SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
------------------------------------------
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ------------------
Commission File Number 0-3021
------
THE ST. PAUL COMPANIES, INC.
- ---------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
--------- ---------------------------------
(State or other jurisdiction of (I.R.S Employer Identification
incorporation or organization) No.)
385 Washington St., Saint Paul, MN 55102
- ---------------------------------- ---------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (612) 221-7911
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of the Registrant's Common Stock, without par
value, outstanding at May 10, 1994, was 84,087,248. This total of
shares outstanding reflects the impact of the 2-for-1 stock split
approved and declared by the Registrant's Board of Directors on May 3,
1994.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income, (Unaudited),
Three Months Ended March 31, 1994 and 1993 3
Consolidated Balance Sheets, March 31, 1994
(Unaudited) and December 31, 1993 4
Consolidated Statements of Common Shareholders'
Equity, Three Months Ended March 31, 1994
(Unaudited) and Twelve Months Ended 6
December 31, 1993
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 1994 and 1993 7
Notes to Consolidated Financial Statements
(Unaudited) 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15
PART II. OTHER INFORMATION
Item 1 through Item 6 21
Signatures 23
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Unaudited
(In thousands)
Three Months Ended
March 31
-----------------------
1994 1993
---- ----
Revenues:
Premiums earned $845,402 800,937
Net investment income 168,408 165,612
Insurance brokerage fees and commissions 66,450 62,578
Investment banking-asset management 53,598 60,075
Realized investment gains 21,783 11,358
Other 8,134 13,468
--------- ---------
Total revenues 1,163,775 1,114,028
--------- ---------
Expenses:
Insurance losses and loss adjustment expenses 667,688 619,490
Policy acquisition expenses 191,351 184,990
Operating and administrative 222,733 199,706
--------- ---------
Total expenses 1,081,772 1,004,186
--------- ---------
Income before income taxes 82,003 109,842
Income tax expense (benefit):
Federal current 20,698 28,189
Other (3,132) (6,378)
--------- ---------
Total income tax expense 17,566 21,811
--------- ---------
Net income $64,437 88,031
========= =========
Earnings per common share:
Primary $0.73 1.01
========= =========
Fully diluted $0.71 0.98
========= =========
Dividends declared on common stock $0.375 0.35
========= =========
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
March 31, December 31,
ASSETS 1994 1993
- ------ ---------- ----------
(Unaudited)
Investments:
Fixed maturities, at estimated market value $8,816,933 9,147,964
Equities, at estimated market value 491,173 548,682
Real estate, at cost less accumulated
depreciation of $51,569 (1993; $48,847) 505,955 488,691
Venture capital, at estimated market value 308,919 297,982
Other investments 51,599 47,834
Short-term investments, at cost 695,725 725,261
---------- ----------
Total investments 10,870,304 11,256,414
Cash 20,178 25,420
Investment banking inventory securities 249,511 305,804
Reinsurance recoverables:
Unpaid losses 1,525,798 1,545,026
Paid losses 77,973 94,437
Receivables:
Underwriting premiums 967,454 1,008,034
Insurance brokerage activities 722,874 805,209
Interest and dividends 175,582 174,852
Other 127,533 105,513
Deferred policy acquisition expenses 284,500 294,860
Ceded unearned premiums 245,491 238,633
Deferred income taxes 607,073 425,012
Office properties and equipment, at cost less
accumulated depreciation of $224,352
(1993; $215,389) 455,338 455,861
Goodwill 278,014 284,276
Other assets 133,386 129,845
---------- ----------
Total assets $16,741,009 17,149,196
========== ==========
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In thousands)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1993
- ------------------------------------ ------------ -----------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $9,291,021 9,185,191
Unearned premiums 1,842,601 1,875,635
---------- ----------
Total insurance reserves 11,133,622 11,060,826
Debt 584,737 639,729
Payables:
Insurance brokerage activities 1,023,804 1,083,845
Income taxes 165,809 162,645
Reinsurance premiums 146,079 138,150
Accrued expenses and other 552,699 593,205
Other liabilities 442,711 466,989
---------- ----------
Total liabilities 14,049,461 14,145,389
---------- ----------
Series B convertible preferred stock;
1,450 shares authorized; 1,021 shares
outstanding (1,023 shares in 1993) 147,315 147,608
Guaranteed obligation - PSOP (146,600) (148,929)
---------- ----------
