ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis
RECORD EARNINGS, ROE OF 17% FOR THE ST. PAUL IN 1993
After the tumultuous year of 1992, during which we
weathered unprecedented catastrophe losses of $305
million and a $365 million goodwill write-down, we
rebounded to post record net income in 1993. Our pretax
earnings in 1993 were $523 million, compared with a
loss of $225 million in 1992 and earnings of $528
million in 1991. It would be difficult not to show
improvement after a year like 1992, and the following
table provides a clearer picture of the extent of that
improvement in 1993 by segregating the impact of
catastrophe losses, the goodwill write-down and
realized gains.
Year Ended December 31
(In millions) 1993 1992 1991
---- ---- ----
Pretax earnings (loss),
as reported $523 $(225) $528
Add (subtract):
Catastrophe losses 62 305 73 (GRAPHIC
Goodwill write-down - 365 - IMAGE NO.1-
Realized gains (58) (156) (38) SEE APPENDIX)
---- ---- ----
$527 $289 $563
=== === ===
In 1993, we experienced significant improvements in
our core commercial, personal and reinsurance
underwriting operations, saw the beginnings of recovery
in our insurance brokerage operations, and continued to
reap strong returns from our investment in The John
Nuveen Company.
Our after-tax operating earnings, which exclude
realized investment gains, totaled $387 million in
1993, translating into a 17% return on beginning
shareholders' equity.
Net income of $428 million in 1993, the highest
annual total in the company's history, was driven by
the improvements noted earlier. Another factor
contributing to 1993's net income was a change in the
statutory federal tax rate. When the rate increased to
35% in 1993 retroactive to the beginning of the year,
we recorded a net income tax benefit of $15 million, or
$0.34 per share. This benefit reflected the impact of
the rate change on our significant deferred tax asset.
In 1992, we incurred tax expense despite the sizable
pretax loss because our goodwill write-down and
substantial foreign underwriting and insurance
brokerage losses were not deductible for U.S. federal
tax purposes. Also in 1992, we implemented two new
Statements of Financial Accounting Standards (SFAS)
relating to income taxes and postretirement benefits,
which in total reduced our net loss by $76 million.
Consolidated revenues of $4.5 billion in 1993 were
level with 1992 revenues. Marginal growth in earned
premiums and a 10% increase in investment banking-asset
management revenues were offset by a decline in (GRAPHIC IMAGE
realized gains, which were unusually high in 1992 due NO.2-SEE
to the $98 million gain realized on our sale of a APPENDIX)
minority interest in The John Nuveen Company. In 1992,
revenues were 3% higher than 1991 as a result of an
increase in realized gains (due to the Nuveen sale) and
a 25% increase in investment banking-asset management
revenues.
Our total assets at the end of 1993 exceeded $17
billion. In 1993, we adopted SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts," which required us to record
reinsurance recoverables on unpaid losses and ceded
unearned premiums as assets instead of netting these
items against insurance reserves. Total assets at the
end of both 1993 and 1992 increased by $1.8 billion
compared with what they would have been under our prior
practice of netting these amounts. We also adopted SFAS
No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," as of Dec. 31, 1993. Our fixed-
maturity portfolio is now recorded at estimated market
value on our balance sheet, with the corresponding
unrealized appreciation recorded, net of taxes, in
common shareholders' equity. This increased total
assets by $764 million at the end of 1993. We did not
restate our 1992 balance sheet to reflect this change.
Our adoption of these statements had no effect on net
income or loss.
Operational Review
We operate in three business segments - underwriting,
insurance brokerage and investment banking-asset
management. Our underwriting segment operates primarily
under the name St. Paul Fire and Marine Insurance
Company, which is our largest subsidiary. Our insurance
brokerage companies do business as the Minet Group,
which is based in London. The John Nuveen Company, of
which we are a 74% majority owner, comprises our
investment banking-asset management segment. In the
next several pages, we analyze the pretax results of
these segments for the last three years.
UNDERWRITING RESULTS MUCH IMPROVED OVER 1992
Buoyed by the decline in catastrophe losses and other
improvements experienced in several of our underwriting
operations, pretax income in our underwriting segment
totaled $507 million in 1993, much improved over 1992
income of $81 million. Pretax catastrophe losses in
1993 - $62 million - were our lowest total in five
years and were 20% of 1992's record total of $305
million. When catastrophe losses are factored out of
both years' results, our underwriting performance
improved by over $174 million in 1993, an indication of
the underlying quality of earnings in 1993. Written
premiums in 1993 were level with 1992, a result which
was expected given our strategy of reducing premium
volume in certain market sectors. If not for our
acquisition of Economy Fire & Casualty Company
(Economy) in the third quarter of 1993, written
premiums would have been 3% below 1992, mirroring the
3% decline in 1992 from 1991. A sharp reduction in
Business Insurance volume and a less pronounced decline
in Specialized Commercial premiums in 1993 were offset
by strong increases in Reinsurance and Personal
Insurance premiums. Our recent efforts to reduce
premium growth in certain coverages, such as workers'
compensation, and our more frequent use of higher
deductibles on large accounts have been major factors
in restraining premium growth for the last two years.
Our consolidated GAAP underwriting loss of $150
million was over $400 million less than the catastrophe-
driven loss of $567 million in 1992. This translated
into a 13 point improvement in the loss and loss
expense ratio compared with 1992, eight points of which
were due to the decline in catastrophe losses. The
underwriting expense ratio improved slightly in 1993,
due to the combined effect of expense control efforts
and the addition of Economy. In 1992, the underwriting
loss was $400 million worse than 1991, and the loss and
loss expense ratio was 10 points worse than 1991, due
to the highest level of catastrophe losses incurred in
the company's history.
Reinsurance, which was particularly hard hit by
catastrophe losses in 1992, improved its underwriting
results by $269 million in 1993. Specialized Commercial
and Business Insurance also achieved declines in
underwriting losses, although not of the same magnitude
as Reinsurance. In addition, Personal Insurance
improved in 1993, due to improved loss experience and
strong results from Economy.
Restructuring - During 1993, we began to restructure
our U.S. Insurance Underwriting operations into a more
customer-focused, flexible and efficient organization.
We recorded charges of $21 million in 1993 associated
with this restructuring, primarily consisting of
severance and relocation expenses. Beginning in 1994,
our underwriting performance will be reported in a new
format to reflect the results of this restructuring.
See the underwriting segment's "Outlook for 1994 - Our
Restructured Underwriting Operations" section on page
30 for further information.
Underwriting Results - The accompanying table
summarizes written premiums, underwriting results and (GRAPHIC IMAGE
combined ratios for each of our underwriting operations NO.3-SEE
for the last three years. Following the table is a APPENDIX)
discussion of 1993 results for each operation and a
look ahead to 1994.
% of 1993 Year Ended December 31
($ in millions) Written Premiums 1993 1992 1991
---------------- ---- ---- ----
SPECIALIZED COMMERCIAL
Written premiums 31% $1,000 $1,058 $1,138
Underwriting result $ (89) $ (171) $ (41)
Combined ratio 109.3 116.2 103.6
MEDICAL SERVICES
Written premiums 22% $ 710 $ 712 $ 717
Underwriting result $ 133 $ 152 $ 149
Combined ratio 80.0 78.6 77.1
BUSINESS INSURANCE
Written premiums 15% $ 478 $ 623 $ 730
Underwriting result $ (71) $ (142) $ (120)
Combined ratio 115.0 122.2 115.9
REINSURANCE
Written premiums 14% $ 431 $ 343 $ 364
Underwriting result $ (45) $ (314) $ (126)
Combined ratio 109.9 187.1 133.7
PERSONAL INSURANCE
Written premiums 12% $ 388 $ 226 $ 204
Underwriting result $ (16) $ (44) $ (13)
Combined ratio 103.4 118.9 106.4
INTERNATIONAL
Written premiums 6% $ 172 $ 180 $ 81
Underwriting result $ (62) $ (48) $ (13)
Combined ratio 135.9 132.1 117.4
TOTAL
Written premiums 100% $3,179 $3,142 $3,234
Underwriting result $ (150) $ (567) $ (164)
Combined ratio:
Loss and loss expense ratio 72.5 85.6 75.2
Underwriting expense ratio 32.0 32.2 29.4
----- ----- -----
Combined ratio 104.5 117.8 104.6
===== ===== =====
Combined ratio including
policyholders' dividends 104.7 118.2 105.0
===== ===== =====
Figures are on a GAAP basis, except for statutory combined ratios,
which are not derived from the GAAP financial statements.
Specialized Commercial
Specialized Commercial is composed of Industry
Underwriting, Specialty Underwriting, St. Paul Surety,
Financial Services and Pools. Industry Underwriting
underwrites property-liability insurance, including
workers' compensation, for selected industry groups,
which include construction companies, technology
companies and public sector entities. Specialty
Underwriting includes National Accounts, Professional
Liability, Surplus Lines and Ocean Marine. National
Accounts underwrites large commercial risks for a broad
spectrum of large businesses. Professional Liability
provides errors and omissions coverage for certain
professionals, such as lawyers and real estate agents,
and also underwrites directors and officers liability
insurance. Surplus Lines underwrites coverages for
unique and hard-to-place risks typically placed in the
excess and surplus lines marketplace. Ocean Marine
provides a variety of property-liability coverages
related to ocean and inland waterways. St. Paul Surety
underwrites surety bonds (primarily for construction
contractors), which guarantee that third parties will
be indemnified against the nonperformance of
contractual obligations. Financial Services provides
coverages for depository institutions. These policies
include fidelity, which covers employers against
dishonest acts of employees; directors and officers
liability; and all property-liability coverages for
this industry.
Written Premiums - Specialized Commercial written
premiums of $1 billion were down 5% in 1993, following
a 7% reduction in 1992. These declines were expected
and were concentrated in Industry Underwriting. We were
experiencing unacceptably high levels of underwriting
losses, including heavy losses on workers' compensation
business, and we initiated corrective actions to reduce (GRAPHIC IMAGE
our exposure to these losses. We increased our emphasis NO.4-SEE
on deductible policies for large accounts so the APPENDIX)
policyholder retains more risk of loss. We also sharply
curtailed the amount of guaranteed-cost policies we
underwrite and instead focused on loss-sensitive
policies (in which premiums are based on claim
experience). The premium decline in 1992 was further
impacted by the economic recession, which reduced
demand for certain insurance products.
Underwriting Result - The 1993 underwriting loss in
Specialized Commercial declined by $82 million from the
1992 loss, primarily resulting from a significant turnaround in
Industry Underwriting results. The improvement was
driven by a reduction in workers' compensation
exposures and losses. In addition, the Construction
sector of Industry Underwriting experienced favorable
development on losses recorded in prior years.
Specialty Underwriting, Financial Services and St. Paul
Surety also posted improved results in 1993. In 1992,
Specialized Commercial's underwriting loss of $171
million was over four times the 1991 loss as a result
of increased current year losses and increased
operating expenses. Catastrophe losses were not a
significant factor in the 1992 loss, although they
totaled $16 million, compared with only $3 million in
1991.
Medical Services
Medical Services markets and underwrites professional
liability insurance and various other types of property-
liability insurance for physicians and surgeons,
hospitals, nurses, dentists, nursing homes and other
health care providers. Medical Services operates
through four major market sectors - Physicians and
Surgeons, Health Care Facilities, Major Accounts and
Other Professionals.
Written Premiums - Medical Services recorded written
premiums of $710 million in 1993, level with premium
volume in both 1992 and 1991. However, the Major
Accounts sector, which serves large health care (GRAPHIC IMAGE
delivery systems, showed a 23% increase in premiums NO.5-SEE
over 1992. We believe our value-added services give us APPENDIX)
a competitive advantage in this sector. Premium volume
in the Physicians and Surgeons sector declined 3% from
1992, and Other Professionals volume was down 19% from
1992. In 1992, an increase over 1991 in Physicians and
Surgeons volume was offset by slight declines in the
other three sectors.
Underwriting Result - Medical Services continues to be
a major success for us. The underwriting profit of $133
million in 1993, although down slightly from 1992's
profit of $152 million, represented the fifth
consecutive annual underwriting profit for Medical
Services. In 1991, the profit was $149 million. In all
three years, we experienced savings on provisions for
losses made in prior years in all market sectors. Loss
experience has been better than what was envisioned
when reserves were originally established.
Business Insurance
Business Insurance underwrites general commercial
property-liability coverages, commercial package
insurance and various coverages designed specifically
for small- to medium-sized commercial businesses,
including manufacturers, wholesalers and retailers.
This operation serves a broad class of middle market
businesses, as well as specific customer groups.
Written Premiums - Premium volume in Business Insurance
of $478 million declined 23% in 1993. Much like the
reduction in Specialized Commercial premiums discussed
earlier, we expected a decline of this magnitude
because of our conscious efforts to reduce the volume
of business for which our loss experience had been
unacceptable. In 1993, we sharply reduced the amount of
workers' compensation business written, and we
intensified our efforts to ensure that business in this
market sector was adequately priced. In 1992, premium
volume was not directly comparable to 1991 totals due
to a realignment in our operations. Totals for 1991
include premiums from our Canadian operations, which in
1992 were reported in our International operation, and
premiums relating to Financial Services, which in 1992
were reported in Specialized Commercial. We continue to
operate in a very competitive pricing environment in
this segment of the domestic insurance market, a
situation which has contributed to the lack of premium
growth for several years.
Underwriting Result - The underwriting loss of $71
million for this operation was half the 1992 loss of
$142 million. A decline in catastrophe losses from $34
million in 1992 to $14 million in 1993 contributed to
this result; however, the significant reduction in the
volume of business in this operation was the dominant
factor in the reduced underwriting loss. In 1992,
catastrophe losses accounted for the majority of the
deterioration from 1991. Workers' compensation losses
were a significant factor in underwriting losses for
both 1992 and 1991.
Reinsurance
A reinsurance agreement transfers risk between
insurance companies. Our Reinsurance business operates
under the name St. Paul Re, which is based in New York
with an office in London. St. Paul Re underwrites
treaty and facultative reinsurance in both the domestic
and international marketplaces. Treaty reinsurance
covers whole classes or lines of business, while
facultative reinsurance covers specific risks.
Written Premiums - Written premiums of $431 million in
1993 increased 26% over 1992, primarily due to price
increases implemented for most of our property
reinsurance products (led by catastrophe reinsurance).
Reinsurance was one of the few operations in which
market conditions were amenable to price increases in
1993. In 1992, premium volume declined 6% from 1991 due
to our efforts to restrain growth in certain types of
coverages.
Underwriting Result - The underwriting loss of $45
million in 1993 was the best result posted by
Reinsurance in five years and represented a significant
improvement over the loss of $314 million in 1992.
