-----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, gMbjmMbFmMm3mUiMVdMsE7sKKWQ2zzjyyzbRX7vWeCGKOITLRtJHc47ZkHI7n+kk +2DDzz8balKRuh6dxD7CiQ== 0000086312-95-000004.txt : 19950517 0000086312-95-000004.hdr.sgml : 19950516 ACCESSION NUMBER: 0000086312-95-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950512 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: 95537438 BUSINESS ADDRESS: STREET 1: 385 WASHINGTON ST CITY: SAINT PAUL STATE: MN ZIP: 55102 BUSINESS PHONE: 6122217911 FORMER COMPANY: FORMER CONFORMED NAME: SAINT PAUL COMPANIES INC DATE OF NAME CHANGE: 19900730 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ---- EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1995 ------------------------------------------ or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ---- EXCHANGE ACT OF 1934 For the transition period from to ---------------------- ------------------ Commission File Number 0-3021 ------ THE ST. PAUL COMPANIES, INC. - ---------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 --------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 385 Washington St., Saint Paul, MN 55102 - ---------------------------------- --------------------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (612) 221-7911 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of the Registrant's Common Stock, without par value, outstanding at May 10, 1995, was 84,394,400. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Consolidated Statements of Income, (Unaudited), Three Months Ended March 31, 1995 and 1994 3 Consolidated Balance Sheets, March 31, 1995 (Unaudited) and December 31, 1994 4 Consolidated Statements of Common Shareholders' Equity, Three Months Ended March 31, 1995 (Unaudited) and Twelve Months Ended 6 December 31, 1994 Consolidated Statements of Cash Flows (Unaudited), Three Months Ended March 31, 1995 and 1994 7 Notes to Consolidated Financial Statements (Unaudited) 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II. OTHER INFORMATION Item 1 through Item 6 22 Signatures 24 EXHIBIT INDEX 25 PART I FINANCIAL INFORMATION THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Income Unaudited (In thousands) Three Months Ended March 31 ----------------------- 1995 1994 ---- ---- Revenues: Premiums earned $946,070 845,402 Net investment income 186,389 168,408 Insurance brokerage fees and commissions 67,061 66,450 Investment banking-asset management 53,616 53,598 Realized investment gains 2,977 21,783 Other 11,346 8,134 --------- --------- Total revenues 1,267,459 1,163,775 --------- --------- Expenses: Insurance losses and loss adjustment expenses 680,439 667,688 Policy acquisition expenses 207,694 191,351 Operating and administrative 231,180 222,733 --------- --------- Total expenses 1,119,313 1,081,772 --------- --------- Income before income taxes 148,146 82,003 Income tax expense (benefit): Federal current 47,068 20,698 Other (9,518) (3,132) --------- --------- Total income tax expense 37,550 17,566 --------- --------- Net income $110,596 64,437 ========= ========= Earnings per common share: Primary $1.27 0.73 ========= ========= Fully diluted $1.23 0.71 ========= ========= Dividends declared on common stock $0.40 0.375 ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) March 31, December 31, ASSETS 1995 1994 - ------ ---------- ---------- (Unaudited) Investments: Fixed maturities, at estimated market value $9,066,702 8,828,684 Real estate, at cost less accumulated depreciation of $63,155 (1994; $60,234) 613,867 528,144 Equities, at estimated market value 588,355 531,042 Venture capital, at estimated market value 332,712 330,032 Other investments 46,691 46,539 Short-term investments, at cost 1,038,185 898,081 ---------- ---------- Total investments 11,686,512 11,162,522 Cash 36,101 46,664 Investment banking inventory securities 136,749 148,031 Reinsurance recoverables: Unpaid losses 1,543,677 1,533,250 Paid losses 106,650 88,900 Receivables: Underwriting premiums 1,046,903 1,107,788 Insurance brokerage activities 672,379 891,823 Interest and dividends 185,271 182,938 Other 80,646 88,657 Deferred policy acquisition expenses 320,388 324,358 Ceded unearned premiums 248,426 255,687 Deferred income taxes 697,417 790,508 Office properties and equipment, at cost less accumulated depreciation of $248,595 (1994; $243,945) 475,030 477,570 Goodwill 281,332 279,308 Other assets 134,518 117,816 ---------- ---------- Total assets $17,651,999 17,495,820 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In thousands) March 31, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 - ------------------------------------ ------------ ----------- (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $9,555,780 9,423,429 Unearned premiums 2,071,324 2,109,170 ---------- ---------- Total insurance reserves 11,627,104 11,532,599 Debt 628,178 622,624 Payables: Insurance brokerage activities 988,417 1,191,089 Income taxes 223,520 183,659 Reinsurance premiums 166,320 155,833 Accrued expenses and other 552,599 600,211 Other liabilities 448,940 