-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, dVDq343fgueA9Njyp1/+SEGTdoZmOint7V9RoWB3+opcI0ivg+lrOBnbrtWqZLr7 QPc5ifHq+ZWVf0LmZAXJmg== 0000086312-94-000014.txt : 19940815 0000086312-94-000014.hdr.sgml : 19940815 ACCESSION NUMBER: 0000086312-94-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST PAUL COMPANIES INC /MN/ CENTRAL INDEX KEY: 0000086312 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 410518860 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10898 FILM NUMBER: 94543304 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, 1994 ------------------------------------------ or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ---- EXCHANGE ACT OF 1934 For the transition period from to ---------------------- ------------------ Commission File Number 0-3021 ------ THE ST. PAUL COMPANIES, INC. - ----------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 --------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 385 Washington St., Saint Paul, MN 55102 - ---------------------------------- --------------------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (612) 221-7911 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of the Registrant's Common Stock, without par value, outstanding at August 9, 1994, was 84,022,787. 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, 1994 and 1993 3 Consolidated Balance Sheets, June 30, 1994 (Unaudited) and December 31, 1993 4 Consolidated Statements of Common Shareholders' Equity, Six Months Ended June 30, 1994 (unaudited) and Twelve Months Ended December 31, 1993 6 Consolidated Statements of Cash Flows (Unaudited), Six Months Ended June 30, 1994 and 1993 7 Notes to Consolidated Financial Statements (Unaudited) 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 PART II. OTHER INFORMATION Item 1 through Item 6 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 ------------------ ------------------ 1994 1993 1994 1993 ---- ---- ---- ---- Revenues: Premiums earned $845,957 746,853 1,691,359 1,547,790 Net investment income 167,250 166,833 335,658 332,445 Insurance brokerage fees and commissions 74,298 67,390 140,748 129,968 Investment banking-asset management 53,201 61,292 106,799 121,367 Realized investment gains 14,897 22,487 36,680 33,845 Other 9,546 4,483 17,680 17,951 --------- --------- --------- --------- Total revenues 1,165,149 1,069,338 2,328,924 2,183,366 --------- --------- --------- --------- Expenses: Insurance losses and loss adjustment expenses 591,946 527,143 1,259,634 1,146,633 Policy acquisition expenses 193,468 193,655 384,819 378,645 Operating and administrative 220,541 209,139 443,274 408,845 --------- --------- --------- --------- Total expenses 1,005,955 929,937 2,087,727 1,934,123 --------- --------- --------- --------- Income before income taxes 159,194 139,401 241,197 249,243 Income tax expense (benefit): Federal current 42,152 38,866 62,850 67,055 Other (10,720) (7,962) (13,852) (14,340) --------- --------- --------- --------- Total income tax expense 31,432 30,904 48,998 52,715 --------- --------- --------- --------- Net income $127,762 108,497 192,199 196,528 ========= ========= ========= ========= Net income per common share: Primary $1.49 1.25 2.22 2.26 ========= ========= ========= ========= Fully diluted $1.43 1.21 2.14 2.18 ========= ========= ========= ========= Dividends declared on common stock $0.375 0.35 0.75 0.70 ========= ========= ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) June 30, December 31, ASSETS 1994 1993 - ------ ---------- ---------- (Unaudited) Investments: Fixed maturities, at estimated market value $8,758,639 9,147,964 Equities, at estimated market value 504,058 548,682 Real estate, at cost less accumulated depreciation of $54,338 (1993; $48,847) 526,356 488,691 Venture capital, at estimated market value 303,693 297,982 Other investments 49,661 47,834 Short-term investments, at cost 845,320 725,261 ---------- ---------- Total investments 10,987,727 11,256,414 Cash 38,344 25,420 Investment banking inventory securities 79,568 305,804 Reinsurance recoverables: Unpaid losses 1,520,911 1,545,026 Paid losses 81,899 94,437 Receivables: Underwriting premiums 1,066,905 1,008,034 Insurance brokerage activities 825,224 805,209 Interest and dividends 178,614 174,852 Other 125,856 105,513 Deferred policy acquisition expenses 294,674 294,860 Ceded unearned premiums 248,278 238,633 Deferred income taxes 686,145 425,012 Office properties and equipment, at cost less accumulated depreciation of $240,472 (1993; $215,389) 458,818 455,861 Goodwill 274,346 284,276 Other assets 94,820 129,845 ---------- ---------- Total assets $16,962,129 17,149,196 ========== ========== 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 1994 1993 - ------------------------------------ ------------ ----------- (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $9,322,685 9,185,191 Unearned premiums 