SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
X OF THE SECURITIES EXCHANGE ACT OF 1934
----
For the quarterly period ended June 30, 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 August 8, 1995, was 84,538,776.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Consolidated Statements of Income (Unaudited), Three
and Six Months Ended June 30, 1995 and 1994 3
Consolidated Balance Sheets, June 30, 1995
(Unaudited) and December 31, 1994 4
Consolidated Statements of Common Shareholders' Equity,
Six Months Ended June 30, 1995 (Unaudited) and
Twelve Months Ended December 31, 1994 6
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 1995 and 1994 7
Notes to Consolidated Financial Statements (Unaudited) 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 1 through Item 6 23
Signatures 25
EXHIBIT INDEX 26
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Unaudited
(In thousands)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1995 1994 1995 1994
---- ---- ---- ----
Revenues:
Premiums earned $991,827 845,957 1,937,897 1,691,359
Net investment income 190,176 167,250 376,565 335,658
Insurance brokerage fees
and commissions 77,052 74,298 144,113 140,748
Investment banking-asset
management 54,262 53,201 107,878 106,799
Realized investment gains 9,347 14,897 12,324 36,680
Other 8,064 9,546 19,410 17,680
--------- --------- --------- ---------
Total revenues 1,330,728 1,165,149 2,598,187 2,328,924
--------- --------- --------- ---------
Expenses:
Insurance losses and loss
adjustment expenses 723,390 591,946 1,403,829 1,259,634
Policy acquisition expenses 219,228 193,468 426,922 384,819
Operating and administrative 244,856 220,541 476,036 443,274
--------- --------- --------- ---------
Total expenses 1,187,474 1,005,955 2,306,787 2,087,727
--------- --------- --------- ---------
Income before income taxes 143,254 159,194 291,400 241,197
Income tax expense (benefit):
Federal current 44,192 42,152 91,260 62,850
Other (13,905) (10,720) (23,423) (13,852)
--------- --------- --------- ---------
Total income tax expense 30,287 31,432 67,837 48,998
--------- --------- --------- ---------
Net income $112,967 127,762 223,563 192,199
========= ========= ========= =========
Net income per common share:
Primary $1.30 1.49 2.57 2.22
========= ========= ========= =========
Fully diluted $1.24 1.43 2.47 2.14
========= ========= ========= =========
Dividends declared on
common stock $0.40 0.375 0.80 0.75
========= ========= ========= =========
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
June 30, December 31,
ASSETS 1995 1994
------ ---------- ----------
(Unaudited)
Investments:
Fixed maturities, at estimated market value $9,621,174 8,828,684
Equities, at estimated market value 662,461 531,042
Real estate, at cost less accumulated
depreciation of $66,125 (1994; $60,234) 617,867 528,144
Venture capital, at estimated market value 335,407 330,032
Other investments 51,371 46,539
Short-term investments, at cost 1,057,047 898,081
---------- ----------
Total investments 12,345,327 11,162,522
Cash 37,271 46,664
Investment banking inventory securities 59,618 148,031
Reinsurance recoverables:
Unpaid losses 1,518,114 1,533,250
Paid losses 138,733 88,900
Receivables:
Underwriting premiums 1,230,363 1,107,788
Insurance brokerage activities 759,145 891,823
Interest and dividends 184,057 182,938
Other 122,646 88,657
Deferred policy acquisition expenses 337,825 324,358
Ceded unearned premiums 239,371 255,687
Deferred income taxes 610,289 790,508
Office properties and equipment, at cost
less accumulated depreciation
of $255,503 (1994; $243,945) 475,854 477,570
Goodwill 292,916 279,308
Other assets 183,246 117,816
---------- ----------
Total assets $18,534,775 17,495,820
========== ==========
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In thousands)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
------------------------------------ ------------ -----------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $9,693,382 9,423,429
Unearned premiums 2,169,679 2,109,170
---------- ----------
Total insurance reserves 11,863,061 11,532,599
Debt 586,512 622,624
Payables:
Insurance brokerage activities 1,088,163 1,191,089
Income taxes 192,209 183,659
Reinsurance premiums 177,428 155,833
Accrued expenses and other 666,033 600,211
