<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, 1995
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 612-310-7911
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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 18, 1996, was
$4,668,977,742. The number of shares of the Registrant's Common
Stock, without par value, outstanding at March 18, 1996, was
83,754,512.
An Exhibit Index is set forth at page 31 of this report.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's 1995 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 7, 1996, are incorporated by
reference into Parts III and IV of this report.
Page 1 of 31 pages
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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 and reinsurance
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, The St.
Paul was the 243rd largest U. S. corporation, based on total 1994 revenues.
At March 18, 1996, The St. Paul and its subsidiaries employed approximately
12,300 persons.
The St. Paul's underwriting segment accounted for 89% of consolidated
revenues in 1995. The brokerage and investment banking-asset management
segments accounted for 7% and 4% of consolidated revenues, respectively, in
1995. Note 15 on pages 65 and 66 of The St. Paul's 1995 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
1995 1994 1993
---- ---- ----
Insurance Underwriting:
St. Paul Fire and Marine:
Specialized Commercial 22.8% 21.6% 22.7%
Personal Insurance 12.1 13.2 8.1
Medical Services 11.2 13.6 15.4
Commercial 10.8 10.6 12.2
---- ---- ----
Total Fire and Marine 56.9 59.0 58.4
St. Paul Re 12.1 10.3 8.9
St. Paul International
Underwriting 4.4 3.3 4.0
Net investment income 13.5 14.4 14.5
Realized investment gains 1.4 0.7 1.1
Other 0.7 0.6 0.7
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Total underwriting 89.0 88.3 87.6
Insurance brokerage 6.8 7.4 7.2
Investment banking-
asset management 4.4 4.7 5.5
Parent company
and eliminations (0.2) (0.4) (0.3)
---- ---- ----
Total 100.0% 100.0% 100.0%
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UNDERWRITING
Overview. The St. Paul's 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
property-liability insurance companies worldwide. St. Paul International
Underwriting provides primary property-liability insurance coverages
outside the United States, and insurance on U.S. risks of foreign
policyholders.
<PAGE>
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 16th on the basis of 1994 written premiums.
Principal Departments and Products
The "Underwriting Results by Operation" table on page 19 of The St. Paul's
1995 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.
St. Paul Fire and Marine
Fire and Marine underwrites insurance through the following business units:
Specialized Commercial. Based on written premiums, this is the largest of
Fire and Marine's operations. Specialized Commercial 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 1994 written premiums,
Fire and Marine's surety operation ranked as the fourth-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 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.
<PAGE>
Effective Jan. 1, 1996, Specialized Commercial was restructured to more
closely align its operations with the industry groups they serve. Three
new business centers were formed - Manufacturing, Services Industry and
Transportation/Programs. The National Accounts operation was eliminated.
The large commercial risks previously underwritten in that operation are
now underwritten in the respective individual Specialized Commercial
operations.
Personal Insurance. This operation provides property and liability
insurance coverages for individuals. Through a variety of monoline and
package policies, individuals can acquire coverages to protect personal
property such as homes, automobiles and boats, as well as to provide
coverage for personal liability.
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
(physicians and surgeons, dental professionals and nurses); individual
health care facilities (including hospitals, long-term care facilities and
other facilities such as laboratories); and entire systems (hospital
networks and managed care systems). Specialized claim and loss control
services are vital components of Medical Services' insurance products and
services. Fire and Marine is the largest medical liability insurer in the
United States, with premium volume representing approximately 10% of the
U.S. market in 1994 based on premium data published in "Best's Review."
Commercial. Fire and Marine's Commercial underwriting operation offers
property and liability insurance to a broad range of small to midsize
commercial enterprises. Business coverages marketed include package,
general liability, umbrella and excess liability, commercial auto and fire,
inland marine and workers' compensation. Commercial offers tailored
coverages and insurance products for specific customer groups such as golf
courses, museums, colleges and schools, amusement and recreation
organizations, manufacturers, wholesalers and processors. Coverages
marketed to the small commercial customer include the Package Accounts for
Commercial Enterprises (PACE) policies for offices, retailers and family
restaurants.
St. Paul Re
St. Paul Re underwrites reinsurance in both domestic and international
insurance markets (referred to as "assumed reinsurance"). Reinsurance is an
agreement through which one insurance company will transfer some of the
risk it has underwritten to another insurer and will pay a premium in order
to do so. 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 underwrites 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 seventh
largest U.S. reinsurance underwriter based on written premium volume for
the first nine months of 1995.
In late 1994, St. Paul Re purchased from CIGNA Corporation the opportunity
to renew most of the international business underwritten by CIGNA
Reinsurance-Property & Casualty. In 1995, the renewal of CIGNA business
accounted for $119 million of St. Paul Re's written premiums for the year.
St. Paul International Underwriting
St. Paul International Underwriting includes primary insurance written
outside the United States. 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 broad range of commercial and personal
lines products and services tailored to meet the unique needs of customers
in each of the indigenous markets which it serves.
<PAGE>
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 1995 property-liability written premiums were produced in each of
Illinois, Minnesota, California and Texas.
Fire and Marine's business is produced primarily through approximately
6,400 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.
St. Paul Re produces business from its New York and London headquarters, as
well as from its offices in Miami, Brussels, Singapore and Tokyo. St. Paul
Re obtains business primarily through the broker or intermediary market.
Approximately 50% of St. Paul Re's business in 1995 originated from outside
the United States.
St. Paul International Underwriting is headquartered in London and
underwrites insurance through indigenous operations in several markets
outside the United States, including Africa, Canada, the Netherlands, the
Republic of Ireland, Spain and the United Kingdom.
Reserves for Losses and Loss Adjustment Expenses
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 1995 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 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 1985 through
1995. 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 reinsurance and international underwriting operations
are included in the table from 1988 to 1995.
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.
<PAGE>
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 1985 reserve of $3,364 million developed up to $3,477 million,
or a $113 million deficiency, by the end of 1986. By the end of 1995, the
1985 reserve had developed a deficiency of $419 million. The changes in
the estimate of 1985 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 1995),
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, 1995) 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, 1995, $3,431 million of the
currently estimated $3,783 million of losses and LAE that have been
incurred for the years up to and including 1985 have been paid. Thus, as
of Dec. 31, 1995, it is estimated that $352 million of incurred losses and
LAE are unpaid for the years up to and including 1985.
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 1994 reserves that relates to 1985 losses is
included in the cumulative redundancy or deficiency amount for the years
1985 through 1994.
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 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net liability for <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
unpaid losses and LAE $3,364 4,043 4,745 5,502 5,907 6,279 6,688 7,207 7,640 7,890 8,393
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Liability re-estimated
as of:
One year later 3,477 4,087 4,727 5,313 5,656 6,037 6,436 6,984 7,312 7,642
Two years later 3,625 4,078 4,489 4,914 5,338 5,787 6,260 6,703 7,027
Three years later 3,652 3,955 4,268 4,789 5,135 5,628 6,066 6,563
Four years later 3,597 3,874 4,226 4,731 5,027 5,490 6,063
Five years later 3,572 3,874 4,178 4,707 4,975 5,521
Six years later 3,624 3,885 4,180 4,682 5,058
Seven years later 3,652 3,914 4,169 4,796
Eight years later 3,688 3,951 4,163
Nine years later 3,742 3,983
Ten years later 3,783
Cumulative redundancy
(deficiency) $ (419) 60 582 706 849 758 625 644 613 248
===== ==== ===== ===== ===== ===== ===== ===== ===== =====
Cumulative redundancy
(deficiency) excluding
foreign exchange (1) $ (419) 60 582 720 834 764 641 647 617 256
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Net liability for
unpaid losses and LAE 7,207 7,640 7,890 8,393
Reinsurance recoverable on
unpaid losses 1,606 1,545 1,533 1,854
----- ----- ----- ------
Gross liability 8,813 9,185 9,423 10,247
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Gross re-estimated
liability:
One year later 8,692 8,842 9,599
Two years later 8,389 8,934
Three years later 8,622
Gross cumulative
redundancy (deficiency) 191 251 (176)
=== === ===
Gross cumulative
redundancy (deficiency) excluding
foreign exchange (1) 166 241 (199)
=== === ===
Cumulative amount of net
liability paid through:
One year later 976 1,008 1,101 1,196 1,318 1,450 1,452 1,547 1,566 1,591
Two years later 1,666 1,787 1,884 2,044 2,209 2,361 2,493 2,576 2,608
Three years later 2,185 2,332 2,466 2,646 2,797 3,015 3,155 3,245
Four years later 2,548 2,732 2,869 3,043 3,216 3,442 3,584
Five years later 2,812 3,012 3,132 3,348 3,496 3,713
Six years later 3,008 3,205 3,322 3,554 3,674
Seven years later 3,157 3,343 3,453 3,691
Eight years later 3,258 3,447 3,573
Nine years later 3,343 3,551
Ten years later 3,431
Cumulative amount of
gross liability paid
through:
One year later 1,935 1,872 1,958
Two years later 3,199 3,136
Three years later 4,047
(1) The results of The St. Paul's U.K.-based operations translated from
original currencies into U.S. dollars are included with The St. Paul's
U.S. underwriting operations in this table from 1988 to 1995. 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>
<PAGE>
Note 6 on pages 56 and 57 of the 1995 Annual Report to Shareholders, which
includes a reconciliation of beginning and ending loss reserve liabilities
for each of the last three years, is incorporated herein by reference.
Additional information about The St. Paul's reserves is contained in the
"Insurance Reserves" and "Environmental and Asbestos Claims" sections of
"Management's Discussion and Analysis" on pages 30 through 34 of the 1995
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.
2) Provide its respective underwriting operations with the capacity
necessary to write large limits on accounts.
The collectibility of reinsurance is subject to the solvency of reinsurers.
The St. Paul's Reinsurance Security Committee, which has established
financial standards to determine qualified, financially secure reinsurers,
guides the placement of ceded reinsurance. Uncollectible reinsurance
recoverables have not had a material adverse impact on The St. Paul's
results of operations, liquidity or financial position. Note 13 on pages
64 and 65 of the 1995 Annual Report to Shareholders, which provides a
schedule of ceded reinsurance information, is incorporated herein by
reference.
INSURANCE BROKERAGE
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 by "Business Insurance," Minet is the tenth largest international
insurance brokerage organization in the world, based on total 1994
revenues. Minet is based in London and has 125 offices in 32 countries
throughout North America, Europe, Africa, Asia and Australia.
Minet operates through six business units, each focusing on distinct client
groups. 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
1994 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. Global Professional Services provides insurance brokerage
services to the world's largest accounting firms, as well as law firms, law
societies and 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.
INVESTMENT BANKING-ASSET MANAGEMENT
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 78% interest in Nuveen.
Through John Nuveen & Co. Incorporated, a wholly-owned subsidiary, Nuveen
markets tax-free, open-end and closed-end (exchange-traded) managed funds.
Nuveen also underwrites and trades municipal bonds and tax-free 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 $15.5 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 $7 billion in national,
state, insured and money market portfolios. In addition, Nuveen manages 60
exchange-traded funds with approximately $26 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.
The St. Paul has had limited involvement with derivative financial
instruments, primarily to hedge against fluctuations in interest rates,
equity security values and foreign currency values. The St. Paul has not
participated in the derivatives market for trading or speculative purposes.
<PAGE>
Fixed Maturities. Fixed maturities constituted 79% of The St. Paul's
investment portfolio at Dec. 31, 1995. 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 Value at Investment Pretax After-tax
Year Year-end Year-end Income Yield Yield
- ---- -------- -------- ------ ------ --------
1995 $9,715.0 $10,372.9 $665.4 7.2% 5.6%
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%
The St. Paul determines the mix of its investments 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 1995 were comprised of intermediate-term, investment-
grade taxable and tax-exempt securities. The fixed maturities portfolio is
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, 1995, pretax unrealized appreciation
totaled $658 million.
The fixed maturities portfolio is managed conservatively to provide
reasonable return while limiting exposure to risks. Approximately 96% 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, 1995, and consist of a diversified portfolio of common stocks,
which are held with the primary objective of achieving capital
appreciation. This portfolio provided $49 million of realized investment
gains and $15 million of dividend income in 1995, and its carrying value at
year-end included $160 million of unrealized appreciation.
Real Estate. The St. Paul's real estate holdings, which comprised 5% of
total investments at Dec. 31, 1995, consist primarily of a diversified
portfolio of commercial office and warehouse buildings geographically
distributed throughout the United States. This portfolio produced $33
million of pretax investment income in 1995. 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, 1995.
These investments are in the form of limited partnership interests or
direct equity investments, and their carrying value at year-end included
$129 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, 1995.
Notes 3, 4 and 5 on pages 54 through 56 of the 1995 Annual Report to
Shareholders, and the "Investments" section of "Management's Discussion and
Analysis" on pages 35 through 37 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 domestic and international underwriting
subsidiaries compete with a large number of other insurers. In addition,
many large commercial customers self-insure their risks or utilize large
deductibles on purchased insurance. The St. Paul's 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 1995, The St. Paul received $196.0
million in cash dividends from Fire and Marine. In 1996, up to $331.6
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,
competes with a large number of other insurance brokers and risk
consultants in the countries where it does business, and worldwide. 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.
- ------ ----------
St. Paul Fire and Marine Insurance Company 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. Economy Fire & Casualty Company, a subsidiary of St. Paul Fire and
Marine Insurance Company, owns a building in Freeport, Illinois that houses
a portion of Fire and Marine's personal insurance operations.
Minet and St. Paul International Insurance Company Ltd. also own buildings
in the United Kingdom which house their respective operations.
St. Paul Fire and Marine Insurance Company 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
64 of the 1995 Annual Report to Shareholders, the "Legal Matters" section
of "Management's Discussion and Analysis" on page 34 of said Annual Report,
and the "Environmental and Asbestos Claims" section of "Management's
Discussion and Analysis" on pages 31 through 34 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, now called St. Paul
International Insurance Company Limited (SPI), had
<PAGE>
accepted business from Weavers. A portion of that business was ceded by
SPI to reinsurers. Certain of those reinsurers have challenged the validity
of certain reinsurance contracts relating to the Weavers pool, of which SPI
was a member, in an attempt to avoid liability under those contracts. 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.
In late 1993, the Superior Court of California entered judgment in an
action brought against Fire and Marine in 1987 by Arntz Contracting Company
and certain affiliates alleging breach of contract and intentional
interference with ability to conduct business. The judgment affirmed a
jury's August 1993 award of approximately $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. The St. Paul recognizes that the final
outcome of this case, if adverse to Fire and Marine, may materially impact
the results of operations in the period in which that outcome occurs, but
believes it will not have a materially adverse effect on its liquidity or
overall financial position.
Item 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, 1995.
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, St. Paul Re or St. Paul
International Underwriting. 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 Michael J. Conroy, 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. Michael J. Conroy joined The St. Paul in August 1994.
For three years prior to that date, Mr. Conroy served as executive vice
president and chief administrative officer of The Home Insurance Company.
For two years prior to that, Mr. Conroy held various other management
positions with The Home Insurance Company. 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. Andrew I. 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. 59 Chairman, President Serving at the
Leatherdale and Chief Executive pleasure of the
Officer Board from 5-90
<PAGE>
Patrick A. Thiele 45 Executive Vice Serving at the
President and pleasure of the
Chief Financial Board from 12-91
Officer
Nicholas M. 41 Executive Vice Serving at the
Brown Jr. President and pleasure of the
Chief Operating Board from 5-94
Officer-
Fire and Marine
Michael J. Conroy 54 Executive Vice Serving at the
President and pleasure of the
Chief Administrative Board from 8-95
Officer
James F. Duffy 52 President and Serving at the
Chief Executive pleasure of the
Officer- Board from 9-93
St. Paul Re
Mark L. Pabst 49 President and Serving at the
Chief Executive pleasure of the
Officer-St. Paul Board from 2-95
International
Underwriting
Susan J. Albrecht 49 President- Serving at the
Major Markets- pleasure of the
Fire and Marine Board from 12-94
Stephen J. Klingel 45 President- Serving at the
Personal pleasure of the
Insurance- Board from 8-95
Fire and Marine
Joseph B. Nardi 51 President- Serving at the
Medical Services- pleasure of the
Fire and Marine Board from 8-82
Janet R. Nelson 46 President- Serving at the
Custom Markets- pleasure of the
Fire and Marine Board from 5-94
James A. Schulte 46 President- Serving at the
Commercial- pleasure of the
Fire and Marine Board from 10-93
Howard E. Dalton 58 Senior Vice Serving at the
President and pleasure of the
Chief Accounting Board from 9-87
Officer
Andrew I. Douglass 52 Senior Vice Serving at the
President and pleasure of the
General Counsel Board from 8-93
<PAGE>
Gary P. Hanson 52 Senior Vice Serving at the
President - Sales pleasure of the
and Marketing Board from 8-95
James Hom 40 Senior Vice Serving at the
President- pleasure of the
Corporate Planning Board from 10-94
Greg A. Lee 46 Senior Vice Serving at the
President- pleasure of the
Human Resources Board from 1-93
Bruce A. Backberg 47 Vice President Serving at the
and Corporate pleasure of the
Secretary Board from 5-92
James L. Boudreau 60 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 the inside back cover of The St.
Paul's 1995 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 44
and 45 of the 1995 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 16 to 43 of the
1995 Annual Report to Shareholders is incorporated herein by reference.
In early February 1996, The St. Paul's board of directors authorized the
repurchase of up to five percent of the company's common shares. Such
repurchases may be made from time to time on the open market and through
private transactions following management's determination that such
repurchases are appropriate to protect or increase shareholder value. From
the date of the board's authorization through March 18, 1996, the company
repurchased 341,700 shares.
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
The financial statements and supplementary data on pages 46 to 67 of the
1995 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 7, 1996, 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 12 to 20 and the "Board of
Directors Compensation" section on pages 6 to 9 of the Proxy Statement
relating to the annual meeting of shareholders to be held May 7, 1996, 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 21 to 24 of the Proxy Statement relating to the annual
meeting of shareholders to be held May 7, 1996, 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 Income - Years Ended
December 31, 1995, 1994 and 1993
Consolidated Balance Sheets - December 31, 1995
and 1994
Consolidated Statements of Shareholders'
Equity - Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years Ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
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
<PAGE>
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 of The St.
Paul are incorporated herein by reference to Form 10-Q for
the quarter ended June 30, 1995.
The current bylaws of The 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 Amended and Restated Shareholder Protection
Rights Agreement is incorporated herein by reference to Form
10-Q for the quarter ended June 30, 1995.
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 Deferred Stock Grant Agreement with Mr. Mark L. Pabst.
The Directors' Charitable Award Program is
incorporated by reference to the Form 10-K for the year
ended December 31, 1994.
The Compensation Arrangement with Mr. Nicholas M.
Brown Jr. is incorporated by reference to the Form 10-K for
the year ended December 31, 1994.
The Relocation Loan Payback Agreement with Mr.