472,336 ---------- ---------- Total liabilities 14,635,078 14,758,351 ---------- ---------- Series B convertible preferred stock; 1,450 shares authorized; 1,010 shares outstanding (1,012 shares in 1994) 145,709 146,102 Guaranteed obligation - PSOP (137,589) (141,567) ---------- ---------- Net convertible preferred stock 8,120 4,535 ---------- ---------- Common Shareholders' Equity: Common stock, 240,000 shares authorized; 84,341 shares outstanding (84,202 shares in 1994) 449,863 445,222 Retained earnings 2,436,682 2,362,286 Guaranteed obligation - ESOP (40,627) (44,410) Unrealized appreciation of investments 199,908 13,948 Unrealized loss on foreign currency translation (37,025) (44,112) ---------- ---------- Total common shareholders' equity 3,008,801 2,732,934 ---------- ---------- Total liabilities, preferred stock and common shareholders' equity $17,651,999 17,495,820 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Common Shareholders' Equity (In thousands) Three Twelve Months EndedMonths Ended March 31 December 31 ------------------------ 1995 1994 ---- ---- (Unaudited) Common stock: Beginning of period $445,222 438,559 Stock issued under stock option and other incentive plans 4,696 11,130 Reacquired common shares (55) (4,467) --------- --------- End of period 449,863 445,222 --------- --------- Retained earnings: Beginning of period 2,362,286 2,082,832 Net income 110,596 442,828 Dividends declared on common stock (33,484) (124,921) Dividends declared on preferred stock, net of taxes (2,146) (8,448) Reacquired common shares (570) (30,005) --------- --------- End of period 2,436,682 2,362,286 --------- --------- Guaranteed obligation - ESOP: Beginning of period (44,410) (56,005) Principal payments 3,783 11,595 --------- --------- End of period (40,627) (44,410) --------- --------- Unrealized appreciation of investments, net of taxes: Beginning of period 13,948 588,844 Change during the period 185,960 (574,896) --------- --------- End of period 199,908 13,948 --------- --------- Unrealized loss on foreign currency translation, net of taxes: Beginning of period (44,112) (49,102) Change during the period 7,087 4,990 --------- --------- End of period (37,025) (44,112) --------- --------- Total common shareholders' equity $3,008,801 2,732,934 ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (In thousands) Three Months Ended March 31 ----------------------- 1995 1994 ------ ------ OPERATING ACTIVITIES Underwriting: Net income $123,472 71,126 Adjustments: Change in net insurance reserves 85,445 88,808 Change in underwriting premiums receivable 46,237 38,556 Provision for deferred taxes (14,557) (6,250) Realized gains (1,551) (19,202) Other (36,842) 37,768 --------- --------- Total underwriting 202,204 210,806 --------- --------- Insurance brokerage: Net loss (16,061) (11,194) Adjustments: Change in premium balances 12,750 22,773 Change in accounts payable and accrued expenses (21,994) (18,799) Depreciation and goodwill amortization 5,988 4,545 Other 18,949 (9,342) --------- --------- Total insurance brokerage (368) (12,017) --------- --------- Investment banking-asset management: Net income 12,011 10,728 Adjustments: Change in inventory securities 11,282 56,293 Change in short-term investments (45,854) (2,990) Change in open security transactions 6,260 17,461 Change in short-term borrowings - (80,383) Other 29,871 25,245 --------- --------- Total investment banking-asset management 13,570 26,354 --------- --------- Parent company and consolidating eliminations: Net loss (8,826) (6,223) Realized gains (1,426) (2,581) Adjustments 21,822 4,745 --------- --------- Total parent company and consoldating eliminations 11,570 (4,059) --------- --------- Net cash provided by operating activities 226,976 221,084 --------- --------- INVESTING ACTIVITIES Purchases of investments (505,862) (518,789) Sales and maturities of investments 406,841 391,649 Change in short-term investments (93,817) 31,416 Change in open security transactions (9,999) (55,788) Net purchases of office properties and equipment (10,776) (9,846) Other 2,102 (16,029) --------- --------- Net cash used in investing activities (211,511) (177,387) --------- --------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (34,517) (32,632) Proceeds from issuance of debt 9,139 28,528 Reacquired common shares (497) (29,245) Other (273) (14,681) --------- --------- Net cash used in financing activities (26,148) (48,030) --------- --------- Effect of exchange rate changes on cash 120 (909) --------- --------- Decrease in cash (10,563) (5,242) Cash at beginning of period 46,664 25,420 --------- --------- Cash at end of period $36,101 20,178 ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited March 31, 1995 Note 1 Basis of Presentation - ----------------------------- The consolidated financial statements include The St. Paul Companies, Inc. and subsidiaries, and have been prepared in conformity with generally accepted accounting principles. These 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 45 to 60 of the Registrant's annual report to shareholders for the year ended December 31, 1994. The amounts in those notes have not changed except as a result of transactions in the ordinary course of business or as otherwise disclosed in these notes. Some figures in the 1994 consolidated financial statements have been reclassified to conform with the 1995 presentation. These reclassifications had no effect on net income or common shareholders' equity, as previously reported. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 2 Earnings Per Share - -------------------------- Earnings per common share (EPS) amounts were calculated by dividing net income, as adjusted, by the adjusted average common shares outstanding. Three Months Ended March 31 ------------------ 1995 1994 ------ ------ (In thousands) PRIMARY Net income, as reported $110,596 64,437 Preferred dividends declared (net of taxes) (2,146) (2,109) ------- ------ Net income, as adjusted $108,450 62,328 ======= ======= FULLY DILUTED Net income, as reported $110,596 64,437 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (874) (950) ------- ------- Net income, as adjusted $109,722 63,487 ======= ======= ADJUSTED AVERAGE COMMON SHARES OUTSTANDING Primary 85,191 85,017 ======= ======= Fully diluted 89,321 89,124 ======= ======= 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 preferred stock. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 3 Investments - ------------------- A summary of investment transactions is presented below. Three Months Ended March 31 ------------------------------ 1995 1994 ------ ------ (In thousands) Purchases: Fixed maturities $233,719 305,417 Equities 169,040 151,408 Real estate 92,588 22,638 Venture capital 9,705 31,976 Other investments 810 7,350 -------- --------- Total purchases 505,862 518,789 -------- --------- Proceeds from sales and maturities: Fixed maturities: Sales 21,541 27,056 Maturities and redemptions 222,294 156,789 Equities 151,470 187,787 Real estate 236 - Venture capital 9,494 10,971 Other investments 1,806 9,046 -------- --------- Total sales and maturities 406,841 391,649 -------- --------- Net purchases $ 99,021 127,140 ======== ========= The increase (decrease) in unrealized appreciation of investments was as follows: Three Months Ended Twelve Months Ended March 31, 1995 December 31, 1994 ------------------ ------------------- (In thousands) Fixed maturities $249,446 (847,554) Equities 36,427 (30,106) Venture capital 1,415 (4,064) -------- ------- Total change in pretax unrealized appreciation 287,288 (881,724) Increase (decrease) in deferred tax asset (101,328) 306,828 -------- ------- Total change in unrealized appreciation, net of taxes $185,960 (574,896) ======== ======= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Premiums collected by the brokerage operations from insureds, but not yet remitted to insurance carriers, are restricted as to use by business practices. These restricted funds are included in short-term investments and totaled $412 million at March 31, 1995, and $385 million at December 31, 1994. Note 4 Income Taxes - -------------------- The components of income tax expense are as follows: Three Months Ended March 31 ------------------- 1995 1994 ------ ------ (In thousands) Federal current tax expense $47,068 20,698 Federal deferred tax benefit (13,621) (6,069) ------ ------ Total federal income tax expense 33,447 14,629 Foreign income taxes 2,870 1,797 State income taxes 1,233 1,140 ------ ------ Total income tax expense $37,550 17,566 ====== ====== 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. 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 Pollution and Asbestos Claims" in Management's Discussion and Analysis for information on these claims. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 6 Debt - ------------ Debt consists of the following: March 31, December 31, 1995 1994 --------------------------------- - -- Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- (In thousands) Commercial paper $284,119 284,119 275,635 275,635 Medium-term notes 204,434 196,500 204,433 189,400 9 3/8% notes 99,974 104,300 99,971 102,800 Guaranteed ESOP debt 33,334 34,700 36,112 37,200 Pound sterling loan notes 6,317 6,317 6,473 6,473 ------- ------- ------- ------- Total debt $628,178 625,936 622,624 611,508 ======= ======= ======= ======= Note 7 Reinsurance - ------------------- The company's consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the company's acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks the company has underwritten to other insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to protect the company from potential losses in excess of the amount it is prepared to accept. The company expects those with whom it has ceded reinsurance to honor their obligations. In the event these companies are unable to honor their obligations, the company will pay these amounts. The company has established allowances for possible nonpayment of amounts due to it. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses and loss adjustment expenses is as follows: Three Months Ended March 31 -------------------- 1995 1994 ------ ------ (In thousands) Premiums written: Direct $804,202 764,593 Assumed 218,514 162,624 Ceded (106,353) (122,646) ------- ------- Net premiums written $916,363 804,571 ======= ======= Premiums earned: Direct $865,582 792,615 Assumed 194,189 167,207 Ceded (113,701) (114,420) ------- ------- Net premiums earned $946,070 845,402 ======= ======= Insurance losses and loss adjustment expenses: Direct $575,550 543,212 Assumed 204,732 176,167 Ceded (99,843) (51,691) ------- ------- Net insurance losses and loss adjustment expenses $680,439 667,688 ======= ======= Note 8 Subsequent Event - ------------------------ On May 10, 1995, the company announced the sale, through St. Paul Capital L.L.C., of 4,140,000 convertible monthly income preferred securities bearing a dividend rate of 6% The company directly or indirectly owns all of the common securities of St. Paul Capital L.L.C., which was formed for the purpose of issuing these preferred securities and investing the proceeds in convertible subordinated debentures of the company. Gross proceeds from the sale, which is expected to close on May 16, 1995, will be $207 million. Each preferred security carries a liquidation preference of $50 and is convertible into 0.8475 shares of the company's common stock (equivalent to a conversion price of $59 per common share). The securities are noncallable for four years. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations March 31, 1995 Consolidated Results - -------------------- Pretax earnings in the first quarter of 1995 were $148 million, significantly higher than 1994 first quarter earnings of $82 million. The improvement over 1994 occurred in the underwriting segment and was largely due to a $74 million decline in pretax catastrophe losses. The company's insurance brokerage operation posted a first quarter pretax loss of $15 million, $6 million worse than the comparable loss in 1994. Investment banking-asset management earnings increased slightly over those in the first quarter of 1994. Net income for the first quarter totaled $111 million, or $1.23 per share, compared with net income of $64 million, or $0.71 per share in the first quarter of 1994. Consolidated revenues of $1.27 billion for the quarter were over $100 million higher than 1994 revenues of $1.16 billion. An increase in insurance premiums earned was the primary factor in the growth over 1994. Results by Segment - ------------------ Pretax results by industry segment were as follows (in millions): Three Months Ended March 31 -------------------- 1995 1994 Pretax income (loss): ---- ---- Underwriting: GAAP underwriting result $(15) (83) Net investment income 178 165 Realized investment gains 2 19 Other (5) (12) --- --- Total underwriting 160 89 Insurance brokerage (15) (9) Investment banking-asset management 19 17 Parent and other (16) (15) --- --- Income before income taxes $148 82 === === THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Underwriting - ------------ First quarter pretax earnings of $160 million in the underwriting segment represented a significant improvement over 1994 earnings of $89 million, primarily due to a decrease in catastrophe losses. The following summarizes key financial results by underwriting operation: Three Months % of 1995 Ended March 31 Written ------------------- ($ in Millions) Premiums 1995 1994 - --------------- --------- ----- ---- Specialized Commercial: Written Premiums 31% $284 263 Underwriting Result $(20) (34) Combined Ratio 106.7 110.4 Personal Insurance: Written Premiums 16% $151 144 Underwriting Result $(7) (11) Combined Ratio 104.5 107.5 Commercial: Written Premiums 16% $146 121 Underwriting Result $(4) (34) Combined Ratio 102.6 128.1 Medical Services: Written Premiums 15% $136 165 Underwriting Result $26 34 Combined Ratio 85.2 80.5 ---- ----- ----- Total St. Paul Fire and Marine: Written Premiums 78% $717 693 Underwriting Result $(5) (45) Combined Ratio 101.1 105.6 Reinsurance: Written Premiums 17% $156 82 Underwriting Result $(5) (29) Combined Ratio 104.5 134.3 International: Written Premiums 5% $ 43 30 Underwriting Result $(5) (9) Combined Ratio 113.5 128.9 ---- ----- ----- Total: Written Premiums 100% $916 805 GAAP Underwriting Result $(15) (83) Statutory Combined Ratio: Loss and Loss Expense Ratio 71.9 79.0 Underwriting Expense Ratio 30.4 31.2 ----- ----- Combined Ratio 102.3 110.2 ===== ===== Combined Ratio Incl. Policyholders' Dividends 102.4 110.2 ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued In the first quarter of 1995, the commercial underwriting operations of the company's business center previously known as St. Paul Personal & Business Insurance were transferred to the Commercial business center. The company's Personal Insurance business center, as renamed, now consists exclusively of personal insurance coverages for individuals. Amounts for 1994 have been reclassified to conform to the 1995 presentation. First