Other liabilities 446,391 472,336
---------- ----------
Total liabilities 15,019,797 14,758,351
---------- ----------
Company-obligated minority interest
in St. Paul Capital L.L.C. (Note 8) 207,000 -
Series B convertible preferred stock;
1,450 shares authorized; 1,007 shares
outstanding (1,012 shares in 1994) 145,245 146,102
Guaranteed obligation - PSOP (137,589) (141,567)
---------- ----------
Net convertible preferred stock 7,656 4,535
---------- ----------
Common shareholders' equity:
Common stock, 240,000 shares authorized; 84,481
shares outstanding (84,202 shares in 1994) 454,406 445,222
Retained earnings 2,513,794 2,362,286
Guaranteed obligation - ESOP (37,849) (44,410)
Unrealized appreciation of investments 402,179 13,948
Unrealized loss on foreign currency translation (32,208) (44,112)
---------- ----------
Total common shareholders' equity 3,300,322 2,732,934
---------- ----------
Total liabilities, minority interest,
preferred stock and common
shareholders' equity $18,534,775 17,495,820
========== ==========
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Common Shareholders' Equity
(In thousands)
Six Twelve
Months Ended Months Ended
June 30 December 31
------------ ------------
1995 1994
---- ----
(Unaudited)
Common stock:
Beginning of period $445,222 438,559
Stock issued under stock option and
other incentive plans 9,239 11,130
Reacquired common stock (55) (4,467)
---------- ----------
End of period 454,406 445,222
---------- ----------
Retained earnings:
Beginning of period 2,362,286 2,082,832
Net income 223,563 442,828
Dividends declared on common stock (67,021) (124,921)
Dividends declared on PSOP preferred
stock, net of taxes (4,285) (8,448)
Reacquired common shares (749) (30,005)
---------- ----------
End of period 2,513,794 2,362,286
---------- ----------
Guaranteed obligation - ESOP:
Beginning of period (44,410) (56,005)
Principal payments 6,561 11,595
---------- ----------
End of period (37,849) (44,410)
---------- ----------
Unrealized appreciation of investments,
net of taxes:
Beginning of period 13,948 588,844
Change during the period 388,231 (574,896)
---------- ----------
End of period 402,179 13,948
---------- ----------
Unrealized loss on foreign currency
translation, net of taxes:
Beginning of period (44,112) (49,102)
Change during the period 11,904 4,990
---------- ----------
End of period (32,208) (44,112)
---------- ----------
Total common shareholders' equity $3,300,322 2,732,934
========== ==========
See notes to consolidated financial statements.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Six Months Ended
June 30
-----------------------
1995 1994
------ ------
OPERATING ACTIVITIES
Underwriting:
Net income $244,253 201,956
Adjustments:
Change in net insurance reserves 334,822 202,539
Change in underwriting premiums receivable (130,344) (56,662)
Provision for deferred taxes (31,570) (19,038)
Realized gains (9,133) (33,661)
Other (102,901) 80,230
---------- ----------
Total underwriting 305,127 375,364
---------- ----------
Insurance brokerage:
Net loss (23,061) (19,478)
Adjustments:
Change in premium balances 22,410 15,353
Change in accounts payable and
accrued expenses (19,988) (18,693)
Depreciation and goodwill amortization 12,241 9,396
Other 23,970 (6,650)
---------- ----------
Total insurance brokerage 15,572 (20,072)
---------- ----------
Investment banking-asset management:
Net income 24,165 21,832
Adjustments:
Change in inventory securities 88,413 226,255
Change in short-term investments (115,154) (168,990)
Change in open security transactions (17,195) 6,040
Change in short-term borrowings - (80,383)
Other 37,742 35,145
---------- ----------
Total investment banking-asset management 17,971 39,899
---------- ----------
Parent company and consolidating eliminations:
Net loss (21,794) (12,111)
Realized gains (3,191) (3,019)
Adjustments 29,931 (5,612)
---------- ----------
Total parent company and
consolidating eliminations 4,946 (20,742)
---------- ----------
Net cash provided by operating activities 343,616 374,449
---------- ----------
INVESTING ACTIVITIES
Purchase of investments (1,272,747) (1,097,732)
Sales and maturities of investments 850,757 826,723
Change in short-term investments (33,468) 48,430
Change in open security transactions 60,929 (53,593)
