<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 March 31, 1996
---------------------------------------
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 No.)
incorporation or organization)
385 Washington St., Saint Paul, MN 55102
- ---------------------------------- ---------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (612) 310-7911
--------------
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 April 26, 1996, was 83,779,934.
<PAGE>
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, 1996 and 1995 3
Consolidated Balance Sheets, March 31, 1996
(Unaudited) and December 31, 1995 4
Consolidated Statements of Shareholders' Equity,
Three Months Ended March 31, 1996
(Unaudited) and Twelve Months Ended 6
December 31, 1995
Consolidated Statements of Cash Flows (Unaudited),
Three Months Ended March 31, 1996 and 1995 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 22
EXHIBIT INDEX 23
<PAGE>
PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Unaudited
(In thousands)
Three Months Ended
March 31
-----------------------
1996 1995
---- ----
Revenues:
Premiums earned $1,030,576 946,070
Net investment income 200,500 186,389
Insurance brokerage fees and commissions 68,109 67,061
Investment banking-asset management 53,340 53,616
Realized investment gains 47,920 2,977
Other 8,246 11,346
--------- ---------
Total revenues 1,408,691 1,267,459
--------- ---------
Expenses:
Insurance losses and loss adjustment expenses 755,460 680,439
Policy acquisition expenses 230,488 207,694
Operating and administrative 258,663 231,180
--------- ---------
Total expenses 1,244,611 1,119,313
--------- ---------
Income before income taxes 164,080 148,146
Income tax expense (benefit):
Federal current 35,397 47,068
Other (138) (9,518)
--------- ---------
Total income tax expense 35,259 37,550
--------- ---------
Net income $128,821 110,596
========= =========
Earnings per common share:
Primary $1.49 1.27
========= =========
Fully diluted $1.40 1.23
========= =========
Dividends declared on common stock $0.44 0.40
========= =========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
March 31, December 31,
ASSETS 1996 1995
- ------ ---------- ----------
(Unaudited)
Investments:
Fixed maturities, at estimated market value $10,335,291 10,372,890
Equities, at estimated market value 746,635 711,471
Real estate, at cost less accumulated
depreciation of $71,951 (1995; $68,795) 607,987 611,656
Venture capital, at estimated market value 423,208 388,599
Other investments 46,459 42,776
Short-term investments, at cost 977,945 939,528
---------- ----------
Total investments 13,137,525 13,066,920
Cash 33,243 34,440
Investment banking inventory securities 70,981 249,662
Reinsurance recoverables:
Unpaid losses 1,806,347 1,853,817
Paid losses 94,851 74,568
Receivables:
Underwriting premiums 1,222,304 1,316,560
Insurance brokerage activities 710,108 652,801
Interest and dividends 196,881 197,740
Other 90,773 81,885
Deferred policy acquisition expenses 361,063 372,174
Ceded unearned premiums 180,633 226,943
Deferred income taxes 607,145 528,805
Office properties and equipment, at cost less
accumulated depreciation of $287,217
(1995; $277,759) 461,079 478,286
Goodwill 323,146 314,457
Other assets 175,534 207,444
---------- ----------
Total assets $19,471,613 19,656,502
========== ==========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(In thousands)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- ------------------------------------ ------------ -----------
(Unaudited)
Liabilities:
Insurance reserves:
Losses and loss adjustment expenses $10,276,100 10,247,070
Unearned premiums 2,217,602 2,361,028
---------- ----------
Total insurance reserves 12,493,702 12,608,098
Debt 671,864 704,042
Payables:
Insurance brokerage activities 1,004,703 979,964
Income taxes 216,117 179,249
Reinsurance premiums 140,140 139,058
Accrued expenses and other 535,999 618,903
Other liabilities 509,779 490,067
---------- ----------
Total liabilities 15,572,304 15,719,381
---------- ----------
Company-obligated mandatorily redeemable preferred
securities of St. Paul Capital L.L.C. 207,000 207,000
---------- ----------
Shareholders' equity:
Preferred:
Series B convertible preferred stock;
1,450 shares authorized; 996 shares
outstanding (999 shares in 1995) 143,788 144,165
Guaranteed obligation - PSOP (130,523) (133,293)
---------- ----------
Total preferred shareholders' equity 13,265 10,872
---------- ----------
Common:
Common stock, 240,000 shares authorized;
83,734 shares outstanding
(83,976 shares in 1995) 462,893 460,458
Retained earnings 2,776,401 2,704,075
Guaranteed obligation - ESOP (29,516) (32,294)
Unrealized appreciation of investments 512,698 627,791
Unrealized loss on foreign currency translation (43,432) (40,781)
---------- ----------
Total common shareholders' equity 3,679,044 3,719,249
---------- ----------
Total shareholders' equity 3,692,309 3,730,121
---------- ----------
Total liabilities, redeemable preferred
securities and shareholders' equity $19,471,613 19,656,502
========== ==========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands)
Three Twelve
Months Ended Months Ended
March 31 December 31
------------ ------------
1996 1995
---- ----
(Unaudited)
Preferred shareholders' equity:
Series B convertible preferred stock:
Beginning of period 144,165 146,102
Change during period (377) (1,937)
--------- ---------
End of period 143,788 144,165
--------- ---------
Guaranteed obligation - PSOP:
Beginning of period (133,293) (141,567)
Principal payments 2,770 8,274
--------- ---------
End of period (130,523) (133,293)
--------- ---------
Total preferred shareholders' equity 13,265 10,872
--------- ---------
Common shareholders' equity:
Common stock:
Beginning of period 460,458 445,222
Stock issued under stock option and
other incentive plans 4,482 19,481
Reacquired common shares (2,047) (4,245)
--------- ---------
End of period 462,893 460,458
--------- ---------
Retained earnings:
Beginning of period 2,704,075 2,362,286
Net income 128,821 521,209
Dividends declared on common stock (36,641) (133,956)
Dividends declared on preferred stock,
net of taxes (2,165) (8,582)
Reacquired common shares (18,367) (38,291)
Tax benefit on employee stock options and awards 678 1,409
--------- ---------
End of period 2,776,401 2,704,075
--------- ---------
Guaranteed obligation - ESOP:
Beginning of period (32,294) (44,410)
Principal payments 2,778 12,116
--------- ---------
End of period (29,516) (32,294)
--------- ---------
Unrealized appreciation of investments, net of taxes:
Beginning of period 627,791 13,948
Change during the period (115,093) 613,843
--------- ---------
End of period 512,698 627,791
--------- ---------
Unrealized gain (loss)loss on foreign currency
translation, net of taxes:
Beginning of period (40,781) (44,112)
Change during the period (2,651) 3,331
--------- ---------
End of period (43,432) (40,781)
--------- ---------
Total common shareholders' equity 3,679,044 3,719,249
--------- ---------
Total shareholders' equity $3,692,309 3,730,121
========= =========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Three Months Ended
March 31
-----------------------
1996 1995
------ ------
OPERATING ACTIVITIES
Underwriting:
Net income $137,466 123,472
Adjustments:
Change in net insurance reserves (11,594) 85,445
Change in underwriting premiums receivable 92,293 46,237
Provision for deferred taxes (7,226) (14,557)
Realized investment gains (42,298) (1,551)
Other 43,355 (36,842)
--------- ---------
Total underwriting 211,996 202,204
--------- ---------
Insurance brokerage:
Net loss (14,978) (16,061)
Adjustments:
Change in premium balances (34,000) 12,750
Change in accounts payable and accrued expenses (24,337) (21,994)
Depreciation and goodwill amortization 7,932 5,988
Other 8,561 18,949
--------- ---------
Total insurance brokerage (56,822) (368)
--------- ---------
Investment banking-asset management:
Net income 13,288 12,011
Adjustments:
Change in inventory securities 180,066 11,282
Change in short-term investments (180,973) (45,854)
Change in short-term borrowings (25,000) -
Change in open security transactions 1,784 6,260
Other 26,627 29,871
--------- ---------
Total investment banking-asset management 15,792 13,570
--------- ---------
Parent company and consolidating eliminations:
Net loss (6,955) (8,826)
Realized investment gains (5,355) (1,426)
