<PAGE>
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 June 30, 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 August 9, 1994, was 84,022,787.
<PAGE>
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, 1994
and 1993 3
Consolidated Balance Sheets, June 30, 1994
(Unaudited) and December 31, 1993 4
Consolidated Statements of Common Shareholders'
Equity, Six Months Ended June 30, 1994 (unaudited)
and Twelve Months Ended December 31, 1993 6
Consolidated Statements of Cash Flows (Unaudited),
Six Months Ended June 30, 1994 and 1993 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 22
Signatures 23
EXHIBIT INDEX 24
<PAGE>
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
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
Revenues:
Premiums earned $845,957 746,853 1,691,359 1,547,790
Net investment income 167,250 166,833 335,658 332,445
Insurance brokerage fees
and commissions 74,298 67,390 140,748 129,968
Investment banking-asset management 53,201 61,292 106,799 121,367
Realized investment gains 14,897 22,487 36,680 33,845
Other 9,546 4,483 17,680 17,951
--------- --------- --------- ---------
Total revenues 1,165,149 1,069,338 2,328,924 2,183,366
--------- --------- --------- ---------
Expenses:
Insurance losses and loss adjustment
expenses 591,946 527,143 1,259,634 1,146,633
Policy acquisition expenses 193,468 193,655 384,819 378,645
Operating and administrative 220,541 209,139 443,274 408,845
--------- --------- --------- ---------
Total expenses 1,005,955 929,937 2,087,727 1,934,123
--------- --------- --------- ---------
Income before income taxes 159,194 139,401 241,197 249,243
Income tax expense (benefit):
Federal current 42,152 38,866 62,850 67,055
Other (10,720) (7,962) (13,852) (14,340)
--------- --------- --------- ---------
Total income tax expense 31,432 30,904 48,998 52,715
--------- --------- --------- ---------
Net income $127,762 108,497 192,199 196,528
========= ========= ========= =========
Net income per common share:
Primary $1.49 1.25 2.22 2.26
========= ========= ========= =========
Fully diluted $1.43 1.21 2.14 2.18
========= ========= ========= =========
Dividends declared on common stock $0.375 0.35 0.75 0.70
========= ========= ========= =========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
June 30, December 31,
ASSETS 1994 1993
- ------ ---------- ----------
(Unaudited)
Investments:
Fixed maturities, at estimated market value $8,758,639 9,147,964
Equities, at estimated market value 504,058 548,682
Real estate, at cost less accumulated
depreciation of $54,338 (1993; $48,847) 526,356 488,691
Venture capital, at estimated market value 303,693 297,982
Other investments 49,661 47,834
Short-term investments, at cost 845,320 725,261
---------- ----------
Total investments 10,987,727 11,256,414
Cash 38,344 25,420
Investment banking inventory securities 79,568 305,804
Reinsurance recoverables:
Unpaid losses 1,520,911 1,545,026
Paid losses 81,899 94,437
Receivables:
Underwriting premiums 1,066,905 1,008,034
Insurance brokerage activities 825,224 805,209
Interest and dividends 178,614 174,852
Other 125,856 105,513
Deferred policy acquisition expenses 294,674 294,860
Ceded unearned premiums 248,278 238,633
Deferred income taxes 686,145 425,012
Office properties and equipment, at cost less
accumulated depreciation of $240,472
(1993; $215,389) 458,818 455,861
Goodwill 274,346 284,276
Other assets 94,820 129,845
---------- ----------
Total assets $16,962,129 17,149,196
========== ==========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In thousands)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1993
- ------------------------------------ ------------ -----------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $9,322,685 9,185,191
Unearned premiums 1,920,888 1,875,635
---------- ----------
Total insurance reserves 11,243,573 11,060,826
Debt 590,398 639,729
Payables:
Insurance brokerage activities 1,119,848 1,083,845
Income taxes 162,859 162,645
Reinsurance premiums 150,281 138,150
Accrued expenses and other 563,501 593,205
Other liabilities 453,716 466,989
---------- ----------
Total liabilities 14,284,176 14,145,389
---------- ----------
Series B convertible preferred stock;
1,450 shares authorized; 1,018 shares
outstanding (1,023 shares in 1993) 146,895 147,608
Guaranteed obligation - PSOP (146,601) (148,929)
---------- ----------
Net convertible preferred stock 294 (1,321)
---------- ----------
Common Shareholders' Equity:
Common stock, 240,000 shares authorized;
83,993 shares outstanding
(84,715 shares in 1993) 438,648 438,559
Retained earnings 2,179,078 2,082,832
Guaranteed obligation - ESOP (49,965) (56,005)
Unrealized appreciation of investments 163,892 588,844
Unrealized loss on foreign currency translation (53,994) (49,102)
---------- ----------
Total common shareholders' equity 2,677,659 3,005,128
---------- ----------
Total liabilities, preferred stock
and common shareholders' equity $16,962,129 17,149,196
========== ==========
See notes to consolidated financial statements.