Net purchases of office properties and equipment (22,544) (18,101)
Other (44,759) 15,721
---------- ----------
Net cash used in investing activities (461,832) (278,552)
---------- ----------
FINANCING ACTIVITIES
Dividends paid on common and preferred stock (71,184) (67,105)
Proceeds from issuance of monthly income
preferred securities 207,000 -
Proceeds from issuance of debt 65,500 57,151
Reacquired common shares (497) (33,570)
Repayment of debt (95,306) (20,350)
Other 3,170 (18,819)
---------- ----------
Net cash provided by (used in) financing
activities 108,683 (82,693)
---------- ----------
Effect of exchange rate changes on cash 140 (280)
---------- ----------
Increase (decrease) in cash (9,393) 12,924
Cash at beginning of period 46,664 25,420
---------- ----------
Cash at end of period $37,271 38,344
========== ==========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
June 30, 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 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 Six Months Ended
June 30 June 30
---------------- ----------------
1995 1994 1995 1994
------ ------ ------ ------
(In thousands)
PRIMARY
Net income, as reported $112,967 127,762 223,563 192,199
PSOP preferred dividends declared
(net of taxes) (2,139) (2,105) (4,285) (4,214)
-------- -------- -------- --------
Net income, as adjusted $110,828 125,657 219,278 187,985
======== ======== ======== ========
FULLY DILUTED
Net income, per financial statements $112,967 127,762 223,563 192,199
Additional PSOP expense (net of taxes)
due to assumed conversion of
preferred stock (871) (947) (1,745) (1,897)
Dividend on monthly income preferred
securities (net of taxes) 1,009 - 1,009 -
-------- -------- -------- --------
Net income, as adjusted $113,105 126,815 222,827 190,302
======== ======== ======== ========
ADJUSTED AVERAGE COMMON SHARES
OUTSTANDING
Primary 85,362 84,561 85,277 84,788
======== ======== ======== ========
Fully diluted 91,157 88,678 90,231 88,935
======== ======== ======== ========
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 PSOP preferred
stock and monthly income preferred securities.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 3 Investments
-------------------
Investment Activity. A summary of investment transactions is presented
below.
Six Months Ended June 30
------------------------------
1995 1994
------ ------
(In thousands)
Purchases:
Fixed maturities $761,513 660,534
Equities 376,182 344,006
Real estate 102,426 48,094
Venture capital 27,344 36,964
Other investments 5,282 8,134
--------- ---------
Total purchases 1,272,747 1,097,732
--------- ---------
Proceeds from sales and maturities:
Fixed maturities:
Sales 126,205 140,896
Maturities and redemptions 352,244 305,213
Equities 334,704 357,026
Venture capital 30,598 11,987
Real estate 4,839 -
Other investments 2,167 11,601
--------- ---------
Total sales and maturities 850,757 826,723
--------- ---------
Net purchases $421,990 271,009
========= =========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common shareholders'
equity was as follows:
Six Months Ended Twelve Months Ended
June 30, 1995 December 31, 1994
------------------ -------------------
(In thousands)
Fixed maturities $505,121 (847,554)
Equities 79,857 (30,106)
Venture capital 9,099 (4,064)
-------- -------
Total change in pretax
unrealized appreciation 594,077 (881,724)
Increase (decrease) in deferred
tax asset due to change
in unrealized appreciation (205,846) 306,828
-------- --------
Total change in unrealized
appreciation, net of taxes $388,231 (574,896)
======== ========
Restricted Funds. Premiums collected by the brokerage operations from
insureds, but not yet remitted to insurance carriers, are restricted as
to use by business practices. These restricted funds are included in
short-term investments and totaled $388 million at June 30, 1995, and
$385 million at December 31, 1994.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Note 4 Income Taxes
--------------------
The components of the income tax provision are as follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1995 1994 1995 1994
------ ------ ------ ------
(In thousands)
Federal current tax expense $44,192 42,152 91,260 62,850
Federal deferred tax benefit (17,396) (15,559) (31,017) (21,628)
------- ------- ------- -------
Total federal income tax