Other adjustments (3,601) 21,822
--------- ---------
Total parent company and consolidating
eliminations (15,911) 11,570
--------- ---------
Net cash provided by operating activities 155,055 226,976
--------- ---------
INVESTING ACTIVITIES
Purchases of investments (732,306) (505,862)
Proceeds from sales and maturities of investments 528,421 406,841
Change in short-term investments 130,147 (93,817)
Change in open security transactions (32,926) (9,999)
Net purchases of office properties and equipment (6,477) (10,776)
Other 15,848 2,102
--------- ---------
Net cash used in investing activities (97,293) (211,511)
--------- ---------
FINANCING ACTIVITIES
Dividends paid on common and preferred stock (36,487) (34,517)
Proceeds from issuance of debt - 9,139
Reacquired common shares (20,206) (497)
Other (2,309) (273)
--------- ---------
Net cash used in financing activities (59,002) (26,148)
--------- ---------
Effect of exchange rate changes on cash 43 120
--------- ---------
Decrease in cash (1,197) (10,563)
Cash at beginning of period 34,440 46,664
--------- ---------
Cash at end of period $33,243 36,101
========= =========
See notes to consolidated financial statements.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
March 31, 1996
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 51 to 67 of the Registrant's
annual report to shareholders for the year ended December 31,
1995. 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 1995 consolidated financial statements
have been reclassified to conform with the 1996
presentation. These reclassifications had no effect on net
income or common shareholders' equity, as previously
reported.
<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 operating earningsnet income, as adjusted, by the
adjusted average common shares outstanding.
Three Months Ended
March 31
------------------
1996 1995
------ ------
(In thousands)
PRIMARY
Net income, as reported $128,821 110,596
PSOP preferred dividends
declared (net of taxes) (2,165) (2,146)
Premium on preferred shares redeemed (208) -
------- -------
Net income, as adjusted $126,448 108,450
======= =======
FULLY DILUTED
Net income, as reported $128,821 110,596
Additional PSOP expense (net of taxes)
due to assumed conversion of preferred stock (758) (874)
Dividends on monthly income preferred
securities (net of taxes) 2,018 -
Premium on preferred shares redeemed (208) -
------- -------
Net income, as adjusted $129,873 109,722
======= =======
ADJUSTED AVERAGE COMMON SHARES OUTSTANDING
Primary 85,150 85,191
======= =======
Fully diluted 92,596 89,321
======= =======
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 the
company-obligated mandatorily redeemable preferred
securities of St. Paul Capital L.L.C. (monthly income
preferred securities).
<PAGE>
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
------------------------------
1996 1995
------ ------
(In thousands)
Purchases:
Fixed maturities $490,613 233,719
Equities 207,698 169,040
Real estate 3,488 92,588
Venture capital 25,992 9,705
Other investments 4,515 810
-------- ---------
Total purchases 732,306 505,862
-------- ---------
Proceeds from sales and maturities:
Fixed maturities:
Sales 63,830 21,541
Maturities and redemptions 209,549 222,294
Equities 211,586 151,470
Real estate 1,466 236
Venture capital 41,428 9,494
Other investments 562 1,806
-------- ---------
Total sales and maturities 528,421 406,841
-------- ---------
Net purchases $203,885 99,021
======== =========
The increase (decrease) in unrealized appreciation of investments was
as follows:
Three Months Ended Twelve Months Ended
March 31, 1996 December 31, 1995
------------------ -------------------
(In thousands)
Fixed maturities $(230,671) 742,626
Equities 10,886 130,247
Venture capital 32,621 59,880
-------- -------
Total change in pretax
unrealized appreciation (187,164) 932,753
Increase (decrease) in
deferred tax asset 72,071 (318,910)
-------- -------
Total change in unrealized
appreciation, net of taxes $(115,093) 613,843
======== =======
<PAGE>
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 $342 million at March 31, 1996, and $380 million at
December 31, 1995.