James F. Duffy is incorporated by reference to the Form 10-K
for the year ended December 31, 1994.
The Pension Service Agreement with Mr. Andrew I.
Douglass is incorporated by reference to the Form 10-K for
the year ended December 31, 1994.
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 7, 1996.
<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 1995 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 Items in
for the year ended this
December 31, 1995 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 1995 Annual Report to Shareholders is
furnished to the Commission in a paper format pursuant to
Rule 14a-3(c).
(21) List of subsidiaries of The St. Paul Companies, Inc.
<PAGE>
(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, No. 33-56987 and No. 333-
01065) and Form S-3 (SEC File No. 33-33931, No. 33-50115
and No. 33-58491).
(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 29, 1996, was filed
relating to the announcement of The St. Paul's financial results
for the year ended December 31, 1995.
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 20, 1996 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 20, 1996 By /s/ Douglas W. Leatherdale
-------------- --------------------------
Douglas W. Leatherdale,
Director, Chairman of the
Board, President and Chief
Executive Officer
Date March 20, 1996 By /s/ Patrick A. Thiele
-------------- ---------------------
Patrick A. Thiele, Director,
Executive Vice President and
Chief Financial Officer
Date March 20, 1996 By /s/ Howard E. Dalton
-------------- --------------------
Howard E. Dalton, Senior
Vice President and Chief
Accounting Officer
Date March 20, 1996 By /s/ Michael R. Bonsignore
-------------- -------------------------
Michael R. Bonsignore*, Director
Date March 20, 1996 By /s/ John H. Dasburg
-------------- -------------------
John H. Dasburg*, Director
<PAGE>
Date March 20, 1996 By /s/ W. John Driscoll
-------------- --------------------
W. John Driscoll*, Director
Date March 20, 1996 By /s/ Pierson M. Grieve
-------------- ---------------------
Pierson M. Grieve*, Director
Date March 20, 1996 By /s/ Ronald James
-------------- ----------------
Ronald James*, Director
Date March 20, 1996 By /s/ William H. Kling
-------------- --------------------
William H. Kling*, Director
Date March 20, 1996 By /s/ Bruce K. MacLaury
-------------- ---------------------
Bruce K. MacLaury*, Director
Date March 20, 1996 By /s/ Ian A. Martin
-------------- -----------------
Ian A. Martin*, Director
Date March 20, 1996 By /s/ Glen D. Nelson
-------------- ------------------
Glen D. Nelson*, Director
Date March 20, 1996 By /s/ Anita M. Pampusch
-------------- ---------------------
Anita M. Pampusch*, Director
Date March 20, 1996 By /s/ Gordon M. Sprenger
-------------- ----------------------
Gordon M. Sprenger*, Director
Date March 20, 1996 *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 29, 1996, we reported on the consolidated balance
sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1995, as contained in the 1995 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 1995. 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 Note 4 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," in 1993.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota ---------------------
January 29, 1996 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, 1995
(In thousands)
1995
-------------------------------------
Amount at
which shown
in the
Cost* Value* balance sheet
--------- --------- --------------
Type of investment:
Fixed maturities:
- ----------------
United States Government and
government agencies and
authorities $ 2,087,057 $ 2,205,997 $ 2,205,997
States, municipalities and
political subdivisions 4,295,822 4,665,893 4,665,893
Foreign governments 893,677 929,994 929,994
Corporate securities 1,348,506 1,429,390 1,429,390
Mortgage-backed securities 1,089,891 1,141,616 1,141,616
---------- ---------- ----------
Total fixed maturities 9,714,953 10,372,890 10,372,890
---------- ========== ----------
Equity securities:
- -----------------
Common stocks:
Public utilities 55,208 71,035 71,035
Banks, trusts and insurance
companies 66,082 80,655 80,655
Industrial, miscellaneous and
all other 429,741 559,781 559,781
---------- --------- ---------
Total equity securities 551,031 711,471 711,471
---------- ========= ---------
Venture capital 259,324 $ 388,599 388,599
---------- ========= ---------
Real estate 631,656** 611,656
Other investments 42,776 42,776
Short-term investments 939,528 939,528
---------- ----------
Total investments $12,139,268 $13,066,920
========== ==========
* See Notes 1, 3, 4 and 5 to the consolidated financial statements
included in The St. Paul's 1995 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, 1995 and 1994
(In thousands)
Assets: 1995 1994
------ -----
Investment in subsidiaries $4,514,440 $3,308,561
Investments:
Fixed maturities 138,552 42,385
Equity securities 52,235 41,288
Short-term investments 40,130 5,040
Deferred income taxes 136,427 139,396
Notes and other receivables from subsidiaries 1,017 350
Other assets 88,266 46,579
--------- ---------
Total assets $4,971,067 $3,583,599
========= =========
Liabilities:
Debt $ 1,074,657 $ 766,016
Dividends payable to shareholders 33,559 31,549
Other liabilities 132,730 48,565
--------- ---------
Total liabilities 1,240,946 846,130
--------- ---------
Shareholders' Equity:
Preferred:
Convertible preferred stock 144,165 146,102
Guaranteed obligation - PSOP (133,293) (141,567)
--------- ---------
Total preferred shareholders' equity 10,872 4,535
--------- ---------
Common:
Common stock, authorized 240,000 shares;
issued 83,976 shares (84,202 in 1994) 460,458 445,222
Retained earnings 2,704,075 2,362,286
Guaranteed obligation - ESOP (32,294) (44,410)
Unrealized appreciation of investments 627,791 13,948
Unrealized loss on foreign
currency translation (40,781) (44,112)
--------- ---------
Total common shareholders' equity 3,719,249 2,732,934
--------- ---------
Total shareholders' equity 3,730,121 2,737,469
--------- ---------
Total liabilities and
shareholders' equity $4,971,067 $3,583,599
========= =========
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, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
----- ----- -----
Revenues:
Net investment income $ 9,165 $ 4,470 $ 4,647
Realized investment gains 8,800 4,240 5,551
------ ------ ------
Total revenues 17,965 8,710 10,198
------ ------ ------
Expenses:
Interest expense 63,744 48,457 43,349
Administrative and other 29,476 21,312 25,403
------ ------ ------
Total expenses 93,220 69,769 68,752
------ ------ ------
Loss before
income tax benefit (75,255) (61,059) (58,554)
Income tax benefit (18,941) (22,608) (24,977)
------ ------ ------
Net loss - Parent only (56,314) (38,451) (33,577)
Equity in net income
of subsidiaries 577,523 481,279 461,186
------- ------- -------
Consolidated net income $521,209 $442,828 $427,609
======= ======= =======
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, 1995, 1994 and 1993
(In thousands)
1995 1994 1993
----- ----- -----
Operating Activities:
Net loss $ (56,314) $ (38,451) $ (33,577)
Cash dividends from subsidiaries 206,118 210,523 208,333
Tax payments from subsidiaries 159,216 104,509 99,751
State and federal income tax payments (103,000) (84,910) (83,200)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Deferred tax benefit (1,077) (19,660) (7,609)
Realized investment gains (8,800) (4,240) (5,551)
Other (110) 1,897 (14,205)
------- ------- -------
Cash provided by operating activities 196,033 169,668 163,942
------- ------- -------
Investing Activities:
Purchases of investments (218,525) (93,601) (61,614)
Proceeds from sales and maturities
of investments 93,919 84,337 62,656
Capital contributions to
subsidiaries (223,623) (53,466) (75,136)
Acquisitions - (10,643) -
Other (870) 14 1,356
------- ------- -------
Cash used in
investing activities (349,099) (73,359) (72,738)
------- ------- -------
Financing Activities:
Dividends paid to shareholders (144,662) (136,062) (129,218)
Proceeds from issuance of debt 455,028 87,721 77,243
Repayment of debt (125,446) (20,350) (51,735)
Repurchase of common shares (41,714) (34,150) (207)
Stock options exercised and other 9,860 6,532 12,713
------- ------- -------
Cash provided by
(used in) financing activities 153,066 (96,309) (91,204)
------- ------- -------
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 1995 Annual Report to Shareholders.
2. Debt consists of the following (in thousands):
December 31,
--------------------
1995 1994
------- -------
Medium-term notes $ 397,433 $ 204,433
Convertible subordinated debentures (1) 262,026 -
Commercial paper 149,629 275,635
Guaranteed PSOP debt (1) 133,293 141,567
9-3/8% notes 99,982 99,971
Guaranteed ESOP debt 25,001 36,112
Guaranteed ESOP debt (1) 7,293 8,298
--------- -------
Total debt $1,074,657 $766,016
========= =======
(1) Eliminated in consolidation.
See Note 8 to the consolidated financial statements included in the
1995 Annual Report to Shareholders for further information on debt
outstanding at Dec. 31, 1995.
The amount of debt, other than debt eliminated in consolidation, that
becomes due during each of the next five years is as follows: 1996,
$11.1 million; 1997, $111.1 million; 1998, $27.8 million; 1999, $20.0
million; and 2000, $149.6 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
--------- ---------------- -------- ---------
1995
- ----
Property-Liability Insurance
Underwriting:
Fire and Marine:
Specialized Commercial $119,150 $ 3,377,431 $ 753,479 -
Personal Insurance 58,153 405,266 286,121 -
Medical Services 58,777 2,129,471 647,878 -
Commercial 60,561 1,399,928 290,475 -
------- ---------- --------- -------
Total Fire and Marine 296,641 7,312,096 1,977,953 -
St. Paul Re 57,256 1,843,843 249,376 -
International 18,277 1,091,131 133,699 -
------- ---------- --------- -------
Total $372,174 $10,247,070 $2,361,028 -
======= ========== ========= =======
1994
- ----
Property-Liability Insurance
Underwriting:
Fire and Marine:
Specialized Commercial $110,792 $3,209,219 $ 688,662 -
Personal Insurance 56,597 417,761 268,760 -
Medical Services 48,131 2,179,849 592,627 -
Commercial 56,309 1,450,462 265,210 -
------- --------- --------- -------
Total Fire and Marine 271,829 7,257,291 1,815,259 -
St. Paul Re 40,318 1,912,028 192,861 -
International 12,211 254,110 101,050 -
------- --------- --------- -------
Total $324,358 $9,423,429 $2,109,170 -
======= ========= ========= =======
<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
1995 earned income expenses expenses expenses written
-------- ---------- ---------- ----------- --------- -------
Property-Liability
Underwriting:
Fire and Marine:
Specialized <C> <C> <C> <C> <C> <C>
Commercial $1,230,790 - $ 961,801 $298,765 $ 98,328 $1,304,062
Personal
Insurance 655,347 - 486,275 145,547 56,524 673,347
Medical
Services 605,468 - 387,716 97,695 44,557 673,980
Commercial 587,016 - 378,754 155,125 57,580 617,767
--------- -------- --------- -------- ------- ---------
Total Fire
and Marine 3,078,621 - 2,214,546 697,132 256,989 3,269,156
St. Paul Re 654,981 - 461,033 132,521 56,936 713,475
International 237,727 - 188,728 27,326 44,857 260,582
Net investment income - $731,096 - - - -
Other - - - - 82,130 -
--------- -------- --------- ------- ------- ---------
Total $3,971,329 $731,096 $2,864,307 $856,979 $440,912 $4,243,213
========= ======== ========= ======= ======= =========
1994
- ----
Property-Liability
Insurance Underwriting:
Fire and Marine:
Specialized
Commercial $1,015,397 - $ 764,760 $252,577 $ 88,046 $1,085,514
Personal Insurance 619,414 - 455,879 138,512 51,338 635,557
Medical Services 638,413 - 369,571 109,517 38,848 689,716
Commercial 498,543 - 365,555 137,661 59,079 529,741
--------- -------- --------- ------- ------- ---------
Total Fire
and Marine 2,771,767 - 1,955,765 638,267 237,311 2,940,528
St. Paul Re 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 - - - - 66,581 -
--------- ------- --------- ------- ------- ---------
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 - $ 778,042 $263,138 $ 91,570 $1,000,255
Personal Insurance 360,305 - 249,345 70,221 56,053 375,518
Medical Services 688,980 - 389,483 122,323 48,777 710,281
Commercial 543,894 - 406,741 170,155 38,381 489,861
--------- ------- --------- ------- ------- ---------
Total Fire
and Marine 2,604,618 - 1,823,611 625,837 234,781 2,575,915
St. Paul Re 395,008 - 301,060 74,026 38,152 431,242
International 178,712 - 179,067 32,274 30,042 171,388
Net investment income - $646,396 - - - -
Other - - - - 59,855 -
--------- ------- --------- ------- ------- ---------
Total $3,178,338 $646,396 $2,303,738 $732,137 $362,830 $3,178,545
========= ======= ========= ======= ======= =========
</TABLE>
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
Years Ended December 31, 1995, 1994 and 1993
(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
- -------------- ------- --------- --------- -------- ---------
1995 $3,678,190 641,351 934,490 3,971,329 23.5%
========= ======= ======= =========
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%
========= ======= ======= =========
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1994 and 1993
(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
- ----------- ---------- --------- --------- ----------- --------
1995
- ----
Real estate valuation
adjustment $20,000 - - - 20,000
====== ====== ===== ===== ======
Allowance for uncollectible:
Agency loans $ 1,664 - - - 1,664
====== ====== ===== ===== ======
Premiums receivable from:
Underwriting activities $20,938 4,192 - 6,212 18,918
====== ====== ===== ===== ======
Brokerage activities $19,529 967 - 2,978 17,518
====== ====== ===== ===== ======
Reinsurance $25,823 - - 4,292 21,531
====== ====== ===== ===== ======
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
====== ====== ===== ===== ======
(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) Amended and Restated Shareholder Protection
Rights Agreement***......................................
(9) Voting trust agreements**........................................
(10) Material contracts
(a) The Deferred Stock Grant Agreement with Mr. Mark L. Pabst..... (1)
(b) The Directors' Charitable Award Program***....................
(c) Compensation Arrangement with Mr. Nicholas M. Brown Jr.***...
(d) Relocation Loan Payback Agreement with Mr. James F. Duffy***..
(e) Pension Service Agreement with Mr. Andrew I. Douglass***......
(f) 1994 Stock Incentive Plan***..................................
(g) 1994 Annual Incentive Plan***.................................
(h) Long-Term Incentive Plan***...................................
(i) Non-Employee Director Stock Retainer Plan***..................
(j) Outside Directors' Retirement Plan***.........................
(k) Amended 1988 Stock Option Plan***.............................
(l) Restricted Stock Award Plan***................................
(m) Benefit Equalization Plan***..................................
(n) Special Severance Policy***...................................
(o) Deferred Management Incentive Awards Agreement
- Prime Rate***...............................................
(p) Deferred Management Incentive Awards Agreement
- Phantom Stock***............................................
(q) Directors' Deferred Compensation Agreement
- Prime Rate***...............................................
(r) Directors' Deferred Compensation Agreement
- Phantom Stock***............................................
(s) Alternative Long-Term Incentive Plan***.......................
(t) Annual Incentive Plan***......................................
(u) Executive Post-Retirement Life Insurance Plan***..............
(v) 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 with 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>
THE ST. PAUL COMPANIES, INC.
DEFERRED STOCK GRANT AGREEMENT
Agreement made and entered into this 2nd day of November, 1993,
by and between The St. Paul Companies Inc., ("Company") and Mark
Pabst ("Employee").
In consideration of the mutual promises herein contained, the
parties hereto hereby agree as follows:
1. Grant of Shares Subject to Deferral. The Employee hereby
acknowledges that the Company has on this date and on the
terms and conditions of this Agreement, agreed to issue to the
Employee two thousand (2,000) common shares, without par
value, of the Company as presently constituted, on the dates
and subject to satisfaction of the conditions set forth
herein. The shares which are the subject of this Agreement
shall hereinafter be referred to as the "Deferred Shares". In
the event that, prior to the issuance of any Deferred Shares
which become subject to issuance hereunder, the Company issues
any common shares for less than fair value as determined
reasonably and in good faith by the Board of Directors
(including stock splits and stock dividends but excluding
shares issued to employees of the Company or its subsidiaries
or pursuant to employee benefit plans), the number of Deferred
Shares subject to this Agreement shall, to the extent the
consideration is less than fair value, be adjusted (increased
or decreased) appropriately at the time they are issued
pursuant hereto so as to prevent the equity interest in the
Company represented by unissued Deferred Shares from being
unfairly diluted.
2. Conditions. The Employee hereby agrees that, until the
Deferred Shares are issued, the Employee will not have any
rights of a shareholder with respect to the Deferred Shares
and will not have the right or power to sell, assign,
transfer, pledge, encumber or otherwise alienate, hypothecate
or dispose of any Deferred Shares. Employee does not have the
right to sell, assign or transfer any interest in this
Agreement.
3. Condition Precedent. It is a condition precedent to the
issuance of any Deferred Shares that the Employee be an
employee of the Company or one of its subsidiaries at the
event or on the date set out below for issuance of such
Deferred Shares unless his employment shall have terminated
involuntarily without cause or that he shall have died or
become disabled and while an employee of the Company or one of
its subsidiaries. Unless the Employee's employment shall have
terminated earlier for reasons other than death or disability
or involuntary termination without cause, the Company shall
cause the issuance, fully paid and nonassessable, and delivery
to the Employee of two thousand Deferred Shares duly
registered in the Employee's name upon: 1) his return to the
U.S. from expatriate assignment; 2) involuntary termination
without cause; 3) his death or disability; or 4) April 5,
1996.
<PAGE>
4. Termination of Employment. In the event of termination of the
Employee's employment with the Company and all of its
subsidiaries prior to the date/event fixed for the issuance of
Deferred Shares for any cause whatsoever other than death or
disability or involuntary termination without cause, the
Employee shall not be entitled to have issued to him any
unissued Deferred Shares and the reservation of such Deferred
Shares for issuance to the Employee shall terminate without
further obligation to the Employee. In the event the
termination of Employee's employment with the Company and all
of its subsidiaries is involuntary without cause or occurs by
reason of his death or disability, the full number of Deferred
Shares subject to deferral shall, unless previously issued
under paragraph 3 above, be issued immediately to Employee or,
if he is deceased, to his spouse, if he is married, otherwise
to the representative of his estate. The employment of the
Employee shall be considered for purposes of this Agreement to
have been terminated because of disability if, while an
employee of the Company or any of its subsidiaries, he becomes
physically or mentally disabled, whether totally or partially,
so that he is prevented from satisfactorily performing his
duties as an employee for a period of six consecutive months
or for shorter periods aggregating six months in any period of
twelve consecutive months, and as a result his employment with
the Company and all of its subsidiaries is terminated.
An involuntary termination without cause shall mean a Company
(or subsidiary) initiated termination based on a business
decision and unrelated to the Employee's performance and
conduct.