expense 26,796 26,593 60,243 41,222
Foreign income taxes 2,265 3,664 5,135 5,461
State income taxes 1,226 1,175 2,459 2,315
------- ------- ------- -------
Total income tax expense $30,287 31,432 67,837 48,998
======= ======= ======= =======
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:
June 30, December 31,
1995 1994
------------------ -----------------
Book Fair Book Fair
Value Value Value Value
----- ----- ----- -----
(In thousands)
Medium-term notes $270,037 272,100 204,433 189,400
Commercial paper 179,570 179,570 275,635 275,635
9 3/8% notes 99,977 104,400 99,971 102,800
Guaranteed ESOP debt 30,556 32,100 36,112 37,200
Pound sterling loan notes 6,372 6,372 6,473 6,473
------- ------- ------- -------
Total debt $586,512 594,542 622,624 611,508
======= ======= ======= =======
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 Six Months Ended
June 30 June 30
-------------------- ---------------------
1995 1994 1995 1994
---- ---- ---- ----
(In thousands)
Premiums written:
Direct $947,804 806,107 1,752,006 1,570,700
Assumed 307,008 274,852 525,522 437,476
Ceded (159,686) (159,840) (266,039) (282,486)
--------- --------- --------- ---------
Net premiums written $1,095,126 921,119 2,011,489 1,725,690
========= ========= ========= =========
Premiums earned:
Direct $921,372 802,802 1,786,954 1,595,417
Assumed 239,556 198,180 433,745 365,387
Ceded (169,101) (155,025) (282,802) (269,445)
--------- --------- --------- ---------
Net premiums earned $991,827 845,957 1,937,897 1,691,359
========= ========= ========= =========
Insurance losses and loss
adjustment expenses:
Direct $666,432 508,124 1,241,982 1,051,336
Assumed 170,814 183,366 375,546 359,533
Ceded (113,856) (99,544) (213,699) (151,235)
--------- --------- --------- ---------
Net insurance losses and
loss adjustment expenses $723,390 591,946 1,403,829 1,259,634
========= ========= ========= =========
Note 8 Company-obligated Minority Interest in St. Paul Capital L.L.C.
----------------------------------------------------------------------
On May 16, 1995, the company issued, through St. Paul Capital
L.L.C.,("SPCLLC") 4,140,000 convertible monthly income preferred securities
(MIPS), generating gross proceeds of $207 million. The MIPS pay an annual
dividend of 6% of the liquidation preference of $50 per security. The
company directly or indirectly owns all of the common securities of SPCLLC,
a special purpose limited liability company which was formed for the purpose
of issuing these preferred securities. The MIPS are guaranteed by the
company and are 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
Notes to Consolidated Financial Statements, Continued
SPCLLC used the proceeds of the MIPS sale and common capital contributions
from the company (together totaling $262 million) to purchase 6% convertible
subordinated debentures issued by the company. These debentures are due May
31, 2025 and interest is payable monthly. The debentures are eliminated in
the company's consolidated balance sheet.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1995
Consolidated Results
--------------------
Consolidated pretax earnings of $143 million in the second quarter were
down 10% from second quarter 1994 earnings of $159 million. An increase
in catastrophe losses and other expenses in the underwriting segment
drove the decline in quarterly earnings. Results from the company's
insurance brokerage and investment banking-asset management operations
improved slightly over the second quarter of 1994. For the first half
of 1995, pretax earnings of $291 million were $50 million higher than
the first six months of 1994, primarily due to improved results in the
underwriting segment.
Net income in the second quarter was $113 million, or $1.24 per share,
compared with net income of $128 million, or $1.43 per share, in the
second quarter of 1994. Net income of $224 million, or $2.47 per share,
for the first six months of 1995 increased 16% over comparable 1994 net
income of $192 million, or $2.14 per share.
Consolidated revenues in the second quarter totaled $1.33 billion, an
increase of 14% over second quarter 1994 revenues of $1.17 billion.
Year-to-date revenues in 1995 were 12% higher than the same period of
1994. Growth in insurance premiums earned drove the increased revenue
in 1995.