Note 4 Income Taxes
- --------------------
The components of income tax expense are as follows:
Three Months Ended
March 31
-------------------
1996 1995
------ ------
(In thousands)
Federal current tax expense $35,397 47,068
Federal deferred tax benefit (7,447) (13,621)
------ ------
Total federal income tax expense 27,950 33,447
Foreign income taxes 5,893 2,870
State income taxes 1,416 1,233
------ ------
Total income tax expense $35,259 37,550
====== ======
Note 5 Contingent Liabilities
- ------------------------------
In the ordinary course of conducting business, the company
and some of its 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 and Asbestos Claims" in Management's
Discussion and Analysis for information on these claims.
<PAGE>
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,
1996 1995
---------------- ----------------
Book Fair Book Fair
Value Value Value Value
----- ----- ----- -----
(In thousands)
Medium-term notes $397,432 400,000 397,433 419,500
Commercial paper 145,335 145,335 149,629 149,629
9 3/8% notes 99,985 103,800 99,982 105,300
Guaranteed ESOP debt 22,223 23,100 25,001 26,200
Pound sterling loan notes 6,889 6,889 6,997 6,997
Short-term borrowings - - 25,000 25,000
------- ------- ------- -------
Total debt $671,864 679,124 704,042 732,626
======= ======= ======= =======
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.
<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
March 31
--------------------
1996 1995
------ ------
(In thousands)
Premiums written:
Direct $782,710 804,202
Assumed 223,610 218,514
Ceded (71,709) (106,353)
--------- -------
Net premiums written $934,611 916,363
========= =======
Premiums earned:
Direct $918,121 865,582
Assumed 229,759 194,189
Ceded (117,304) (113,701)
--------- -------
Net premiums earned $1,030,576 946,070
========= =======
Insurance losses and loss
adjustment expenses:
Direct $623,489 575,550
Assumed 189,399 204,732
Ceded (57,428) (99,843)
------- -------
Net insurance losses and
loss adjustment expenses $755,460 680,439
======= =======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 1996
Consolidated Results
- --------------------
Pretax earnings in the first quarter of 1996 were $164
million, 11% higher than 1995 first quarter earnings of $148
million. The improvement over 1995 occurred primarily in
the underwriting segment and was largely due to a $40
million increase in realized investment gains, which offset
a catastrophe-driven deterioration in underwriting results.
The company's insurance brokerage operation posted a first
quarter pretax loss of $13 million, $2 million less than the
comparable 1995 loss. Investment banking-asset management
earnings increased $3 million over the first quarter of
1995. Net income for the first quarter totaled $129
million, or $1.40 per share, compared with net income of
$111 million, or $1.23 per share, in the first quarter of
1995.
Consolidated revenues of $1.41 billion for the quarter
increased 11% over 1995 first quarter revenues of $1.27
billion. An increase in insurance premiums earned and
realized investment gains were the primary factors in the
growth over 1995.
Results by Segment
- ------------------
Pretax results by industry segment were as follows (in
millions):
Three Months Ended
March 31
--------------------
1996 1995
Pretax income (loss): ---- ----
Underwriting:
GAAP underwriting result $(42) (15)
Net investment income 189 178
Realized investment gains 42 2
Other (16) (5)
--- ---
Total underwriting 173 160
Insurance brokerage (13) (15)
Investment banking-asset management 22 19
Parent company and
consolidating eliminations (18) (16)
--- ---
Income before income taxes $164 148
=== ===
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Underwriting
- ------------
First quarter pretax earnings of $173 million in the underwriting
segment increased $13 million over 1995 earnings of $160 million,
primarily due to an increase in realized investment gains generated
from the equity and venture capital portfolios.