In the event that the Employee is not an employee of the
Company or one of its subsidiaries on the date he becomes
entitled to have Deferred Shares issued to him pursuant
hereto, the Company may, in lieu of issuing Deferred Shares,
elect to pay to him (or his surviving spouse or the
representative of his estate, as the case may be) an amount
equal to the market value on the date of the Deferred Shares
that would have otherwise been issuable to him. The "market
value" of such Deferred Shares shall be the closing price in
the principal United States market for common shares of the
Company on that day, or if the market is closed on the day, on
the next preceding day on which the market was open.
5. Payment in Lieu of Dividends. On the day fixed for the
payment of cash dividends on its common shares while Employee
is employed by the Company or one of its subsidiaries, or if
Employee shall have ceased to be employed by the Company or
one of its subsidiaries because of his death or disability or
involuntary termination without cause, the Company shall pay
to the Employee (or his surviving spouse or the representative
of his estate) an amount equal to any dividends which would
have been paid on any unissued Deferred Shares if they had
been issued and outstanding on the record date of the payment
of that dividend.
6. Payment of Taxes. Employee shall properly remit to the
Company within two weeks of the date of the issuance of
Deferred Shares, or any payment in lieu of dividends with
respect to any Deferred Shares, the amount of all tax and
other withholding for income, employment or other taxes, which
are due in connection with the grant, issuance and delivery of
the Deferred Shares or a payment in lieu of dividends. The
Company or any of its subsidiaries may, at its
<PAGE>
option, withhold the amount of any such taxes or other
withholding from Deferred Shares otherwise issuable and any
cash dividend equivalents otherwise payable hereunder or from
other amounts otherwise payable to the Employee. If the
condition precedent to the issuance of Deferred Shares is
satisfied by reason of the Employee's death or disability and
the value of the unissued Deferred Shares would be treated as
income to Employee, his spouse or estate, for the year in
which the condition is satisfied, the Company shall issue a
sufficient number of Deferred Shares based on fair market
value to pay any taxes on account of unissued Deferred Shares.
7. Governing Law. This Agreement and the legal relations between
the parties as to all matters, including without limitation,
matters of validity, interpretation construction, effect,
performance and remedies, will be governed by and construed in
accordance with the internal laws of the State of Minnesota
(without regard to the laws of conflict of any jurisdiction),
the place of incorporation and the principal place of business
of the Company, and the Employee consents to the jurisdiction
of the courts of the State of Minnesota or U.S. Federal courts
sitting in Minnesota for all disputes arising under or
connected with this Agreement.
8. Compliance with Securities Laws. If in the opinion of counsel
of the Employee reasonably acceptable to the Company, it is
necessary for compliance with securities laws of the United
States and/or any state thereof which are applicable to the
proposed sale by the Employee (or his surviving spouse or the
representative of his estate) of any Deferred Shares within 3
years after issuance thereof pursuant to this Agreement, on
receipt of the Employee's request and a copy of his counsel's
opinion, the Company will register the sale of and/or qualify
the Deferred Shares under applicable United States federal
laws and the laws of the state where the sale is to take place
for immediate sale and will maintain that registration and/or
qualification in effect for at least 20 business days;
provided that the Company need not register fewer than 1000
Deferred Shares at one time and need not register any Deferred
Shares more than once; provided further that, on receiving the
Employee's request that it register and/or qualify such
Deferred Shares, the Company may in turn notify the Employee
that it elects instead to purchase the Deferred Shares from
the Employee, which purchase shall take place on delivery to
the Company of the Deferred Shares duly endorsed for transfer
to the Company within seven days after the day on which the
Company notifies the Employee of its election at the closing
price for common shares of the Company in the principal United
States market for common shares of the Company on the day the
Deferred Shares are delivered to the Company or if the market
is closed on that day, that day on the next preceding day on
which the market was open. If the Company unreasonably
refuses or fails to register or qualify Deferred Shares
pursuant hereto at the Employee's request and does not offer
to purchase them by the date scheduled for their delivery to
the Company, the Employee may require the Company to purchase
the Deferred Shares on the terms and conditions set forth for
above for a purchase at the Company's election.
<PAGE>
In witness whereof the parties have executed this Agreement as
of the day and year set forth above.
THE ST. PAUL COMPANIES, INC.
By /s/ Douglas W. Leatherdale /s/ Mark Pabst
--------------------------- ----------
Douglas W. Leatherdale Mark Pabst
Chairman & CEO
<PAGE>
AMENDMENT NO. 1 TO THE ST. PAUL COMPANIES, INC.
DEFERRED STOCK GRANT AGREEMENT WITH MARK PABST
DATED NOVEMBER 2, 1993
Section 3 of the Deferred Stock Grant Agreement (the "Agreement")
made and entered into the 2nd day of November, 1993 by and
between The St. Paul Companies, Inc. and Mark Pabst is hereby
amended as follows:
3. Condition Precedent. It is a condition precedent to the
issuance of any Deferred Shares that the Employee be an
employee of the Company or one of its subsidiaries at the
event or on the date set out below for issuance of such
Deferred Shares unless his employment shall have terminated
involuntarily without cause or that he shall have died or
become disabled and while an employee of the Company or one of
its subsidiaries. Unless the Employee's employment shall have
terminated earlier for reasons other than death or disability
or involuntary termination without cause, the Company shall
cause the issuance, fully paid and nonassessable, and delivery
to the Employee of two thousand Deferred Shares duly
registered in the Employee's name upon: 1) his return to the
U.S. from expatriate assignment; 2) involuntary termination
without cause; 3) his death or disability; or 4) March 14,
1997.
The capitalized terms used above shall have the same meaning as
defined in the Agreement.
In witness whereof, the parties have executed this Amendment No. 1
to the Agreement as of the 6th day of March, 1996 and such
Amendment shall be effective as of that date.
THE ST. PAUL COMPANIES, INC.
By /s/ Greg Lee /s/ Mark Pabst
----------------------------- ------------------
Greg Lee Mark Pabst
Senior Vice President
<PAGE>
EXHIBIT 11
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings per Common Share
(In thousands, except per share amounts)
Twelve Months Ended
December 31,
-----------------------------
1995 1994 1993
----- ----- -----
INCOME AVAILABLE TO COMMON SHARES:
PRIMARY
Net income, as reported $521,209 $442,828 $427,609
Adjusted for:
Preferred dividends (net of taxes) (8,582) (8,448) (8,395)
Premium on preferred shares redeemed (823) - -
------- ------- -------
Net income available to common shares $511,804 $434,380 $419,214
======= ======= =======
FULLY DILUTED
Net income, as reported $521,209 $442,828 $427,609
Adjusted for:
Additional PSOP expense (net of taxes)
due to assumed conversion of
preferred stock (3,477) (3,782) (4,080)
Dividends on monthly income preferred
securities (net of taxes) 5,046 - -
Premium on preferred shares redeemed (823) - -
------- ------- -------
Net income available to common shares $521,955 $439,046 $423,529
======= ======= =======
WEIGHTED AVERAGE SHARES:
PRIMARY
Common shares 84,385 84,183 84,417
Adjusted for:
Outstanding stock options (based on
treasury stock method using average
market price) 1,014 633 799
------- ------- -------
Weighted average, as adjusted 85,399 84,816 85,216
======= ======= =======
FULLY DILUTED
Common shares 84,385 84,183 84,417
Adjusted for:
Assumed conversion of preferred stock 4,027 4,073 4,106
Assumed conversion of monthly income
preferred shares 2,211 - -
Outstanding stock options (based on
treasury stock method using market
price at end of period) 1,220 811 946
------- ------- -------
Weighted average, as adjusted 91,843 89,067 89,469
======= ======= =======
EARNINGS PER COMMON SHARE:
Primary $5.99 $5.12 $4.92
======= ======= =======
Fully diluted $5.68 $4.93 $4.73
======= ======= =======
<PAGE>
EXHIBIT 12
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Ratios
(In thousands, except ratios)
Twelve Months Ended
December 31,
---------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
EARNINGS (LOSS):
Income (loss) before
income taxes $656,233 $563,578 $522,606 $(225,063) $528,061
Add: fixed charges 68,069 62,718 65,633 70,897 65,045
Less: capitalized interest - - - 4,580 3,571
------- ------- ------- ------- -------
Income (loss),
as adjusted $724,302 $626,296 $588,239 $(158,746) $589,535
======= ======= ======= ======= =======
FIXED CHARGES AND
PREFERRED DIVIDENDS:
Fixed charges:
Interest costs $ 46,822 $ 39,736 $ 40,921 $ 40,288 $ 39,275
Rental expense (1) 21,247 22,982 24,712 30,609 25,770
------- ------- ------- ------- -------
Total fixed charges 68,069 62,718 65,633 70,897 65,045
Preferred stock dividends 18,120 18,337 18,488 18,395 18,451
Dividend on monthly
income preferred
securities 7,763 - - - -
------- ------- ------- ------- -------
Total fixed charges
and preferred
dividends $ 93,952 $ 81,055 $ 84,121 $ 89,292 $ 83,496
======= ======= ======= ======= =======
Ratio of earnings to
fixed charges (2) 10.64 9.99 8.96 - 9.06
======= ======= ======= ======= =======
Ratio of earnings to
combined fixed charges
and preferred
stock dividends (2) 7.71 7.73 6.99 - 7.06
======= ======= ======= ======= =======
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 Companies
STRENGTH REFLECTED IN THIRD YEAR OF RECORD EARNINGS
1995 was a solid year on virtually all fronts for The St. Paul.
Operating in a property-liability industry where challenging and
competitive market conditions persist, we generated consolidated
pretax earnings totaling $656 million, our third consecutive year of
record results. Double-digit premium growth, reduced expense levels
and impressive investment returns combined to produce pretax earnings
in excess of $650 million in our underwriting segment. The John Nuveen
Company also contributed to our record results, rebounding in 1995 to
post its highest earnings ever. However, our insurance brokerage
operation, Minet, continued to struggle amid difficult market
conditions in that industry. Our balance sheet at the end of the year
reflected the successes achieved in 1995 - common shareholders' equity
increased by nearly $1 billion since the end of 1994. The following
table provides a consolidated overview of our results for the last
three years:
(In millions)
Year ended December 31 1995 1994 1993
---- ---- ----
Pretax income (loss):
Underwriting $ 652 $ 561 $ 507
Insurance brokerage (13) (10) (13)
Investment banking-asset management 88 72 83
Parent company and consolidating
eliminations (71) (59) (54)
---- ---- ----
Pretax income 656 564 523
Income tax expense 135 121 95
---- ---- ----
Net income $ 521 $ 443 $ 428
==== ==== ====
Per share $5.68 $4.93 $4.73
==== ==== ====
<PAGE>
In 1994, consolidated pretax income of $564 million was $41 million
higher than in 1993, as our underwriting segment overcame significant
catastrophe losses to post pretax earnings that were 11% higher than
comparable 1993 earnings. Nuveen's earnings in 1994 declined from 1993
levels due to a difficult interest rate environment and investor
uncertainty in the municipal bond market.
Our operating earnings, which exclude after-tax realized investment
gains, totaled $465 million in 1995, compared with earnings of $414
million in 1994 and $387 million in 1993.
Our revenues grew significantly in 1995. The following table
provides a look at revenues generated by our industry segments in the
last three years:
(In millions)
Year ended December 31 1995 1994 1993
---- ---- ----
Revenues:
Underwriting $4,814 $4,152 $3,906
Insurance brokerage 366 346 321
Investment banking-asset
management 236 220 246
Parent company and
consolidating eliminations (6) (17) (13)
----- ----- -----
Total revenues $5,410 $4,701 $4,460
===== ===== =====
Change from prior year 15% 5% (1)%
----- ----- -----
Revenues in our underwriting segment grew 16% in 1995, primarily due
to a significant increase in net earned premiums in our commercial
underwriting operations, and at St. Paul Re, chiefly due to business
acquired from the Cigna Corporation. Virtually all of our other
underwriting business centers also experienced strong growth in
premium revenues in 1995. In addition, the favorable conditions that
prevailed in the bond, equity and venture capital markets throughout
1995 contributed to consolidated pretax realized investment gains of
$85 million for the year, more than double 1994's comparable total. In
1994, consolidated revenues increased 5% 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 the following pages, we take a more detailed look at 1995 results
for each of the three industry segments in which we conduct business.
We underwrite property-liability insurance through St. Paul Fire and
Marine (Fire and Marine), St. Paul Re and St. Paul International
Underwriting. We operate in the insurance brokerage industry through
the Minet group of companies, based in London. We are involved in the
investment banking-asset management industry through our 78% ownership
interest in The John Nuveen Company, based in Chicago.
(GRAPHIC IMAGE NO. 1-SEE APPENDIX)
(GRAPHIC IMAGE NO. 2-SEE APPENDIX)
<PAGE>
UNDERWRITING SHOWS STRONG GROWTH, PROFITABILITY
In a competitive marketplace, the primary challenge facing insurers is
to increase premium volume while at the same time maintaining an
acceptable combined ratio. We were successful on both counts in 1995.
Written premiums in our underwriting segment totaled $4.2 billion in
1995, an increase of $620 million, or 17%, over 1994 premiums of $3.6
billion. Premium growth in Fire and Marine was centered in its
Specialized Commercial and Commercial operations. At St. Paul Re, the
incremental impact of business acquired from the Cigna Corporation in
late 1994 and other new business resulted in a $200 million increase
in premium volume over 1994. We also retained more (reinsured less) of
the business in many of our underwriting operations in 1995, which was
another factor in companywide net premium growth for the year. In
1994, written premiums grew 14% over 1993's total of $3.2 billion,
primarily due to the acquisition of Economy in August 1993. St. Paul
Re also contributed to premium growth in 1994.
The combined ratio of 101.8 was our best in 16 years. Our loss
ratio, which measures losses and loss adjustment expenses as a
percentage of earned premiums, was level with 1994 at 72.1. The
expense ratio, which measures underwriting expenses as a percentage of
written premiums, improved one-half point to 29.7 in 1995, dipping
below 30 for the first time since 1991.
For several years in the early 1990s, significant losses in our
reinsurance and commercial operations were mitigated somewhat by
underwriting profits in our Medical Services operation. The aggressive
steps we have taken to improve reinsurance and commercial results have
been successful - we have achieved three consecutive years of improved
underwriting results in spite of lower levels of profitability in
Medical Services.
An improvement in underwriting results and an 8% increase in
investment income resulted in pretax income of $652 million for the
underwriting segment in 1995. Comparable earnings in 1994 and 1993
were $561 million and $507 million, respectively. Pretax investment
income in 1995 totaled $731 million, compared with $675 million in
1994 and $646 million in 1993.
Catastrophe losses once again played a role in our underwriting
results in 1995. Over the last several years we've increased the
amount of property insurance and reinsurance we underwrite while at
the same time taking steps to prevent inordinately large losses from
individual catastrophic events. The losses we incurred in 1995 were
not out of line with what we've come to expect for catastrophe
experience - 2.5 to 3 points of earned premiums. The following table
isolates the impact of catastrophe losses on our consolidated GAAP
underwriting results and combined ratios for the last three years
(premiums have not been adjusted), illustrating the improvement in
noncatastrophe loss experience over that time span.
(Dollars in millions)
Year ended December 31 1995 1994 1993
---- ---- ----
Actual:
GAAP underwriting loss $ (103) $ (113) $ (150)
Combined ratio 101.8 102.3 104.5
Adjustment:
Catastrophe losses $ (124) $ (105) $ (62)
Impact on combined ratio 3.1 3.1 1.9
---- ---- ----
Excluding catastrophe losses:
GAAP underwriting result $ 21 $ (8) $ (88)
Combined ratio 98.7 99.2 102.6
==== ==== ====
Spring storms and several hurricanes accounted for the bulk of our
catastrophe experience in 1995. In 1994, the California earthquake,
winter ice storms and summer hail storms put an end to the temporary
lull in significant catastrophe activity in 1993.
<PAGE>
1996 Underwriting Outlook - We expect the pace of premium growth to
diminish in 1996, as premium rates in virtually all property-liability
market sectors, particularly commercial and reinsurance, are trending
downward. Our challenge in this competitive pricing environment will
be to maintain an acceptable combined ratio while continuing to pursue
premium growth.
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 1994 and 1993 information to conform to our 1995
presentation. Following the table, we take a closer look at what
happened in 1995 and look ahead to 1996 for each operation.
(Dollars in millions) % of 1995
Written
Year ended December 31 Premiums 1995 1994 1993
-------- ---- ---- ----
St. Paul Fire and Marine
Specialized Commercial
Written premiums 30% $ 1,304 $ 1,086 $ 1,000
Underwriting result $ (124) $ (89) $ (116)
Combined ratio 109.0 107.1 111.9
Medical Services
Written premiums 16% $ 674 $ 690 $ 710
Underwriting result $ 76 $ 118 $ 133
Combined ratio 86.6 80.3 80.0
Personal Insurance
Written premiums 16% $ 673 $ 635 $ 376
Underwriting result $ (33) $ (26) $ (16)
Combined ratio 104.6 103.9 103.4
Commercial
Written premiums 15% $ 618 $ 530 $ 490
Underwriting result $ (3) $ (63) $ (71)
Combined ratio 99.6 111.7 114.8
Total St. Paul Fire and Marine
Written premiums 77% $ 3,269 $ 2,941 $ 2,576
Underwriting result $ (84) $ (60) $ (70)
Combined ratio 101.8 101.0 102.6
St. Paul Re
Written premiums 17% $ 713 $ 513 $ 431
Underwriting result $ 4 $ (22) $ (18)
Combined ratio 99.1 105.1 103.1
St. Paul International Underwriting
Written premiums 6% $ 261 $ 169 $ 172
Underwriting result $ (23) $ (31) $ (62)
Combined ratio 109.4 117.6 135.9
Total Underwriting
Written premiums 100% $ 4,243 $ 3,623 $ 3,179
Underwriting result $ (103) $ (113) $ (150)
Combined ratio:
Loss and loss expense ratio 72.1 72.1 72.5
Underwriting expense ratio 29.7 30.2 32.0
----- ----- -----
Combined ratio 101.8 102.3 104.5
===== ===== =====
Combined ratio including
policyholders' dividends 102.0 102.3 104.7
===== ===== =====
Figures are on a GAAP basis, except for combined ratios, which are not
derived from our GAAP financial statements.
<PAGE>
Underwriting
St. Paul Fire and Marine
- ------------------------
Fire and Marine is our U.S. insurance underwriting operation, which
underwrites property-liability insurance and provides insurance-
related products and services to commercial, professional and
individual customers. Fire and Marine utilizes a network of
independent insurance agents and brokers to deliver its insurance
products.
Based on 1994 written premium volume, Fire and Marine ranked as the
16th-largest U.S. property-liability underwriter; its Medical Services
operation ranked as the largest medical liability insurance
underwriter in the United States.