Obviously, 1993 was a much calmer year in terms of
natural disasters than 1992, when we experienced the
most expensive storm in U.S. history - Hurricane Andrew
- - and a host of other weather-related disasters.
Reinsurance catastrophe losses of $25 million in 1993
were nearly $200 million less than the record losses of
$221 million incurred in 1992. In addition to price
increases on catastrophe coverages, we have increased
the deductibles that insurance companies pay before our
catastrophe coverage is triggered, and we have put
limits on the total amount we'll pay for a single
catastrophe. We continue to shift our book of business
from "pro rata" coverages to "excess of loss" coverages
in which we have more control over pricing. In 1992,
underwriting results deteriorated from the 1991 loss of
$126 million due to the unprecedented catastrophe
losses incurred.
Personal Insurance
Personal Insurance includes all personal property-
liability insurance coverages for homes, automobiles,
boats and other personal property. On Aug. 31, 1993, we
acquired Economy, a personal insurance underwriter (GRAPHIC IMAGE
based in Illinois. The St. Paul's focus has been on NO.6-SEE
PAK II, a package policy which combines auto and APPENDIX)
homeowners insurance, along with other personal
coverages, into one policy. Economy primarily markets
monoline policies, which offer coverage for specific
personal insurance needs, such as home or auto.
Written Premiums - Personal Insurance premiums of $388
million increased by nearly 72% in 1993, primarily due
to the addition of Economy, which recorded $127 million
in written premiums from the date of acquisition to the
end of the year. We also experienced a 25% increase in
PAK II volume in 1993, reflecting the continued
aggressive marketing efforts for this product. Since
the end of 1991, the total number of PAK II policies in
force has increased by 63%, totaling 107,000 at the end
of 1993. In 1992, the 11% growth in premium volume over
1991 resulted from a strong increase in PAK II volume.
Underwriting Result - Underwriting results rebounded
markedly in 1993, aided by a decline in catastrophe
losses and Economy's strong performance. The
underwriting loss of $16 million was one-third of the
$44 million loss in 1992, which was driven by
catastrophe losses from Hurricane Andrew. Economy
posted an underwriting profit of $9 million since its
acquisition. In 1992, underwriting results deteriorated
by over $30 million from 1991 due to catastrophe losses
and increased underwriting expenses associated with
exiting states where we chose not to do business.
Excluding the impact of catastrophes in both years, PAK
II loss experience in 1992 was slightly improved over
1991.
International
International includes direct insurance written in
foreign countries, primarily the United Kingdom and
Canada, and multinational accounts. We formed
International in 1992; this business was previously
reported in various underwriting operations of the
company.
Written Premiums - Premium volume of $172 million in
1993 was down 5% from 1992, primarily due to reduced
personal insurance business in the United Kingdom.
However, commercial insurance volume in the United
Kingdom increased by $29 million over 1992. Total
premiums generated in Canada also increased in 1993.
Premium volume in 1992 was not directly comparable to
1991 because we did not restate prior year totals to
include our Canadian operations, which accounted for
$39 million in premiums in 1992. We also experienced
strong growth in the United Kingdom in 1992.
Underwriting Result - The underwriting loss
deteriorated to $62 million in 1993, compared with a
loss of $48 million in 1992. An increase in losses
incurred on commercial business written in Canada and (GRAPHIC IMAGE
the United Kingdom accounted for the higher loss in NO.7-SEE
1993. The 1992 loss was $35 million worse than the APPENDIX)
comparable 1991 loss, primarily due to increased losses
in commercial and personal insurance in the United
Kingdom.
1994 Outlook- Our Restructured Underwriting Operations
We changed the organizational structure of our U.S.
Insurance Underwriting operations, effective January
1994. Our goal is to create a more efficient and
customer-focused organization. We have formed three
separate underwriting operations, each having a
distinct identity and each focused on particular
insurance market sectors. Reinsurance and International
will remain as separate operations and are not impacted
by this restructuring. The following is a discussion of
our 1994 outlook for each of the three new operations,
as well as for Reinsurance and International.
St. Paul Specialty - This new operation is composed of
Medical Services, National Accounts, Surety,
Construction, Custom Markets (which includes
Technology, Financial Services, Professional Liability,
Surplus Lines, Ocean Marine and Public Sector) and
Pools. This operation will focus on the specialized
needs of a variety of customers. In Medical Services,
we will continue to focus on new business development
in Major Accounts in 1994, where we experienced strong
growth in 1993. We will continue to strive for
profitable growth in all market sectors served by St.
Paul Specialty as economic conditions improve.
St. Paul Personal & Business Insurance - This operation
markets package and monoline personal insurance
products (including Economy's) and also serves small
commercial accounts (generally those which generate
less than $10,000 in annual premiums). In 1994, our
focus will be on integrating Economy into our existing
operations and continuing our aggressive efforts to
reduce the costs associated with underwriting business
in this market. We do not expect the level of
competition to abate in 1994; consequently, achieving
significant gains in market share will be difficult. We
do, however, expect to realize cost savings as a result
of our efforts to improve efficiency and productivity.
St. Paul Commercial - This operation primarily consists
of our former Business Insurance operation and will
focus on midsize commercial customers, which generate
between $10,000 and $1 million in annual premiums. To
enable this operation to be more responsive to the
unique needs of customers in particular geographic
areas, we have established 12 regional offices, each
headed by a regional president authorized to handle
transactions from start to finish. We believe the
regionalization of this operation will allow us to be
more responsive to the specific issues that affect
potential profitability in each region of the country.
Our challenge in 1994 will be completing the
restructuring while maintaining the underwriting and
pricing discipline instituted in our Business Insurance
operations in 1993.
Reinsurance - Our challenge in 1994 will be to sustain
the improvements we achieved in 1993 in this operation.
We believe our financial strength will allow us to take
advantage of opportunities out of the reach of some of
our competitors. We expect that premiums will increase
in 1994 due to continued price increases.
International - We intend to gradually increase our
International premium volume in 1994 and beyond by
employing the same approach we have successfully used
domestically - identifying "niche" markets and
developing superior products to meet customers' needs.
Reserves for Losses and Loss Adjustment Expenses
Loss reserves comprise the largest liability on our
balance sheet. We establish reserves that reflect our
estimates of the total losses and loss adjustment
expenses we will ultimately have to pay under insurance
and reinsurance policies. These claims include those
that have been reported but not settled, as well as
claims that have been incurred but not yet reported to
us. The length of time that reserves are carried on our
balance sheet is a function of the pay-out patterns for
the types of coverages involved. For example, reserves
for medical malpractice claims, which are frequently
settled many years after the claim is reported,
generally remain on our balance sheet longer than
reserves for property claims, which are usually settled
shortly after the claim is reported.
We establish loss reserves on an undiscounted basis
after deductions for deductibles and estimates of
salvage and subrogation, which combined totaled $611
million and $580 million at the end of 1993 and 1992,
respectively. Our loss reserve estimates reflect such
variables as past loss experience, social trends in
damage awards, changes in judicial interpretation of
legal liability and policy coverages and inflation. We
take into account not only monetary increases in the
cost of what we insure, but also changes in societal
factors that influence jury verdicts and case law and,
in turn, claim costs.
Subjective judgments are an integral component of our
loss reserving process, due to the nature of the
variables involved. We continually review our reserves,
using a variety of statistical and actuarial techniques
to analyze current claim costs, frequency and severity
data, and economic, social and legal factors. The
degree of judgment involved in estimating insurance
reserves is underscored by the fact that 47% of our
reserves at the end of 1993 pertained to our estimate
of losses that had been incurred but not reported to
us. We adjust reserves established in prior years as
loss experience develops and new information becomes
available. Adjustments to previously estimated reserves
are reflected in our financial results in the periods
in which they are made.
Reconciliation of Liability for Losses and Loss
Adjustment Expenses (LAE) - The accompanying table
presents a reconciliation of beginning and ending loss
reserves for the last three years. We have reclassified
incurred and paid losses in 1992 and 1991 to conform to
the 1993 presentation, which includes the results of
our U.K.-based underwriting operation, St. Paul UK, in
the current year and prior year information.
Year Ended December 31
(In millions) 1993 1992 1991
---- ---- ----
Loss and LAE reserves at
beginning of year, as reported $8,813 $8,246 $7,777
Less reinsurance recoverables on
unpaid losses at beginning of year (1,606) (1,558) (1,498)
----- ----- -----
Net loss and LAE reserves
at beginning of year 7,207 6,688 6,279
Economy reserves at acquisition 280 - -
Provision for losses and LAE
for claims incurred:
Current year 2,527 2,941 2,608
Prior years (223) (251) (242)
----- ----- -----
Total incurred 2,304 2,690 2,366
----- ----- -----
Losses and LAE payments
for claims incurred:
Current year (580) (708) (503)
Prior years (1,547) (1,452) (1,451)
----- ----- -----
Total paid (2,127) (2,160) (1,954)
Unrealized foreign exchange gain (24) (11) (3)
----- ----- -----
Net loss and LAE reserves
at end of year 7,640 7,207 6,688
Plus reinsurance recoverables on
unpaid losses at end of year 1,545 1,606 1,558
----- ----- -----
Loss and LAE reserves at
end of year, as reported $9,185 $8,813 $8,246
===== ===== =====
We recorded a $223 million reduction in prior year
loss reserves in 1993, compared with similar reductions
of $251 million and $242 million in 1992 and 1991,
respectively. Favorable loss development in all Medical
Services sectors and in Specialized Commercial drove
the 1993 reduction, while the 1992 and 1991 reductions
resulted from favorable loss development in Medical
Services. Claims on Medical Services coverages are
typically settled several years after they are
originally reported. Improvement in claim experience,
as well as changes in economic, social and legal trends
since the loss reserves were originally established,
caused us to reduce our estimate of the ultimate cost
of losses incurred. The decline in current year losses
incurred resulted from the marked decline in
catastrophe losses and improvement in noncatastrophe
loss experience.
Paid losses and loss adjustment expenses on current
year claims decreased by 18% in 1993 due to the decline
in catastrophe losses incurred. Because the majority of
our business involves liability coverages, which
typically experience longer pay-out patterns than
property coverages, the majority of our paid losses in
each year were on claims incurred in prior years.
Investments
Achieving appreciable growth in our investment income
continued to be a major challenge in the lower interest
rate environment which prevailed throughout 1993. Our
underwriting segment's pretax investment income of $646
million was essentially level with 1992 income of $642 (GRAPHIC IMAGE
million. Investment income in 1992 increased less than NO.8-SEE
1% over 1991. We have experienced essentially no growth APPENDIX)
in investment returns over the last few years due to
the lower yields available on new investments relative
to the average yield on investments maturing during
that period. For the three-year period ending Dec. 31,
1993, fixed-maturity investments of $2.8 billion with
an average yield of 10.3% matured or were redeemed,
while the average yield on new investments purchased in
those three years was 6.8%, including an average yield
of only 6.4% in 1993. The fact that we purchased
approximately $1.7 billion of tax-exempt securities in
those years, which have lower yields than taxable
securities, also contributed to the lack of growth in
pretax investment income. In 1993, despite the fact
that our investment purchases were almost exclusively
taxable securities, our fixed-maturity portfolio's
weighted average pretax yield fell to 7.4%, compared
with 8.0% and 8.4% in 1992 and 1991, respectively.
After subtracting the $760 million increase in the
carrying value of our fixed-maturity portfolio in 1993
(which resulted from our new practice of recording
these securities at estimated market value), our total
underwriting investment portfolio increased to $10.1
billion at the end of 1993, an increase of 9% over
1992. Invested assets in 1992 increased 7% over year-
end 1991. The primary sources of funds to build our
investment portfolio are underwriting cash flows, which
consist of the excess of premiums collected over losses
and expenses paid, and investment cash flows, which
consist of income on existing investments and proceeds
from sales and maturities of investments. Our
investment portfolio continued to grow at a strong pace
in 1993 due to positive underwriting cash flows.
The quality of our investment portfolio remains very
high. Our investment strategy mirrors our corporate
philosophy - maximizing shareholder return while
maintaining financial integrity. In spite of a
sustained period of declining returns from fixed-
maturity securities, we have not compromised the
quality of our investment portfolio by increasing our
holdings of other investment vehicles that have
potential for higher short-term returns but also carry
more long-term risk. At the end of 1993, our fixed-
maturities portfolio comprised 85% of the underwriting
segment's total investments, and 95% of that portfolio
was rated at investment grade levels (BBB or better).
The remainder of the portfolio consisted of nonrated
securities, most of which would be considered
investment grade quality if rated.
The carrying value of our equity-security portfolio
at the end of the year was $516 million, which included
$62 million of unrealized appreciation. Equities
account for 5% of total investments. We recorded
dividend income of $12 million and realized gains of
$43 million from this portfolio in 1993.
The remainder of our invested assets consist of real
estate, venture capital, short-term investments and
other miscellaneous investments, which in the aggregate
comprised 10% of the portfolio at the end of 1993.
These investments have potential for higher returns but
also carry more risk, including less liquidity and
greater uncertainty of rate of return. Our venture
capital carrying value included $73 million of
unrealized appreciation at Dec. 31, 1993. We recorded
$24 million of realized gains from sales of venture
capital investments in 1993. Our real estate holdings
consist of direct and joint venture investments - we do
not have a portfolio of real estate mortgage loans.
1994 Outlook - Investment-grade, intermediate-term
fixed-maturity securities will continue to constitute
the majority of our investment purchases in 1994. As
was the case in 1993, we expect that most of these (GRAPHIC IMAGE
purchases will be taxable securities in consideration NO.9-SEE
of our consolidated tax position. We expect the low APPENDIX)
interest rate environment to continue throughout 1994.
However, barring unusually severe losses which would
restrict cash flow, we expect slightly higher
investment income. We will also pursue attractive
investment opportunities in our other asset classes.
INSURANCE BROKERAGE FOCUSES ON SPECIALTY MARKETS
The insurance brokerage segment includes the combined
results of all our brokerage companies, which are
managed by the Minet Group in London. Minet's operating
results in recent years have been negatively impacted
by the combined effect of a stagnant worldwide economy
and excess capacity in primary insurance markets, which
has dampened demand for its brokerage services.
However, Minet's pretax loss of $13 million in 1993 was
a significant improvement over the 1992 pretax loss of
$433 million. The 1992 loss included a $365 million
write-down in the value of goodwill and a provision of
$39 million for reorganization costs and other
nonrecurring charges. The impact of these one-time
charges in 1992 and goodwill amortization for both (GRAPHIC IMAGE
years must be subtracted from the pretax losses to NO.10-SEE
provide a more meaningful comparison of Minet's APPENDIX)
operational performance. On this comparative basis,
Minet's 1993 pretax loss was $4 million, compared with
a loss of $8 million in 1992. Operating expenses
declined 4% from 1992, primarily resulting from
aggressive expense control efforts. In 1991, Minet
posted pretax earnings of $9 million.