1,920,888 1,875,635 ---------- ---------- Total insurance reserves 11,243,573 11,060,826 Debt 590,398 639,729 Payables: Insurance brokerage activities 1,119,848 1,083,845 Income taxes 162,859 162,645 Reinsurance premiums 150,281 138,150 Accrued expenses and other 563,501 593,205 Other liabilities 453,716 466,989 ---------- ---------- Total liabilities 14,284,176 14,145,389 ---------- ---------- Series B convertible preferred stock; 1,450 shares authorized; 1,018 shares outstanding (1,023 shares in 1993) 146,895 147,608 Guaranteed obligation - PSOP (146,601) (148,929) ---------- ---------- Net convertible preferred stock 294 (1,321) ---------- ---------- Common Shareholders' Equity: Common stock, 240,000 shares authorized; 83,993 shares outstanding (84,715 shares in 1993) 438,648 438,559 Retained earnings 2,179,078 2,082,832 Guaranteed obligation - ESOP (49,965) (56,005) Unrealized appreciation of investments 163,892 588,844 Unrealized loss on foreign currency translation (53,994) (49,102) ---------- ---------- Total common shareholders' equity 2,677,659 3,005,128 ---------- ---------- Total liabilities, preferred stock and common shareholders' equity $16,962,129 17,149,196 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Common Shareholders' Equity (In thousands) Six Twelve Months Ended Months Ended June 30 December 31 ------------ ----------- 1994 1993 ---- ---- (Unaudited) Common stock: Beginning of period $438,559 422,249 Stock issued under stock option and other incentive plans 4,484 16,334 Reacquired common shares (4,395) (24) --------- --------- End of period 438,648 438,559 --------- --------- Retained earnings: Beginning of period 2,082,832 1,781,113 Net income 192,199 427,609 Dividends declared on common stock (62,414) (116,962) Dividends declared on preferred stock, net of taxes (4,214) (8,395) Reacquired common shares (29,325) (533) --------- --------- End of period 2,179,078 2,082,832 --------- --------- Guaranteed obligation - ESOP: Beginning of period (56,005) (67,452) Principal payments 6,040 11,447 --------- --------- End of period (49,965) (56,005) --------- --------- Unrealized appreciation of investments, net of taxes: Beginning of period 588,844 63,669 Change during the period (424,952) 23,193 Change due to adoption of SFAS No. 115 - 501,982 --------- --------- End of period 163,892 588,844 --------- --------- Unrealized gain (loss) on foreign currency translation, net of taxes: Beginning of period (49,102) 2,920 Change during the period (4,892) (52,022) --------- --------- End of period (53,994) (49,102) --------- --------- Total common shareholders' equity $2,677,659 3,005,128 ========= ========= 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 ----------------------- 1994 1993 ------ ------ OPERATING ACTIVITIES Underwriting: Net income $201,956 204,362 Adjustments: Change in net insurance reserves 202,539 166,203 Change in underwriting premiums receivable (56,662) 73,883 Provision for deferred taxes (19,038) (16,315) Realized gains (33,661) (28,785) Other 62,198 (68,086) --------- --------- Total underwriting 357,332 331,262 --------- --------- Insurance brokerage: Net loss (19,478) (21,075) Adjustments: Change in premium balances 15,353 (57,947) Change in accounts payable and accrued expenses (18,693) (33,537) Depreciation and goodwill amortization 9,396 9,560 Other (6,650) (20,164) --------- --------- Total insurance brokerage (20,072) (123,163) --------- --------- Investment banking-asset management: Net income 21,832 26,264 Adjustments: Change in inventory securities 226,236 43,626 Change in open security transactions 6,040 16,315 Change in short-term borrowings (80,383) (20,000) Other 35,164 25,061 --------- --------- Total investment banking-asset management 208,889 91,266 --------- --------- Parent company and consolidating eliminations: Net loss (12,111) (13,023) Realized gains (3,019) (5,060) Adjustments (5,612) 16,080 --------- --------- Total parent company and consol. eliminations (20,742) (2,003) --------- --------- Net cash provided by operating activities 525,407 297,362 --------- --------- INVESTING ACTIVITIES Purchases of investments (1,097,732) (1,025,967) Sales and maturities of investments 826,723 782,992 Change in short-term investments (120,560) (29,063) Change in open security transactions (53,593) 11,558 Net purchases of office properties and equipment (18,101) (24,274) Other 15,721 (19,068) --------- --------- Net cash used in investing activities (447,542) (303,822) --------- --------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (67,105) (64,102) Proceeds from issuance of debt 57,151 62,737 Reacquired common shares (33,570) (207) Repayment of debt (20,350) (23,106) Other (787) 24,181 --------- --------- Net cash used in financing activities (64,661) (497) --------- --------- Effect of exchange rate changes on cash (280) (920) --------- --------- Increase (decrease) in cash 12,924 (7,877) Cash at beginning of period 25,420 26,648 --------- --------- Cash at end of period $38,344 18,771 ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited June 30, 1994 Note 1 Basis of Presentation - ----------------------------- The consolidated financial statements include The St. Paul Companies, Inc. and subsidiaries, and have been prepared in conformity with generally accepted accounting principles. These financial statements rely, in part, on estimates. In the opinion of management, all necessary adjustments have been reflected for a fair presentation of the results of operations, financial position and cash flows in the accompanying unaudited consolidated financial statements. The results for the period are not necessarily indicative of the results to be expected for the entire year. Reference should be made to the "Notes to Consolidated Financial Statements" on pages 49 to 63 of the Registrant's annual report to shareholders for the year ended December 31, 1993. The amounts in those notes have not changed except as a result of transactions in the ordinary course of business or as otherwise disclosed in these notes. Some figures in the 1993 consolidated financial statements have been reclassified to conform with the 1994 presentation. These reclassifications had no effect on net income or common shareholders' equity, as previously reported. All references in the consolidated financial statements and related footnotes to per share amounts and to the number of shares of common stock for both 1994 and 1993 reflect the effect of the 2-for-1 stock split which occurred on June 6, 1994 (see Note 9). THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 2 Earnings Per Share - -------------------------- Earnings per common share (EPS) amounts were calculated by dividing net income, as adjusted, by the adjusted average common shares outstanding. The common shares outstanding were adjusted for the 2-for-1 stock split (see Note 9). Three Months Ended Six Months Ended June 30 June 30 --------------------- -------------------- 1994 1993 1994 1993 ------ ------ ------ ------ (In thousands) PRIMARY Net income, as reported $127,762 108,497 192,199 196,528 Preferred dividends declared (net of taxes) (2,105) (2,094) (4,214) (4,196) ------- ------- ------- ------- Net income, as adjusted $125,657 106,403 187,985 192,332 ======= ======= ======= ======= FULLY DILUTED Net income, as reported $127,762 108,497 192,199 196,528 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (947) (1,036) (1,897) (2,074) ------- ------- ------- ------- Net income, as adjusted $126,815 107,461 190,302 194,454 ======= ======= ======= ======= AVERAGE SHARES OUTSTANDING Primary 84,561 85,025 84,788 84,954 ======= ======= ======= ======= Fully diluted 88,678 89,106 88,935 89,067 ======= ======= ======= ======= Average shares outstanding include the common and common equivalent shares outstanding for the period and, for fully diluted EPS, common shares that would be issuable upon conversion of preferred stock. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 3 Investments - ------------------- Investment Activity. A summary of investment transactions is presented below. Six Months Ended June 30 ------------------------------ 1994 1993 ------ ------ Purchases: (In thousands) Fixed maturities $660,534 760,478 Equities 344,006 201,248 Real estate 48,094 18,163 Venture capital 36,964 45,322 Other investments 8,134 756 --------- --------- Total purchases 1,097,732 1,025,967 --------- --------- Proceeds from sales and maturities: Fixed maturities: Sales 140,896 121,694 Maturities and redemptions 305,213 431,539 Equities 357,026 198,665 Venture capital 11,987 26,527 Other investments 11,601 4,567 --------- --------- Total sales and maturities 826,723 782,992 --------- --------- Net purchases $271,009 242,975 ========= ========= 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, 1994 December 31, 1993 ------------------ ------------------- (In thousands) Fixed maturities $(601,717) 771,598 Equities (46,757) (23,993) Venture capital (7,821) 52,550 -------- ------- Total change in pretax unrealized appreciation (656,295) 800,155 Increase (decrease) in deferred tax asset due to change in unrealized appreciation 231,343 (274,980) -------- -------- Total change in unrealized appreciation, net of taxes $(424,952) 525,175 ======== ======== Prior to the company's adoption of SFAS No. 115 on Dec. 31, 1993, the company did not record unrealized appreciation or depreciation of fixed maturities on the balance sheet. Consequently, the unrealized appreciation of fixed maturities in the twelve-month column above represents the cumulative unrealized appreciation recorded upon the company's adoption of SFAS No. 115. The actual increase in pretax unrealized appreciation of fixed maturities for the twelve months ended Dec. 31, 1993 was $257.8 million. Restricted Funds. Premiums collected by the brokerage operations from insureds, but not yet remitted to insurance carriers, are restricted as to use by business practices. These restricted funds are included in short-term investments and totaled $374 million at June 30, 1994, and $393 million at December 31, 1993. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 4 Income Taxes - -------------------- The components of the income tax provision are as follows: Three Months Ended Six Months Ended June 30 June 30 ------------------------------------- 1994 1993 1994 1993 ------ ------ ------ ------ (In thousands) Federal current tax expense $42,152 38,866 62,850 67,055 Federal deferred tax benefit (15,559) (12,141) (21,628)(23,304) ------ ------ ------ ------- Total federal income tax expense 26,593 26,725 41,222 43,751 Foreign income taxes 3,664 2,549 5,461 5,634 State income taxes 1,175 1,630 2,315 3,330 ------ ------ ------ ------- Total income tax expense $31,432 30,904 48,998 52,715 ====== ====== ====== ======= Note 5 Contingent Liabilities - ------------------------------ In the ordinary course of conducting business, some of the company's subsidiaries have been named as defendants in various lawsuits. Some of these lawsuits attempt to establish liability under insurance contracts issued by those companies. Plaintiffs in these lawsuits are asking for money damages or to have the court direct the activities of our operations in certain ways. In some cases, plaintiffs seek to establish coverage for their liability under environmental protection laws. 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. 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, 1994 1993 ---------------- ------------------- Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- (In thousands) Commercial paper $244,335 244,335 201,384 201,384 Medium-term notes 204,431 195,400 210,780 221,100 9 3/8% notes 99,965 106,500 99,959 113,400 Guaranteed ESOP debt 41,667 44,000 47,223 52,200 Short-term borrowings - - 80,383 80,383 ------- ------- ------- ------- Total debt $590,398 590,235 639,729 668,467 ======= ======= ======= ======= The medium-term notes mature on various dates beginning in 1998 and continuing through 2004. The 9 3/8% notes mature in June 1997. The guaranteed ESOP debt is due in March 1998. Note 7 Reinsurance - ------------------- The company's consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the company's acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks the company has underwritten to other insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to protect the company from potential losses in excess of the amount it is prepared to accept. The company expects those with whom it has ceded reinsurance to honor their obligations. In the event these companies are unable to honor their obligations in full, the company will pay the shortfall. The company has established allowances for possible nonpayment of amounts due to it from these companies. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses and loss adjustment expenses is as follows: Three Months Ended Six Months Ended June 30 June 30 -------------------- --------------------- 1994 1993 1994 1993 ---- ---- ---- ---- (In thousands) Premiums written: Direct $806,107 689,773 1,570,700 1,372,590 Assumed 274,852 184,749 437,476 369,035 Ceded (159,840) (114,925) (282,486) (220,876) ------- ------- --------- --------- Net premiums written $921,119 759,597 1,725,690 1,520,749 ======= ======= ========= ========= Premiums earned: Direct $802,802 710,163 1,595,417 1,439,914 Assumed 198,180 161,817 365,387 341,904 Ceded (155,025) (125,127) (269,445) (234,028) ------- ------- --------- --------- Net premiums earned $845,957 746,853 1,691,359 1,547,790 ======= ======= ========= ========= Insurance losses and loss adjustment expenses: Direct $508,124 430,491 1,051,336 922,579 Assumed 183,366 135,727 359,533 343,275 Ceded (99,544) (39,075) (151,235) (119,221) ------- ------- --------- --------- Net insurance losses and loss adjustment expenses $591,946 527,143 1,259,634 1,146,633 ======= ======= ========= ========= Note 8 New Accounting Standard - ------------------------------- Effective January 1, 1994, the company adopted Statement of Financial Accounting Standards (SFAS) No. 112, "Employers Accounting for Postemployment Benefits." The company now recognizes the obligation for postemployment benefits on the accrual basis. The company's previous practice was to record workers' compensation benefits on the accrual basis and record all other postemployment benefits on the cash basis. The cumulative effect of adopting SFAS No. 112 was $4.0 million, which was recorded as an operating expense in the first quarter of 1994. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 9 Shareholders' Equity - ---------------------------- The company's Restated Articles of Incorporation were amended by vote of the shareholders at the 1994 Annual Meeting of Shareholders to increase the authorized common shares of the company from 120 million to 240 million. Subsequent to this action, the Board of Directors approved a 2-for-1 stock split, which resulted in the issuance of one additional share of common stock for each outstanding share to shareholders of record on May 17, 1994. The additional shares were issued on June 6, 1994. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations June 30, 1994 Consolidated Results - -------------------- Second quarter consolidated pretax earnings of $159 million were 14% higher than earnings of $139 million in the second quarter of 1993. Improved results in the Underwriting segment, driven by a decline in the GAAP underwriting loss, accounted for the growth in earnings over 1993. Insurance brokerage results in the second quarter improved $4 million over 1993; however, investment banking-asset management earnings were $3 million below 1993. Year-to-date pretax income in 1994 of $241 million was down slightly from comparable 1993 income of $249 million. Second quarter net income was $128 million, or $1.43 per share, compared with net income of $108 million, or $1.21 per share, in the second quarter of 1993. Net income of $192 million, or $2.14 per share, for the first half of 1994 was slightly below 1993 net income of $197 million, or $2.18 per share. All per share figures reflect the 2-for-1 stock split that occurred in June 1994. Results by Segment - ------------------ Pretax results by industry segment were as follows (in millions): Three Months Ended Six Months Ended June 30 June 30 ------------------ ----------------- 1994 1993 1994 1993 Pretax income (loss): ---- ---- ---- ---- Underwriting: GAAP underwriting result $(14) (42) (97) (102) Net investment income 164 163 329 325 Realized investment gains 14 20 34 29 Other (4) (2) (17) (3) --- --- --- --- Total underwriting 160 139 249 249 Insurance brokerage (5) (9) (14) (17) Investment banking-asset management 18 21 35 41 Parent and other (14) (12) (29) (24) --- --- --- --- Income before income taxes $159 139 241 249 === === === === THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Underwriting - ------------ The Underwriting segment's second quarter pretax earnings of $160 million improved 15% over pretax earnings of $139 million in the comparable period of 1993. Improved underwriting results in the International, Specialized Commercial and Reinsurance lines of business were the primary factors in the improvement over 1993. The following summarizes key financial results by underwriting operation: Three Months Six Months % of 1994 Ended June 30 Ended June 30 Written --------------- --------------- ($ in Millions) Premiums 1994 1993 1994 1993 - --------------- -------- ---- ---- ---- ---- Specialized Commercial: Written Premiums 31% $278 263 541 526 Underwriting Result $(22) (29) (56) (59) Combined Ratio 106.6 107.3 108.5 110.3 St. Paul Personal & Business Insurance: Written Premiums 21% $195 97 367 180 Underwriting Result $(6) (7) (28) (28) Combined Ratio 102.7 105.3 107.6 115.5 Medical Services: Written Premiums 17% $130 143 295 328 Underwriting Result $37 39 71 82 Combined Ratio 78.3 78.5 79.3 77.1 Reinsurance: Written Premiums 16% $196 123 277 203 Underwriting Result $(3) (9) (32) (32) Combined Ratio 97.7 105.0 113.0 115.5 St. Paul Commercial: Written Premiums 11% $93 87 187 198 Underwriting Result $(15) (14) (38) (30) Combined Ratio 115.5 115.9 120.0 114.9 International: Written Premiums 4% $29 47 59 86 Underwriting Result $(5) (22) (14) (35) Combined Ratio 121.1 142.9 125.4 140.2 ---- ----- ----- ----- ----- Total: Written Premiums 100% $921 760 1,726 1,521 GAAP Underwriting Result $(14) (42) (97) (102) Statutory Combined Ratio: Loss and Loss Expense Ratio 70.0 70.6 74.5 74.1 Underwriting Expense Ratio 30.2 33.1 30.7 32.3 ----- ----- ----- ----- Combined Ratio 100.2 103.7 105.2 106.4 ===== ===== ===== ===== Combined Ratio Including Policyholders' Dividends 100.3 104.1 105.2 106.6 ===== ===== ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued The preceding table represents the company's revised reporting format effective as of June 1994. Specialized Commercial includes the following lines of business: Construction, Technology, National Accounts, Surety, Financial Services, Professional Liability, Surplus Lines, Ocean Marine and Public Sector. St. Paul Personal & Business Insurance markets personal insurance products and also serves small commercial accounts. St. Paul Commercial serves midsize commercial customers. The company's Reinsurance and International underwriting operations were largely unaffected by this change in reporting format. Written premiums in the second quarter totaled $921 million, 21% higher than comparable 1993 premiums of $760 