<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
-- OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 0-3021
THE ST. PAUL COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
385 Washington Street, Saint Paul, MN 55102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 612-221-7911
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock (without par value) New York Stock Exchange
London Stock Exchange
Stock Purchase Rights New York Stock Exchange
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(Title of class) (Name of each exchange on which
registered)
Securities registered pursuant to Section 12(g) of the Act:
None.
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
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. (X)
The aggregate market value of the outstanding Common Stock held by
nonaffiliates of the Registrant on March 24, 1995, was
$4,242,382,341. The number of shares of the Registrant's Common
Stock, without par value, outstanding at March 24, 1995, was
84,334,840.
An Exhibit Index is set forth at page 31 of this report.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's 1994 Annual Report to Shareholders are
incorporated by reference into Parts I, II and IV of this report.
Portions of the Registrant's Proxy Statement relating to the annual
meeting of shareholders to be held May 2, 1995, are incorporated by
reference into Parts III and IV of this report.
<PAGE>
PART I
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Item 1. Business.
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General Description
The St. Paul Companies, Inc. ("The St. Paul") is incorporated as a general
business corporation under the laws of the State of Minnesota. The St. Paul
and its subsidiaries comprise one of the oldest insurance organizations in
the United States, dating back to 1853. The St. Paul is a management company
principally engaged, through its subsidiaries, in three industry segments:
property-liability insurance underwriting, insurance brokerage and investment
banking-asset management. As a management company, The St. Paul oversees the
operations of its subsidiaries and provides them with capital, management and
administrative services. According to "Fortune" magazine's most recent
rankings, in terms of total assets, The St. Paul was the 25th largest
diversified financial company in the United States at Dec. 31, 1993. At
March 23, 1995, The St. Paul and its subsidiaries employed approximately
12,900 persons.
The St. Paul's primary business is insurance underwriting, which accounted
for 88% of consolidated revenues in 1994. Insurance brokerage and investment
banking-asset management operations accounted for 7% and 5% of consolidated
revenues, respectively, in 1994. Note 16 on pages 58 and 59 of The St.
Paul's 1994 Annual Report to Shareholders, which discloses revenues, income
(loss) before income taxes and identifiable assets for The St. Paul's
industry segments and by geographic areas for the last three years, is
incorporated herein by reference.
The following table lists the sources of The St. Paul's consolidated revenues
for each of the last three years:
Percentage of
Consolidated Revenues
1994 1993 1992
---- ---- ----
Insurance Underwriting:
Fire and Marine:
Specialized Commercial 21.6% 22.7% 23.4%
Personal & Business 15.7 10.9 7.6
Medical Services 13.6 15.4 16.0
Commercial 8.1 9.4 12.0
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Total Fire and Marine 59.0 58.4 59.0
Reinsurance 10.3 8.9 8.0
International 3.3 4.0 2.9
Net Investment Income 14.4 14.5 14.3
Realized Investment Gains 0.7 1.1 1.3
Other 0.6 0.7 0.5
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Total Insurance
Underwriting 88.3 87.6 86.0
Insurance Brokerage 7.4 7.2 7.3
Investment Banking-Asset
Management 4.7 5.5 4.9
Parent Company and
Eliminations (0.4) (0.3) 1.8
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Total 100.0% 100.0% 100.0%
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UNDERWRITING OPERATIONS
Overview. The St. Paul's insurance underwriting business is conducted
through three principal operations. St. Paul Fire and Marine ("Fire and
Marine") is The St. Paul's U.S. insurance underwriting operation. Fire and
Marine underwrites property and liability insurance and provides insurance-
related products and services to commercial, professional and individual
customers throughout the United States. The St. Paul's reinsurance business
operates under the name St. Paul Re, which underwrites reinsurance for
leading North American and international insurance companies. International
Underwriting offers primary property-liability insurance coverages in the
United Kingdom and in other selected international markets, primarily Canada
and Western Europe.
The primary sources of the underwriting operations' revenues are premiums
earned from insurance and reinsurance policies, and income earned from the
investment portfolio. According to the most recent industry statistics
published in "Best's Review" with respect to property-liability insurers
doing business in the United States, The St. Paul's underwriting operations
ranked 15th on the basis of 1993 written premiums.
Principal Departments and Products
The "Underwriting Results by Operation" table on page 23 of The St. Paul's
1994 Annual Report to Shareholders, which summarizes written premiums,
underwriting results and combined ratios for each of its underwriting
operations for the last three years, is incorporated herein by reference.
The following discussion summarizes the business structure of The St. Paul's
underwriting operations.
Fire and Marine
Fire and Marine underwrites insurance through the following business units:
Specialized Commercial. This is the largest of Fire and Marine's operations,
based on written premiums, and includes a number of individual underwriting
operations organized according to market segments or along product lines.
Specialized Commercial, in general, provides coverage for damage to the
customer's property (fire, inland marine and auto), liability for bodily
injury or damage to the property of others (general liability, auto liability
and excess), workers' compensation insurance, and various professional
liability coverages.
Operations serving particular market segments consist of the following:
Construction provides insurance to medium- and large-size general building
contractors, highway contractors and specialty contractors. Large
construction projects are insured during the life of the project. Technology
underwrites a range of specialized coverages for information technology
firms, as well as manufacturers of electronics, synthetics, industrial
machinery and medical equipment. Financial Services provides fidelity
coverages for depository institutions, in addition to directors and officers
liability and all other property and liability coverages for this industry.
National Accounts underwrites large commercial risks for a broad spectrum of
large businesses, including multistate operations. Public Sector Services
markets insurance products and services to all levels of government entities.
The following operations are organized along specific product lines: Surety
underwrites surety bonds, primarily for construction contractors, which
guarantee that third parties will be indemnified against the nonperformance
of contractual obligations. Based on estimated 1994 premium data, Fire and
Marine's surety operation is the second-largest underwriter of surety bonds
in the United States. Ocean Marine provides a variety of property and
liability insurance related to ocean and inland waterways traffic, including
cargo and hull property protection. Professional Liability markets errors
and omissions coverage for lawyers, insurance agents and other nonmedical
<PAGE>
professionals, including directors and officers. Surplus Lines underwrites
products liability insurance, umbrella and excess liability coverages,
property insurance for high-risk classes of business, and coverages for
unique, sometimes one-of-a-kind risks. Special Property provides property
insurance programs for large commercial accounts.
Specialized Commercial also includes the results of Fire and Marine's
participation in insurance pools and associations, which provide specialized
underwriting skills and risk management services for the classes of business
that they write. These pools and associations serve to increase the
underwriting capacity of the participating companies for insurance policies
where the concentration of risk is so high or the amount so large that a
single company could not prudently accept the entire risk.
Personal & Business Insurance. This operation provides property and
liability insurance coverages for individuals and small-business owners. For
individuals, a variety of monoline and package policies are offered to
protect personal property such as homes, automobiles and boats, as well as to
provide coverage for personal liability. Economy Fire & Casualty Company, a
personal insurance underwriter acquired in August 1993, is included in this
operation and is in the process of being fully integrated into Fire and
Marine's existing personal insurance operations. For small-business owners,
Personal & Business Insurance markets Package Accounts for Commercial
Enterprises (PACE) policies, which offer general commercial property and
liability coverages for offices, retailers and family restaurants.
Medical Services. Medical Services underwrites professional liability,
property and general liability insurance for the health care delivery system.
Products include coverages for health care professionals such as physicians
and surgeons, dental professionals and nurses. Products for individual
health care facilities and entire systems, such as hospital networks and
managed care systems, are also marketed. Specialized claim and loss control
services are integral components of Medical Services' insurance products.
Fire and Marine is the largest medical liability insurer in the United
States, with premium volume representing approximately 12% of the United
States market in 1993 based on premium data published in "Best's Review."
Commercial. Fire and Marine's Commercial underwriting operation offers
property and liability insurance to midsize commercial enterprises.
Coverages marketed include package, general liability, umbrella and excess
liability, commercial auto and fire, inland marine and workers' compensation.
Insurance products are designed for midsize manufacturers, retailers and
service businesses, as well as specific customer groups such as museums,
country clubs, hotels and schools.
Reinsurance
St. Paul Re underwrites reinsurance in both domestic and international
insurance markets (referred to as "assumed reinsurance"). Reinsurance is an
agreement between insurance companies to transfer risks. A large portion of
reinsurance is effected automatically under general reinsurance contracts
known as treaties. In some instances, reinsurance is effected by negotiation
on individual risks, which is referred to as facultative reinsurance. St.
Paul Re obtains business primarily through the broker or intermediary market,
writing both treaty and facultative reinsurance for property, liability,
ocean marine, surety and specialty coverages. According to data published by
the Reinsurance Association of America, St. Paul Re ranked as the eighth
largest U.S. reinsurance underwriter based on written premium volume for the
first nine months of 1994.
In late 1994, St. Paul Re purchased from the CIGNA Corporation the right to
renew most of the international business underwritten by CIGNA Reinsurance-
Property & Casualty. This purchase is expected to enable St. Paul Re to
expand and diversify its global reinsurance capabilities.
<PAGE>
International Underwriting
The International Underwriting operation includes primary insurance written
outside the United States, mainly the United Kingdom, Canada, Spain and the
Republic of Ireland. It also includes insurance written for foreign
operations of multinational corporations based in the United States, and
insurance written to cover exposures in the United States for foreign-based
companies. This operation offers a range of commercial and personal lines
products and services tailored to meet the unique needs of customers located
outside the United States.
Principal Markets and Methods of Distribution
St. Paul Fire and Marine Insurance Company and its subsidiaries are licensed
and transact business in all 50 states, the District of Columbia, Puerto Rico
and the Virgin Islands. Fire and Marine's business is broadly distributed
throughout the United States, with a particularly strong market presence in
the Midwestern region. Five percent or more of Fire and Marine's 1994
property-liability written premiums were produced in each of Illinois,
Minnesota and New York.
Fire and Marine's business is produced primarily through approximately 6,300
independent insurance agencies and national insurance brokers. Fire and
Marine maintains 12 regional offices in major cities throughout the United
States and 90 additional service offices in the United States to respond to
the needs of agents, brokers and policyholders. Approximately 81% of Fire
and Marine's total premium volume in 1994 originated in the regional and
service offices, with the balance of business produced by various insurance
pools and by the home office.
In 1994, St. Paul Re produced business from its New York and London offices,
and approximately 30% of its business originated from outside the United
States. As a result of the acquisition from the CIGNA Corporation in late
1994, St. Paul Re now also operates out of offices in Brussels, Singapore and
Miami.
Reserves for Losses and Loss Adjustment Expenses (LAE)
General Information. When claims are made by or against policyholders, any
amounts that The St. Paul's underwriting operations pay or expect to pay to
the claimant are referred to as losses. The costs of investigating,
resolving and processing these claims are referred to as loss adjustment
expenses (LAE). Reserves are established that reflect the estimated unpaid
total cost of these two items. The reserves for unpaid losses and LAE cover
claims that were incurred not only in 1994 but also in prior years. These
reserves include estimates of the total cost of claims that have already been
reported but not yet settled, and those that have been incurred but not yet
reported. Loss reserves are established on an undiscounted basis, and are
reduced for deductibles recoverable from customers and estimates of salvage
and subrogation.
Management continually reviews loss reserves, using a variety of statistical
and actuarial techniques to analyze claim costs, frequency and severity data,
and social and economic factors. Management believes that the reserves
currently established for losses and LAE are adequate to cover their eventual
costs. However, final claim payments may differ from these reserves,
particularly when these payments may not take place for several years.
Adjustments to previously estimated reserves are reflected in results in the
year in which they are made.
Ten-year Development. The table on page 7 presents a development of net loss
and LAE reserve liabilities and payments for the years 1984 through 1994.
The top line on the table shows the estimated liability for unpaid losses and
LAE, net of reinsurance recoverable, recorded at the balance sheet date for
each of the years indicated. Loss development data for The St. Paul's U.K.-
based underwriting subsidiary, St. Paul UK, is included for all years in the
table since 1988.
<PAGE>
The upper portion of the table, which shows the re-estimated amount relating
to the previously recorded liability, is based upon experience as of the end
of each succeeding year. This estimate is either increased or decreased as
further information becomes known about individual claims and as changes in
the trend of claim frequency and severity become apparent.
The "Cumulative Redundancy (Deficiency)" line on the table for any given year
represents the aggregate change in the estimates for all years subsequent to
the year the reserves were initially established. For example, the 1984
reserve of $2,917 million developed up to $2,993 million, or a $76 million
deficiency, by the end of 1985. By the end of 1994, the 1984 reserve had
developed a deficiency of $488 million. The changes in the estimate of 1984
loss reserves were reflected in operations during the past ten years.
In 1993, The St. Paul adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts." This statement
required, among other things, that reinsurance recoverables on unpaid losses
and LAE be shown as an asset, instead of the prior practice of netting this
amount against insurance reserves for balance sheet reporting purposes.
The middle portion of the table, which includes data for only those periods
impacted since the adoption of SFAS No. 113 (the years 1992 through 1994),
represents a reconciliation between the net reserve liability as shown on the
top line of the table and the gross reserve liability as shown on The St.
Paul's balance sheet. This portion of the table also presents the gross re-
estimated reserve liability as of the end of the latest re-estimation period
(Dec. 31, 1994) and the related re-estimated reinsurance recoverable. The
St. Paul did not restate data for years prior to 1992 in this table for
presentation on a gross basis due to the impracticality of determining such
gross data on a reliable basis for its foreign underwriting operations.
The lower portion of the table presents the cumulative amounts paid with
respect to the previously recorded liability as of the end of each succeeding
year. For example, as of Dec. 31, 1994, $3,078 million of the currently
estimated $3,405 million of losses and LAE that have been incurred for the
years up to and including 1984 have been paid. Thus, as of Dec. 31, 1994, it
is estimated that $327 million of incurred losses and LAE are unpaid for the
years up to and including 1984.
Caution should be exercised in evaluating the information shown on this
table. It should be noted that each amount includes the effects of all
changes in amounts for prior periods. For example, the portion of the
development shown for year-end 1993 reserves that relates to 1984 losses is
included in the cumulative redundancy or deficiency amount for the years 1984
through 1993.
This table presents calendar year data. It does not present accident or
policy year development data, which some readers may be more accustomed to
analyzing. The social and economic conditions and other trends which had an
impact on the changes in the estimated liability in the past are not
necessarily indicative of the future. Accordingly, readers are cautioned
against extrapolating any conclusions about future results from the
information presented in this table.
<PAGE>
Analysis of Loss and Loss Adjustment Expense (LAE) Development
(in millions)
<TABLE>
<CAPTION>
<S>
Year ended December 31 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net liability for <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
unpaid losses and LAE $2,917 3,364 4,043 4,745 5,502 5,907 6,279 6,688 7,207 7,640 7,890
====== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Liability re-estimated
as of:
One year later 2,993 3,477 4,087 4,727 5,313 5,656 6,037 6,436 6,984 7,312
Two years later 3,104 3,625 4,078 4,489 4,914 5,338 5,787 6,260 6,703
Three years later 3,203 3,652 3,955 4,268 4,789 5,135 5,628 6,066
Four years later 3,222 3,597 3,874 4,226 4,731 5,027 5,490
Five years later 3,202 3,572 3,874 4,178 4,707 4,975
Six years later 3,227 3,624 3,885 4,180 4,682
Seven years later 3,280 3,652 3,914 4,169
Eight years later 3,308 3,688 3,951
Nine years later 3,361 3,742
Ten years later 3,405
Cumulative redundancy
(deficiency) $ (488) (378) 92 576 820 932 789 622 504 328
======= ===== ===== ===== ===== ===== ===== ===== ===== =====
Cumulative redundancy
(deficiency) excluding
foreign exchange (1) $ (488) (378) 92 576 831 914 791 633 501 326
======= ===== ===== ===== ===== ===== ===== ===== ===== =====
Net liability for
unpaid losses and LAE 7,207 7,640 7,890
Reinsurance recoverable on
unpaid losses 1,606 1,545 1,533
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Gross liability 8,813 9,185 9,423
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Gross re-estimated liability:
One year later 8,692 8,842
Two years later 8,389
Gross cumulative
redundancy 424 343
=== ===
Gross cumulative
redundancy excluding
foreign exchange (1) 421 355
=== ===
Cumulative amount of net
liability paid through:
One year later $ 941 976 1,008 1,101 1,196 1,318 1,450 1,452 1,547 1,566
Two years later 1,539 1,666 1,787 1,884 2,044 2,209 2,361 2,493 2,576
Three years later 1,983 2,185 2,332 2,466 2,646 2,797 3,015 3,155
Four years later 2,304 2,548 2,732 2,869 3,043 3,216 3,442
Five years later 2,533 2,812 3,012 3,132 3,348 3,496
Six years later 2,703 3,008 3,205 3,322 3,554
Seven years later 2,833 3,157 3,343 3,453
Eight years later 2,935 3,258 3,447
Nine years later 3,010 3,343
Ten years later 3,078
Cumulative amount of
gross liability paid
through:
One year later 1,935 1,872
Two years later 3,199
(1) The results of St. Paul UK translated from original currencies into
U.S. dollars are included with The St. Paul's U.S. underwriting
operations in this table since 1988. The foreign currency translation
impact on the cumulative redundancy (deficiency) arises from the
difference between reserve developments translated at the exchange
rates at the end of the year in which the liabilities were originally
estimated, and the exchange rates at the end of the year in which the
liabilities were re-estimated.
</TABLE>
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For further information on The St. Paul's loss reserves, including a
reconciliation of beginning and ending loss reserve liabilities for each of
the last three years, refer to the "Reserves for Losses and Loss Adjustment
Expenses" section on pages 28 and 29, and the "Environmental Pollution and
Asbestos Claims" section on pages 29 and 30, of the 1994 Annual Report to
Shareholders, which are incorporated herein by reference.
Ceded Reinsurance
Through ceded reinsurance, other insurers and reinsurers agree to share
certain risks that The St. Paul's subsidiaries have underwritten. The
purpose of reinsurance is to limit a ceding insurer's maximum net loss
arising from large risks or catastrophes. Reinsurance also serves to
increase the direct writing capacity of the ceding insurer. Amounts
recoverable on ceded losses are recorded as an asset.
The St. Paul strives to achieve the following objectives with respect to
ceded reinsurance:
1) Protect its assets from large individual risk and occurrence losses by
purchasing reinsurance from financially secure reinsurance companies at
a reasonable cost.
2) Provide its respective underwriting operations with the capacity
necessary to write large limits on accounts by purchasing reinsurance
from financially secure reinsurance companies at a reasonable cost.
The collectibility of reinsurance is subject to the solvency of reinsurers.
The placement of ceded reinsurance is guided by The St. Paul's Reinsurance
Security Committee, which has established financial standards to determine
qualified reinsurers. Uncollectible reinsurance recoverables have not had a
material adverse impact on The St. Paul's results of operations, liquidity or
financial position. Note 14 on pages 57 and 58 of the 1994 Annual Report to
Shareholders, which provides a schedule of ceded reinsurance information, is
incorporated herein by reference.
INSURANCE BROKERAGE OPERATIONS
The St. Paul's insurance brokerage segment, Minet, provides insurance and
reinsurance broking and risk advisory services for major corporations and
large professional organizations worldwide. According to the most recent
rankings in terms of total 1993 revenues by "Business Insurance," Minet is
the tenth largest international insurance brokerage organization in the
world. Based in London, Minet has 131 offices throughout North America,
Europe, Africa, Asia and Australia.
Minet operates through six business units, each focusing on distinct client
groups. Global Professional Services provides insurance brokerage services
to the world's largest accounting firms, as well as law firms, law societies
and insurance companies. International Retail serves clients in Asia,
Africa, Australia and Europe. Retail brokers act on behalf of organizations
such as corporations and partnerships by providing risk management services
and procuring insurance coverages. International Broking, through its
wholesale broking operations, provides access to Lloyd's of London and other
markets for the purpose of assembling underwriting capacity for specialized
insurance programs for clients throughout the world. Wholesale brokers act on
behalf of retail brokers by procuring specialty insurance coverages. Minet's
North American operations include retail brokerage and advisory services for
professional clients and major industrial and service corporations. This
business unit includes Minet's U.S. wholesale brokerage network, Swett &
Crawford, which, according to the most recent rankings in terms of total 1993
revenues by "Business Insurance," is the largest wholesale insurance broker
in the United States. Reinsurance provides facultative and treaty
intermediary services to insurance companies throughout the world. Minet
Risk Services provides consulting and actuarial services to clients
worldwide, and also provides management services to captive insurance
companies.
<PAGE>
Minet in recent years has expanded the scope of its specialty brokerage
operations by acquiring several small, specialized brokers throughout the
world to complement its existing worldwide client base and market network.
In 1992, The St. Paul significantly reduced the carrying value of its
investment in Minet through a $365 million write-down of goodwill. The
"Insurance Brokerage" section of "Management's Discussion and Analysis" on
pages 33 and 34 of the 1994 Annual Report to Shareholders, which discusses
the goodwill write-down and other matters, is incorporated herein by
reference.
INVESTMENT BANKING-ASSET MANAGEMENT OPERATIONS
The John Nuveen Company ("Nuveen") is the St. Paul's investment banking-asset
management subsidiary. The St. Paul and Fire and Marine currently hold a
combined 77% interest in Nuveen after selling a minority interest by means of
an initial public offering in 1992. Note 13 on page 57 of The St. Paul's
1994 Annual Report to Shareholders, which provides further information on the
sale of a minority interest in Nuveen, is incorporated herein by reference.
Through John Nuveen & Co. Incorporated, a wholly-owned subsidiary, Nuveen
markets tax-exempt, open-end and closed-end (exchange-traded) managed funds.
Nuveen also underwrites and trades municipal bonds and tax-exempt unit
investment trusts (UITs). Nuveen markets its funds and UITs to individuals
through registered representatives associated with unaffiliated national and
regional broker-dealers and other financial organizations. Through its
Municipal Finance Department, the firm also serves state and local
governments and their authorities by financing community projects through
both negotiated and competitive financings.
Nuveen Advisory Corp., a wholly-owned subsidiary of John Nuveen & Co.
Incorporated, is investment adviser to the Nuveen-sponsored open-end mutual
funds and exchange-traded funds. Nuveen Institutional Advisory Corp., also a
wholly-owned subsidiary, is investment adviser to other Nuveen-sponsored
exchange-traded funds and also provides investment management services to
trust funds established by public utilities for the decommissioning of
nuclear power plants.
As the leading sponsor of tax-free UITs, Nuveen currently sponsors trusts
with assets of $16.8 billion in 50 different national, state and insured
portfolios. Nuveen also manages 21 tax-free, open-end mutual funds and money
market funds with net assets of approximately $6 billion in national, state,
insured and money market portfolios. In addition, Nuveen manages 70
exchange-traded funds with approximately $24 billion in net assets, which are
traded on national stock exchanges.
Nuveen has its principal office in Chicago and maintains regional sales
offices in other cities across the United States.
INVESTMENTS
Objectives. The St. Paul's board of directors approves the annual investment
plans of the underwriting subsidiaries. The primary objectives of those
plans are as follows:
1) to maintain a widely diversified fixed maturities portfolio structured
to maximize investment income while minimizing credit risk through
investments in high-quality instruments;
2) to provide for long-term growth in the market value of the investment
portfolio through investments in certain other investment classes, such
as equity securities, real estate and venture capital;
3) to manage the mix of portfolio maturities to complement anticipated
insurance loss pay-out patterns.
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The St. Paul has limited involvement with derivative financial instruments to
hedge against fluctuations in interest rates, equity security values and
foreign currency values, and to generate income. The St. Paul does not
participate in the derivatives market for trading or speculative purposes.
Fixed Maturities. Fixed maturities constituted 79% of The St. Paul's
investment portfolio at Dec. 31, 1994. The following table presents
information about the fixed maturities portfolio for the last five years
(dollars in millions).
Weighted Weighted
Amortized Market Pretax Net Average Average
Cost at Year Value at Investment Pretax After-tax
Year Year-end Year-end Income Yield Yield
---- --------- ------------ ---------- -------- --------
1994 $8,913.4 $8,828.7 $626.3 7.4% 5.7%
1993 8,385.1 9,148.0 607.1 7.4% 5.9%
1992 7,731.2 8,236.3 605.2 8.0% 6.5%
1991 7,230.3 7,722.1 589.0 8.4% 6.8%
1990 6,538.1 6,714.5 561.4 9.0% 6.9%
The St. Paul determines the mix of its investment in taxable and tax-exempt
securities based on its current and projected tax position and the
relationship between taxable and tax-exempt investment yields. Fixed
maturity purchases in 1994 were predominantly intermediate-term, investment-
grade taxable securities. Beginning Dec. 31, 1993, the fixed maturities
portfolio was carried on The St. Paul's balance sheet at estimated market
value, with unrealized appreciation and depreciation (net of taxes) recorded
in common shareholders' equity. At Dec. 31, 1994, the pretax unrealized
depreciation on the portfolio totaled $85 million.
The fixed maturities portfolio is managed conservatively to provide
reasonable return while limiting exposure to risks. Approximately 95% of the
fixed maturities portfolio is rated at investment grade levels (BBB or
better). Nonrated securities comprise the remainder of the portfolio. Most
of these are nonrated municipal bonds which, in management's view, would be
considered of investment-grade quality if rated.
Equities. Equity holdings comprised 5% of The St. Paul's investments at Dec.
31, 1994, and consist of a diversified portfolio of common stocks, which are
held with the primary objective of achieving capital appreciation. This
portfolio provided $21 million of realized investment gains and $13 million
of dividend income in 1994, and its carrying value at year-end included $30
million of unrealized appreciation.
Real Estate. The St. Paul's real estate holdings, which comprised 5% of
total investments at Dec. 31, 1994, consist primarily of a diversified
portfolio of commercial office and warehouse buildings geographically
distributed throughout the United States. This portfolio produced $28
million of pretax investment income in 1994. The St. Paul does not invest
in real estate mortgages.
Venture Capital. Securities of small- to medium-size companies spanning a
variety of industries comprised The St. Paul's investments in venture
capital, which accounted for 3% of total investments at Dec. 31, 1994. These
investments are in the form of limited partnership interests or direct equity
investments, and their carrying value at year-end included $69 million of
unrealized appreciation.
Other Investments. The St. Paul's portfolio also includes short-term
securities and other miscellaneous investments, which in the aggregate
comprised 8% of total investments at Dec. 31, 1994.
Notes 3, 4 and 5 on pages 48 through 50 of the 1994 Annual Report to
Shareholders, and the "Investments" section of "Management's Discussion and
Analysis" on pages 31 through 33 of said Annual Report, which provide
additional information about The St. Paul's investment portfolio, are
incorporated herein by reference.
<PAGE>
COMPETITION AND REGULATION
The businesses in which The St. Paul's subsidiaries are engaged are all
highly competitive.
Underwriting. The St. Paul's underwriting subsidiaries compete with a large
number of other insurers. These subsidiaries compete principally by
attempting to offer a combination of superior products, underwriting
expertise and services at a competitive price. The combination of products,
services, pricing and other methods of competition varies by line of
insurance and by coverage within each line of insurance.
The St. Paul and its underwriting subsidiaries are subject to regulation by
certain states as an insurance holding company system. Such regulation
generally provides that transactions between companies within the holding
company system must be fair and equitable. In addition, transfers of assets
among such affiliated companies, certain dividend payments from underwriting
subsidiaries and certain material transactions between companies within the
system may be subject to prior notice to or approval of state regulatory
authorities. During 1994, The St. Paul received $201.0 million in cash
dividends from Fire and Marine and a $157.1 million noncash dividend of the
capital stock of Fire and Marine's U.K.-based underwriting operation. In
1995, up to $311.6 million in cash dividends can be paid by Fire and Marine
to The St. Paul without regulatory approval. Any change of control
(generally presumed by the holding company laws to occur with the acquisition
of 10% or more of an insurance holding company's voting securities) of The
St. Paul and its underwriting subsidiaries is also subject to such prior
approval.