The following summarizes key financial results by underwriting
operation:
Three Months
% of 1996 Ended March 31
Written -------------------
($ in Millions) Premiums 1996 1995
- --------------- --------- ----- ----
Specialized Commercial:
Written Premiums 28% $263 284
Underwriting Result $(10) (20)
Combined Ratio 105.5 106.7
Personal Insurance:
Written Premiums 17% $164 151
Underwriting Result $(28) (7)
Combined Ratio 116.9 104.5
Commercial:
Written Premiums 17% $155 146
Underwriting Result $(9) (4)
Combined Ratio 106.3 102.6
Medical Services:
Written Premiums 11% $103 136
Underwriting Result $20 26
Combined Ratio 94.4 85.2
---- ----- -----
Total St. Paul Fire
and Marine:
Written Premiums 73% $685 717
Underwriting Result $(27) (5)
Combined Ratio 106.1 101.1
Reinsurance:
Written Premiums 21% $193 156
Underwriting Result $(9) (5)
Combined Ratio 104.7 104.5
International:
Written Premiums 6% $57 43
Underwriting Result $(6) (5)
Combined Ratio 112.2 113.5
---- ----- -----
Total:
Written Premiums 100% $935 916
GAAP Underwriting Result $(42) (15)
Statutory Combined Ratio:
Loss and Loss Expense Ratio 73.3 71.9
Underwriting Expense Ratio 32.8 30.4
----- -----
Combined Ratio 106.1 102.3
===== =====
Combined Ratio Incl.
Policyholders' Dividends 106.3 102.4
===== =====
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
First quarter written premiums of $935 million increased 2%
over comparable 1995 premiums of $916 million. Incremental
premiums from the company's 1994 acquisition from CIGNA
Corporation of renewal rights for certain international
reinsurance business were the primary reason for the 24%
growth in Reinsurance premiums in the first quarter. CIGNA-
related premiums totaled $42 million in the first quarter of
1996, compared with $18 million in the same period of 1995.
Personal Insurance premiums increased 9% over 1995, driven
by growth in the package line of business, which combines
several personal coverages into one policy.
Medical Services premium volume was down $33 million, or
25%, from 1995. Approximately $27 million of this decline
resulted from the quarter-to-quarter comparative distortions
arising from the transition to annual policy terms for
physicians and surgeons' business. That transition was
completed in the third quarter of 1995, so those accounts
that would have previously been due for renewal in the first
quarter will now renew until the third quarter of this year.
Specialized Commercial volume was down $21 million from
1995, largely due to the company's withdrawal from a large
insurance pool arrangement, which reduced premiums by $32
million compared with the first quarter of 1995. Several
business centers within Specialized Commercial, including
Construction and National Accounts, experienced premium
growth over 1995.
The first quarter GAAP underwriting loss was $42 million,
compared with a loss of $15 million in the first quarter of
1995. Total pretax catastrophe losses in 1996 were $62
million, compared with losses of $16 million in 1995's first
quarter. The East Coast blizzard and other winter storms
were the primary sources of catastrophe losses in 1996. The
expense ratio was 2.4 points worse than 1995, reflecting a
higher commission ratio and the impact of other underwriting
expenses growing at a faster rate than written premiums.
Key factors in the change in underwriting results from 1995
were as follows:
- Personal Insurance - $21 million worse than 1995 - A
$7 million increase in catastrophe losses and other
unfavorable loss experience accounted for the
deterioration from 1995.
- Medical Services - $6 million worse than 1995 - The
decline from 1995 reflects the combined impact of
reduced earned premiums and underwriting expenses
that were level with 1995.
- Commercial - $5 million worse than 1995 -
Catastrophe losses in 1996 were $12 million higher
than 1995, more than offsetting an improvement in
prior year loss experience.
- Specialized Commercial - $10 million better than
1995 - A significant decline in losses from the
company's involvement in insurance pools drove the
improvement over 1995, offsetting the impact of $27
million in catastrophe losses in the quarter.