million. St. Paul Personal & Business Insurance premium volume was double the comparable 1993 total, due to $102 million of premiums produced by Economy Fire & Casualty Company, which the company acquired in September 1993. Excluding the impact of Economy, consolidated written premiums increased 8% over the second quarter of 1993. Reinsurance written premiums grew 60% over 1993's second quarter primarily as a result of rate increases and a higher level of retentions on existing reinsurance contracts. International volume declined 38% from 1993 due to reduced personal insurance business in the United Kingdom. Year-to-date written premiums in 1994 increased 13% over the first half of 1993, again due to premium growth in St. Paul Personal & Business Insurance and Reinsurance. The second quarter GAAP underwriting loss was $14 million, compared with 1993's second quarter loss of $42 million. Key factors in the improvement in underwriting results over the second quarter of 1993 were as follows: - International - $17 million better than 1993 - Improved loss experience on personal and commercial business written in the United Kingdom drove the improvement over 1993. - Specialized Commercial - $7 million better than 1993 - A reduction in current year loss experience in the National Accounts line was the primary contributor to improved results in 1994. - Reinsurance - $6 million better than 1993 - Improved loss experience on non-U.S. business was the primary factor in the improvement in underwriting results. The six-month GAAP underwriting loss of $97 million improved slightly over the 1993 loss of $102 million. Catastrophe losses in 1994 of $88 million were $40 million higher than 1993 losses of $48 million (primarily due to the Los Angeles earthquake and winter storms, which both occurred THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued in the first quarter). However, a $21 million improvement in year-to-date International results and improvements in non-catastrophe loss experience in several lines served to offset the increase in catastrophe losses. The Underwriting segment's pretax investment income for the second quarter of $164 million was level with 1993, and year- to-date investment income was up slightly from 1993. Underwriting and investment cash flows continue to fuel steady growth in this segment's investment portfolio, but declining fixed maturity yields over the last several years have resulted in stagnant investment income levels. The weighted average pretax yield on the Underwriting investment portfolio at June 30, 1994 was 7.3%, down from 7.8% at the same time in 1993. Fixed maturities purchased in the first six months of 1994 were almost exclusively taxable securities, in consideration of the company's consolidated tax position. Taxable securities comprised 46% of the total Underwriting investment portfolio at quarter-end, compared with 42% a year ago. The company uses derivative instruments on a limited basis for the purpose of hedging. The company does not speculate in derivative instruments. Insurance Brokerage - ------------------- The Insurance Brokerage segment's second quarter 1994 pretax loss of $5 million was $4 million less than the comparable 1993 loss of $9 million. Total revenues in this segment increased 13% over 1993's second quarter, due to new business initiatives and the acquisition of new brokerage operations. The year-to-date pretax loss was $14 million, compared with a loss of $17 million in the first half of 1993. Investment Banking-Asset Management - ----------------------------------- The John Nuveen Company (Nuveen) posted second quarter pretax earnings of $24 million, down from comparable 1993 earnings of $28 million. The company's portion of Nuveen's second quarter earnings was $18 million, compared with $21 million in 1993. Year-to-date, the company's portion was $35 million, compared with $41 million in 1993. The company holds a 76% majority interest in Nuveen. Nuveen's distribution and underwriting revenues were down from the second quarter of 1993 as net sales of tax-free mutual funds declined and no new exchange-traded funds were offered. Municipal new issue volume also was down in 1994, negatively impacting Nuveen's investment banking revenues. Although investment advisory fees earned on assets under Nuveen's management increased six percent over the second quarter of 1993, assets under management of $30.8 billion at June 30, 1994 declined $1.9 billion from year-end 1993 as rising interest rates during 1994 drove down the value of managed fund assets. Unit Investment Trust sales in the second quarter were lower than the comparable period of 1993. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Nuveen expects the higher interest rate environment to have a positive long-term impact on earnings as the higher tax- free yields become attractive to investors. UIT sales in the second quarter, although lower than the comparable period of 1993, were 22% higher than sales in this year's first quarter. Environmental Claims - -------------------- The company's underwriting operations continue to receive claims under policies written many years ago alleging injuries from hazardous waste substances or alleging covered property damages for the cost to clean up hazardous waste sites. Significant legal issues, primarily pertaining to issues of coverage, exist with regard to the alleged liability of the company's underwriting operations for these claims. In the company's opinion, court decisions in certain jurisdictions have tended to expand insurance coverage beyond the intent of the original policies. The company's ultimate liability for pollution claims is extremely difficult to estimate. Insured parties have submitted claims for losses not covered in the insurance policy, and the ultimate resolution of these claims may be subject to lengthy litigation, during which time it is difficult to estimate the company's potential liability. In addition, variables, such as the length of time necessary to clean up a polluted site, and controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of a pollution claim. The company maintains a claim staff that continually evaluates its exposure to pollution liability losses. At June 30, 1994, the company's total reserves for pollution-related losses were approximately $75 million. Despite these difficulties in estimating potential liability, the company believes that its reserves for such losses are adequate. Many significant pollution claims currently being brought against insurance companies arise out of contamination that occurred 20 to 30 years ago, a time frame during which the company's underwriting operations' commercial book of business was largely composed of small- to medium-sized businesses without significant exposure to pollution liability. In addition, the company believes that its current mix of commercial business carries a relatively low risk of significant pollution liability. Finally, the company's Commercial General Liability policy form has, since 1970, included a specific pollution coverage exclusion, and, since 1986, an absolute pollution exclusion. Legal developments may cause the company to make additional adjustments to the reserves for these claims in the future, but, in management's judgment, such adjustments should not have a material adverse impact on the company's financial position. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Capital Resources - ----------------- Common shareholders' equity at June 30, 1994 totaled $2.68 billion, down 11% from year-end 1993. The unrealized appreciation of the company's investment portfolio declined by $425 million (net of taxes) in the first half of 1994 primarily due to the impact of rising interest rates on the carrying value of the company's fixed maturities portfolio. The company also repurchased 846,000 of its outstanding common shares (as adjusted for the 2-for-1 stock split) in the first six months of 1994 for a total cost of $34 million. Total debt outstanding at June 30, 1994 was $590 million, down from $640 million at year-end 1993 due to a decline in Nuveen's short-term borrowings. The company issued an additional $14 million of medium-term notes under an existing shelf registration during 1994, and has also funded medium-term note maturities of $20 million. The ratio of total debt to total capitalization at quarter-end was 18%, unchanged from year-end 1993. The company currently has no significant capital commitments planned for the remainder of 1994 and beyond. The company's ratio of earnings to fixed charges was 8.34 for the first six months of 1994, compared with 8.25 for the same period of 1993. The company's ratio of earnings to combined fixed charges and preferred stock dividends was 6.52 for the first six months of 1994, compared with 6.52 for the same period of 1993. Fixed charges consist of interest expense before reduction for capitalized interest and one-third of rental expense, which is considered to be representative of an interest factor. Liquidity - --------- Liquidity refers to the company's ability to generate sufficient funds to meet the cash requirements of its business operations. Net cash provided by operations was $525 million in the first six months of 1994, compared to $297 million in 1993. The significant increase over 1993 was primarily the result of increased cash flows in the investment banking-asset management and insurance brokerage segments. The underwriting segment's cash flows from operations also increased over the first half of 1993. PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements included in Part I of this report is incorporated herein by reference. 