The underwriting subsidiaries are subject to licensing and supervision by
government regulatory agencies in the jurisdictions in which they do
business. The nature and extent of such regulation vary but generally have
their source in statutes which delegate regulatory, supervisory and
administrative powers to state insurance commissioners. Such regulation,
supervision and administration of the underwriting subsidiaries may relate,
among other things, to the standards of solvency which must be met and
maintained; the licensing of insurers and their agents; the nature of and
limitations on investments; restrictions on the size of risk which may be
insured under a single policy; deposits of securities for the benefit of
policyholders; regulation of policy forms and premium rates; periodic
examination of the affairs of insurance companies; annual and other reports
required to be filed on the financial condition of insurers or for other
purposes; requirements regarding reserves for unearned premiums, losses and
other matters; the nature of and limitations on dividends to policyholders
and shareholders; the nature and extent of required participation in
insurance guaranty funds; and the involuntary assumption of hard-to-place or
high-risk insurance business, primarily in the personal auto and workers'
compensation insurance lines.
Loss ratio trends in property-liability insurance underwriting experience may
be improved by, among other things, changing the kinds of coverages provided
by policies, providing loss prevention services, increasing premium rates or
by a combination of these. The freedom of The St. Paul's insurance
underwriting subsidiaries to meet emerging adverse underwriting trends may be
slowed, from time to time, by the effects of those state laws which require
prior approval by insurance regulatory authorities of changes in policy forms
and premium rates. Fire and Marine does business in all 50 states and the
District of Columbia, Puerto Rico and the Virgin Islands. Many of these
jurisdictions require prior approval of most or all premium rates.
The St. Paul's insurance underwriting business in the United Kingdom is
regulated by the Department of Trade and Industry (DTI). The DTI's principal
objectives are to ensure that insurance companies are responsibly managed,
that they have adequate funds to meet liabilities to policyholders and that
they maintain required levels of solvency. In Canada, the conduct of
insurance business is regulated under provisions of the Insurance Companies
Act of 1992, which requires insurance companies to maintain certain levels of
capital depending on the type and amount of insurance policies in force. The
St. Paul is also subject to regulations in the other countries and
jurisdictions in which it writes insurance business.
<PAGE>
Insurance Brokerage. The St. Paul's insurance brokerage segment, Minet, is
subject to licensing requirements and other regulations under the laws of the
countries in which it operates. In addition, rules of the Lloyd's insurance
market in London and other regulatory organizations govern certain business
activities of the brokerage operations. The regulation, supervision and
administration of the brokerage operations are extensive, but in general
relate to licensing standards and procedures applicable to brokers;
limitations on the handling and investment of premium trust funds; business
reporting and premium tax collection requirements; procedures for issuing
policies; and restrictions on the eligibility of insurers with whom insurance
coverage may be placed.
Investment Banking-Asset Management. Nuveen is a publicly-traded company
registered under the Securities Exchange Act of 1934 and listed on the New
York Stock Exchange. One of its subsidiaries is a registered broker and
dealer under the Securities Exchange Act of 1934, and is subject to
regulation by The Securities and Exchange Commission, the National
Association of Securities Dealers, Inc. and other federal and state agencies.
Nuveen's other two subsidiaries are registered investment advisers under the
Investment Advisers Act of 1940. As such, they are subject to regulation by
the Securities and Exchange Commission.
Item 2. Properties.
- ------ ----------
Fire and Marine owns its corporate headquarters buildings, located at 385
Washington Street and 130 West Sixth Street, Saint Paul, Minnesota. These
buildings, which are adjacent to one another and connected by skyway, are
also occupied by The St. Paul. These buildings consist of approximately 1.1
million square feet of gross floor space.
Minet, St. Paul International Insurance Company Ltd. and Economy also own
buildings which house their respective operations.
Fire and Marine and its subsidiary, St. Paul Properties, Inc., own a
portfolio of income-producing properties in various locations across the
United States that they have purchased for investment.
The St. Paul's operating subsidiaries rent or lease office space in many
cities in which they operate.
Management considers the currently owned and leased office facilities of The
St. Paul and its subsidiaries adequate for the current and anticipated future
level of operations.
Item 3. Legal Proceedings.
- ------ -----------------
The information set forth in the "Legal Matters" section of Note 11 on page
57 of the 1994 Annual Report to Shareholders, the "Legal Matters" section of
"Management's Discussion and Analysis" on page 30 of said Annual Report, and
the "Environmental Pollution and Asbestos Claims" section of "Management's
Discussion and Analysis" on pages 29 and 30 of said Annual Report are
incorporated herein by reference.
In 1990, at the direction of the UK Department of Trade and Industry (DTI),
five insurance underwriting subsidiaries of London United Investments PLC
(LUI) suspended underwriting new insurance business. At the same time, four
of those subsidiaries, being insolvent, suspended payment of claims and have
since been placed in provisional liquidation. The fifth subsidiary, Walbrook
Insurance Company, continued paying claims until May 1992 but has now also
been placed in provisional insolvent liquidation. Weavers Underwriting
Agency (Weavers), an LUI subsidiary, managed these insurers. The St. Paul's
insurance brokerage operation, Minet, had brokered business to and from
Weavers for many years. From 1973 through 1980, The St. Paul's UK-based
underwriting operations had accepted business from Weavers. St. Paul
International Insurance
<PAGE>
Company Limited (SPI) is a defendant in proceedings brought in the English
courts in 1987 by Milano Assicurazioni SPA to challenge the validity of
certain reinsurance contracts relating to the Weavers pool, of which SPI was
a member. The trial is due to commence in April 1995. SPI is aware that
there are other reinsurers seeking to avoid liability on certain of the
reinsurance contracts relating to the Weavers pool. SPI and other members of
the Weavers pool are seeking enforcement of the reinsurance contracts. Minet
may also become the subject of legal proceedings arising from its role as one
of the major brokers for Weavers. The proceedings are being vigorously
contested by The St. Paul and it recognizes that the final outcome of these
proceedings, if adverse to The St. Paul, may materially impact the results of
operations in the period in which that outcome occurs, but believes it will
not have a materially adverse effect on its liquidity or overall financial
position.
The St. Paul reported in its 1993 Form 10-K on a declaratory judgment action
in the Circuit Court of Missouri involving Economy's potential liability
under a homeowner's policy for a wrongful death that occurred in the home of
its insured, Robert A. Berdella, Jr. That action was settled in December
1994 at no cost to either The St. Paul or Economy.
The St. Paul previously reported that the Superior Court of California had
entered judgment against Fire and Marine and in favor of Arntz Contracting
Company and certain of its affiliates in the amount of $16.5 million in
compensatory damages and $100 million in punitive damages. In January 1994,
the portion of the judgment granting punitive damages was vacated. Both
parties have appealed the court's ruling.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
No matter was submitted to a vote of security holders during the quarter
ended Dec. 31, 1994.
Executive Officers of the Registrant.
- ------------------------------------
All of the following persons are regarded as executive officers of The St.
Paul Companies, Inc. because of their responsibilities and duties as elected
officers of The St. Paul, Fire and Marine or St. Paul Re. There are no family
relationships between any of The St. Paul's executive officers and directors,
and there are no arrangements or understandings between any of these officers
and any other person pursuant to which the officer was selected as an
officer. All of the following officers except Nicholas M. Brown Jr., Andrew
I. Douglass, Greg A. Lee and James Hom have held executive positions with The
St. Paul or one or more of its subsidiaries for more than five years, and
have been employees of The St. Paul or a subsidiary for more than five years.
Nicholas M. Brown Jr. joined The St. Paul in September 1993. For more than
five years prior to that date, Mr. Brown held various management positions
with Aetna Life and Casualty. Mr. Douglass joined The St. Paul in August
1993. For more than five years prior to 1993, Mr. Douglass had been
Executive Vice President and General Counsel of Heller International
Corporation. Greg A. Lee joined The St. Paul in January 1993. For more than
five years prior to that date, Mr. Lee held various human resources
management positions with PepsiCo, Inc. and its subsidiaries. James Hom
joined The St. Paul in October 1994. For two years prior to that date, Mr.
Hom served as vice president-corporate claims and project management for The
Home Insurance Company. Prior to that, Mr. Hom spent seven years managing
insurance consulting groups for two large public accounting firms.
Positions Term of Office
Presently and Period of
Name Age Held Service
- ---- --- ---------- --------------
Douglas W. 58 Chairman, President Serving at the
Leatherdale and Chief Executive pleasure of the
Officer Board from 5-90
<PAGE>
Patrick A. Thiele 44 Executive Vice Serving at the
President and pleasure of the
Chief Financial Board from 12-91
Officer
Nicholas M. 40 Executive Vice Serving at the
Brown Jr. President and pleasure of the
Chief Operating Board from 5-94
Officer-
Fire and Marine
James F. Duffy 51 President and Serving at the
Chief Executive pleasure of the
Officer- Board from 9-93
St. Paul Re
Susan J. Albrecht 48 President- Serving at the
Major Markets- pleasure of the
Fire and Marine Board from 12-94
Gary P. Hanson 51 President- Serving at the
Personal & pleasure of the
Business Board from 9-93
Insurance-
Fire and Marine
Joseph B. Nardi 50 President- Serving at the
Medical Services- pleasure of the
Fire and Marine Board from 8-82
Janet R. Nelson 45 President- Serving at the
Custom Markets- pleasure of the
Fire and Marine Board from 5-94
James A. Schulte 45 President- Serving at the
Commercial- pleasure of the
Fire and Marine Board from 10-93
Mark L. Pabst 48 Senior Vice Serving at the
President-Fire and pleasure of the
Marine and President Board from 2-95
and Chief Executive
Officer-International
Underwriting
Howard E. Dalton 57 Senior Vice Serving at the
President and pleasure of the
Chief Accounting Board from 9-87
Officer
Andrew I. Douglass 51 Senior Vice Serving at the
President and pleasure of the
General Counsel Board from 8-93<PAGE>
<PAGE>
James Hom 39 Senior Vice Serving at the
President- pleasure of the
Corporate Planning Board from 10-94
Greg A. Lee 45 Senior Vice Serving at the
President- pleasure of the
Human Resources Board from 1-93
Bruce A. Backberg 46 Vice President Serving at the
and Corporate pleasure of the
Secretary Board from 5-92
James L. Boudreau 59 Vice President Serving at the
and Treasurer pleasure of the
Board from 11-90
Part II
-------
Item 5. Market for the Registrant's Common Equity and
- ------ Related Stockholder Matters.
---------------------------------------------
The "Stock Trading" and "Stock Price and Dividend Rate" portions of the
"Shareholder Information" section on page 66 of The St. Paul's 1994 Annual
Report to Shareholders are incorporated herein by reference.
Item 6. Selected Financial Data.
- ------ -----------------------
The "Eleven-year Summary of Selected Financial Data" section on pages 38 and
39 of the 1994 Annual Report to Shareholders is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial
- ------ Condition and Results of Operations.
-------------------------------------------------
The "Management's Discussion and Analysis" section on pages 20 to 37 of the
1994 Annual Report to Shareholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
The financial statements and supplementary data on pages 38 to 60 of the 1994
Annual Report to Shareholders are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on
- ------ Accounting and Financial Disclosure.
------------------------------------------------
None.
<PAGE>
Part III
--------
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
The "Nominees for Directors" section, which provides information regarding
The St. Paul's directors, on pages 4 to 6 of The St. Paul's Proxy Statement
relating to the annual meeting of shareholders to be held May 2, 1995, is
incorporated herein by reference. Information regarding The St. Paul's
executive officers is included in Part I of this report.
Item 11. Executive Compensation.
- ------- ----------------------
The "Executive Compensation" section on pages 11 to 19 and the "Board of
Directors Compensation" section on pages 6 to 8 of the Proxy Statement
relating to the annual meeting of shareholders to be held May 2, 1995, are
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial
- ------- Owners and Management.
----------------------------------------
The "Security Ownership of Certain Beneficial Owners and Management" section
on pages 20 to 23 of the Proxy Statement relating to the annual meeting of
shareholders to be held May 2, 1995, are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
None.
Part IV
-------
Item 14. Exhibits, Financial Statements, Financial Statement
- ------- Schedules and Reports on Form 8-K.
---------------------------------------------------
(a) Filed documents. The following documents are filed as part of this
report:
1. Financial Statements.
Incorporated by reference into Part II of this report:
The St. Paul Companies, Inc. and Subsidiaries:
Consolidated Statements of Operations - Years Ended
December 31, 1994, 1993 and 1992
Consolidated Balance Sheets - December 31, 1994
and 1993
Consolidated Statements of Common Shareholders'
Equity - Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows - Years Ended
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
<PAGE>
2. Financial Statement Schedules.
The St. Paul Companies, Inc. and Subsidiaries:
Independent Auditors' Report on Financial Statement Schedules
I. Summary of Investments - Other than Investments in
Related Parties
II. Condensed Financial Information of Registrant
III. Supplementary Insurance Information
IV. Reinsurance
V. Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable, not required, or the information is included
elsewhere in the Consolidated Financial Statements or Notes
thereto.
3. Exhibits. An Exhibit Index is set forth at page 31 of this report.
(3) The current articles of incorporation and the current bylaws
of The St. Paul are incorporated herein by reference to Form
10-Q for the quarter ended March 31, 1994.
(4) A specimen certificate of The St. Paul's common stock is
incorporated herein by reference to the Form 10-K for the year
ended December 31, 1992.
The Shareholder Protection Rights Agreement and the amendment
thereof are incorporated herein by reference to the Form 8-K
Current Reports dated December 4, 1989, and March 9, 1990.
There are no long-term debt instruments in which the total
amount of securities authorized exceeds 10% of the total
assets of The St. Paul and its subsidiaries on a consolidated
basis. The St. Paul agrees to furnish a copy of any of its
long-term debt instruments to the Securities and Exchange
Commission upon request.
(10) The Directors' Charitable Award Program.
Compensation Arrangement with Mr. Nicholas M. Brown Jr.
Relocation Loan Payback Agreement with Mr. James F. Duffy.
Pension Service Agreement with Mr. Andrew I. Douglass.
The 1994 Stock Incentive Plan is incorporated by reference to
Form 10-Q for the quarter ended March 31, 1994.
The 1994 Annual Incentive Plan is incorporated by reference to
Form 10-Q for the quarter ended March 31, 1994.
The Long-Term Incentive Plan is incorporated by reference to
Form 10-Q for the quarter ended March 31, 1994.
The Non-Employee Director Stock Retainer Plan is incorporated
by reference to Form 10-K for the year ended December 31,
1991.
The summary description of the Outside Directors' Retirement
Plan is incorporated by reference to the Proxy Statement
relating to the annual meeting of shareholders to be held
May 2, 1995.
<PAGE>
The 1988 Stock Option Plan as in effect for options granted
prior to June 1994, as amended, is incorporated by reference
to Form 10-K for the year ended December 31, 1990.
The Restricted Stock Award Plan, as amended, is incorporated
by reference to Form 10-K for the year ended December 31,
1989.
The Benefit Equalization Plan and Special Severance Policy are
incorporated by reference to Form 10-K for the year ended
December 31, 1987.
The Deferred Management Incentive Awards Agreement - Prime
Rate, the Deferred Management Incentive Awards Agreement -
Phantom Stock, the Directors' Deferred Compensation Agreement
- Prime Rate and the Directors' Deferred Compensation
Agreement - Phantom Stock are incorporated by reference to
Form 10-K for the year ended December 31, 1982.
The Alternate Long-Term Incentive Plan is incorporated by
reference to Form 10-Q for the quarter ended March 31, 1983.
The summary descriptions of the Annual Incentive Plan (as in
effect prior to 1994), Executive Post-Retirement Life
Insurance Plan and Executive Excess Long-Term Disability Plan
are incorporated by reference to the Proxy Statement relating
to the annual meeting of shareholders which was held on May 5,
1992.
(11) A statement regarding the computation of per share earnings.
(12) A statement regarding the computation of the ratio of earnings
to combined fixed charges and preferred stock dividends.
(13) The 1994 Annual Report to Shareholders. The following
portions of such annual report, representing those portions
expressly incorporated by reference in this report on Form
10-K, are filed as an exhibit to this report:
Portions of Annual Report
for the year ended Items in
December 31, 1994 this report
---------------------------- -----------
Consolidated Financial
Statements Item 8
Notes to Consolidated
Financial Statements Item 1, 8
Independent Auditors' Report Item 8
Management's Discussion and
Analysis Item 1, 3, 7
"Stock Trading" and "Stock
Price and Dividend Rate"
portions of "Shareholder
Information" Item 5
Eleven-year Summary of
Selected Financial Data Item 6
The complete 1994 Annual Report to Shareholders is furnished
to the Commission in a paper format pursuant to Rule 14a-3(c).
<PAGE>
(21) List of subsidiaries of The St. Paul Companies, Inc.
(23) Consent of independent auditors to incorporation by reference
of certain reports into Registration Statements on Form S-8
(SEC File No. 2-69894, No. 33-15392, No. 33-20516, No. 33-
23446, No. 33-23948, No. 33-24220, No. 33-24575, No. 33-26923,
No. 33-49273 and No. 33-56987) and Form S-3 (SEC File No. 33-
33931 and No. 33-50115).
(24) Power of attorney.
(27) Financial data schedule.
(28) Information from reports furnished to state insurance
regulatory authorities.
(b) Reports on Form 8-K.
A Form 8-K Current Report dated January 26, 1995, was filed
relating to the announcement of The St. Paul's financial results
for the year ended December 31, 1994.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, The St. Paul Companies, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE ST. PAUL COMPANIES, INC.
----------------------------
(Registrant)
Date March 27, 1995 By /s/ Bruce A. Backberg
-------------- ---------------------
Bruce A. Backberg
Vice President and
Corporate Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of The St.
Paul Companies, Inc. and in the capacities and on the dates indicated.
Date March 27, 1995 By /s/ Douglas W. Leatherdale
-------------- --------------------------
Douglas W. Leatherdale,
Director, Chairman of the
Board, President and Chief
Executive Officer
Date March 27, 1995 By /s/ Patrick A. Thiele
-------------- ---------------------
Patrick A. Thiele, Director,
Executive Vice President and
Chief Financial Officer
Date March 27, 1995 By /s/ Howard E. Dalton
-------------- --------------------
Howard E. Dalton, Senior
Vice President and Chief
Accounting Officer
<PAGE>
Date March 27, 1995 By /s/ Michael R. Bonsignore
-------------- -------------------------
Michael R. Bonsignore*, Director
Date March 27, 1995 By /s/ John H. Dasburg
-------------- -------------------
John H. Dasburg*, Director
Date March 27, 1995 By /s/ W. John Driscoll
-------------- --------------------
W. John Driscoll*, Director
Date March 27, 1995 By /s/ Pierson M. Grieve
-------------- ---------------------
Pierson M. Grieve*, Director
Date March 27, 1995 By /s/ Ronald James
-------------- ----------------
Ronald James*, Director
Date March 27, 1995 By /s/ William H. Kling
-------------- --------------------
William H. Kling*, Director
Date March 27, 1995 By /s/ Bruce K. MacLaury
-------------- ---------------------
Bruce K. MacLaury*, Director
Date March 27, 1995 By /s/ Ian A. Martin
-------------- -----------------
Ian A. Martin*, Director
Date March 27, 1995 By /s/ Glen D. Nelson
-------------- ------------------
Glen D. Nelson*, Director
Date March 27, 1995 By /s/ Anita M. Pampusch
-------------- ---------------------
Anita M. Pampusch*, Director
Date March 27, 1995 *By /s/ Bruce A. Backberg
-------------- ---------------------
Bruce A. Backberg, Attorney-in-fact
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Shareholders
The St. Paul Companies, Inc.:
Under date of January 26, 1995, we reported on the consolidated balance
sheets of The St. Paul Companies, Inc. and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements of
operations, common shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1994, as contained in the 1994
annual report to shareholders. These consolidated financial statements and
our report thereon are incorporated by reference in the annual report on Form
10-K for the year 1994. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedules listed in the index in Item 14(a) 2. of said Form 10-K.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Notes 1 and 14 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," in
1993.
Also, as discussed in Notes 6 and 8 to the consolidated financial statements,
the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," and No. 106, "Accounting for Postretirement Benefits Other
Than Pensions," in 1992.
Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP
January 26, 1995 -------------------------
KPMG Peat Marwick LLP
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1994
(In thousands)
1994
----------------------------------
Amount at
which shown
in the
Cost* Value* balance sheet
-------- -------- -------------
Type of investment:
Fixed maturities:
United States Government and
government agencies and
authorities $ 2,202,765 $2,066,758 $ 2,066,758
States, municipalities and
political subdivisions 4,016,100 4,164,739 4,164,739
Foreign governments 697,083 682,709 682,709
Corporate securities 1,156,422 1,080,681 1,080,681
Mortgage-backed securities 841,003 833,797 833,797
---------- --------- ----------
Total fixed maturities 8,913,373 8,828,684 8,828,684
---------- ========= ----------
Equity securities:
Common stocks:
Public utilities 49,130 50,727 50,727
Banks, trusts and insurance
companies 26,894 26,825 26,825
Industrial, miscellaneous and
all other 424,825 453,490 453,490
---------- --------- ----------
Total equity securities 500,849 531,042 531,042
---------- ========= ----------
Venture capital 260,637 $ 330,032 330,032
---------- ========= ----------
Real estate 548,144** 528,144
Other investments 46,539 46,539
Short-term investments 898,081 898,081
---------- ----------
Total investments $11,167,623 $11,162,522
========== ==========
*See Notes 1, 3, 4 and 5 to the consolidated financial statements included
in The St. Paul's 1994 Annual Report to Shareholders.
** The cost of real estate represents the cost of the properties before
valuation provisions. (See Schedule V on page 30).
<PAGE>
THE ST. PAUL COMPANIES, INC. (Parent Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET INFORMATION
December 31, 1994 and 1993
(In thousands)
Assets
- ------ 1994 1993
-------- --------
Investment in subsidiaries $3,308,561 $3,555,191
Investments:
Fixed maturities 42,385 49,134
Equity securities 41,288 32,959
Short-term investments 5,040 2,478
Deferred income taxes 139,396 113,765
Notes and other receivables from subsidiaries 350 1,205
Other assets 46,579 31,920
--------- ---------
Total assets $3,583,599 $3,786,652
========= =========
Liabilities
- -----------
Debt $ 766,016 $ 717,056
Dividends payable to shareholders 31,549 29,634
Other liabilities 48,565 36,155
--------- ---------
Total liabilities 846,130 782,845
--------- ---------
Convertible preferred stock 146,102 147,608
Guaranteed obligation - PSOP (141,567) (148,929)
--------- ---------
Net convertible preferred stock 4,535 (1,321)
--------- ---------
Common Shareholders' Equity
- ---------------------------
Common stock, authorized 240,000 shares;
issued 84,202 shares (84,715 in 1993) 445,222 438,559
Retained earnings 2,362,286 2,082,832
Guaranteed obligation - ESOP (44,410) (56,005)
Unrealized appreciation of investments 13,948 588,844
Unrealized loss on foreign currency translation (44,112) (49,102)
--------- ---------
Total common shareholders' equity 2,732,934 3,005,128
--------- ---------
Total liabilities, preferred stock
and common shareholders' equity $3,583,599 $3,786,652
========= =========
See accompanying notes to condensed financial information.
<PAGE>
THE ST. PAUL COMPANIES, INC. (Parent Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF INCOME INFORMATION
Years Ended December 31, 1994, 1993 and 1992
(In thousands)
1994 1993 1992
------- ------- -------
Revenues:
Net investment income $ 4,470 $ 4,647 $ 7,174
Realized investment gains (losses) 4,240 5,551 (7,022)
Realized gain on sale of
minority interest in Nuveen - - 98,284
------- ------- -------
Total revenues 8,710 10,198 98,436
------- ------- -------
Expenses:
Interest expense 48,457 43,349 36,933
Administrative and other 21,312 25,403 22,575
------- ------- -------
Total expenses 69,769 68,752 59,508
------- ------- -------
Income (loss) before
income taxes (61,059) (58,554) 38,928
Income tax benefit (22,608) (24,977) (119,574)
------- ------- -------
Income (loss) before cumulative
effects of accounting changes (38,451) (33,577) 158,502
Cumulative effects of
accounting changes:
Income taxes - - (23,264)
Postretirement benefits - - (2,934)
------- ------- -------
Net income (loss) - Parent only (38,451) (33,577) 132,304
Equity in net income (loss)
of subsidiaries 481,279 461,186 (288,342)
------- ------- -------
Consolidated net income (loss) $442,828 $427,609 $(156,038)
======= ======= =======
See accompanying notes to condensed financial information.
<PAGE>
THE ST. PAUL COMPANIES, INC. (Parent Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS INFORMATION
Years Ended December 31, 1994, 1993 and 1992
(In thousands)
1994 1993 1992
------ ------ ------
Operating Activities:
Net income (loss) $ (38,451) $ (33,577) $ 132,304
Cash dividends from subsidiaries 210,523 208,333 109,788
Tax payments from subsidiaries 104,509 99,751 106,078
State and federal income tax payments (84,910) (83,200) (107,100)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Deferred tax benefit (19,660) (7,609) (109,994)
Realized gains (4,240) (5,551) (91,262)
Other 1,897 (14,205) 2,951
-------- -------- --------
Cash provided by operating activities 169,668 163,942 42,765
-------- -------- --------
Investing Activities:
Proceeds from sales and maturities
of investments 84,337 62,656 145,083
Purchases of investments (93,601) (61,614) (193,626)
Capital contributions to
subsidiaries (53,466) (75,136) (50,311)
Acquisitions (10,643) - -
Proceeds from sale of Nuveen shares - - 137,052
Other 14 1,356 (5,734)
-------- -------- --------
Cash provided by (used in)
investing activities (73,359) (72,738) 32,464
-------- -------- --------
Financing Activities:
Dividends paid to shareholders (136,062) (129,218) (126,067)
Issuance of debt 87,721 77,243 102,646
Repayment of debt (20,350) (51,735) (8,504)
Reacquired common shares (34,150) (207) (57,722)
Stock options exercised and other 6,532 12,713 14,418
-------- -------- --------
Cash used in financing activities (96,309) (91,204) (75,229)
-------- -------- --------
Change in cash - - -
Cash at beginning of year - - -
-------- -------- --------
Cash at end of year $ - $ - $ -
======== ======== ========
See accompanying notes to condensed financial information.
<PAGE>
THE ST. PAUL COMPANIES, INC. (Parent Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
1. The accompanying condensed financial information should be read in
conjunction with the consolidated financial statements and notes
included in The St. Paul's 1994 Annual Report to Shareholders.
2. Debt consists of the following (in thousands):
December 31,
-------------------
1994 1993
------ ------
Commercial paper $275,635 $201,384
Medium-term notes 204,433 210,780
Guaranteed PSOP debt (1) 141,567 148,929
9-3/8% notes 99,971 99,959
Guaranteed ESOP debt 36,112 47,223
Guaranteed ESOP debt (1) 8,298 8,781
------- -------
Total debt $766,016 $717,056
======= =======
(1) Eliminated in consolidation.
See Note 7 to the consolidated financial statements included in the 1994
Annual Report to Shareholders for further information on the debt
outstanding at Dec. 31, 1994.
