock $0.47 0.44 0.94 0.88 ======== ========= ========= ======= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) June 30, December 31, ASSETS 1997 1996 - ------ ---------- ---------- (Unaudited) Investments: Fixed maturities, at estimated market value $11,935,094 11,944,085 Equities, at estimated market value 986,124 808,295 Real estate, at cost less accumulated depreciation of $85,086 (1996; $81,764) 731,876 693,910 Venture capital, at estimated market value 463,112 586,222 Other investments 44,955 43,311 Short-term investments, at cost 422,948 289,793 ---------- ---------- Total investments 14,584,109 14,365,616 Cash 54,423 37,214 Investment banking inventory securities 57,603 143,594 Reinsurance recoverables: Unpaid losses 1,849,941 1,890,105 Paid losses 67,579 68,692 Receivables: Underwriting premiums 1,541,357 1,558,967 Interest and dividends 209,929 213,883 Other 107,894 104,865 Deferred policy acquisition expenses 398,898 401,768 Ceded unearned premiums 213,272 243,663 Deferred income taxes 941,107 908,220 Office properties and equipment, at cost less accumulated depreciation of $243,947 (1996; $217,454) 283,813 281,093 Goodwill 245,689 167,338 Other assets 370,302 295,958 ---------- ---------- Total assets $20,925,916 20,680,976 ========== ========== 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 1997 1996 - ------------------------------------ ----------- ------------ (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $11,743,413 11,673,148 Unearned premiums 2,418,414 2,566,551 ---------- ---------- Total insurance reserves 14,161,827 14,239,699 Debt 705,740 689,141 Payables: Income taxes 256,630 219,081 Reinsurance premiums 169,654 181,524 Accrued expenses and other 581,949 484,062 Other liabilities 635,718 656,649 ---------- ---------- Total liabilities 16,511,518 16,470,156 ---------- ---------- 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; 974 shares outstanding (985 shares in 1996) 140,998 142,131 Guaranteed obligation - PSOP (123,000) (126,068) ---------- ---------- Total preferred shareholders' equity 17,998 16,063 ---------- ---------- Common: Common stock, 240,000 shares authorized; 83,741 shares outstanding (83,198 shares in 1996) 496,905 475,710 Retained earnings 3,209,879 2,935,928 Guaranteed obligation - ESOP (14,009) (20,353) Unrealized appreciation of investments 511,822 616,968 Unrealized loss on foreign currency translation (15,197) (20,496) ---------- ---------- Total common shareholders' equity 4,189,400 3,987,757 ---------- ---------- Total shareholders' equity 4,207,398 4,003,820 ---------- ---------- Total liabilities, redeemable preferred securities and shareholders' equity $20,925,916 20,680,976 ========== ========== 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, 1997 1996 ------------ ------------ Preferred shareholders' equity: (Unaudited) Series B convertible preferred stock: Beginning of period $142,131 144,165 Change during period (1,133) (2,034) ---------- ---------- End of period 140,998 142,131 ---------- ---------- Guaranteed obligation - PSOP: Beginning of period (126,068) (133,293) Principal payments 3,068 7,225 ---------- ---------- End of period (123,000) (126,068) ---------- ---------- Total preferred shareholders' equity 17,998 16,063 ---------- ---------- Common shareholders' equity: Common stock: Beginning of period 475,710 460,458 Stock issued under stock incentive plans 21,246 21,393 Stock issued for acquisition - 1,664 Reacquired common shares (51) (7,805) ---------- ---------- End of period 496,905 475,710 ---------- ---------- Retained earnings: Beginning of period 2,935,928 2,704,075 Net income 355,073 450,099 Dividends declared on common stock (78,342) (145,956) Dividends declared on PSOP preferred stock, net of taxes (4,353) (8,664) Reacquired common shares (515) (67,445) Tax benefit on employee stock options and awards 2,088 3,819 ---------- ---------- End of period 3,209,879 2,935,928 ---------- ---------- Guaranteed obligation - ESOP: Beginning of period (20,353) (32,294) Principal payments 6,344 11,941 ---------- ---------- End of period (14,009) (20,353) ---------- ---------- Unrealized appreciation of investments, net of taxes: Beginning of period 616,968 627,791 Change during the period (105,146) (10,823) ---------- ---------- End of period 511,822 616,968 ---------- ---------- Unrealized loss on foreign currency translation, net of taxes: Beginning of period (20,496) (40,781) Currency translation adjustments 5,299 (5,309) Realized loss relating to discontinued operations - 25,594 ---------- ---------- End of period (15,197) (20,496) ---------- ---------- Total