The Minet companies are engaged in retail, wholesale
and reinsurance broking on a worldwide basis. Retail
brokers act on behalf of organizations such as
corporations and partnerships by providing risk
management advisory services and procuring insurance
coverages. Wholesale brokers act on behalf of retail
brokers by procuring specialty insurance coverages.
Reinsurance brokers act as intermediaries to service
the reinsurance needs of insurers. Minet is a broker of
specialized coverages in several markets, such as
professional indemnity, construction, financial
institutions and energy. The purpose of the 1992
reorganization of Minet's operating structure was to
enable Minet to be profitable despite unfavorable
external factors. Minet no longer strives to be an "all-
purpose" broker, but rather focuses on the specialty
markets in which it has experienced success in the
past. We believe that the improvement in operating
results in 1993, although relatively modest, is an
indication that Minet's new focus can be successful in
a difficult market environment.
Total insurance brokerage revenues were $321 million
in 1993, a slight decline from 1992 revenues of $328
million. Fees and commissions grew modestly in 1993.
However, investment income decreased by $8 million in
1993, due primarily to a general decline in
international interest rates and a reduction in funds
available for investment. In 1992, brokerage fees and
commissions were near 1991 levels.
Minet's reinsurance broking operation posted
increased earnings in 1993, driven by an increase in
brokerage fees and commissions. The severe worldwide
catastrophe losses experienced in 1992 resulted in a
tightening of capacity in the catastrophe reinsurance
market, which in turn increased the demand for Minet's
brokerage services. Minet also acquired a reinsurance
brokerage company in 1993, which contributed to the
growth in revenues. Minet's retail brokerage revenues
declined from 1992; however, results improved due to a
sharp decrease in operating expenses. Wholesale
brokerage improved slightly over 1992 due to an
increase in revenues. In 1992, Minet's reinsurance
brokerage results improved over 1991, but both retail
and wholesale results were adversely impacted by excess
capacity in primary insurance markets.
The goodwill write-down in 1992 occurred after we
analyzed our estimates of Minet's discounted future
earnings and concluded that our carrying value was
significantly higher than its estimated value. The
write-down was a noncash charge with no related tax
benefit.
1994 Outlook - We believe that Minet is poised to
achieve further improvement in 1994. Newly streamlined
after the complete reorganization of its operations,
Minet is positioned to take advantage of emerging
trends in the marketplace. We are seeking to expand
Minet's specialty operations through the acquisition of
existing brokerage companies and the recruitment of new
brokers to augment its current operations. Efforts to
contain expenses will continue.
INVESTMENT BANKING-ASSET MANAGEMENT POSTS RECORD
EARNINGS
Our investment banking-asset management segment
consists of The John Nuveen Company. Nuveen achieved
record pretax income of $112 million in 1993, of which
we recorded $83 million after deducting the minority
shareholders' interest of $29 million. Nuveen's pretax
earnings in 1992 were $98 million (our share was $82
million), and 1991 earnings were $77 million.
Management fees earned from providing investment
advisory services on assets under management drove
earnings in all three years. We sold a minority
interest in Nuveen through an initial public offering
in 1992, after which we retained 74% ownership.
Consequently, our consolidated results reflect 100% of
Nuveen's earnings up to the date of sale in 1992 and
74% of earnings thereafter. We realized a pretax gain
of $98 million and proceeds of $137 million on the
minority interest sale in 1992.
Nuveen markets tax-exempt open-end and closed-end
(exchange-traded) managed fund shares and provides
investment advice to and administers the business (GRAPHIC IMAGE
affairs of its family of managed funds. Nuveen also NO.11-SEE
underwrites and trades municipal bonds and tax-exempt APPENDIX)
unit investment trusts (UITs), and provides pricing and
surveillance services to its UITs.
Revenues increased by 11% in 1993, driven by a 27%
increase in investment advisory fees earned. In 1992,
these fees grew by 47% over 1991. These large increases
resulted from the significant growth in assets under
management.
Total assets under Nuveen's management were $32.7
billion at the end of 1993, a 20% increase over the
comparable 1992 total of $27.3 billion and over $10
billion higher than year-end 1991. The growth in these
managed assets is largely the result of sponsoring new
tax-free fund products. The increase in managed assets
also reflects increased sales over redemptions of
existing tax-free open-end fund products, reinvestment
of fund dividends and interest distributions of Nuveen-
sponsored UITs, and increases in the value of the
underlying municipal bond investments of the funds.
In 1993, Nuveen sold $4.0 billion of tax-exempt,
exchange-traded funds, down slightly from 1992 sales of
$4.2 billion. Total sales in 1991 were $7.3 billion.
The decline reflected increased competition in the
leveraged closed-end fund market. Sales of UITs in 1993
declined for the second year in a row due to the low
interest rate environment and increased competition for
investor attention from equity markets. UIT sales were
$1.4 billion in 1993, compared with $1.9 billion and
$2.3 billion in 1992 and 1991, respectively.
Nuveen's sales of municipal securities increased by
12% to just under $2.6 billion in 1993, reflecting an
increase in municipal bond new issue and refunding
activity. During 1993, Nuveen was senior manager or co-
manager in 128 municipal underwritings totaling $7.8
billion, compared with 127 municipal underwritings
totaling $4.7 billion in 1992.
Environmental Claims
Our 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 our underwriting operations
for these claims. In our opinion, court decisions in
certain jurisdictions have tended to expand insurance
coverage beyond the intent of the original policies.
Our 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 our 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. We maintain a claim staff that
continually evaluates our exposure to pollution
liability losses. At the end of 1993, our total
reserves for pollution-related losses were
approximately $75 million.
Despite these difficulties in estimating potential
liability, we believe that our 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 our underwriting
operations' commercial book of business was largely
composed of small- to medium-sized businesses without
significant exposure to pollution liability. In
addition, we believe our current mix of commercial
business carries a relatively low risk of significant
pollution liability. Finally, our 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 us to make additional
adjustments to the reserves for these claims in the
future, but, in our judgment, such adjustments should
not have a material adverse impact on our financial
position.
Capital Resources and Liquidity
Capital Resources
Capital resources consist of our common shareholders'
equity and debt outstanding, representing those funds (GRAPHIC IMAGE
deployed or available to be deployed to support our NO.12-SEE
business operations. The following table summarizes our APPENDIX)
capitalization for the last three years:
December 31
(In millions) 1993 1992 1991
----- ----- -----
Common shareholders' equity $3,005 $2,202 $2,533
Debt 640 567 487
----- ----- -----
Total capitalization $3,645 $2,769 $3,020
===== ===== =====
Ratio of debt to total capitalization 18% 20% 16%
===== ===== =====
Our strong earnings for the year contributed to the
increase in capital funds in 1993, but approximately
$500 million of the increase was due to the unrealized
appreciation (net of taxes) recorded on our fixed-
maturity portfolio. This new practice pushed our common
shareholders' equity past the $3 billion mark for the
first time in company history. At the end of 1992,
total capital resources had declined from 1991 due to
severe operating losses and a significant repurchase of
common stock outstanding during the year.
Total debt outstanding at Dec. 31, 1993, grew
primarily due to increased short-term borrowings by
Nuveen. We issued $77 million of medium-term notes in
1993 at interest rates ranging from 5.9% to 6.7%. Our
commercial paper outstanding fell to just over $200
million, a decline of almost $30 million during the
year. We also repaid the remaining $25 million of St.
Paul loan notes that we issued in 1988. In 1992, debt
outstanding increased $80 million over year-end 1991,
primarily due to the issuance of medium-term notes
during the year. Total debt did not materially change
in 1991.
We may issue additional medium-term notes in 1994 to
take advantage of the relatively low interest rate
environment currently prevailing. At year-end, we had
the capacity to issue an additional $288 million of
debt under a $300 million shelf registration with the
Securities and Exchange Commission.
In 1993, our major capital transaction consisted of
the purchase of Economy from Kemper Corporation. Our
total investment in Economy is approximately $395
million, of which we paid $295 million in cash. The
remainder of the purchase price consisted of a $100
million contribution of securities to the capital of
Economy. This acquisition was financed with internal
funds.
We repurchased and retired 793,000 shares of our
common stock in 1992 for a total cost of $58 million.
We also completed construction of Minet's office (GRAPHIC IMAGE
building in London and renovation of our existing NO.13-SEE
headquarters building in Saint Paul, Minn. The total APPENDIX)
cost of these projects in 1992 was $43 million, which
was funded internally.
In 1991, our major capital transactions consisted of
funding the completion of a new headquarters building
and renovation of our existing building, both in Saint
Paul, and we continued construction of Minet's building
in London. The total cost of these projects in 1991 was
$64 million, which was funded internally.
In February 1994, we announced that we may repurchase
up to one million of our outstanding common shares from
time to time in 1994 depending on market conditions to
meet the needs of our stock-based employee compensation
programs. The cost of any such repurchase will be
funded internally. We anticipate no additional major
capital expenditures during 1994.
Liquidity
We define liquidity as our ability to generate
sufficient cash flows to meet the short- and long-term
cash requirements of our business operations. Our short-
term cash needs primarily consist of funding insurance
loss and loss adjustment expense payments and day-to-
day operating expenses. These needs are met through
cash receipts from our operations, primarily composed
of insurance premiums collected, investment income,
insurance brokerage fees and commissions and investment
banking-asset management revenues. Our net positive
cash flow from operations is used to fund our
commitments and to build the investment portfolio,
thereby increasing future investment income.
Because of the nature of our business operations, in
which premiums are collected and invested before
related losses are paid, we believe our liquidity
requirements beyond 1994 will be adequately funded by
operational cash flows. However, our financial strength
and relatively conservative level of debt currently
outstanding provide us with the flexibility and
capacity to obtain funds externally through debt or
equity financings.
We generated net operational cash flows of $733
million in 1993, compared with $587 million in 1992 and
$719 million in 1991. Operating cash flows in our
underwriting segment in 1993 increased strongly over
1992 as a result of a decline in paid losses pertaining
to catastrophes and reinsurance recoveries on
catastrophe losses incurred in 1992. Insurance
brokerage cash flows were level with 1992.
In 1992, cash flows from operations declined from
1991 primarily due to an 11% increase in insurance
losses paid, a large portion of which was related to
catastrophes. Insurance brokerage cash flows also
declined in 1992 as a result of operating losses. The
goodwill write-down in 1992 was a noncash charge and
had no cash flow impact. Operational cash flows in each
of the last three years have been more than adequate to
meet the liquidity requirements for our business
operations.
Our investment portfolio is also a source of
liquidity should the need arise, in the form of readily
marketable fixed maturities, common stocks and short-
term investments.
New Accounting Standard
The Financial Accounting Standards Board issued SFAS
No. 112, "Employers Accounting for Postemployment
Benefits," to be implemented no later than 1994. This
statement establishes standards for employers who
provide benefits to former or inactive employees after
employment but before retirement (postemployment
benefits). Employers are required to recognize the
obligation to provide postemployment benefits if
certain conditions are met. Our current practice is to
record workers' compensation benefits on the accrual
basis and record all other postemployment benefits on
the cash basis. We do not expect the implementation of
this statement to materially affect the results of our
operations.
APPENDIX TO ITEM 7-NARRATIVE DESCRIPTION OF GRAPHIC IMAGES
CONTAINED IN PAPER FORMAT VERSION OF MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
-------------------------------------------------
GRAPHIC IMAGE NO. 1-Bar graph depicting Operating Earnings (Loss) per
Common Share for the years 1989 through 1993.
1989: $6.91
1990: $8.19
1991: $8.47
1992: ($8.08)
1993: $8.55
CAPTION: "The St. Paul generated record operating
earnings in 1993 after a record loss in 1992.
Corrective underwriting actions and a decline
in catastrophe losses drove the improvement
in 1993."
GRAPHIC IMAGE NO. 2-Bar graph depicting Return on Equity for the years
1989 through 1993.
1989: 16.8%
1990: 16.1%
1991: 17.0%
1992: --
1993: 17.2%
CAPTION: "This ratio is calculated by dividing operating
earnings (less preferred dividends) by
common shareholders' equity at the beginning
of the year."
GRAPHIC IMAGE NO. 3-Illustration of continental United States with the following
caption: "The St. Paul's U.S. Insurance Underwriting
operations were restructured effective Jan. 1, 1994.
Three operations-St. Paul Specialty, St. Paul Commercial
and St. Paul Personal and Business Insurance-were formed
from Specialized Commercial (Industry Underwriting,
Specialty Underwriting, Surety, Financial Services),
Medical Services, Business Insurance and Personal
Insurance."
GRAPHIC IMAGE NO. 4-Illustration of construction girders with following
caption: "St. Paul Surety is the largest surety under-
writer in the United States."
GRAPHIC IMAGE NO. 5-Illustration of medical equipment with the following
caption: "The St. Paul's Medical Services operation is
the nation's largest underwriter of medical liability
insurance."
GRAPHIC IMAGE NO. 6-Illustration of single-family home with the following
caption: "The acquisition of Economy Fire & Casualty
Company in August 1993 helped boost Personal Insurance
premiums to $388 million in 1993 from $226 million in
1992."
GRAPHIC IMAGE NO. 7-Illustration of various countries' flags with the
following caption: "St. Paul International underwrites
property-liability insurance in the United Kingdom,
Spain and the Republic of Ireland. The St. Paul also
underwrites business in Canada."
GRAPHIC IMAGE NO. 8-Bar graph depicting Underwriting Operations Invested
Assets for the years 1989 through 1993.
(In Billions)
1989: $7.8
1990: $8.1
1991: $8.6
1992: $9.2
1993: $10.9
CAPTION: "Our invested assets have grown at a compound rate of
9% over the last five years."
GRAPHIC IMAGE NO. 9-Graph depicting composition of Underwriting Operations
Investment Portfolio at the end of 1993.
Fixed Maturities 85%
Equities 5%
Real Estate 4%
Venture Capital 3%
Short-term and
Other Investments 3%
CAPTION: "The obligation to pay claims when they come due drives the
portfolio mix, which is heavily weighted toward high-quality
bonds."
GRAPHIC IMAGE NO. 10-Illustration of painting, tanker and oil rig with the
following caption: "Minet is a specialty broker and
adviser, serving clients in construction, financial
institutions, marine and energy, fine arts and jewelry,
professional services and other businesses."
GRAPHIC IMAGE NO. 11-Bar graph depicting Pretax Earnings, The John Nuveen
Company, for the years 1989 through 1993.
(In Millions)
1989: $38
1990: $47
1991: $77
1992: $98
1993: $112
CAPTION: "The St. Paul's portion of Nuveen's record $112 million 1993
pretax earnings was $83 million. The St. Paul owns 74% of Nuveen
after selling a minority interest in 1992."