Catastrophe losses in 1995's first quarter were $4
million.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
First quarter pretax investment income in the underwriting
segment was $189 million, 6% higher than first quarter 1995
investment income of $178 million. Total fixed maturity
investments in the segment have grown by nearly $900 million
in the last twelve months, primarily the result of strong
investment cash flows. Fixed maturities purchased in the
first quarter were predominantly tax-exempt securities. The
new money rate on tax-exempt fixed maturities in the first
quarter of 1996 was 5.4%, compared with 7.4% on taxable
securities. Tax-exempt securities comprised 38% of the
total underwriting investment portfolio at March 31, 1996,
up from 35% a year ago. The weighted average pretax yield
on the fixed maturities portfolio at March 31, 1996 was
7.1%, and the portfolio had an average life of 8.5 years.
Approximately 96% of that portfolio is rated at investment
grade levels (BBB or better).
Environmental 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 environmental 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 environmental claims is
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
an environmental 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 claims, both of which are still
developing.
In 1994, the company specifically reallocated, for
environmental and asbestos claims, a portion of previously
established IBNR (incurred but not reported) reserves.
Prior to that, the company made no specific allocation of
its IBNR reserves for environmental or asbestos claims, but
rather identified reserves only for reported claims (case
reserves).
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
In the fourth quarter of 1995, the company recorded
additional gross reserves of $360 million and specifically
reallocated $113 million of previously recorded net reserves
for North American environmental and asbestos losses on
policies written in the United Kingdom prior to 1980.
The following table represents a reconciliation of total
gross and net environmental reserve development for the
three months ended March 31, 1996, and the years ended Dec. 31,
1995 and 1994. Amounts in the "net" column are reduced
by reinsurance recoverable.
1996 1995 1994
Pollution (three ---- ----
--------- months)
-----------
(in millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Beginning reserves $528 319 275 200 105 73
Incurred losses 8 7 59 68 71 56
Reserve reallocation - - 233 79 132 95
Paid losses (7) (6) (39) (28) (33) (24)
--- --- --- --- --- ---
Ending reserves $529 320 528 319 275 200
=== === === === === ===
Many significant environmental 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 for policies
underwritten in the United States.
The following table represents a reconciliation of total
gross and net reserve development for asbestos claims for
the three months ended March 31, 1996, and the years
ended Dec. 31, 1995 and 1994:
1996 1995 1994
Asbestos (three ---- ----
-------- months)
-----------
(in millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Beginning reserves $283 158 185 145 62 48
Incurred losses (4) 3 (13) (9) 13 14
Reserve reallocation - - 127 34 127 95
Paid losses (6) (4) (16) (12) (17) (12)
--- --- --- --- --- ---
Ending reserves $273 157 283 158 185 145
=== === === === === ===
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
Most of the asbestos claims the company has received pertain
to policies written prior to 1986. Since 1986, for policies
underwritten in the United States, the company's Commercial
General Liability policy has included the industry standard
absolute pollution exclusion, which the company believes
applies to asbestos claims.
The company believes its current reserves for environmental
and asbestos losses represent the best estimate of its
ultimate liability for such losses. Because of the
difficulty inherent in estimating those losses, however,
there is no assurance that the company's ultimate liability
will, in fact, match current reserves. The company
continues to evaluate new information and developing loss
patterns, but it believes any additional loss provisions for
environmental and asbestos claims will not materially impact
its results of operations, liquidity or financial position.
Total gross environmental and asbestos reserves at March 31,
1996, of $802 million represented approximately 8% of gross
consolidated reserves of $10.3 billion.
Legal Matters
- -------------
In May 1995, a purported class action lawsuit brought in the
District Court of Brazoria County, Texas, was served on
three of the company's subsidiaries on behalf of persons
who, from 1983 through 1985, purchased interests in certain
limited partnerships for which Damson Oil Corporation served
as general partner. The complaint seeks unspecified actual
damages, treble damages, punitive damages, attorneys' fees,
costs, and pre- and post-judgment interest. In April 1995,
plaintiffs sent the company's subsidiaries a letter under
the Texas Deceptive Trade Practices Act demanding $400
million of alleged actual damages plus unspecified
attorneys' fees in settlement of their claims. The
subsidiaries rejected the plaintiffs' demand and are
vigorously contesting these proceedings. If the final
outcome of these proceedings is adverse, it might materially
impact the results of the company's operations and liquidity
in the period in which that outcome occurs, but the company
believes it should not have a material adverse effect on the
company's overall financial position.