common shareholders' equity 4,189,400 3,987,757 ---------- ---------- Total shareholders' equity $4,207,398 4,003,820 ========== ========== 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 -------------------- 1997 1996 ------ ------ OPERATING ACTIVITIES Underwriting: Net income 407,895 276,543 Adjustments: Change in net insurance reserves (44,119) 123,419 Change in underwriting premiums receivable 43,038 (5,246) Deferred tax benefit (12,209) (18,464) Realized investment gains (259,537) (88,473) Other 23,104 85,277 ---------- ---------- Total underwriting 158,172 373,056 ---------- ---------- Investment banking-asset management: Net income 26,681 26,679 Adjustments: Change in inventory securities 85,991 186,110 Change in short-term investments (25,326) (163,827) Change in short-term borrowings - (25,000) Change in open security transactions 2,398 4,381 Other (15,095) (13,689) ---------- ---------- Total investment banking-asset management 74,649 14,654 ---------- ---------- Parent company and consolidating eliminations: Net loss from continuing operations (11,753) (23,516) Adjustments: Realized investment gains (3,969) (6,952) Other (35,037) (2,237) ---------- ---------- Total parent company and consolidating eliminations (50,759) (32,705) ---------- ---------- Net cash provided by operating activities 182,062 355,005 ---------- ---------- Cash outflow resulting from sale of discontinued operations (20,284) - ---------- ---------- INVESTING ACTIVITIES Purchase of investments (1,546,239) (1,437,458) Proceeds from sales and maturities of investments 1,525,478 1,158,798 Change in short-term investments (96,902) 18,174 Change in open security transactions 38,633 (16,666) Net purchases of office properties and equipment (24,764) (13,710) Other 12,410 21,699 ---------- ---------- Net cash used in investing activities (91,384) (269,163) ---------- ---------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (81,550) (76,217) Proceeds from issuance of debt 122,186 22,586 Repayment of debt (100,000) - Repurchase of common shares (566) (41,619) Other 6,701 5,856 ---------- ---------- Net cash used in financing activities (53,229) (89,394) ---------- ---------- Effect of exchange rate changes on cash 44 (49) ---------- ---------- Increase (decrease) in cash 17,209 (3,601) Cash at beginning of period 37,214 25,475 ---------- ---------- Cash at end of period 54,423 21,874 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited June 30, 1997 Note 1 Basis of Presentation - ----------------------------- The 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 53 to 69 of the Registrant's annual report to shareholders for the year ended December 31, 1996. 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 1996 consolidated financial statements have been reclassified to conform with the 1997 presentation. These reclassifications had no effect on net income or 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 ------------------ ----------------- 1997 1996 1997 1996 ------ ------ ------ ------ (In thousands) PRIMARY Net income, as reported $230,524 130,053 355,073 258,874 PSOP preferred dividends declared (net of taxes) (2,168) (2,159) (4,353) (4,324) Premium on preferred shares redeemed (651) (232) (911) (440) -------- ------- ------- ------- Net income, as adjusted $227,705 127,662 349,809 254,110 ======== ======= ======= ======= FULLY DILUTED Net income, as reported $230,524 130,053 355,073 258,874 Dividends on monthly income preferred securities (net of taxes) 2,019 2,019 4,037 4,037 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (666) (755) (1,336) (1,513) Premium on preferred shares redeemed (651) (232) (911) (440) -------- ------- ------- ------- Net income, as adjusted $231,226 131,085 356,863 260,958 ======== ======= ======= ======= ADJUSTED AVERAGE COMMON SHARES OUTSTANDING Primary 84,849 84,510 84,679 84,838 ====== ====== ====== ====== Fully diluted 92,425 92,011 92,345 92,258 ====== ====== ====== ====== 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 ---------------------------- 1997 1996 ------ ------ (In thousands) Purchases: Fixed maturities $683,639 857,188 Equities 712,474 503,952 Real estate 72,889 12,338 Venture capital 57,222 50,554 Other investments 20,015 13,426 --------- --------- Total purchases 1,546,239 1,437,458 --------- --------- Proceeds from sales and maturities: Fixed maturities: Sales 379,770 174,459 Maturities and redemptions 258,575 413,100 Equities 675,707 480,694 Venture capital 180,973 85,525 Real estate 26,991 3,308 Other investments 3,462 1,712 --------- --------- Total sales and