GRAPHIC IMAGE NO. 12-Bar graph depicting Book Value per Common Share at the
end of the years 1989 through 1993.
1989: $47.65
1990: $52.00
1991: $59.57
1992: $52.37
1993: $70.95
CAPTION: "Common Shareholders' equity reached a new high of $3 billion,
or $70.95 per share at year-end."
GRAPHIC IMAGE NO. 13-Bar graph depicting Ratio of Debt to Total Capitalization
at the end of the years 1989 through 1993.
1989: 11.1%
1990: 17.7%
1991: 16.1%
1992: 20.5%
1993: 17.6%
CAPTION: "We maintain a conservative level of debt as a percentage of our
total capital. Growth in common shareholders' equity drove the
decrease in 1993."
Item 6. SELECTED FINANCIAL DATA.
-----------------------
Consolidated
For the year ended December 31
(Dollars in thousands) 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ----
FROM CONTINUING OPERATIONS
Revenues $4,460,172 $4,498,692 $4,351,700 $4,005,237 $3,788,648 $3,634,953
Operating earnings (loss) 386,628 (333,791) 380,804 385,458 338,267 349,261
Income (loss) before cumulative effects
and extraordinary credit 427,609 (232,521) 405,062 391,270 398,158 352,615
INVESTMENT ACTIVITY
Net investment income 661,106 666,374 675,604 669,989 662,211 592,032
Realized investment gains (losses),
net of taxes 40,981 36,437 24,258 5,812 59,891 3,354
Change in unrealized appreciation
of investments, net of taxes* 525,175 (23,815) 55,093 (67,558) 60,045 20,428
OTHER SELECTED FINANCIAL DATA
(As of December 31)
Total assets 17,149,196 15,392,054 14,744,717 13,907,293 12,734,411 11,997,989
Debt 639,729 566,717 486,779 473,829 293,802 417,140
Common shareholders' equity 3,005,128 2,202,499 2,532,841 2,196,371 2,349,254 2,015,219
Common shares outstanding 42,357,338 42,059,277 42,521,242 42,234,029 49,303,881 46,364,084
PER COMMON SHARE DATA
Operating earnings (loss) 8.55 (8.08) 8.47 8.19 6.91 7.26
Income (loss) before cumulative effects
and extraordinary credit 9.47 (5.69) 9.01 8.31 8.12 7.32
Book value 70.95 52.37 59.57 52.00 47.65 43.47
Market price 89.88 77.00 72.88 62.75 59.13 43.50
Cash dividends declared 2.80 2.72 2.60 2.40 2.20 2.00
OPERATING EARNINGS RETURN
ON BEGINNING EQUITY 17.2% - 17.0% 16.1% 16.8% 20.4%
Underwriting
For the year ended December 31
(Dollars in thousands) 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ----
Written premiums $3,178,545 $3,142,419 $3,233,729 $3,052,032 $2,807,223 $2,690,536
Statutory underwriting result (143,599) (557,463) (170,894) (141,751) (207,977) (92,741)
GAAP underwriting result (150,255) (566,886) (163,782) (120,730) (196,378) (90,209)
Net investment income 646,396 642,301 640,856 629,242 614,119 548,766
Pretax operating earnings (loss) 457,752 20,781 451,184 457,161 364,352 420,339
Pretax income (loss) 507,181 81,132 486,063 466,731 456,167 424,187
Statutory combined ratio:
Loss and loss expense ratio 72.5 85.6 75.2 73.2 75.7 73.6
Underwriting expense ratio 32.0 32.2 29.4 30.0 30.5 30.0
---- ---- ---- ---- ---- ----
Combined ratio 104.5 117.8 104.6 103.2 106.2 103.6
Combined ratio including
policyholders' dividends 104.7 118.2 105.0 104.2 106.6 104.0
<FN>
* The change for 1993 includes the impact of adopting SFAS No. 115.
Consolidated
For the year ended December 31
(Dollars in thousands) 1987 1986 1985 1984 1983
---- ---- ---- ---- ----
FROM CONTINUING OPERATIONS
Revenues $3,358,918 $3,190,754 $2,762,126 $2,366,528 $2,096,173
Operating earnings (loss) 324,315 153,882 42,061 (196,794) 116,027
Income (loss) before cumulative effects
and extraordinary credit 318,826 159,585 90,899 (192,850) 125,551
INVESTMENT ACTIVITY
Net investment income 534,767 458,710 381,280 327,608 284,154
Realized investment gains (losses),
net of taxes (5,489) 5,703 48,838 3,944 9,524
Change in unrealized appreciation
of investments, net of taxes (19,959) (13,396) 3,317 (32,744) (17,831)
OTHER SELECTED FINANCIAL DATA
(As of December 31)
Total assets 9,712,307 8,669,598 7,861,877 6,176,745 5,807,111
Debt 96,576 344,299 750,876 126,932 128,660
Common shareholders' equity 1,711,362 1,440,565 1,012,245 968,692 1,286,712
Common shares outstanding 46,301,857 46,247,850 40,100,450 40,089,946 40,079,884
PER COMMON SHARE DATA
Operating earnings (loss) 6.76 3.33 1.05 (4.91) 2.75
Income (loss) before cumulative effects
and extraordinary credit 6.64 3.45 2.27 (4.81) 2.98
Book value 36.96 31.15 25.24 24.16 32.10
Market price 46.00 40.25 39.94 26.81 30.25
Cash dividends declared 1.76 1.50 1.50 1.50 1.40
OPERATING EARNINGS RETURN
ON BEGINNING EQUITY 22.5% 15.2% 4.3% - 8.8%
Underwriting
For the year ended December 31
(Dollars in thousands) 1987 1986 1985 1984 1983
---- ---- ---- ---- ----
Written premiums $2,704,165 $2,556,425 $2,234,910 $1,894,355 $1,744,091
Statutory underwriting result (145,061) (265,105) (460,306) (574,447) (241,820)
GAAP underwriting result (127,066) (275,184) (408,755) (572,542) (231,138)
Net investment income 498,251 431,594 366,687 313,395 273,386
Pretax operating earnings (loss) 358,493 142,532 (58,387) (261,134) 34,827
Pretax income (loss) 351,358 151,552 31,674 (254,332) 49,820
Statutory combined ratio:
Loss and loss expense ratio 76.2 82.0 91.3 99.4 81.3
Underwriting expense ratio 28.9 27.9 28.5 30.9 31.8
---- ---- ---- ---- ----
Combined ratio 105.1 109.9 119.8 130.3 113.1
Combined ratio including
policyholders' dividends 105.3 110.5 120.8 131.0 113.5
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
Management's Responsibility for Financial Statements
Scope of Responsibility - Management prepares the
accompanying financial statements and related
information and is responsible for their integrity and
objectivity. The statements were prepared in conformity
with generally accepted accounting principles. These
financial statements include amounts that are based on
management's estimates and judgments, particularly our
reserves for losses and loss adjustment expenses. We
believe that these statements present fairly the
company's financial position and results of operations
and that the other information contained in the annual
report is consistent with the financial statements.
Internal Controls - We maintain and rely on a system of
internal accounting controls designed to provide
reasonable assurance that assets are safeguarded and
transactions are properly authorized and recorded. We
continually monitor these internal accounting controls,
modifying and improving them as business conditions and
operations change. Our internal audit department also
independently reviews and evaluates these controls. We
recognize the inherent limitations in all control
systems and believe that our systems provide an
appropriate balance between the costs and benefits
desired. We believe our systems of internal accounting
controls provide reasonable assurance that errors or
irregularities that would be material to the financial
statements are prevented or detected in the normal
course of business.
Independent Auditors - Our independent auditors, KPMG
Peat Marwick, have audited the consolidated financial
statements. Their audit was conducted in accordance
with generally accepted auditing standards, which
includes the consideration of our internal controls to
the extent necessary to form an independent opinion on
the consolidated financial statements prepared by
management.
Audit Committee - The audit committee of the board of
directors, composed solely of outside directors,
oversees management's discharge of its financial
reporting responsibilities. The committee meets
periodically with management, our internal auditors and
representatives of KPMG Peat Marwick to discuss
auditing, financial reporting and internal control
matters. Both internal audit and KPMG Peat Marwick have
access to the audit committee without management's
presence.
Code of Conduct - We recognize our responsibility for
maintaining a strong ethical climate. This
responsibility is addressed in the company's written
code of conduct.
/s/ Douglas W. Leatherdale /s/ Howard E. Dalton
- -------------------------- --------------------
Douglas W. Leatherdale Howard E. Dalton
Chairman, President and Senior Vice President
Chief Executive Officer Chief Accounting Officer
Independent Auditors' Report
The Board of Directors and Shareholders
The St. Paul Companies, Inc.:
We have audited the accompanying consolidated balance
sheets of The St. Paul Companies, Inc. and subsidiaries
as of December 31, 1993 and 1992, and the related
consolidated statements of operations, common
shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1993.
These consolidated financial statements are the
responsibility of the company's management. Our
responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are
free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles
used and significant estimates made by management, as
well as evaluating the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material
respects, the financial position of The St. Paul
Companies, Inc. and subsidiaries at December 31, 1993
and 1992, and the results of their operations and their
cash flows for each of the years in the three-year
period ended December 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in Notes 1 and 13 to the consolidated
financial statements, the company adopted the
provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and
Equity Securities," and No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts," in 1993.
Also, as discussed in Notes 5 and 7 to the
consolidated financial statements, the company adopted
the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," and No. 106,
"Accounting for Postretirement Benefits Other Than
Pensions," in 1992.
/s/ KPMG Peat Marwick
- ---------------------
KPMG Peat Marwick
Saint Paul, Minnesota
January 24, 1994
The St. Paul Companies
Consolidated Statements of Operations
Year Ended December 31
(In thousands) 1993 1992 1991
------ ------ ------
REVENUES
Premiums earned $3,178,338 $3,143,246 $3,146,238
Net investment income 661,106 666,374 675,604
Insurance brokerage fees and
commissions 283,680 280,836 284,702
Investment banking-asset
management 241,730 218,825 175,610
Realized investment gains 58,254 57,451 38,008
Realized gain on sale of minority
interest in Nuveen - 98,284 -
Other 37,064 33,676 31,538
-----------------------------------
Total revenues 4,460,172 4,498,692 4,351,700
-----------------------------------
EXPENSES
Insurance losses and loss
adjustment expenses 2,303,738 2,690,046 2,365,569
Policy acquisition expenses 732,137 789,305 757,098
Operating and administrative 901,691 879,404 700,972
Write-down of goodwill - 365,000 -
-----------------------------------
Total expenses 3,937,566 4,723,755 3,823,639
-----------------------------------
Income (loss) before
income taxes 522,606 (225,063) 528,061
Income tax expense (benefit):
Federal current 148,508 109,740 190,520
Other (53,511) (102,282) (67,521)
-----------------------------------
Total income tax expense 94,997 7,458 122,999
-----------------------------------
Income (loss) before cumulative
effects of accounting changes 427,609 (232,521) 405,062
Cumulative effects of accounting
changes:
Income taxes - 126,047 -
Postretirement benefits - (49,564) -
-----------------------------------
Net Income (Loss) $ 427,609 $ (156,038) $ 405,062
===================================
PRIMARY EARNINGS (LOSS)
PER COMMON SHARE
Income (loss) before cumulative effects
of accounting changes $ 9.84 $ (5.69) $ 9.35
Cumulative effects of accounting
changes:
Income taxes - 2.98 -
Postretirement benefits - (1.17) -
-----------------------------------
Net Income (Loss) $ 9.84 $ (3.88) $ 9.35
===================================
FULLY DILUTED EARNINGS (LOSS)
PER COMMON SHARE
Income (loss) before cumulative effects
of accounting changes $ 9.47 $ (5.69) $ 9.01
Cumulative effects of accounting
changes:
Income taxes - 2.98 -
Postretirement benefits - (1.17) -
-----------------------------------
Net Income (Loss) $ 9.47 $ (3.88) $ 9.01
===================================
See notes to consolidated financial statements.
The St. Paul Companies
Consolidated Balance Sheets
December 31
(In thousands) 1993 1992
------ ------
ASSETS
Investments:
Fixed maturities $ 9,147,964 $ 7,722,479
Equities 548,682 493,797
Real estate 488,691 435,079
Venture capital 297,982 231,159
Other investments 47,834 55,561
Short-term investments 725,261 638,685
---------- ----------
Total investments 11,256,414 9,576,760
Cash 25,420 26,648
Investment banking
inventory securities 305,804 226,332
Reinsurance recoverables:
Unpaid losses 1,545,026 1,605,824
Paid losses 94,437 146,046
Receivables:
Underwriting premiums 1,008,034 1,103,315
Insurance brokerage
activities 805,209 656,042
Interest and dividends 174,852 167,939
Other 105,513 92,767
Deferred policy acquisition
expenses 294,860 280,130
Ceded unearned premiums 238,633 189,382
Deferred income taxes 425,012 599,576
Office properties and
equipment 455,861 462,796
Goodwill 284,276 121,349
Other assets 129,845 137,148
---------- ----------
Total Assets $17,149,196 $15,392,054
========== ==========
LIABILITIES
Insurance reserves:
Losses and loss adjustment
expenses $ 9,185,191 $ 8,812,559
Unearned premiums 1,875,635 1,709,011
---------- ----------
Total insurance reserves 11,060,826 10,521,570
Debt 639,729 566,717
Payables:
Insurance brokerage activities 1,083,845 935,457
Reinsurance premiums 138,150 143,878
Income taxes 162,645 109,451
Accrued expenses and other 593,205 507,124
Other liabilities 466,989 405,931
---------- ----------
Total Liabilities 14,145,389 13,190,128
---------- ----------
Convertible preferred stock 147,608 149,161
Guaranteed obligation - PSOP (148,929) (149,734)
----------- ----------
Net Convertible Preferred Stock (1,321) (573)
----------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock 438,559 422,249
Retained earnings 2,082,832 1,781,113
Guaranteed obligation - ESOP (56,005) (67,452)
Unrealized appreciation
of investments 588,844 63,669
Unrealized gain (loss) on
foreign currency translation (49,102) 2,920
---------- ----------
Total Common Shareholders'
Equity 3,005,128 2,202,499
---------- ----------
Total Liabilities, Preferred Stock and
Common Shareholders' Equity $17,149,196 $15,392,054
========== ==========
See notes to consolidated financial statements.