quarter written premiums of $916 million increased 14% over comparable 1994 premiums of $805 million. All underwriting operations except Medical Services experienced premium growth over 1994. Reinsurance volume of $156 million in the quarter was nearly double the comparable 1994 total, primarily due to favorable market conditions, additions of business resulting from the company's October 1994 acquisition of a book of property- liability reinsurance business from a subsidiary of CIGNA Corporation and a change in estimated premiums in the first quarter of 1994 made in the ordinary course of business. Commercial volume grew 21% over the first quarter of 1994, driven by new business in several classes of commercial coverages. Medical Services volume declined 18% from the first quarter of 1994, due primarily to a 1994 change in policy terms from six months to one year for much of the physicians and surgeons segment of the business. The first quarter GAAP underwriting loss was $15 million, compared with a loss of $83 million in the first quarter of 1994. Catastrophe losses stemming from the California earthquake and East Coast winter storms were the dominant factor in the first quarter 1994 underwriting loss. Total pretax catastrophe losses in 1995 were $16 million, compared with losses of $90 million in 1994's first quarter. Key factors in the change in underwriting results from 1994 were as follows: - Commercial - $30 million better than 1994 - Favorable current year loss experience, driven by a decline in catastrophe losses and reduced expenses, contributed to the improvement over 1994. - Reinsurance - $24 million better than 1994 - A $26 million decline in catastrophe losses accounted for the improvement over 1994. - Specialized Commercial - $14 million better than 1994 - The improvement over 1994 resulted from a decline in catastrophe losses and reduced involuntary costs, which more than offset deterioration in insurance pool results. - Medical Services - $8 million worse than 1994 - While still performing strongly, the extent of favorable prior year loss development was not as great as in the first quarter of 1994. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued First quarter pretax investment income in the underwriting segment was $178 million, 8% higher than first quarter 1994 investment income of $165 million. Total fixed maturity investments in the segment have grown by nearly $390 million in the last twelve months, primarily due to strong cash flows from operations. The average yield on taxable fixed maturities purchased in the first quarter was 8.5%, compared with 6.4% in the first quarter of 1994. Fixed maturities purchased in the first quarter were predominantly taxable securities. Taxable securities comprised 48% of the total Underwriting investment portfolio at March 31, 1995. The weighted average pretax yield on the underwriting fixed maturities portfolio at March 31, 1995 was 7.4%, and approximately 95% of that portfolio is rated at investment grade levels (BBB or better). Environmental Pollution and Asbestos Claims - ------------------------------------------- The company's underwriting operations continue to receive claims under policies written many years ago alleging injuries from environmental pollution or alleging covered property damages for the cost to clean up polluted sites. The company has also received asbestos claims arising out of product liability coverages under general liability policies. Significant legal issues, primarily pertaining to issues of coverage, exist with regard to the company's alleged liability for both pollution and asbestos claims. In the company's opinion, court decisions in certain jurisdictions have tended to expand insurance coverage beyond the intent of the original policies. The company's ultimate liability for pollution claims is extremely difficult to estimate. Insured parties have submitted claims for losses not covered in the insurance policy, and the ultimate resolution of these claims may be subject to lengthy litigation, making it difficult to estimate the company's potential liability. In addition, variables, such as the length of time necessary to clean up a polluted site, and controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of a pollution claim. Estimating the ultimate liability for asbestos claims is equally difficult. The primary factors influencing the estimate of the total cost of these claims are case law and a history of prior claim development, both of which are still developing. Because of the significant uncertainties associated with pollution and asbestos claims, and the likelihood that they will not be resolved in the near future, the company is unable to estimate its ultimate exposure to these claims and cannot quantify a range of reasonably possible losses in addition to recorded reserves. Consequently, the company's results of operations in future periods may be materially impacted by these claims. However, the company believes it is unlikely that such claims will materially impact its financial position or liquidity. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Prior to 1994, the company made no specific allocation for pollution or asbestos claims of its IBNR (incurred but not reported) reserves, but rather identified reserves only for reported claims (case reserves). In the third quarter of 1994, the company specifically allocated for pollution and asbestos claims a portion of previously established IBNR reserves. The following table represents a reconciliation of total gross and net pollution reserve development for the three months ended March 31, 1995, and each of the years in the three-year period ended Dec. 31, 1994. Amounts in the "net" column are reduced by reinsurance. 1995 1994 1993 1992 Pollution (three ---- ---- ---- - --------- months) ----------- (in millions) Gross Net Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- ----- --- Beginning reserves $275 200 105 73 88 62 76 55 Incurred losses 8 9 71 56 32 22 30 20 IBNR allocation - - 132 95 - - - - Paid losses (8) (7) (33) (24) (15) (11) (18) (13) --- --- --- --- --- --- --- --- Ending reserves $275 202 275 200 105 73 88 62 === === === === === === === === At March 31, 1995, approximately 70% of the company's total gross pollution reserves represented reserves for claims on direct business written in the United States by St. Paul Fire and Marine. The balance of the company's pollution reserves consisted of estimated losses on reinsurance it has assumed. 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 Fire and Marine's 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 domestic commercial business carries a relatively low risk of significant pollution liability. Finally, since 1970, the company's Commercial General Liability policy form has included a specific pollution exclusion, and, since 1986, the industry standard absolute pollution exclusion. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued The following table represents a reconciliation of total gross and net reserve development for asbestos claims for the three months ended March 31, 1995, and each of the years in the three-year period ended Dec. 31, 1994: 1995 1994 1993 1992 Asbestos (three ---- ---- ---- - -------- months) ----------- (in millions) Gross Net Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- ----- --- Beginning reserves $185 145 62 48 70 54 65 54 Incurred losses 9 8 13 14 17 15 25 17 IBNR allocation - - 127 95 - - - - Paid losses (6) (5) (17) (12) (25) (21) (20) (17) --- --- --- --- --- --- --- --- Ending reserves $188 148 185 145 62 48 70 54 === === === === === === === === Most of the asbestos claims the company has received pertain to policies written prior to 1986. Since 1986, the company's Commercial General Liability policy has used the industry standard absolute pollution exclusion, which the company believes applies to asbestos claims. Total gross pollution and asbestos reserves at March 31, 1995, of $463 million represented approximately 5% of gross consolidated reserves of $9.6 billion. Insurance Brokerage - ------------------- The insurance brokerage segment (Minet) posted a pretax loss of $15 million for the quarter, compared with a loss of $9 million in 1994. Brokerage fees and commissions were virtually level with the first quarter of 1994; however, total expenses increased by $7 million in 1995. Salary and related expenses increased $5 million over the first quarter of 1994, primarily due to Minet's ongoing effort to develop new business opportunities through the expansion of its specialty broker staff. The worldwide insurance brokerage market continues to be sluggish, hindering Minet's ability to improve its results. Investment Banking-Asset Management - ----------------------------------- The company's portion of pretax earnings from The John Nuveen Company (Nuveen) was $19 million in the first quarter of 1995, compared with $17 million in the first quarter of 1994. The company holds a 77% interest in Nuveen. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued After a year characterized by extremely difficult market conditions brought about by frequent interest rate hikes, the municipal bond market stabilized in the first quarter orf 1995, and Nuveen's results improved slightly over the comparable period of 1994. Nuveen's underwriting and distribution revenues increased sharply over the first quarter of 1994, primarily due to inventory positioning profits resulting from the more favorable market conditions in 1995. Management fees earned from investment advisory services provided on assets under Nuveen's management declined slightly from the comparable period of 1994, but assets under management of $31.2 billion grew by $1.5 billion since year-end 1994, primarily due to an increase in the underlying value of fund investments. Unit investment trust (UIT) sales in the quarter increased 8% over the first quarter of 1994 as tax-free investment vehicles once again became attractive in the less turbulent interest rate environment prevalent