Net convertible preferred stock 715 (1,321)
---------- ----------
Common Shareholders' Equity:
Common stock, 240,000 shares authorized;
84,041 shares outstanding
(84,715 shares in 1993) 437,381 438,559
Retained earnings 2,088,421 2,082,832
Guaranteed obligation - ESOP (52,743) (56,005)
Unrealized appreciation of investments 276,907 588,844
Unrealized loss on foreign currency translation (59,133) (49,102)
---------- ----------
Total common shareholders' equity 2,690,833 3,005,128
---------- ----------
Total liabilities, preferred stock
and common shareholders' equity $16,741,009 17,149,196
========== ==========
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Common Shareholders' Equity
(In thousands)
Three Twelve
Months Ended Months Ended
March 31 December 31
------------ ------------
1994 1993
---- ----
(Unaudited)
Common stock:
Beginning of period $438,559 422,249
Stock issued under stock option and
other incentive plans 2,629 16,334
Reacquired common shares (3,807) (24)
--------- ---------
End of period 437,381 438,559
--------- ---------
Retained earnings:
Beginning of period 2,082,832 1,781,113
Net income 64,437 427,609
Dividends declared on common stock (31,219) (116,962)
Dividends declared on preferred
stock, net of taxes (2,109) (8,395)
Reacquired common shares (25,520) (533)
--------- ---------
End of period 2,088,421 2,082,832
--------- ---------
Guaranteed obligation - ESOP:
Beginning of period (56,005) (67,452)
Principal payments 3,262 11,447
--------- ---------
End of period (52,743) (56,005)
--------- ---------
Unrealized appreciation of investments,
net of taxes:
Beginning of period 588,844 63,669
Change during the period (311,937) 23,193
Change due to adoption of SFAS No. 115 - 501,982
--------- ---------
End of period 276,907 588,844
--------- ---------
Unrealized gain (loss) on foreign currency
translation, net of taxes:
Beginning of period (49,102) 2,920
Change during the period (10,031) (52,022)
--------- ---------
End of period (59,133) (49,102)
--------- ---------
Total common shareholders' equity $2,690,833 3,005,128
========= =========
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Three Months Ended
March 31
-----------------------
1994 1993
------ ------
OPERATING ACTIVITIES
Underwriting:
Net income $71,126 92,568
Adjustments:
Change in net insurance reserves 88,808 133,557
Change in underwriting premiums receivable 38,556 62,835
Provision for deferred taxes (6,250) (8,495)
Realized gains (19,202) (8,663)
Other 29,382 (56,898)
--------- ---------
Total underwriting 202,420 214,904
--------- ---------
Insurance brokerage:
Net loss (11,194) (9,822)
Adjustments:
Change in premium balances 22,773 (37,641)
Change in accounts payable and accrued expenses (18,799) (45,481)
Depreciation and goodwill amortization 4,545 5,899
Other (9,342) (10,248)
--------- ---------
Total insurance brokerage (12,017) (97,293)
--------- ---------
Investment banking-asset management:
Net income 10,728 13,009
Adjustments:
Change in inventory securities 56,293 (11,936)
Change in open security transactions 17,461 32,674
Change in short-term borrowings (80,383) (20,000)
Other 25,245 15,128
--------- ---------
Total investment banking-asset management 29,344 28,875
--------- ---------
Parent company and consolidating eliminations:
Net loss (6,223) (7,724)
Realized gains (2,581) (2,695)
Adjustments 4,745 15,601
--------- ---------
Total parent company and consol. eliminations (4,059) 5,182
--------- ---------
Net cash provided by operating activities 215,688 151,668
--------- ---------
INVESTING ACTIVITIES
Purchases of investments (518,789) (614,486)
Sales and maturities of investments 391,649 456,447
Change in short-term investments 28,426 58,057
Change in open security transactions (55,788) (8,644)
Net purchases of office properties and equipment (9,846) (12,959)
Other (16,029) (16,109)
--------- ---------
Net cash used in investing activities (180,377) (137,694)
--------- ---------
FINANCING ACTIVITIES
Dividends paid on common and preferred stock (32,632) (31,620)
Proceeds from issuance of debt 28,528 41,005
Reacquired common shares (29,245) (207)
Repayment of debt - (22,806)
Other (6,295) 1,731
--------- ---------
Net cash used in financing activities (39,644) (11,897)
--------- ---------
Effect of exchange rate changes on cash (909) (949)
--------- ---------
Increase (decrease) in cash (5,242) 1,128
Cash at beginning of period 25,420 26,648
--------- ---------
Cash at end of period $20,178 27,776
========= =========
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
March 31, 1994
Note 1 Basis of Presentation
- -----------------------------
The consolidated financial statements include The St. Paul Companies,
Inc. and subsidiaries, and have been prepared in conformity with
generally accepted accounting principles.