The St. Paul Companies
Consolidated Statements of Common Shareholders' Equity
Year Ended December 31
(In thousands) 1993 1992 1991
----- ----- -----
COMMON SHAREHOLDERS' EQUITY
Common stock:
Beginning of year $ 422,249 $ 414,257 $ 398,694
Stock issued under stock option
and other incentive plans 16,334 15,862 15,593
Reacquired common shares (24) (7,870) (30)
-------- -------- --------
End of year 438,559 422,249 414,257
-------- -------- --------
Retained earnings:
Beginning of year 1,781,113 2,108,923 1,820,360
Net income (loss) 427,609 (156,038) 405,062
Dividends declared on common
stock, $2.80 per share in 1993
($2.72 in 1992 and $2.60 in 1991) (116,962) (113,478) (108,285)
Dividends declared on preferred
stock, net of taxes (8,395) (8,349) (8,037)
Reacquired common shares (533) (49,945) (177)
-------- -------- --------
End of year 2,082,832 1,781,113 2,108,923
-------- -------- --------
Guaranteed obligation - ESOP:
Beginning of year (67,452) (78,564) (90,156)
Principal payments 11,447 11,112 11,592
-------- -------- --------
End of year (56,005) (67,452) (78,564)
-------- -------- --------
Unrealized appreciation of
investments, net of taxes:
Beginning of year 63,669 87,484 32,391
Change due to adoption of
SFAS No. 115 501,982 - -
Other changes for the year 23,193 (23,815) 55,093
-------- -------- --------
End of year 588,844 63,669 87,484
-------- -------- --------
Unrealized gain (loss) on foreign
currency translation, net of taxes:
Beginning of year 2,920 741 35,082
Change for the year (52,022) 2,179 (34,341)
-------- -------- --------
End of year (49,102) 2,920 741
-------- -------- --------
Total Common Shareholders'
Equity $3,005,128 $2,202,499 $2,532,841
========= ========= =========
See notes to consolidated financial statements.
The St. Paul Companies
Consolidated Statements of Cash Flows
Year Ended December 31
(In thousands) 1993 1992 1991
----- ----- -----
OPERATING ACTIVITIES
Underwriting:
Net income $ 423,109 $ 218,261 $ 390,593
Adjustments:
Change in net insurance reserves 204,423 515,202 522,338
Change in underwriting
premiums receivable 89,441 64,336 (82,753)
Deferred tax benefit (48,976) (113,435) (110,262)
Cumulative effects of
accounting changes - (99,092) -
Realized gains (49,429) (60,351) (34,880)
Other 157,560 91,658 25,422
-------- -------- --------
Total underwriting 776,128 616,579 710,458
-------- -------- --------
Insurance brokerage:
Net loss (24,710) (442,830) (6,313)
Adjustments:
Change in premium balances (20,718) 3,768 17,674
Change in accounts payable
and accrued expenses (8,985) 9,732 (15,370)
Depreciation and goodwill
amortization 20,233 33,717 33,052
Write-down of goodwill - 365,000 -
Other (2,833) (8,308) (7,716)
-------- -------- --------
Total insurance brokerage (37,013) (38,921) 21,327
-------- -------- --------
Investment banking-asset management:
Net income 52,103 49,653 47,886
Adjustments:
Change in inventory securities (79,472) 5,150 3,814
Change in short-term
borrowings 60,383 (2,000) 8,300
Change in open security
transactions (3,143) (4,562) (20,845)
Other 8,872 18,960 (25,980)
-------- -------- --------
Total investment banking-
asset management 38,743 67,201 13,175
-------- -------- --------
Parent company and consolidating eliminations:
Net income (loss) (22,893) 18,878 (27,104)
Realized gains (8,825) (95,384) (3,128)
Other adjustments (12,672) 18,316 4,593
-------- -------- --------
Total parent company and
consolidating eliminations (44,390) (58,190) (25,639)
-------- -------- --------
Net Cash Provided by
Operating Activities 733,468 586,669 719,321
-------- -------- --------
INVESTING ACTIVITIES
Purchases of investments (2,484,731) (2,315,872) (2,201,215)
Proceeds from sales and
maturities of investments 1,954,206 1,721,498 1,506,913
Purchase of Economy Fire &
Casualty, net of cash acquired (274,561) - -
Proceeds from sale of Nuveen shares - 137,052 -
Change in short-term investments 134,165 20,697 212,300
Change in open security transactions 56,463 (15,443) (45,475)
Net purchases of office properties
and equipment (47,210) (100,695) (94,388)
Other (28,866) 8,540 (9,045)
-------- -------- --------
Net Cash Used in
Investing Activities (690,534) (544,223) (630,910)
-------- -------- --------
FINANCING ACTIVITIES
Dividends paid on common
and preferred stock (129,218) (126,067) (120,154)
Proceeds from issuance of debt 77,243 102,646 64,831
Repayment of debt (51,735) (8,504) (45,011)
Repurchase of common shares (207) (57,722) (193)
Other 61,359 49,737 19,395
-------- -------- --------
Net Cash Used in Financing
Activities (42,558) (39,910) (81,132)
-------- -------- --------
Effect of exchange rate
changes on cash (1,604) (55) (59)
-------- -------- --------
Increase (Decrease) in Cash (1,228) 2,481 7,220
-------- -------- --------
Cash at beginning of year 26,648 24,167 16,947
-------- -------- --------
Cash at End of Year $ 25,420 $ 26,648 $ 24,167
======== ======== ========
See notes to consolidated financial statements.
The St. Paul Companies
Notes to Consolidated Financial Statements
Note 1
A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
How We Prepare Our Financial Statements
The following summary explains the accounting policies
we use to arrive at some of the more significant
amounts in our financial statements.
GAAP - We prepare our financial statements in
accordance with generally accepted accounting
principles (GAAP). We follow the accounting standards
established by the Financial Accounting Standards Board
and the American Institute of Certified Public
Accountants.
Consolidation - We combine our financial statements
with those of our subsidiaries and present them on a
consolidated basis. The consolidated financial
statements do not include the results of material
transactions between us and our subsidiaries or among
our subsidiaries. We record the results of our
insurance brokerage and foreign underwriting operations
on a one-quarter lag.
Reclassifications - We reclassified some figures in our
1992 and 1991 financial statements and notes to conform
with the 1993 presentation. This includes the reporting
of "gross" assets and liabilities for reinsurance-
related balances in accordance with Statement of
Financial Accounting Standards (SFAS) No. 113,
"Accounting and Reporting for Reinsurance of Short-
Duration and Long-Duration Contracts," and the
reclassification of realized gains from operating cash
flow to investing cash flow. These reclassifications
had no effect on net income or loss, or common
shareholders' equity, as previously reported for those
years.
Information About Our Investments
New Method for Valuing Investments - We implemented
SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" as of Dec. 31, 1993. We
classified our entire fixed maturity and equity
investment portfolios as "available-for-sale."
Accordingly, these investments are reported at
estimated market value at Dec. 31, 1993, with
unrealized gains and losses (net of deferred taxes)
recorded in common shareholders' equity. Prior years'
financial statements were not restated. Classifying
these portfolios as "available-for-sale" did not impact
net income.
Fixed Maturities - We carry our fixed maturities at
estimated market value as of Dec. 31, 1993. Prior to
our adoption of SFAS No. 115, we carried fixed
maturities at amortized cost.
Equities - We carry our equity securities at estimated
market value, consistent with prior years.
Real Estate - Our real estate investments primarily
consist of commercial buildings. Some of these
properties we own directly and others we hold in joint
ventures.
For direct investments, we carry land at cost and
buildings at cost less accumulated depreciation and
valuation adjustments. We depreciate real estate assets
on a straight-line basis over 40 years. Tenant
improvements are amortized over the term of the lease.
The accumulated depreciation of these assets was $48.8
million and $39.0 million at Dec. 31, 1993 and 1992,
respectively.
We account for our joint ventures using the equity
method, which means we carry these investments at cost,
adjusted for our share of earnings or losses from these
joint ventures, and reduced by any cash distributions
the joint ventures make to us.
Venture Capital - We invest in securities of small- to
medium-sized companies. These investments are in the
form of limited partnerships or direct ownership. The
limited partnerships are carried at our equity in the
estimated market value of the investments held by these
limited partnerships. The securities we own directly
are carried at estimated market value.
Realized Investment Gains and Losses - We record the
cost of each individual investment security so that
when we sell, we are able to identify and record the
gain or loss on that transaction.
We continually monitor the difference between the
cost and estimated market value of our investments. If
any of our investments experience a decline in value
that is other than temporary, we establish a valuation
allowance for the decline and record a realized loss on
the statement of operations.
Unrealized Appreciation and Depreciation of Investments
- - For investments we carry at estimated market value,
we record the difference between cost and market, net
of deferred taxes, as a part of common shareholders'
equity. This difference is referred to as unrealized
appreciation or depreciation of investments.
Accounting for Our Underwriting Operations
Premiums Earned - Our largest source of revenues is
from premiums on policies written by our insurance
underwriters. We reflect the premiums as revenues
evenly over the policy terms. The premiums that we have
not yet recognized as revenues are recorded as unearned
premiums.
Insurance Losses and Loss Adjustment Expenses - Losses
refer to the amounts we paid or expect to pay to
claimants for events that have occurred. The costs of
investigating, resolving and processing these claims
are referred to as loss adjustment expenses. We record
these items on our statement of operations net of
reinsurance, which means that we reduce our gross
losses and loss expenses incurred by the amounts we
will recover under reinsurance contracts.
We establish reserves for the estimated total unpaid
cost of losses and loss expenses, which cover events
that occurred in 1993 and prior years. These reserves
reflect our estimates of the total cost of claims that
were reported to us but not yet paid, and the cost of
claims not yet reported to us. We base our estimates on
past loss experience and consider current claim trends
as well as prevailing social, economic and legal
conditions. We reduce our loss reserves for estimated
amounts of salvage and subrogation, and deductibles
recoverable from our customers. Estimated amounts
recoverable from reinsurers on unpaid losses and loss
expenses are reflected as assets.
We believe that the reserves we have established are
adequate to cover the ultimate costs of losses and loss
adjustment expenses. Final claim payments, however, may
differ from the established reserves, particularly when
these payments may not occur for several years. Any
adjustments we make to reserves are reflected in the
results for the year during which the adjustments are
made.
Policy Acquisition Expenses - The costs directly
related to writing an insurance policy are referred to
as policy acquisition expenses and consist of
commissions, state premium taxes and other direct
underwriting expenses. Although these expenses arise
when we issue a policy, we defer and amortize them over
the same period as the premiums are recorded as
revenues.
If deferred policy acquisition expenses were to
exceed the sum of unearned premiums and related
anticipated investment income less expected losses and
loss adjustment expenses, the excess costs would be
expensed immediately.
Accounting for Our Insurance Brokerage Operations
Fees and Commissions - Our insurance brokers and
advisers help customers obtain or place insurance
policies or reinsurance contracts and provide insurance
advisory and consulting services. We earn fees and
commissions for providing these services. These
revenues are recorded on the date billed or the
effective date of the policy, whichever is later.
Servicing costs are expensed as incurred. We record
premiums receivable from customers as assets with
corresponding liabilities, net of commissions, to the
insurance carriers with whom the business was placed.
Restricted Funds - Premiums collected, but not yet
remitted to insurance carriers, are restricted as to
use by business practices. These amounts are included
in short-term investments and totaled $393.2 million
and $366.7 million at the end of 1993 and 1992,
respectively.
Accounting for Our Investment Banking-Asset Management
Operations
Our investment banking-asset management segment markets
tax-exempt open-end and closed-end (exchange-traded)
managed fund shares and provides investment advice to
and manages the business affairs of the Nuveen family
of managed funds. They also underwrite and trade
municipal bonds and tax-exempt unit investment trusts
(UITs). They hold in inventory municipal bonds and UITs
that will be sold to individuals or security dealers;
such inventory securities are carried at market value.
Revenues include investment advisory fees, revenues
from the distribution of Nuveen UITs and managed fund
investment products, gains and losses from the sale of
inventory securities, and unrealized gains and losses
on inventory securities held.
Goodwill
Goodwill is the excess of the amount paid to acquire a
company over the fair value of its net assets, reduced
by any subsequent valuation adjustments. We amortize
goodwill over periods of up to 15 years. In 1992 and
prior years, we amortized this asset on a straight-line
basis over periods of up to 40 years. The accumulated
amortization of goodwill was $70.1 million and $51.1
million at Dec. 31, 1993 and 1992, respectively.
We continually monitor the value of our goodwill
based on our estimates of discounted future earnings.
If we determine that our goodwill has been impaired, we
reduce its carrying value with a corresponding charge
to expenses. At the end of 1992, we wrote down $365
million of the goodwill associated with our investment
in the Minet Group and reduced the amortization period
for substantially all of the remaining goodwill to 15
years.
Office Properties and Equipment
We carry office properties and equipment at depreciated
cost. We depreciate these assets on a straight-line
basis over the estimated useful lives of the assets.
The accumulated depreciation for office properties and
equipment was $215.4 million and $193.1 million at the
end of 1993 and 1992, respectively.
Foreign Currency Translation
We assign functional currencies to our foreign
operations. These are generally the currencies of the
local operating environment. Foreign currency amounts
are converted to the functional currency, and the
resulting foreign exchange gains or losses are
reflected in the statement of operations. Functional
currency amounts are then translated into U.S. dollars.
The unrealized gain or loss from this translation is
recorded as a part of common shareholders' equity. Both
the conversion and translation are calculated using
current exchange rates for the balance sheets and
average exchange rates for the statements of
operations.
Supplemental Cash Flow Information
Interest and Income Taxes Paid - We paid interest of
$41.2 million in 1993, $35.1 million in 1992 and $35.1
million in 1991. Interest payments in 1992 and 1991
were net of capitalized interest of $4.6 million and
$3.6 million, respectively. We paid federal income
taxes of $121.8 million in 1993, $107.1 million in 1992
and $160.2 million in 1991.
Noncash Financing Activities - In connection with our
acquisition of Economy Fire & Casualty Company
(Economy) from Kemper Corporation in 1993, we
contributed securities with a book value of
approximately $100 million to the capital of Economy.
Note 2
EARNINGS PER COMMON SHARE
Earnings (loss) per common share (EPS) amounts were
calculated by dividing net income (loss), as adjusted,
by the average common shares outstanding.
Year Ended December 31
(In thousands) 1993 1992 1991
------- ------- -------
PRIMARY
Net income (loss), as reported $427,609 $(156,038) $405,062
Preferred dividends declared
(net of taxes) (8,395) (8,349) (8,037)
Tax benefit on common stock
dividends paid to ESOP - - 1,998
------- ------- -------
Net income (loss), as adjusted $419,214 $(164,387) $399,023
======= ======= =======
FULLY DILUTED
Net income (loss), as reported $427,609 $(156,038) $405,062
Additional PSOP expense (net of taxes)
due to assumed conversion
of preferred stock (4,080) - (4,472)
Tax benefit on common stock dividends
paid to ESOP and PSOP - - 3,834
Preferred dividends declared (net of taxes) - (8,349) -
------- ------- -------
Net income (loss), as adjusted $423,529 $(164,387) $404,424
======= ======= =======
AVERAGE SHARES OUTSTANDING
Primary 42,611 42,360 42,694
Fully diluted 44,735 42,360 44,891
Average shares outstanding include, if dilutive, the
common and common equivalent shares outstanding for the
year and, for fully diluted EPS, common shares that
would be issuable upon conversion of preferred stock.