maturities 1,525,478 1,158,798 --------- --------- Net purchases $20,761 278,660 ========= ========= 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, 1997 December 31, 1996 ------------------- --------------------- (In thousands) Fixed maturities $(63,174) (198,855) Equities 41,873 25,975 Venture capital (140,472) 163,110 ----------- ----------- Total change in pretax unrealized appreciation (161,773) (9,770) Increase (decrease) in deferred tax asset 56,627 (1,053) ----------- ----------- Total change in unrealized appreciation, net of taxes $(105,146) (10,823) =========== =========== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 4 Income Taxes - -------------------- The components of income tax expense on continuing operations are as follows: Three Months Ended Six Months Ended June 30 June 30 ------------------- ------------------- 1997 1996 1997 1996 ------ ------ ------ ------ (In thousands) Federal current tax expense $92,773 37,427 157,444 73,082 Federal deferred tax benefit (21,137) (8,143) (39,026) (16,018) --------- --------- --------- --------- Total federal income tax expense 71,636 29,284 118,418 57,064 Foreign income taxes 4,723 6,952 9,329 10,833 State income taxes 1,494 1,444 3,017 2,860 --------- --------- --------- --------- Total income tax expense on continuing operations $77,853 37,680 130,764 70,757 ========= ========= ========= ========= 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, 1997 1996 ---------------------- ------------------ Book Fair Book Fair Value Value Value Value ------ ------ ------ ------ (In thousands) Medium-term notes $511,923 514,700 430,427 435,500 Commercial paper 172,262 172,262 131,610 131,610 Real estate mortgage debt 13,220 13,100 13,220 13,220 Guaranteed ESOP debt 8,335 8,400 13,890 14,000 9 3/8% notes - - 99,994 101,500 -------- -------- -------- -------- Total debt $705,740 708,462 689,141 695,830 ======== ======== ======== ======== 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 ---------------------- --------------------- 1997 1996 1997 1996 ------ ------ ------ ------ (In thousands) Premiums written: Direct $945,001 910,911 1,820,540 1,693,621 Assumed 368,885 292,249 587,685 515,859 Ceded (127,601) (125,234) (192,720) (196,943) ---------- --------- ---------- ---------- Net premiums written $1,186,285 1,077,926 2,215,505 2,012,537 ========== ========= ========== ========== Premiums earned: Direct $1,025,971 927,064 2,049,465 1,845,185 Assumed 256,443 249,887 507,413 479,646 Ceded (117,117) (121,567) (220,128) (238,871) ---------- --------- --------- ---------- Net premiums earned $1,165,297 1,055,384 2,336,750 2,085,960 ========== ========= ========= ========== Insurance losses and loss adjustment expenses: Direct $779,463 672,799 1,504,218 1,296,288 Assumed 168,957 190,023 330,187 379,422 Ceded (102,935) (84,021) (120,042) (141,449) ---------- --------- --------- ---------- Net insurance losses and loss adjustment expenses $845,485 778,801 1,714,363 1,534,261 ========== ========= ========= ========= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 8 Discontinued Operations - ------------------------------- In May 1997, The St. Paul completed the sale of its brokerage operation, Minet, to Aon Corporation. The St. Paul's gross proceeds from the sale were approximately equal to its remaining carrying value of Minet. In connection with the transaction, The St. Paul agreed to indemnify Aon against most preclosing liabilities of the Minet businesses. The company recorded a net after-tax loss on disposal of $67.8 million in the first quarter of 1997, which resulted primarily from The St. Paul's agreement to be responsible for certain severance, employee benefits, future lease commitments and other costs relating to Minet. The following summarizes discontinued operations for the second quarter and first half of 1997 and 1996: Three Months Ended, Six Months Ended June 30 June 30 ------------------- ------------------ 1997 1996 1997 1996 ------ ------ ------ ------ (In thousands) Operating loss, before income taxes $ - (4,524) - (17,932) Income tax expense - 718 - 2,900 -------- -------- -------- -------- Operating loss, net of taxes - (5,242) - (20,832) -------- -------- -------- -------- Loss on disposal, before income taxes - - (103,280) - Income tax benefit - - 35,530 - -------- -------- -------- -------- Loss on disposal, net of taxes - - (67,750) - -------- -------- -------- -------- Loss from discontinued operations $ - (5,242) (67,750) (20,832) ======== ======== ======== ======== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations June 30, 1997 Consolidated