The amount of debt, other than debt eliminated in consolidation, that
becomes due during each of the next five years is as follows: 1995 and
1996, $11.1 million; 1997, $386.7 million; 1998, $27.8 million; and
1999, $20.0 million.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
At December 31,
----------------------------------------------
Deferred Gross loss Other policy
policy and loss Gross claims and
acquisition adjustment unearned benefits
expenses expense reserves premiums payable
---------- --------------- -------- --------
1994
- ----
Property-Liability Insurance
Underwriting:
Fire and Marine:
Specialized Commercial $110,792 $3,209,219 $ 688,662 -
Personal & Business
Insurance 66,248 635,538 322,199 -
Medical Services 48,131 2,179,849 592,627 -
Commercial 46,658 1,232,685 211,771 -
------- --------- --------- -------
Total Fire and Marine 271,829 7,257,291 1,815,259 -
Reinsurance 40,318 1,912,028 192,861 -
International 12,211 254,110 101,050 -
------- --------- --------- -------
Total $324,358 $9,423,429 $2,109,170 -
======= ========= ========= =======
1993
- ----
Property-Liability Insurance
Underwriting:
Fire and Marine:
Specialized Commercial $106,584 $3,014,729 $ 595,960 -
Personal & Business
Insurance 66,048 648,343 312,128 -
Medical Services 44,951 2,229,728 552,165 -
Commercial 38,738 1,295,976 171,899 -
------- --------- --------- -------
Total Fire and Marine 256,321 7,188,776 1,632,152 -
Reinsurance 29,177 1,812,517 161,178 -
International 9,362 183,898 82,305 -
------- --------- --------- -------
Total $294,860 $9,185,191 $1,875,635 -
======= ========= ========= =======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III- - SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
<TABLE>
<CAPTION>
Insurance
losses Amortization
Net and loss of policy Other
<S> Premiums investment adjustment acquisition operating Premiums
1994 earned income expenses expenses expenses written
- ---- -------- --------- --------- ---------- -------- -------
Property-Liability
Underwriting:
Fire and Marine:
Specialized <C> <C> <C> <C> <C> <C>
Commercial $1,015,397 - $ 764,760 $252,577 $ 89,477 $1,085,514
Personal &
Business
Insurance 737,601 - 542,970 163,517 67,774 746,756
Medical
Services 638,413 - 369,571 109,517 38,848 689,716
Commercial 380,356 - 278,464 112,656 43,666 418,542
--------- ------- -------- ------- ------- --------
Total Fire
and Marine 2,771,767 - 1,955,765 638,267 239,765 2,940,528
Reinsurance 483,368 - 372,013 90,281 42,877 513,322
International 156,946 - 133,920 25,398 28,797 169,176
Net investment
income - $674,818 - - - -
Other - - - - 64,127 -
--------- ------- --------- ------- ------- ---------
Total $3,412,081 $674,818 $2,461,698 $753,946 $375,566 $3,623,026
========= ======= ========= ======= ======= =========
1993
- ----
Property-Liability
Insurance Underwriting:
Fire and Marine:
Specialized
Commercial $1,011,439 - $ 751,406 $263,138 $ 91,570 $1,000,255
Personal &
Business
Insurance 485,564 - 344,398 95,770 81,357 485,552
Medical Services 688,980 - 389,483 122,323 48,777 710,281
Commercial 418,635 - 311,688 144,606 19,721 379,827
--------- -------- --------- -------- ------- --------
Total Fire
and Marine 2,604,618 - 1,796,975 625,837 241,425 2,575,915
Reinsurance 395,008 - 327,696 74,026 38,152 431,242
International 178,712 - 179,067 32,274 30,042 171,388
Net investment
income - $646,396 - - - -
Other - - - - 53,211 -
--------- ------- --------- ------- ------- ---------
Total $3,178,338 $646,396 $2,303,738 $732,137 $362,830 $3,178,545
========= ======= ========= ======= ======= =========
1992
- ----
Property-Liability
Insurance Underwriting:
Fire and Marine:
Specialized
Commercial $1,050,936 - $ 868,570 $282,938 $ 77,583 $1,058,127
Personal &
Business
Insurance 341,902 - 271,050 96,141 38,013 350,236
Medical Services 722,172 - 403,990 134,442 40,471 712,021
Commercial 541,109 - 457,756 173,497 34,455 499,172
--------- ------- --------- ------- ------- ---------
Total Fire
and Marine 2,656,119 - 2,001,366 687,018 190,522 2,619,556
Reinsurance 361,093 - 558,305 79,950 37,194 343,045
International 126,034 - 130,375 22,337 21,159 179,818
Net investment
income - $642,301 - - - -
Other - - - 61,525 -
--------- ------- --------- ------- ------- ---------
Total $3,143,246 $642,301 $2,690,046 $789,305 $310,400 $3,142,419
========= ======= ========= ======= ======= =========
</TABLE>
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
Years Ended December 31, 1994, 1993 and 1992
(In thousands)
Percentage
Property-liability Ceded to Assumed of amount
insurance Gross other from other Net assumed to
premiums earned: amount companies companies amount net
- ----------------- ------ --------- --------- ------ ----------
1994 $3,296,215 594,121 709,987 3,412,081 20.8%
========= ======= ======= =========
1993 $3,021,203 523,491 680,626 3,178,338 21.4%
========= ======= ======= =========
1992 $3,027,243 545,502 661,505 3,143,246 21.0%
========= ======= ======= =========
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1994, 1993 and 1992
(In thousands)
Additions
--------------------
Balance at Charged to Charged to Balance
beginning costs and other at end
Description of year expenses accounts Deductions(1) of year
- ----------- --------- -------- -------- ----------- ------
1994
- ----
Real estate valuation
adjustment $10,000 10,000 - - 20,000
======= ====== ===== ====== ======
Allowance for uncollectible:
Agency loans $ 4,750 - - 3,086 1,664
======= ====== ===== ====== ======
Premiums receivable from:
Underwriting activities $22,218 2,373 - 3,653 20,938
======= ====== ===== ====== ======
Brokerage activities $19,069 820 - 360 19,529
======= ====== ===== ====== ======
Reinsurance $26,202 492 - 871 25,823
======= ====== ===== ====== ======
1993
- ----
Real estate valuation
adjustment $ - 10,000 - - 10,000
======= ====== ===== ====== ======
Allowance for uncollectible:
Agency loans $ 5,000 3,000 - 3,250 4,750
======= ====== ===== ====== ======
Premiums receivable from:
Underwriting activities $ 7,314 15,972 - 1,068 22,218
======= ====== ===== ====== ======
Brokerage activities $18,771 1,637 - 1,339 19,069
======= ====== ===== ====== ======
Reinsurance $32,768 2,947 - 9,513 26,202
======= ====== ===== ====== ======
1992
- ----
Oil and gas valuation
adjustment for ceiling
test write-down $65,636 - - 65,636 -
======= ====== ===== ====== =======
Allowance for uncollectible:
Agency loans $ 5,000 - - - 5,000
======= ====== ===== ====== =======
Premiums receivable from:
Underwriting activities $12,344 2,496 - 7,526 7,314
======= ====== ===== ====== =======
Brokerage activities $20,843 1,992 - 4,064 18,771
======= ====== ===== ====== =======
Reinsurance $13,708 21,508 - 2,448 32,768
======= ====== ===== ====== =======
(1)Deductions include write-offs of amounts determined to be uncollectible
and unrealized foreign exchange gains and losses.
<PAGE>
EXHIBIT INDEX*
-------------- How
Exhibit Filed
- ------- -----
(2) Plan of acquisition, reorganization, arrangement,
liquidation, or succession**..................................
(3) Articles of incorporation and by-laws***......................
(4) Instruments defining the rights of security holders,
including indentures
(a) Specimen Common Stock Certificate***......................
(b) Shareholder Protection Rights Agreement***................
(9) Voting trust agreements**.....................................
(10) Material contracts
(a) The Directors' Charitable Award Program...................(1)
(b) Compensation Arrangement with Mr. Nicholas M. Brown Jr...(1)
(c) Relocation Loan Payback Agreement with Mr. James F. Duffy.(1)
(d) Pension Service Agreement with Mr. Andrew I. Douglass.....(1)
(e) 1994 Stock Incentive Plan***..............................
(f) 1994 Annual Incentive Plan***.............................
(g) Long-Term Incentive Plan***...............................
(h) Non-Employee Director Stock Retainer Plan***..............
(i) Outside Directors' Retirement Plan***.....................
(j) Amended 1988 Stock Option Plan***.........................
(k) Restricted Stock Award Plan***............................
(l) Benefit Equalization Plan***..............................
(m) Special Severance Policy***...............................
(n) Deferred Management Incentive Awards Agreement
- Prime Rate*** .............................................
(o) Deferred Management Incentive Awards Agreement
- Phantom Stock***. .........................................
(p) Directors' Deferred Compensation Agreement
- Prime Rate*** .............................................
(q) Directors' Deferred Compensation Agreement
- Phantom Stock***. .........................................
(r) Alternative Long-Term Incentive Plan***...................
(s) Annual Incentive Plan***..................................
(t) Executive Post-Retirement Life Insurance Plan***..........
(u) Executive Excess Long-Term Disability Plan***.............
(11) Statement re computation of per share earnings..............(1)
(12) Statement re computation of ratios..........................(1)
(13) Annual report to security holders...........................(1)
(16) Letter re change in certifying accountant**.................
(18) Letter re change in accounting principles**.................
(21) Subsidiaries of the Registrant..............................(1)
(22) Published report regarding matters submitted to vote
of security holders**.........................................
(23) Consents of experts and counsel.............................(1)
(24) Power of attorney ..........................................(1)
(27) Financial data schedule ....................................(1)
(28) Information from reports furnished to state insurance
regulatory authorities........................................ P
(99) Additional exhibits**.......................................
* The exhibits are included only w ith the copies of this report
that are filed with the Securities and Exchange Commission.
However, copies of the exhibits may be obtained from The St.
Paul for a reasonable fee by writing to the Corporate
Secretary, The St. Paul Companies, Inc., 385 Washington
Street, St. Paul, Minnesota 55102.
** These items are not applicable.
***These items are incorporated by reference as described in Item
14(a)(3) of this report.
(1) Filed electronically.
P Filed on paper under cover of Form SE pursuant to Rule 311(c) of
Regulation S-T.
<PAGE>
EXHIBIT 10(a)
THE ST. PAUL COMPANIES, INC.
DIRECTORS CHARITABLE AWARD PROGRAM
1. PURPOSE OF THE PROGRAM
The St. Paul Companies, Inc. Directors Charitable Award
Program (the "Program") allows each eligible Director
of The St. Paul Companies, Inc. (the "Company") to
recommend that the Company make a donation of up to
$1,000,000 to the eligible tax-exempt organization(s)
(the "Donee(s)") selected by the Director, with the
donation to be made, in the Director's name, in ten
equal annual installments, with the first installment
to be made as soon as is practicable after the
Director's death. The purpose of the Program is to
recognize the interest of the Company and its Directors
in supporting worthy educational institutions and other
charitable organizations.
2. ELIGIBILITY
All persons serving as Directors of the Company as of
February 7, 1995, shall be eligible to participate in
the Program upon their completion of enrollment in the
Program. All Directors who join the Company's Board of
Directors after that date shall be immediately eligible
to participate in the Program upon election to the
Board and completion of enrollment in the Program.
3. RECOMMENDATION OF DONATION
When a Director becomes eligible to participate in the
Program, he or she shall make a written recommendation
to the Company, on a form approved by the Company for
this purpose, designating the Donee(s) which he or she
intends to be the recipient(s) of the Company donation
to be made on his or her behalf. A Director may revise
or revoke any such recommendation prior to his or her
death by signing a new recommendation form and
submitting it to the Company.
4. AMOUNT AND TIMING OF DONATION
Each eligible Director may choose one organization to
receive a Company donation of up to $1,000,000, or up
to four organizations to receive donations aggregating
up to $1,000,000. Each recommended organization must be
recommended to receive a donation
<PAGE>
of at least $100,000. The donation will be made by the
Company in ten equal annual installments, with the
first installment to be made as soon as is practicable
after the Director's death. If a
Director recommends more than one organization to
receive a donation, each will receive a prorated
portion of each annual installment. Each annual
installment payment will be divided among the
recommended organizations in the same proportions as
the total donation amount has been allocated among the
organizations by the Director.
5. DONEES
In order to be eligible to receive a donation, a
recommended organization must initially, and at the
time a donation is to be made, qualify to receive tax-
deductible donations under the Internal Revenue Code,
and be reviewed and approved by the Board Governance
Committee. A recommendation will be approved unless it
is determined, in the exercise of good faith judgment,
that a donation to the organization would be
detrimental to the best interests of the Company. A
Director's private foundation is not eligible to
receive donations under the Program. If an organization
recommended by a Director ceases to qualify as a Donee,
and if the Director does not submit a form to change
the recommendation before his or her death, the amount
recommended to be donated to the organization will
instead be donated to the Director's remaining
recommended qualified Donee(s) on a prorated basis. If
none of the recommended organizations qualify, the
donation will be made to the organization(s) selected
by the Company.
6. VESTING
The amount of the donation made on a Director's behalf
will be determined based on the Director's months of
Board service, in accordance with the following vesting
schedule:
VESTING DATE DONATION AMOUNT
------------ ---------------
Upon third anniversary of $200,000
date first elected a
director by shareholders
(Election Date)
Upon fourth anniversary $400,000
of Election Date
<PAGE>
VESTING DATE DONATION AMOUNT
------------ ---------------
Upon fifth anniversary of $600,000
Election Date
Upon sixth anniversary of $800,000
Election Date
Upon seventh anniversary Up to
of Election Date $1,000,000
Notwithstanding this vesting schedule, a Director will
be entitled to a donation amount of up to $1,000,000 in
the event (a) he or she dies or becomes disabled while
serving as a Director, (b) if not an employee of the
Company, he or she retires at the mandatory retirement
age for non-employee directors, or (c) if an employee
of the Company, he or she retires on or after his or
her normal retirement date.
For persons serving as Directors on February 7, 1995,
Board service prior to that date will count as vesting
service.
If a Director recommends more than one organization to
receive aggregate donations of up to $1,000,000, and if
the applicable vested donation amount is less than
$1,000,000, the actual donation amount will be divided
among those organizations in the same proportions as
the total donation amount has been allocated among the
organizations by the Director.
7. FUNDING AND PROGRAM ASSETS
The Company may fund the Program or it may choose not
to fund the Program. If the Company elects to fund the
Program in any manner, neither the Directors nor their
recommended Donee(s) shall have any rights or interests
in any assets of the Company identified for such
purpose. Nothing contained in the Program shall create,
or be deemed to create, a trust, actual or
constructive, for the benefit of a Director or any
Donee recommended by a Director to receive a donation,
or shall give, or be deemed to give, any Director or
recommended Donee any interest in any assets of the
Program or the Company. If the Company elects to fund
the Program through life insurance policies, a
participating Director agrees to cooperate and fulfill
the enrollment requirements necessary to obtain
insurance on his or her life.
8. AMENDMENT OR TERMINATION
The Board of Directors of the Company may, at any time,
without the consent of the Directors participating in
the Program, amend, suspend, or terminate the Program.
<PAGE>
9. ADMINISTRATION
The Program shall be administered by the Board
Governance Committee. The Committee shall have
authority, in its discretion, but subject to the
provisions of the Program, to prescribe, amend, and
rescind rules, regulations and procedures relating to
the Program. The determinations of the Committee on the
foregoing matters shall be conclusive and binding on
all interested parties.
10. GOVERNING LAW
The Program shall be construed and enforced according
to the laws of the State of Minnesota and all
provisions thereof shall be administered according to
the laws of said state.
11. EFFECTIVE DATE
The Program shall become effective when all Directors,
as of February 7, 1995, have completed the Program
enrollment requirements.
<PAGE>
EXHIBIT 10(b)
Compensation Arrangement with Mr. Nicholas M. Brown Jr.
-------------------------------------------------------
March 28, 1995
Mr. Nicholas M. Brown Jr.
5600 Bristol Lane
Minnetonka, MN 55343
Dear Nick,
This is to confirm the special arrangements, outside the
normal St. Paul benefit and executive compensation programs,
that we agreed to upon your joining The St. Paul in August
of 1993. From this point forward, the only such special
benefits to which you are entitled are as follows:
1. We will ensure that the amount of pension benefit
you receive from The St. Paul, when added to the pension
benefit you will receive from the Aetna, will be no less
than the pension benefit you would have received from the
Aetna had you remained employed at Aetna through the date of
the termination of your employment from St. Paul. We will calculate
this in the following manner:
a. First we will add together the pension benefits you
will be paid under the Aetna pension program with the
pension benefit you will receive through the St. Paul
pension program.
b. We will then calculate the amount that your pension
would have been from the Aetna, assuming a 7% annual
salary increase from the year you joined St. Paul
through the year of the termination of your employment
with St. Paul.
c. If a. is equal to or greater than b., we will not
pay you any additional pension benefit. However, if
b. is greater than a., we will pay you the
difference.
2. If, at any time between now and August 2, 1996, there
is any change in your reporting relationship to the CEO
or any change of your management responsibilities which
is unsatisfactory to you, and for that reason you decide
to terminate employment with The St. Paul Companies, or
The St. Paul terminates the relationship for any reason
other than malfeasance, you will be paid three times your
normal annual cash compensation.
You will, of course, continue in the benefit and
compensation arrangements that have been previously been
established for you. Going forward, you will participate in
all benefit and compensation programs available to an
executive in your office in accordance with the terms of
those programs.
<PAGE>
This supersedes any previous arrangements and understandings
we may have had with respect to such special benefit and
compensation programs. If you approve of this agreement,
please sign below. If you have any questions, please give
me a call.
Sincerely yours, Agreed to this 28th
St. Paul Fire and Marine day of March, 1995.
Insurance Company
By: /s/ Greg A. Lee /s/ Nicholas M. Brown Jr.
---------------- --------------------
Greg A. Lee Nicholas M. Brown Jr.
Senior Vice President Executive Vice President
Human Resources and Chief Operating
Officer
<PAGE>
EXHIBIT 10(c)
Relocation Loan Payback Agreement with Mr. James F. Duffy
---------------------------------------------------------
This agreement, dated May 23, 1994 is between St. Paul Fire
and Marine Insurance Company (the "Company") and James F.
Duffy (the "Employee").
Whereas, the Employee has accepted a job transfer from St.
Paul, Minnesota to New York, New York which has a higher
cost of living; and
Whereas the Company desires to assist the Employee in his
transition to New York, New York by providing the Employee
with an interest free relocation loan.
Now therefore, the parties hereto agree to the terms and
conditions as follows:
1. The company shall provide a relocation loan, without
interest, to the Employee in the amount of $325,000 and
00/100 Dollars ($325,000) (the "Loan Amount").
2.The Employee agrees to repay the loan in seven (7) equal
installments according to the following schedule:
February 1, 1995 Fifteen percent (15%) of the Loan Amount
February 1, 1996 Fifteen percent (15%) of the Loan Amount
February 1, 1997 Fifteen percent (15%) of the Loan Amount
February 1, 1998 Fifteen percent (15%) of the Loan Amount
February 1, 1999 Fifteen percent (15%) of the Loan Amount
February 1, 2000 Fifteen percent (15%) of the Loan Amount
February 1, 2001 Remainder of the outstanding balance
3.In the event of the nonpayment when due of any payment
due under this Agreement and if such default continues
for a period of thirty (30) days, then, at the option of
the Company, any or all of the outstanding Loan Amount
shall immediately become due and payable. The failure to
assert this right shall not be deemed a waiver.
4.In the event the Employee voluntarily terminates his
employment with the Company and its affiliated companies
prior to the payment in full of the loan, then, at the
option of the Company, the outstanding Loan Amount shall
immediately become due and payable. The failure to
assert this right shall not be deemed a waiver.
5.In the event of the Employee's involuntary termination
from the Company or an affiliated company, then, at the
option of the Company, the outstanding Loan Amount shall
immediately become due and payable. The failure to
assert this right shall not be deemed a waiver.
<PAGE>
6.This agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
/s/ James F. Duffy July 11, 1994
------------------ -------------
James F. Duffy
Accepted by:
St. Paul Fire and Marine Insurance Company
/s/ Greg Lee May 23, 1994
------------ ------------
Greg Lee
Senior Vice President-Human Resources
<PAGE>
EXHIBIT 10(d)
Pension Service Agreement with Mr. Andrew I. Douglass
-----------------------------------------------------
March 28, 1995
Mr. Andrew I. Douglass
810 Oakgreen Avenue North
Stillwater, MN 55082
Dear Andy:
This is to confirm the special arrangement, outside the
normal St. Paul benefit and executive compensation programs,
that we agreed to when you joined The St. Paul in August
1993. Pursuant to that arrangement, you will be given
credit under The St. Paul pension plan for your eight years
of service with Heller International Corporation. Although
we will not be able to credit that service under our
qualified plan, we will make the necessary arrangements on a
nonqualified basis.
To review a number of the compensation arrangements that have already
been put in place, you were paid an up-front bonus upon joining the
Company, your annual salary has been set at a mutually satisfactory
level and will be reviewed every March 1 as is the case for all officers,
you were granted options on 5,000 (post-split) shares in February of
1994, and you were awarded 4,000 (post-split) restricted shares shortly
after joining the Company.
We have also established that, on an ongoing basis, among other things,
you will participate in the Annual Incentive Award Plan with a maximum
annual opportunity of 50% of base salary, you will participate in the
Long-Term Incentive Plan for senior management, you will continue to
receive a benefit for executive tax/financial counseling service worth
$3,500 to $5,000 per year, and you are eligible for an annual Company-
paid physical exam by your personal physician.
You will, of course, continue in the benefit and
compensation arrangements that have previously been
established for you. Going forward, you will participate in
all benefit and compensation programs available to an
executive in your office in accordance with the terms of
those programs.
This supersedes any previous arrangements and understandings
we may have had with respect to such special benefit and
compensation programs. If you approve of this agreement,
please sign below. If you have any questions, please give
me a call.
Sincerely yours, Agreed to this 28th
The St. Paul Companies, Inc. day of March, 1995.
By: /s/ Greg A. Lee /s/ Andrew I. Douglass
---------------- ---------------------
Greg A. Lee Andrew I. Douglass
Senior Vice President Senior Vice President
Human Resources and General Counsel
<PAGE>
EXHIBIT 11
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings (Loss) Per Common Share
(In thousands, except per share amounts)
Twelve Months Ended
December 31,
------------------------------
1994 1993 1992
----- ----- -----
PRIMARY
Earnings (loss):
Net income (loss), as reported $442,828 $427,609 $(156,038)
Preferred dividends declared
(net of taxes) (8,448) (8,395) (8,349)
------- ------- -------
Net income (loss), as adjusted $434,380 $419,214 $(164,387)
======= ======= =======
Shares:
Weighted average number of common
shares outstanding 84,183 84,417 84,721
Additional dilutive effect of:
Outstanding stock options (based on
treasury stock method using average
market price) 633 799 -
------- ------- -------
Weighted average, as adjusted 84,816 85,216 84,721
======= ======= =======
FULLY DILUTED
Earnings (loss):
Net income (loss), as reported $442,828 $427,609 $(156,038)
Additional PSOP expense (net of taxes)
due to assumed conversion of
preferred stock (3,782) (4,080) -
Preferred dividends declared (net of taxes) - - (8,349)
------- ------- -------
Net income (loss), as adjusted $439,046 $423,529 $(164,387)
======= ======= =======
Shares:
Weighted average number of common
shares outstanding 84,183 84,417 84,721
Additional dilutive effect of:
Convertible preferred stock 4,073 4,106 -
Outstanding stock options (based on
treasury stock method using market
price at end of period) 811 946 -
------- ------- -------
Weighted average, as adjusted 89,067 89,469 84,721
======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE:
Primary $5.12 $4.92 $(1.94)
======= ======= =======
Fully diluted $4.93 $4.73 $(1.94)
======= ======= =======
<PAGE>
EXHIBIT 12
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Ratios
(In thousands, except ratios)
Twelve Months Ended
December 31,
---------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
EARNINGS (LOSS):
Income (loss) before
income taxes $563,578 $522,606 $(225,063) $528,061 $503,905
Add: fixed charges 62,718 65,633 70,897 65,045 60,148
Less: capitalized interest - - 4,580 3,571 6,935
------- ------- ------- ------- -------
Income (loss),
as adjusted $626,296 $588,239 $(158,746) $589,535 $557,118
======= ======= ======= ======= =======
FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS:
Fixed charges:
Interest costs $ 39,736 $ 40,921 $ 40,288 $ 39,275 $ 36,490
Rental expense (1) 22,982 24,712 30,609 25,770 23,658
------- ------- ------- ------- -------
Total fixed charges 62,718 65,633 70,897 65,045 60,148
Preferred stock dividends 18,337 18,488 18,395 18,451 17,285
------- ------- ------- ------- -------
Total fixed charges
and preferred stock
dividends $ 81,055 $ 84,121 $ 89,292 $ 83,496 $ 77,433
======= ======= ======= ======= =======
Ratio of earnings to
fixed charges (2) 9.99 8.96 - 9.06 9.26
======= ======= ======= ======= =======
Ratio of earnings to
combined fixed charges
and preferred
stock dividends (2) 7.73 6.99 - 7.06 7.19
======= ======= ======= ======= =======
1) Interest portion deemed implicit in total rent expense.
2) The 1992 loss was inadequate to cover "fixed charges" by $229.6
million, and "combined fixed charges and preferred dividends" by $248.0
million.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis
THE ST. PAUL REPORTS RECORD EARNINGS IN 1994
In a year marked by highly competitive market conditions in
the property-liability insurance industry, we achieved our
best underwriting result since 1988 and recorded our second
consecutive year of record earnings. Pretax earnings in 1994
were driven by our underwriting segment, where fundamental
improvements overcame catastrophe losses that were the third-
worst in our history. Our insurance brokerage operation,
Minet, continued to make progress in realigning its business
structure. And our investment in The John Nuveen Company was
once again profitable. However, functioning in a difficult
market environment in 1994, Nuveen experienced a decline in
earnings after its record results last year. In 1993, we
experienced a dramatic improvement in our underwriting and
insurance brokerage segments as we rebounded from 1992's
unprecedented catastrophe losses and a $365 million write-down
in Minet goodwill.
The following table provides a consolidated overview of our
results for the last three years:
Year Ended December 31
(In millions) 1994 1993 1992
---- ---- ----
Pretax earnings (loss):
Underwriting .......................... $561 $507 $81
Insurance brokerage ................... (10) (13) (433)
Investment banking-asset management ... 72 83 82
Parent company and
consolidating eliminations ........... (59) (54) 45
---- ---- ----
Pretax income (loss) ................. 564 523 (225)
Income tax expense ..................... 121 95 7
---- ---- ----
Net income (loss) before
accounting changes................... 443 428 (232)
Cumulative effects of
accounting changes .................... - - 76
---- ---- ----
Net income (loss) .................... $443 $428 $(156)
==== ==== ====
Per share* ........................... $4.93 $4.73 $(1.94)
==== ==== ====
*All per share amounts reflect the 2-for-1 stock split in 1994.
Net income of $443 million in 1994 was the highest annual
total in the company's history, surpassing last year's
previous record of $428 million. Net income in 1993 included
an income tax benefit of $15 million, or $0.17 per share,
resulting from the impact of an increase in the
<PAGE>
(GRAPHIC IMAGE NO. 1-
SEE APPENDIX)
statutory federal tax rate on our deferred tax asset. In 1992, our
net loss was reduced by an after-tax gain of $65 million from our
sale of a minority interest in The John Nuveen Company. Also
in 1992, we implemented two new Statements of Financial
Accounting Standards (SFAS) relating to income taxes and
postretirement benefits, which in total reduced our net loss
by $76 million.
Our operating earnings, which exclude after-tax realized
investment gains, were $414 million in 1994, compared with
earnings of $387 million in 1993 and a loss of $334 million in
1992.