These consolidated financial statements rely, in part, on estimates.
In the opinion of management, all necessary adjustments have been
reflected for a fair presentation of the results of operations,
financial position and cash flows in the accompanying unaudited
consolidated financial statements. The results for the period are not
necessarily indicative of the results to be expected for the entire
year.
Reference should be made to the "Notes to Consolidated Financial
Statements" on pages 49 to 63 of the Registrant's annual report to
shareholders for the year ended December 31, 1993. The amounts in
those notes have not changed except as a result of transactions in the
ordinary course of business or as otherwise disclosed in these notes.
Some figures in the 1993 consolidated financial statements have been
reclassified to conform with the 1994 presentation. These
reclassifications had no effect on net income or common shareholders'
equity, as previously reported.
All references in the consolidated financial statements and related
footnotes to per share amounts and to the number of shares of common
stock for both 1994 and 1993 reflect the effect of the 2-for-1 stock
split approved by the company's Board of Directors on May 3, 1994 (see
Note 9).
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 2 Earnings Per Share
- --------------------------
Earnings per common share (EPS) amounts were calculated by dividing net
income, as adjusted, by the adjusted average common shares outstanding.
The common shares outstanding were adjusted for the 2-for-1 stock split
(see Note 9).
Three Months Ended
March 31
------------------
1994 1993
------ ------
(In thousands)
PRIMARY
Net income, as reported $64,437 88,031
Preferred dividends declared (net of taxes) (2,109) (2,102)
------- -------
Net income, as adjusted $62,328 85,929
======= =======
FULLY DILUTED
Net income, as reported $64,437 88,031
Additional PSOP expense (net of taxes)
due to assumed conversion of preferred stock (950) (1,038)
------- -------
Net income, as adjusted $63,487 86,993
======= =======
ADJUSTED AVERAGE SHARES OUTSTANDING
Primary 85,017 84,883
======= =======
Fully diluted 89,124 89,032
======= =======
Adjusted average shares outstanding include the common and common
equivalent shares outstanding for the period and, for fully diluted
EPS, common shares that would be issuable upon conversion of preferred
stock.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 Investments
- -------------------
A summary of investment transactions is presented below.
Three Months Ended March 31
------------------------------
1994 1993
------ ------
(In thousands)
Purchases:
Fixed maturities $305,417 489,198
Equities 151,408 98,064
Real estate 22,638 3,355
Venture capital 31,976 23,372
Other investments 7,350 497
-------- ---------
Total purchases 518,789 614,486
-------- ---------
Proceeds from sales and maturities:
Fixed maturities:
Sales 27,056 73,866
Maturities and redemptions 156,789 263,928
Equities 187,787 105,110
Venture capital 10,971 12,816
Other investments 9,046 727
-------- ---------
Total sales and maturities 391,649 456,447
-------- ---------
Net purchases $127,140 158,039
======== =========
The increase (decrease) in unrealized appreciation of investments was
as follows:
Three Months Ended Twelve Months Ended
March 31, 1994 December 31, 1993
------------------ -------------------
(In thousands)
Fixed maturities $(453,184) 257,774
Equities (35,450) (23,993)
Venture capital 324 52,550
-------- -------
Total change in pretax
unrealized appreciation (488,310) 286,331
=======
Increase in deferred tax
benefit due to change
in unrealized appreciation 176,373
--------
Total change in unrealized
appreciation, net of taxes $(311,937)
========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Premiums collected by the brokerage operations from insureds, but not
yet remitted to insurance carriers, are restricted as to use by
business practices. These restricted funds are included in short-term
investments and totaled $394 million at March 31, 1994, and $393
million at December 31, 1993.