Insurance Brokerage
- -------------------
The insurance brokerage segment (Minet) posted a pretax loss
of $13 million for the quarter, compared with a loss of $15
million in 1995. Brokerage fees and commissions increased
$2 million over the first quarter of 1995, and investment
income grew $1 million. Salary and
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
related expenses increased $2 million over the first quarter
of 1995, primarily due to Minet's expansion of its specialty
broker staff. Conditions in many insurance brokerage market
sectors remain unfavorable, hindering Minet's ability to
significantly improve its results.
Investment Banking-Asset Management
- -----------------------------------
The company's portion of pretax earnings from The John
Nuveen Company (Nuveen) was $22 million in the first quarter
of 1996, compared with $19 million in 1995's first quarter.
The company holds a 78% interest in Nuveen.
Fees earned from investment advisory services provided on
assets under Nuveen's management grew $3 million, or 6%,
over the first quarter of 1995. Total assets under
management at March 31, 1996 of $31.6 billion were $500
million higher than the same time in 1995. Managed assets
were down slightly from year-end 1995 as a result of a
decline in the market value of underlying fund investments.
Nuveen's underwriting and distribution revenues declined $4
million from the comparable 1995 total, due to a decline in
profits recognized on securities held in inventory. Unit
investment trust sales of $215 million in the quarter
decreased 28% compared with the first quarter of 1995,
reflecting investor uncertainty about interest rate trends.
Capital Resources
- -----------------
Common shareholders' equity of $3.68 billion at March 31,
1996 fell slightly from year-end 1995 equity of $3.72
billion. First quarter net income was offset by a $143
million decline (net of taxes) in the unrealized
appreciation of the company's fixed maturities portfolio.
Heightened concerns about the state of the U.S. economy
negatively impacted bond values in the first quarter. The
after-tax unrealized appreciation on the company's equity
and venture capital portfolios grew by $28 million since the
end of 1995. Total debt outstanding at quarter-end of $672
million was down 5% from year-end 1995 due to a decline in
short-term borrowings by Nuveen. The ratio of total debt to
total capitalization of 15% was unchanged from year-end
1995.
The company repurchased and retired 372,000 of its common
shares during the quarter for a total cost of $20.2 million,
which was funded internally.
The company anticipates that any major capital expenditures
during the remainder of 1996 would involve acquisitions of
existing businesses or further stock repurchases; there are
no major capital improvements planned for 1996.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued
The company's ratio of earnings to fixed charges was 10.58
for the first three months of 1996, compared with 9.49 for
the same period of 1995. The company's ratio of earnings to
combined fixed charges and preferred stock dividends was
7.33 for the first three months of 1996, compared with 7.53
for the same period of 1995. Fixed charges consist of
interest expense 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 short- and long-term cash
requirements of its business segments. Net cash provided by
operations was $155 million in the first three months of
1996, compared to $227 million in 1995. The insurance
brokerage segment was the primary source of the decline from
1995, due to timing differences between the receipt of
premiums due from customers and the remittance of premiums
to insurance carriers. The company's consolidated liquidity
position remains strong due to cash flows from the
underwriting segment.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note 5 to the
consolidated financial statements, and the "Legal
Matters" section of Management's Discussion and
Analysis included in Part I of this report, are
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
last page in this document.
(b) Reports on Form 8-K.