Consolidated revenues increased 5% in 1994 to $4.7 billion,
reflecting the incremental impact of including the results of
Economy Fire & Casualty Company (Economy), acquired in August
1993, for a full year. In 1993, consolidated revenues were
level with 1992, as increases in earned premiums and
investment banking-asset management revenues were offset by a
sharp decline in realized gains.
The St. Paul's consolidated assets stood at $17.5 billion at
the end of 1994, compared with total assets of $17.1 billion
at year-end 1993. An $848 million decline in the carrying
value of our fixed maturity investment portfolio masked
underlying asset growth in 1994. We adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," as of Dec. 31, 1993, and began recording our
fixed maturity portfolio at estimated market value on our
balance sheet, with the corresponding unrealized appreciation,
net of taxes, recorded in common shareholders' equity. Fixed
maturity investments at the end of 1994 included $85 million
of unrealized depreciation. Our adoption of SFAS No. 115 had
no effect on net income or loss.
OPERATIONAL REVIEW
We operate in three industry segments - underwriting,
insurance brokerage and investment banking-asset management.
Our underwriting operation conducts business primarily under
the name St. Paul Fire and Marine (Fire and Marine), which is
our largest operation. Our two other underwriting operations
are Reinsurance (St. Paul Re) and International. Minet, based
in London, comprises our insurance brokerage segment. The John
Nuveen Company, of which we own 77%, is an investment banking-
asset management firm based in Chicago. On the pages that
follow, we will analyze the pretax results of these segments
for the last three years.
(GRAPHIC IMAGE NO. 2-
SEE APPENDIX)
<PAGE>
(GRAPHIC IMAGE NO. 3-
SEE APPENDIX)
UNDERWRITING RESULTS IMPROVE DESPITE COMPETITIVE MARKET
Consolidated written premiums of $3.6 billion in 1994 grew 14%
over 1993 premiums of $3.2 billion. Premium growth was
centered in Personal & Business Insurance, which included the
results for Economy for a full 12 months, and in Reinsurance,
due to price increases, higher retentions and new business. In
1993, premiums were level with 1992, as increases in Personal
& Business Insurance and Reinsurance were offset by a decline
in Commercial volume.
The following table provides a look at our consolidated GAAP
underwriting results and combined ratios for the last three
years and illustrates the fundamental improvement in
underwriting performance after factoring out the impact of
catastrophes in each year.
Year ended December 31
(Dollars in millions) 1994 1993 1992
---- ---- ----
Actual:
GAAP underwriting loss ................ $(113) $(150) $(567)
Combined ratio ........................ 102.3 104.5 117.8
Adjustment:
Catastrophe losses .................... $(105) $(62) $(305)
Impact on combined ratio .............. 3.1 1.9 9.7
---- ---- ----
Excluding catastrophe losses:
GAAP underwriting loss ................ $(8) $(88) $(262)
Combined ratio ........................ 99.2 102.6 108.1
---- ---- ----
In 1994, the California earthquake, winter ice storms and
summer hail storms ended the respite we enjoyed in 1993 from
major catastrophes. Hurricane Andrew was the most significant
catastrophe in 1992, severely impacting results in the
underwriting segment.
Reinsurance and Specialized Commercial were primary
contributors to the improvement in noncatastrophe underwriting
experience since 1992. In both operations, we have undertaken
a variety of pricing and underwriting actions designed to
reduce the volatility of underwriting results and ultimately
provide for a higher quality book of business. Our successful
efforts to restrain expense growth throughout the underwriting
segment have also played a major role in improved underwriting
results. Our underwriting expense ratio improved by 1.8 points
from 1993, due to improved organizational efficiency and the
<PAGE>
acquisition of Economy. We continued to restructure Fire and
Marine in 1994, an effort that began in 1993 with the goal of
creating a more efficient and customer-focused organization by
streamlining the processes by which we acquire business and
provide service to our customers. In 1993, we recorded
restructuring charges of $21 million, primarily consisting of
severance and relocation expenses. We incurred no additional
restructuring charges in 1994.
Pretax earnings in the underwriting segment of $561 million
increased 11% over 1993 income of $507 million, reflecting
improved underwriting results and increased investment income.
Pretax investment income totaled $675 million in 1994,
compared with $646 million and $642 million in 1993 and 1992,
respectively. The increase in 1994 reflected the inclusion of
Economy for a full year. For several years prior to 1994,
investment income levels were stagnant due to a sustained
period of falling interest rates.
UNDERWRITING RESULTS BY OPERATION - The following table
summarizes written premiums, underwriting results and combined
ratios for each of our underwriting operations for the last
three years. We made several reclassifications to 1993 and
1992 information to conform to our 1994 presentation. After
the table, we take a closer look at 1994 results and a look
ahead to 1995 for each operation.
% of 1994 Year Ended December 31
(Dollars in millions) Written Premiums 1994 1993 1992
---------------- ---- ---- ----
SPECIALIZED COMMERCIAL
Written premiums ............. 30% $1,086 $1,000 $1,058
Underwriting result .......... $(89) $(116) $(244)
Combined ratio ............... 107.1 111.9 123.2
PERSONAL & BUSINESS INSURANCE
Written premiums ............. 21% $747 $486 $350
Underwriting result .......... $(35) $(29) $(63)
Combined ratio ............... 104.6 105.8 117.7
MEDICAL SERVICES
Written premiums ............. 19% $690 $710 $712
Underwriting result .......... $118 $133 $152
Combined ratio ............... 80.3 80.0 78.6
COMMERCIAL
Written premiums ............. 11% $418 $380 $499
Underwriting result .......... $(54) $(58) $(123)
Combined ratio ............... 112.6 115.4 123.9
TOTAL ST. PAUL FIRE AND MARINE
Written premiums ........... 81% $2,941 $2,576 $2,619
Underwriting result ........ $(60) $(70) $(278)
Combined ratio ............. 101.0 102.6 110.5
REINSURANCE
Written premiums ............. 14% $513 $431 $343
Underwriting result .......... $(22) $(18) $(241)
Combined ratio ............... 105.1 103.1 166.3
INTERNATIONAL
Written premiums ............. 5% $169 $172 $180
Underwriting result .......... $(31) $(62) $(48)
Combined ratio ............... 117.6 135.9 132.1
TOTAL
Written premiums ........... 100% $3,623 $3,179 $3,142
Underwriting result ........ $(113) $(150) $(567)
Combined ratio:
Loss and loss expense ratio 72.1 72.5 85.6
Underwriting expense ratio. 30.2 32.0 32.2
----- ----- -----
Combined ratio............. 102.3 104.5 117.8
===== ===== =====
Combined ratio including
policyholders' dividends... 102.3 104.7 118.2
===== ===== =====
Figures are on a GAAP basis, except for combined ratios,
which are not derived from the GAAP financial statements.
<PAGE>
SPECIALIZED COMMERCIAL
Specialized Commercial includes a number of our businesses
that are organized according to market segments or along
product lines. Market segments served include Construction,
Technology, Financial Services, National Accounts and Public
Sector Services. Product lines include Surety, Ocean Marine,
Professional Liability, Surplus Lines and Special Property.
Specialized Commercial also includes the results of our
participation in insurance Pools.
WRITTEN PREMIUMS - Specialized Commercial written premiums
increased 9% in 1994 to $1.1 billion. Premium growth in 1994
was centered in Ocean Marine, Surplus Lines, Public Sector
Services and Special Property. In all of these sectors, new
business opportunities were available due to a decline in the
number of insurers writing these types of coverages. Ocean
Marine premiums of $94 million in 1994 increased $19 million
over 1993, and premium volume in Surplus Lines grew 45% in
1994 to $76 million. Public Sector Services experienced a $10
million increase in written premiums in 1994. In addition, our
increased participation in an industrial risk insurance pool
contributed to premium growth in Pools. In market sectors
characterized by high levels of competition, we experienced
little or no premium growth. Construction, the largest sector
of Specialized Commercial, posted 1994 written premiums of
$210 million, up slightly over 1993. National Accounts volume
declined 19% in 1994, and Technology written premiums were
down 6% from 1993. In 1993, Specialized Commercial premiums
were down 5% from 1992, primarily due to the conversion of
workers' compensation business to high deductible programs.
UNDERWRITING RESULT - Specialized Commercial's underwriting
loss of $89 million in 1994 was $27 million less than 1993's
loss of $116 million. The improvement in underwriting results
was centered in those business sectors where we experienced
premium growth. Ocean Marine posted an underwriting profit of
$8 million due to the effect of favorable development on
prior-year losses and new business. Special Property's
underwriting result improved $10 million compared with 1993,
as a result of improved current-year loss experience. In those
sectors where premium volume declined or was flat with 1993,
we experienced little or no improvement in bottom line
results. Construction's underwriting loss increased to $29
million in 1994, up from $21 million in 1993 as a result of
deterioration in loss experience. Technology's underwriting
result improved by $3 million over 1993. In 1993, Specialized
Commercial's underwriting result was $128 million better than
1992, primarily due to reduced losses on workers' compensation
coverages and improved loss experience in most business
sectors. Catastrophe losses did not have a major impact on
Specialized Commercial results in 1994, 1993 or 1992.
OUTLOOK FOR 1995 - We believe there is reasonable opportunity
for profitable growth in Specialized Commercial. We anticipate
that our Ocean Marine, Surplus Lines, Public Sector Services
and Special Property units will continue to experience growth
in 1995, assuming market conditions remain favorable. In
Construction, Technology, National Accounts, Financial
Services and Professional Liability, growth will be a
challenge, as we expect no improvement in the marketplace. Our
efforts in all of Specialized Commercial's businesses will
focus on new product development with the purpose of acquiring
new business by offering innovative coverages and superior
service to individual market sectors.
PERSONAL & BUSINESS INSURANCE
Personal & Business Insurance provides property-liability
insurance products for individuals and small-business owners.
For individuals, we offer a variety of monoline and package
coverages for personal property, such as homes and autos, and
personal liability. For small-business owners, we market
Package Accounts for Commercial Enterprises (PACE) policies
for offices, retailers and family restaurants.
WRITTEN PREMIUMS - Premiums written in Personal & Business
Insurance increased 54% over 1993. Volume in 1994 reflects a
full year of premiums produced by Economy, whereas 1993
included only four months of Economy premiums. Excluding the
impact of Economy in both years, premium volume in this
operation was down slightly from 1993. Premiums generated by
our primary package policy, PAK II, increased 12% in 1994 as a result
<PAGE>
of growth in the number of accounts. However, PACE
premium volume in 1994 declined 20% from 1993, reflecting the
intensely competitive market environment that persists for
small commercial accounts.
UNDERWRITING RESULT - The underwriting loss deteriorated to
$35 million in 1994, $6 million worse than 1993. Catastrophe
losses in 1994 masked underlying improvement in this
operation. Factoring out the impact of catastrophes, this
operation posted underwriting losses of $6 million, $20
million and $32 million in 1994, 1993 and 1992, respectively.
Our personal package and PACE sectors, largely unaffected by
catastrophes, experienced a combined $18 million improvement
in underwriting results in 1994. The underwriting expense
ratio for Personal & Business Insurance improved by 3.9 points
in 1994, reflecting the addition of Economy and the results of
our expense management and efficiency efforts. Underwriting
results in 1993 improved markedly over 1992 as a result of a
decline in catastrophe losses and Economy's underwriting
profit. Results in 1992 were severely impacted by catastrophe
losses associated with Hurricane Andrew.
OUTLOOK FOR 1995 - We expect the personal and small commercial
market environment to become increasingly competitive;
consequently, we will continue our aggressive efforts to
increase efficiency and reduce costs in Personal & Business
Insurance. Continuing the integration of Economy into our
existing business structure will remain a priority in 1995.
(GRAPHIC IMAGE NO. 4-
SEE APPENDIX)
MEDICAL SERVICES
Medical Services offers medical professional liability,
property and general liability insurance to the health care
delivery system. Products include coverages for health care
professionals (physicians and surgeons, dental professionals
and nurses), individual health care facilities and entire
systems, such as hospital networks and managed care systems.
Specialized claim and loss control services are also integral
components of Medical Services' insurance products. Medical
Services operates through four major market sectors -
Physicians and Surgeons, Health Care Facilities, Major
Accounts and Other Professionals. Medical Services is the
largest medical liability insurer in the United States, based
on written premium volume.
WRITTEN PREMIUMS - Medical Services' premium volume declined
3% in 1994 to $690 million. However, the number of Medical
Services' physician and surgeon policyholders increased 2%,
and the number of insured hospital beds increased 6%. The
decrease in premium volume in the face of those increases is
primarily due to an ongoing shift in our mix of business
toward our Major Accounts sector, where higher self-insured
retentions generate less written premiums. In 1993, written
premiums were level with 1992, as an increase in Major
Accounts volume was offset by declines in the Physicians and
Surgeons and Other Professional sectors.
UNDERWRITING RESULT - Medical Services' 1994 underwriting
profit of $118 million represented the fifth consecutive year
with a profit in excess of $100 million. The underwriting
profits in 1993 and 1992 were $133 million and $152 million,
respectively. Favorable prior-year loss experience was the
dominant factor in underwriting profits for all three years.
OUTLOOK FOR 1995 - New business initiatives and continued
profitability mark the outlook for Medical Services. Our new
business efforts will focus on building physicians and
surgeons professional liability market share in states in
which we either have not offered this coverage or have not
focused on developing significant market share. We expect to
continue our recent growth in coverages for the long-term care
industry, and we plan to capitalize on opportunities arising
from the consolidations, mergers and acquisitions that mark
the current evolving health care delivery system.
<PAGE>
COMMERCIAL
Commercial offers property and liability insurance to midsize
commercial enterprises. This includes coverages for specific
customer groups, such as museums and country clubs, as well as
coverages designed for specific regional needs. Business
coverages marketed include package, general liability,
umbrella liability, commercial auto and fire, inland marine
and workers' compensation.
WRITTEN PREMIUMS - All sectors in Commercial contributed to
this operation's 10% growth in 1994 premium volume. In the
three years prior to 1994, our Commercial premiums declined
sharply as a result of our efforts to reduce our exposures in
certain lines of business where loss experience had been
unacceptable, particularly workers' compensation coverages.
Having substantially changed the mix of our book of business
in 1993, we turned our attention in 1994 to acquiring new
business and completing the restructuring of our Commercial
operations. The ``middle market'' served by Commercial remains
intensely competitive, and as a result, premium growth in 1994
is more a reflection of new business than price increases. In
1993, premiums declined by 24% from 1992 due to reduced
workers' compensation business.
UNDERWRITING RESULT - Commercial's underwriting loss declined
slightly in 1994, to $54 million from $58 million in 1993.
Deterioration in loss experience for general liability
coverages was offset by improved results in workers'
compensation and inland marine and a decline in involuntary
costs. Catastrophe losses were not significant in 1994 or
1993. The underwriting expense ratio in Commercial was
slightly below 1993, an encouraging indication that our
efforts to streamline this operation are paying off with
bottom line results. The $58 million underwriting loss in 1993
was less than half the 1992 loss, primarily due to a decline
in catastrophe losses that severely impacted results in 1992.
OUTLOOK FOR 1995 - We will continue to pursue new business
opportunities in Commercial. Our challenge in growing this
business will be to maintain underwriting discipline in
evaluating new business. We believe the new structure of this
operation will allow us to maintain our favorable loss ratio
while we strive to reduce our expense ratio.
REINSURANCE
Our Reinsurance business operates under the name St. Paul Re,
which underwrites reinsurance from its New York and London
offices for North American and international property-
liability insurance companies. St. Paul Re obtains business
primarily through the broker or intermediary market, writing
both treaty and facultative reinsurance for property,
liability, ocean marine and certain specialty classes.
WRITTEN PREMIUMS - Reinsurance premiums increased 19% in 1994,
primarily due to the combined impact of price increases,
higher retentions and new business. Premium growth was
particularly strong for nonmarine treaty business written in
London, due to a favorable rate environment, which made new
business opportunities more attractive. Written premiums in
1993 increased 26% over 1992, primarily due to price increases
on most property reinsurance coverages. Severe worldwide
catastrophe losses in the early 1990s heightened the demand
for and led to increased rates on catastrophe reinsurance,
which contributed to our premium growth in both 1994 and 1993.
UNDERWRITING RESULT - The 1994 underwriting loss of $22
million was only slightly worse than the 1993 loss of $18
million, in spite of an $18 million increase in catastrophe
losses in 1994. Reinsurance experienced a $47 million loss
associated with the California earthquake in January 1994.
Excluding the impact of catastrophes in both years,
Reinsurance posted a profit of $21 million in 1994, compared
with a profit of $6 million in 1993. A favorable pricing
environment for most property reinsurance products over the
last two years, coupled with improving loss experience, has
resulted in a reduction in noncatastrophe underwriting losses.
Ocean Marine reinsurance results also contributed to the
improvement over 1993. In 1993, a significant decline in
catastrophe losses accounted for the marked turnaround in
underwriting results compared with 1992, when Hurricane Andrew
and a host of other weather-related disasters had a severe
impact on reinsurance results.
OUTLOOK FOR 1995 - We anticipate additional premium growth as
a result of our agreement in late 1994 to purchase the book of
international property-liability reinsurance from a
reinsurance underwriting subsidiary of the CIGNA Corporation.
We believe the opportunity for new and renewal accounts
offered by this book of business fits
<PAGE>
well with St. Paul Re's efforts to expand the scope of its
international operations. The incremental impact of this purchase on
1995 written premiums will depend on the extent to which existing business
is renewed and new business is developed. Our challenge in
1995 will be to maintain adequate pricing levels to avoid the
severe cyclical swings that have marked the reinsurance market
in recent years.
INTERNATIONAL
International includes primary insurance written outside the
United States, mainly in the United Kingdom, Canada, Spain and
the Republic of Ireland, and multinational accounts.
International offers a range of commercial and personal lines
products and services tailored to meet the unique needs of
customers located outside the United States.
WRITTEN PREMIUMS - International written premiums of $169
million in 1994 declined slightly from 1993. We undertook
steps in 1994 to improve the quality of our book of
international business, including changing the mix of our
business to focus more on commercial accounts and less on
personal coverages. Premium volume for commercial coverages
underwritten in the United Kingdom increased 31% in 1994,
while U.K. personal insurance premium volume declined 28% from
1993 levels, as we reduced the number of policies written on
high-risk motorists. Premiums written in Canada were level
with 1993. In 1993, premiums declined 5% from 1992, primarily
as a result of a decline in personal insurance volume in the
United Kingdom.
UNDERWRITING RESULT - The underwriting loss of $31 million in
1994 was half the 1993 loss, and the improvement spanned
virtually all major sectors of International. Underwriting
results in Canada were $13 million better than 1993, led by
improved current-year loss experience in general commercial
business. In the United Kingdom, both the commercial and
personal sectors made progress, posting a combined $14 million
improvement in underwriting results. In 1993, the underwriting
loss deteriorated to $62 million, from $48 million in 1992,
due to adverse loss development on commercial business written
in both Canada and the United Kingdom.
OUTLOOK FOR 1995 - Our plans include expanding both our
product lines and geographic coverage. In Canada, we will
pursue market share in several specialty niche markets, and in
the United Kingdom, new business initiatives will focus on
specific customer groups in both commercial and personal
market sectors. We plan to expand our international business
in Europe. Reducing underwriting losses in our existing
operations will be a priority in 1995.
(GRAPHIC IMAGE NO. 5-
SEE APPENDIX)
<PAGE>
(GRAPHIC IMAGE NO. 6-
SEE APPENDIX)
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Loss reserves constitute 64% of our consolidated liabilities.
We establish reserves that reflect our estimates of the total
losses and loss adjustment expenses we will ultimately have to
pay under insurance and reinsurance policies. These include
losses that have been reported but not settled and losses that
have been incurred but not yet reported to us (IBNR). Loss
reserves are established on an undiscounted basis after
reductions for deductibles and estimates of salvage and
subrogation. These reductions totaled $669 million, and $611
million at the end of 1994 and 1993, respectively.
For reported losses, we establish reserves on a "case"
basis within the parameters of coverage provided in the
related policy. For IBNR losses, we estimate reserves using
established actuarial methods. Our case and IBNR loss reserve
estimates reflect such variables as past loss experience,
social trends in damage awards, changes in judicial
interpretation of legal liability and policy coverages, and
inflation. We take into account not only monetary increases in
the cost of what we insure, but also changes in societal
factors that influence jury verdicts and case law and, in
turn, claim costs.
Due to the nature of many of the coverages we offer, which
involve claims that may not be settled for many years after
they are incurred, subjective judgments as to our ultimate
exposure to losses are an integral and necessary component of
our loss reserving process. We continually review our
reserves, using a variety of statistical and actuarial
techniques to analyze current claim costs, frequency and
severity data, and prevailing economic, social and legal
factors. We adjust reserves established in prior years as loss
experience develops and new information becomes available.
Adjustments to previously estimated reserves are reflected in
our financial results in the periods in which they are made.
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES (LAE) - The accompanying table presents a
reconciliation of beginning and ending consolidated loss
reserves for the last three years.
Year Ended December 31
(In millions) 1994 1993 1992
---- ---- ----
Loss and LAE reserves at beginning
of year, as reported .................. $9,185 $8,813 $8,246
Less reinsurance recoverables on
unpaid losses at beginning of year .... (1,545) (1,606) (1,558)
----- ----- -----
Net loss and LAE reserves
at beginning of year................. 7,640 7,207 6,688
Economy reserves at acquisition ........ - 280 -
Provision for losses and
LAE for claims incurred:
Current year ......................... 2,790 2,527 2,941
Prior years .......................... (328) (223) (251)
----- ----- -----
Total incurred....................... 2,462 2,304 2,690
Losses and LAE payments for
claims incurred:
Current year ......................... (667) (580) (708)
Prior years .......................... (1,566) (1,547) (1,452)
----- ----- -----
Total paid........................... (2,233) (2,127) (2,160)
Unrealized foreign exchange loss (gain) 21 (24) (11)
----- ----- -----
Net loss and LAE reserves
at end of year ...................... 7,890 7,640 7,207
Plus reinsurance recoverables on
unpaid losses at end of year ......... 1,533 1,545 1,606
----- ----- -----
Loss and LAE reserves at
end of year, as reported ........... $9,423 $9,185 $8,813
===== ===== =====
<PAGE>
In each of the years shown in the table, we have recorded
reductions in the loss provision for claims incurred in prior
years. This recurring favorable development on prior-year
losses runs contrary to the experiences of many of our peers
in the property-liability insurance industry. Prior-year
reserve strengthening has essentially become the industry norm
over the last several years, as changes in social, economic
and judicial factors and the emergence of pollution and
asbestos claims have increased the estimated costs of settling
insurance claims. A number of factors have contributed to our
divergence from industry norms. First, we write more medical
liability coverages than any of our peers, and that market has
experienced a relatively favorable claims environment for the
last seven years. Second, we have experienced a comparatively
lower amount of adverse development on pollution and asbestos
claim losses relative to our peers on commercial policies
written prior to 1985. Third, we believe that generally, our
reserving philosophy is more conservative than others in the
industry.
In all three years in the table, our Medical Services
operation accounted for a significant amount of the favorable
prior-year loss development. Our conservative reserving
philosophy in this operation has evolved over time and is the
product of many years of experience underwriting coverages in
this unique and often volatile market. The nature of medical
liability claims is such that changes in the frequency and
severity of claims can occur suddenly, but it can be several
years before we know how these changes will ultimately impact
us. Since 1987, the medical liability claims environment has
been favorable, but our response in terms of pricing and
(GRAPHIC IMAGE NO. 7-
SEE APPENDIX)
reserving has been cautious and gradual, since prior
experience in this line of business has shown that reserves
previously believed to be adequate can revert to deficiency in
a short period of time due to shifting trends in social, legal
and regulatory factors.
In 1994, we also experienced favorable prior-year loss
development in several of our Specialized Commercial business
sectors, particularly general liability and workers'
compensation coverages. Improvement in claim experience and
changes in economic, social and legal trends since reserves
were established caused us to reduce our estimate of the
ultimate cost of losses incurred in these sectors.
ENVIRONMENTAL POLLUTION AND ASBESTOS CLAIMS
Our 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. We have 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 our alleged liability for both pollution and asbestos
claims. In our opinion, court decisions in certain
jurisdictions have tended to expand insurance coverage beyond
the intent of the original policies.
Our 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 our 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 our
ultimate liability for asbestos claims is equally difficult.
The primary factors influencing our estimate of the total cost
of these claims are case law and a history of prior claim
development, both of which are still developing.
<PAGE>
Because of the significant uncertainties associated with
pollution and asbestos claims and the likelihood that they
will not be resolved in the near future, we are unable to
estimate our ultimate exposure to these claims and cannot
quantify a range of reasonably possible losses in addition to
recorded reserves. Consequently, our results of operations in
future periods may be materially impacted by these claims.
However, we believe it is unlikely that such claims will
materially impact our financial position or liquidity.
Prior to 1994, we made no specific allocation for pollution
or asbestos claims of our IBNR (incurred but not reported)
reserves, but rather identified reserves only for reported
claims (case reserves). In the third quarter of 1994, we
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 each of the
years in the three-year period ended Dec. 31, 1994. Amounts in
the ``net'' column are reduced by reinsurance.
1994 1993 1992
---- ---- ----
(In millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Pollution
Beginning reserves ...... $105 $73 $88 $62 $76 $55
Incurred losses ......... 71 56 32 22 30 20
IBNR allocation ......... 132 95 - - - -
Paid losses ............. (33) (24) (15) (11) (18) (13)
--- --- --- --- --- ---
Ending reserves ......... $275 $200 $105 $73 $88 $62
=== === === === === ===
At Dec. 31, 1994, approximately 70% of our total gross
pollution reserves represented reserves for claims on direct
business written in the United States by Fire and Marine. The
balance of our pollution reserves consisted of estimated
losses on reinsurance we have assumed.
Many significant pollution claims currently being brought
against insurance companies arise out of contamination that
occurred 20 to 30 years ago, a time frame during which Fire
and Marine's commercial book of business was largely composed
of small- to medium-size businesses without significant
exposure to pollution liability. In addition, we believe that
our current mix of domestic commercial business carries a
relatively low risk of significant pollution liability.
Finally, since 1970, our Commercial General Liability policy
form has included a specific pollution exclusion and, since
1986, the industry standard absolute pollution exclusion.
The following table represents a reconciliation of total
gross and net reserve development for asbestos claims for each
of the years in the three-year period ended Dec. 31, 1994:
1994 1993 1992
---- ---- ----
(In millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Asbestos
Beginning reserves ...... $62 $48 $70 $54 $65 $54
Incurred losses ......... 13 14 17 15 25 17
IBNR allocation ......... 127 95 - - - -
Paid losses ............. (17) (12) (25) (21) (20) (17)
--- --- --- --- --- ---
Ending reserves ......... $185 $145 $62 $48 $70 $54
=== === === === === ===
Most of the asbestos claims we have received pertain to
policies written prior to 1986. Since 1986, our Commercial
General Liability policy has used the industry standard
absolute pollution exclusion, which we believe applies to
asbestos claims.
Total gross pollution and asbestos reserves at Dec. 31,
1994, of $460 million represented approximately 5% of gross
consolidated reserves of $9.4 billion.
LEGAL MATTERS
In 1994, Fire and Marine was added as a defendant to
Weatherford Roofing Company, et al. vs. Employers National
Insurance Company, et al., a purported class action. The
plaintiffs claim (among other things) that approximately 300
insurance companies have overcharged customers for
retrospectively rated workers' compensation insurance in Texas
between 1987 and 1992. In the course of responding to the
complaint, we determined that in certain instances we made
charges in excess of the filed and approved regulated rates
for retrospectively rated workers' compensation insurance,
both in Texas and other states. We are in the process of
making refunds with interest in all affected states, and the
judge has approved the settlement of the Texas case.