Note 4 Income Taxes
- --------------------
The components of income tax expense are as follows:
Three Months Ended
March 31
-------------------
1994 1993
------ ------
(In thousands)
Federal current tax expense $20,698 28,189
Federal deferred tax benefit (6,069) (11,163)
------ ------
Total federal income tax expense 14,629 17,026
Foreign income taxes 1,797 3,085
State income taxes 1,140 1,700
------ ------
Total income tax expense $17,566 21,811
====== ======
Note 5 Contingent Liabilities
- ------------------------------
In the ordinary course of conducting business, some of the company's
subsidiaries have been named as defendants in various lawsuits. Some
of these lawsuits attempt to establish liability under insurance
contracts issued by those companies. Plaintiffs in these lawsuits are
asking for money damages or to have the court direct the activities of
our operations in certain ways. In some cases, plaintiffs seek to
establish coverage for their liability under environmental protection
laws.
The company believes that the total amounts that it or its subsidiaries
will ultimately have to pay in all of these lawsuits will have no
material effect on its overall financial position.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 6 Debt
- ------------
Debt consists of the following:
March 31, December 31,
1994 1993
---------------- ------------------
Book Fair Book Fair
Value Value Value Value
----- ----- ----- -----
(In thousands)
Commercial paper $215,549 215,549 201,384 201,384
Medium-term notes 224,781 223,000 210,780 221,100
9 3/8% notes 99,962 109,400 99,959 113,400
Guaranteed ESOP debt 44,445 48,100 47,223 52,200
Short-term borrowings - - 80,383 80,383
------- ------- ------- -------
Total debt $584,737 596,049 639,729 668,467
======= ======= ======= =======
Note 7 Reinsurance
- -------------------
The company's consolidated financial statements reflect the effects of
assumed and ceded reinsurance transactions. Assumed reinsurance refers
to the company's acceptance of certain insurance risks that other
insurance companies have underwritten. Ceded reinsurance involves
transferring certain insurance risks the company has underwritten to
other insurance companies who agree to share these risks. The primary
purpose of ceded reinsurance is to protect the company from potential
losses in excess of the amount it is prepared to accept.
The company expects those with whom it has ceded reinsurance to honor
their obligations. In the event these companies are unable to honor
their obligations in full, the company will pay the shortfall. The
company has established allowances for possible nonpayment of amounts
due to it from these companies.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses and loss adjustment expenses is as
follows:
Three Months Ended
March 31
--------------------
1994 1993
------ ------
(In thousands)
Premiums written:
Direct $764,593 682,817
Assumed 162,624 184,286
Ceded (122,646) (105,951)
------- -------
Net premiums written $804,571 761,152
======= =======
Premiums earned:
Direct $792,615 729,751
Assumed 167,207 180,087
Ceded (114,420) (108,901)
------- -------
Net premiums earned $845,402 800,937
======= =======
Insurance losses and loss
adjustment expenses:
Direct $543,212 492,088
Assumed 176,167 207,548
Ceded (51,691) (80,146)
------- -------
Net insurance losses and
loss adjustment expenses $667,688 619,490
======= =======
Note 8 New Accounting Standard
- -------------------------------
Effective January 1, 1994, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 112, "Employers Accounting for
Postemployment Benefits." The company now recognizes the obligation
for postemployment benefits on the accrual basis. The company's
previous practice was to record workers' compensation benefits on the
accrual basis and record all other postemployment benefits on the cash
basis. The cumulative effect of adopting SFAS No. 112 was $4.0
million, which was recorded as an operating expense in the first
quarter of 1994.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 9 Shareholders' Equity
- ----------------------------
The company's Restated Articles of Incorporation were amended by vote
of the shareholders at the 1994 Annual Meeting of Shareholders to
increase the authorized common shares of the company from 120 million
to 240 million. Subsequent to this action, the Board of Directors
approved a 2-for-1 stock split, which will result in the issuance of
one additional share of common stock for each outstanding share to
shareholders of record on May 17, 1994. It is expected that the
additional shares will be issued on June 6, 1994.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 1994
Consolidated Results
- --------------------
Pretax earnings of $82 million in the first quarter declined 25% from
1993 first quarter earnings of $110 million. Results in each industry
segment were below 1993 levels, particularly in underwriting, where
increased catastrophe losses accounted for the decline from 1993.