<PAGE>
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
------------ -----------
1994 1993
---- ----
(Unaudited)
Common stock:
Beginning of period $438,559 422,249
Stock issued under stock option
and other incentive plans 4,484 16,334
Reacquired common shares (4,395) (24)
--------- ---------
End of period 438,648 438,559
--------- ---------
Retained earnings:
Beginning of period 2,082,832 1,781,113
Net income 192,199 427,609
Dividends declared on common stock (62,414) (116,962)
Dividends declared on preferred
stock, net of taxes (4,214) (8,395)
Reacquired common shares (29,325) (533)
--------- ---------
End of period 2,179,078 2,082,832
--------- ---------
Guaranteed obligation - ESOP:
Beginning of period (56,005) (67,452)
Principal payments 6,040 11,447
--------- ---------
End of period (49,965) (56,005)
--------- ---------
Unrealized appreciation of investments, net of taxes:
Beginning of period 588,844 63,669
Change during the period (424,952) 23,193
Change due to adoption of SFAS No. 115 - 501,982
--------- ---------
End of period 163,892 588,844
--------- ---------
Unrealized gain (loss) on foreign currency
translation, net of taxes:
Beginning of period (49,102) 2,920
Change during the period (4,892) (52,022)
--------- ---------
End of period (53,994) (49,102)
--------- ---------
Total common shareholders' equity $2,677,659 3,005,128
========= =========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Six Months Ended
June 30
-----------------------
1994 1993
------ ------
OPERATING ACTIVITIES
Underwriting:
Net income $201,956 204,362
Adjustments:
Change in net insurance reserves 202,539 166,203
Change in underwriting premiums receivable (56,662) 73,883
Provision for deferred taxes (19,038) (16,315)
Realized gains (33,661) (28,785)
Other 62,198 (68,086)
--------- ---------
Total underwriting 357,332 331,262
--------- ---------
Insurance brokerage:
Net loss (19,478) (21,075)
Adjustments:
Change in premium balances 15,353 (57,947)
Change in accounts payable and accrued expenses (18,693) (33,537)
Depreciation and goodwill amortization 9,396 9,560
Other (6,650) (20,164)
--------- ---------
Total insurance brokerage (20,072) (123,163)
--------- ---------
Investment banking-asset management:
Net income 21,832 26,264
Adjustments:
Change in inventory securities 226,236 43,626
Change in open security transactions 6,040 16,315
Change in short-term borrowings (80,383) (20,000)
Other 35,164 25,061
--------- ---------
Total investment banking-asset management 208,889 91,266
--------- ---------
Parent company and consolidating eliminations:
Net loss (12,111) (13,023)
Realized gains (3,019) (5,060)
Adjustments (5,612) 16,080
--------- ---------
Total parent company and consol. eliminations (20,742) (2,003)
--------- ---------
Net cash provided by operating activities 525,407 297,362
--------- ---------
INVESTING ACTIVITIES
Purchases of investments (1,097,732) (1,025,967)
Sales and maturities of investments 826,723 782,992
Change in short-term investments (120,560) (29,063)
Change in open security transactions (53,593) 11,558
Net purchases of office properties and equipment (18,101) (24,274)
Other 15,721 (19,068)
--------- ---------
Net cash used in investing activities (447,542) (303,822)
--------- ---------
FINANCING ACTIVITIES
Dividends paid on common and preferred stock (67,105) (64,102)
Proceeds from issuance of debt 57,151 62,737
Reacquired common shares (33,570) (207)
Repayment of debt (20,350) (23,106)
Other (787) 24,181
--------- ---------
Net cash used in financing activities (64,661) (497)
--------- ---------
Effect of exchange rate changes on cash (280) (920)
--------- ---------
Increase (decrease) in cash 12,924 (7,877)
Cash at beginning of period 25,420 26,648
--------- ---------
Cash at end of period $38,344 18,771
========= =========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
June 30, 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 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 which occurred on June 6,
1994 (see Note 9).