(PHOTO IMAGE NO. 1 - SEE APPENDIX)
(PHOTO IMAGE NO. 2 - SEE APPENDIX)
St. Paul Fire and Marine
Specialized Commercial
- ----------------------
Specialized Commercial is composed of Custom Markets, which serves
specific commercial customer segments (Financial Services, Ocean
Marine, Professional Liability, Public Sector Services, Surplus Lines
and Technology), and Major Markets, which provides specialized
products and services for targeted industry groups (Construction,
Surety and National Accounts). The results of our Special Property
operation and our participation in insurance pools are also included
here.
Premiums - Written premiums in this category totaled $1.3 billion in
1995, a 20% increase over 1994 premium volume of $1.1 billion. Nearly
all of Specialized Commercial's operations experienced premium gains
in 1995. National Accounts, which offers custom-designed insurance
programs for large commercial accounts, posted an $85 million increase
in premiums over 1994. Premiums in Construction, which serves medium-
and large-size contractors, grew $33 million, or 16%, in 1995. Surplus
Lines volume increased 28% in 1995; Ocean Marine premiums grew 26%;
Technology volume was up 16%; and Financial Services premiums were 11%
higher than 1994.
In all of these operations, we judged market and pricing conditions
favorable enough in 1995 to underwrite significant amounts of new
business and retain a greater portion of that business. We have
achieved growth by focusing on specific market niches where our
underwriting and product expertise and our financial credibility have
been competitive advantages. We did not relax our underwriting
standards for the sake of growth, but instead took advantage of the
opportunities we saw to expand our involvement in the specialized
commercial market in 1995.
<PAGE>
(PHOTO IMAGE NO. 3 - SEE APPENDIX)
(PHOTO IMAGE NO. 4 - SEE APPENDIX)
(PHOTO IMAGE NO. 5 - SEE APPENDIX)
Underwriting Result - Specialized Commercial's 1995 underwriting loss
was $124 million, compared with a loss of $89 million in 1994. An
increase in environmental and asbestos reserves for North American
business written in the United Kingdom prior to 1980 contributed to
the deterioration in underwriting results in 1995. (See the
"Environmental and Asbestos Claims" section on page 31 for additional
information.) Increased losses from our participation in insurance
pools were also a factor in the 1995 underwriting result. These losses
overshadowed improved loss experience in several other business
sectors, particularly Construction and Technology, where favorable
development on prior-year losses resulted in a significant reduction
in underwriting losses compared with 1994. Specialized Commercial's
expense ratio improved by nearly a point over last year.
(PHOTO IMAGE NO. 6 - SEE APPENDIX)
1994 vs. 1993 - In 1994, Specialized Commercial's written premiums
grew 9% over 1993. Premium growth resulted primarily from new business
and was centered in Ocean Marine, Surplus Lines, Public Sector
Services and Special Property. Construction premiums in 1994 were
virtually level with 1993, and National Accounts and Technology volume
declined from 1993 levels. Specialized Commercial's underwriting loss
in 1994 was $27 million less than the comparable 1993 loss. The
improvement originated in those market sectors experiencing the
greatest premium growth, particularly Special Property and Ocean
Marine.
1996 Outlook - We expect the rate of Specialized Commercial's written
premium growth to decline in 1996, due to less favorable conditions in
several market sectors. With the success of our own Special Property
operation, we will reduce our participation in property insurance
pools in 1996. We will seek to identify additional niches in the
specialized commercial marketplace with the goal of developing new
business opportunities.
St. Paul Fire and Marine
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 (including hospitals, long-term care facilities and other
facilities such as laboratories), and entire systems, such as hospital
networks and managed care systems. Specialized claim and loss control
services are vital components of Medical Services' insurance products.
Medical Services underwrites through three major business lines -
Health Care Professionals, Health Care Facilities and Major Accounts.
Premiums - Written premiums of $674 million declined 2% from 1994
volume of $690 million. The decline was primarily attributable to
continued intense competition in the medical liability marketplace.
The potential for significant Medical Services premium growth also
continued to be hindered by an industrywide trend toward higher levels
of self-insured retentions on large accounts, which reduce our
exposure to losses but also result in less written premiums.
Underwriting Result - Medical Services' underwriting profit of $76
million in 1995 was $42 million less than the comparable 1994 profit
of $118 million. The decline was primarily due to a reduction in the
extent of favorable prior-year loss development, particularly in
Health Care Professionals. Nonetheless, Medical Services continued its
history of strong financial performance - the 1995 result was its
seventh consecutive annual underwriting profit, and its combined ratio
has been below 100 over that time span.
<PAGE>
1994 vs. 1993 - In 1994, the shift toward higher levels of self-
insurance was the primary factor in the 3% decline in Medical
Services' written premiums from 1993. The underwriting profit in 1994
was $15 million less than the 1993 profit due to reduced levels of
favorable prior-year loss development.
1996 Outlook - We expect continued profitability from Medical Services
in 1996, but we anticipate that our combined ratio will continue to
edge upward as the extent of favorable prior-year loss development
continues to diminish. We expect further success from Major Accounts,
as the trend toward larger health care delivery systems continues. In
the interest of bolstering new business production, we will continue
to focus on strengthening our partnership with key medical agents and
brokers. Our expansion into four Western states and the acquisition of
a Nevada medical liability underwriting company in 1995 should
translate into an increase in our Health Care Professionals market
share in that region of the country in 1996.
St. Paul Fire and Marine
Personal Insurance
- ------------------
Personal Insurance provides property-liability insurance coverage for
individuals. Through a variety of monoline and package policies,
individuals can acquire coverages for personal property, such as
homes, autos and boats, and for personal liability.
Premiums - Premium volume grew to $673 million in 1995, a 6% increase
over 1994. Premiums generated by our primary package policy, PAK II,
were 10% higher than 1994 due to growth in new business.
Underwriting Result - Underwriting results in Personal Insurance
deteriorated by $7 million in 1995, primarily due to less favorable
loss experience in several monoline coverages. The expense ratio of
30.4 in 1995 was virtually level with 1994. Catastrophe losses in this
operation totaled $20 million in 1995, compared with $26 million in
1994.
(PHOTO IMAGE NO. 7 - SEE APPENDIX)
1994 vs. 1993 - In 1994, Personal Insurance premiums were 69% higher
than 1993. The increase reflected the inclusion of Economy, acquired
in August 1993, for a full year. The underwriting loss of $26 million
in 1994 was $10 million worse than 1993, primarily the result of an
increase in catastrophe losses.
1996 Outlook - In 1996, we will focus on enhancing our personal
insurance products to retain our current customers, position ourselves
for future growth in this very competitive market and improve
underwriting results. The integration of Economy into our operations
will be completed in 1996 with the consolidation of business processes
and underwriting functions, which will result in increased
organizational efficiencies.
(GRAPHIC IMAGE NO. 3 - SEE APPENDIX)
<PAGE>
(PHOTO IMAGE NO. 8 - SEE APPENDIX)
St. Paul Fire and Marine
Commercial
- ----------
Commercial offers property and liability insurance to the small
commercial market and the commercial middle market. Business coverages
marketed include fire, inland marine, general liability, workers'
compensation, commercial auto and umbrella excess liability.
Commercial offers tailored coverages and insurance products for
specific customer groups, such as museums, golf courses,
manufacturers, wholesalers and processors. Coverages marketed to the
small commercial customer include our Package Accounts for Commercial
Enterprises (PACE) policies for offices, retailers and family
restaurants.
Premiums - Commercial premium volume in 1995 increased 17% to $618
million. Premium growth occurred across a broad spectrum of commercial
coverages and was largely due to new business. We also retained more
of our business in 1995, which contributed to net premium gains. Over
the last several years, we've completely revamped the product and
service delivery systems in Commercial in order to be more responsive
to the unique needs of customers in particular market sectors. We
believe the strong premium growth and expense savings over the last
two years reflect the success of that initiative.
Underwriting Result - Commercial's underwriting result improved by $60
million in 1995, driven by improvement in current- and prior-year loss
development in our general liability line. In addition, losses from
our workers' compensation business have declined due to favorable
changes in the regulatory environment in several states. The
improvement in 1995 results occurred in spite of a $19 million
increase in catastrophe losses compared with 1994. In 1995, the
operational efficiencies achieved in this operation were reflected in
a more than three point improvement in the expense ratio. Over the
last two years, Commercial written premiums have grown at a compound
annual rate of 12%, while noncommission underwriting expenses have
been flat.
(PHOTO IMAGE NO. 9 - SEE APPENDIX)
1994 vs. 1993 - Commercial premiums in 1994 of $530 million were $40
million higher than 1993, primarily the result of new business in many
commercial market sectors. Underwriting results improved $8 million
compared with 1993, largely due to better results from workers'
compensation business and a decline in involuntary costs.
1996 Outlook - With another year of keen competition anticipated from
our national and regional company competitors, it will be a challenge
to meet our goals of continued premium growth and increased
profitability in 1996. We will strive to enhance our competitive
advantage through further productivity improvements, selective
underwriting and customer focus. We anticipate growth in small
business premiums in 1996 as a result of recent enhancements made to
our PACE products.
<PAGE>
(PHOTO IMAGE NO. 10 - SEE APPENDIX)
Underwriting
St. Paul Re
- -----------
St. Paul Re underwrites reinsurance for leading property-liability
insurance companies worldwide. St. Paul Re obtains business primarily
in the broker or intermediary market, writing both treaty and
facultative reinsurance for property, liability, ocean marine and
certain specialty classes.
Premiums - St. Paul Re's premium volume increased $200 million in
1995. We acquired the opportunity to renew the Cigna Corporation's
book of international property-liability reinsurance in late 1994, and
that business provided $119 million of new reinsurance premiums for
St. Paul Re in 1995. We also took advantage of favorable market and
pricing conditions in the property reinsurance marketplace and
aggressively sought out new reinsurance business in 1995.
Underwriting Result - St. Paul Re recorded a $4 million underwriting
profit in 1995, compared with an underwriting loss of $22 million in
1994. A decline in losses on property reinsurance coverages accounted
for the majority of 1995's improved results. Catastrophe losses in our
reinsurance operation totaled $37 million in 1995, down slightly from
last year's losses of $42 million.
1994 vs. 1993 - In 1994, St. Paul Re's premium volume was 19% higher
than 1993, due to price increases, higher retentions and new business
in several market sectors, particularly nonmarine treaty business. St.
Paul Re's underwriting loss of $22 million in 1994 was only slightly
worse than the comparable 1993 loss of $18 million, despite a
significant increase in catastrophe losses.
(PHOTO IMAGE NO. 11 - SEE APPENDIX)
1996 Outlook - We do not expect the favorable market conditions that
prevailed throughout much of 1995 to continue into 1996. We anticipate
that reinsurance rates will continue to trend downward in 1996, and
premium growth from new business will be more difficult to attain.
With reasonable levels of catastrophe losses, however, we expect to
maintain current levels of profitability. Our challenge will be to
maintain adequate pricing levels to mitigate the impact of cyclical
swings in the reinsurance market.
<PAGE>
Underwriting
International Underwriting
- --------------------------
International includes most primary insurance written outside the
United States, mainly in the United Kingdom, Canada, Spain and the
Republic of Ireland, and insurance on U.S. risks of foreign insureds
(multinational accounts). International offers a range of commercial
and personal products and services tailored to meet the unique needs
of customers located outside the United States.
(PHOTO IMAGE NO. 12 - SEE APPENDIX)
Premiums - Written premiums in this operation of $261 million for the
year were $92 million higher than 1994 premiums of $169 million. In
1995, we recorded initial premiums of $54 million from our subsidiary
Camperdown Corporation, which is our vehicle for writing business
through Lloyd's of London. Premium volume from personal insurance
coverages written in the United Kingdom increased $27 million in 1995,
and premiums written in Canada increased 22% over 1994 levels.
Underwriting Result - Improved loss experience on personal and
commercial business in the United Kingdom was the primary factor in an
$8 million improvement in underwriting results in 1995.
1994 vs. 1993 - In 1994, we undertook steps to realign the mix of our
International business, and the result was a slight decline in written
premiums from 1993 levels. Improved loss experience in Canada and the
United Kingdom resulted in a $31 million improvement in underwriting
results compared with 1993.
1996 Outlook - The 1996 outlook for International is characterized by
growth and continued improvement in profitability. We are focusing our
expansion efforts in several European countries, Latin America, Canada
and Africa. We currently envision that our expansion will be
facilitated primarily through our own start-up operations, initially
in commercial markets. Through Camperdown, we will continue to invest
in Lloyd's underwriting syndicates that underwrite global or regional
specialty coverages.
<PAGE>
(PHOTO IMAGE NO. 13 - SEE APPENDIX)
Underwriting
Insurance Reserves
- ------------------
Reserves for losses and loss adjustment expenses are our largest
liability. 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). We establish loss reserves
on an undiscounted basis after reductions for estimates of salvage and
subrogation.
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. Both
our case and IBNR 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.
Many of the coverages we offer involve claims that may not
ultimately be settled for many years after they are incurred, so
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.
For a reconciliation of beginning and ending consolidated loss and
loss adjustment expense reserves for the last three years, see Note 6
to the consolidated financial statements on page 56. As shown in that
reconciliation, we have recorded reductions in the loss provision for
claims incurred in prior years totaling $248 million, $328 million and
$223 million in 1995, 1994 and 1993, respectively.
This recurring reduction in previously established reserves runs
contrary to the experiences of many of our peers in the property-
liability insurance industry. A number of factors have contributed to
our divergence from industry experience. First, we believe that
generally, our reserving philosophy is more conservative than others
in the industry. Second, we underwrite more medical liability
coverages than any of our peers, and while the extent of favorable
prior-year development on that business has begun to diminish, it has
been the primary contributor to this favorable development over the
last several years. Finally, we have experienced a comparatively lower
amount of adverse development on environmental and asbestos claim
losses relative to our peers.
(GRAPHIC IMAGE NO. 4 - SEE APPENDIX)
<PAGE>
(GRAPHIC IMAGE NO. 5 - SEE APPENDIX)
Medical Services has accounted for the majority of favorable prior-
year loss development in each of the last three years. Our
conservative reserving philosophy in this operation is the product of
many years of experience underwriting liability coverages in that
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. The medical liability claims
environment in recent years has been relatively favorable, but our
response in terms of reserving has been cautious and gradual, since
our prior experience with these coverages has shown that reserves
previously believed to be adequate can rapidly revert to a deficiency
due to shifting trends in social, legal and regulatory factors. It
should be noted that the pricing of Medical Services' coverages
reflects the favorable loss development on previously established
reserves.
In 1995 and 1994, we also experienced favorable prior-year loss
development in several of our Specialized Commercial business sectors,
particularly in general liability and workers' compensation.
Improvement in claim experience and favorable changes in the legal and
regulatory environments in certain geographic locations have caused us
to reduce our estimate of the ultimate cost of losses incurred since
reserves were initially established.
Underwriting
Environmental 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 environmental 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 environmental claims is difficult to
estimate. Insured parties have submitted claims for losses not covered
in the insurance policy, and the ultimate resolution of these claims
may be subject to lengthy litigation, making it difficult to estimate
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 an environmental 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 claims, both
of which are still developing.
<PAGE>
(PHOTO IMAGE NO. 14 - SEE APPENDIX)
In the third quarter of 1994, we specifically reallocated, for
environmental and asbestos claims, a portion of previously established
IBNR reserves. Prior to 1994, we made no specific allocation of our
IBNR reserves for environmental or asbestos claims, but rather
identified reserves only for reported claims (case reserves).
We have previously reported on our difficulty in reasonably
estimating a range of possible additional North American environmental
and asbestos losses on policies written in the United Kingdom prior to
1980 (primarily relating to our involvement with the "Weavers"
insurance pool). Prior to 1995, we had no reliable information on
which to base such an estimate. In the fourth quarter of 1995, having
received new information, we completed an evaluation of potential
additional losses arising from those policies and the collectibility
of related reinsurance recoverables.
Our 1995 evaluation concluded that gross reserves for these North
American losses should be stated at $442 million, and net reserves
should be stated at $211 million. Prior to this evaluation, reserves
for these losses were recorded on a net basis because we had
insufficient information on which to base an estimate of gross losses.
As a result, in the fourth quarter of 1995, we recorded additional
gross reserves of $360 million and specifically reallocated $113
million of previously recorded net reserves for these losses. We
allocated the additional net reserves to the insurance pools line of
Specialized Commercial.
These reserves were reallocated from other business centers in
Specialized Commercial ($82 million), Commercial ($17 million) and St.
Paul Re ($14 million).
The following table represents a reconciliation of total gross and
net environmental reserve development for each of the years in the
three-year period ended Dec. 31, 1995. Amounts in the "net" column are
reduced by reinsurance recoverable. The gross incurred losses are less
than the net incurred losses in 1995 due to reinsurance commutation
agreements.
1995 1994 1993
---- ---- ----
(In millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
ENVIRONMENTAL
Beginning reserves $275 $200 $105 $ 73 $ 88 $ 62
Incurred losses 59 68 71 56 32 22
Reserve reallocation 233 79 132 95 - -
Paid losses (39) (28) (33) (24) (15) (11)
--- --- --- --- --- ---
Ending reserves $528 $319 $275 $200 $105 $ 73
=== === === === === ===
Many significant environmental claims currently being brought
against insurance companies arise out of contamination that occurred
20 to 30 years ago. Since 1970, our Commercial General Liability
policy form has included a specific pollution exclusion and, since
1986, an industry standard absolute pollution exclusion for policies
underwritten in the United States.
<PAGE>
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, 1995. Gross and net incurred
losses in 1995 are negative because of favorable loss development on
our domestic commercial business.
1995 1994 1993
(In millions) Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
ASBESTOS
Beginning reserves $185 $ 145 $ 62 $ 48 $ 70 $ 54
Incurred losses (13) (9) 13 14 17 15
Reserve reallocation 127 34 127 95 - -
Paid losses (16) (12) (17) (12) (25) (21)
--- --- --- --- --- ---
Ending reserves $283 $ 158 $185 $145 $ 62 $ 48
=== === === === === ===
Most of the asbestos claims we have received pertain to policies
written prior to 1986. Since 1986, for policies underwritten in the
United States, our Commercial General Liability policy has included
the industry standard absolute pollution exclusion, which we believe
applies to asbestos claims.
After our evaluation of additional North American exposures and the
resulting reserve reallocation in 1995, based on all information
currently available to us, our reserves for environmental and asbestos
losses at Dec. 31, 1995, represent our best estimate of our ultimate
liability for such losses. However, because of the difficulty inherent
in estimating such losses, we cannot give assurances that our ultimate
liability for environmental and asbestos losses will, in fact, match
our current reserves. We will continue to evaluate new information and
developing loss patterns, but we believe any future additional loss
provisions for environmental and asbestos claims will not materially
impact the results of our operations, liquidity or financial position.
Total gross environmental and asbestos reserves at Dec. 31, 1995, of
$811 million represented approximately 8% of gross consolidated
reserves of $10.2 billion.