Catastrophe losses of $90 million in 1994 were nearly double the 1993
first quarter total of $46 million. First quarter investment banking-
asset management earnings were $3 million below comparable 1993
earnings due to a decline in investment banking and distribution
revenues. Net income for the first quarter was $64 million, or $0.71
per share, compared with 1993 first quarter net income of $88 million,
or $0.98 per share.
Consolidated revenues of $1.16 billion for the quarter were 4% higher
than 1993 revenues of $1.11 billion. An increase in insurance premiums
earned, primarily due to the company's acquisition of Economy Fire &
Casualty Company in the third quarter of 1993, accounted for the
majority of the growth over 1993.
Results by Segment
- ------------------
Pretax results by industry segment were as follows (in millions):
Three Months Ended
March 31
--------------------
1994 1993
Pretax income (loss): ---- ----
Underwriting:
GAAP underwriting result $(83) (60)
Net investment income 165 162
Realized investment gains 19 9
Other (12) (1)
--- ---
Total underwriting 89 110
Insurance brokerage (9) (8)
Investment banking-asset management 17 20
Parent and other (15) (12)
--- ---
Income before income taxes $82 110
=== ===
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Underwriting
- ------------
First quarter pretax earnings of $89 million in the underwriting
segment declined by 20% from 1993 earnings of $110 million, primarily
due to an increase in catastrophe losses.
The following summarizes key financial results by underwriting
operation:
Three Months
% of 1994 Ended March 31
Written -------------------
($ in Millions) Premiums 1994 1993
- --------------- --------- ----- ----
St. Paul Personal
& Business Insurance:
Written premiums 21% $172 83
Underwriting result $(22) (21)
Combined ratio 112.5 126.0
Medical Services:
Written premiums 20% $165 185
Underwriting result $34 43
Combined ratio 80.5 76.1
Custom Markets:
Written premiums 15% $119 121
Underwriting result $(11) (10)
Combined ratio 107.6 109.2
Other Specialty Markets:
Written premiums 18% $144 142
Underwriting result $(23) (19)
Combined ratio 112.9 115.7
St. Paul Commercial:
Written premiums 12% $ 93 111
Underwriting result $(23) (16)
Combined ratio 124.6 114.5
Reinsurance:
Written premiums 10% $ 81 80
Underwriting result $(29) (22)
Combined ratio 134.3 127.7
International:
Written premiums 4% $ 31 39
Underwriting result $(9) (15)
Combined ratio 128.9 137.0
---- ----- -----
Total:
Written premiums 100% $805 761
GAAP underwriting result $(83) (60)
Statutory combined ratio:
Loss and loss expense ratio 79.0 77.3
Underwriting expense ratio 31.2 31.5
----- -----
Combined ratio 110.2 108.8
===== =====
Combined ratio including
policyholders' dividends 110.2 108.9
===== =====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
The preceding table represents the company's restructured underwriting
operations effective in 1994. "St. Paul Personal & Business Insurance"
markets personal insurance products (including Economy's) and also
serves small commercial accounts. "Custom Markets" is composed of
several lines of business previously classified as "Specialized
Commercial," including Technology, Financial Services, Professional
Liability, Surplus Lines, Ocean Marine and Public Sector. "Other
Specialty Markets" consists of Construction, National Accounts, Surety
and Pools. "St. Paul Commercial" primarily consists of the company's
former Business Insurance operation and serves midsize commercial
customers. The company's Reinsurance and International underwriting
operations were unaffected by this restructuring; however, the company
now reports certain business in Other Specialty Markets that had been
previously reported in Reinsurance, and 1993 results have been
reclassified to reflect this change in reporting.