Note 3
INVESTMENTS
Valuation of Investments - The following presents the
cost, gross unrealized appreciation and depreciation,
and estimated market value of our investments in fixed
maturities, equities and venture capital.
December 31, 1993
Gross Gross Estimated
Unrealized Unrealized Market
(In thousands) Cost Appreciation Depreciation Value
--------- ------------ ------------ ----------
Fixed maturities:
U.S. government $1,854,287 $ 89,183 $ (4,478) $1,938,992
States and
political subdivisions 4,108,680 502,819 (581) 4,610,918
Foreign governments 520,254 47,515 (3,070) 564,699
Corporate securities 957,526 66,917 (8,369) 1,016,074
Mortgage-backed securities 944,352 74,361 (1,432) 1,017,281
--------- ----------- ---------- ----------
Total fixed maturities 8,385,099 780,795 (17,930) 9,147,964
Equities 488,383 80,398 (20,099) 548,682
Venture capital 224,523 89,100 (15,641) 297,982
--------- ----------- --------- ----------
Total $9,098,005 $950,293 $(53,670) $9,994,628
========= =========== ========= ==========
December 31, 1992
Gross Gross Estimated
Unrealized Unrealized Market
(In thousands) Cost Appreciation Depreciation Value
-------- ------------ ----------- ---------
Fixed maturities:
U.S. government $1,322,264 $ 70,779 $ (88) $1,392,955
States and
political subdivisions 4,248,793 311,687 (2,758) 4,557,722
Foreign governments 391,598 22,066 (625) 413,039
Corporate securities 564,584 10,840 (11,106) 564,318
Mortgage-backed securities 1,203,972 104,916 (620) 1,308,268
--------- ------- ------- ----------
Total fixed maturities 7,731,211 520,288 (15,197) 8,236,302
Equities 409,505 94,553 (10,261) 493,797
Venture capital 210,250 33,469 (12,560) 231,159
--------- ------- ------- ----------
Total $8,350,966 $648,310 $(38,018) $8,961,258
========= ======= ======= ==========
Statutory Deposits - At Dec. 31, 1993, our underwriting
subsidiary had investments in fixed maturities with an
estimated market value of $402.9 million on deposit
with regulatory authorities as required by law.
Securities Lending Program - We participate in a
securities lending program that is administered by one
of our custodial banks. Under this program, we loan
U.S. Treasury securities to qualified third parties,
primarily major brokerage firms. We obtain collateral
for the loan equal to 102 percent of the estimated market
value and accrued interest of the loaned securities. We
receive a portion of the interest earned on the collateral.
In addition, we maintain full ownership rights to the
securities loaned, including investment income. We also
have the ability to sell the securities while they are
on loan. As of Dec. 31, 1993, the estimated market value
of loaned securities was $867 million.
Fixed Maturities by Maturity Date - Presented below is
a breakdown of our fixed maturities by years to
maturity. Actual maturities may differ from those
stated as a result of calls and prepayments.
December 31, 1993
Amortized Estimated
(In thousands) Cost Market Value
--------- ------------
One year or less $ 114,598 $ 115,325
Over one year through five years 758,056 804,925
Over five years through ten years 2,133,120 2,311,488
Over ten years 4,434,973 4,898,945
Mortgage-backed securities with
various maturities 944,352 1,017,281
--------- ---------
Total $8,385,099 $9,147,964
========= =========
Note 4
INVESTMENT TRANSACTIONS
Investment Activity - Here is a summary of our
investment purchases, sales and maturities.
Year Ended December 31
(In thousands) 1993 1992 1991
--------- --------- ---------
PURCHASES
Fixed maturities $1,816,965 $1,778,736 $1,671,570
Equities 465,056 401,374 397,164
Real estate 110,371 64,658 46,298
Venture capital 79,410 55,928 50,558
Other investments 12,929 15,176 35,625
--------- --------- ---------
Total purchases 2,484,731 2,315,872 2,201,215
--------- --------- ---------
PROCEEDS FROM SALES
AND MATURITIES
Fixed maturities:
Sales 169,330 295,648 361,734
Maturities and redemptions 1,236,912 976,712 601,448
Equities 437,610 431,225 464,145
Real estate 40,764 - 31,248
Venture capital 59,124 2,803 15,926
Other investments 10,466 15,110 32,412
--------- --------- ---------
Total sales and
maturities 1,954,206 1,721,498 1,506,913
--------- --------- ---------
Net purchases $ 530,525 $ 594,374 $ 694,302
========= ========= =========
Net Investment Income - Here is a summary of our net
investment income.
Year Ended December 31
(In thousands) 1993 1992 1991
---- ---- ----
Fixed maturities $607,067 $605,217 $589,048
Equities 12,035 11,629 12,763
Real estate 19,288 19,022 15,298
Venture capital (2,012) (1,966) (1,156)
Other investments 698 569 5,353
Short-term investments 37,952 46,018 67,622
------- ------- -------
Total 675,028 680,489 688,928
Investment expenses (13,922) (14,115) (13,324)
------- ------- -------
Net investment income $661,106 $666,374 $675,604
======= ======= =======
Realized and Unrealized Investment Gains (Losses) - The
following summarizes our pretax realized investment
gains and losses and change in pretax unrealized
appreciation.
Year Ended December 31
(In thousands) 1993 1992 1991
PRETAX REALIZED ------- ------- -------
INVESTMENT GAINS (LOSSES)
Fixed maturities:
Gross realized gains $ 8,916 $ 12,702 $ 6,488
Gross realized losses (3,585) (1,391) (2,209)
------- ------- -------
Total fixed maturities 5,331 11,311 4,279
Equities:
Gross realized gains 62,310 81,841 80,658
Gross realized losses (18,782) (16,066) (20,048)
------- ------- -------
Total equities 43,528 65,775 60,610
Real estate (10,188) (7,519) (644)
Venture capital 24,046 (180) (4,167)
Other (4,463) (11,936) (22,070)
------- ------- -------
Total pretax realized
investment gains $ 58,254 $ 57,451 $ 38,008
======= ======= =======
CHANGE IN PRETAX
UNREALIZED APPRECIATION
Fixed maturities $257,774 $ 13,297 $317,542
Equities (23,993) (34,038) 65,343
Venture capital 52,550 6,687 15,962
------- ------- -------
Total change in pretax
unrealized appreciation $286,331 $(14,054) $398,847
======= ======= =======
Note 5
INCOME TAXES
New Federal Tax Rate - During the third quarter of
1993, the corporate federal income tax rate increased
from 34% to 35%, retroactive to Jan. 1, 1993. Because
we have a significant deferred tax asset on our balance
sheet, the tax rate increase resulted in a net benefit
to income of $15.4 million, or $0.34 per share, in
1993.
Method for Computing Income Tax Expense - We
implemented SFAS No. 109, "Accounting for Income
Taxes," in the first quarter of 1992. The cumulative
effect of this change was a one-time increase to
earnings of $126.0 million or $2.98 per share. Prior
years' financial statements were not restated to apply
the provisions of this statement.
SFAS No. 109 changed the way we calculate tax expense
shown in our financial statements. Under prior rules,
the primary objective was to match the tax expense with
pretax income on the statement of operations. Under
SFAS No. 109, the primary objective is to ensure that
the deferred tax asset or liability on the balance
sheet properly reflects the amount due to or from the
government in the future. As a consequence, the portion
of the tax expense that is a result of the change in
the deferred tax asset or liability may not always be
consistent with the income reported in the statements
of operations.
Some items of revenue and expense included in the
statements of operations may not be currently taxable
or deductible on our income tax returns. Therefore, our
income tax assets and liabilities are divided into a
current portion, which is the amount attributable to
our current year's tax return, and a deferred portion,
which is the amount attributable to another year's tax
return. The revenue and expense items not currently
taxable or deductible are called temporary differences.
Income Tax Expense (Benefit) - Income tax expense or
benefits are recorded in various places in our
financial statements. A summary of the amounts and
places follows:
Year Ended December 31
(In thousands) 1993 1992
------ ------
STATEMENTS OF OPERATIONS
Expense related to income or loss
before cumulative effects of
accounting changes $ 94,997 $ 7,458
Benefit from the adoption of:
SFAS No. 109 - (126,047)
SFAS No. 106 - (25,777)
------- -------
Total income tax expense
(benefit) included in
net income or loss 94,997 (144,366)
------- -------
COMMON SHAREHOLDERS' EQUITY
Benefit for deductions relating to
dividends on unallocated
ESOP and PSOP shares (4,873) (5,226)
Expense (benefit) for the change in
unrealized appreciation
of investments and unrealized
foreign exchange 274,126 (15,675)
------- -------
Total income tax expense (benefit)
included in common
shareholders' equity 269,253 (20,901)
------- -------
Total income tax expense (benefit)
included in financial statements $364,250 $(165,267)
======= =======
Components of Income Tax Expense - The components of
income tax expense related to the income or loss before
cumulative effects of accounting changes are as
follows:
Year Ended December 31
(In thousands) 1993 1992 1991
------- ------- -------
Federal current
tax expense $148,508 $ 109,740 $190,520
Federal deferred tax benefit (54,935) (114,832) (94,323)
Impact of tax rate change (15,383) - -
------- ------- -------
Total federal income tax
expense (benefit) 78,190 (5,092) 96,197
Foreign income taxes 9,692 6,776 21,196
State income taxes 7,115 5,774 5,606
------- ------- -------
Total income tax
expense $ 94,997 $ 7,458 $122,999
======= ======= =======
Our Tax Rate Is Different From The Statutory Rate - Our
total federal income tax expense (benefit) differs from
the statutory rate of 35% (34% in 1992 and 1991) of
pretax income or loss as shown in the following table:
Year Ended December 31
(In thousands) 1993 1992 1991
------- ------- --------
Federal income tax expense
(benefit) at statutory rates $182,912 $ (76,521) $179,541
Increase (decrease)
attributable to:
Nontaxable investment
income (90,502) (91,780) (77,438)
Foreign operations 9,869 48,894 15,233
Impact of tax rate change (15,383) - -
Write-down of goodwill - 124,100 -
Loss reserve fresh start
benefit - - (12,681)
Salvage and subrogation
fresh start benefit - - (9,199)
Other (8,706) (9,785) 741
------- ------- -------
Federal income tax
expense (benefit) $ 78,190 $ (5,092) $ 96,197
======= ======= =======
Loss Reserve Fresh Start - The loss reserve fresh start
benefit represents the permanent exclusion from taxable
income of the effect of discounting year-end 1986 loss
reserves. Under SFAS No. 109, adopted in 1992, loss
reserve fresh start is treated as a temporary
difference. Consequently, it did not impact our rate
reconciliation in 1993 or 1992. The majority of the
cumulative effect benefit of $126.0 million from
implementing SFAS No. 109 was due to the immediate
recognition of the remaining loss reserve fresh start
benefit.
SALVAGE AND SUBROGATION FRESH START - Sometimes when we
incur a loss we obtain a right to sell the damaged
property we insured or a right to collect a portion of
the loss we incurred from another insurance company or
another party. These rights are called salvage and
subrogation and reduce our losses incurred.
The salvage and subrogation fresh start benefit
represents the permanent exclusion from taxable income
of a portion of the salvage and subrogation related to
losses incurred in years prior to 1990. A company like
ours, which has accrued salvage and subrogation in
prior years, is allowed a tax deduction equal to 87% of
the discounted value of the amount accrued as of Dec.
31, 1989. Under the prior rules, the deduction was to
be recorded equally over four years. Therefore, in 1990
and 1991 we recognized 25% of the deduction. We took
the remaining deduction in 1992 when we implemented
SFAS No. 109. As with loss reserve fresh start, salvage
and subrogation fresh start is considered a temporary
difference under SFAS No. 109 and did not impact our
rate reconciliation in 1993 or 1992.
Major Components of Deferred Income Taxes on Our
Balance Sheet - The tax effects of temporary
differences that give rise to the deferred tax assets
and deferred tax liabilities are presented below:
December 31
(In thousands) 1993 1992
------- -------
DEFERRED TAX ASSETS
Loss reserves $593,938 $545,052
Unearned premium reserves 107,142 95,357
Deferred compensation 82,501 45,277
Foreign loss carryforwards 51,479 47,015
Other 140,344 115,542
------- -------
Total gross deferred
tax assets 975,404 848,243
Less valuation allowance (58,931) (54,173)
------- -------
Net deferred tax assets 916,473 794,070
------- -------
DEFERRED TAX LIABILITIES
Unrealized appreciation of investments 308,718 32,799
Deferred acquisition costs 97,958 88,761
Real estate 44,062 25,835
Other 40,723 47,099
------- -------
Total gross deferred tax liabilities 491,461 194,494
------- -------
Net deferred income tax assets $425,012 $599,576
======= =======
We have alternative minimum tax (AMT) credit
carryforwards of approximately $30.1 million which are
available to reduce future federal regular income taxes
over an indefinite period. The benefit of the AMT
credit carryforward is included in our net deferred tax
assets.
If we think that all of our deferred tax assets will
not result in future tax benefits, we must establish a
"valuation allowance" for the portion of these assets
that we think will not be realized. The valuation
allowance for deferred tax assets as of Jan. 1, 1992,
was $35.0 million. The net change in the total
valuation allowance for the years ended Dec. 31, 1993
and 1992, was an increase of $4.7 million and $19.2
million, respectively, relating entirely to our foreign
operations. Based upon a review of our refundable
taxes, anticipated future earnings, and all other
available evidence, both positive and negative, we have
concluded it is "more likely than not" that our net
deferred tax assets will be realized.
A summary of timing differences under the income tax
accounting rules used prior to 1992 and their related
federal tax effects follows:
(In thousands) Year Ended December 31, 1991
----------------------------
Loss reserves $(69,292)
Unearned premium reserves (16,846)
Deferred compensation 12,031
Oil and gas (7,972)
Other (12,244)
-------
Deferred income tax benefit $(94,323)
=======
Undistributed Earnings of Subsidiaries - U.S. income
taxes have not been provided on $31.6 million of our
foreign operations' undistributed earnings as of Dec.
31, 1993, as such earnings are intended to be
permanently reinvested in those operations.
Furthermore, any taxes paid to foreign governments on
these earnings may be partially used as credits against
the U.S. tax on any dividend distributions from such
earnings.
We have not provided taxes on approximately $57.5
million of undistributed earnings related to our 74%
ownership of The John Nuveen Company that arose in 1993
and 1992 because we currently do not expect those
earnings to become taxable to us.