<PAGE>
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 Six Months Ended
June 30 June 30
--------------------- --------------------
1994 1993 1994 1993
------ ------ ------ ------
(In thousands)
PRIMARY
Net income, as reported $127,762 108,497 192,199 196,528
Preferred dividends declared
(net of taxes) (2,105) (2,094) (4,214) (4,196)
------- ------- ------- -------
Net income, as adjusted $125,657 106,403 187,985 192,332
======= ======= ======= =======
FULLY DILUTED
Net income, as reported $127,762 108,497 192,199 196,528
Additional PSOP expense
(net of taxes) due to
assumed conversion of
preferred stock (947) (1,036) (1,897) (2,074)
------- ------- ------- -------
Net income, as adjusted $126,815 107,461 190,302 194,454
======= ======= ======= =======
AVERAGE SHARES OUTSTANDING
Primary 84,561 85,025 84,788 84,954
======= ======= ======= =======
Fully diluted 88,678 89,106 88,935 89,067
======= ======= ======= =======
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.
<PAGE>
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
------------------------------
1994 1993
------ ------
Purchases: (In thousands)
Fixed maturities $660,534 760,478
Equities 344,006 201,248
Real estate 48,094 18,163
Venture capital 36,964 45,322
Other investments 8,134 756
--------- ---------
Total purchases 1,097,732 1,025,967
--------- ---------
Proceeds from sales and maturities:
Fixed maturities:
Sales 140,896 121,694
Maturities and redemptions 305,213 431,539
Equities 357,026 198,665
Venture capital 11,987 26,527
Other investments 11,601 4,567
--------- ---------
Total sales and maturities 826,723 782,992
--------- ---------
Net purchases $271,009 242,975
========= =========
<PAGE>
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, 1994 December 31, 1993
------------------ -------------------
(In thousands)
Fixed maturities $(601,717) 771,598
Equities (46,757) (23,993)
Venture capital (7,821) 52,550
-------- -------
Total change in pretax
unrealized appreciation (656,295) 800,155
Increase (decrease) in deferred
tax asset due to change
in unrealized appreciation 231,343 (274,980)
-------- --------
Total change in unrealized
appreciation, net of taxes $(424,952) 525,175
======== ========
Prior to the company's adoption of SFAS No. 115 on Dec. 31, 1993,
the company did not record unrealized appreciation or
depreciation of fixed maturities on the balance sheet.
Consequently, the unrealized appreciation of fixed maturities in
the twelve-month column above represents the cumulative
unrealized appreciation recorded upon the company's adoption of
SFAS No. 115. The actual increase in pretax unrealized
appreciation of fixed maturities for the twelve months ended Dec. 31,
1993 was $257.8 million.
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 $374
million at June 30, 1994, and $393 million at December 31, 1993.