Results by Segment
------------------
Pretax results by industry segment were as follows (in millions):
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1995 1994 1995 1994
---- ---- ---- ----
Pretax income (loss):
Underwriting:
GAAP underwriting results ($26) (14) (41) (97)
Net investment income 181 164 359 329
Realized investment gains 8 14 9 34
Other (18) (4) (22) (17)
---- ---- ---- ----
Total underwriting 145 160 305 249
Insurance brokerage (4) (5) (18) (14)
Investment banking-asset management 20 18 39 35
Parent and other (18) (14) (35) (29)
---- ---- ---- ----
Income before income taxes $143 159 291 241
==== ==== ==== ====
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Underwriting
------------
Pretax earnings in the underwriting segment totaled $145 million in the
second quarter, down 9% from earnings of $160 million in the same period
of 1994. A $12 million deterioration in underwriting results, driven by
an increase in catastrophe losses, and an increase in other expenses
were partially offset by a $17 million increase in investment income.
The following summarizes key financial results by underwriting
operation:
% of Three Months Six Months
1995 Ended June 30 Ended June 30
Written -------------- --------------
($ in Millions) Premiums 1995 1994 1995 1994
--------------- -------- ---- ---- ---- ----
Specialized Commercial:
Written Premiums 33% $355 278 639 541
Underwriting Results ($26) (22) (46) (56)
Combined Ratio 106.0 106.6 106.2 108.5
Personal Insurance:
Written Premiums 16% $179 168 329 313
Underwriting Results ($3) (6) (10) (17)
Combined Ratio 101.1 102.8 102.7 105.1
Commercial:
Written Premiums 14% $142 120 289 241
Underwriting Results ($11) (15) (15) (49)
Combined Ratio 107.9 112.5 105.2 120.3
Medical Services:
Written Premiums 13% $129 130 266 295
Underwriting Results $25 37 51 71
Combined Ratio 85.8 78.3 85.5 79.3
---- ----- ----- ----- -----
Total St. Paul Fire &
Marine:
Written Premiums 76% $805 696 1,523 1,390
Underwriting Results ($15) (6) (20) (51)
Combined Ratio 101.3 100.5 101.2 103.1
Reinsurance:
Written Premiums 20% $244 196 400 277
Underwriting Results $1 (3) (4) (32)
Combined Ratio 95.5 97.7 99.4 113.0
International:
Written Premiums 4% $46 29 88 59
Underwriting Results ($12) (5) (17) (14)
Combined Ratio 127.5 121.1 120.8 125.4
---- ----- ----- ----- -----
Total:
Written Premiums 100% $1,095 921 2,011 1,726
GAAP Underwriting Results ($26) (14) (41) (97)
Statutory Combined Ratio:
Loss and Loss Expense Ratio 72.9 70.0 72.4 74.5
Underwriting Expense Ratio 28.5 30.2 29.3 30.7
----- ----- ----- -----
Combined Ratio 101.4 100.2 101.7 105.2
===== ===== ===== =====
Combined Ratio Including
Policyholders' Dividends 101.6 100.3 101.9 105.2
===== ===== ===== =====
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.
Written premiums of $1.1 billion in the second quarter were 19% higher
than comparable 1994 premiums of $921 million. In the Specialized
Commercial category, new business in the National Accounts and
Construction business sectors accounted for the majority of the 28%
increase in premium volume over 1994. Reinsurance written premiums were
nearly $50 million higher than the same quarter of 1994, primarily due
to approximately $40 million in incremental premiums from the renewal of
reinsurance business acquired from a subsidiary of the CIGNA Corporation
in 1994. New business in several classes of coverages accounted for the
19% increase in Commercial premium volume over the second quarter of
1994. Medical Services' written premiums in the second quarter were
level with the same quarter last year.
Written premiums for the first half of 1995 increased 17% over the same
period of 1994, primarily due to premium growth in Reinsurance,
Specialized Commercial and Commercial.
The GAAP underwriting loss in the second quarter was $26 million,
compared with 1994's second quarter loss of $14 million. Catastrophe
losses of $55 million, primarily stemming from spring storms in Texas
and the Midwest, severely impacted second quarter underwriting results
and more than offset underlying improvement in loss experience and
reduced expense ratios in many lines of business. The second quarter of
1994 included virtually no catastrophe losses. Key factors in the
increase in second quarter underwriting losses compared to 1994 were as
follows:
- Medical Services - $12 million worse than 1994 - The magnitude
of favorable prior year loss development was less than that
experienced in 1994, resulting in a reduced underwriting profit.
- International - $7 million worse than 1994 - An increase in
losses in Canada was the primary factor in the deterioration
from 1994.