Results -------------------- The St. Paul's consolidated pretax income from continuing operations of $308 million in the second quarter of 1997 was 78% higher than comparable 1996 income of $173 million. The improvement over 1996 was primarily due to a $121 million increase in realized investment gains in the underwriting segment, largely resulting from sales of venture capital investments and equity securities. Year-to-date pretax earnings of $554 million increased by over $200 million compared with six- month earnings in 1996, driven by the underwriting segment's increase in realized investment gains and investment income. The St. Paul's net income of $355 million for the first six months of 1997 includes an after-tax loss from discontinued operations of $67.8 million relating to the sale of its brokerage operation, Minet. Refer to Note 8 on page 14 of this report for further information regarding The St. Paul's discontinued operations. Consolidated revenues in the second quarter totaled $1.62 billion, an increase of 19% over second quarter 1996 revenues of $1.36 billion. Year-to-date revenues in 1997 were 18% higher than the same period of 1996. Growth in insurance premiums earned, investment income and realized investment gains drove the increased revenue in 1997. The following table summarizes The St. Paul's results. Three Months Six Months Ended June 30 Ended June 30 ------------- ------------- 1997 1996 1997 1996 ----- ----- ----- ----- Pretax income (loss): Underwriting: GAAP underwriting result $(57) (39) (108) (81) Net investment income 217 194 435 383 Realized investment gains 167 46 260 88 Other (17) (32) (36) (48) --- --- --- --- Total underwriting 310 169 551 342 Investment banking- asset management 21 22 44 43 Parent and other (23) (18) (41) (35) --- --- --- --- Income from continuing operations before income taxes 308 173 554 350 Income tax expense 77 38 131 70 --- --- --- --- Income from continuing operations 231 135 423 280 Loss from discontinued operations, net of taxes - (5) (68) (21) --- --- --- --- Net income $231 130 355 259 === === === === Fully diluted net income per common share $2.50 1.42 3.86 2.83 ==== ==== ==== ==== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Underwriting ------------ The following summarizes key financial results by underwriting operation: % of Three Months Six Months 1997 Ended June 30 Ended June 30 Written ------------- ------------- ($ in Millions) Premiums 1997 1996 1997 1996 -------- ----- ----- ----- ----- Specialized Commercial: Written Premiums 28% $327 340 628 604 Underwriting Result ($12) 19 (15) 9 Combined Ratio 103.5 94.1 102.5 99.5 Commercial: Written Premiums 21% $211 155 451 310 Underwriting Result ($12) (2) (28) (11) Combined Ratio 107.4 102.7 110.1 104.4 Personal Insurance: Written Premiums 17% $205 189 380 353 Underwriting Result ($13) (61) (36) (89) Combined Ratio 105.9 134.0 109.3 125.5 Medical Services: Written Premiums 8% $87 98 182 200 Underwriting Result $5 20 8 40 Combined Ratio 104.9 94.2 105.2 94.3 ----- ----- ----- ----- ----- Total St. Paul Fire & Marine: Written Premiums 74% $830 782 1,641 1,467 Underwriting Result ($32) (24) (71) (51) Combined Ratio 105.0 104.5 106.4 105.3 St. Paul International Underwriting: Written Premiums 7% $93 56 146 113 Underwriting Result ($15) (6) (22) (12) Combined Ratio 117.6 112.0 115.7 112.1 ----- ----- ----- ----- ----- Total Worldwide Insurance Operations: Written Premiums 81% $923 838 1,787 1,580 Underwriting Result ($47) (30) (93) (63) Combined Ratio 105.9 105.0 107.1 105.8 St. Paul Re: Written Premiums 19% $ 263 240 429 433 Underwriting Result ($10) (9) (15) (18) Combined Ratio 101.6 102.0 102.6 103.2 ----- ----- ----- ----- ----- Total Underwriting: Written Premiums 100% $1,186 1,078 2,216 2,013 GAAP Underwriting Result ($57) (39) (108) (81) Statutory Combined Ratio: Loss and Loss Expense Ratio 72.6 73.8 73.4 73.6 Underwriting Expense Ratio 32.4 30.5 32.8 31.6 ----- ----- ----- ----- Combined Ratio 105.0 104.3 106.2 105.2 ===== ===== ===== ===== Combined Ratio Incl. Policyholders' Dividends 105.4 104.4 106.6 105.3 ===== ===== ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Written Premiums - ---------------- Second quarter 1997 written premiums of $1.19 billion grew 10% over comparable 1996 premiums of $1.08 billion. The St. Paul's Commercial operation posted a $56 million premium increase over 1996's second quarter, reflecting the impact of The St. Paul's acquisition of Northbrook Holdings, Inc. and its three commercial underwriting companies (Northbrook) in the third quarter of 1996. Personal Insurance premiums of $205 million increased 9% over 1996, due to new business and price increases on policies renewed during the quarter. International premiums of $93 million grew 65% over the same quarter of 1996, primarily the result of an increase in premiums generated by Camperdown (a subsidiary of The St. Paul) through Lloyd's of London. Reinsurance premiums increased 10% in the second quarter of 1997, largely due to several new business initiatives. Medical Services' premiums declined 11%, to $87 million, in the second quarter of 1997, reflecting the impact of pricing actions supporting the company's strategy to sustain market share. Specialized Commercial, experienced a 4% decline in premiums compared with the second quarter of 1996, due to competitive conditions which have impacted pricing in many of the commercial markets served by this operation. For the first half of 1997, consolidated premiums were 10% ahead of 1996, primarily due to the $155 million incremental impact of Northbrook on 1997 volume. Medical Services premiums were down 9% from the first half of 1996. Underwriting Results - -------------------- The second quarter 1997 GAAP underwriting loss was $57 million, compared with 1996's second quarter loss of $39 million. Catastrophe losses in the second quarter of 1997 totaled $61 million, the majority of which resulted from flood-related damage in the Red River Valley, which forms the border between North Dakota and Minnesota. Catastrophe losses in last year's second quarter were $52 million. Key factors in the change in second quarter underwriting results from 1996 were as follows: - Personal Insurance - $48 million better than 1996 - A decline in catastrophe losses accounted for half of the improvement over 1996. The remainder resulted from improved loss experience in Personal's core book of business, as well as a reduction in the rate of expense growth. - Specialized Commercial - $31 million worse than 1996 - A $19 million increase in catastrophes was the primary factor in the deterioration in 1997 results. - Medical Services - $15 million worse than 1996 - The combination of deterioration in loss experience and price declines in a competitive market accounted for the decline in 1997 profitability. - Commercial - $10 million worse than 1996 - An increase in catastrophe losses was the primary factor contributing to the deterioration from 1996. - International - $9 million worse than 1996 - Restructuring of operations in Argentina, difficult market conditions in the United Kingdom and a loss in one of the Lloyd's syndicates in which The St. Paul invested account for the deterioration in 1997 results. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued The year-to-date GAAP underwriting loss of $108 million was $27 million worse than the 1996 six-month loss of $81 million despite a $49 million improvement in catastrophe experience. An increase in losses and declining prices contributed to a $32 million decline in Medical Services profitability in 1997. Specialized Commercial's six-month results were $24 million worse than 1996, and Commercial results deteriorated by $17 million. The negative variances in these three operations more than offset a $53 million improvement in Personal Insurance results in 1997. Investments - ----------- Pretax investment income in the underwriting segment for the second quarter was $217 million, up 12% from $194 million in 1996. Year-to-date investment income increased by $52 million, or 14%, over last year. More than half of the increase in 1997 was attributable to income earned on fixed maturity investments acquired in last year's Northbrook purchase. Investment income growth also resulted from an increase in invested assets over the last twelve months. New money available for fixed maturity investments in the first half of 1997 was predominantly directed toward taxable securities due to The St. Paul's current consolidated tax position. The weighted average pretax yield on the underwriting segment's fixed maturities portfolio was 7.0% at June 30, 1997, down from 7.2% a year ago. Pretax realized investment gains totaled $167 million and $260 million for the second quarter and six months of 1997, respectively. Both amounts were well above comparable 1996 levels. Sales of venture capital and equity security investments in favorable market conditions accounted for virtually all of 1997's gains. The sale of a single venture capital investment generated pretax gains of $129 million in the first half of 1997. Environmental and Asbestos Claims --------------------------------- The St. Paul'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. These operations also receive 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 underwriting operations' 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. In addition, variables, such as the length of time necessary to clean up a polluted site, 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. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued 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 experience, both of which are still developing. In 1995, The St. Paul's underwriting operations 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, 1997, and the years ended Dec. 31, 1996 and 1995. Amounts in the "net" column are reduced by reinsurance recoverables. Environmental - ------------- 1997 (six months) 1996 1995 ------------ ------------ ------------ (in millions) Gross Net Gross Net Gross Net ----- --- ---- --- ----- --- Beginning reserves $581 368 528 319 275 200 Reserves acquired - - 18 7 - - Incurred losses 9 6 67 72 59 68 Reserve reallocation - - - - 233 79 Paid losses (22) (13) (32) (30) (39) (28) ---- --- --- --- --- --- Ending reserves $568 361 581 368 528 319 ==== === === === === === Many significant environmental claims currently being brought against insurance companies arise out of contamination that occurred 20 to 30 years ago. Since 1970, the underwriting operations' 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, 1997, and the years ended Dec. 31, 1996 and 1995: Asbestos 1997 - -------- (six months) 1996 1995 ----------- ------------ ------------ (in millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Beginning reserves $278 169 283 158 185 145 Reserves acquired - - 6 6 - - Incurred losses 19 (2) 12 18 (13) (9) Reserve reallocation - - - - 127 34 Paid losses (13) (7) (23) (13) (16) (12) ---- --- --- --- --- --- Ending reserves $284 160 278 169 283 158 ==== === === === === === 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 underwriting operations' Commercial General Liability policy has included the industry standard absolute pollution exclusion, which the company believes applies to asbestos claims. Based on all information currently available, The St. Paul's reserves for environmental and asbestos losses represent its best estimate of its ultimate liability for such losses. Because of the difficulty inherent in estimating such losses, however, the company cannot give assurances that its ultimate liability for environmental and asbestos losses will, in fact, match current reserves. The company continues to evaluate new information and developing loss patterns, but it believes any future additional loss provisions for environmental and asbestos claims will not materially impact the results of operations, liquidity or financial position. Total gross environmental and asbestos reserves at June 30, 1997, of $852 million represented approximately 7% of gross consolidated reserves of $11.74 billion. Investment Banking-Asset Management ----------------------------------- The company's portion of second quarter pretax earnings of The John Nuveen Company (Nuveen) was $21 million, compared with $22 million in 1996. For the first half of 1997, the company's portion was $44 million, compared with $43 million in 1996. The company currently holds a 77% interest in Nuveen. Asset management fees of $51 million for the second quarter were 12% higher than those in the same period of 1996. Assets under management totaled $37.6 billion at June 30, up over $4 billion from year-end 1996. The increases in managed assets and related fee revenues reflect Nuveen's January 1997 acquisition of Flagship Resources, Inc., a tax-exempt mutual fund and money management firm. The total cost of that acquisition was $63 million (substantially all of which represented goodwill), plus as much as an additional $20 million, contingent upon meeting future growth targets. Nuveen partially funded the purchase by the issuance of $45 million of preferred stock. Nuveen's Unit Investment Trust sales in the first six months of 1997 were 10% below the same period of 1996, reflecting a decline in investor interest in municipal security investments in the current favorable equity market conditions. In July, Nuveen announced an agreement to acquire Rittenhouse Financial Services, Inc., which manages approximately $9 billion of individual equity and balanced accounts for affluent investors. The purchase is expected to be completed by September 1997 for a total cash consideration of approximately $145 million. Capital Resources ----------------- The St. Paul's total capitalization (debt and equity) stood at