<PAGE>
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
-------------------------------------
1994 1993 1994 1993
------ ------ ------ ------
(In thousands)
Federal current tax expense $42,152 38,866 62,850 67,055
Federal deferred tax benefit (15,559) (12,141) (21,628)(23,304)
------ ------ ------ -------
Total federal income tax expense 26,593 26,725 41,222 43,751
Foreign income taxes 3,664 2,549 5,461 5,634
State income taxes 1,175 1,630 2,315 3,330
------ ------ ------ -------
Total income tax expense $31,432 30,904 48,998 52,715
====== ====== ====== =======
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.
<PAGE>
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,
1994 1993
---------------- -------------------
Book Fair Book Fair
Value Value Value Value
----- ----- ----- -----
(In thousands)
Commercial paper $244,335 244,335 201,384 201,384
Medium-term notes 204,431 195,400 210,780 221,100
9 3/8% notes 99,965 106,500 99,959 113,400
Guaranteed ESOP debt 41,667 44,000 47,223 52,200
Short-term borrowings - - 80,383 80,383
------- ------- ------- -------
Total debt $590,398 590,235 639,729 668,467
======= ======= ======= =======
The medium-term notes mature on various dates beginning in
1998 and continuing through 2004. The 9 3/8% notes mature
in June 1997. The guaranteed ESOP debt is due in March
1998.
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.
<PAGE>
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
-------------------- ---------------------
1994 1993 1994 1993
---- ---- ---- ----
(In thousands)
Premiums written:
Direct $806,107 689,773 1,570,700 1,372,590
Assumed 274,852 184,749 437,476 369,035
Ceded (159,840) (114,925) (282,486) (220,876)
------- ------- --------- ---------
Net premiums written $921,119 759,597 1,725,690 1,520,749
======= ======= ========= =========
Premiums earned:
Direct $802,802 710,163 1,595,417 1,439,914
Assumed 198,180 161,817 365,387 341,904
Ceded (155,025) (125,127) (269,445) (234,028)
------- ------- --------- ---------
Net premiums earned $845,957 746,853 1,691,359 1,547,790
======= ======= ========= =========
Insurance losses and loss
adjustment expenses:
Direct $508,124 430,491 1,051,336 922,579
Assumed 183,366 135,727 359,533 343,275
Ceded (99,544) (39,075) (151,235) (119,221)
------- ------- --------- ---------
Net insurance losses and
loss adjustment expenses $591,946 527,143 1,259,634 1,146,633
======= ======= ========= =========
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.
<PAGE>
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 resulted in the issuance of one
additional share of common stock for each outstanding share
to shareholders of record on May 17, 1994. The additional
shares were issued on June 6, 1994.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1994
Consolidated Results
- --------------------
Second quarter consolidated pretax earnings of $159 million were
14% higher than earnings of $139 million in the second quarter of
1993. Improved results in the Underwriting segment, driven by a
decline in the GAAP underwriting loss, accounted for the growth
in earnings over 1993. Insurance brokerage results in the second
quarter improved $4 million over 1993; however, investment
banking-asset management earnings were $3 million below 1993.
Year-to-date pretax income in 1994 of $241 million was down
slightly from comparable 1993 income of $249 million.
Second quarter net income was $128 million, or $1.43 per share,
compared with net income of $108 million, or $1.21 per share, in
the second quarter of 1993. Net income of $192 million, or $2.14
per share, for the first half of 1994 was slightly below 1993 net
income of $197 million, or $2.18 per share. All per share
figures reflect the 2-for-1 stock split that occurred in June
1994.
Results by Segment
- ------------------
Pretax results by industry segment were as follows (in millions):
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1994 1993 1994 1993
Pretax income (loss): ---- ---- ---- ----
Underwriting:
GAAP underwriting result $(14) (42) (97) (102)
Net investment income 164 163 329 325
Realized investment gains 14 20 34 29
Other (4) (2) (17) (3)
--- --- --- ---
Total underwriting 160 139 249 249
Insurance brokerage (5) (9) (14) (17)
Investment banking-asset management 18 21 35 41
Parent and other (14) (12) (29) (24)
--- --- --- ---
Income before income taxes $159 139 241 249
=== === === ===
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Underwriting
- ------------
The Underwriting segment's second quarter pretax earnings of
$160 million improved 15% over pretax earnings of $139
million in the comparable period of 1993. Improved
underwriting results in the International, Specialized
Commercial and Reinsurance lines of business were the
primary factors in the improvement over 1993.