IRS Examinations - The Internal Revenue Service has
examined our consolidated returns through 1990 and is
currently examining the years 1991 and 1992. We believe
that any additional taxes assessed as a result of these
examinations would not materially affect our overall
financial position.
Note 6
DEBT AND CREDIT ARRANGEMENTS
Debt consists of the following:
December 31
1993 1992
------------------- -------------------
Book Fair Book Fair
(In thousands) Value Value Value Value
------- ------- ------- -------
Commercial paper $201,384 $201,384 $229,889 $229,889
Medium-term notes:
Series A 198,780 208,500 133,534 137,700
Series B 12,000 12,600 - -
9-3/8% notes 99,959 113,400 99,947 111,900
Short-term borrowings 80,383 80,383 20,000 20,000
Guaranteed ESOP debt 47,223 52,200 58,333 65,000
Pound sterling loan notes - - 25,014 25,014
------- ------- ------- -------
Total debt $639,729 $668,467 $566,717 $589,503
======= ======= ======= =======
Fair Value - The fair value of our commercial paper and
short-term borrowings approximates their book value
because they are short-term in nature. For our other
debt, which has longer terms and fixed interest rates,
our fair value estimate is based on current interest
rates available on debt securities in the market which
have terms similar to ours. Because interest rates
generally have declined since our debt was issued, it
would have cost us more than book value to retire our
debt at year-end.
Commercial Paper - Our commercial paper is supported by
a $400 million credit agreement which expires in 1996.
The credit agreement requires us to stay below a
certain ratio of debt to equity, maintain a stated
amount of common shareholders' equity and meet certain
other requirements. As of year-end 1993, we had not
borrowed any funds under the agreement, and we were in
compliance with all provisions.
Interest rates on commercial paper issued in 1993
ranged from 3.0% to 3.6%; in 1992 the range was 3.0% to
4.7%; and in 1991 the range was 4.5% to 7.4%. In 1993,
we entered into an interest-rate swap agreement that
requires us to pay a fixed rate of 5.6% on $50 million
of our outstanding commercial paper through the year
2000.
Medium-term Notes - The Series A medium-term notes were
issued at various times during the three-year period
ended Dec. 31, 1993, bearing interest rates ranging
from 5.9% to 8.4%. Maturities range from three to 10
years after the issuance date.
One Series B medium-term note was issued in 1993.
This note bears an interest rate of 6.3% and matures 10
years after the issuance date.
9-3/8% Notes - The 9-3/8% notes were issued in 1990 and
mature on June 15, 1997.
Short-term Borrowings - Short-term borrowings are
obligations of our investment banking-asset management
operation that are collateralized by some of its
inventory securities. These borrowings consisted of
securities sold under an agreement to repurchase at
year-end 1993, and bank borrowings at the end of 1992.
Guaranteed ESOP Debt - The guaranteed ESOP debt bears
an interest rate of 7.95% and is due March 1, 1998. The
ESOP's principal payments and related interest are
funded quarterly through a combination of our
contributions and dividends on shares held by the ESOP.
We show this debt as our liability, because we
guaranteed the debt.
Interest Expense - Our interest expense was $40.8
million in 1993, $35.6 million in 1992 and $35.6
million in 1991.
Maturities - The amount of debt that becomes due in
each of the next five years is as follows: 1994, $111.8
million; 1995, $11.1 million; 1996, $212.5 million;
1997, $111.1 million; and 1998, $27.8 million.
Note 7
RETIREMENT PLANS
Pension Plans - We maintain funded defined benefit
pension plans for most of our U.S. and non-U.S.
employees. Benefits are based on years of service and
the employee's compensation while employed by the
company. U.S. pension benefits generally vest after
five years of service. Non-U.S. pension benefits
generally vest after two years of service.
Our U.S. pension plans are noncontributory. This
means that employees do not pay anything into the
plans. Our funding policy is to contribute amounts
sufficient to meet the minimum funding requirements of
the Employee Retirement Income Security Act, and any
additional amounts that may be necessary. This may
result in no contribution being made in a particular
year.
We contribute to our non-U.S. pension plans based on
a percentage of salaries. These plans are contributory,
which means that employees also contribute a percentage
of their salary to the plan.
The following table details the components of our net
periodic pension cost for our U.S. and non-U.S. funded
pension plans.
Year Ended December 31
(In thousands) 1993 1992 1991
------ ------ ------
Service cost - benefits
earned during the year $29,515 $32,912 $22,621
Interest cost on projected
benefit obligation 36,670 39,449 30,328
Actual return on plan assets (66,449) (25,333) (77,173)
Net amortization and deferral 28,270 (20,352) 36,572
------- ------- -------
Net periodic pension cost $28,006 $26,676 $12,348
====== ====== ======
The following table summarizes the funded status of
our plans. We use the services of an independent
actuary to assist us in the determination of our
pension costs and obligations.
December 31
1993 1992
(In thousands) U.S. Non-U.S. U.S. Non-U.S.
------- -------- ------- --------
Accumulated benefit
obligation:
Vested $233,565 $194,403 $220,514 $170,079
Nonvested 30,746 119 22,664 117
------- ------- ------- -------
Subtotal 264,311 194,522 243,178 170,196
Effect of projected
salary increases 94,340 42,753 112,407 30,080
------- ------- ------- -------
Projected benefit
obligation 358,651 237,275 355,585 200,276
Plan assets at fair value 228,322 215,843 238,756 206,862
------- ------- ------- -------
Assets (greater) less
than projected
benefit obligation 130,329 21,432 116,829 (6,586)
Unrecognized net loss (54,233) (52,386) (39,912) (33,368)
Unrecognized net
asset at transition 12,973 16,797 14,721 22,336
Unrecognized prior
service cost 109 (2,991) 67 (3,919)
------- ------- ------- -------
Accrued (prepaid)
pension cost
recorded on the
balance sheet $ 89,178 $ (17,148) $ 91,705 $ (21,537)
======= ======= ====== =======
Pension cost is determined using assumptions at the
beginning of the year. The funded status is determined
using assumptions at the end of the year. Assumptions
as of Dec. 31 used to determine projected benefit
obligations and pension costs are as follows:
1993 1992 1991 1990
---- ---- ---- ----
U.S. PLANS
Discount rate 6.25% 7.25% 7.75% 8.50%
Rate of increase in
compensation 4.25 5.50 6.00 6.00
Expected rate of return
on plan assets 9.00 9.00 9.50 9.50
NON-U.S. PLANS
Discount rate 7.50 9.50 9.50 10.50
Rate of increase in
compensation 5.50 7.50 7.50 8.00
Expected rate of return
on plan assets 9.50 10.50 10.50 11.50
Plan assets are invested primarily in equities and
fixed maturities, and included 190,086 shares of our
common stock with a market value of $17.1 million and
$14.6 million at Dec. 31, 1993 and 1992, respectively.
We also maintain a noncontributory, unfunded pension
plan to provide certain employees with pension benefits
in excess of limits imposed by federal tax law and a
noncontributory, unfunded pension plan for our outside
directors. At the end of both 1993 and 1992, we had a
liability of $11.7 million recorded for these plans.
During the fourth quarter of 1992, we offered a
voluntary early retirement incentive, enabling certain
eligible employees to elect early retirement. Early
retirement was elected by 292 employees, which resulted
in a pretax cost of $31.0 million in 1992.
Employee Stock Ownership Plan - We maintain an ESOP for
qualified employees of our U.S.-based corporate,
underwriting and insurance brokerage operations. The
ESOP allocated 249,628 shares in 1993, 246,209 shares
in 1992, and 247,933 shares in 1991. The remaining
1,054,476 shares will be released for allocation
annually through March 1, 1998.
Shares of our stock that have been and will be
allocated to eligible employees are held by the ESOP
trust, which is responsible for making principal and
interest payments on the debt it incurred to purchase
those shares at the inception of the ESOP. We pay
dividends on the shares in the trust and also make
contributions as needed to meet the ESOP's debt service
obligations.
The following table summarizes our ESOP expense for
each of the last three years:
Year Ended December 31
(In thousands) 1993 1992 1991
---- ---- ----
Debt service $16,626 $17,093 $18,504
Dividends paid to ESOP trust (6,185) (6,339) (6,310)
Proceeds from sales of
forfeited shares, interest
income and other 226 290 (697)
------ ------ -----
Net ESOP expense $10,667 $11,044 $11,497
====== ====== ======
Cash contributions to trust $10,091 $10,496 $11,389
====== ====== ======
Preferred Stock Ownership Plan - Our Savings Plus
Preferred Stock Ownership Plan (PSOP) allocates
preferred shares semiannually to those employees
participating in our Savings Plus Plan. The allocations
are equivalent to 60% of employees' contributions up to
a maximum of 6% of their salary plus shares equal to
the value of dividends on previously allocated shares.
Each share is currently convertible into two shares of
common stock.
We pay annual preferred dividends of $11.724 per
share and make additional cash contributions to the
PSOP as necessary in order to meet the PSOP's debt
obligations. We paid preferred dividends of $12.0
million in 1993, and $12.2 million in 1992 and 1991. We
also made additional cash contributions to the PSOP of
$2.7 million in 1993, $1.8 million in 1992, and $2.0
million in 1991.
The PSOP allocated 53,342 preferred shares in 1993,
51,057 shares in 1992 and 49,957 in 1991. The remaining
860,300 shares will be released for allocation annually
through Jan. 31, 2005. We recorded PSOP expense of $9.3
million, $9.8 million and $8.7 million in 1993, 1992
and 1991, respectively.
Postretirement Benefits Other Than Pension - We provide
certain health care and life insurance benefits for
retired U.S. employees and their eligible dependents.
We currently anticipate that most of our employees will
become eligible for these benefits if they retire while
working for us. The cost of these benefits is shared
with the retiree. The benefits are generally provided
through our employee benefits trust to which periodic
contributions are made to cover benefits paid during
the year.
Effective Jan. 1, 1992, we implemented SFAS No. 106,
"Employers' Accounting for Postretirement Benefits
Other Than Pensions." This statement changed our
method of accounting for postretirement benefits from
the cash basis to the accrual basis. Now, we accrue
postretirement benefits expense during the period that
the employee renders the service to earn the benefit.
We recorded a transition obligation of $75.3 million,
representing the cumulative Jan. 1, 1992, liability for
postretirement benefits, in the first quarter of 1992.
This cumulative effect, net of taxes, was a charge to
earnings of $49.6 million, or $1.17 per share.
The following table details the components of the net
periodic postretirement benefits cost:
Year Ended December 31
(In thousands) 1993 1992
----- -----
Service cost - benefits attributed to
service during the year $ 4,227 $ 4,159
Interest cost on accumulated
postretirement benefits obligation 8,699 7,117
Actual return on plan assets (686) (891)
Net amortization and deferral (590) (17)
------ ------
Net periodic postretirement
benefits cost $11,650 $10,368
====== ======
The postretirement benefits expense for 1991 was $3.1
million. The 1991 expense was based on cash
contributions made to the employee benefits trust for
retired employees.
The following table summarizes the funded status of
the plan. We use the services of an independent actuary
to assist in the determination of benefits costs and
obligations.
December 31
(In thousands) 1993 1992
------ ------
Accumulated postretirement
benefits obligation:
Retirees $ 74,541 $ 59,342
Fully eligible active plan participants 8,720 4,199
Other active plan participants 47,797 41,830
------ ------
Subtotal 131,058 105,371
Plan assets at fair value 13,693 13,007
------ ------
Assets less than accumulated post-
retirement benefits obligation 117,365 92,364
Unrecognized net loss (14,374) (4,369)
Unrecognized prior service cost 5,370 -
------ ------
Accrued postretirement benefits
cost recorded on the balance sheet $108,361 $ 87,995
======= ======
Postretirement benefits cost is determined using
assumptions at the beginning of the year. The funded
status is determined using the assumptions at the end
of the year. Assumptions as of Dec. 31 used to
determine postretirement benefits cost and accumulated
postretirement benefits obligations are as follows:
1993 1992 1991
---- ---- ----
Discount rate 7.00% 7.75% 8.00%
Rate of increase in compensation 4.25 5.50 6.00
Expected rate of return on plan assets 7.50 7.50 7.50
A health care inflation rate of 15% was assumed in
1993. The rate is assumed to decrease 1% annually to 6%
and then remain at that level. This inflation rate
assumption has a significant impact on the health care
portion of the postretirement benefits. For example, a
1% increase in this rate would have increased the
accumulated postretirement benefits obligation at Dec.
31, 1993, by $19.5 million and the 1993 periodic
benefits cost by $2.7 million.
Note 8
STOCK OPTION AND OTHER INCENTIVE PLANS
Stock Option Plans - Our option plans for certain U.S.-
based officers and outside directors give these
individuals the right to buy our stock at the market
price on the day the options were granted. Generally,
each option to buy remains open for 10 years. During
this period, option holders may buy any number of
shares up to the limit set in their option grant.
Approximately 410,500 option shares were available at
year-end for future grants under our U.S. plans.
We also have separate stock option plans for certain
employees of our non-U.S. operations. Most of the
options granted under these plans were priced at the
market price of our common stock on the grant date.
Generally, they can be exercised from three to 10 years
after the grant date. Approximately 222,000 option
shares remained available at year-end for future grants
under our non-U.S. plans.
Information concerning our U.S. and non-U.S. stock
option plans is in the following table:
Number of
Option Price Option
Shares Per Share Shares
- ------ ----------- ---------
Outstanding Jan. 1, 1991 $14.42-63.00 1,325,518
Granted 63.75-72.50 736,362
Canceled 41.50-68.50 (97,021)
Exercised 19.90-60.40 (275,771)
----------- ---------
Outstanding Dec. 31, 1991 14.42-72.50 1,689,088
Granted 70.00-77.00 233,507
Canceled 20.19-68.50 (11,136)
Exercised 14.42-72.50 (322,650)
----------- ---------
Outstanding Dec. 31, 1992 19.90-77.00 1,588,809
Granted 76.50-95.75 189,454
Canceled 25.96-74.13 (21,297)
Exercised 19.90-80.13 (283,112)
----------- ---------
Outstanding Dec. 31, 1993 $19.90-95.75 1,473,854
=========== =========
Exercisable Dec. 31, 1993 $19.90-93.25 955,574
=========== =========
Restricted Stock Award Plan - Restricted common shares
of the company have been awarded to certain management
personnel through our Restricted Stock Award Plan. The
stock is restricted because recipients receive the
stock only upon the completion of a specified period of
employment, generally one to five years. The shares are
considered issued when awarded, but the recipient does
not own and cannot sell the shares during the
restriction period. Up to 500,000 shares can be awarded
under the plan, of which 337,627 were unissued at
Dec. 31, 1993.