- Commercial - $4 million better than 1994 - Favorable prior year
loss development and reduced expenses more than offset a $23
million increase in catastrophe losses in the quarter.
- Specialized Commercial - $4 million worse than 1994 - A $20
million increase in catastrophe losses and deterioration in
results from the company's participation in insurance pools were
substantially offset by a decline in involuntary costs and
reduced underwriting expenses.
The year-to-date GAAP underwriting loss of $41 million was
significantly better than the 1994 six-month loss of $97 million.
Catastrophe losses in the first half of 1995 totaled $71 million,
compared with $88 million
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
for the same period of 1994. Improvement in noncatastrophe loss
experience, particularly in the Commercial business center, and the
decline in catastrophe losses were the primary factors driving the
reduction in underwriting losses in 1995.
Pretax investment income in the underwriting segment for the second
quarter was $181 million, up 10% from $164 million in 1994. Year-to-
date investment income was $30 million ahead of last year. The increase
over 1994 was primarily due to a general rise in interest rates over the
last 18 months and strong cash flows from operations, which has fueled a
$500 million increase in investments since June 30, 1994. The average
yield on taxable fixed maturity purchases, which have constituted the
majority of investment purchases in 1995, was 8.0% in the first six
months of 1995, compared with 7.1% for the same period of 1994. For the
first time in several years, the company began investing in tax-exempt
fixed maturities in the second quarter, due to increasing yields on
those securities and changes in the company's consolidated tax position
which make tax-exempt investments more attractive.
The weighted average pretax yield on the underwriting segment's fixed
maturities portfolio was 7.3% at June 30, 1995, and approximately 95% of
that portfolio was 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.
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
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 at this time. However, the
company is continually evaluating its exposure to these claims in an
effort to quantify such a range. The company's results of operations in
future periods may be materially impacted by these claims, but the
company believes it is unlikely that such claims will materially impact
its financial position or liquidity.
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 for only 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 six months ended June 30, 1995,
and the years ended Dec. 31, 1994 and 1993. Amounts in the "net" column
are reduced by reinsurance.
1995 1994 1993
Pollution (six months) ---- ----
--------- ----------
(in millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Beginning reserves $275 200 105 73 88 62
Incurred losses 31 35 71 56 32 22
IBNR allocation - - 132 95 - -
Paid losses (16) (14) (33) (24) (15) (11)
--- --- --- --- --- ---
Ending reserves $290 221 275 200 105 73
=== === === === === ===
Many significant pollution claims currently being brought against
insurance companies arise out of contamination that occurred 20 to 30
years ago. Since 1970, the company's Commercial General Liability
policy form has included a specific pollution exclusion, and, since
1986, an 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 six months ended June
30, 1995, and the years ended Dec. 31, 1994 and 1993:
1995 1994 1993
Asbestos (six months) ---- ----
-------- ----------
(in millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Beginning reserves $185 145 62 48 70 54
Incurred losses 7 9 13 14 17 15
IBNR allocation - - 127 95 - -
Paid losses (9) (5) (17) (12) (25) (21)
--- --- --- --- --- ---
Ending reserves $183 149 185 145 62 48
=== === === === === ===
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 June 30, 1995, of $473
million represented approximately 5% of gross consolidated reserves of
$9.7 billion.
Insurance Brokerage
-------------------
The insurance brokerage segment (Minet) incurred a pretax loss of $4
million in the second quarter, a slight improvement over the comparable
1994 loss of $5 million. Investment income increased $4 million, and
brokerage fees and commissions grew 5% over the second quarter of 1994.
Salaries and related expenses increased 7% due to increased staffing
levels associated with Minet's continuing effort to develop new business
opportunities. Minet's pretax loss for the first half of 1995 was $18
million, compared with a loss of $14 million in the first six months of
1994. The competitive market environment for brokerage services
worldwide continues to have a negative impact on Minet's results.
Investment Banking-Asset Management
-----------------------------------
The company's portion of The John Nuveen Company's second quarter pretax
earnings was $20 million, compared with $18 million in 1994. For the
first half of 1995, the company's portion was $39 million, compared with
$35 million in 1994. The company currently owns 77% of Nuveen.