The following summarizes key financial results by underwriting operation:
Three Months Six Months
% of 1994 Ended June 30 Ended June 30
Written --------------- ---------------
($ in Millions) Premiums 1994 1993 1994 1993
- --------------- -------- ---- ---- ---- ----
Specialized Commercial:
Written Premiums 31% $278 263 541 526
Underwriting Result $(22) (29) (56) (59)
Combined Ratio 106.6 107.3 108.5 110.3
St. Paul Personal
& Business Insurance:
Written Premiums 21% $195 97 367 180
Underwriting Result $(6) (7) (28) (28)
Combined Ratio 102.7 105.3 107.6 115.5
Medical Services:
Written Premiums 17% $130 143 295 328
Underwriting Result $37 39 71 82
Combined Ratio 78.3 78.5 79.3 77.1
Reinsurance:
Written Premiums 16% $196 123 277 203
Underwriting Result $(3) (9) (32) (32)
Combined Ratio 97.7 105.0 113.0 115.5
St. Paul Commercial:
Written Premiums 11% $93 87 187 198
Underwriting Result $(15) (14) (38) (30)
Combined Ratio 115.5 115.9 120.0 114.9
International:
Written Premiums 4% $29 47 59 86
Underwriting Result $(5) (22) (14) (35)
Combined Ratio 121.1 142.9 125.4 140.2
---- ----- ----- ----- -----
Total:
Written Premiums 100% $921 760 1,726 1,521
GAAP Underwriting Result $(14) (42) (97) (102)
Statutory Combined Ratio:
Loss and Loss Expense Ratio 70.0 70.6 74.5 74.1
Underwriting Expense Ratio 30.2 33.1 30.7 32.3
----- ----- ----- -----
Combined Ratio 100.2 103.7 105.2 106.4
===== ===== ===== =====
Combined Ratio Including
Policyholders' Dividends 100.3 104.1 105.2 106.6
===== ===== ===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
The preceding table represents the company's revised
reporting format effective as of June 1994. Specialized
Commercial includes the following lines of business:
Construction, Technology, National Accounts, Surety,
Financial Services, Professional Liability, Surplus Lines,
Ocean Marine and Public Sector. St. Paul Personal &
Business Insurance markets personal insurance products and
also serves small commercial accounts. St. Paul Commercial
serves midsize commercial customers. The company's
Reinsurance and International underwriting operations were
largely unaffected by this change in reporting format.
Written premiums in the second quarter totaled $921 million,
21% higher than comparable 1993 premiums of $760 million.
St. Paul Personal & Business Insurance premium volume was
double the comparable 1993 total, due to $102 million of
premiums produced by Economy Fire & Casualty Company, which
the company acquired in September 1993. Excluding the
impact of Economy, consolidated written premiums increased
8% over the second quarter of 1993. Reinsurance
written premiums grew 60% over 1993's second quarter
primarily as a result of rate increases and a higher level
of retentions on existing reinsurance contracts.
International volume declined 38% from 1993 due to reduced
personal insurance business in the United Kingdom.
Year-to-date written premiums in 1994 increased 13% over the
first half of 1993, again due to premium growth in St. Paul
Personal & Business Insurance and Reinsurance.
The second quarter GAAP underwriting loss was $14 million,
compared with 1993's second quarter loss of $42 million.
Key factors in the improvement in underwriting results over
the second quarter of 1993 were as follows:
- International - $17 million better than 1993 -
Improved loss experience on personal and commercial
business written in the United Kingdom drove the
improvement over 1993.
- Specialized Commercial - $7 million better than 1993
- A reduction in current year loss experience in the
National Accounts line was the primary contributor
to improved results in 1994.