Underwriting
Legal Matters
- -------------
In May 1995, a purported class action lawsuit brought in the District
Court of Brazoria County, Texas, was served on three of our
subsidiaries on behalf of persons who, from 1983 through 1985,
purchased interests in certain limited partnerships for which Damson
Oil Corporation served as general partner. The complaint seeks
unspecified actual damages, treble damages, punitive damages,
attorneys' fees, costs, and pre- and post-judgment interest. In April
1995, plaintiffs sent our subsidiaries a letter under the Texas
Deceptive Trade Practices Act demanding $400 million of alleged actual
damages plus unspecified attorneys' fees in settlement of their
claims. The subsidiaries rejected the plantiffs' demand and are
vigorously contesting these proceedings. If the final outcome of these
proceedings is adverse, it might materially impact the results of our
operations and liquidity in the period in which that outcome occurs,
but we believe it should not have a material adverse effect on our
overall financial position.
(GRAPHIC IMAGE NO. 6 - SEE APPENDIX)
<PAGE>
(GRAPHIC IMAGE NO. 7 - SEE APPENDIX)
Underwriting
Investments
- -----------
Our primary investment objective is to maintain a widely diversified,
high-quality investment portfolio structured to maximize investment
income while minimizing credit risk. Fixed maturity securities
constitute the majority of our underwriting operations' investment
portfolio. We also invest in 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. We have had limited involvement with derivative
financial instruments, primarily using them for the purposes of
hedging against fluctuations in interest rates, equity security values
and foreign currency values.
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, provide the funds used to build
our investment portfolio. Both sources of funds have been strong for
the last several years, and, consequently, our investment portfolio
has continued to grow, resulting in an increase in investment income.
The underwriting segment's pretax investment income grew 8% in 1995 to
$731 million. In 1994, pretax investment income of $675 million was 4%
higher than 1993 income of $646 million.
From a total return perspective, factoring in pretax investment
income, realized investment gains and the increase in unrealized
appreciation, our underwriting segment's total investment portfolio
produced a pretax return of $1.7 billion in 1995. Falling interest
rates and a significant increase in equity security market values were
the primary factors pushing the unrealized appreciation on our total
portfolio to just under $1 billion at the end of 1995.
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 our major
investment classes.
(In millions)
December 31 1995 1994 1993
---- ---- ----
Fixed maturities $10,395 $ 8,938 $ 9,249
Equities 659 490 516
Real estate 612 528 489
Venture capital 389 330 298
Short-term investments 318 342 269
Other investments 42 47 47
------ ------ ------
Total investments $12,415 $10,675 $10,868
====== ====== ======
<PAGE>
Fixed Maturities - Fixed maturities accounted for 84% of the
underwriting segment's total investments at the end of 1995. This
portfolio is composed of high-quality, intermediate-term taxable U.S.
government agency and corporate bonds and tax-exempt U.S. municipal
bonds. Taxable bonds account for 56% of total fixed maturities,
compared with 54% at the end of 1994. After several years of almost
exclusive purchases of taxable securities, we began purchasing tax-
exempt bonds in the second half of 1995 due to yield considerations
and changes in our consolidated tax position. Approximately 96% 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.
We carry the fixed maturities portfolio on our balance sheet at
market value. Because that value is based on the relationship between
the portfolio's stated yields and prevailing market yields at any
given time, interest rate fluctuations can have a swift and
significant impact on the carrying value of those securities. At the
end of 1995, after a year of declining interest rates, the carrying
value included $682 million of pretax unrealized appreciation.
Interest rates moved sharply upward in 1994, and the result was $78
million in unrealized depreciation at the end of the year.
In 1993, year-end unrealized appreciation totaled $758 million. A
look at the amortized cost of those investments at the end of 1995,
1994 and 1993 - $9.7 billion, $9.0 billion and $8.5 billion,
respectively - reveals the extent of real growth in this asset class.
Fixed maturities produced investment income of $672 million in 1995,
a 5% increase over 1994 income of $637 million. This was the first
time in several years we've experienced real growth in returns from
these investments, which is attributable to the significant growth in
invested assets in 1995, the incremental impact of a full year's
investment income from the securities purchased in the higher interest
rate environment of 1994, and the diminishing phenomenon of older,
higher-yielding bond maturities being replaced with securities bearing
comparatively lower current yields. Fixed maturity income in 1994 was
$19 million higher than 1993, but that was almost entirely due to the
incremental impact of the acquisition of Economy.
Equities - Our equity holdings account for 5% of the underwriting
segment's total investments and consist of a diversified portfolio of
common stocks. In 1995, we recorded dividend income of $14 million on
this portfolio, compared with $13 million in 1994 and $12 million in
1993. Our portfolio benefited from the significant appreciation in
(GRAPHIC IMAGE NO. 8 - SEE APPENDIX)
<PAGE>
(GRAPHIC IMAGE NO. 9 - SEE APPENDIX)
equity values in 1995. We recorded realized gains from sales of equity
securities of $43 million for the year, and the portfolio's carrying
value at the end of the year included $154 million of unrealized
appreciation, compared with appreciation of $29 million at the end of
1994. Equity sales generated realized gains of $20 million and $43
million in 1994 and 1993, respectively.
Real Estate - Our real estate holdings (5% of the underwriting
segment's total investments) consist of direct and joint venture
equity investments, primarily in commercial office and warehouse
properties geographically distributed throughout the United States. We
do not have a portfolio of real estate mortgage loans. In 1995, we
earned pretax investment income of $33 million on our real estate
properties, compared with $28 million in 1994. We also generated
operational cash flows in excess of $60 million from these properties.
Venture Capital - This investment class (3% of the underwriting
segment's total investments) consists of private investments spanning
a variety of industries, with a particular concentration on
information technology, health care and consumer firms. The carrying
value of this portfolio at year-end 1995 included $129 million of
unrealized appreciation. In 1995, we recorded $38 million of realized
gains from sales of venture capital investments, compared with $18
million in 1994 and $24 million in 1993.
1996 Outlook - Barring significant changes in interest rates or
operational cash flows, we anticipate investment income will continue
to grow in 1996. We believe it is unlikely the pretax total return
from our investment portfolio will approach 1995's total of $1.7
billion. The majority of our investment purchases will again consist
of high-grade fixed-maturity securities, with additional investments
in our other asset classes as market conditions warrant. As our
underwriting business continues to expand internationally, we expect
to deploy a growing percentage of our funds available for investment
in those foreign locations. In 1996, we will explore the possibility
of developing an investment portfolio of derivative financial
instruments.
<PAGE>
(PHOTO IMAGE NO. 15 - SEE APPENDIX)
INSURANCE BROKERAGE OPERATES IN DIFFICULT MARKET
Minet
Our insurance brokerage operation, Minet, provides retail and
wholesale insurance broking, reinsurance broking and risk advisory
services for major corporations and large professional organizations
worldwide. Minet, based in London, is a broker of specialized
coverages, such as professional indemnity, directors and officers,
financial institutions, energy, technology and construction. Minet's
U.S.-based Swett & Crawford Group is the nation's largest wholesale
brokerage network in terms of total revenues.
Minet recorded a pretax loss of $13 million in 1995, compared with a
loss of $10 million in 1994. Brokerage fees and commissions totaled
$323 million in 1995, an increase of 2% over 1994. Revenue growth for
Minet and the insurance brokerage industry as a whole has been plagued
for some time by excess capacity in worldwide insurance markets.
Operating expenses grew 7% in 1995, primarily due to an increase in
personnel costs associated with the development of new specialty
broker teams.
Minet's 1994 pretax loss represented a slight improvement over the
pretax loss of $13 million in 1993. Brokerage fees and commissions
grew 7% in 1994.
(PHOTO IMAGE NO. 16 - SEE APPENDIX)
1996 Outlook - We expect Minet's results to improve in 1996. We
anticipate that we will begin to see the benefits of the substantial
re-engineering and reinvestment program that we've executed at Minet
over the last several years. Our focus will be on maturing and
developing our chosen business lines.
<PAGE>
INVESTMENT BANKING-ASSET MANAGEMENT PERFORMS WELL
The John Nuveen Company
Nuveen's core businesses are asset management; developing, marketing
and distributing tax-free investment products; and investment banking.
Nuveen markets tax-free open-end and closed-end (exchange-traded)
managed fund shares and provides investment advice to and administers
the business affairs of its managed funds. Nuveen also underwrites and
trades municipal bonds and tax-free unit investment trusts (UITs), and
provides pricing and surveillance services to its UITs. We held a 78%
ownership interest in Nuveen at the end of 1995.
(PHOTO IMAGE NO. 17 - SEE APPENDIX)
Profits realized on securities held in inventory and successful
efforts to contain expenses combined to produce record earnings for
The John Nuveen Company in 1995. Nuveen's pretax earnings of $114
million were 20% higher than 1994 earnings of $95 million. Our portion
of Nuveen's 1995 pretax earnings was $88 million, compared with $72
million in 1994.
Nuveen's revenues increased $16 million in 1995, largely the result
of gains recognized on tax-free securities held for future sale to
investors. Nuveen realizes profits or losses from the changes in the
market value of its UIT inventories and municipal bond inventories
held for future UIT products. In the declining interest rate
environment of 1995, Nuveen realized $5 million in pretax gains on
these inventory securities. In 1994, amid rapidly rising interest
rates, Nuveen experienced pretax losses of $8 million on its inventory
holdings. This swing in inventory profits, coupled with cost reduction
efforts that produced a 3% decline in operating expenses, accounted
for the improvement in Nuveen's 1995 results.
Investment advisory fees generated from Nuveen's asset management
business totaled $183 million in 1995, virtually level with 1994. A
decline in incremental revenues from new product sales was offset by
increased fee revenues generated by growth in the market value of
existing managed assets. Assets under management at the end of 1995
stood at $32.4 billion, compared with $29.7 billion at the end of
1994. Growth in assets under management occurred primarily from
appreciation in the value of underlying fund investments, which was
fueled by falling interest rates during the year. UIT sales in 1995 of
$1.1 billion were down 11% from 1994 sales of $1.2 billion.
In 1994, Nuveen's pretax earnings declined 15% from 1993's total of
$112 million, as rising interest rates, a significant decline in
municipal new issue volume and investor uncertainty combined to
produce some of the most difficult market conditions in the municipal
bond business in 50 years. (Our portion of Nuveen's earnings in 1993
was $83 million.) Nuveen's revenues declined 10% in 1994, and sales
of tax-free, exchange-traded funds in 1994 were $470 million, compared
with 1993 sales of $4.0 billion. UIT sales were also down, and assets
under management at the end of 1994 declined by $3.0 billion from
$32.7 billion a year earlier, due to a decline in the market value of
underlying fund investments.
<PAGE>
CAPITAL BASE APPROACHES $4.7 BILLION, CASH FLOW STRONG
The St. Paul Companies
CAPITAL RESOURCES
Our capital resources consist of shareholders' equity, debt and
monthly income preferred securities, which represent funds deployed or
available to be deployed to support our business operations. The
following table summarizes our capitalization at the end of the last
three years:
(In millions)
December 31 1995 1994 1993
---- ---- ----
Shareholders' equity:
Common shareholders' equity:
Common stock and
retained earnings $3,165 $2,808 $2,521
Unrealized appreciation
of investments 628 14 589
ESOP obligation and unrealized
foreign exchange loss (74) (89) (105)
----- ----- -----
Total common shareholders' equity 3,719 2,733 3,005
Preferred shareholders' equity 11 4 (1)
----- ----- -----
Total shareholders' equity 3,730 2,737 3,004
Debt 704 623 640
Company-obligated mandatorily
redeemable preferred securities of
St. Paul Capital L.L.C. 207 - -
----- ----- -----
Total capitalization $4,641 $3,360 $3,644
===== ===== =====
Ratio of debt to total capitalization 15% 19% 18%
----- ----- -----
Our total capitalization increased by nearly $1.3 billion in 1995,
due to growth in the unrealized appreciation of our investment
portfolio, record earnings and the issuance of monthly income
preferred securities. The declining interest rate environment in 1995
resulted in a $490 million after-tax increase in the unrealized
appreciation of our fixed maturity holdings. The after-tax
appreciation of our equity and venture capital portfolios increased
$124 million in 1995. In 1994, total capitalization declined by nearly
$300 million, in spite of strong earnings, due to the decrease in the
unrealized appreciation of our fixed maturity holdings.
In May 1995, we issued 4,140,000 company-obligated mandatorily
redeemable preferred securities, also known as convertible monthly
income preferred securities, which generated proceeds of $207 million.
We used a portion of the proceeds to pay down some of our commercial
paper debt, and we used the remaining funds for general corporate
purposes.
Debt outstanding at the end of 1995 of $704 million was 13% higher
than the year-end 1994 total of $623 million. We issued $193 million
of medium-term notes in 1995, and we had just under $400 million of
(GRAPHIC IMAGE NO. 1O - SEE APPENDIX)
(GRAPHIC IMAGE NO. 11 - SEE APPENDIX)
<PAGE>
those notes outstanding at the end of the year, bearing a weighted
average interest rate of 7%. At the end of 1994, debt was slightly
lower than a year earlier, as a decline in short-term borrowings at
Nuveen more than offset a $74 million increase in commercial paper
outstanding.
We may issue additional medium-term notes in 1996. At year-end, we
had the ability to issue an additional $82 million of debt under a
$300 million shelf registration with the Securities and Exchange
Commission (SEC). We expect to register additional debt securities
with the SEC in 1996.
We paid common shareholder dividends of $133 million in 1995,
compared with dividends of $125 million and $117 million in 1994 and
1993, respectively. In February 1996, our board of directors increased
our common dividend rate to $1.76 per share, representing the 10th
consecutive year of dividend rate increases.
Our other major capital expenditures in both 1995 and 1994 consisted
of repurchasing shares of our common stock for various employee
benefit plans. We repurchased 778,000 shares in 1995 and 860,000
shares in 1994 for total costs of $42 million and $34 million,
respectively. These repurchases were funded internally.
In 1993, we purchased Economy Fire & Casualty Company 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.
We do not anticipate any major capital expenditures in 1996, but if
any were to occur, they would involve acquisitions of existing
businesses or further stock repurchases. We have no major capital
improvements planned for 1996.
The St. Paul Companies
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 paying insurance loss and loss adjustment expenses 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, equity securities 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. Strong cash flows resulted in a net increase in underwriting's
invested assets of $796 million (not including increases in market
value) in 1995.
Minet's primary source of operational cash flows is insurance
brokerage fees and commissions. In the last three years, we have
supplemented Minet's liquidity requirements through capital
contributions totaling $162 million.
(GRAPHIC IMAGE NO. 12 - SEE APPENDIX)
<PAGE>
Nuveen's operational cash flows consist chiefly of asset management
fees and product distribution revenues, which are more than adequate
to meet Nuveen's liquidity needs.
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 in 1996 and beyond 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 were $918 million in 1995, compared with
$899 million in 1994 and $754 million in 1993. The underwriting
segment's cash flows in 1995 were virtually level with 1994. Minet's
cash flows from operations improved by $13 million, but Nuveen
experienced a $20 million decline compared with 1994.
In 1994, cash flows in all of our industry segments improved over
1993, led by our underwriting segment, where reduced underwriting
losses and increased investment receipts resulted in a $71 million
increase in cash flows from operations. 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.
The St. Paul Companies
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," which is required to be
implemented no later than 1996. This statement requires that entities
review for impairment long-lived assets and certain intangible assets,
such as goodwill, whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. Under certain
circumstances, an impairment loss equal to the amount by which the
carrying amount of an asset exceeds its fair value shall be
recognized. We will implement the provisions of this statement in
1996, and we do not anticipate any material impact on our results of
operations.
In late 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation," which is also required to be implemented no later
than 1996. This statement establishes a fair value-based method of
accounting for stock-based compensation plans, but permits continued
application of the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," in determining
compensation expense related to stock-based compensation. Companies
that continue to apply Opinion No. 25 must nonetheless comply with the
new disclosure requirements of SFAS No. 123. We will continue to
account for stock-based compensation under the provisions of Opinion
No. 25 and its related interpretations. We will adopt the new
disclosure requirements of SFAS No. 123 in 1996. This adoption will
not have any impact on the results of our operations in 1996 or
succeeding years.
<PAGE>
APPENDIX TO ITEM 7 - NARRATIVE DESCRIPTION OF GRAPHIC AND PHOTO 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 1991 through 1995.
1991: $4.23
1992: ($4.04)
1993: $4.28
1994: $4.60
1995: $5.07
CAPTION: "For the third consecutive year, The St. Paul generated
record operating earnings."
GRAPHIC IMAGE NO. 2 - Bar graph depicting Return on Beginning Equity
for the years 1991 through 1995.
1991: 17.0%
1992: --
1993: 17.2%
1994: 13.5%
1995: 16.7%
CAPTION: "We calculate return on equity by dividing operating
earnings (less preferred dividends) by common shareholders'
equity at the beginning of the year."
PHOTO IMAGE NO. 1 - Photo of Mr. Nicholas M. Brown Jr.
Executive Vice President, Chief Operating Officer
St. Paul Fire and Marine
PHOTO IMAGE NO. 2 - Photo of Mr. Michael J. Conroy
Executive Vice President, Chief Administrative
Officer
St. Paul Fire and Marine
PHOTO IMAGE NO. 3 - Photo of two individuals at a construction site.
CAPTION: Customer: Yonkers Contracting Company, Inc.
------------------------------------------
"A safe work site is in the best interests of all, including
the contractor, the insurance agent and the insurance
company. George Cesarini (left), St. Paul regional
construction loss control manager, brings his own experience
as a construction superintendent/engineer to this work site
on the Manhattan Bridge in New York City. Yonkers
Contracting Company, Inc. is the general contractor for this
multiyear, multimillion-dollar rehabilitation project.
Working with contractors before projects begin, Cesarini
helps develop a safety plan and visits the site regularly
through completion. Henry Lombardi (right) is executive vice
president of Allied Coverage Corp., Yonkers' independent
insurance agency. Allied specializes in insurance for the
construction industry. Together, The St. Paul and Allied
bring a unique understanding of the loss exposures,
regulations and standards impacting contractors to this and
other construction projects."
<PAGE>
PHOTO IMAGE NO. 4 - Photo of Ms. Janet R. Nelson
President, Custom Markets
Specialized Commercial
PHOTO IMAGE NO. 5 - Photo of Ms. Susan J. Albrecht
President, Major Markets
Specialized Commercial
PHOTO IMAGE NO. 6 - Photo of Mr. Joseph B. Nardi
President, Medical Services
GRAPHIC IMAGE NO. 3 - Bar graph depicting Underwriting Operations
Written Premiums for the years 1991 through 1995.
(in billions)
1991: $3.2
1992: $3.1
1993: $3.2
1994: $3.6
1995: $4.2
CAPTION: "Strong growth in virtually all of our underwriting
operations resulted in a 17% increase in premium volume over
1994."
PHOTO IMAGE NO. 7 - Photo of Mr. Stephen J. Klingel
President, Personal Insurance
PHOTO IMAGE NO. 8 - Photo of two individuals in a hardware store.