First quarter written premiums of $805 million were 6% higher than
comparable 1993 premiums of $761 million. The growth resulted from
increased premiums in St. Paul Personal & Business, which in 1994
includes $91 million of premiums from Economy Fire & Casualty Company,
acquired in September 1993. Excluding the impact of Economy on first
quarter 1994 premium volume, consolidated written premiums were below
1993. Medical Services experienced an 11% decline in premiums, which
resulted from a decrease in the number of insureds. St. Paul
Commercial volume was down 16%, primarily due to reduced involuntary
premiums.
Catastrophe losses of $90 million dominated the first quarter 1994
consolidated GAAP underwriting loss of $83 million. The Los Angeles
earthquake ($55 million) and East Coast winter storms ($33 million)
were the major catastrophes experienced during the quarter. Medical
Services continued its strong performance, posting a $34 million
underwriting profit for the quarter. The GAAP underwriting loss in the
first quarter of 1993 was $60 million, which included catastrophe
losses of $46 million. Key factors in the change in underwriting
results from 1993 were as follows:
- Medical Services - $9 million worse than 1993 - While still
performing well, the extent of favorable prior year loss
development was not as great as in the first quarter of 1993.
- St. Paul Commercial - $7 million worse than 1993 - Catastrophe
losses of $10 million in 1994 were $6 million higher than 1993,
accounting for the majority of the deterioration from 1993.
- Reinsurance - $7 million worse than 1993 - Catastrophe losses
were $40 million in the first quarter, compared with $13
million in the comparable 1993 period. Excluding the impact of
catastrophes in both years, Reinsurance posted an $11 million
underwriting profit in 1994, compared with a $9 million
underwriting loss in 1993. This improvement resulted from the
corrective actions taken in this operation.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
- International - $6 million better than 1993 - Improved loss
experience on insurance business written in Spain provided the
majority of the improvement over 1993.
First quarter pretax investment income in the underwriting segment was
$165 million, slightly higher than first quarter 1993 investment income
of $162 million. The investment portfolio continues to grow due to
positive underwriting cash flows; however, yields on new investments
remain lower than those on maturing securities, resulting in minimal
growth in investment income. The weighted average pretax yield on the
Underwriting investment portfolio at March 31, 1994 was 7.4%, compared
with 7.9% at the same time in 1993. Fixed-maturities purchased in the
first quarter were predominantly taxable securities. Taxable
securities comprised 43% of the total Underwriting investment portfolio
at March 31, 1994 and 1993. Approximately 95% of the fixed maturities
portfolio is rated at investment grade levels (BBB or better).
Insurance Brokerage
- -------------------
The Insurance Brokerage segment posted a pretax loss of $9 million for
the quarter, compared with a loss of $8 million in 1993. Brokerage
fees and commissions increased by $4 million over 1993 and expenses
were up $6 million, both primarily the result of acquisitions made
during 1993. Brokerage fees and commissions were above 1993 levels in
most business units.
Investment Banking-Asset Management
- -----------------------------------
The John Nuveen Company's (Nuveen) pretax earnings of $23 million in
the first quarter of 1994 were down from first quarter 1993 earnings of
$28 million. The company's portion of pretax earnings from Nuveen was
$17 million, compared with $20 million in the first quarter of 1993.
The company now holds a 75% interest in Nuveen. Management fees earned
from investment advisory services provided on assets under Nuveen's
management grew 20% over the comparable period of 1993, and assets
under management were $2.1 billion higher than the same time in 1993.
However, managed assets fell by $1.4 billion (to $31.3 billion) from year-end
1993 and unit investment trust (UIT) sales in the quarter declined compared
with the first quarter of 1993 as investors sought alternative investment
vehicles in a rising interest rate environment. In addition, municipal
new issue volume declined from 1993, which, along with the decline in
mutual fund sales and UIT sales, resulted in a decline in underwriting
and distribution revenues compared with the first quarter of 1993.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Environmental Claims
- --------------------
The company's underwriting operations continue to receive claims under
policies written many years ago alleging injuries from hazardous waste
substances or alleging covered property damages for the cost to clean
up hazardous waste sites. Significant legal issues, primarily
pertaining to issues of coverage, exist with regard to the alleged
liability of the company's underwriting operations for these claims.
