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