just under $5 billion at the end of the second quarter. Six- month net income of $355 million pushed common shareholders' equity to a record high of $4.19 billion at the end of June, an increase of over $200 million from year-end 1996. A bond market rally added almost $100 million to the after-tax unrealized appreciation of the company's fixed maturities portfolio in the second quarter, but that appreciation was still $41 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued million lower than year-end 1996. The after-tax unrealized appreciation on The St. Paul's equity and venture capital portfolios declined $64 million in the first half of 1997, reflecting sales of investments that generated substantial realized gains in that six-month period. The St. Paul repurchased and retired less than 10,000 shares of its common stock in the first half of 1997. The company intends to continue its repurchase program when such purchases are deemed an appropriate use of capital. Total debt outstanding at the end of the quarter was $706 million, up slightly from $689 million at the end of 1996. In June 1997, the maturity of The St. Paul's $100 million, 9-3/8% Notes was funded through the issuance of medium-term notes and commercial paper, both of which bear lower interest rates than the matured notes. The company has issued $81.5 million of medium-term notes in the first half of 1997. The $512 million of such notes outstanding at June 30, 1997, bear a weighted average interest rate of 7.1% and account for nearly 75% of The St. Paul's total debt outstanding. Debt as a percentage of total capitalization at June 30, 1997, was 14%, unchanged from year-end 1996. The company anticipates that any major capital expenditures during the second half of 1997 would involve acquisitions of existing businesses or common stock repurchases; there are no major capital improvements planned for the remainder of the year. The company's ratio of earnings to fixed charges was 15.80 for the first six months of 1997, compared with 11.42 for the same period of 1996. The company's ratio of earnings to combined fixed charges and preferred stock dividends was 11.27 for the first six months of 1997, compared with 7.87 for the same period of 1996. Fixed charges consist of interest expense before reduction for capitalized interest and one-third of rental expense, which is considered to be representative of an interest factor. Liquidity --------- Liquidity refers to the company's ability to generate sufficient funds to meet the cash requirements of its business operations. Net cash provided by operations was $182 million in the first half of 1997, compared with $355 million in 1996. Although The St. Paul's operational cash flows have declined in 1997, the company's overall liquidity position remains strong due to funds provided from substantial realized investment gains in the underwriting segment. Impact of Accounting Pronouncement to be Adopted in the Future - -------------------------------------------------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which revises the calculation and presentation provisions of Accounting Principles Board Opinion No. 15 and its related interpretations. SFAS No. 128 is effective for fiscal years and interim periods ending after December 15, 1997. It replaces the presentation of primary earnings per share with "basic earnings per share," and fully diluted earnings per share with "diluted earnings per share." If the provisions of SFAS No. 128 had been applied for the six months ended June 30, 1997 and 1996, basic earnings per share would have been $5.01 and $3.29, respectively, for income from continuing operations, and $4.20 and $3.04, respectively, for net income. Diluted earnings per share would have been the same as fully diluted earnings per share for both periods. PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements is incorporated herein by reference. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. An Exhibit Index is set forth as the last page in this document. (b) Reports on Form 8-K. 1) The St. Paul filed a Form 8-K Current Report dated April 28, 1997, announcing its financial results for the quarter ended March 31, 1997, and the anticipated impact of flooding in the Red River Valley on its second quarter 1997 financial results. 2) The St. Paul filed a Form 8-K Current Report dated July 28, 1997, announcing its financial results for the quarter ended June 30, 1997. 