In the company's opinion, court decisions in certain jurisdictions have
tended to expand insurance coverage beyond the intent of the original
policies.
The company's ultimate liability for pollution claims is extremely
difficult to estimate. Insured parties have submitted claims for
losses not covered in the insurance policy, and the ultimate resolution
of these claims may be subject to lengthy litigation, during which time
it is difficult to estimate the company's potential liability. In
addition, variables, such as the length of time necessary to clean up a
polluted site, and controversies surrounding the identity of the
responsible party and the degree of remediation deemed necessary, make
it difficult to estimate the total cost of a pollution claim. The
company maintains a claim staff that continually evaluates its exposure
to pollution liability losses. At March 31, 1994, the company's total
reserves for pollution-related losses were approximately $75 million.
Despite these difficulties in estimating potential liability, the
company believes that its reserves for such losses are adequate. Many
significant pollution claims currently being brought against insurance
companies arise out of contamination that occurred 20 to 30 years ago,
a time frame during which the company's underwriting operations'
commercial book of business was largely composed of small- to medium-
sized businesses without significant exposure to pollution liability.
In addition, the company believes that its current mix of commercial
business carries a relatively low risk of significant pollution
liability. Finally, the company's Commercial General Liability policy
form has, since 1970, included a specific pollution coverage exclusion,
and, since 1986, an absolute pollution exclusion.
Legal developments may cause the company to make additional adjustments
to the reserves for these claims in the future, but, in management's
judgment, such adjustments should not have a material adverse impact on
the company's financial position.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Capital Resources
- -----------------
Common shareholders' equity of $2.7 billion at March 31, 1994 declined
by $314 million from year-end 1993. The unrealized appreciation of the
company's investment portfolio declined by $312 million (net of taxes)
in the first quarter primarily due to rising interest rates in the bond
market. The company also repurchased 733,400 of its outstanding common
stock (as adjusted for the 2-for-1 stock split) for a total cost of $29
million during the first quarter. Total debt outstanding declined $55
million from year-end 1993, due to a decline in Nuveen's short-term
borrowings. The company issued an additional $14 million of medium-
term notes under an existing shelf registration during the first
quarter. The ratio of total debt to total capitalization at quarter-
end was 18%, unchanged from year end 1993.
The company currently has no significant capital commitments planned
for 1994 and beyond.
The company's ratio of earnings to fixed charges was 5.69 for the first
three months of 1994, compared with 7.37 for the same period of 1993.
The company's ratio of earnings to combined fixed charges and preferred
stock dividends was 4.51 for the first three months of 1994, compared
with 5.83 for the same period of 1993. Fixed charges consist of
interest expense before reduction for capitalized interest and one-
third of rental expense, which is considered to be representative of an
interest factor.
Liquidity
- ---------
Liquidity refers to the company's ability to generate sufficient funds
to meet the cash requirements of its business operations. Net cash
provided by operations was $216 million in the first three months of
1994, compared to $152 million in 1993. The increase over 1993 was
primarily due to increased cash flows in the Insurance Brokerage
segment. The company's consolidated liquidity position remains strong
due to the Underwriting segment's cash flows from underwriting and
investment activities.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 5 to the consolidated
financial statements included in Part I of this report is
incorporated herein by reference.
Item 2. Changes in Securities.
As noted in Item 4, the Registrant's articles of incorporation
were amended, effective May 3, 1994, to increase the number of
authorized shares of voting common stock from one hundred
twenty million to two hundred forty million.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The Registrant's annual shareholders' meeting was held on
May 3, 1994.
(1) All thirteen persons nominated for directors by management
were named in proxies for the meeting which were solicited
pursuant to Regulation 14A of the Securities Exchange Act
of 1934. There was no solicitation in opposition to
management's nominees as listed in the proxy statements.