- Reinsurance - $6 million better than 1993 - Improved
loss experience on non-U.S. business was the primary
factor in the improvement in underwriting results.
The six-month GAAP underwriting loss of $97 million improved
slightly over the 1993 loss of $102 million. Catastrophe
losses in 1994 of $88 million were $40 million higher than
1993 losses of $48 million (primarily due to the Los Angeles
earthquake and winter storms, which both occurred
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
in the first quarter). However, a $21 million
improvement in year-to-date International results and
improvements in non-catastrophe loss experience in several
lines served to offset the increase in catastrophe losses.
The Underwriting segment's pretax investment income for the
second quarter of $164 million was level with 1993, and year-
to-date investment income was up slightly from 1993.
Underwriting and investment cash flows continue to fuel
steady growth in this segment's investment portfolio, but
declining fixed maturity yields over the last several years
have resulted in stagnant investment income levels. The
weighted average pretax yield on the Underwriting investment
portfolio at June 30, 1994 was 7.3%, down from 7.8% at
the same time in 1993. Fixed maturities purchased in the
first six months of 1994 were almost exclusively taxable
securities, in consideration of the company's consolidated
tax position. Taxable securities comprised 46% of the total
Underwriting investment portfolio at quarter-end, compared
with 42% a year ago. The company uses derivative
instruments on a limited basis for the purpose of hedging.
The company does not speculate in derivative instruments.
Insurance Brokerage
- -------------------
The Insurance Brokerage segment's second quarter 1994 pretax
loss of $5 million was $4 million less than the comparable
1993 loss of $9 million. Total revenues in this segment
increased 13% over 1993's second quarter, due to new
business initiatives and the acquisition of new brokerage
operations. The year-to-date pretax loss was $14 million,
compared with a loss of $17 million in the first half of
1993.
Investment Banking-Asset Management
- -----------------------------------
The John Nuveen Company (Nuveen) posted second quarter
pretax earnings of $24 million, down from comparable 1993
earnings of $28 million. The company's portion of Nuveen's
second quarter earnings was $18 million, compared with $21
million in 1993. Year-to-date, the company's portion was
$35 million, compared with $41 million in 1993. The company
holds a 76% majority interest in Nuveen.
Nuveen's distribution and underwriting revenues were down from the
second quarter of 1993 as net sales of tax-free mutual funds
declined and no new exchange-traded funds were offered.
Municipal new issue volume also was down in 1994, negatively
impacting Nuveen's investment banking revenues.
Although investment advisory fees earned on assets under Nuveen's
management increased six percent over the second quarter of
1993, assets under management of $30.8 billion at June 30, 1994
declined $1.9 billion from year-end 1993 as rising interest
rates during 1994 drove down the value of managed fund assets.
Unit Investment Trust sales in the second quarter were
lower than the comparable period of 1993.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Nuveen expects the higher interest rate environment to have
a positive long-term impact on earnings as the higher tax-
free yields become attractive to investors. UIT sales in
the second quarter, although lower than the comparable
period of 1993, were 22% higher than sales in this year's
first quarter.
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 June 30, 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.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Capital Resources
- -----------------
Common shareholders' equity at June 30, 1994 totaled $2.68
billion, down 11% from year-end 1993. The unrealized
appreciation of the company's investment portfolio declined
by $425 million (net of taxes) in the first half of 1994
primarily due to the impact of rising interest rates on the
carrying value of the company's fixed maturities portfolio.
The company also repurchased 846,000 of its outstanding
common shares (as adjusted for the 2-for-1 stock split) in
the first six months of 1994 for a total cost of $34
million. Total debt outstanding at June 30, 1994 was $590
million, down from $640 million at 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 1994, and has also
funded medium-term note maturities of $20 million. 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 the remainder of 1994 and beyond.