Our results in 1994 include an accrual of approximately $45
million to cover substantially all of the costs of all such
premium refunds, interest and related expenses. The majority
of this accrual was recorded in our Specialized Commercial
operation.
<PAGE>
(GRAPHIC IMAGE NO. 8-
SEE APPENDIX)
INVESTMENTS
Our investment strategy mirrors our corporate philosophy -
maximizing shareholder return while maintaining financial
integrity. Our underwriting operations' investment portfolio
is dominated by fixed maturities. Our primary objective is to
maintain a widely diversified, high-quality portfolio
structured to maximize investment income while minimizing
credit risk. We manage the mix of portfolio maturities to
complement anticipated insurance loss pay-out patterns. We
also invest in other investment classes such as equity
securities, real estate and venture capital, which have the
potential for higher returns but also involve a greater degree
of risk, including uncertain rates of return and less
liquidity.
Funds to build our investment portfolio originate from
underwriting cash flows, which consist of the excess of
premiums collected over losses and expenses paid, and
investment cash flows, which consist of income on existing
investments and proceeds from sales and maturities of
investments. Our underwriting and investment cash flows have
been strong for the last several years, and, consequently, our
investment portfolio has continued to grow. However, a
sustained period of declining interest rates prior to 1994 has
resulted in stagnant investment income levels. Our
underwriting segment's pretax investment income in 1994 was
$675 million, compared with $646 million and $642 million in
1993 and 1992, respectively. The increase in 1994 was
primarily due to Economy (acquired in August 1993) being
included in our results for a full 12-month period.
We have limited involvement with derivative financial
instruments to hedge against fluctuations in interest rates,
equity security values and foreign currency values, and to
generate income. We do not participate in the derivatives
market for trading or speculative purposes.
<PAGE>
(GRAPHIC IMAGE NO. 9-
SEE APPENDIX)
The following table provides a look at the composition and
carrying value of our underwriting segment's investment
portfolio for the last three years, followed by more
information about each of the major investment classes.
December 31
(In millions) 1994 1993 1992
---- ---- ----
Fixed maturities ....................... $8,938 $9,249 $7,826
Equities ............................... 490 516 471
Real estate ............................ 528 489 435
Venture capital ........................ 330 298 231
Short-term investments ................. 342 269 213
Other investments ...................... 47 47 56
------ ------ -----
Total investments .................... $10,675 $10,868 $9,232
====== ====== =====
FIXED MATURITIES - This is the largest of our asset classes,
comprising 84% of total underwriting investments at the end of
1994. This portfolio primarily consists of high-quality,
intermediate-term taxable U.S. government, agency and
corporate bonds and tax-exempt U.S. municipal bonds. Taxable
bonds account for 54% of total fixed maturities, up from 50%
in 1993. Approximately 95% of our fixed maturities are rated
at investment-grade levels (BBB or better). The remainder of
the portfolio consists of nonrated securities, most of which,
in our opinion, would be considered investment-grade quality
if rated.
The carrying values for 1994 and 1993 in the foregoing table
represent market value, while 1992 is stated at amortized
cost. At the end of 1993, we classified our entire portfolio
as "available for sale" and marked it to market in accordance
with SFAS No. 115. At that time, with interest rates at a 20-
year low, the market value of our portfolio was $758 million
higher than its amortized cost. In 1994, as interest rates
took a sharp upward turn, this unrealized appreciation was
completely eroded, and the year-end 1994 carrying value is $78
million below amortized cost. A clearer picture of the real
growth in this investment class emerges when comparing the
amortized cost of these securities at the end of the last
three years: $9.0 billion in 1994, $8.5 billion in 1993 and
$7.8 billion in 1992. This represents a compound annual growth
rate of 7% over the last two years.
Despite these increases, fixed maturity investment income
for these years - $637 million in 1994, $618 million in 1993,
and $614 million in 1992 - has not grown at the same rate.
(The 1994 total includes the incremental impact of Economy.)
Declining yields available on new fixed maturity investments
relative to higher yields on maturing investments over the
last several years have prevented any meaningful investment
income growth. The upward turn in interest rates in 1994
affected only new investments and did not appreciably impact
investment income for the year.
EQUITIES - Our equity holdings account for 5% of the
underwriting segment's total investments and consist of a
diversified portfolio of common stocks. In 1994, we recorded
dividend income of $13 million on this portfolio, compared
with $12 million in both 1993 and 1992. Realized gains from
sales of equity securities totaled $20 million in 1994.
Comparable gains in 1993 and 1992 were $43 million and $62
million, respectively. This portfolio's carrying value at the
end of 1994 included $29 million of unrealized appreciation.
(GRAPHIC IMAGE NO. 10-
SEE APPENDIX)
<PAGE>
(GRAPHIC IMAGE NO. 11-
SEE APPENDIX)
REAL ESTATE - Our real estate holdings consist of direct and
joint venture equity investments, primarily in commercial
office and warehouse properties geographically distributed
around the United States. We do not have a portfolio of real
estate mortgage loans. In 1994, we recorded pretax investment
income of $28 million and experienced strong operational cash
flows from these properties.
VENTURE CAPITAL - This investment class consists of private
investments spanning a variety of industries, with a
particular concentration on information technology, health
care and retail firms. The carrying value of this portfolio at
year-end 1994 included $69 million of unrealized appreciation.
We recorded $18 million of realized gains from sales of
venture capital investments in 1994, compared with $24 million
in 1993. In 1992, we incurred a minimal realized loss on
venture capital sales.
OUTLOOK FOR 1995 - We expect the sharp upward move in interest
rates that occurred in 1994 will contribute to investment
income growth, as we make new investments at these higher
rates. There will be no major changes in our investment
strategy - taxable, investment-grade, intermediate-term
securities will still be our focus for new fixed maturity
purchases. We will begin investing directly in equity
securities issued by foreign corporations on a limited basis
in 1995.
INSURANCE BROKERAGE SHOWS MODEST IMPROVEMENT
Our insurance brokerage segment, Minet, provides insurance and
reinsurance broking and risk advisory services for major
corporations and large professional organizations worldwide.
In recent years, Minet's operating results have been
negatively impacted by excess capacity in worldwide insurance
markets and the increasing trend away from commissions and
toward fees as a basis of determining prices for services
performed. Minet's pretax loss of $10 million in 1994
represented a slight improvement over 1993's loss of $13
million. In 1992, Minet's pretax loss of $433 million was
driven by a $365 million goodwill write-down and a $39 million
provision for reorganization costs and other nonrecurring
charges.
Minet is engaged in retail, wholesale and reinsurance
broking on a worldwide basis. Retail brokers act on behalf of
organizations such as corporations and partnerships by
providing risk management advisory services and securing
insurance coverages. Wholesale brokers act on behalf of retail
brokers by procuring specialty insurance coverages.
Reinsurance brokers act as intermediaries to service the
reinsurance needs of insurers. Minet is a broker of
specialized coverages, such as professional indemnity,
directors and officers, financial institutions, energy,
technology and construction. Minet has focused its business on
specialty products and industries that have been successful in
the past or that have significant potential for success in the
future.
<PAGE>
Brokerage fees and commissions increased 7% to $316 million
in 1994, reflecting growth in Minet's reinsurance and
wholesale brokerage operations and additional revenues
contributed by several newly acquired specialty brokerage
firms. Expenses increased in 1994 as a result of the expansion
of retail specialty broking teams. In 1993, Minet's operating
expenses declined due to aggressive expense control measures
and integration efforts. During the past three years, we have
made $142 million in capital contributions to Minet to enhance
liquidity and facilitate the acquisition of several specialty
brokers.
Minet's reinsurance brokerage operation recorded an increase
in pretax earnings in 1994, driven by growth in brokerage fees
and commissions and investment income. Tightened capacity in
the worldwide reinsurance market, due to severe catastrophes
in the early 1990s, has resulted in increased demand for
Minet's reinsurance brokerage services. Retail and wholesale
brokerage operations also posted modestly improved results in
1994. However, Minet experienced a decline in earnings from
its Global Professional Services unit, which provides
brokerage and advisory services to the world's largest
accounting firms.
In 1993, Minet experienced a slight improvement over 1992
results, adjusted to remove the impact of one-time charges.
The goodwill write-down in 1992 occurred after we analyzed
our estimates of Minet's discounted future earnings and
concluded that our carrying value was significantly higher
than its estimated value. The write-down was a noncash charge
with no related tax benefit.
OUTLOOK FOR 1995 - We do not anticipate a favorable turn in
market conditions, and, as a result, our focus will remain on
developing new business opportunities in specialty market
niches where we have the expertise to offer value-added
services. We will pursue acquisitions that complement our
existing operations and continue to grow internally through
the addition of new specialty broker teams. In an environment
where revenue growth is a difficult challenge, expense
containment initiatives will remain a vital component of our
efforts to improve profitability.
(GRAPHIC IMAGE NO. 12-
SEE APPENDIX)
<PAGE>
INVESTMENT BANKING-ASSET MANAGEMENT PERFORMS WELL IN DIFFICULT
MARKET
The John Nuveen Company, in which we held a 77% interest at
year-end 1994, comprises our investment banking-asset
management segment. Nuveen markets tax-exempt open-end and
closed-end (exchange-traded) managed fund shares and provides
investment advice to and administers the business affairs of
its family of managed funds. Nuveen also underwrites and
trades municipal bonds and tax-exempt unit investment trusts
(UITs), and provides pricing and surveillance services to its
UITs. We sold a portion of our interest in Nuveen in May 1992.
Our consolidated results include Nuveen's earnings to the
extent of our ownership percentage. We realized a pretax gain
of $98 million and proceeds of $137 million on the minority
interest sale in 1992.
Rapidly rising interest rates, declining municipal new issue
volume and increased investor uncertainty resulting from the
increase in interest rates all combined to make 1994 one of
the most difficult markets since World War II for participants
in the municipal bond business. Nuveen's total revenues
declined 10% in 1994 to $220 million from $246 million in
1993. Revenues in 1992 were $221 million. Investment advisory
fees earned on managed assets increased slightly over 1993.
Distribution revenues fell by $23 million, or 70%, from 1993
due to the decline in the value of municipal bonds and UITs
held for future sale and the decline in new investment product
sales in 1994. The increase in 1993 revenues was driven by
growth in asset management fees.
Nuveen's sales of tax-exempt, exchange-traded funds in 1994
were $470 million, a significant decline from 1993 sales of
$4.0 billion and 1992 sales of $4.2 billion. In addition, UIT
sales declined, as did the underwriting and sales of municipal
securities as a result of the 44% decline during the year in
municipal new issue and refunding volume.
In this difficult and challenging environment, Nuveen's
pretax earnings in 1994 of $95 million were the third-best in
its history. Earnings in 1993 and 1992 were $112 million and
$98 million, respectively. Our portion of Nuveen's earnings in
each of those years was $72 million, $83 million and $82
million, respectively.
Total assets under Nuveen's management fell to $29.7 billion
at the end of 1994, compared with $32.7 billion at the end of
1993. The comparable 1992 total was $27.3 billion. The decline
in 1994 was primarily due to the reduction in the underlying
value of fund portfolio investments resulting from the rising
interest rate environment; sales of shares in all funds were
offset by redemptions of shares in mutual funds. In 1993,
growth in managed assets was largely the result of sponsoring
new tax-free investment products, and an increase in the value
of underlying municipal bond investments held by the various
funds.
CAPITAL RESOURCES
Our capital resources represent funds deployed or available to
be deployed to support our business operations and consist of
common shareholders' equity and debt outstanding. The
following table summarizes our capitalization at the end of
the last three years:
December 31
(In millions) 1994 1993 1992
---- ---- ----
Common shareholders' equity:
Common stock and retained earnings .... $2,808 $2,521 $2,203
Guaranteed obligation - ESOP .......... (45) (56) (68)
Unrealized appreciation of investments 14 589 64
Unrealized foreign
exchange gain (loss) ................. (44) (49) 3
----- ----- -----
Total common shareholders' equity .... 2,733 3,005 2,202
Debt ................................... 623 640 567
----- ----- -----
Total capitalization ................. $3,356 $3,645 $2,769
===== ===== =====
Ratio of debt to
total capitalization ................. 19% 18% 20%
===== ===== =====
<PAGE>
(GRAPHIC IMAGE NO. 13-
SEE APPENDIX)
Our total capitalization declined by nearly $300 million in
1994 despite our record earnings, primarily due to the
decrease in the carrying value of our fixed maturity holdings.
Rising interest rates in 1994 eroded our bond values, to the
extent that the unrealized appreciation on that portfolio
decreased $552 million (net of taxes) by the end of 1994. In
1993, total capitalization increased by over $800 million from
year-end 1992 as a result of strong earnings and the impact of
recording fixed maturities at market value.
Debt outstanding in 1994 declined slightly from 1993. A $74
million increase in commercial paper outstanding was more than
offset by a decline in short-term borrowings at Nuveen. We
issued $14 million of medium-term notes in 1994. We also
funded note maturities totaling $20 million. In 1993, debt
outstanding increased due to short-term borrowings by Nuveen.
In 1992, debt outstanding increased $80 million, primarily due
to the issuance of medium-term notes.
We may issue additional medium-term notes in 1995. At year-
end, we had the capacity to issue an additional $274 million
of debt under a $300 million shelf registration with the
Securities and Exchange Commission.
We repurchased and retired 860,000 of our outstanding common
shares in 1994 for a total cost of $34 million, which was
funded internally. We may engage in further stock repurchases
if we believe our stock is undervalued to the point that
repurchasing it will be consistent with our goal of enhancing
shareholder value.
In 1993, our major capital transaction consisted of the
purchase of Economy from Kemper Corporation for $395 million.
We paid $295 million in cash and contributed $100 million of
securities to the capital of Economy. This acquisition was
financed with internal funds.
In 1992, we repurchased and retired 1,585,000 shares of our
common stock (as adjusted for the 1994 stock split) for a
total cost of $58 million. We also completed construction of
Minet's office building in London and renovation of our
existing headquarters building in Saint Paul, Minn. The total
cost of these projects in 1992 was $43 million, which was
funded internally.
We anticipate that any major capital expenditures in 1995
would involve acquisitions of existing businesses; we have no
major capital improvements planned for 1995.
(GRAPHIC IMAGE NO. 14-
SEE APPENDIX)
(GRAPHIC IMAGE NO. 15-
SEE APPENDIX)
<PAGE>
LIQUIDITY
Liquidity refers to our ability to generate sufficient cash
flows to meet the short- and long-term cash requirements of
our business segments. The underwriting segment's short-term
cash needs primarily consist of funding insurance loss and
loss adjustment expense payments and day-to-day operating
expenses. Those needs are met through cash receipts from
operations, which consist primarily of insurance premiums
collected and investment income. Our investment portfolio is
also a source of liquidity, in the form of readily marketable
fixed maturities, common stocks and short-term investments.
Underwriting's net positive cash flows from operations are
used to build the investment portfolio and thereby increase
future investment income. Minet's primary source of
operational cash flows is insurance brokerage fees and
commissions, and Nuveen's operational cash flows originate
predominantly from asset management fees and product
distribution revenues.
Because of the nature of our underwriting operations, where
premiums are generally collected and invested before related
losses are paid, we believe our liquidity requirements beyond
1994 will be adequately funded by operational cash flows.
However, our financial strength and relatively conservative
level of debt provide us with the flexibility and capacity to
obtain funds externally through debt or equity financings.
Cash flows from operations totaled $899 million in 1994,
compared with $754 million in 1993 and $610 million in 1992.
Operating cash flows in each of our business segments improved
over 1993. In our underwriting segment, a decline in
underwriting losses and growth in investment income drove
operating cash flows to $884 million, an increase of $71
million over 1993.
In 1993, cash flows from operations grew over 1992 primarily
due to a decline in paid losses associated with catastrophes
and reinsurance recoveries on catastrophe losses incurred in
1992. Operational cash flows on a consolidated basis in each
of the last three years have been more than adequate to meet
the liquidity requirements for each of our business segments.
We are not aware of any current recommendations by
regulatory authorities that, if implemented, might have a
material impact on our liquidity, capital resources or
operations.
(GRAPHIC IMAGE NO. 16-
SEE APPENDIX)
<PAGE>
APPENDIX TO ITEM 7-NARRATIVE DESCRIPTION OF GRAPHIC IMAGES
CONTAINED IN PAPER FORMAT VERSION OF MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
-------------------------------------------------
GRAPHIC IMAGE NO. 1-Bar graph depicting Operating Earnings (Loss) per
Common Share for the years 1990 through 1994.
1990: $4.09
1991: $4.23
1992: ($4.04)
1993: $4.28
1994: $4.60
CAPTION: "The St. Paul generated record operating earnings
in 1994 for the second consecutive year. In 1992,
our operating loss was driven by record catastrophe
losses (including Hurricane Andrew) and a write-down
in the value of a subsidiary."
GRAPHIC IMAGE NO. 2-Bar graph depicting Return on Beginning Equity
for the years 1990 through 1994.
1990: 16.1%
1991: 17.0%
1992: --
1993: 17.2%
1994: 13.5%
CAPTION: "ROE is calculated by dividing operating earnings (less
preferred dividends) by common shareholders' equity
at the beginning of the year. Even though operating
earnings increased in 1994, ROE went down because 1994
beginning equity was higher due to the addition of
unrealized appreciation on our bond portfolio."
GRAPHIC IMAGE NO. 3-Photo depicting construction worker on girders
in building under construction.
CAPTION: "The St. Paul is a leading provider of insurance for the
construction industry. Through St. Paul Construction, we
underwrite property-liability coverages for contractors
throughout the United States. St. Paul Surety is the
second-largest U.S. underwriter of contract surety bonds
for contractors."
GRAPHIC IMAGE NO. 4-Bar graph depicting Underwriting Operations
Written Premiums for the years 1990 through 1994.
(In Billions)
1990: $3.1
1991: $3.2
1992: $3.1
1993: $3.2
1994: $3.6
CAPTION: "Our acquisition of Economy Fire & Casualty Company in
late 1993, along with growth in our Specialized Commercial,
Commercial and Reinsurance operations, were the chief
factors behind a 14% increase in premium volume over 1993."
<PAGE>
GRAPHIC IMAGE NO. 5-Photo depicting golf course.
CAPTION: "St. Paul Commercial's Eagle 3 policy is tailor-made to
meet the unique insurance needs of country clubs - one of
the targeted markets for Commercial."
GRAPHIC IMAGE NO. 6-Pie chart depicting Underwriting Operations
Premium Distribution in 1994.
Specialized Commercial 30%
Personal & Business Insurance 21%
Medical Services 19%
Commercial 11%
Reinsurance 14%
International 5%
CAPTION: "Our underwriting operations, which produced $3.6 billion
in written premiums in 1994, offer a wide range of
insurance products and services."
GRAPHIC IMAGE NO. 7-Bar graph depicting Underwriting Operations
Combined Ratio for the years 1990 through 1994.
1990 1991 1992 1993 1994
----- ----- ----- ----- -----
Loss Ratio 73.2 75.2 85.6 72.5 72.1
Expense Ratio 30.0 29.4 32.2 32.0 30.2
----- ----- ----- ----- -----
Combined Ratio 103.2 104.6 117.8 104.5 102.3
===== ===== ===== ===== =====
CAPTION: "Our underwriting combined ratio improved by 2.2 points in
1994. The combined ratio measures underwriting profit or
loss. The lower the combined ratio, the better the result."
GRAPHIC IMAGE NO. 8-Photo depicting manufacturing professional.
CAPTION: "St. Paul Technology provides property-liability insurance
for electronics manufacturing, medical technology, industrial
electronics machinery, synthetics manufacturing and information
technology firms."
GRAPHIC IMAGE NO. 9-Bar graph depicting Underwriting Operations Net
Investment Income for the years 1990 through 1994.
(In Millions)
1990: $629
1991: $641
1992: $642
1993: $646
1994: $675
CAPTION: "Investment income is a steady, reliable component of total
earnings."
<PAGE>
GRAPHIC IMAGE NO. 10-Pie chart depicting composition of Underwriting
Operations Investment Portfolio.
Fixed Maturities 84%
Equities 5%
Real Estate 5%
Venture Capital 3%
Short-term and
Other Investments 3%
CAPTION: "The obligation to pay claims when they come due drives the
portfolio mix, which is heavily weighted toward high-quality
bonds. At year-end 1994, the carrying value of our portfolio
was $10.7 billion."
GRAPHIC IMAGE NO. 11-Table depicting Bond Portfolio Ratings.
Rating Percent
------ -------
AAA 54%
AA 24%
A 14%
BBB 3%
Nonrated 5%
CAPTION: "Long-term fixed maturities comprised 84% of our underwriting
investments at year-end; 95% were rated at investment-
grade levels."
GRAPHIC IMAGE NO. 12-Photo depicting New York Stock Exchange.
CAPTION: "When the closing bell rings and the clamor on the floor of
the New York Stock Exchange subsides, St. Paul employees
have more than a passing interest in how "SPC" stock
performed that day. St. Paul employees now own 11 percent
of our stock - providing a link between investor and
employee interests."
GRAPHIC IMAGE NO. 13-Bar graph depicting Total Capitalization for
the years 1990 through 1994.
(In billions)
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Common Share-
holders' Equity $2.2 $2.5 $2.2 $3.0 $2.7
Debt 0.5 0.5 0.6 0.6 0.6
---- ---- ---- ---- ----
Total Capitalization $2.7 $3.0 $2.8 $3.6 $3.3
==== ==== ==== ==== ====
CAPTION: "Debt remains a relatively small percentage - at 19% -
of our total capitalization at year-end 1994. Capitalization
declined in 1994 due to the decrease in the value of our
bond portfolio."
GRAPHIC IMAGE NO. 14-Bar graph depicting Book Value per Common Share
for the years 1990 through 1994.
1990: $26.00
1991: $29.78
1992: $26.18
1993: $35.47
1994: $32.46
CAPTION: "Rising interest rates in 1994 eroded the appreciation on
our bond portfolio, which decreased common shareholders'
equity from $3.0 billion in 1993 to $2.7 billion, or $32.46
per share, in 1994."
<PAGE>
GRAPHIC IMAGE NO. 15-Table depicting Claims-paying Ratings as of
December 31, 1994.
Organization Rating
------------ ------
A.M. Best A+
Moody's Aa1
Standard & Poor's AAA
CAPTION: "The St. Paul's flagship company, St. Paul Fire and Marine,
has a long history of high ratings for claims-paying ability."
GRAPHIC IMAGE NO. 16-Bar graph depicting Dividends Paid per Common
Share for the years 1990 through 1994.
1990: $1.18
1991: $1.28
1992: $1.35
1993: $1.39
1994: $1.48
CAPTION: "Dividends are an important aspect of our total return to
investors. Our objective is to increase dividends on a
regular basis. We have paid a common share dividend for
123 consecutive years and increased dividends in 63 of
those years."
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
-----------------------
<TABLE>
<CAPTION>
The St. Paul Companies
ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
CONSOLIDATED
For the year ended December 31
(Dollars in thousands)
1994 1993 1992 1991 1990 1989
<S> ---- ---- ---- ---- ---- ----
FROM CONTINUING OPERATIONS <C> <C> <C> <C> <C> <C>
Revenues .............................. $4,701,285 $4,460,172 $4,498,692 $4,351,700 $4,005,237 $3,788,648
Operating earnings (loss) ............. 413,866 386,628 (333,791) 380,804 385,458 338,267
Income (loss) before cumulative
effects and extraordinary credit ..... 442,828 427,609 (232,521) 405,062 391,270 398,158
INVESTMENT ACTIVITY
Net investment income ................. 694,594 661,106 666,374 675,604 669,989 662,211
Realized investment gains (losses),
net of taxes ......................... 28,962 40,981 36,437 24,258 5,812 59,891
Change in unrealized appreciation
of investments, net of taxes* ........ (574,896) 525,175 (23,815) 55,093 (67,558) 60,045
OTHER SELECTED FINANCIAL DATA
(AS OF DECEMBER 31)
Total assets .......................... 17,495,820 17,149,196 15,392,054 14,744,717 13,907,293 12,734,411
Debt .................................. 622,624 639,729 566,717 486,779 473,829 293,802
Common shareholders' equity ........... 2,732,934 3,005,128 2,202,499 2,532,841 2,196,371 2,349,254
Common shares outstanding** ........... 84,202,417 84,714,676 84,118,554 85,042,484 84,468,058 98,607,762
PER COMMON SHARE DATA
Operating earnings (loss) ............. 4.60 4.28 (4.04) 4.23 4.09 3.45
Income (loss) before cumulative
effects and extraordinary credit ..... 4.93 4.73 (2.84) 4.50 4.16 4.06
Book value ............................ 32.46 35.47 26.18 29.78 26.00 23.82
Year-end market price ................. 44.75 44.94 38.50 36.44 31.38 29.57
Cash dividends declared ............... 1.50 1.40 1.36 1.30 1.20 1.10
OPERATING EARNINGS RETURN
ON BEGINNING EQUITY .................. 13.5% 17.2% - 17.0% 16.1% 16.8%
UNDERWRITING
For the year ended December 31
(Dollars in thousands) 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ----
Written premiums ...................... $3,623,026 $3,178,545 $3,142,419 $3,233,729 $3,052,032 $2,807,223
Statutory underwriting result ......... (143,317) (143,599) (557,463) (170,894) (141,751) (207,977)
GAAP underwriting result .............. (113,008) (150,255) (566,886) (163,782) (120,730) (196,378)
Net investment income ................. 674,818 646,396 642,301 640,856 629,242 614,119
Pretax operating earnings (loss) ...... 524,742 457,752 20,781 451,184 457,161 364,352
Pretax income (loss) .................. 560,709 507,181 81,132 486,063 466,731 456,167
Statutory combined ratio:
Loss and loss expense ratio .......... 72.1 72.5 85.6 75.2 73.2 75.7
Underwriting expense ratio ........... 30.2 32.0 32.2 29.4 30.0 30.5
----- ----- ----- ----- ----- -----
Combined ratio ....................... 102.3 104.5 117.8 104.6 103.2 106.2
Combined ratio including
policyholders' dividends ............. 102.3 104.7 118.2 105.0 104.2 106.6
*The change for 1993 includes the impact of adopting SFAS No. 115.