CAPTION: Customer: Ace Hardware Corporation
----------------------------------
"It's Saturday morning at Terry's Ace Hardware in Hastings,
Minn. Families have purchased tools and home fix-up
supplies from Ace Hardware stores since 1924. For 10 years,
The St. Paul has customized insurance coverages and loss
control programs for store owners. Personal
property, general liability, automobile, workers'
compensation and umbrella excess coverages are offered
within The St. Paul's Business Owners Services PACE (Package
Accounts for Commercial Enterprises) small-business owner's
policy. Approximately 1,400 Ace stores nationwide are
covered by The St. Paul. Ace Hardware Corporation is a
dealer-owned cooperative composed of more than 5,000 stores
in 50 states and 55 countries and territories."
PHOTO IMAGE NO. 9 - Photo of Mr. James A. Schulte
President, Commercial
<PAGE>
PHOTO IMAGE NO. 10 - Photo of two individuals in New York City.
CAPTION: Customer: Korean Reinsurance Company
------------------------------------
"St. Paul Re's financial strength and consistency in the
worldwide reinsurance marketplace continue to appeal to
customers. Elizabeth Mui, assistant vice president-
international underwriting for St. Paul Re, is pictured with
Mr. Ho In Lee, New York representative of the Korean
Reinsurance Company. Mr. Lee is Korean Re's liaison to St.
Paul Re and other U.S. reinsurers. Mui works with U.S.
brokers to provide reinsurance to Korean insurance companies
and St. Paul Re's other customers throughout the Asia-
Pacific region."
PHOTO IMAGE NO. 11 - Photo of Mr. James F. Duffy
Chief Executive Officer, St. Paul Re
PHOTO IMAGE NO. 12 - Photo of Mr. Mark L. Pabst
President, Chief Executive Officer,
St. Paul International Underwriting
PHOTO IMAGE NO. 13 - Photo two individuals standing in front of a
hospital.
CAPTION: Customer: The Princess Margaret Hospital
----------------------------------------
"Already the largest insurer of U.K. National Health Service
Trusts, The St. Paul has also recognized the growth
potential of the U.K. private health care sector. St. Paul
International Underwriting has developed products and
services to address these customers' emerging insurance
requirements. The Princess Margaret Hospital in Windsor,
England, is part of General Healthcare Group plc (GHG), one
of the largest providers of private health care in the
United Kingdom. The St. Paul provides GHG - its largest
private health care account in Europe - with medical
professional liability, employer's and public liability,
material property and business interruption insurance."
GRAPHIC IMAGE NO. 4 - Pie chart depicting Underwriting Operations
Premium Distribution in 1995.
Specialized Commercial 30%
Medical Services 16%
Personal Insurance 16%
Commercial 15%
St. Paul Re 17%
St. Paul International Underwriting 6%
CAPTION: "Our underwriting operations, which produced $4.2 billion in
written premiums in 1995, offer a wide range of insurance
products and services."
<PAGE>
GRAPHIC IMAGE NO. 5 - Bar graph depicting Underwriting Operations
Combined Ratio for the years 1991 through 1995.
1991 1992 1993 1994 1995
----- ----- ----- ----- -----
Loss ratio 75.2 85.6 72.5 72.1 72.1
Expense ratio 29.4 32.2 32.0 30.2 29.7
----- ----- ----- ----- -----
Combined ratio 104.6 117.8 104.5 102.3 101.8
===== ===== ===== ===== =====
CAPTION: "Our expense ratio dipped below 30 for the first time since
1991, contributing to our best combined ratio in 16 years.
The lower the combined ratio, the better the result."
PHOTO IMAGE NO. 14 - Photo of two individuals standing in front of a
quilt.
CAPTION: Customer: Anabaptist and Church of the Brethren Communities
-----------------------------------------------------------
"The St. Paul's Multicultural Business Group has begun a
unique partnership with the Anabaptist and Brethren Agency
Inc. in Akron, Pa. The St. Paul will offer insurance to
Anabaptist and Church of the Brethren communities - nearly
700,000 church members in more than 5,000 congregations,
with heaviest concentrations in Pennsylvania and the
Midwest. A tradition common to these communities is
quilting, an art which has been passed on for generations by
family members like this grandmother and granddaughter,
pictured in Akron. Quilts have also become a source of
income, and volunteer-created quilts are auctioned to help
support these communities' international relief agencies,
enabling them to express their ministry of peace-making.
Formed in 1995, the Multicultural Business Group works with
many St. Paul underwriting units to serve cultural groups
and organizations throughout the United States."
GRAPHIC IMAGE NO. 6 - Chart depicting The St. Paul's Claims-paying
Ratings as of December 31, 1995.
Organization Rating
----------------- ------
A.M. Best A+
Moody's Aa1
Standard & Poor's AAA
CAPTION: "Independent rating agencies have long recognized The St.
Paul for its claims-paying ability."
<PAGE>
GRAPHIC IMAGE NO. 7 - 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: "Investment income, unrealized appreciation and realized
gains from sales of investments combined to produce a total
pretax return of $1.7 billion from the portfolio in 1995."
GRAPHIC IMAGE NO. 8 - Bar graph depicting Underwriting Operations Net
Investment Income for the years 1991 through 1995.
(in millions)
1991: $641
1992: $642
1993: $646
1994: $675
1995: $731
CAPTION: "Strong performance by all invested asset classes - bonds,
stocks, real estate and venture capital - contributed to
investment income growth of 8% in 1995. Investment income
is a steady, reliable component of our total earnings."
GRAPHIC IMAGE NO. 9 - Table depicting Underwriting Operations Bond
Portfolio Ratings.
Rating Percent
------------ -------------
AAA 54%
AA 24
A 15
BBB 3
Nonrated 4
---
100
CAPTION: "The carrying value of our underwriting operations' bond
portfolio at year-end included $682 million of unrealized
appreciation."
<PAGE>
PHOTO IMAGE NO. 15 - Photo of man holding bottle in brewery.
CAPTION: Customer: The South African Breweries Limited
---------------------------------------------
"Bottles are prepared for washing before being filled at the
Alrode Brewery, south of Johannesburg, South Africa. This
state-of-the-art brewery is one of eight in South Africa
owned by The South African Breweries Limited (SAB), a
consumer-oriented company that is Africa's largest
industrial group, with a product portfolio including beer,
soft drinks, retailing, hotels and mass market consumer
goods manufacturing. Minet, The St. Paul's insurance
brokerage operation, has provided insurance broking services
through its association with M.I.B Group (Pty) Limited to
SAB for over 30 years. Minet is the Lloyd's broker with the
largest presence in Africa, including 25 percent ownership
of M.I.B, South Africa's leading independent broker. M.I.B
provides insurance broking and risk management services to
SAB. Minet places a substantial portion of SAB's insurance
into the London market."
PHOTO IMAGE NO. 16 - Photo of Mr. Peter S. Christie
Chairman, Chief Executive Officer,
Minet
PHOTO IMAGE NO. 17 - Photo of Mr. Richard J. Franke
Chairman, Chief Executive Officer,
The John Nuveen Company
GRAPHIC IMAGE NO. 10 - Bar graph depicting Total Capitalization at the
end of the years 1991 through 1995.
(in billions)
1991 1992 1993 1994 1995
----- ----- ----- ----- -----
Debt $0.5 $0.6 $0.6 $0.6 $0.7
Redeemable
Preferred
Securities
and Share-
holders'
Equity 2.5 2.2 3.0 2.8 3.9
----- ----- ----- ----- -----
Total $3.0 $2.8 $3.6 $3.4 $4.6
===== ===== ===== ===== =====
CAPTION: "Record earnings, growth in the unrealized appreciation of
our investments and the issuance of new securities pushed
our capitalization to $4.6 billion at year-end. Debt
remains at a conservative level."
<PAGE>
GRAPHIC IMAGE NO. 11 - Bar graph depicting Book Value per Common Share
at the end of the years 1991 through 1995.
1991: $29.78
1992: $26.18
1993: $35.47
1994: $32.46
1995: $44.29
CAPTION: "The $1 billion increase in common shareholders' equity
translated into a 36% increase in book value per common
share in 1995."
GRAPHIC IMAGE NO. 12 - Bar graph depicting Dividends Paid per Common
Share for the years 1991 through 1995.
1991: $1.28
1992: $1.35
1993: $1.39
1994: $1.48
1995: $1.58
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 124
consecutive years and increased dividends in 64 of those
years."
<PAGE>
Item 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
The St. Paul Companies
Eleven-year Summary of Selected Financial Data
Consolidated
(Dollars in thousands)
For the year ended December 31 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
<S>
From Continuing Operations <C> <C> <C> <C> <C> <C>
Revenues $5,409,630 $4,701,285 $4,460,172 $4,498,692 $4,351,700 $4,005,237
Operating earnings (loss) 464,852 413,866 386,628 (333,791) 380,804 385,458
Income (loss) before cumulative effects
and extraordinary credit 521,209 442,828 427,609 (232,521) 405,062 391,270
Investment Activity
Net investment income 771,612 694,594 661,106 666,374 675,604 669,989
Realized investment gains (losses),
net of taxes 56,357 28,962 40,981 36,437 24,258 5,812
Change in unrealized appreciation
of investments, net of taxes* 613,843 (574,896) 525,175 (23,815) 55,093 (67,558)
Other Selected Financial Data (As of December 31)
Total assets 19,656,502 17,495,820 17,149,196 15,392,054 14,744,717 13,907,293
Debt 704,042 622,624 639,729 566,717 486,779 473,829
Common shareholders' equity 3,719,249 2,732,934 3,005,128 2,202,499 2,532,841 2,196,371
Common shares outstanding** 83,975,864 84,202,417 84,714,676 84,118,554 85,042,484 84,468,058
Per Common Share Data**
Operating earnings (loss) 5.07 4.60 4.28 (4.04) 4.23 4.09
Income (loss) before cumulative
effects and extraordinary credit 5.68 4.93 4.73 (2.84) 4.50 4.16
Book value 44.29 32.46 35.47 26.18 29.78 26.00
Year-end market price 55.63 44.75 44.94 38.50 36.44 31.38
Cash dividends declared 1.60 1.50 1.40 1.36 1.30 1.20
Operating Earnings Return On
Beginning Common Equity 16.7% 13.5% 17.2% _ 17.0% 16.1%
*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.
Underwriting
(Dollars in thousands)
For the year ended December 31 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ----
Written premiums $4,243,213 $3,623,026 $3,178,545 $3,142,419 $3,233,729 $3,052,032
Statutory underwriting result (152,703) (143,317) (143,599) (557,463) (170,894) (141,751)
GAAP underwriting result (103,045) (113,008) (150,255) (566,886) (163,782) (120,730)
Net investment income 731,096 674,818 646,396 642,301 640,856 629,242
Pretax operating earnings (loss) 577,509 524,742 457,752 20,781 451,184 457,161
Pretax income 651,912 560,709 507,181 81,132 486,063 466,731
Statutory combined ratio:
Loss and loss expense ratio 72.1 72.1 72.5 85.6 75.2 73.2
Underwriting expense ratio 29.7 30.2 32.0 32.2 29.4 30.0
----- ----- ----- ----- ----- -----
Combined ratio 101.8 102.3 104.5 117.8 104.6 103.2
Combined ratio including
policyholders' dividends 102.0 102.3 104.7 118.2 105.0 104.2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The St. Paul Companies
Eleven-year Summary of Selected Financial Data
Consolidated
(Dollars in thousands)
For the year ended December 31 1989 1988 1987 1986 1985
---- ---- ---- ---- ----
<S>
From Continuing Operations <C> <C> <C> <C> <C>
Revenues $3,788,648 $3,634,953 $3,358,918 $3,190,754 $2,762,126
Operating earnings (loss) 338,267 349,261 324,315 153,882 42,061
Income (loss) before cumulative effects
and extraordinary credit 398,158 352,615 318,826 159,585 90,899
Investment Activity
Net investment income 662,211 592,032 534,767 458,710 381,280
Realized investment gains (losses),
net of taxes 59,891 3,354 (5,489) 5,703 48,838
Change in unrealized appreciation
of investments, net of taxes 60,045 20,428 (19,959) (13,396) 3,317
Other Selected Financial Data
(As of December 31)
Total assets 12,734,411 11,997,989 9,712,307 8,669,598 7,861,877
Debt 293,802 417,140 96,576 344,299 750,876
Common shareholders' equity 2,349,254 2,015,219 1,711,362 1,440,565 1,012,245
Common shares outstanding** 98,607,762 92,728,168 92,603,714 92,495,700 80,200,900
Per Common Share Data**
Operating earnings (loss) 3.45 3.63 3.38 1.67 0.52
Income (loss) before cumulative
effects and extraordinary credit 4.06 3.66 3.34 1.77 1.17
Book value 23.82 21.73 18.48 15.57 12.62
Year-end market price 29.57 21.75 23.00 20.13 19.97
Cash dividends declared 1.10 1.00 0.88 0.75 0.75
Operating Earnings Return On
Beginning Common Equity 16.8% 20.4% 22.5% 15.2% 4.3%
**All years presented reflect the effect of the 2-for-1 stock split
executed June 6, 1944.
Underwriting
(Dollars in thousands)
For the year ended December 31 1989 1988 1987 1986 1985
---- ---- ---- ---- ---- ----
Written premiums $2,807,223 $2,690,536 $2,704,165 $2,556,425 $2,234,910
Statutory underwriting result (207,977) (92,741) (145,061) (265,105) (460,306)
GAAP underwriting result (196,378) (90,209) (127,066) (275,184) (408,755)
Net investment income 614,119 548,766 498,251 431,594 366,687
Pretax operating earnings (loss) 364,352 420,339 358,493 142,532 (58,387)
Pretax income 456,167 424,187 351,358 151,552 31,674
Statutory combined ratio:
Loss and loss expense ratio 75.7 73.6 76.2 82.0 91.3
Underwriting expense ratio 30.5 30.0 28.9 27.9 28.5
----- ----- ----- ----- ----- -----
Combined ratio 106.2 103.6 105.1 109.9 119.8
Combined ratio including
policyholders' dividends 106.6 104.0 105.3 110.5 120.8
</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 systems 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
internal 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, 1995 and
1994, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the years in the three-year period
ended December 31, 1995. 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, 1995
and 1994, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 4 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," in
1993.
/s/ KPMG Peat Marwick LLP
---------------------
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 29, 1996
<PAGE>
The St.Paul Companies
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
REVENUES
Premiums earned $3,971,329 $3,412,081 $3,178,338
Net investment income 771,612 694,594 661,106
Insurance brokerage fees
and commissions 310,512 303,152 283,680
Investment banking-asset management 221,007 211,789 241,730
Realized investment gains 84,572 41,974 58,254
Other 50,598 37,695 37,064
--------- --------- ---------
Total revenues 5,409,630 4,701,285 4,460,172
--------- --------- ---------
EXPENSES
Insurance losses and loss
adjustment expenses 2,864,307 2,461,698 2,303,738
Policy acquisition expenses 856,979 753,946 732,137
Operating and administrative 1,032,111 922,063 901,691
--------- --------- ---------
Total expenses 4,753,397 4,137,707 3,937,566
--------- --------- ---------
Income before income taxes 656,233 563,578 522,606
Income tax expense (benefit):
Federal current 180,743 151,347 148,508
Other (45,719) (30,597) (53,511)
--------- --------- ---------
Total income tax expense 135,024 120,750 94,997
--------- --------- ---------
Net Income $ 521,209 $ 442,828 $ 427,609
========= ========= =========
EARNINGS PER COMMON SHARE
Primary $ 5.99 $ 5.12 $ 4.92
--------- --------- ---------
Fully Diluted $ 5.68 $ 4.93 $ 4.73
--------- --------- ---------
See notes to consolidated financial statements.
<PAGE>
The St. Paul Companies
CONSOLIDATED BALANCE SHEETS
In thousands)
December 31 1995 1994
---- ----
ASSETS
Investments:
Fixed maturities $10,372,890 $ 8,828,684
Equities 711,471 531,042
Real estate 611,656 528,144
Venture capital 388,599 330,032
Other investments 42,776 46,539
Short-term investments 939,528 898,081
---------- ----------
Total investments 13,066,920 11,162,522
Cash 34,440 46,664
Investment banking inventory securities 249,662 148,031
Reinsurance recoverables:
Unpaid losses 1,853,817 1,533,250
Paid losses 74,568 88,900
Receivables:
Underwriting premiums 1,316,560 1,107,788
Insurance brokerage activities 652,801 891,823
Interest and dividends 197,740 182,938
Other 81,885 88,657
Deferred policy acquisition expenses 372,174 324,358
Ceded unearned premiums 226,943 255,687
Deferred income taxes 528,805 790,508
Office properties and equipment 478,286 477,570
Goodwill 314,457 279,308
Other assets 207,444 117,816
---------- ----------
Total Assets $19,656,502 $17,495,820
========== ==========
LIABILITIES
Insurance reserves:
Losses and loss adjustment expenses $10,247,070 $ 9,423,429
Unearned premiums 2,361,028 2,109,170
---------- ----------
Total insurance reserves 12,608,098 11,532,599
Debt 704,042 622,624
Payables:
Insurance brokerage activities 979,964 1,191,089
Reinsurance premiums 179,249 155,833
Income taxes 139,058 183,659
Accrued expenses and other 618,903 600,211
Other liabilities 490,067 472,336
---------- ----------
Total Liabilities 15,719,381 14,758,351
Company-obligated mandatorily redeemable
preferred securities of St. Paul Capital L.L.C. 207,000 -
---------- ----------
SHAREHOLDERS' EQUITY
Preferred:
Convertible preferred stock 144,165 146,102
Guaranteed obligation - PSOP (133,293) (141,567)
---------- ----------
Total Preferred Shareholders' Equity 10,872 4,535
---------- ----------
Common:
Common stock 460,458 445,222
Retained earnings 2,704,075 2,362,286
Guaranteed obligation - ESOP (32,294) (44,410)
Unrealized appreciation of investments 627,791 13,948
Unrealized loss on foreign currency translation (40,781) (44,112)
---------- ----------
Total Common Shareholders' Equity 3,719,249 2,732,934
---------- ----------
Total Shareholders' Equity 3,730,121 2,737,469
---------- ----------
Total Liabilities, Redeemable Preferred
Securities and Shareholders' Equity $19,656,502 $17,495,820
========== ==========
See notes to consolidated financial statements.