The municipal bond market has stabilized somewhat compared to last year
but still remains challenging. For the first time since the second
quarter of 1994, Nuveen's asset management revenues increased over the
comparable prior quarter as a result of the increased market value of
managed assets. Assets under management totaled $31.4 billion at June
30, an increase of $1.7 billion
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
since year-end 1994. Nuveen's underwriting and distribution revenues in
the first half of 1995 were more than double the comparable 1994 total,
primarily due to inventory positioning profits resulting from more
favorable market conditions in 1995. Unit Investment Trust sales in
1995 were $570 million, compared with $612 million in the first half of
1994.
Capital Resources
-----------------
Common shareholders' equity of $3.3 billion at quarter-end was 21%
higher than year-end 1994 equity of $2.7 billion. The increase in
equity was driven by the company's earnings and growth in the unrealized
appreciation of the company's fixed maturities portfolio. The declining
interest rate environment during the first half of 1995 fueled a rally
in the bond market, which in turn has resulted in a $330 million
increase (net of taxes) in the market value of the company's portfolio.
On May 16, 1995, the company completed the sale of 4,140,000 convertible
monthly income preferred securities (MIPS) bearing a dividend rate of
6%. Each preferred security is convertible at the option of the holder
into 0.8475 shares of the company's common stock. Gross proceeds from
the sale were $207 million. A portion of the proceeds was used to
reduce the company's commercial paper debt, with the remainder invested
in fixed maturity securities and available for general corporate
purposes.
Total debt outstanding at the end of the quarter was $587 million, down
from $623 million at the end of 1994. The $95 million decline in
commercial paper was partially offset by the issuance of $66 million of
medium-term notes. The ratio of debt to total capitalization at June
30, 1995, was 14%, down from 19% at year-end 1994 due to the decline in
debt and the significant increase in shareholders' equity. The MIPS are
"hybrid" equity securities and are included in total capital.
The company anticipates no major capital expenditures in 1995.
The company's ratio of earnings to fixed charges was 8.93 for the first
six months of 1995, compared with 8.34 for the same period of 1994. The
company's ratio of earnings to combined fixed charges and preferred
stock dividends was 6.93 for the first six months of 1995, compared with
6.52 for the same period of 1994. 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 $344 million in the first half of 1995,
compared with $374 million in 1994. The company's 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.
In late May of 1995, a purported class action lawsuit brought
in the District Court of Brazoria County, Texas was served on
three subsidiaries of the company on behalf of persons who
allegedly paid $400 million from 1983 through 1985 for
interests in certain limited partnerships that Damson Oil
Corporation ("Damson") served as general partner. The
complaint in this lawsuit (Olin Nelson, et al. v. St. Paul Fire
and Marine Insurance Company, St. Paul Surplus Lines Insurance
Company ("Surplus Lines") and St. Paul Specialty Underwriting,
Inc.) alleges, among other things, that the defendants
conspired with Damson to mislead the investors as to the
protection afforded by certain insurance policies issued by
Surplus Lines in violation of the Texas Deceptive Trade
Practices Act and other laws. The plaintiffs seek unspecified
actual damages, treble damages, punitive damages, attorney
fees, costs, and pre- and post-judgment interest. The
defendants have removed the case to the U.S. District Court for
the Southern District of Texas, and plaintiffs are seeking to
have the case remanded to the Texas state court. These
proceedings are being vigorously contested by the defendants,
and the company recognizes that the final outcome of these
proceedings, if adverse to the defendants, may materially
impact the results of operations of the company in the period
in which that outcome occurs, but believes it should not have a
material adverse effect on its liquidity or overall financial
position.
Item 2. Changes in Securities.
i) On August 1, 1995, The company's Board of Directors approved
certain amendments to the company's Shareholder Protection
Rights Agreement (the "Rights Agreement") to, among other
things, add a "flip-in" feature. On December 4, 1989, the
company's Board of Directors approved the Rights Agreement and
declared a dividend of one Right for each outstanding share of
the company's common stock. Each Right entitles the registered
holder under certain circumstances to purchase from the company
one two-thousandth of a share of the company's Series A Junior
Participating Preferred Stock at a current exercise price of
$92.50 per right, subject to adjustment. The Rights currently
trade with the company's common stock, and no separate Rights
certificates have been distributed. The Rights will separate
from the common stock and become exercisable under conditions
and at times specified in the Rights Agreement.