The company's ratio of earnings to fixed charges was 8.34
for the first six months of 1994, compared with 8.25 for the
same period of 1993. The company's ratio of earnings to
combined fixed charges and preferred stock dividends was
6.52 for the first six months of 1994, compared with 6.52
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
$525 million in the first six months of 1994, compared to
$297 million in 1993. The significant increase over 1993
was primarily the result of increased cash flows in the
investment banking-asset management and insurance brokerage
segments. The underwriting segment's cash flows from
operations also increased over the first half of 1993.
<PAGE>
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.
Not applicable.
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 as the
next document in this report.
(b) Reports on Form 8-K.
1) 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.
2) The Registrant filed a Form 8-K Current
Report dated July 25, 1994, pertaining to the
Registrant's press release of second quarter
1994 financial results.
<PAGE>
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 12, 1994 By /s/ Bruce A.Backberg
---------------------
Bruce A. Backberg
Vice President
and Corporate Secretary
(Authorized Signatory)
Date: August 12, 1994 By /s/ Howard E. Dalton
--------------------
Howard E. Dalton
Senior Vice President
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
-------------
How
Exhibit 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*................................
(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.
(1) Filed electronically under Operational EDGAR.
<PAGE>
Exhibit 11
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
(In thousands) Three Months Ended Six Months Ended
June 30 June 30
------------------- ----------------
1994 1993 1994 1993
EARNINGS: ----- ----- ----- -----
Primary:
Net income, as reported $127,762 108,497 192,199 196,528
Preferred dividends declared (net of taxes) (2,105) (2,094) (4,214) (4,196)
------- ------- ------- -------
Net income, as adjusted $125,657 106,403 187,985 192,332
======= ======= ======= =======
Fully diluted:
Net income, as reported $127,762 108,497 192,199 196,528
Additional PSOP expense (net of taxes) due to
assumed conversion of preferred stock (947) (1,036) (1,897) (2,074)
------- ------- ------- -------
Net income, as adjusted $126,815 107,461 190,302 194,454
======= ======= ======= =======
SHARES:
Primary:
Weighted average number of common shares
outstanding, per financial statements 84,026 84,322 84,273 84,249
Additional dilutive effect of outstanding stock
options (based on treasury stock method using
average market price) 535 703 515 705
------- ------- ------- -------
Weighted average, as adjusted 84,561 85,025 84,788 84,954
======= ======= ======= =======
Fully diluted:
Weighted average number of common shares
outstanding, per financial statements 84,026 84,322 84,273 84,249
Additional dilutive effect of:
Convertible preferred stock 4,079 4,107 4,084 4,116
Outstanding stock options (based on treasury
stock method using market price at end of
period) 573 677 578 702
------- ------- ------- -------
Weighted average, as adjusted 88,678 89,106 88,935 89,067
======= ======= ======= =======
EARNINGS PER COMMON SHARE:
Primary $1.49 1.25 2.22 2.26
Fully diluted $1.43 1.21 2.14 2.18
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Exhibit 12
Computation of Ratios
(In thousands, except ratios)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
1994 1993 1994 1993
----- ----- ----- -----
EARNINGS:
Income before income taxes $159,194 139,401 241,197 249,243
Add: fixed charges 15,392 17,121 32,870 34,363
------- ------- ------- -------
Income, as adjusted $174,586 156,522 274,067 283,606
======= ======= ======= =======
FIXED CHARGES:
Interest costs $10,358 10,773 20,212 21,614
Rental expense (1) 5,034 6,348 12,658 12,749
------- ------- ------- -------
Total fixed charges $15,392 17,121 32,870 34,363
======= ======= ======= =======
FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS:
Fixed charges $15,392 17,121 32,870 34,363
Preferred stock dividends 4,591 4,553 9,194 9,117
------- ------- ------- -------
Total fixed charges and preferred
stock dividends $19,983 21,674 42,064 43,480
======= ======= ======= =======
Ratio of earnings to fixed charges 11.34 9.14 8.34 8.25
======= ======= ======= =======
Ratio of earnings to combined fixed
charges and preferred stock dividends 8.74 7.22 6.52 6.52
======= ======= ======= =======
(1) Interest portion deemed implicit in total rent expense.