in the first quarter of 1995. Capital Resources - ----------------- Common shareholders' equity of $3.0 billion at March 31, 1995 was 10% higher than year-end 1994 equity of $2.7 billion. The increase was driven by the company's strong earnings and a first quarter bond market rally which favorably impacted the market value of the company's fixed maturities investment portfolio. The unrealized appreciation of that portfolio increased $161 million (net of taxes) in the first quarter. Total debt outstanding at quarter-end of $628 million was nearly level with year-end 1994. However, the ratio of total debt to total capitalization dropped from 19% at year-end to 17% at March 31, 1995 due to the increase in shareholders' equity. On May 10, 1995, the company announced the sale of 4,140,000 shares of convertible monthly income preferred securities (MIPS). The transaction is expected to close on May 16. The gross proceeds of $207 million will be used for general corporate purposes, which may include possible acquisitions and the reduction of outstanding commercial paper. The company anticipates that any major capital expenditures during the remainder of 1995 would involve acquisitions of existing businesses; there are no major capital improvements planned for 1995. The company's ratio of earnings to fixed charges was 9.49 for the first three months of 1995, compared with 5.69 for the same period of 1994. The company's ratio of earnings to combined fixed charges and preferred stock dividends was 5.697.53 for the first three months of 1995, compared with 4.51 for the same period of 1994. Fixed charges consist of interest expense and one-third of rental expense, which is considered to be representative of an interest factor. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Liquidity - --------- Liquidity refers to the company's ability to generate sufficient funds to meet the short- and long-term cash requirements of its business segments. Net cash provided by operations was $227 million in the first three months of 1995, compared to $221 million in 1994. The increase over 1994 was primarily due to improved cash flows in the brokerage segment. The company's consolidated liquidity position remains strong due to thate underwriting segment's cash flows from underwriting and investment activities. PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements included in Part I of this report is incorporated herein by reference. In 1990, at the direction of the UK Department of Trade and Industry (DTI), five insurance underwriting subsidiaries of London United Investments PLC (LUI) suspended underwriting new insurance business. At the same time, four of those subsidiaries, being insolvent, suspended payment of claims and have since been placed in provisional liquidation. The fifth subsidiary, Walbrook Insurance Company, continued paying claims until May 1992 but has now also been placed in provisional insolvent liquidation. Weavers Underwriting Agency (Weavers), an LUI subsidiary, managed these insurers. The company's insurance brokerage operation, Minet, had brokered business to and from Weavers for many years. From 1973 through 1980, the company's UK-based underwriting operations had accepted business from Weavers. In its Form 10-K for the year ended Dec. 31, 1994, the company had reported that its wholly-owned subsidiary, St. Paul International Insurance Company Limited (SPI), was a defendant in proceedings brought in the English courts in 1987 by Milano Assicurazioni SPA to challenge the validity of certain reinsurance contracts relating to the Weavers pool, of which SPI was a member. Those proceedings have been settled. Certain other insurers are seeking to avoid liability on certain of the reinsurance contracts relating to the Weavers pool through legal proceedings currently pending in London. SPI and other members of the Weavers pool are seeking enforcement of the reinsurance contracts. Minet may also become the subject of legal proceedings arising from its role as one of the major brokers for Weavers. The proceedings are being vigorously contested by the company, and it recognizes that the final outcome of these proceedings, if adverse to the company, may materially impact the results of operations in the period in which that outcome occurs, but believes it will not have a materially adverse effect on its liquidity or overall financial position. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. The Registrant's annual shareholders' meeting was held on May 2, 1995. (1) All thirteen persons nominated for directors by management were named in proxies for the meeting which were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the proxy statements. All thirteen nominees were elected by the following votes: In favor Withheld -------- -------- Michael R. Bonsignore 75,768,036 74,384 John H. Dasburg 75,749,996 92,424 W. John Driscoll 75,745,908 96,512 Pierson M. Grieve 75,750,476 91,944 Ronald James 75,770,746 71,674 William H. Kling 75,761,685 80,735 Douglas W. Leatherdale 75,762,659 79,761 Bruce K. MacLaury 75,767,747 74,673 Ian A. Martin 75,768,802 73,618 Glen D. Nelson 75,766,970 75,450 Anita M. Pampusch 75,765,046 77,374 Gordon M. Sprenger 75,760,951 81,469 Patrick A. Thiele 75,768,596 73,824 (2)By a vote of 75,540,942 in favor, 125,296 against and 176,182 abstaining, the shareholders ratified the selection of KPMG Peat Marwick LLP as the independent auditors for the Registrant. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. An Exhibit Index is set forth as the last page in this document. (b) Reports on Form 8-K. 1) The Registrant filed a Form 8-K Current Report dated January 26, 1995, pertaining to the Registrant's press release of fourth 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: May 11, 1995 By /s/ Bruce A. Backberg --------------------- Bruce A. Backberg Vice President and Corporate Secretary (Authorized Signatory) Date: May 11, 1995 By /s/ Howard E. Dalton -------------------- Howard E. Dalton Senior Vice President Chief Accounting Officer EXHIBIT INDEX ------------- Exhibit How - ------- Filed ----- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession*.............................. (4) Instruments defining the rights of security holders, including indentures*................................... (10) Material contracts*........................................ (11) Statement re computation of per share earnings**........... (1) (12) Statement re computation of ratios**....................... (1) (15) Letter re unaudited interim financial information*......... (18) Letter re change in accounting principles*................. (19) Report furnished to security holders*...................... (22) Published report regarding matters submitted to vote of security holders*............................... (23) Consents of experts and counsel*........................... (24) Power of attorney*......................................... (27) Financial data schedule**.................................. (1) (99) Additional exhibits*....................................... * These items are not applicable. ** This exhibit is included only with the copies of this report that are filed with the Securities and Exchange Commission. However, a copy of the exhibit may be obtained from the Registrant for a reasonable fee by writing to the Law Department, The St. Paul Companies, 385 Washington Street, Saint Paul, MN 55102. (1) Filed electronically under Operational EDGAR Program. EX-11 2 EXHIBIT 11 Exhibit 11 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings Per Share (In thousands) Three Months Ended March 31 ------------------ 1995 1994 EARNINGS: ------ ------ Primary: Net income, as reported $110,596 64,437 Preferred dividends declared (net of taxes) (2,146) (2,109) ------- ------- Net income, as adjusted $108,450 62,328 ======= ======= Fully diluted: Net income, as reported $110,596 64,437 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (874) (950) ------- ------- Net income, as adjusted $109,722 63,487 ======= ======= SHARES: Primary: Weighted average number of common shares outstanding, per financial statements 84,264 84,521 Additional dilutive effect of outstanding stock options (based on treasury stock method using average market price) 927 496 ------- ------- Weighted average, as adjusted 85,191 85,017 ======= ======= Fully diluted: Weighted average number of common shares outstanding, per financial statements 84,264 84,521 Additional dilutive effect of: Convertible preferred stock 4,045 4,088 Outstanding stock options (based on treasury stock method using market price at end of period) 1,012 515 ------- ------- Weighted average, as adjusted 89,321 89,124 ======= ======= EARNINGS PER COMMON SHARE: Primary $1.27 0.73 Fully diluted $1.23 0.71 EX-12 3 EXHIBIT 12 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Exhibit 12 Computation of Ratios (In thousands, except ratios) Three Months Ended March 31 -------------------- 1995 1994 ------ ------ EARNINGS: Income before income taxes $148,146 82,003 Add: fixed charges 17,445 17,478 ------- ------- Income, as adjusted $165,591 99,481 ======= ======= FIXED CHARGES: Interest costs $11,617 9,854 Rental expense (1) 5,828 7,624 ------- ------- Total fixed charges $17,445 17,478 ======= ======= FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Fixed charges $17,445 17,478 Preferred stock dividends 4,554 4,603 ------- ------- Total fixed charges and preferred stock dividends $21,999 22,081 ======= ======= Ratio of earnings to fixed charges 9.49 5.69 ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends 7.53 4.51 ======= ======= (1) Interest portion deemed implicit in total rent expense. EX-27 4 EXHIBIT 27
7 1,000 3-MOS DEC-31-1995 MAR-31-1995 9,066,702 0 0 588,355 0 613,867 11,686,512 36,101 106,650 320,388 17,651,999 9,555,780 2,071,324 0 0 628,178 449,863 0 8,120 2,558,938 17,651,999 946,070 186,389 2,977 132,023 680,439 207,694 231,180 148,146 37,550 110,596 0 0 0 110,596 1.27 1.23 0 0 0 0 0 0 0
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