**All years presented reflect the effect of the 2-for-1 stock split
executed June 6, 1994.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The St. Paul Companies
ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA
CONSOLIDATED
For the year ended December 31
(Dollars in thousands)
1988 1987 1986 1985 1984
<S> ---- ---- ---- ---- ----
FROM CONTINUING OPERATIONS <C> <C> <C> <C>
Revenues .............................. $3,634,953 $3,358,918 $3,190,754 $2,762,126 $2,366,528
Operating earnings (loss) ............. 349,261 324,315 153,882 42,061 (196,794)
Income (loss) before cumulative
effects and extraordinary credit ..... 352,615 318,826 159,585 90,899 (192,850)
INVESTMENT ACTIVITY
Net investment income ................. 592,032 534,767 458,710 381,280 327,608
Realized investment gains (losses),
net of taxes ......................... 3,354 (5,489) 5,703 48,838 3,944
Change in unrealized appreciation
of investments, net of taxes* ........ 20,428 (19,959) (13,396) 3,317 (32,744)
OTHER SELECTED FINANCIAL DATA
(AS OF DECEMBER 31)
Total assets .......................... 11,997,989 9,712,307 8,669,598 7,861,877 6,176,745
Debt .................................. 417,140 96,576 344,299 750,876 126,932
Common shareholders' equity ........... 2,015,219 1,711,362 1,440,565 1,012,245 968,692
Common shares outstanding** ........... 92,728,168 92,603,714 92,495,700 80,200,900 80,179,892
PER COMMON SHARE DATA
Operating earnings (loss) ............. 3.63 3.38 1.67 .52 (2.45)
Income (loss) before cumulative
effects and extraordinary credit ..... 3.66 3.34 1.77 1.17 (2.63)
Book value ............................ 21.73 18.48 15.57 12.62 12.08
Year-end market price ................. 21.75 23.00 20.13 19.97 13.41
Cash dividends declared ............... 1.00 .88 .75 .75 .75
OPERATING EARNINGS RETURN
ON BEGINNING EQUITY .................. 20.4% 22.5% 15.2% 4.3% -
UNDERWRITING
For the year ended December 31
(Dollars in thousands) 1988 1987 1986 1985 1984
Written premiums ...................... $2,690,536 $2,704,165 $2,556,425 $2,234,910 $1,894,355
Statutory underwriting result ......... (92,741) (145,061) (265,105) (460,306) (574,447)
GAAP underwriting result .............. (90,209) (127,066) (275,184) (408,755) (572,542)
Net investment income ................. 548,766 498,251 431,594 366,687 313,395
Pretax operating earnings (loss) ...... 420,339 358,493 142,532 (58,387) (261,134)
Pretax income (loss) .................. 424,187 351,358 151,552 31,674 (254,332)
Statutory combined ratio:
Loss and loss expense ratio .......... 73.6 76.2 82.0 91.3 99.4
Underwriting expense ratio ........... 30.0 28.9 27.9 28.5 30.9
----- ----- ----- ----- -----
Combined ratio ....................... 103.6 105.1 109.9 119.8 130.3
Combined ratio including
policyholders' dividends ............. 104.0 105.3 110.5 120.8 131.0
*The change for 1993 includes the impact of adopting SFAS No. 115.
**All years presented reflect the effect of the 2-for-1 stock split
executed June 6, 1994.
</TABLE>
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
SCOPE OF RESPONSIBILITY - Management prepares the accompanying
financial statements and related information and is responsible for
their integrity and objectivity. The statements were prepared in
conformity with generally accepted accounting principles. These
financial statements include amounts that are based on management's
estimates and judgments, particularly our reserves for losses and loss
adjustment expenses. We believe that these statements present fairly
the company's financial position and results of operations and that
the other information contained in the annual report is consistent
with the financial statements.
INTERNAL CONTROLS - We maintain and rely on a system of internal
accounting controls designed to provide reasonable assurance that
assets are safeguarded and transactions are properly authorized and
recorded. We continually monitor these internal accounting controls,
modifying and improving them as business conditions and operations
change. Our internal audit department also independently reviews and
evaluates these controls. We recognize the inherent limitations in all
control systems and believe that our systems provide an appropriate
balance between the costs and benefits desired. We believe our systems
of internal accounting controls provide reasonable assurance that
errors or irregularities that would be material to the financial
statements are prevented or detected in the normal course of business.
INDEPENDENT AUDITORS - Our independent auditors, KPMG Peat Marwick
LLP, have audited the consolidated financial statements. Their audit
was conducted in accordance with generally accepted auditing
standards, which includes the consideration of our internal controls
to the extent necessary to form an independent opinion on the
consolidated financial statements prepared by management.
AUDIT COMMITTEE - The audit committee of the board of directors,
composed solely of outside directors, oversees management's discharge
of its financial reporting responsibilities. The committee meets
periodically with management, our internal auditors and
representatives of KPMG Peat Marwick LLP to discuss auditing,
financial reporting and internal control matters. Both internal audit
and KPMG Peat Marwick LLP have access to the audit committee without
management's presence.
CODE OF CONDUCT - We recognize our responsibility for maintaining a
strong ethical climate. This responsibility is addressed in the
company's written code of conduct.
/s/ Douglas W. Leatherdale /s/ Howard E. Dalton
-------------------------- --------------------
Douglas W. Leatherdale Howard E. Dalton
Chairman, President and Senior Vice President
Chief Executive Officer Chief Accounting Officer
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
THE ST. PAUL COMPANIES, INC.:
We have audited the accompanying consolidated balance sheets of The
St. Paul Companies, Inc. and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of operations, common
shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1994. These consolidated
financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of The St. Paul Companies, Inc. and subsidiaries at December 31, 1994
and 1993, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Notes 1 and 14 to the consolidated financial
statements, the company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts," in 1993.
Also, as discussed in Notes 6 and 8 to the consolidated financial
statements, the company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," and No. 106,
"Accounting for Postretirement Benefits Other Than Pensions," in
1992.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 26, 1995
<PAGE>
The St. Paul Companies
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
REVENUES
Premiums earned ........................$3,412,081 $3,178,338 $3,143,246
Net investment income .................. 694,594 661,106 666,374
Insurance brokerage fees
and commissions ...................... 303,152 283,680 280,836
Investment banking-asset management .... 211,789 241,730 218,825
Realized investment gains .............. 41,974 58,254 57,451
Realized gain on sale of minority
interest in Nuveen ................... - - 98,284
Other .................................. 37,695 37,064 33,676
--------- --------- ---------
Total revenues .................... 4,701,285 4,460,172 4,498,692
--------- --------- ---------
EXPENSES
Insurance losses and loss
adjustment expenses .................. 2,461,698 2,303,738 2,690,046
Policy acquisition expenses ............ 753,946 732,137 789,305
Operating and administrative ........... 922,063 901,691 879,404
Write-down of goodwill ................. - - 365,000
--------- --------- ---------
Total expenses .................... 4,137,707 3,937,566 4,723,755
--------- --------- ---------
Income (loss) before income taxes . 563,578 522,606 (225,063)
Income tax expense (benefit):
Federal current ...................... 151,347 148,508 109,740
Other ................................ (30,597) (53,511) (102,282)
--------- --------- ---------
Total income tax expense .......... 120,750 94,997 7,458
--------- --------- ---------
Income (loss) before cumulative
effects of accounting changes .... 442,828 427,609 (232,521)
Cumulative effects of
accounting changes:
Income taxes ........................ - - 126,047
Postretirement benefits ............. - - (49,564)
--------- --------- ---------
Net Income (Loss) ................. $442,828 $427,609 $(156,038)
========= ========= =========
PRIMARY EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before cumulative
effects of accounting changes ........ $5.12 $4.92 $(2.84)
Cumulative effects of
accounting changes:
Income taxes ........................ - - 1.49
Postretirement benefits ............. - - (0.59)
--------- --------- ---------
Net Income (Loss) ................. $5.12 $4.92 $(1.94)
========= ========= =========
FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE
Income (loss) before cumulative
effects of accounting changes ........ $4.93 $4.73 $(2.84)
Cumulative effects of
accounting changes:
Income taxes ........................ - - 1.49
Postretirement benefits ............. - - (0.59)
--------- --------- ---------
Net Income (Loss) ................. $4.93 $4.73 $(1.94)
========= ========= =========
See notes to consolidated financial statements.
<PAGE>
The St. Paul Companies
CONSOLIDATED BALANCE SHEETS
December 31
(In thousands) 1994 1993
---- ----
ASSETS
Investments:
Fixed maturities ............................... $8,828,684 $9,147,964
Equities ....................................... 531,042 548,682
Real estate .................................... 528,144 488,691
Venture capital ................................ 330,032 297,982
Other investments .............................. 46,539 47,834
Short-term investments ......................... 898,081 725,261
---------- ----------
Total investments ............................. 11,162,522 11,256,414
Cash ............................................. 46,664 25,420
Investment banking inventory securities .......... 148,031 305,804
Reinsurance recoverables:
Unpaid losses .................................. 1,533,250 1,545,026
Paid losses .................................... 88,900 94,437
Receivables:
Underwriting premiums .......................... 1,107,788 1,008,034
Insurance brokerage activities ................. 891,823 805,209
Interest and dividends ......................... 182,938 174,852
Other .......................................... 88,657 105,513
Deferred policy acquisition expenses ............. 324,358 294,860
Ceded unearned premiums .......................... 255,687 238,633
Deferred income taxes ............................ 790,508 425,012
Office properties and equipment .................. 477,570 455,861
Goodwill ......................................... 279,308 284,276
Other assets ..................................... 117,816 129,845
---------- ----------
Total Assets .................................. $17,495,820 $17,149,196
========== ==========
LIABILITIES
Insurance reserves:
Losses and loss adjustment expenses ............ $9,423,429 $9,185,191
Unearned premiums .............................. 2,109,170 1,875,635
---------- ----------
Total insurance reserves ...................... 11,532,599 11,060,826
Debt ............................................. 622,624 639,729
Payables:
Insurance brokerage activities ................. 1,191,089 1,083,845
Reinsurance premiums ........................... 155,833 138,150
Income taxes ................................... 183,659 162,645
Accrued expenses and other ..................... 600,211 593,205
Other liabilities ................................ 472,336 466,989
---------- ----------
Total Liabilities ............................. 14,758,351 14,145,389
---------- ----------
Convertible preferred stock ...................... 146,102 147,608
Guaranteed obligation - PSOP ..................... (141,567) (148,929)
---------- ----------
Net Convertible Preferred Stock ............... 4,535 (1,321)
---------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock ..................................... 445,222 438,559
Retained earnings ................................ 2,362,286 2,082,832
Guaranteed obligation - ESOP ..................... (44,410) (56,005)
Unrealized appreciation of investments ........... 13,948 588,844
Unrealized loss on foreign currency translation .. (44,112) (49,102)
---------- ----------
Total Common Shareholders' Equity ............. 2,732,934 3,005,128
---------- ----------
Total Liabilities, Preferred Stock
and Common Shareholders' Equity ............. $17,495,820 $17,149,196
========== ==========
See notes to consolidated financial statements.
<PAGE>
The St. Paul Companies
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
COMMON SHAREHOLDERS' EQUITY
Common stock:
Beginning of year .................... $438,559 $422,249 $414,257
Stock issued under stock option
and other incentive plans ........... 11,130 16,334 15,862
Reacquired common shares ............. (4,467) (24) (7,870)
--------- --------- ---------
End of year ....................... 445,222 438,559 422,249
--------- --------- ---------
Retained earnings:
Beginning of year .................... 2,082,832 1,781,113 2,108,923
Net income (loss) .................... 442,828 427,609 (156,038)
Dividends declared on common stock,
$1.50 per share in 1994 ($1.40 in
1993 and $1.36 in 1992) ............. (124,921) (116,962) (113,478)
Dividends declared on preferred
stock, net of taxes ................. (8,448) (8,395) (8,349)
Reacquired common shares ............. (30,005) (533) (49,945)
--------- --------- ---------
End of year ....................... 2,362,286 2,082,832 1,781,113
--------- --------- ---------
Guaranteed obligation - ESOP:
Beginning of year .................... (56,005) (67,452) (78,564)
Principal payments ................... 11,595 11,447 11,112
--------- --------- ---------
End of year ....................... (44,410) (56,005) (67,452)
--------- --------- ---------
Unrealized appreciation of
investments, net of taxes:
Beginning of year .................... 588,844 63,669 87,484
Change for the year .................. (574,896) 23,193 (23,815)
Change due to adoption of SFAS No. 115 - 501,982 -
--------- --------- ---------
End of year ....................... 13,948 588,844 63,669
--------- --------- ---------
Unrealized gain (loss) on foreign
currency translation, net of taxes:
Beginning of year .................... (49,102) 2,920 741
Change for the year .................. 4,990 (52,022) 2,179
--------- --------- ---------
End of year ....................... (44,112) (49,102) 2,920
--------- --------- ---------
Total Common Shareholders' Equity .$2,732,934 $3,005,128 $2,202,499
========= ========= =========
See notes to consolidated financial statements.
<PAGE>
The St. Paul Companies
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
OPERATING ACTIVITIES
Underwriting:
Net income ........................... $452,756 $423,109 $218,261
Adjustments:
Change in net insurance reserves .... 445,791 204,423 515,202
Change in underwriting
premiums receivable ............... (89,147) 89,441 64,336
Deferred tax benefit ................ (36,085) (48,976) (113,435)
Cumulative effects of
accounting changes ................ - - (99,092)
Realized gains ...................... (35,967) (49,429) (60,351)
Other ............................... 146,886 194,990 108,611
------- ------- -------
Total underwriting ................ 884,234 813,558 633,532
------- ------- -------
Insurance brokerage:
Net loss ............................. (19,571) (24,710) (442,830)
Adjustments:
Change in premium balances .......... 4,303 (20,718) 3,768
Change in accounts payable
and accrued expenses .............. (19,334) (8,985) 9,732
Depreciation and goodwill
amortization ...................... 23,948 20,233 33,717
Write-down of goodwill .............. - - 365,000
Other ............................... 9,749 (2,833) (8,308)
------- ------- -------
Total insurance brokerage ......... (905) (37,013) (38,921)
------- ------- -------
Investment banking-asset management:
Net income ........................... 44,196 52,103 49,653
Adjustments:
Change in inventory securities ...... 156,823 (79,472) 5,150
Change in short-term borrowings ..... (80,383) 60,383 (2,000)
Change in short-term investments .... (94,968) (17,048) 5,928
Change in open security transactions 10,879 (3,143) (4,562)
Other ............................... 21,051 8,872 18,960
------- ------- -------
Total investment banking-
asset management ................. 57,598 21,695 73,129
------- ------- -------
Parent company and consolidating
eliminations:
Net income (loss) .................... (34,553) (22,893) 18,878
Realized gains ....................... (4,240) (8,825) (95,384)
Other adjustments .................... (2,919) (12,672) 18,316
------- ------- -------
Total parent company and
consolidating eliminations ....... (41,712) (44,390) (58,190)
------- ------- -------
Net Cash Provided by
Operating Activities ............. 899,215 753,850 609,550
------- ------- -------
INVESTING ACTIVITIES
Purchases of investments ...............(2,087,104) (2,484,731) (2,315,872)
Proceeds from sales and
maturities of investments ............ 1,465,668 1,954,206 1,721,498
Change in short-term investments ....... (40,922) 151,213 14,769
Change in open security transactions ... (6,156) 56,463 (15,443)
Net purchases of office
properties and equipment ............. (66,564) (47,210) (100,695)
Purchase of Economy Fire & Casualty,
net of cash acquired ................. - (274,561) -
Proceeds from sale of Nuveen shares .... - - 137,052
Other .................................. (20,530) (28,866) 8,540
------- ------- -------
Net Cash Used in
Investing Activities ............. (755,608) (673,486) (550,151)
------- ------- -------
FINANCING ACTIVITIES
Dividends paid on common
and preferred stock .................. (136,062) (129,218) (126,067)
Proceeds from issuance of debt ......... 94,194 77,243 102,646
Repayment of debt ..................... (20,350) (51,735) (8,504)
Repurchase of common shares ............ (34,150) (207) (57,722)
Other .................................. (26,855) 23,929 32,784
------- ------- -------
Net Cash Used in
Financing Activities ............. (123,223) (79,988) (56,863)
------- ------- -------
Effect of exchange rate changes on cash 860 (1,604) (55)
Increase (Decrease) in Cash ....... 21,244 (1,228) 2,481
------- ------- -------
Cash at beginning of year .............. 25,420 26,648 24,167
------- ------- -------
Cash at End of Year ............... $46,664 $25,420 $26,648
======= ======= =======
See notes to consolidated financial statements.
<PAGE>
The St. Paul Companies
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HOW WE PREPARE OUR FINANCIAL STATEMENTS
The following summary explains the accounting policies we use to
arrive at some of the more significant amounts in our financial
statements.
GAAP - We prepare our financial statements in accordance with
generally accepted accounting principles (GAAP). We follow the
accounting standards established by the Financial Accounting Standards
Board and the American Institute of Certified Public Accountants.
CONSOLIDATION - We combine our financial statements with those of our
subsidiaries and present them on a consolidated basis. The
consolidated financial statements do not include the results of
material transactions between us and our subsidiaries or among our
subsidiaries. We record the results of our insurance brokerage and
foreign underwriting operations on a one-quarter lag.
RECLASSIFICATIONS - We reclassified some figures in our 1993 and 1992
financial statements and notes to conform with the 1994 presentation.
These reclassifications had no effect on net income or loss, or common
shareholders' equity, as previously reported for those years.
STOCK SPLIT - In June 1994, we executed a 2-for-1 stock split. All
references in these financial statements and related notes to per-
share amounts and to the number of shares of common stock reflect the
effect of this stock split on all periods presented.
INFORMATION ABOUT OUR INVESTMENTS
METHOD FOR VALUING INVESTMENTS - We implemented Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" as of Dec. 31, 1993. We
classified our entire fixed maturity and equity investment portfolios
as "available-for-sale." Accordingly, these investments are reported
at estimated market value at Dec.31, 1994 and 1993. Classifying these
portfolios as "available-for-sale" did not impact net income.
FIXED MATURITIES - We carry our fixed maturities at estimated market
value as of Dec. 31, 1994 and 1993. Prior to our adoption of SFAS No.
115, we carried fixed maturities at amortized cost.
EQUITIES - We carry our equity securities at estimated market value.
REAL ESTATE - Our real estate investments primarily consist of
commercial buildings. Some of these properties we own directly and
others we hold in joint ventures.
For direct investments, we carry land at cost and buildings at cost
less accumulated depreciation and valuation adjustments. We depreciate
real estate assets on a straight-line basis over 40 years. Tenant
improvements are amortized over the term of the lease. The accumulated
depreciation of these assets was $60.2 million and $48.8 million at
Dec. 31, 1994 and 1993, respectively.
We account for our joint ventures using the equity method, which
means we carry these investments at cost, adjusted for our share of
earnings or losses from these joint ventures, and reduced by any cash
distributions the joint ventures make to us and valuation adjustments.
VENTURE CAPITAL - We invest in securities of small- to medium-sized
companies. These investments are in the form of limited partnerships
or direct ownership. The limited partnerships are carried at our
equity in the estimated market value of the investments held by these
limited partnerships. The securities we own directly are carried at
estimated market value.
REALIZED INVESTMENT GAINS AND LOSSES - We record the cost of each
individual investment security so that when we sell, we are able to
identify and record the gain or loss on that transaction.
<PAGE>
We continually monitor the difference between the cost and estimated
market value of our investments. If any of our investments experience
a decline in value that is other than temporary, we establish a
valuation allowance for the decline and record a realized loss on the
statement of operations.
UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS - For
investments we carry at estimated market value, we record the
difference between cost and market, net of deferred taxes, as a part
of common shareholders' equity. This difference is referred to as
unrealized appreciation or depreciation of investments.
ACCOUNTING FOR OUR UNDERWRITING OPERATIONS
PREMIUMS EARNED - Our largest source of revenues is from premiums on
policies written by our insurance underwriters. We reflect the
premiums as revenues evenly over the policy terms. The premiums that
we have not yet recognized as revenues are recorded as unearned
premiums.
INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES - Losses refer to the
amounts we paid or expect to pay to claimants for events that have
occurred. The costs of investigating, resolving and processing these
claims are referred to as loss adjustment expenses. We record these
items on our statement of operations net of reinsurance, which means
that we reduce our gross losses and loss expenses incurred by the
amounts we will recover under reinsurance contracts.
We establish reserves for the estimated total unpaid cost of losses
and loss expenses, which cover events that occurred in 1994 and prior
years. These reserves reflect our estimates of the total cost of
claims that were reported to us, but not yet paid, and the cost of
claims not yet reported to us. We base our estimates on past loss
experience and consider current claim trends as well as prevailing
social, economic and legal conditions. We reduce our loss reserves for
estimated amounts of salvage and subrogation and deductibles
recoverable from our customers. Estimated amounts recoverable from
reinsurers on unpaid losses and loss expenses are reflected as assets.
We believe that the reserves we have established are adequate to
cover the ultimate costs of losses and loss adjustment expenses. Final
claim payments, however, may differ from the established reserves,
particularly when these payments may not occur for several years. Any
adjustments we make to reserves are reflected in the results for the
year during which the adjustments are made.
The "Reserves for Losses and Loss Adjustment Expenses" section on
pages 28 and 29 of Management's Discussion and Analysis includes a
table depicting the development of our loss reserve liabilities for
the last three years, and further discussion relating to our loss
reserve development. The "Environmental Pollution and Asbestos
Claims" section on pages 29 and 30 of Management's Discussion and
Analysis includes tables depicting the development of our pollution
and asbestos loss reserve liabilities for the last three years, and
further discussion relating to the development of those reserves.
POLICY ACQUISITION EXPENSES - The costs directly related to writing an
insurance policy are referred to as policy acquisition expenses and
consist of commissions, state premium taxes and other direct
underwriting expenses. Although these expenses arise when we issue a
policy, we defer and amortize them over the same period as the
premiums are recorded as revenues.
If deferred policy acquisition expenses were to exceed the sum of
unearned premiums and related anticipated investment income less
expected losses and loss adjustment expenses, the excess costs would
be expensed immediately.
<PAGE>
ACCOUNTING FOR OUR INSURANCE BROKERAGE OPERATIONS
Our insurance brokerage segment consists of the Minet group of
companies. Our insurance brokers and advisers help customers obtain or
place insurance policies or reinsurance contracts and provide
insurance advisory and consulting services. We earn fees and
commissions for providing these services. These revenues are recorded
on the date billed or the effective date of the policy, whichever is
later. Servicing costs are expensed as incurred. We record premiums
receivable from customers as assets with corresponding liabilities,
net of commissions, payable to the insurance carriers with whom the
business was placed.
Premiums collected, but not yet remitted to insurance carriers, are
restricted as to use by business practices. These amounts are included
in short-term investments and totaled $385.0 million and $393.2
million at the end of 1994 and 1993, respectively.
ACCOUNTING FOR OUR INVESTMENT BANKING-ASSET MANAGEMENT OPERATIONS
Our investment banking-asset management segment consists of The John
Nuveen Company. Nuveen markets tax-exempt open-end and closed-end
(exchange-traded) managed fund shares and provides investment advice
to and manages the business affairs of the Nuveen family of managed
funds. They also underwrite and trade municipal bonds and tax-exempt
unit investment trusts (UITs). They hold in inventory municipal bonds
and UITs that will be sold to individuals or security dealers; such
inventory securities are carried at market value.
Revenues include investment advisory fees, revenues from the
distribution of Nuveen UITs and managed fund investment products,
gains and losses from the sale of inventory securities, and unrealized
gains and losses on inventory securities held.
GOODWILL
Goodwill is the excess of the amount paid to acquire a company over
the fair value of its net assets, reduced by amortization and any
subsequent valuation adjustments. We amortize goodwill over periods of
up to 15 years. In 1992 and prior years, we amortized this asset on a
straight-line basis over periods of up to 40 years. The accumulated
amortization of goodwill was $102.9 million and $70.1 million at Dec.
31, 1994 and 1993, respectively.
We continually monitor the value of our goodwill based on our
estimates of discounted future earnings. If we determine that our
goodwill has been impaired, we reduce its carrying value with a
corresponding charge to expenses. At the end of 1992, we wrote down
$365 million of the goodwill associated with our investment in Minet
and reduced the amortization period for substantially all of the
remaining goodwill to 15 years.
OFFICE PROPERTIES AND EQUIPMENT
We carry office properties and equipment at depreciated cost. We
depreciate these assets on a straight-line basis over the estimated
useful lives of the assets. The accumulated depreciation for office
properties and equipment was $243.9 million and $215.4 million at the
end of 1994 and 1993, respectively.
FOREIGN CURRENCY TRANSLATION
We assign functional currencies to our foreign operations. These are
generally the currencies of the local operating environment. Foreign
currency amounts are converted to the functional currency, and the
resulting foreign exchange gains or losses are reflected in the
statement of operations. Functional currency amounts are then
translated into U.S. dollars. The unrealized gain or loss from this
translation is recorded as a part of common shareholders' equity. Both
the conversion and translation are calculated using current exchange
rates for the balance sheets and average exchange rates for the
statements of operations.
<PAGE>
SUPPLEMENTAL CASH FLOW INFORMATION
INTEREST AND INCOME TAXES PAID - We paid interest of $40.0 million in
1994, $41.2 million in 1993 and $35.1 million in 1992. Interest
payments in 1992 were net of capitalized interest of $4.6 million. We
paid federal income taxes of $122.7 million in 1994, $121.8 million in
1993 and $107.1 million in 1992.
NONCASH INVESTING ACTIVITIES - In connection with our acquisition of
Economy Fire & Casualty Company (Economy) from Kemper Corporation in
1993, we contributed securities with a book value of approximately
$100 million to the capital of Economy.
Note 2
EARNINGS PER COMMON SHARE
Earnings (loss) per common share (EPS) amounts were calculated by
dividing net income (loss), as adjusted, by the average common shares
outstanding.
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
PRIMARY
Net income (loss), as reported .........$442,828 $427,609 $(156,038)
Preferred dividends declared
(net of taxes) ........................ (8,448) (8,395) (8,349)
------- ------- -------
Net income (loss), as adjusted .......$434,380 $419,214 $(164,387)
======= ======= =======
FULLY DILUTED
Net income (loss), as reported .........$442,828 $427,609 $(156,038)
Additional PSOP expense
(net of taxes) due to assumed
conversion of preferred stock ......... (3,782) (4,080) -
Preferred dividends declared
(net of taxes) ........................ - - (8,349)
------- ------- -------
Net income (loss), as adjusted .......$439,046 $423,529 $(164,387)
======= ======= =======
AVERAGE SHARES OUTSTANDING
Primary ................................ 84,816 85,216 84,721
Fully diluted .......................... 89,067 89,469 84,721
Average shares outstanding include, if dilutive, the common and
common equivalent shares outstanding for the year and, for fully
diluted EPS, common shares that would be issuable upon conversion of
preferred stock.
<PAGE>
Note 3
INVESTMENTS
VALUATION OF INVESTMENTS - The following presents the cost, gross
unrealized appreciation and depreciation, and estimated market value
of our investments in fixed maturities, equities and venture capital.
December 31, 1994
Gross Gross Estimated
Unrealized Unrealized Market
(In thousands) Cost Appreciation Depreciation Value
---- ----------- ----------- --------
Fixed maturities:
U.S. government ...........$2,202,765 $6,796 $(142,803) $2,066,758
States and political
subdivisions ............. 4,016,100 170,738 (22,099) 4,164,739
Foreign governments ....... 697,083 7,833 (22,207) 682,709
Corporate securities ...... 1,156,422 2,011 (77,752) 1,080,681
Mortgage-backed securities 841,003 20,909 (28,115) 833,797
--------- ------- -------- ---------
Total fixed maturities 8,913,373 208,287 (292,976) 8,828,684
Equities ................... 500,849 50,305 (20,112) 531,042
Venture capital ............ 260,637 88,437 (19,042) 330,032
--------- ------- -------- ---------
Total ....................$9,674,859 $347,029 $(332,130) $9,689,758
========= ======= ======== =========
December 31, 1993
Gross Gross Estimated
Unrealized Unrealized Market
(In thousands) Cost Appreciation Depreciation Value
---- ----------- ----------- --------
Fixed maturities:
U.S. government ...........$1,854,287 $89,183 $(4,478) $1,938,992
States and political
subdivisions ............. 4,108,680 502,819 (581) 4,610,918
Foreign governments ....... 520,254 47,515 (3,070) 564,699
Corporate securities ...... 957,526 66,917 (8,369) 1,016,074
Mortgage-backed securities 944,352 74,361 (1,432) 1,017,281
--------- ------- -------- ---------
Total fixed maturities ... 8,385,099 780,795 (17,930) 9,147,964
Equities ................... 488,383 80,398 (20,099) 548,682
Venture capital ............ 224,523 89,100 (15,641) 297,982
--------- ------- -------- ---------
Total ....................$9,098,005 $950,293 $(53,670) $9,994,628
========= ======= ======== =========
STATUTORY DEPOSITS - At Dec. 31, 1994, our underwriting operations had
investments in fixed maturities with an estimated market value of
$378.8 million on deposit with regulatory authorities, as required by
law.