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 next document in this report. (b) Reports on Form 8-K. 1) The Registrant filed a Form 8-K Current Report dated April 25, 1994, pertaining to the Registrant's press release of first quarter 1994 financial results. 2) The Registrant filed a Form 8-K Current Report dated July 25, 1994, pertaining to the Registrant's press release of second quarter 1994 financial results. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE ST. PAUL COMPANIES, INC. (Registrant) Date: August 12, 1994 By /s/ Bruce A.Backberg --------------------- Bruce A. Backberg Vice President and Corporate Secretary (Authorized Signatory) Date: August 12, 1994 By /s/ Howard E. Dalton -------------------- Howard E. Dalton Senior Vice President Chief Accounting Officer EXHIBIT INDEX ------------- How Exhibit Filed - ------- ----- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession*........................... (4) Instruments defining the rights of security holders, including indentures*................................ (10) Material contracts*..................................... (11) Statement re computation of per share earnings**........ (1) (12) Statement re computation of ratios**.................... (1) (15) Letter re unaudited interim financial information*...... (18) Letter re change in accounting principles*.............. (19) Report furnished to security holders*................... (22) Published report regarding matters submitted to vote of security holders*............................ (23) Consents of experts and counsel*........................ (24) Power of attorney*...................................... (27) Financial data schedule*................................ (99) Additional exhibits*.................................... * These items are not applicable. ** This exhibit is included only with the copies of this report that are filed with the Securities and Exchange Commission. However, a copy of the exhibit may be obtained from the Registrant for a reasonable fee by writing to Legal Services, The St. Paul Companies, 385 Washington Street, Saint Paul, MN 55102. (1) Filed electronically under Operational EDGAR. EX-11 2 EXHIBIT 11 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 ------------------- ---------------- 1994 1993 1994 1993 EARNINGS: ----- ----- ----- ----- Primary: Net income, as reported $127,762 108,497 192,199 196,528 Preferred dividends declared (net of taxes) (2,105) (2,094) (4,214) (4,196) ------- ------- ------- ------- Net income, as adjusted $125,657 106,403 187,985 192,332 ======= ======= ======= ======= Fully diluted: Net income, as reported $127,762 108,497 192,199 196,528 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (947) (1,036) (1,897) (2,074) ------- ------- ------- ------- Net income, as adjusted $126,815 107,461 190,302 194,454 ======= ======= ======= ======= SHARES: Primary: Weighted average number of common shares outstanding, per financial statements 84,026 84,322 84,273 84,249 Additional dilutive effect of outstanding stock options (based on treasury stock method using average market price) 535 703 515 705 ------- ------- ------- ------- Weighted average, as adjusted 84,561 85,025 84,788 84,954 ======= ======= ======= ======= Fully diluted: Weighted average number of common shares outstanding, per financial statements 84,026 84,322 84,273 84,249 Additional dilutive effect of: Convertible preferred stock 4,079 4,107 4,084 4,116 Outstanding stock options (based on treasury stock method using market price at end of period) 573 677 578 702 ------- ------- ------- ------- Weighted average, as adjusted 88,678 89,106 88,935 89,067 ======= ======= ======= ======= EARNINGS PER COMMON SHARE: Primary $1.49 1.25 2.22 2.26 Fully diluted $1.43 1.21 2.14 2.18 EX-12 3 EXHIBIT 12 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 ------------------ ------------------ 1994 1993 1994 1993 ----- ----- ----- ----- EARNINGS: Income before income taxes $159,194 139,401 241,197 249,243 Add: fixed charges 15,392 17,121 32,870 34,363 ------- ------- ------- ------- Income, as adjusted $174,586 156,522 274,067 283,606 ======= ======= ======= ======= FIXED CHARGES: Interest costs $10,358 10,773 20,212 21,614 Rental expense (1) 5,034 6,348 12,658 12,749 ------- ------- ------- ------- Total fixed charges $15,392 17,121 32,870 34,363 ======= ======= ======= ======= FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Fixed charges $15,392 17,121 32,870 34,363 Preferred stock dividends 4,591 4,553 9,194 9,117 ------- ------- ------- ------- Total fixed charges and preferred stock dividends $19,983 21,674 42,064 43,480 ======= ======= ======= ======= Ratio of earnings to fixed charges 11.34 9.14 8.34 8.25 ======= ======= ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends 8.74 7.22 6.52 6.52 ======= ======= ======= ======= (1) Interest portion deemed implicit in total rent expense. -----END PRIVACY-ENHANCED MESSAGE-----