The "flip-in" feature of the amended Rights Agreement provides
that if any person together with its affiliates and associates
becomes the beneficial owner of 15% or more of the outstanding
shares of the company's common stock, each Right (other than
those held by the 15%-or-more shareholder and its affiliates,
associates, successors and assigns) will entitle the holder to
purchase, at the exercise price, shares of the company's common
stock having a market value equal to two times the exercise
price (i.e., in exchange for payment of the exercise price,
currently $92.50, a holder of a Right will receive shares of
the company's common stock with a market value of $185).
In addition, the Rights Agreement was amended to provide that
the Rights would flip-in (and the holder of each Right, other
than an Adverse Person, as described below, and its affiliates,
associates, successors and assigns would be entitled to the
benefits described in the preceding paragraph) upon a
determination of the Board of Directors that a person is an
"Adverse Person." An "Adverse Person" is a person who
beneficially owns at least 10% of the outstanding shares of the
company's common stock and who, in the determination of the
Board of Directors, either (i) intends to take certain actions
not in the company's or a shareholder's best interests or (ii)
is likely to cause a material adverse impact on the company,
the company's employees, customers, suppliers, creditors or
other constituencies.
A copy of the amended and restated Shareholder Protection
Rights Agreement is included as an exhibit hereto. The
foregoing summary of the amendments to the Rights Agreement is
not complete and is qualified in its entirety by reference to
the amended and restated Shareholder Protection Rights
Agreement.
ii) In connection with the offering of Convertible Monthly Income
Securities (MIPS) discussed in Note 8 to the Consolidated
Financial Statements, the company designated a new series of
preferred stock as Series C Cumulative Convertible Preferred
Stock (the "Series C Preferred"). The Series C Preferred would
only be issued in the event of certain circumstances, including
the vote of a majority of the aggregate liquidation preference
of MIPS to effectively elect to exchange the MIPS for
depositary shares, each representing a 1/100th interest in a
share of Series C Preferred. The Series C Preferred, if
issued, would have dividend, conversion and other terms
substantially similar to the terms of the Convertible MIPS,
except that, among other things, the holders of the Series C
Preferred would have the right to elect two additional
directors of the company whenever dividends on the Series C
Preferred are in arrears for 18 months. The Series C Preferred
would not be subject to mandatory redemption.
The "Certificate of Designation of The St. Paul Companies,
Inc. Series C Cumulative Convertible Preferred Stock" is now a
part of the company's Restated Articles of Incorporation, which
are filed as an exhibit hereto.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth on page 26 of this
report.
(b) Reports on Form 8-K.
The Registrant filed a Form 8-K Current Report, dated July
24, 1995, pertaining to the Registrant's press release of
second quarter 1995 financial results.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ST. PAUL COMPANIES, INC.
(Registrant)
Date: August 10, 1995 By /s/ Bruce A. Backberg
---------------------
Bruce A. Backberg
Vice President
and Corporate Secretary
(Authorized Signatory)
Date: August 10, 1995 By /s/ Howard E. Dalton
--------------------
Howard E. Dalton
Senior Vice President
Chief Accounting Officer
EXHIBIT INDEX
-------------
Exhibit
-------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession*..............................
(3) (i) Articles of incorporation **..........................
(ii) By-laws*..............................................
(4) Instruments defining the rights of security holders,
including indentures**..................................
(i) Amended and Restated Shareholder Protection Rights
Agreement**..........................................
(10) Material contracts*........................................
(11) Statement re computation of per share earnings**...........
(12) Statement re computation of ratios**.......................
(15) Letter re unaudited interim financial information*.........
(18) Letter re change in accounting principles*.................
(19) Report furnished to security holders*......................
(22) Published report regarding matters submitted to
vote of security holders*...............................
(23) Consents of experts and counsel*...........................
(24) Power of attorney*.........................................
(27) Financial data schedule**..................................
(99) Additional exhibits*.......................................
* These items are not applicable.
** This exhibit is included only with the copies of this report that are
filed with the Securities and Exchange Commission. However, a copy
of the exhibit may be obtained from the Registrant for a reasonable
fee by writing to Legal Services, The St. Paul Companies, 385
Washington Street, Saint Paul, MN 55102.