FIXED MATURITIES BY MATURITY DATE - The following table presents the
breakdown of our fixed maturities by years to maturity. Actual
maturities may differ from those stated as a result of calls and
prepayments.
December 31, 1994
Amortized Estimated
(In thousands) Cost Market Value
--------- ---------
One year or less .......................... $ 201,801 $ 203,790
Over one year through five years .......... 1,010,042 998,895
Over five years through ten years ......... 3,139,067 3,032,260
Over 10 years ............................. 3,721,460 3,759,942
Mortgage-backed securities with
various maturities ....................... 841,003 833,797
--------- ---------
Total ................................... $8,913,373 $8,828,684
========= =========
<PAGE>
Note 4
INVESTMENT TRANSACTIONS
INVESTMENT ACTIVITY - Here is a summary of our investment purchases,
sales and maturities.
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
PURCHASES
Fixed maturities ................ $1,235,653 $1,816,965 $1,778,736
Equities ........................ 700,568 465,056 401,374
Real estate ..................... 74,420 110,371 64,658
Venture capital ................. 66,622 79,410 55,928
Other investments ............... 9,841 12,929 15,176
--------- --------- ---------
Total purchases ............... 2,087,104 2,484,731 2,315,872
--------- --------- ---------
PROCEEDS FROM SALES AND MATURITIES
Fixed maturities:
Sales .......................... 181,126 169,330 295,648
Maturities and redemptions ..... 533,292 1,236,912 976,712
Equities ........................ 707,608 437,610 431,225
Real estate ..................... 6,718 40,764 -
Venture capital ................. 28,817 59,124 2,803
Other investments ............... 8,107 10,466 15,110
--------- --------- ---------
Total sales and maturities .... 1,465,668 1,954,206 1,721,498
--------- --------- ---------
Net purchases ................. $ 621,436 $ 530,525 $ 594,374
========= ========= =========
NET INVESTMENT INCOME - Here is a summary of our net investment
income.
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
Fixed maturities ............... $626,263 $607,067 $605,217
Equities ....................... 12,984 12,035 11,629
Real estate .................... 28,049 19,288 19,022
Venture capital ................ (1,849) (2,012) (1,966)
Other investments .............. 346 698 569
Short-term investments ......... 45,893 37,952 46,018
------- ------- -------
Total........................ 711,686 675,028 680,489
Investment expenses ............ (17,092) (13,922) (14,115)
------- ------- -------
Net investment income........ $694,594 $661,106 $666,374
======= ======= =======
<PAGE>
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) - The following
summarizes our pretax realized investment gains and losses and change
in unrealized appreciation of investments recorded in common
shareholders' equity.
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
PRETAX REALIZED
INVESTMENT GAINS (LOSSES)
Fixed maturities:
Gross realized gains ......... $5,232 $8,916 $12,702
Gross realized losses ........ (1,849) (3,585) (1,391)
------ ------ ------
Total fixed maturities....... 3,383 5,331 11,311
------ ------ ------
Equities:
Gross realized gains ......... 59,548 62,310 81,841
Gross realized losses ........ (38,626) (18,782) (16,066)
------ ------ ------
Total equities............... 20,922 43,528 65,775
------ ------ ------
Real estate .................... (10,458) (10,188) (7,519)
Venture capital ................ 17,616 24,046 (180)
Other .......................... 10,511 (4,463) (11,936)
------ ------ ------
Total pretax realized
investment gains ............ $41,974 $58,254 $57,451
====== ====== ======
CHANGE IN UNREALIZED APPRECIATION
Fixed maturities ............... $(847,554) $771,598 $ -
Equities ....................... (30,106) (23,993) (34,038)
Venture capital ................ (4,064) 52,550 6,687
Other .......................... - - (8,732)
------- ------- ------
Total change in pretax
unrealized appreciation ..... (881,724) 800,155 (36,083)
Increase (decrease) in
deferred tax asset ........... 306,828 (274,980) 12,268
------- ------- ------
Total change in unrealized
appreciation, net of taxes .. $(574,896) $525,175 $(23,815)
======= ======= ======
Prior to our adoption of SFAS No. 115 on Dec. 31, 1993, we did not
record unrealized appreciation or depreciation of fixed maturities on
the consolidated balance sheet. Consequently, the change in unrealized
appreciation of fixed maturities for 1993 represents the cumulative
unrealized appreciation recorded upon our adoption of SFAS No. 115.
The actual increase in pretax unrealized appreciation of fixed
maturities for the years ended Dec. 31, 1993 and 1992, respectively,
was $257.8 million and $13.3 million.
Note 5
DERIVATIVE FINANCIAL INSTRUMENTS
In October 1994, the Financial Accounting Standards Board issued SFAS
No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments." Derivative financial instruments are
defined as futures, forward, swap or option contracts and other
financial instruments with similar characteristics. We are not
involved in derivatives for trading purposes, but have limited
involvement with these instruments for purposes of hedging and income
generation. All investments, including derivative instruments, have
some degree of market and credit risk associated with them. However,
the market risk on our derivatives substantially offsets the market
risk associated with fluctuations in interest rates, and the value of
certain investments. We minimize our credit risk by conducting
derivative transactions only with reputable, investment-grade counter
parties. We use the following types of derivative instruments:
INTEREST RATE SWAP AGREEMENTS - We enter into interest rate swap
agreements for the purpose of minimizing the effect of interest rate
fluctuations on some of our investments and debt.
<PAGE>
At Dec. 31, 1994 and 1993, we had investments in perpetual floating
rate notes totaling $45 million and $55 million, respectively, and we
were party to interest rate swap agreements for notional amounts
equaling these totals at those dates. We record the market value of
these agreements on our balance sheet. The market value represents the
asset that would be realized, or the liability that would be incurred,
had they been terminated at the balance sheet date. At Dec. 31, 1994
and 1993, we recorded a liability of $1.7 million and an asset of $4.1
million, respectively, associated with these agreements.
In 1993, we entered into an interest rate swap agreement that
requires us to pay a fixed rate of 5.6% on $50 million of our
outstanding floating rate commercial paper through the year 2000. At
Dec. 31, 1994 and 1993, the estimated market value of this swap
agreement was an asset of $5.8 million and $400,000, respectively.
OPTION CONTRACTS - At the end of 1994 we had written exchange-traded
options on $48.2 million of our equity security investments for the
purpose of income generation. The comparable amount at the end of 1993
was $41.1 million. We recorded the market value of these options on
our balance sheet. At Dec. 31, 1994 and 1993, we recorded an
unrealized loss of $276,000 and $52,000, respectively, associated with
these options.
FOREIGN EXCHANGE FORWARD CONTRACTS - Our U.K.-based insurance
brokerage operation purchases these contracts to minimize the impact
of fluctuating foreign currencies on its results of operations. At
Dec. 31, 1994 and 1993, our open position on foreign exchange forward
contracts totaled $26.4 million and $33.9 million, respectively. The
unrealized loss on these contracts was $412,000 and $199,000 at the
end of 1994 and 1993, respectively.
Note 6
INCOME TAXES
METHOD FOR COMPUTING INCOME TAX EXPENSE - Since 1992, we have computed
our tax expense in accordance with SFAS No. 109, "Accounting for
Income Taxes." The primary objective of our tax computation is to
ensure that the deferred tax asset or liability on the balance sheet
properly reflects the amount due from or to the government in the
future. As a consequence, the portion of the tax expense that is a
result of the change in the deferred tax asset or liability may not
always be consistent with the income reported in the statements of
operations.
Some items of revenue and expense included in the statements of
operations may not be currently taxable or deductible on our income
tax returns. Therefore, our income tax assets and liabilities are
divided into a current portion, which is the amount attributable to
our current year's tax return, and a deferred portion, which is the
amount attributable to another year's tax return. The revenue and
expense items not currently taxable or deductible are called temporary
differences.
<PAGE>
INCOME TAX EXPENSE (BENEFIT) - Income tax expense or benefits are
recorded in various places in our financial statements. A summary of
the amounts and places follows:
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
STATEMENTS OF OPERATIONS
Expense related to income or
loss before cumulative effects
of accounting changes ........ $120,750 $94,997 $ 7,458
Benefit from the adoption of:
SFAS No. 109 ................. - - (126,047)
SFAS No. 106 ................. - - (25,777)
------- ------- -------
Total income tax expense
(benefit) included in net
income or loss .............. 120,750 94,997 (144,366)
------- ------- -------
COMMON SHAREHOLDERS' EQUITY
Benefit for deductions relating
to dividends on unallocated
ESOP and PSOP shares ......... (4,578) (4,873) (5,226)
Deferred expense (benefit)
for the change in unrealized
appreciation of investments
and unrealized foreign
exchange ..................... (308,073) 274,126 (15,675)
------- ------- -------
Total income tax expense
(benefit) included in common
shareholders' equity ........ (312,651) 269,253 (20,901)
------- ------- -------
Total income tax expense
(benefit) included in
financial statements ........ $(191,901) $364,250 $(165,267)
======= ======= =======
COMPONENTS OF INCOME TAX EXPENSE - The components of income tax
expense related to the income or loss before cumulative effects of
accounting changes are as follows:
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
Federal current tax expense .... $151,347 $148,508 $109,740
Federal deferred tax benefit ... (47,933) (54,935) (114,832)
Impact of tax rate change ...... - (15,383) -
------- ------- -------
Total federal income tax
expense (benefit) ........... 103,414 78,190 (5,092)
Foreign income taxes ........... 11,788 9,692 6,776
State income taxes ............. 5,548 7,115 5,774
------- ------- -------
Total income tax expense..... $120,750 $ 94,997 $ 7,458
======= ======= =======
OUR TAX RATE IS DIFFERENT FROM THE STATUTORY RATE - Our total federal
income tax expense (benefit) differs from the statutory rate of 35%
(34% in 1992) of pretax income or loss as shown in the following
table:
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
Federal income tax expense
(benefit) at statutory rates . $197,252 $182,912 $(76,521)
Increase (decrease)
attributable to:
Nontaxable investment income . (87,630) (90,502) (91,780)
Foreign operations ........... (9,335) 9,869 48,894
Impact of tax rate change .... - (15,383) -
Write-down of goodwill ....... - - 124,100
Other ........................ 3,127 (8,706) (9,785)
------- ------- -------
Federal income tax
expense (benefit) .......... $103,414 $78,190 $(5,092)
======= ======= =======
<PAGE>
MAJOR COMPONENTS OF DEFERRED INCOME TAXES ON OUR BALANCE SHEET - The
tax effects of temporary differences that give rise to the deferred
tax assets and deferred tax liabilities are presented in the following
table:
December 31
(In thousands) 1994 1993
---- ----
DEFERRED TAX ASSETS
Loss reserves ............................. $ 642,368 $ 593,938
Unearned premium reserves ................. 119,363 107,142
Deferred compensation ..................... 82,456 82,501
Foreign loss carryforwards ................ 43,263 51,479
Alternative minimum tax
credit carryforwards ..................... 41,096 30,107
Other ..................................... 125,001 110,237
--------- --------
Total gross deferred tax assets ......... 1,053,547 975,404
Less valuation allowance .................. (50,359) (58,931)
--------- --------
Net deferred tax assets ................. 1,003,188 916,473
--------- --------
DEFERRED TAX LIABILITIES
Unrealized appreciation of investments .... 1,889 308,718
Deferred acquisition costs ................ 105,428 97,958
Real estate ............................... 43,994 44,062
Other ..................................... 61,369 40,723
--------- --------
Total gross deferred tax liabilities .... 212,680 491,461
--------- --------
Deferred income taxes ................... $790,508 $425,012
========= ========
If we believe that all of our deferred tax assets will not result in
future tax benefits, we must establish a "valuation allowance" for
the portion of these assets that we think will not be realized. The
valuation allowance for deferred tax assets as of Jan. 1, 1992, was
$35.0 million. The net change in the total valuation allowance was a
decrease of $8.6 million in 1994, and increases of $4.7 million and
$19.2 million, respectively, in 1993 and 1992, relating entirely to
our foreign operations. Based upon a review of our refundable taxes,
anticipated future earnings, and all other available evidence, both
positive and negative, we have concluded it is "more likely than
not" that our net deferred tax assets will be realized.
UNDISTRIBUTED EARNINGS OF SUBSIDIARIES - U.S. income taxes have not
been provided on $29.1 million of our foreign operations'
undistributed earnings as of Dec. 31, 1994, as such earnings are
intended to be permanently reinvested in those operations.
Furthermore, any taxes paid to foreign governments on these earnings
may be partially used as credits against the U.S. tax on any dividend
distributions from such earnings.
We have not provided taxes on approximately $83.4 million of
undistributed earnings related to our majority ownership of The John
Nuveen Company that arose in 1994, 1993 and 1992 because we currently
do not expect those earnings to become taxable to us.
IRS EXAMINATIONS - The Internal Revenue Service has examined our
consolidated returns through 1990 and is currently examining the years
1991 and 1992. Although it is possible that any additional taxes
assessed as a result of these examinations may be material to
liquidity in the period in which the assessment occurs, we believe
such an assessment would not materially affect our overall financial
position or results of operations.
<PAGE>
Note 7
DEBT AND CREDIT ARRANGEMENTS
Debt consists of the following:
December 31
1994 1993
Book Fair Book Fair
(In thousands) Value Value Value Value
----- ----- ----- -----
Commercial paper ........... $275,635 $275,635 $201,384 $201,384
Medium-term notes .......... 204,433 189,400 210,780 221,100
9-3/8% notes ............... 99,971 102,800 99,959 113,400
Guaranteed ESOP debt ....... 36,112 37,200 47,223 52,200
Pound sterling loan notes .. 6,473 6,473 - -
Short-term borrowings ...... - - 80,383 80,383
------- ------- ------- -------
Total debt ............... $622,624 $611,508 $639,729 $668,467
======= ======= ======= =======
FAIR VALUE - The fair value of our commercial paper and short-term
borrowings approximates their book value because they are short-term
in nature. For our other debt, which has longer terms and fixed
interest rates, our fair value estimate is based on current interest
rates available on debt securities in the market that have terms
similar to ours.
COMMERCIAL PAPER - Our commercial paper is supported by a $400 million
credit agreement that expires in 1997. The credit agreement requires
us to stay below a certain ratio of debt to equity, maintain a stated
amount of common shareholders' equity and meet certain other
requirements. As of year-end 1994, we had not borrowed any funds under
the agreement, and we were in compliance with all provisions.
Interest rates on commercial paper issued in 1994 ranged from 3.1%
to 6.1%; in 1993 the range was 3.0% to 3.6%; and in 1992 the range was
3.0% to 4.7%.
MEDIUM-TERM NOTES - The medium-term notes bear interest rates ranging
from 5.9% to 8.4%. Maturities range from seven to 12 years after the
issuance date.
9-3/8% NOTES - The 9-3/8% notes mature on June 15, 1997.
GUARANTEED ESOP DEBT - The guaranteed ESOP debt bears an interest rate
of 7.95% and is due March 1, 1998. The ESOP's principal payments and
related interest are funded quarterly through a combination of our
contributions and dividends on shares held by the ESOP. We show this
debt as our liability, because we guaranteed the debt.
POUND STERLING LOAN NOTES - The pound sterling loan notes were issued
in 1994 in connection with our acquisition of a brokerage company. The
notes mature on July 15, 2004, and bear an interest rate of 4.9% at
Dec. 31, 1994.
SHORT-TERM BORROWINGS - Short-term borrowings in 1993 were obligations
of our investment banking-asset management operation that were
collateralized by some of its inventory securities. These borrowings
consisted of securities sold under an agreement to repurchase.
INTEREST EXPENSE - Our interest expense was $39.6 million in 1994,
$40.8 million in 1993 and $35.6 million in 1992.
MATURITIES - The amount of debt that becomes due in each of the next
five years is as follows: 1995 and 1996, $11.1 million; 1997, $386.7
million; 1998, $27.8 million; and 1999, $20.0 million.
Note 8
RETIREMENT PLANS
PENSION PLANS - We maintain funded defined benefit pension plans for
most of our U.S. and non-U.S. employees. Benefits are based on years
of service and the employee's compensation while employed by the
company. U.S. pension benefits generally vest after five years of
service. Non-U.S. pension benefits generally vest after two years of
service.
<PAGE>
Our U.S. pension plans are noncontributory. This means that
employees do not pay anything into the plans. Our funding policy is to
contribute amounts sufficient to meet the minimum funding requirements
of the Employee Retirement Income Security Act and any additional
amounts that may be necessary. This may result in no contribution
being made in a particular year.
We contribute to our non-U.S. pension plans based on a percentage of
salaries. Certain of these plans are contributory, which means that
employees also contribute a percentage of their salary to the plan.
The following table details the components of our net periodic
pension cost for our U.S. and non-U.S. funded pension plans.
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
Service cost - benefits
earned during the year ....... $37,611 $29,515 $32,912
Interest cost on projected
benefits obligation .......... 40,606 36,670 39,449
Actual return on plan assets ... (6,928) (66,449) (25,333)
Net amortization and deferral .. (35,243) 28,270 (20,352)
------ ------ ------
Net periodic pension cost.... $36,046 $28,006 $26,676
====== ====== ======
The following table summarizes the funded status of our plans.
December 31
1994 1993
(In thousands) U.S. Non-U.S. U.S. Non-U.S.
----- -------- ----- --------
Accumulated benefits
obligation:
Vested .................... $180,793 $186,317 $233,565 $194,403
Nonvested ................. 23,072 424 30,746 119
------- ------- ------- -------
Subtotal ................. 203,865 186,741 264,311 194,522
Effect of projected
salary increases .......... 86,557 45,588 94,340 42,753
------- ------- ------- -------
Projected benefits
obligation............... 290,422 232,329 358,651 237,275
Plan assets at fair value .. 245,852 239,025 228,322 215,843
------- ------- ------- -------
Assets (greater) less
than projected
benefits obligation...... 44,570 (6,696) 130,329 21,432
Unrecognized net gain (loss) 9,071 (18,022) (54,233) (52,386)
Unrecognized net
asset at transition ....... 11,273 15,684 12,973 16,797
Unrecognized prior
service cost .............. 420 (2,844) 109 (2,991)
------- ------- ------- -------
Accrued (prepaid) pension
cost recorded on the
balance sheet............ $ 65,334 $(11,878) $ 89,178 $(17,148)
======= ======= ======= =======
We use the services of an independent actuary to assist us in the
determination of our pension cost and obligation. Pension cost is
determined using assumptions at the beginning of the year. The funded
status is determined using assumptions at the end of the year.
Assumptions as of Dec. 31 used to determine the projected benefits
obligation and pension cost are as follows:
1994 1993 1992 1991
---- ---- ---- ----
U.S. PLANS
Discount rate ................. 8.00% 6.25% 7.25% 7.75%
Rate of increase in
compensation ................. 5.00 4.25 5.50 6.00
Expected rate of return
on plan assets ............... 9.00 9.00 9.00 9.50
NON-U.S. PLANS
Discount rate ................. 8.50 7.50 9.50 9.50
Rate of increase in
compensation ................. 6.00 5.50 7.50 7.50
Expected rate of return
on plan assets ............... 10.00 9.50 10.50 10.50
<PAGE>
Plan assets are invested primarily in equities and fixed maturities
and included 380,172 shares of our common stock with a market value of
$17.0 million and $17.1 million at Dec. 31, 1994 and 1993,
respectively.
We also maintain a noncontributory, unfunded pension plan to provide
certain employees with pension benefits in excess of limits imposed by
federal tax law and a noncontributory, unfunded pension plan for our
outside directors. At the end of 1994 and 1993, we had a liability of
$17.5 million and $13.9 million, respectively, recorded for these
plans.
During 1992, we offered a voluntary early retirement incentive,
enabling certain eligible employees to elect early retirement. Early
retirement was elected by 292 employees, which resulted in a pretax
cost of $31.0 million in 1992.
EMPLOYEE STOCK OWNERSHIP PLAN - We maintain an ESOP for qualified
employees of our U.S.-based corporate, underwriting and insurance
brokerage operations. An ESOP trust was formed that borrowed funds to
purchase shares of our stock for future allocation to qualified
employees. As the principal of the ESOP trust loan is paid, a pro rata
amount of our common stock is released for allocation to eligible
participants. Dividends we pay on all shares held by the trust are
used to pay the ESOP's obligations. In addition, we make contributions
as needed to meet the ESOP's obligations.
All shares held by the ESOP are considered outstanding for EPS
computations, and dividends paid on all ESOP shares are charged to
retained earnings. Our ESOP expense was reduced by the dividends we
paid to the ESOP trust.
The following table summarizes our ESOP expense for each of the last
three years:
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
Compensation expense ........... $12,330 $12,037 $11,776
Interest expense ............... 4,108 5,032 5,982
Dividends paid to ESOP trust ... (6,325) (6,181) (6,337)
Proceeds from sales of forfeited
shares, and interest income .. (273) (221) (377)
------ ------ ------
Net pretax ESOP expense...... $9,840 $10,667 $11,044
===== ====== ======
Cash contributions to trust .... $9,171 $10,091 $10,496
===== ====== ======
The following table details the shares held in the ESOP:
December 31
(Shares) 1994 1993
---- ----
Allocated ................................. 2,630,265 2,295,799
Committed to be released .................. 142,467 131,323
Unallocated ............................... 1,603,176 2,108,952
--------- ---------
Total .................................... 4,375,908 4,536,074
========= =========
The ESOP allocated 505,776 shares in 1994, 499,256 shares in 1993
and 492,418 shares in 1992. The remaining unallocated shares at Dec.
31, 1994, will be released for allocation annually through March 1,
1998.
PREFERRED STOCK OWNERSHIP PLAN - Our Savings Plus Preferred Stock
Ownership Plan (PSOP) allocates preferred shares semiannually to those
employees participating in our Savings Plus Plan. The allocation is
equivalent to 60% of employees' contributions up to a maximum of 6% of
their salary plus shares equal to the value of dividends on previously
allocated shares. To finance the stock purchase for future allocation
to qualified employees, the PSOP borrowed $150 million at 9.4% from
our U.S. underwriting subsidiary. As the principal and interest of the
trust's loan is paid, a pro rata amount of our preferred stock is
released for allocation to participating employees. Each share pays a
dividend of $11.724 annually and is currently convertible into four
shares of common stock (two shares prior to the stock split).
Dividends on all shares held by the trust are used to pay the PSOP
obligation. In addition to dividends paid to the trust, we make
additional cash contributions to the PSOP as necessary in order to
meet the PSOP's debt obligation.
<PAGE>
If dilutive, the common stock equivalent of all shares held by the
PSOP is considered outstanding for fully diluted EPS computations, and
dividends paid on all PSOP shares are charged to retained earnings.
Our PSOP expense was reduced by the dividends we paid to the PSOP
trust.
The following table summarizes our PSOP expense for each of the last
three years:
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
Compensation expense ........... $10,409 $7,268 $7,854
Interest expense ............... 13,602 14,044 14,075
Dividends paid to PSOP trust ... (11,993) (12,022) (12,141)
------ ------ ------
Net pretax PSOP expense ...... $12,018 $9,290 $9,788
====== ====== ======
Cash contributions to trust .... $9,205 $2,728 $1,811
====== ====== ======
The following table details the shares held in the PSOP:
December 31
(Shares) 1994 1993
---- ----
Allocated .............................. 187,194 135,741
Committed to be released ............... 31,601 26,887
Unallocated ............................ 793,691 860,300
--------- ---------
Total ................................. 1,012,486 1,022,928
========= =========
The PSOP allocated 66,609 shares in 1994, 53,342 shares in 1993 and
51,057 shares in 1992. The remaining unallocated shares at Dec. 31,
1994, will be released for allocation annually through Jan. 31, 2005.
POSTRETIREMENT BENEFITS OTHER THAN PENSION - We provide certain health
care and life insurance benefits for retired U.S. employees and their
eligible dependents. We currently anticipate that most of our
employees will become eligible for these benefits if they retire while
working for us. The cost of these benefits is shared with the retiree.
The benefits are generally provided through our employee benefits
trust, to which periodic contributions are made to cover benefits paid
during the year.
Effective Jan. 1, 1992, we implemented SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." This
statement changed our method of accounting for postretirement benefits
from the cash basis to the accrual basis. Now, we accrue
postretirement benefits expense during the period that the employee
renders the service to earn the benefit.
We recorded a transition obligation of $75.3 million, representing
the cumulative Jan. 1, 1992, liability for postretirement benefits, in
the first quarter of 1992. This cumulative effect, net of taxes, was a
charge to earnings of $49.6 million, or $0.59 per share.
The following table details the components of the net periodic
postretirement benefits cost:
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
Service cost - benefits attributed
to service during the year ...... $ 5,089 $ 4,227 $ 4,159
Interest cost on accumulated
postretirement benefits
obligation ...................... 9,645 8,699 7,117
Actual return on plan assets ...... 320 (686) (891)
Net amortization and deferral ..... (1,448) (590) (17)
------ ------ ------
Net periodic postretire-
ment benefits cost ............. $13,606 $11,650 $10,368
====== ====== ======
<PAGE>
The following table summarizes the funded status of the plan.
December 31
(In thousands) 1994 1993
---- ----
Accumulated postretirement
benefits obligation:
Retirees ................................ $66,350 $74,541
Fully eligible active plan participants . 7,174 8,720
Other active plan participants .......... 33,822 47,797
------- -------
Subtotal................................ 107,346 131,058
Plan assets at fair value ................. 13,753 13,693
------- -------
Assets less than accumulated
postretirement benefits obligation ..... 93,593 117,365
Unrecognized net gain (loss) .............. 16,398 (14,374)
Unrecognized prior service cost ........... 5,017 5,370
------- -------
Accrued postretirement benefits
cost recorded on the balance sheet ..... $115,008 $108,361
======= =======
We use the services of an independent actuary to assist in the
determination of the benefits cost and obligation. Postretirement
benefits cost is determined using assumptions at the beginning of the
year. The funded status is determined using the assumptions at the end
of the year. Assumptions as of Dec. 31 used to determine the
postretirement benefits cost and accumulated postretirement benefits
obligation are as follows:
1994 1993 1992 1991
Discount rate ................. 8.50% 7.00% 7.75% 8.00%
Rate of increase
in compensation .............. 5.00 4.25 5.50 6.00
Expected rate of return
on plan assets ............... 8.00 7.50 7.50 7.50
A health care inflation rate of 14% was assumed to change to 8% in
1995, decrease annually to 6% in 2002 and then remain at that level.
This inflation rate assumption has a significant impact on the health
care portion of the postretirement benefits. For example, a 1%
increase in this rate would have increased the accumulated
postretirement benefits obligation at Dec. 31, 1994, by $16.4 million
and the 1994 periodic benefits cost by $3.0 million.
Note 9
STOCK OPTION AND OTHER INCENTIVE PLANS
Our option plans for certain U.S.-based company officers and outside
directors give these individuals the right to buy our stock at the
market price on the day the options were granted. In May 1994, our
shareholders adopted a new stock incentive plan, making available for
future grant up to four million option shares. Stock options granted
under the 1994 plan may be exercised between one and 10 years
subsequent to the date of grant. Options granted under our option plan
in effect prior to May 1994 may be exercised at any time up to 10
years after the grant date.
Up to 800,000 of the four million shares available under the 1994
plan may be granted as restricted stock awards. The stock is
restricted because recipients receive the stock only upon completing a
specified objective or period of employment, generally one to five
years. The shares are considered issued when awarded, but the
recipient does not own and cannot sell the shares during the
restriction period.
Approximately 3,980,000 shares remained at year-end for grant under
the 1994 plan, of which approximately 793,000 may be granted as
restricted shares.