All thirteen nominees were elected by the following votes:
In favor Withheld
-------- --------
Michael R. Bonsignore 36,691,967 648,144
John H. Dasburg 36,632,208 707,903
W. John Driscoll 36,719,696 620,415
Mark S. Fowler 36,685,483 654,628
Pierson M. Grieve 36,718,397 621,714
Ronald James 36,722,857 617,254
William H. Kling 36,722,035 618,076
Douglas W. Leatherdale 36,711,908 628,203
Bruce K. MacLaury 36,721,176 618,935
Ian A. Martin 36,722,997 617,114
Glen D. Nelson 35,842,140 1,497,971
Anita M. Pampusch 35,837,809 1,502,302
Patrick A. Thiele 36,723,558 616,553
(2) By a vote of 36,723,054 in favor, 97,262 against and
519,692 abstaining, the shareholders ratified the
selection of KPMG Peat Marwick as the independent auditors
for the Registrant.
(3) By a vote of 34,377,028 in favor, 2,407,609 against and
555,371 abstaining, the shareholders voted to amend the
company's Restated Articles of Incorporation to increase
the number of authorized shares of voting common stock
from one hundred twenty million to two hundred forty
million.
(4) By a vote of 23,655,026 in favor, 11,655,413 against and
650,965 abstaining, the shareholders did not pass the
proposal to amend the company's Restated Articles of
Incorporation to facilitate their amendment by the Board
of Directors when permitted by applicable law. A vote in
favor by two-thirds of all outstanding shares was required
for approval of this proposal.
(5) By a vote of 35,142,045 in favor, 1,645,368 against and
552,595 abstaining, the shareholders voted to amend the
company's Bylaws to reduce the minimum number of Directors
from thirteen to ten.
(6) By a vote of 35,305,890 in favor, 1,342,616 against and
691,302 abstaining, the shareholders voted to approve the
company's Annual Incentive Plan.
(7) By a vote of 35,572,360 in favor, 1,068,531 against and
699,117 abstaining, the shareholders voted to approve the
company's Long-Term Incentive Plan.
(8) By a vote of 32,185,820 in favor, 4,493,084 against and
661,104 abstaining, the shareholders voted to approve the
company's 1994 Stock Incentive Plan.
Item 5. Other Information.
Not applicable.
SIGNATURES
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth as the last page
in this document.
(b) Reports on Form 8-K.
1) The Registrant filed a Form 8-K Current Report
dated January 24, 1994, pertaining to the Registrant's
press release of fourth quarter 1993 financial results.
2) The Registrant filed a Form 8-K Current Report
dated February 10, 1994, pertaining to its estimate of
pretax losses from January storms and the Los Angeles
earthquake, and to the possibility of its repurchase of
up to one million of its common shares.
3) The Registrant filed a Form 8-K Current Report
dated April 25, 1994, pertaining to the Registrant's
press release of first quarter 1994 financial results.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
(Registrant)
Date: May 12, 1994 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Vice President
and Corporate Secretary
(Authorized Signatory)
Date: May 12, 1994 By /s/ Howard E. Dalton
--------------------
Howard E. Dalton
Senior Vice President
Chief Accounting Officer
EXHIBIT INDEX
-------------
How
Exhibit Filed
- ------- -----
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession*
(3) (i) Articles of incorporation**.......................... (1)
(ii) By-laws**............................................ (1)
(4) Instruments defining the rights of security holders,
including indentures*..................................
(10) Material contracts
(a) 1994 Stock Incentive Plan**........................... (1)
(b) Annual Incentive Plan**............................... (1)
(c) Long-Term Incentive Plan**............................ (1)
(11) Statement re computation of per share earnings**.......... (1)
(12) Statement re computation of ratios**...................... (1)
(15) Letter re unaudited interim financial information*........
(18) Letter re change in accounting principles*................
(19) Report furnished to security holders*.....................
(22) Published report regarding matters submitted to
vote of security holders*..............................
(23) Consents of experts and counsel*..........................
(24) Power of attorney*........................................
(27) Financial data schedule*..................................
(99) Additional exhibits*......................................
* These items are not applicable.
** This exhibit is included only with the copies of this report that
are filed with the Securities and Exchange Commission. However, a
copy of the exhibit may be obtained from the Registrant for a
reasonable fee by writing to the Law Department, The St. Paul
Companies, 385 Washington Street, Saint Paul, MN 55102.
(1) Filed electronically under Operational EDGAR.