1) The Registrant filed a Form 8-K Current
Report dated January 29, 1996, pertaining to
the Registrant's press release of fourth
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: April 30, 1996 By /s/ Bruce A.Backberg
--------------------
Bruce A. Backberg
Vice President
and Corporate Secretary
(Authorized Signatory)
Date: April 30, 1996 By /s/ Howard E. Dalton
--------------------
Howard E. Dalton
Senior Vice President
Chief Accounting Officer
<PAGE>
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 St. Paul Companies, 385 Washington Street,
Saint Paul, MN 55102, Attention: Corporate Secretary.
(1) Filed electronically.
<PAGE>
Exhibit 11
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
(In thousands) Three Months Ended
March 31
------------------
1996 1995
EARNINGS: ------ ------
Primary:
Net income, as reported $128,821 110,596
PSOP preferred dividends
declared (net of taxes) (2,165) (2,146)
Premium on preferred shares redeemed (208) -
------- -------
Net income, as adjusted $126,448 108,450
======= =======
Fully diluted:
Net income, as reported $128,821 110,596
Dividends on monthly income preferred
securities (net of taxes) 2,018 -
Additional PSOP expense (net of taxes) due to
assumed conversion of preferred stock (758) (874)
Premium on preferred shares redeemed (208) -
------- -------
Net income, as adjusted $129,873 109,722
======= =======
SHARES:
Primary:
Weighted average number of common shares
outstanding, per consolidated
financial statements 83,977 84,264
Additional dilutive effect of outstanding stock
options (based on treasury stock method using
average market price) 1,173 927
------- -------
Weighted average, as adjusted 85,150 85,191
======= =======
Fully diluted:
Weighted average number of common shares
outstanding, per consolidated
financial statements 83,977 84,264
Additional dilutive effect of:
Assumed conversion of PSOP preferred stock 3,990 4,045
Assumed conversion of monthly income
preferred securities 3,509 -
Outstanding stock options (based on treasury
stock method using market price at end of
period) 1,120 1,012
------- -------
Weighted average, as adjusted 92,596 89,321
======= =======
EARNINGS PER COMMON SHARE:
Primary $1.49 1.27
Fully diluted $1.40 1.23
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Exhibit 12
Computation of Ratios
(In thousands, except ratios)
Three Months Ended
March 31
--------------------
1996 1995
------ ------
EARNINGS:
Income before income taxes $164,080 148,146
Add: fixed charges 17,119 17,445
------- -------
Income, as adjusted $181,199 165,591
======= =======
FIXED CHARGES:
Interest costs $12,424 11,617
Rental expense (1) 4,695 5,828
------- -------
Total fixed charges $17,119 17,445
======= =======
FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS:
Fixed charges $17,119 17,445
PSOP preferred stock dividends 4,489 4,554
Dividends on monthly income
preferred securities 3,105 -
------- -------
Total fixed charges and
preferred stock dividends $24,713 21,999
======= =======
Ratio of earnings to fixed charges 10.58 9.49
======= =======
Ratio of earnings to combined fixed
charges and preferred stock dividends 7.33 7.53
======= =======
(1) Interest portion deemed implicit in total rent expense.
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 10,335,291
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 746,635
<MORTGAGE> 0
<REAL-ESTATE> 607,987
<TOTAL-INVEST> 13,137,525
<CASH> 33,243
<RECOVER-REINSURE> 94,851
<DEFERRED-ACQUISITION> 361,063
<TOTAL-ASSETS> 19,471,613
<POLICY-LOSSES> 10,276,100
<UNEARNED-PREMIUMS> 2,217,602
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 671,864
207,000
13,265
<COMMON> 462,893
<OTHER-SE> 3,216,151
<TOTAL-LIABILITY-AND-EQUITY> 19,471,613
1,030,576
<INVESTMENT-INCOME> 200,500
<INVESTMENT-GAINS> 47,920
<OTHER-INCOME> 129,695
<BENEFITS> 755,460
<UNDERWRITING-AMORTIZATION> 230,488
<UNDERWRITING-OTHER> 258,663
<INCOME-PRETAX> 164,080
<INCOME-TAX> 35,259
<INCOME-CONTINUING> 128,821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,821
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.40
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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