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 14, 1997 By /s/ Bruce A. Backberg --------------------- Bruce A. Backberg Vice President and Corporate Secretary (Authorized Signatory) Date: August 14, 1997 By /s/ Howard E. Dalton -------------------- Howard E. Dalton Senior Vice President Chief Accounting Officer EXHIBIT INDEX ------------------ Method of Exhibit Filing - ------- ----------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession*................................ (3) Articles of incorporation and by-laws*....................... (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 ------------------ ---------------- 1997 1996 1997 1996 ---- ---- ---- ---- EARNINGS: Primary: Net income, as reported $230,524 130,053 355,073 258,874 PSOP preferred dividends declared (net of taxes) (2,168) (2,159) (4,353) (4,324) Premium on preferred shares redeemed (651) (232) (911) (440) -------- -------- -------- -------- Net income, as adjusted $227,705 127,662 349,809 254,110 ======== ======== ======== ======== Fully diluted: Net income, as reported $230,524 130,053 355,073 258,874 Dividends on monthly income preferred securities (net of taxes) 2,019 2,019 4,037 4,037 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (666) (755) (1,336) (1,513) Premium on preferred shares redeemed (651) (232) (911) (440) -------- -------- -------- -------- Net income, as adjusted $231,226 131,085 356,863 260,958 ======== ======== ======== ======== SHARES: Primary: Weighted average number of common shares outstanding, per consolidated financial statements 83,607 83,522 83,489 83,749 Additional dilutive effect of assumed exercise of outstanding stock options (based on treasury stock method using average market price) 1,242 988 1,190 1,089 ------- ------- ------- ------- Weighted average, as adjusted 84,849 84,510 84,679 84,838 ======= ======= ======= ======= Fully diluted: Weighted average number of common shares outstanding, per consolidated financial statements 83,607 83,522 83,489 83,749 Additional dilutive effect of: Assumed conversion of PSOP preferred stock 3,915 3,977 3,924 3,984 Assumed conversion of monthly income preferred securities 3,509 3,509 3,509 3,509 Assumed exercise of outstanding stock options (based on treasury stock method using market price at end of period) 1,394 1,003 1,423 1,016 ------- ------- ------- ------- Weighted average, as adjusted 92,425 92,011 92,345 92,258 ======= ======= ======= ======= EARNINGS PER COMMON SHARE: Primary $2.68 1.51 4.13 3.00 Fully diluted $2.50 1.42 3.86 2.83 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 ----------------- ----------------- 1997 1996 1997 1996 ----- ----- ----- ----- EARNINGS: Income from continuing operations before income taxes $308,377 172,975 553,587 350,463 Add: fixed charges 18,360 17,051 37,397 33,636 ------- ------- ------- ------- Income, as adjusted $326,737 190,026 590,984 384,099 ======= ======= ======= ======= FIXED CHARGES: Interest costs $13,925 12,724 26,826 25,148 Rental expense (1) 4,435 4,327 10,571 8,488 ------- ------- ------- ------- Total fixed charges $18,360 17,051 37,397 33,636 ======= ======= ======= ======= FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Fixed charges $18,360 17,051 37,397 33,636 PSOP preferred stock dividends 4,391 4,474 8,815 8,963 Dividends on monthly income preferred securities 3,105 3,105 6,210 6,210 ------- ------- ------- ------- Total fixed charges and preferred stock dividends $25,856 24,630 52,422 48,809 ======= ======= ======= ======= Ratio of earnings to fixed charges 17.80 11.14 15.80 11.42 ======= ======= ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends 12.64 7.72 11.27 7.87 ======= ======= ======= ======= (1) Interest portion deemed implicit in total rent expense. EX-27 4
7 1,000 6-MOS 6-MOS 6-MOS DEC-31-1997 DEC-31-1996 DEC-31-1995 JUN-30-1997 JUN-30-1996 JUN-30-1995 11,935,094 10,257,774 9,621,174 0 0 0 0 0 0 986,124 802,117 662,461 0 0 0 731,876 611,614 617,867 14,584,109 12,736,605 11,879,788 54,423 21,874 24,029 67,579 70,301 138,733 398,898 371,383 337,825 20,925,916 18,503,607 17,316,634 11,743,413 10,354,052 9,693,382 2,418,414 2,242,500 2,169,679 0 0 0 0 0 0 705,740 688,663 580,140 207,000 207,000 207,000 17,998 12,813 7,656 496,905 464,844 454,406 3,692,495 3,220,296 2,845,916 20,925,916 18,503,607 17,316,634 2,336,750 2,085,960 1,937,897 436,232 389,180 361,848 263,506 95,425 12,324 141,426 123,800 124,869 1,714,363 1,534,261 1,403,829 527,474 462,279 426,922 382,490 347,362 296,463 553,587 350,463 309,724 130,764 70,757 63,999 422,823 279,706 245,725 (67,750) (20,832) (22,162) 0 0 0 0 0 0 355,073 258,874 223,563 4.13 3.00 2.57 3.86 2.83 2.47 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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