Note 9
COMMON SHAREHOLDERS' EQUITY
Common Stock and Reacquired Shares - We are governed by
the Minnesota Business Corporation Act. There are 120
million authorized shares of voting common stock with
no par value. Shares of common stock reacquired are
considered unissued shares. During 1992, we reacquired
793,000 of our common shares for a total cost of $57.7
million. We reduced our capital stock account for the
cost of these repurchases in proportion to the
percentage of shares reacquired, with the remainder of
the cost charged to retained earnings.
Undesignated Shares - Our articles of incorporation
allow us to issue 5 million undesignated shares. The
board of directors may designate the type of shares and
set the terms thereof. The board designated 1,450,000
of these shares as Series B Convertible Preferred Stock
in connection with the formation of our Preferred Stock
Ownership Plan (PSOP). The board designated 50,000
shares as Series A Junior Participating Preferred Stock
in connection with the establishment of our Shareholder
Protection Rights Plan.
A summary of our common stock activity for the last
three years is as follows:
Year Ended December 31
(Number of Shares) 1993 1992 1991
---- ---- ----
Outstanding at beginning
of year 42,059,277 42,521,242 42,234,029
Issued under stock option
and other incentive plans 297,907 329,599 289,945
Issued upon conversion
of preferred stock 2,566 1,064 353
Reacquired (2,412) (792,628) (3,085)
---------- ---------- ----------
Outstanding at end of year 42,357,338 42,059,277 42,521,242
========== ========== ==========
Dividend Restrictions - We primarily depend on
dividends from our subsidiaries to pay dividends to our
shareholders, service our debt and pay expenses.
Various state laws and regulations limit the amount of
dividends we may receive from our underwriting
subsidiary. We have received regulatory approval for
our underwriting subsidiary to pay us cash dividends of
up to $300 million in 1994 in addition to a dividend of
the capital stock of its U.K.-based underwriting
operation. During 1993, dividends received from our
underwriting subsidiary amounted to $200 million.
Shareholder Protection Rights Plan - Our Shareholder
Protection Rights Plan is designed to protect the
interests of our shareholders in the event of
unsolicited and unfair or coercive attempts to acquire
control of the company. Our shareholders own one right
for each common share owned which would enable them to
initiate specified actions to protect their interests.
We may redeem this right under circumstances specified
in the plan.
Note 10
COMMITMENTS AND CONTINGENCIES
Investment Commitments - We have long-term commitments
to fund venture capital and real estate investments
totaling $71.0 million as of Dec. 31, 1993. We estimate
these commitments will be paid as follows: $26.6
million in 1994; $22.0 million in 1995; $14.6 million
in 1996; $7.3 million in 1997; and $0.5 million in
1998.
Lease Commitments - A portion of our business
activities is carried on in rented premises. We also
enter into leases for equipment, such as office
machines and computers. Our total rental expense was
$74.9 million in 1993, $92.8 million in 1992 and $78.1
million in 1991.
Certain leases are noncancelable, and we would remain
responsible for payment even if we stopped using the
space or equipment. On Dec. 31, 1993, the minimum
annual rents for which we would be liable under these
types of leases are as follows: $63.9 million in 1994,
$53.3 million in 1995, $41.9 million in 1996, $33.9
million in 1997, $29.5 million in 1998 and $119.1
million thereafter.
Legal Matters - In the ordinary course of conducting
business, our operations have been named as defendants
in various lawsuits. Some of these lawsuits attempt to
establish liability under insurance contracts issued by
our underwriting operations. 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.
We believe that the total amounts that we and our
subsidiaries will ultimately have to pay in all of
these lawsuits will have no material effect on our
overall financial position.
Note 11
ACQUISITION OF ECONOMY
On Aug. 31, 1993, we acquired Economy from Kemper
Corporation. Economy is a personal insurance
underwriter with 1993 net written premiums of
approximately $384 million. Our investment in Economy
totaled approximately $395 million. This included a
$100 million contribution of securities to the capital
of Economy, with the remainder paid in cash to Kemper
Corporation. We recorded goodwill of approximately $142
million that we are amortizing over 15 years.
We accounted for the acquisition as a purchase. As a
result, Economy's results were included in our
consolidated results from the date of purchase.
Consolidated results would not have been materially
different had this acquisition been completed at the
beginning of 1991.
Note 12
SALE OF MINORITY INTEREST IN NUVEEN
In May 1992, we sold a minority interest in our
investment banking-asset management subsidiary, The
John Nuveen Company. The sale generated pretax proceeds
of $137.1 million, and resulted in a pretax gain of
$98.3 million. We retained approximately 74 percent
ownership in Nuveen.
We continue to consolidate 100 percent of Nuveen's
assets, liabilities, revenues and expenses, with
reductions on the balance sheet and statement of
operations for the minority interest sold. The minority
interest represents the minority shareholders'
proportionate interest in Nuveen's equity and earnings.
Minority interest of $71.9 million and $54.4 million
was recorded in other liabilities at the end of 1993
and 1992, respectively.
Note 13
REINSURANCE
Our financial statements reflect the effects of assumed
and ceded reinsurance transactions. Assumed reinsurance
refers to our acceptance of certain insurance risks
that other insurance companies have underwritten. Ceded
reinsurance means other insurance companies agree to
share certain risks with us. The primary purpose of
ceded reinsurance is to protect us from potential
losses in excess of what we are prepared to accept.
Effective Jan. 1, 1993, we implemented SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-
Duration and Long-Duration Contracts." This statement
requires us to report balances pertaining to
reinsurance transactions "gross" on the balance sheet.
We now record reinsurance recoverables on unpaid losses
and ceded unearned premiums as assets, in contrast to
our prior practice of netting these amounts against the
corresponding insurance reserves. Adoption of SFAS No.
113 had no impact on net income or common shareholders'
equity.
The largest portion (approximately 17%) of our total
reinsurance recoverables and ceded unearned premiums
was with General Reinsurance Corporation. That company
is rated "A++" by A.M. Best, "Aaa" by Moody's and "AAA"
by Standard & Poor's for its property-liability
insurance claims-paying ability.
We expect the companies to which we have ceded
reinsurance to honor their obligations. In the event
these companies are unable to honor their obligations
to us, we will pay these amounts. We have established
allowances for possible nonpayment of amounts due to
us. The effect of assumed and ceded reinsurance on
premiums written, premiums earned and insurance losses
and loss adjustment expenses is as follows:
Year Ended December 31
(In thousands) 1993 1992 1991
------- ------- -------
PREMIUMS WRITTEN
Direct $3,053,532 $3,011,879 $3,081,944
Assumed 686,557 636,587 697,221
Ceded (561,544) (506,047) (545,436)
-------- -------- --------
Net premiums written $3,178,545 $3,142,419 $3,233,729
========= ========= =========
PREMIUMS EARNED
Direct $3,021,203 $3,027,243 $2,985,674
Assumed 680,626 661,505 707,857
Ceded (523,491) (545,502) (547,293)
-------- -------- --------
Net premiums earned 3,178,338 $3,143,246 $3,146,238
========= ========== =========
INSURANCE LOSSES AND
LOSS ADJUSTMENT EXPENSES
Direct $1,968,839 $2,304,848 $2,060,588
Assumed 721,141 1,034,594 743,921
Ceded (386,242) (649,396) (438,940)
-------- -------- --------
Net insurance losses
and loss adjustment
expenses $2,303,738 $2,690,046 $2,365,569
========= ========= =========
Note 14
STATUTORY ACCOUNTING PRACTICES
Our U.S.-based underwriting operations are required to
file financial statements with state regulatory
authorities. The accounting principles used to prepare
these statutory financial statements differ from GAAP.
On a statutory accounting basis, our U.S.-based
underwriting operations reported net income of $441.1
million in 1993, $185.0 million in 1992 and $156.3
million in 1991. Statutory surplus (shareholder's
equity) of these operations was $1.8 billion and $1.6
billion as of Dec. 31, 1993 and 1992, respectively.
Note 15
SEGMENT INFORMATION
Geographic Areas - We provide international broking
services and property-liability insurance coverages.
The following summary presents financial data based on
the location of our operations:
Year Ended December 31
(In thousands) 1993 1992 1991
--------- --------- ---------
REVENUES
U.S. $ 3,875,545 $ 3,963,203 $ 3,866,797
Non-U.S. 584,627 535,489 484,903
------- ------- --------
Total revenues $ 4,460,172 $ 4,498,692 $ 4,351,700
========= ========= =========
INCOME (LOSS)
BEFORE INCOME TAXES
U.S. $ 559,512 $ 145,477 $ 556,772
Non-U.S. (36,906) (370,540) (28,711)
------- ------- --------
Total income (loss)
before income taxes $ 522,606 $ (225,063) $ 528,061
======= ======= =======
December 31
(In thousands) 1993 1992 1991
--------- --------- ---------
IDENTIFIABLE ASSETS
U.S. $14,703,637 $13,166,460 $12,551,073
Non-U.S. 2,445,559 2,225,594 2,193,644
---------- ---------- ----------
Total assets $17,149,196 $15,392,054 $14,744,717
========== ========== ==========
Industry - Our industry segments consist of
underwriting, insurance brokerage and investment
banking-asset management. The following summary
presents revenues, income (loss) before income taxes
and identifiable assets for each industry segment.
Revenues and pretax income (loss) for each segment
include its respective investment income. The insurance
brokerage segment's fees and commissions include
intercompany commissions which are eliminated when we
consolidate our operations.
Year Ended December 31
(In thousands) 1993 1992 1991
--------- --------- ----------
REVENUES
Underwriting:
Specialized commercial $ 1,011,439 $ 1,050,936 $ 1,122,561
Medical services 688,980 722,172 685,402
Business insurance 531,465 676,265 699,225
Reinsurance 395,008 361,093 375,427
Personal insurance 372,734 206,746 198,212
International 178,712 126,034 65,411
---------- ---------- ----------
Total premiums earned 3,178,338 3,143,246 3,146,238
Net investment income 646,396 642,301 640,856
Realized investment gains 49,429 60,351 34,880
Other 31,723 24,985 24,077
---------- ---------- ----------
Total underwriting 3,905,886 3,870,883 3,846,051
Insurance brokerage:
Fees and commissions 294,579 290,081 293,646
Net investment income 21,213 29,444 40,441
Other 4,725 8,267 9,009
---------- ---------- ----------
Total insurance brokerage 320,517 327,792 343,096
Investment banking-
asset management 245,732 221,182 180,238
---------- ---------- ----------
Total industry segments 4,472,135 4,419,857 4,369,385
Parent company and
consolidating eliminations (11,963) 78,835 (17,685)
---------- ---------- ----------
Total revenues $ 4,460,172 $ 4,498,692 $ 4,351,700
========= ========= =========
INCOME (LOSS) BEFORE
INCOME TAXES
Underwriting:
Specialized commercial $ (89,490) $ (170,765) $ (40,595)
Medical services 132,922 151,906 149,326
Business insurance (70,602) (142,001) (119,606)
Reinsurance (44,866) (314,355) (126,104)
Personal insurance (15,548) (43,835) (13,031)
International (62,671) (47,836) (13,772)
-------- -------- --------
Total GAAP underwriting
result (150,255) (566,886) (163,782)
Net investment income 646,396 642,301 640,856
Realized investment gains 49,429 60,351 34,880
Other (38,389) (54,634) (25,891)
-------- -------- --------
Total underwriting 507,181 81,132 486,063
Insurance brokerage (12,629) (432,527) 9,432
Investment banking-
asset management:
Pretax income before
minority interest 111,663 97,866 77,481
Minority interest (29,076) (15,405) -
-------- -------- --------
Total investment banking-
asset management 82,587 82,461 77,481
-------- -------- --------
Total industry segments 577,139 (268,934) 572,976
Parent company and
consolidating eliminations (54,533) 43,871 (44,915)
-------- -------- --------
Total income before
income taxes $ 522,606 $ (225,063) $ 528,061
======== ======== ========
December 31
(In thousands) 1993 1992 1991
------- ------ -------
IDENTIFIABLE ASSETS
Underwriting $15,144,260 $13,682,466 $12,740,545
Insurance brokerage 1,616,574 1,463,647 1,792,394
Investment banking-
asset management 410,764 294,235 311,846
----------- ----------- ------------
Total industry segments 17,171,598 15,440,348 14,844,785
Parent company and
consolidating eliminations (22,402) (48,294) (100,068)
----------- ----------- ------------
Total assets $17,149,196 $15,392,054 $14,744,717
========== ========== ==========
Note 16
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
An unaudited summary of our quarterly performance is shown below.
1993
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues $1,114,028 $1,069,338 $1,104,975 $1,171,831
Net income 88,031 108,497 141,388 89,693
Net income per common share:
Primary 2.02 2.50 3.27 2.05
Fully diluted 1.95 2.41 3.14 1.98
1992
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues $1,099,209 $1,172,957 $1,125,114 $1,101,412
Income (loss) before cumulative
effects of accounting changes 105,788 143,122 (63,886) (417,545)
Net income (loss) 182,271 143,122 (63,886) (417,545)
Earnings (loss) per common share:
Primary:
Income (loss) before cumulative
effects of accounting changes 2.42 3.29 (1.56) (9.99)
Net income (loss) 4.20 3.29 (1.56) (9.99)
Fully diluted:
Income (loss) before cumulative
effects of accounting changes 2.33 3.15 (1.56) (9.99)
Net income (loss) 4.03 3.15 (1.56) (9.99)
1991
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues $1,021,167 $1,063,512 $1,125,780 $1,141,241
Net income 84,171 103,712 107,747 109,432
Net income per common share:
Primary 1.94 2.39 2.49 2.52
Fully diluted 1.88 2.31 2.40 2.43
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
-------------------------------
Shareholder Information
Stock Trading
The company's stock is traded nationally on the New
York Stock Exchange, where it is assigned the symbol
SPC. The approximate number of holders of record,
including individual owners, of our common stock was
7,550 as of Feb. 15, 1994.
Options on the company's stock trade on the Chicago
Board Options Exchange, under the symbol SPQ.
Stock Price and Dividend Rate
The table below sets forth the amount of cash dividends
declared per share and the high and low closing sales
prices of company stock for each quarter during the
past two years.
Cash
Dividend
1993 High Low Declared
---- --- --------
1st Quarter $83 1/4 $75 1/2 $.70
2nd Quarter 82 7/8 78 1/2 .70
3rd Quarter 93 3/8 80 5/8 .70
4th Quarter 97 86 1/2 .70
Cash dividend paid in 1993 was $2.78.
Cash
Dividend
1992 High Low Declared
---- --- --------
1st Quarter $74 3/4 $68 3/4 $.68
2nd Quarter 80 1/8 67 .68
3rd Quarter 80 69 3/8 .68
4th Quarter 78 1/4 68 1/4 .68
Cash dividend paid in 1992 was $2.69.