<PAGE>
The St. Paul Companies
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
PREFERRED SHAREHOLDERS' EQUITY
Series B convertible preferred stock:
Beginning of year $ 146,102 $ 147,608 $ 149,161
Redemptions during the year (1,937) (1,506) (1,553)
--------- --------- ---------
End of year 144,165 146,102 147,608
--------- --------- ---------
GUARANTEED OBLIGATION - PSOP:
Beginning of year (141,567) (148,929) (149,734)
Principal payments 8,274 7,362 805
--------- --------- ---------
End of year (133,293) (141,567) (148,929)
--------- --------- ---------
Total Preferred Shareholders' Equity 10,872 4,535 (1,321)
--------- --------- ---------
COMMON SHAREHOLDERS' EQUITY
Common stock:
Beginning of year 445,222 438,559 422,249
Stock issued under stock option
and other incentive plans 19,481 11,130 16,334
Reacquired common shares (4,245) (4,467) (24)
--------- --------- ---------
End of year 460,458 445,222 438,559
--------- --------- ---------
Retained earnings:
Beginning of year 2,362,286 2,082,832 1,781,113
Net income 521,209 442,828 427,609
Dividends declared on common stock,
$1.60 per share in 1995 ($1.50 in
1994 and $1.40 in 1993) (133,956) (124,921) (116,962)
Dividends declared on preferred
stock, net of taxes (8,582) (8,448) (8,395)
Reacquired common shares (38,291) (30,005) (533)
Tax benefit on employee stock
options and awards 1,409 - -
--------- --------- ---------
End of year 2,704,075 2,362,286 2,082,832
--------- --------- ---------
GUARANTEED OBLIGATION - ESOP:
Beginning of year (44,410) (56,005) (67,452)
Principal payments 12,116 11,595 11,447
--------- --------- ---------
End of year (32,294) (44,410) (56,005)
--------- --------- ---------
UNREALIZED APPRECIATION OF INVESTMENTS,
NET OF TAXES:
Beginning of year 13,948 588,844 63,669
Change for the year 613,843 (574,896) 23,193
Change due to adoption of SFAS No. 115 - - 501,982
--------- --------- ---------
End of year 627,791 13,948 588,844
--------- --------- ---------
UNREALIZED GAIN (LOSS) ON FOREIGN
CURRENCY TRANSLATION, NET OF TAXES:
Beginning of year (44,112) (49,102) 2,920
Change for the year 3,331 4,990 (52,022)
--------- --------- ---------
End of year (40,781) (44,112) (49,102)
--------- --------- ---------
Total Common Shareholders' Equity 3,719,249 2,732,934 3,005,128
--------- --------- ---------
Total Shareholders' Equity $3,730,121 $2,737,469 $3,003,807
========= ========= =========
See notes to consolidated financial statements.
<PAGE>
The St. Paul Companies
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES
Underwriting:
Net income $ 533,776 $ 452,756 $ 423,109
Adjustments:
Change in net insurance reserves 753,543 445,791 204,423
Change in underwriting
premiums receivable (217,877) (89,147) 89,441
Deferred tax benefit (55,192) (36,085) (48,976)
Realized investment gains (74,403) (35,967) (49,429)
Other (61,509) 146,886 194,990
------- ------- -------
Total underwriting 878,338 884,234 813,558
------- ------- -------
Insurance brokerage:
Net loss (21,400) (19,571) (24,710)
Adjustments:
Change in premium balances (3,371) 4,303 (20,718)
Change in accounts payable
and accrued expenses 4,185 (19,334) (8,985)
Depreciation and goodwill amortization 27,414 23,948 20,233
Other 4,770 9,749 (2,833)
------- ------- -------
Total insurance brokerage 11,598 (905) (37,013)
------- ------- -------
Investment banking-asset management:
Net income 54,746 44,196 52,103
Adjustments:
Change in inventory securities (103,016) 156,823 (79,472)
Change in short-term borrowings 25,000 (80,383) 60,383
Change in short-term investments 45,659 (94,968) (17,048)
Change in open security transactions (10,138) 10,879 (3,143)
Other 25,642 21,051 8,872
------- ------- -------
Total investment banking-
asset management 37,893 57,598 21,695
------- ------- -------
Parent company and consolidating
eliminations:
Net loss (45,913) (34,553) (22,893)
Realized investment gains (10,169) (6,007) (8,825)
Other adjustments 45,997 (1,152) (12,672)
------- ------- -------
Total parent company and
consolidating eliminations (10,085) (41,712) (44,390)
------- ------- -------
Net Cash Provided by
Operating Activities 917,744 899,215 753,850
------- ------- -------
INVESTING ACTIVITIES
Purchases of investments (2,857,778) (2,087,104) (2,484,731)
Proceeds from sales and
maturities of investments 1,991,357 1,465,668 1,954,206
Change in short-term investments (56,491) (40,922) 151,213
Change in open security transactions 6,516 (6,156) 56,463
Net purchases of office
properties and equipment (54,872) (66,564) (47,210)
Purchase of Economy Fire & Casualty,
net of cash acquired - - (274,561)
Acquisition of brokerage companies,
net of cash acquired (51,693) (18,721) (48,862)
Other 9,611 (1,809) 19,996
------- ------- -------
Net Cash Used in
Investing Activities (1,013,350) (755,608) (673,486)
------- ------- -------
FINANCING ACTIVITIES
Dividends paid on common and
preferred stock (144,662) (136,062) (129,218)
Proceeds from issuance of
company-obligated mandatorily
redeemable preferred securities
of St. Paul Capital L.L.C. 207,000 - -
Proceeds from issuance of debt 193,002 94,194 77,243
Repayment of debt (125,446) (20,350) (51,735)
Repurchase of common shares (41,714) (34,150) (207)
Other (4,938) (26,855) 23,929
------- ------- -------
Net Cash Provided by (Used in)
Financing Activities 83,242 (123,223) (79,988)
------- ------- -------
Effect of exchange rate changes on cash 140 860 (1,604)
------- ------- -------
Increase (Decrease) in Cash (12,224) 21,244 (1,228)
------- ------- -------
Cash at beginning of year 46,664 25,420 26,648
------- ------- -------
Cash at End of Year $ 34,440 $ 46,664 $ 25,420
======= ======= =======
See notes to consolidated financial statements.
<PAGE>
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.
Accounting Principles - 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 1994 and 1993
financial statements and notes to conform with the 1995 presentation.
These reclassifications had no effect on net income, or common or
preferred shareholders' equity, as previously reported for those
years.
Stock Split - In 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.
ACCOUNTING FOR OUR UNDERWRITING OPERATIONS
Premiums Earned - Premiums on insurance policies are our largest
source of revenue. We reflect the premiums as revenues evenly over the
policy terms. The premiums that we have not yet recognized as revenues
are recorded on our balance sheet 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 income 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 1995 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 incurred but not yet reported to us (IBNR). Our estimates
consider such variables as past loss experience, current claim trends
and the prevailing social, economic and legal environments. We reduce
our loss reserves for estimated amounts of salvage and subrogation.
Estimated amounts recoverable from reinsurers on unpaid losses and
loss expenses are reflected as assets.
<PAGE>
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.
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
corresponding 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, we would immediately
expense the excess costs.
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 $380.3 million and $385.0
million at the end of 1995 and 1994, respectively.
<PAGE>
ACCOUNTING FOR OUR INVESTMENT BANKING-ASSET MANAGEMENT OPERATIONS
The John Nuveen Company comprises our investment banking-asset
management segment. We held a 78% interest in Nuveen on Dec. 31, 1995.
Nuveen markets tax-free 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-free 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.
We consolidate 100% of Nuveen's assets, liabilities, revenues and
expenses, with reductions on the balance sheet and statement of income
for the minority shareholders' proportionate interest in Nuveen's
equity and earnings. Minority interest of $71.4 million and $66.5
million was recorded in other liabilities at the end of 1995 and 1994,
respectively.
ACCOUNTING FOR OUR INVESTMENTS
Fixed Maturities - Our entire fixed maturity investment portfolio is
classified as "available-for-sale," as defined by Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, we carry that
portfolio on our balance sheet at estimated market value.
Equities - Our equity securities are also classified as "available-for-
sale" and carried at estimated market value.
Real Estate - Our real estate investments primarily consist of
commercial buildings which we own directly or which we have a partial
interest in through joint ventures with other investors.
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 corresponding lease.
The accumulated depreciation of our real estate assets was $68.8
million and $60.2 million at Dec. 31, 1995 and 1994, respectively.
We use the "equity method" of accounting for our joint ventures,
which means we carry these investments at cost, adjusted for our share
of earnings or losses, and reduced by cash distributions from the
joint ventures 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 so that when we sell any of them, we are able to
identify and record the gain or loss on that transaction in the
"Revenues" section of our statement of income.
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 income.
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.
<PAGE>
GOODWILL
Goodwill is the excess of the amount we 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. The accumulated amortization of goodwill was $138.4
million and $102.9 million at Dec. 31, 1995 and 1994, respectively.
We 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.
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 $277.8 million and $243.9 million at the
end of 1995 and 1994, respectively.
<PAGE>
FOREIGN CURRENCY TRANSLATION
We assign functional currencies to our foreign operations, which 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 income. 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 income.
SUPPLEMENTAL CASH FLOW INFORMATION
Interest and Income Taxes Paid - We paid interest of $44.9 million in
1995, $40.0 million in 1994 and $41.2 million in 1993. We paid federal
income taxes of $184.4 million in 1995, $122.7 million in 1994 and
$121.8 million in 1993. Federal tax payments in 1995 include $45
million in taxes and interest for a partial settlement with the IRS
regarding certain issues raised in its audit of our consolidated tax
returns for the years 1991 through 1994.
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 per common share (EPS) amounts were calculated by dividing
net income, as adjusted, by the adjusted average common shares
outstanding.
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
PRIMARY
Net income, as reported $521,209 $442,828 $427,609
PSOP preferred dividends
declared (net of taxes) (8,582) (8,448) (8,395)
Premium on preferred shares redeemed (823) - -
------- ------- -------
Net income, as adjusted $511,804 $434,380 $419,214
======= ======= =======
FULLY DILUTED
Net income, as reported $521,209 $442,828 $427,609
Additional PSOP expense (net of taxes)
due to assumed conversion
of preferred stock (3,477) (3,782) (4,080)
Dividends on monthly income
preferred securities (net of taxes) 5,046 - -
Premium on preferred shares redeemed (823) - -
------- ------- -------
Net income, as adjusted $521,955 $439,046 $423,529
======= ======= =======
ADJUSTED AVERAGE COMMON
SHARES OUTSTANDING
Primary 85,399 84,816 85,216
Fully diluted 91,843 89,067 89,469
Adjusted average common shares outstanding include the common and
common equivalent shares outstanding for the year and, for fully
diluted EPS, common shares that would be issuable upon conversion of
PSOP preferred stock and the monthly income preferred securities.
<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.
Gross Gross Estimated
(In thousands) Unrealized Unrealized Market
December 31, 1995 Cost Appreciation Depreciation Value
---- ----------- ----------- --------
Fixed maturities:
U.S. government $2,087,057 $120,093 $ (1,153) $ 2,205,997
States and political
subdivisions 4,295,822 370,910 (839) 4,665,893
Foreign governments 893,677 42,605 (6,288) 929,994
Corporate securities 1,348,506 85,458 (4,574) 1,429,390
Mortgage-backed securities 1,089,891 53,283 (1,558) 1,141,616
---------- ------- ------- ----------
Total fixed maturities 9,714,953 672,349 (14,412) 10,372,890
Equities 551,031 166,653 (6,213) 711,471
Venture capital 259,324 141,969 (12,694) 388,599
---------- ------- ------- ----------
Total $10,525,308 $980,971 $(33,319) $11,472,960
========== ======= ======= ==========
Gross Gross Estimated
(In thousands) Unrealized Unrealized Market
December 31, 1994 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
========= ======= ======== =========
Statutory Deposits - At Dec. 31, 1995, our underwriting operations had
investments in fixed maturities with an estimated market value of
$434.1 million on deposit with regulatory authorities, as required by
law.
<PAGE>
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.
(In thousands) Amortized Estimated
December 31, 1995 Cost Market Value
--------- ---------
One year or less $ 72,833 $ 73,139
Over one year through five years 1,372,589 1,435,758
Over five years through ten years 3,658,385 3,933,742
Over 10 years 3,521,255 3,788,635
Mortgage-backed securities with
various maturities 1,089,891 1,141,616
--------- ---------
Total $9,714,953 $10,372,890
========= =========
Note 4
INVESTMENT TRANSACTIONS
Investment Activity - Here is a summary of our investment purchases,
sales and maturities.
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
PURCHASES
Fixed maturities $1,829,942 $1,235,653 $1,816,965
Equities 837,288 700,568 465,056
Real estate 116,925 74,420 110,371
Venture capital 66,247 66,622 79,410
Other investments 7,376 9,841 12,929
--------- --------- ---------
Total purchases 2,857,778 2,087,104 2,484,731
--------- --------- ---------
PROCEEDS FROM SALES
AND MATURITIES
Fixed maturities:
Sales 326,382 181,126 169,330
Maturities and
redemptions 709,104 533,292 1,236,912
Equities 836,683 707,608 437,610
Real estate 14,428 6,718 40,764
Venture capital 87,512 28,817 59,124
Other investments 17,248 8,107 10,466
--------- --------- ---------
Total sales and
maturities 1,991,357 1,465,668 1,954,206
--------- --------- ---------
Net purchases $ 866,421 $ 621,436 $ 530,525
========= ========= =========
<PAGE>
Net Investment Income - Here is a summary of our net investment
income.
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
Fixed maturities $665,364 $626,263 $607,067
Equities 14,644 12,984 12,035
Real estate 32,830 28,049 19,288
Venture capital (171) (1,849) (2,012)
Other investments (965) 346 698
Short-term investments 69,542 45,893 37,952
--------- --------- ---------
Total 781,244 711,686 675,028
--------- --------- ---------
Investment expenses (9,632) (17,092) (13,922)
--------- --------- ---------
Net investment income $771,612 $694,594 $661,106
========= ========= =========
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.
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
PRETAX REALIZED
INVESTMENT GAINS (LOSSES)
Fixed maturities:
Gross realized gains $ 3,091 $ 5,232 $ 8,916
Gross realized losses (5,728) (1,849) (3,585)
--------- --------- ---------
Total fixed maturities (2,637) 3,383 5,331
--------- --------- ---------
Equities:
Gross realized gains 78,772 59,548 62,310
Gross realized losses (29,548) (38,626) (18,782)
--------- --------- ---------
Total equities 49,224 20,922 43,528
--------- --------- ---------
Real estate 1,831 (10,458) (10,188)
Venture capital 38,175 17,616 24,046
Other investments (2,021) 10,511 (4,463)
--------- --------- ---------
Total pretax realized
investment gains $84,572 $41,974 $58,254
========= ========= =========
CHANGE IN UNREALIZED APPRECIATION
Fixed maturities $742,626 $(847,554) $771,598
Equities 130,247 (30,106) (23,993)
Venture capital 59,880 (4,064) 52,550
--------- --------- ---------
Total change in
pretax unrealized
appreciation 932,753 (881,724) 800,155
Increase (decrease) in
deferred tax asset (318,910) 306,828 (274,980)
--------- --------- ---------
Total change in
unrealized appreciation,
net of taxes $ 613,843 $(574,896) $ 525,175
========= ========= =========
We implemented SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as of Dec. 31, 1993. Prior to our
adoption of SFAS No. 115, 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 year ended
Dec. 31, 1993, was $257.8 million.
<PAGE>
Note 5
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are defined as futures, forward, swap
or option contracts and other financial instruments with similar
characteristics. We have had limited involvement with these
instruments primarily for purposes of hedging. 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.
At Dec. 31, 1995 and 1994, we had investments in perpetual floating
rate notes totaling $35 million and $45 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, 1995
and 1994, we recorded an asset of $941,000 and a liability of $1.7
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, 1995 and 1994, the estimated market value of this swap
agreement was an asset of $200,000 and $5.8 million, respectively.
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, 1995 and 1994, our open position on foreign exchange forward
contracts totaled $26.5 million and $26.4 million, respectively. The
unrealized loss on these contracts was $1.1 million and $412,000 at
the end of 1995 and 1994, 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. We recorded the market value of these
options on our balance sheet. At Dec. 31, 1994, we recorded an
unrealized loss of $276,000 associated with these options. We had no
such options outstanding at the end of 1995.
<PAGE>
Note 6
INSURANCE RESERVES
Reserves for Losses and Loss Adjustment Expenses - The following table
represents a reconciliation of beginning and ending consolidated
insurance loss and loss adjustment expense (LAE) reserves for each of
the last three years.
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
Loss and LAE reserves at
beginning of year,
as reported $9,423,429 $9,185,191 $8,812,559
Less reinsurance recoverables
on unpaid losses at
beginning of year (1,533,250) (1,545,026) (1,605,824)
--------- --------- ---------
Net loss and LAE reserves
at beginning of year 7,890,179 7,640,165 7,206,735
Reserves of acquired companies 12,329 - 279,600
Provision for losses and
LAE for claims incurred:
Current year 3,112,193 2,790,164 2,526,675
Prior years (247,886) (328,466) (222,937)
--------- --------- ---------
Total incurred 2,864,307 2,461,698 2,303,738
--------- --------- ---------
Losses and LAE payments
for claims incurred:
Current year (783,633) (667,255) (579,779)
Prior years (1,590,701) (1,566,083) (1,546,737)
--------- --------- ---------
Total paid (2,374,334) (2,233,338) (2,126,516)
--------- --------- ---------
Unrealized foreign
exchange loss (gain) 772 21,654 (23,392)
--------- --------- ---------
Net loss and LAE
reserves at end of year 8,393,253 7,890,179 7,640,165
Plus reinsurance recoverables
on unpaid losses at
end of year 1,853,817 1,533,250 1,545,026
--------- --------- ---------
Loss and LAE reserves at
end of year, as reported $10,247,070 $ 9,423,429 $ 9,185,191
========= ========= =========
Environmental and Asbestos Reserves - 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.
The following table summarizes the environmental and asbestos
reserves reflected in our consolidated balance sheet at Dec. 31, 1995
and 1994. Amounts in the "net" column are reduced by reinsurance.
(In thousands) 1995 1994
December 31 Gross Net Gross Net
----- --- ----- ---
Environmental $528,000 $319,000 $275,000 $200,000
Asbestos 283,000 158,000 185,000 145,000
------- ------- ------- -------
Total environmental and
asbestos reserves $811,000 $477,000 $460,000 $345,000
======= ======= ======= =======
<PAGE>
Note 7
INCOME TAXES
Method for Computing Income Tax Expense - We are required to compute
our income tax expense under the liability method. This means deferred
income taxes reflect the estimated future tax effects of temporary
differences between the carrying value of assets and liabilities for
financial reporting purposes and the carrying value of assets and
liabilities for income tax purposes. A current tax liability is
recognized for the estimated taxes payable for the current year.