We also have separate stock option plans for certain employees of
our non-U.S. operations. Most of the options granted under these plans
were priced at the market price of our common stock on the grant date.
Generally, they can be exercised from three to 10 years after the
grant date. Approximately 300,000 option shares remained available at
year-end for future grants under our non-U.S. plans.
<PAGE>
Information concerning our U.S. and non-U.S. stock option plans is
in the following table:
Number of
Option Price Option
(Shares) Per Share Shares
Outstanding Jan. 1, 1992 .......... $7.21 - 36.25 3,378,176
Granted ........................... 35.00 - 38.50 467,014
Canceled .......................... 10.10 - 34.25 (22,272)
Exercised ......................... 7.21 - 36.25 (645,300)
------------- ---------
Outstanding Dec. 31, 1992 ......... 9.95 - 38.50 3,177,618
Granted ........................... 38.25 - 47.88 378,908
Canceled .......................... 12.98 - 37.07 (42,594)
Exercised ......................... 9.95 - 40.07 (566,224)
------------- ---------
Outstanding Dec. 31, 1993 ......... 9.95 - 47.88 2,947,708
Granted ........................... 31.55 - 47.88 661,783
Canceled .......................... 21.75 - 47.88 (41,953)
Exercised ......................... 9.95 - 47.88 (297,293)
------------- ---------
Outstanding Dec. 31, 1994 ......... $21.25 - 47.88 3,270,245
============= =========
Exercisable Dec. 31, 1994 ......... $21.25 - 46.63 2,400,710
============= =========
Note 10
SHAREHOLDERS' EQUITY
COMMON STOCK AND REACQUIRED SHARES - We are governed by the
Minnesota Business Corporation Act. All authorized shares of voting
common stock have no par value. Shares of common stock reacquired are
considered unissued shares.
On May 3, 1994, our shareholders voted to amend the company's
Restated Articles of Incorporation to increase the number of
authorized shares of voting common stock from 120 million to 240
million. Subsequent to this action, the board of directors approved a
2-for-1 stock split, issuing one additional voting common share on
June 6, 1994, for each outstanding share to shareholders of record on
May 17, 1994.
In 1994, we reacquired 860,000 of our common shares for a total cost
of $34.2 million. During 1992, we reacquired 1,585,000 of our common
shares for a total cost of $57.7 million. We reduced our capital stock
account for the cost of these repurchases in proportion to the
percentage of shares reacquired, with the remainder of the cost
charged to retained earnings.
A summary of our common stock activity for the last three years is
as follows:
Year ended December 31
(Shares) 1994 1993 1992
---- ---- ----
Outstanding at beginning
of year ....................... 84,714,676 84,118,554 85,042,484
Issued under stock option
and other incentive plans ..... 344,756 595,814 659,198
Issued upon conversion
of preferred stock ............ 3,125 5,132 2,128
Reacquired ...................... (860,140) (4,824) (1,585,256)
---------- ---------- ----------
Outstanding at end of year ...... 84,202,417 84,714,676 84,118,554
========== ========== ==========
UNDESIGNATED SHARES - Our articles of incorporation allow us to issue
five million undesignated shares. The board of directors may designate
the type of shares and set the terms thereof. The board designated
1,450,000 of these shares as Series B Convertible Preferred Stock in
connection with the formation of our Preferred Stock Ownership Plan
(PSOP). The board designated 50,000 shares as Series A Junior
Participating Preferred Stock in connection with the establishment of
our Shareholder Protection Rights Plan.
<PAGE>
SHAREHOLDER PROTECTION RIGHTS PLAN - Our Shareholder Protection Rights
Plan is designed to protect the interests of our shareholders in the
event of unsolicited and unfair or coercive attempts to acquire
control of the company. Our shareholders own one right for each common
share owned, which would enable them to initiate specified actions to
protect their interests. We may redeem this right under circumstances
specified in the plan.
DIVIDEND RESTRICTIONS - We primarily depend on dividends from our
subsidiaries to pay dividends to our shareholders, service our debt
and pay expenses. Various state laws and regulations limit the amount
of dividends we may receive from our U.S. underwriting subsidiary. In
1995, $311.6 million will be available for dividends free from such
restrictions. During 1994, we received cash dividends of $201.0
million from our U.S. underwriting subsidiary and a $157.1 million
noncash dividend of the capital stock of its U.K.-based underwriting
operation.
Note 11
COMMITMENTS AND CONTINGENCIES
INVESTMENT COMMITMENTS - We have long-term commitments to fund venture
capital and real estate investments totaling $150.3 million as of Dec.
31, 1994. We estimate these commitments will be paid as follows: $99.9
million in 1995; $21.9 million in 1996; $15.6 million in 1997; $7.9
million in 1998; and $5.0 million in 1999.
LEASE COMMITMENTS - A portion of our business activities is carried on
in rented premises. We also enter into leases for equipment, such as
office machines and computers. Our total rental expense was $69.6
million in 1994, $74.9 million in 1993 and $92.8 million in 1992.
Certain leases are noncancelable, and we would remain responsible
for payment even if we stopped using the space or equipment. On Dec.
31, 1994, the minimum annual rents for which we would be liable under
these types of leases are as follows: $59.2 million in 1995, $49.4
million in 1996, $42.1 million in 1997, $36.7 million in 1998, $31.7
million in 1999 and $106.7 million thereafter.
LEGAL MATTERS - In the ordinary course of conducting business, our
operations have been named as defendants in various lawsuits. Some of
these lawsuits attempt to establish liability under insurance
contracts issued by our underwriting operations. 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 our results of operations and liquidity in the period in
which the settlement occurs, we believe that the total amounts that we
and our subsidiaries will ultimately have to pay in all of these
lawsuits will have no material effect on our overall financial
position.
Note 12
ACQUISITION OF ECONOMY
On Aug. 31, 1993, we acquired Economy Fire & Casualty Company, a
personal insurance underwriting company, from Kemper Corporation. Our
investment in Economy totaled approximately $395 million. This
included a $100 million contribution of securities to the capital of
Economy, with the remainder paid in cash to Kemper Corporation. We
recorded goodwill of approximately $142 million that we are amortizing
over 15 years.
We accounted for the Economy acquisition as a purchase. As a result,
Economy's results were included in our consolidated results from the
date of purchase. Consolidated results would not have been materially
different had this acquisition been completed at the beginning of
1992.
<PAGE>
Note 13
SALE OF MINORITY INTEREST IN NUVEEN
In May 1992, we sold a minority interest in our investment banking-
asset management subsidiary, The John Nuveen Company. The sale
generated pretax proceeds of $137.1 million and resulted in a pretax
gain of $98.3 million. We retained approximately 74% ownership in
Nuveen at the time of the sale. We now own approximately 77% of Nuveen
due to Nuveen's repurchase of some of its outstanding shares.
We continue to consolidate 100% of Nuveen's assets, liabilities,
revenues and expenses, with reductions on the balance sheet and
statement of operations for the minority interest sold. The minority
interest represents the minority shareholders' proportionate interest
in Nuveen's equity and earnings. Minority interest of $66.5 million
and $71.9 million was recorded in other liabilities at the end of 1994
and 1993, respectively.
Note 14
REINSURANCE
Our financial statements reflect the effects of assumed and ceded
reinsurance transactions. Assumed reinsurance refers to our acceptance
of certain insurance risks that other insurance companies have
underwritten. Ceded reinsurance means other insurance companies agree
to share certain risks with us. The primary purpose of ceded
reinsurance is to protect us from potential losses in excess of what
we are prepared to accept.
Effective Jan. 1, 1993, we implemented SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short- Duration and Long-Duration
Contracts." This statement requires us to report balances pertaining
to reinsurance transactions "gross" on the balance sheet. We now
record reinsurance recoverables on unpaid losses and ceded unearned
premiums as assets, in contrast to our prior practice of netting these
amounts against the corresponding insurance reserves. Adoption of SFAS
No. 113 had no impact on net income or common shareholders' equity.
The largest portion (approximately 17%) of our total reinsurance
recoverables and ceded unearned premiums was with General Reinsurance
Corporation. That company is rated "A++" by A.M. Best, "Aaa" by
Moody's and "AAA" by Standard & Poor's for its property-liability
insurance claims-paying ability.
We expect the companies to which we have ceded reinsurance to honor
their obligations. In the event these companies are unable to honor
their obligations to us, we will pay these amounts. We have
established allowances for possible nonpayment of amounts due to us.
The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses and loss adjustment expenses is
as follows:
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
PREMIUMS WRITTEN
Direct ....................... $3,491,466 $3,053,532 $3,011,879
Assumed ...................... 745,810 686,557 636,587
Ceded ........................ (614,250) (561,544) (506,047)
--------- --------- ---------
Net premiums written ....... $3,623,026 $3,178,545 $3,142,419
========= ========= =========
PREMIUMS EARNED
Direct ....................... $3,296,215 $3,021,203 $3,027,243
Assumed ...................... 709,987 680,626 661,505
Ceded ........................ (594,121) (523,491) (545,502)
--------- --------- ---------
Net premiums earned ........ $3,412,081 $3,178,338 $3,143,246
========= ========= =========
INSURANCE LOSSES AND
LOSS ADJUSTMENT EXPENSES
Direct ....................... $2,245,796 $1,968,839 $2,304,848
Assumed ...................... 595,492 721,141 1,034,594
Ceded ........................ (379,590) (386,242) (649,396)
--------- --------- ---------
Net insurance losses and
loss adjustment expenses... $2,461,698 $2,303,738 $2,690,046
========= ========= =========
<PAGE>
Note 15
STATUTORY ACCOUNTING PRACTICES
Our underwriting operations are required to file financial statements
with state and foreign regulatory authorities. The accounting
principles used to prepare these statutory financial statements follow
prescribed accounting principles, which differ from GAAP. On a
statutory accounting basis, our underwriting operations reported net
income of $285.3 million in 1994, $441.1 million in 1993, and $185.0
million in 1992. Statutory surplus (shareholder's equity) of these
operations was $1.9 billion and $1.8 billion as of Dec. 31, 1994 and
1993, respectively.
Note 16
SEGMENT INFORMATION
GEOGRAPHIC AREAS - We provide international broking services and
property-liability insurance coverages. The following summary presents
financial data based on the location of our operations:
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
REVENUES
U.S. ......................... $4,071,932 $3,875,545 $3,963,203
Non-U.S. ..................... 629,353 584,627 535,489
--------- --------- ---------
Total revenues ............. $4,701,285 $4,460,172 $4,498,692
========= ========= =========
INCOME (LOSS)
BEFORE INCOME TAXES
U.S. ......................... $520,983 $559,512 $145,477
Non-U.S. ..................... 42,595 (36,906) (370,540)
--------- --------- ---------
Total income (loss)
before income taxes........ $563,578 $522,606 $(225,063)
========= ========= =========
December 31
(In thousands) 1994 1993 1992
---- ---- ----
IDENTIFIABLE ASSETS
U.S. ......................... $14,716,603 $14,703,637 $13,166,460
Non-U.S. ..................... 2,779,217 2,445,559 2,225,594
---------- ---------- ----------
Total assets ............... $17,495,820 $17,149,196 $15,392,054
========== ========== ==========
INDUSTRY - Our industry segments consist of underwriting, insurance
brokerage and investment banking-asset management. The following
summary presents revenues, income (loss) before income taxes and
identifiable assets for each industry segment. Each segment's revenues
and pretax income (loss) include investment income. The insurance
brokerage segment's fees and commissions include intercompany
commissions that are eliminated when we consolidate our operations.
<PAGE>
Year ended December 31
(In thousands) 1994 1993 1992
---- ---- ----
REVENUES
Underwriting:
St. Paul Fire and Marine:
Specialized commercial....... $1,015,397 $1,011,439 $1,050,936
Personal & business insurance 737,601 485,564 341,902
Medical services............. 638,413 688,980 722,172
Commercial................... 380,356 418,635 541,109
--------- --------- ---------
Total St. Paul Fire
and Marine ................. 2,771,767 2,604,618 2,656,119
Reinsurance .................. 483,368 395,008 361,093
International ................ 156,946 178,712 126,034
--------- --------- ---------
Total premiums earned ....... 3,412,081 3,178,338 3,143,246
Net investment income ........ 674,818 646,396 642,301
Realized investment gains .... 35,967 49,429 60,351
Other ........................ 29,053 31,723 24,985
--------- --------- ---------
Total underwriting .......... 4,151,919 3,905,886 3,870,883
--------- --------- ---------
Insurance brokerage:
Fees and commissions ......... 315,977 294,579 290,081
Net investment income ........ 21,322 21,213 29,444
Other ........................ 8,377 4,725 8,267
--------- --------- ---------
Total insurance brokerage ... 345,676 320,517 327,792
--------- --------- ---------
Investment banking-
asset management ............. 220,303 245,732 221,182
--------- --------- ---------
Total industry segments ..... 4,717,898 4,472,135 4,419,857
Parent company and consolidating
eliminations ................. (16,613) (11,963) 78,835
--------- --------- ---------
Total revenues .............. $4,701,285 $4,460,172 $4,498,692
========= ========= =========
INCOME (LOSS) BEFORE INCOME TAXES
Underwriting:
St. Paul Fire and Marine:
Specialized commercial....... $(89,116) $(116,126) $(244,190)
Personal & business insurance (35,258) (28,835) (62,606)
Medical services............. 118,379 132,922 151,906
Commercial................... (54,045) (57,315) (123,230)
--------- --------- ---------
Total St. Paul Fire
and Marine ................. (60,040) (69,354) (278,120)
Reinsurance .................. (21,802) (18,230) (240,930)
International ................ (31,166) (62,671) (47,836)
--------- --------- ---------
Total GAAP underwriting result (113,008) (150,255) (566,886)
Net investment income ........ 674,818 646,396 642,301
Realized investment gains .... 35,967 49,429 60,351
Other ........................ (37,068) (38,389) (54,634)
--------- --------- ---------
Total underwriting .......... 560,709 507,181 81,132
--------- --------- ---------
Insurance brokerage ............ (9,947) (12,629) (432,527)
--------- --------- ---------
Investment banking-asset management:
Pretax income before
minority interest............ 94,635 111,663 97,866
Minority interest ............ (22,777) (29,076) (15,405)
--------- --------- ---------
Total investment banking-
asset management ........... 71,858 82,587 82,461
--------- --------- ---------
Total industry segments ..... 622,620 577,139 (268,934)
Parent company and consolidating
eliminations ................. (59,042) (54,533) 43,871
--------- --------- ---------
Total income (loss) before
income taxes ............... $563,578 $522,606 $(225,063)
========= ========= =========
<PAGE>
December 31
(In thousands) 1994 1993 1992
---- ---- ----
IDENTIFIABLE ASSETS
Underwriting ................... $15,397,173 $15,144,260 $13,682,466
Insurance brokerage ............ 1,738,060 1,616,574 1,463,647
Investment banking-
asset management ............. 348,847 410,764 294,235
---------- ---------- ----------
Total industry segments ..... 17,484,080 17,171,598 15,440,348
Parent company and
consolidating eliminations ... 11,740 (22,402) (48,294)
---------- ---------- ----------
Total assets ................ $17,495,820 $17,149,196 $15,392,054
========== ========== ==========
Note 17
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited summary of our quarterly performance:
1994
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues ................ $1,163,775 $1,165,149 $1,199,068 $1,173,293
Net income .............. 64,437 127,762 129,808 120,821
Net income per common share:
Primary ................ 0.73 1.49 1.51 1.40
Fully diluted .......... 0.71 1.43 1.45 1.35
1993
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues ................ $1,114,028 $1,069,338 $1,104,975 $1,171,831
Net income .............. 88,031 108,497 141,388 89,693
Net income per common share:
Primary ................ 1.01 1.25 1.63 1.02
Fully diluted .......... 0.98 1.21 1.57 0.99
1992
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues ................ $1,099,209 $1,172,957 $1,125,114 $1,101,412
Income (loss) before
cumulative effects of
accounting changes ..... 105,788 143,122 (63,886) (417,545)
Net income (loss) ....... 182,271 143,122 (63,886) (417,545)
Earnings (loss) per
common share:
Primary:
Income (loss) before
cumulative effects of
accounting changes .... 1.21 1.64 (0.78) (4.99)
Net income (loss) ...... 2.10 1.64 (0.78) (4.99)
Fully diluted:
Income (loss) before
cumulative effects of
accounting changes .... 1.16 1.57 (0.78) (4.99)
Net income (loss) ...... 2.01 1.57 (0.78) (4.99)<PAGE>
<PAGE>
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
-----------------------------------------
Shareholder Information
Stock Trading
The company's stock is traded nationally on the New York Stock
Exchange, where it is assigned the symbol SPC. As of Feb. 23, 1995,
the stock is also listed on the London Stock Exchange under the
symbol SPC. The number of holders of record, including individual
owners, of our common stock was 7,789 as of Feb. 27, 1995.
Options on the company's stock trade on the Chicago Board Options
Exchange, under the symbol SPQ.
Stock Price and Dividend Rate
The table below sets forth the amount of cash dividends declared
per share and the high and low closing sales prices of company
stock for each quarter during the past two years. All amounts
presented reflect the effect of a two-for-one stock split in 1994.
Cash
Dividend
1994 High Low Declared
---- ---- --- --------
1st Quarter $ 44 3/8 $38 13/16 $.375
2nd Quarter 41 11/16 37 7/8 .375
3rd Quarter 44 1/2 39 1/2 .375
4th Quarter 45 1/8 40 .375
Cash dividend paid in 1994 was $1.48.
Cash
Dividend
1993 High Low Declared
---- ---- --- --------
1st Quarter $ 41 5/8 $ 37 3/4 $.35
2nd Quarter 41 7/16 39 1/4 .35
3rd Quarter 46 11/16 40 5/16 .35
4th Quarter 48 1/2 43 1/4 .35
Cash dividend paid in 1993 was $1.39.
<PAGE> EXHIBIT 21
Subsidiaries of the Registrant State or
- ------------------------------ Other
Jurisdiction of
Name Incorporation
- ----- -----------
(1) St. Paul Fire and Marine Insurance Company Minnesota
Subsidiaries:
(i) St. Paul Mercury Insurance Co. Minnesota
(ii) St. Paul Guardian Insurance Co. Minnesota
(iii) The St. Paul Insurance Co. Texas
(iv) The St. Paul Insurance Co. of Illinois Illinois
(v) St. Paul Specialty Underwriting, Inc. Delaware
Subsidiaries:
(a) St. Paul Surplus Lines Insurance Co. Delaware
(b) St. Paul Risk Services, Inc. Minnesota
(c) Ramsey Insurance Co. Minnesota
(d) Athena Assurance Co. Minnesota
(vi) St. Paul Property and Casualty
Insurance Co. Nebraska
(vii) St. Paul Insurance Co. of North Dakota North Dakota
(viii) St. Paul Fire and Casualty Insurance Co. Wisconsin
(ix) Economy Fire & Casualty Co. Illinois
(a) Economy Preferred Insurance Co. Illinois
(b) Economy Premier Assurance Co. Illinois
(c) Premier Assurance Center, Inc. Illinois
(x) St. Paul Indemnity Insurance Co. Indiana
(xi) St. Paul Properties, Inc. Delaware
Subsidiaries:
(a) 77 Water Street, Inc. Minnesota
(b) St. Paul Interchange, Inc. Minnesota
(c) St. Paul 345, Inc. Minnesota
(d) 350 Market Street Minnesota
(e) St. Paul Cambridge, Inc. Minnesota
(xii) Seaboard Surety Company New York
Subsidiary:
(a) Seaboard Surety Company of Canada Canada
(xiii) St. Paul Media,Inc. Minnesota
(xiv) St. Paul Private RE, Inc. Minnesota
(xv) St. Paul Venture Capital, Inc. Minnesota
(xvi) St. Paul Land Resources, Inc. Minnesota
(xvii) St. Paul Lloyds Holdings, Inc. Texas
(xviii) St. Paul Management Services, Inc. Minnesota
<PAGE>
(2) Minet Holdings, Inc. New York
Subsidiaries:
(i) The Swett & Crawford Group, Inc. California
Subsidiaries:
(a) Swett Insurance Managers of
Nevada, Inc. Nevada
(b) Swett Insurance Managers of
Idaho, Inc. Idaho
(c) Durin Financial Corporation Wisconsin
(d) Swett Insurance Managers of
California, Inc. California
(e) Swett Insurance Managers of
Pennsylvania, Inc. Pennsylvania
(f) Montgomery General Agency of
New Jersey, Inc. New Jersey
(g) Swett & Crawford California
Subsidiaries:
(1) Swett & Crawford of Texas, Inc. Texas
(2) Swett & Crawford of Hawaii, Inc. Hawaii
(3) Swett Insurance Managers, Inc. Colorado
(h) Swett & Crawford of Connecticut, Inc. Connecticut
(i) Swett Insurance Managers of Maine, Inc. Maine
(j) Swett & Crawford Insurance Agency
of Massachusetts Massachusetts
(ii) Minet Re North America, Inc. Georgia
Subsidiaries:
(a) RFC Intermediaries, Inc. California
(b) Tailored Awards, Inc. Minnesota
(c) RFC Management Corporation Minnesota
(d) Intere Intermediaries, Inc. New York
Subsidiaries:
(1) Intere Bermuda Bermuda
(2) Intere Far East, Ltd. Hong Kong
(3) Port Cove Associates New York
(e) IOC Reinsurance Brokers, Ltd. Canada
(iii) Continental Underwriters, Ltd. Louisiana
(iv) Minet, Inc. New Jersey
Subsidiary:
(a) Minet Insurance Services, Inc. California
(b) Minet Insurance Services of
Texas, Inc. Texas
(v) Minet Limited - Bermuda Bermuda
<PAGE>
(3) St. Paul (UK) Ltd. United Kingdom
Subsidiaries:
(i) St. Paul Reinsurance Company
Limited United Kingdom
(ii) St. Paul Management Limited United Kingdom
(iii) Selsdon Insurance Management Limited United Kingdom
(iv) St. Paul International Insurance
Company Limited United Kingdom
(v) St. Paul Insurance Espana Seguros
Y Reaseguros, S.A. Spain
(vi) Minet Group* United Kingdom
Subsidiaries:
(a) Associated Insurance Brokers
of Botswana (Pty) Limited Botswana
(b) JH Minet Reinsurance Brokers
Limited United Kingdom
(c) Minet Australia Limited Australia
(d) Minet Burn & Roche Pty Limited Australia
(e) Minet Consultancy Services Limited United Kingdom
(f) Minet Hong Kong Limited Hong Kong
(g) Minet Inc. Canada
(h) Minet Limited United Kingdom
(i) Minet Zimbabwe (Pvt) Limited Zimbabwe
(j) Minet ICDC Insurance Brokers Ltd. Kenya
(4) St. Paul Reinsurance Management Corporation New York
Subsidiary:
(i) Excess & Treaty Management Corporation New York
(5) The John Nuveen Company** Delaware
Subsidiaries:
(i) John Nuveen & Co. Incorporated Delaware
(ii) Nuveen Advisory Corp. Delaware
(iii) Nuveen Institutional Advisory Corp. Delaware
(6) St. Paul Investments Limited United Kingdom
(7) Camperdown Corporation Delaware
*Minet Group and its listed subsidiaries also conduct insurance
brokerage business through a number of wholly-owned subsidiaries.
A total of eight such subsidiaries operate in the United States and
61 operate in foreign countries. These 69 subsidiaries, considered
in the aggregate as a single subsidiary, would not constitute a
significant subsidiary as of Dec. 31, 1994.
**The John Nuveen Company is a majority-owned subsidiary jointly
owned by The St. Paul, which holds a 40% interest, and Fire and
Marine, which holds a 37% interest.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The St. Paul Companies, Inc.:
We consent to incorporation by reference in the Registration
Statements on Form S-8 (SEC File No. 2-69894, No. 33-15392, No. 33-
20516, No. 33-23446, No. 33-23948, No. 33-24220, No. 33-24575, No.
33-26923, No. 33-49273 and No. 33-56987) and Form S-3 (SEC File No.
33-33931 and No. 33-50115) of The St. Paul Companies, Inc., of our
report dated January 26, 1995, relating to the consolidated balance
sheets of The St. Paul Companies, Inc. and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements
of operations, common shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1994, and
all related schedules, which report appears in the December 31,
1994 annual report on Form 10-K of The St. Paul Companies, Inc.
Our report refers to changes in the method of accounting for
certain investments, reinsurance, income taxes and postretirement
benefits.
Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP
March 27, 1995 -------------------------
KPMG Peat Marwick LLP
<PAGE>
EXHIBIT 24
Power of Attorney
------------------
KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned, a
director of The St. Paul Companies, Inc., a Minnesota
corporation ("The St. Paul"), do hereby make, nominate and
appoint Bruce A. Backberg and Howard E. Dalton, or either of
them, to be my attorney-in-fact, with full power and
authority to include my conformed signature on the
electronic filing of a Form 10-K for the year ended December
31, 1994, to be filed by The St. Paul with the Securities
and Exchange Commission, and any amendment thereto, and
shall have the same force and effect as though I had
manually signed the Form 10-K or amendment.
Dated: February 7, 1995 Signature: /s/ Michael R. Bonsignore
-------------------------
Name: Michael R. Bonsignore
Dated: February 27, 1995 Signature: /s/ John H. Dasburg
-------------------------
Name: John H. Dasburg
Dated: February 7, 1995 Signature: /s/ W. John Driscoll
-------------------------
Name: W. John Driscoll
Dated: February 7, 1995 Signature: /s/ Pierson M. Grieve
-------------------------
Name: Pierson M. Grieve
Dated: February 7, 1995 Signature: /s/ Ronald James
-------------------------
Name: Ronald James
Dated: February 7, 1995 Signature: /s/ William H. Kling
-------------------------
Name: William H. Kling
Dated: February 7, 1995 Signature: /s/ Bruce K. MacLaury
-------------------------
Name: Bruce K. MacLaury
<PAGE>
Dated: February 7, 1995 Signature: /s/ Ian A. Martin
-----------------
Name: Ian A. Martin
Dated: February 7, 1995 Signature: /s/ Glen D. Nelson
------------------
Name: Glen D. Nelson
Dated: February 7, 1995 Signature: /s/ Anita M. Pampusch
---------------------
Name: Anita M. Pampusch
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 8,828,684
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 531,042
<MORTGAGE> 0
<REAL-ESTATE> 528,144
<TOTAL-INVEST> 11,162,522
<CASH> 46,664
<RECOVER-REINSURE> 88,900
<DEFERRED-ACQUISITION> 324,358
<TOTAL-ASSETS> 17,495,820
<POLICY-LOSSES> 9,423,429
<UNEARNED-PREMIUMS> 2,109,170
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 622,624
<COMMON> 445,222
0
4,535
<OTHER-SE> 2,287,712
<TOTAL-LIABILITY-AND-EQUITY> 17,495,820
3,412,081
<INVESTMENT-INCOME> 694,594
<INVESTMENT-GAINS> 41,974
<OTHER-INCOME> 552,636
<BENEFITS> 2,461,698
<UNDERWRITING-AMORTIZATION> 753,946
<UNDERWRITING-OTHER> 922,063
<INCOME-PRETAX> 563,578
<INCOME-TAX> 120,750
<INCOME-CONTINUING> 442,828
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 442,828
<EPS-PRIMARY> 5.12
<EPS-DILUTED> 4.93
<RESERVE-OPEN> 9,185,191
<PROVISION-CURRENT> 2,790,165
<PROVISION-PRIOR> (328,466)
<PAYMENTS-CURRENT> 667,255
<PAYMENTS-PRIOR> 1,566,082
<RESERVE-CLOSE> 9,423,429
<CUMULATIVE-DEFICIENCY> 343,000
</TABLE>