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:
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
STATEMENTS OF INCOME
Expense related to income $135,024 $ 120,750 $ 94,997
--------- --------- ---------
COMMON SHAREHOLDERS' EQUITY
Benefit for deductions relating to:
Dividends on unallocated
ESOP and PSOP shares (4,094) (4,578) (4,873)
Employee stock options
and awards (1,409) - -
Deferred expense (benefit)
for the change in unrealized
appreciation of investments
and unrealized foreign
exchange 319,195 (308,073) 274,126
--------- --------- ---------
Total income tax expense
(benefit) included in
common shareholders'
equity 313,692 (312,651) 269,253
--------- --------- ---------
Total income tax expense
(benefit) included in
financial statements $448,716 $(191,901) $364,250
========= ========= =========
Components of Income Tax Expense - The components of income tax
expense are as follows:
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
Federal current tax expense $180,743 $ 151,347 $148,508
Federal deferred tax benefit (60,036) (47,933) (54,935)
Impact of tax rate change - - (15,383)
--------- --------- ---------
Total federal income
tax expense 120,707 103,414 78,190
Foreign income taxes 8,488 11,788 9,692
State income taxes 5,829 5,548 7,115
--------- --------- ---------
Total income
tax expense $135,024 $ 120,750 $ 94,997
========= ========= =========
<PAGE>
Our Tax Rate is Different from the Statutory Rate - Our total federal
income tax expense differs from the statutory rate of 35% of pretax
income as shown in the following table:
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
Federal income tax expense
at statutory rates $229,682 $197,252 $182,912
Increase (decrease)
attributable to:
Nontaxable investment
income (83,395) (87,630) (90,502)
Foreign operations (8,588) (9,335) 9,869
Impact of tax rate change - - (15,383)
Other (16,992) 3,127 (8,706)
--------- --------- ---------
Federal income tax
expense $120,707 $103,414 $ 78,190
========= ========= =========
Major Components of Deferred Income Taxes on Our Balance Sheet -
Differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in
taxable or deductible amounts in future years are called temporary
differences. The tax effects of temporary differences that give rise
to the deferred tax assets and deferred tax liabilities are presented
in the following table:
(In thousands)
December 31 1995 1994
---- ----
DEFERRED TAX ASSETS
Loss reserves $ 735,808 $ 642,368
Unearned premium reserves 141,882 119,363
Deferred compensation 87,825 82,456
Foreign loss carryforwards 21,871 43,263
Alternative minimum tax
credit carryforwards 9,165 41,096
Other 137,706 125,001
--------- --------
Total gross deferred tax assets 1,134,257 1,053,547
Less valuation allowance (33,382) (50,359)
--------- --------
Net deferred tax assets 1,100,875 1,003,188
--------- --------
DEFERRED TAX LIABILITIES
Unrealized appreciation of investments 325,694 1,889
Deferred acquisition costs 124,178 105,428
Real estate 47,404 43,994
Other 74,794 61,369
--------- --------
Total gross deferred tax liabilities 572,070 212,680
--------- --------
DEFERRED INCOME TAXES $ 528,805 $ 790,508
========= ========
<PAGE>
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 net
change in the valuation allowance for deferred tax assets was a
decrease of $17.0 million in 1995, a decrease of $8.6 million in 1994,
and an increase of $4.7 million in 1993, 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 $15.7 million of our foreign operations'
undistributed earnings as of Dec. 31, 1995, as such earnings are
intended to be permanently reinvested in those operations.
Furthermore, any taxes paid to foreign governments on these earnings
may be used as credits against the U.S. tax on any dividend
distributions from such earnings.
We have not provided taxes on approximately $118.7 million of
undistributed earnings related to our majority ownership of The John
Nuveen Company as of Dec. 31, 1995, 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 through 1994. During 1995, we reached a partial settlement with
the IRS regarding certain issues that were raised during the course of
their audit. The agreement required us to make an additional payment
of tax and interest to the IRS for the years 1991 through 1994 in the
amount of $45 million. We believe that any additional taxes assessed
as a result of any further adjustments for these years would not
materially affect our overall financial position, results of
operations or liquidity.
Note 8
CAPITAL STRUCTURE
The following summarizes our capital structure:
(In thousands)
December 31 1995 1994
---- ----
Debt $ 704,042 $ 622,624
Company-obligated mandatorily
redeemable preferred securities
of St. Paul Capital L.L.C. 207,000 -
Preferred shareholders' equity 10,872 4,535
Common shareholders' equity 3,719,249 2,732,934
--------- --------
Total capital $4,641,163 $3,360,093
========= ========
Ratio of debt to total capital 15% 19%
--------- --------
<PAGE>
DEBT
Debt consists of the following:
1995 1994
(In thousands) Book Fair Book Fair
December 31 Value Value Value Value
----- ----- ----- -----
Medium-term notes $397,433 $419,500 $204,433 $189,400
Commercial paper 149,629 149,629 275,635 275,635
9-3/8% notes 99,982 105,300 99,971 102,800
Guaranteed ESOP debt 25,001 26,200 36,112 37,200
Short-term borrowings 25,000 25,000 - -
Pound sterling
loan notes 6,997 6,997 6,473 6,473
------- ------- ------- -------
Total debt $704,042 $ 732,626 $622,624 $611,508
======= ======= ======= =======
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.
Medium-term Notes - The medium-term notes bear interest rates ranging
from 5.9% to 8.4%. Maturities range from seven to 15 years after the
issuance date.
Commercial Paper - Our commercial paper is supported by a $400 million
credit agreement that expires in 2000. 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 1995, we had not borrowed any funds under
the agreement, and we were in compliance with all of its provisions.
Interest rates on commercial paper issued in 1995 ranged from 5.4%
to 6.6%; in 1994 the range was 3.1% to 6.1%; and in 1993 the range was
3.0% to 3.6%.
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 bore an interest rate of 6.4% and
4.9% at Dec. 31, 1995 and 1994, respectively.
Interest Expense - Our interest expense was $46.7 million in 1995,
$39.6 million in 1994 and $40.8 million in 1993.
Maturities - The amount of debt that becomes due in each of the next
five years is as follows: 1996, $36.1 million; 1997, $111.1 million;
1998, $27.8 million; 1999, $20.0 million; and 2000, $149.6 million.
<PAGE>
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF ST.
PAUL CAPITAL L.L.C.
In 1995, we issued, through St. Paul Capital L.L.C. (SPCLLC),
4,140,000 company-obligated mandatorily redeemable preferred
securities, generating proceeds of $207 million. These securities are
also known as convertible monthly income preferred securities (MIPS).
The MIPS pay a monthly dividend at an annual rate of 6% of the
liquidation preference of $50 per security. We directly or indirectly
own all of the common shares of SPCLLC, a special purpose limited
liability company which was formed for the sole purpose of issuing the
MIPS. We have effectively fully and unconditionally guaranteed
SPCLLC's obligations under the MIPS. The MIPS are convertible into
0.8475 shares of our common stock (equivalent to a conversion price of
$59 per share). The MIPS are redeemable after four years, but we may
redeem them before four years upon the occurrence of certain events.
PREFERRED SHAREHOLDERS' EQUITY
The preferred shareholders' equity on our balance sheet represents the
par value of preferred shares outstanding that we issued to our
Preferred Stock Ownership Plan (PSOP) Trust, less the remaining
principal balance on the PSOP Trust debt. The PSOP Trust borrowed
funds from our U.S. underwriting subsidiary to finance the purchase of
the preferred shares, and we guaranteed the PSOP debt.
In 1995, we reclassified our net convertible preferred stock balance
to shareholders' equity. We had previously classified this item on our
balance sheet between liabilities and common shareholders' equity. The
PSOP trust may at any time convert any or all of the preferred shares
into shares of our common stock at a rate of four shares of common
stock for each preferred share. Our board of directors has reserved a
sufficient number of our authorized common shares to satisfy the
conversion of all preferred shares issued to the PSOP trust. In
addition, the trust may redeem preferred shares to meet employee
distribution requirements. Upon the redemption of preferred shares, we
may make the payment required in the form of cash or through issuance
of our common shares. Until August 1995, our intent and practice had
been to pay for the preferred share redemptions with cash. Beginning
in September 1995, our intent and practice has been and will continue
to be to issue shares of our common stock to the trust to fulfill the
redemption obligations.
As a result of our intent to exclusively issue common shares to the
trust in the future, we reclassified the net convertible preferred
stock balance to permanent equity. We reclassified the Dec. 31, 1994,
convertible preferred stock balance to conform to the 1995
presentation.
<PAGE>
COMMON 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.
In 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. The board of
directors subsequently 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 1995, we reacquired 778,000 of our common shares for a total cost
of $41.7 million. During 1994, we reacquired 860,000 of our common
shares for a total cost of $34.2 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:
(Shares)
Year ended December 31 1995 1994 1993
---- ---- ----
Outstanding at beginning
of year 84,202,417 84,714,676 84,118,554
Issued under stock option and
other incentive plans 534,096 344,756 595,814
Issued upon conversion of
preferred stock 17,543 3,125 5,132
Reacquired (778,192) (860,140) (4,824)
---------- ---------- ----------
Outstanding at end of year 83,975,864 84,202,417 84,714,676
========== ========== ==========
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
50,000 shares as Series A Junior Participating Preferred Stock in
connection with the establishment of our Shareholder Protection Rights
Plan. The board designated 1,450,000 shares as Series B Convertible
Preferred Stock in connection with the formation of our Preferred
Stock Ownership Plan. In 1995, the board designated 41,400 shares as
Series C Cumulative Convertible Preferred Stock in connection with St.
Paul Capital L.L.C.'s issuance of company-obligated mandatorily
redeemable preferred securities.
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
1996, $331.6 million will be available for dividends free from such
restrictions. During 1995, we received cash dividends of $196.0
million from our U.S. underwriting subsidiary.
<PAGE>
Note 9
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.
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
requirementsof 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.
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
Service cost - benefits
earned during the year $30,167 $ 37,611 $ 29,515
Interest cost on projected
benefits obligation 42,199 40,606 36,670
Actual return on plan assets (92,279) (6,928) (66,449)
Net amortization and deferral 41,571 (35,243) 28,270
------ ------ ------
Net periodic pension cost $21,658 $ 36,046 $ 28,006
====== ====== ======
The following table summarizes the funded status of our plans.
(In thousands) 1995 1994
December 31 U.S. Non-U.S. U.S. Non-U.S.
----- -------- ----- --------
Accumulated benefits
obligation:
Vested $254,634 $185,713 $180,793 $186,317
Nonvested 34,046 426 23,072 424
------- ------- ------- -------
Subtotal 288,680 186,139 203,865 186,741
Effect of projected
salary increases 85,310 58,980 86,557 45,588
------- ------- ------- -------
Projected benefits
obligation 373,990 245,119 290,422 232,329
Plan assets at fair value 350,266 280,107 245,852 239,025
------- ------- ------- -------
Assets (greater) less
than projected
benefits obligation 23,724 (34,988) 44,570 (6,696)
Unrecognized net
gain (loss) 274 11,845 9,071 (18,022)
Unrecognized net
asset at transition 9,573 12,853 11,273 15,684
Unrecognized prior
service cost 441 (2,512) 420 (2,844)
------- ------- ------- -------
Accrued (prepaid)
pension cost
recorded on the
balance sheet $ 34,012 $ (12,802) $65,334 $(11,878)
======= ======= ======= =======
<PAGE>
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:
1995 1994 1993 1992
---- ---- ---- ----
U.S. PLANS
Discount rate 6.75% 8.00% 6.25% 7.25%
Rate of increase in
compensation 3.75 5.00 4.25 5.50
Expected rate of return
on plan assets 9.00 9.00 9.00 9.00
NON-U.S. PLANS
Discount rate 8.50 8.50 7.50 9.50
Rate of increase in
compensation 6.00 6.00 5.50 7.50
Expected rate of return
on plan assets 10.00 10.00 9.50 10.50
Plan assets are invested primarily in equities and fixed maturities
and included 380,172 shares of our common stock with a market value of
$21.1 million and $17.0 million at Dec. 31, 1995 and 1994,
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 1995 and 1994, we had a liability of
$21.2 million and $17.5 million, respectively, recorded for these
plans.
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:
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
Compensation expense $12,305 $12,330 $12,037
Interest expense 3,146 4,108 5,032
Dividends paid to ESOP trust (6,289) (6,325) (6,181)
Proceeds from sales of
forfeited shares, and
interest income (485) (273) (221)
------ ------ ------
Net pretax ESOP expense $ 8,677 $ 9,840 $10,667
====== ====== ======
Cash contributions to trust $ 8,540 $ 9,171 $10,091
====== ====== ======
<PAGE>
The following table details the shares held in the ESOP:
(Shares)
December 31 1995 1994
---- ----
Allocated 2,963,826 2,630,265
Committed to be released 142,139 142,467
Unallocated 1,102,342 1,603,176
--------- ---------
Total 4,208,307 4,375,908
========= =========
The ESOP allocated 500,834 shares in 1995, 505,776 shares in 1994
and 499,256 shares in 1993. The remaining unallocated shares at Dec.
31, 1995, 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.
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:
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
Compensation expense $ 8,242 $ 10,409 $ 7,268
Interest expense 12,796 13,602 14,044
Dividends paid to PSOP trust (11,998) (11,993) (12,022)
------ ------ ------
Net pretax PSOP expense $ 9,040 $ 12,018 $ 9,290
====== ====== ======
Cash contributions to trust $ 9,431 $ 9,205 $ 2,728
====== ====== ======
The following table details the shares held in the PSOP:
(Shares)
December 31 1995 1994
---- ----
Allocated 237,853 187,194
Committed to be released 27,518 31,601
Unallocated 733,693 793,691
--------- ---------
Total 999,064 1,012,486
========= =========
<PAGE>
The PSOP allocated 59,998 shares in 1995, 66,609 shares in 1994 and
53,342 shares in 1993. The remaining unallocated shares at Dec. 31,
1995, 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. We accrue postretirement benefits expense during the
period of the employee's service.
The following table details the components of the net periodic
postretirement benefits cost:
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
Service cost - benefits attributed
to service during the year $ 3,654 $ 5,089 $ 4,227
Interest cost on accumulated
postretirement benefits
obligation 9,664 9,645 8,699
Actual return on plan assets (2,677) 320 (686)
Net amortization and deferral 1,196 (1,448) (590)
------ ------ ------
Net periodic postretire-
ment benefits cost $11,837 $13,606 $11,650
====== ====== ======
The following table summarizes the funded status of the plan.
(In thousands)
December 31 1995 1994
---- ----
Accumulated postretirement
benefits obligation:
Retirees $ 81,533 $ 66,350
Fully eligible active plan participants 8,205 7,174
Other active plan participants 49,237 33,822
------- -------
Subtotal 138,975 107,346
Plan assets at fair value 16,430 13,753
------- -------
Assets less than accumulated
postretirement benefits obligation 122,545 93,593
Unrecognized net gain (loss) (6,098) 16,398
Unrecognized prior service cost 4,664 5,017
------- -------
Accrued postretirement benefits
cost recorded on the balance sheet $121,111 $115,008
======= =======
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:
1995 1994 1993 1992
---- ---- ---- ----
Discount rate 7.00% 8.50% 7.00% 7.75%
Rate of increase
in compensation 3.75 5.00 4.25 5.50
Expected rate of return
on plan assets 8.00 8.00 7.50 7.50
<PAGE>
A health care inflation rate of 8% was assumed to change to 7.5% in
1996, decrease annually to 5% 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, 1995, by $16.9 million
and the 1995 periodic benefits cost by $2.4 million.
Note 10
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 3,330,000 shares remained at year-end for grant under
the 1994 plan, of which approximately 770,000 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 590,000 option shares remained available at
year-end for future grants under our non-U.S. plans.
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, 1993 $ 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
Granted 48.13 - 52.75 719,513
Canceled 21.75 - 47.88 (12,955)
Exercised 21.25 - 43.19 (504,803)
------------- ---------
Outstanding Dec. 31, 1995 $ 21.25 - 52.75 3,472,000
============= =========
Exercisable Dec. 31, 1995 $ 21.25 - 46.63 2,480,918
============= =========
<PAGE>
Note 11
COMMITMENTS AND CONTINGENCIES
Investment Commitments - We have long-term commitments to fund venture
capital and real estate investments totaling $71.4 million as of Dec.
31, 1995. We estimate these commitments will be paid as follows: $32.5
million in 1996; $21.9 million in 1997; $11.6 million in 1998; $5.4
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 $64.4
million in 1995, $69.6 million in 1994 and $74.9 million in 1993.
Certain leases are noncancelable, and we would remain responsible
for payment even if we stopped using the space or equipment. On Dec.
31, 1995, the minimum annual rents for which we would be liable under
these types of leases are as follows: $63.3 million in 1996, $55.4
million in 1997, $49.2 million in 1998, $43.0 million in 1999, $31.1
million in 2000 and $122.1 million thereafter.
Legal Matters - In the ordinary course of conducting business, we and
some of our subsidiaries 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. For further discussion see "Legal Matters" in Management's
Discussion and Analysis on page 34.
Note 12
ACQUISITIONS
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.
In addition, Minet has acquired specialty brokerage companies in
various locations throughout the world. The cost of these companies,
net of cash acquired, totaled $51.7 million in 1995, $18.7 million in
1994 and $48.9 million in 1993.
All of these acquisitions were accounted for as purchases. As a
result, the acquired companies' results were included in our
consolidated results from the date of purchase. Consolidated results
would not have been materially different had these acquisitions been
completed at the beginning of 1993.
<PAGE>
Note 13
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.
We report balances pertaining to reinsurance transactions "gross" on
the balance sheet, meaning that reinsurance recoverables on unpaid
losses and ceded unearned premiums are not deducted from insurance
reserves but are recorded as assets.
The largest concentration (approximately 16%) 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:
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
PREMIUMS WRITTEN
Direct $3,825,517 $3,491,466 $3,053,532
Assumed 1,030,331 745,810 686,557
Ceded (612,635) (614,250) (561,544)
--------- --------- ---------
Net premiums written $4,243,213 $3,623,026 $3,178,545
========= ========= =========
PREMIUMS EARNED
Direct $3,678,190 $3,296,215 $3,021,203
Assumed 934,490 709,987 680,626
Ceded (641,351) (594,121) (523,491)
--------- --------- ---------
Net premiums earned $3,971,329 $3,412,081 $3,178,338
========= ========= =========
INSURANCE LOSSES AND
LOSS ADJUSTMENT EXPENSES
Direct $2,926,261 $2,245,796 $1,968,839
Assumed 743,740 595,492 721,141
Ceded (805,694) (379,590) (386,242)
--------- --------- ---------
Net insurance losses and
loss adjustment expenses $2,864,307 $2,461,698 $2,303,738
========= ========= =========
<PAGE>
Note 14
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 $476.3 million in 1995, $285.3 million in 1994, and $441.1
million in 1993. Statutory surplus (shareholder's equity) of these
operations was $2.5 billion and $1.9 billion as of Dec. 31, 1995 and
1994, respectively.
Note 15
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:
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
REVENUES
U.S. $ 4,567,436 $ 4,071,932 $ 3,875,545
Non-U.S. 842,194 629,353 584,627
--------- --------- ---------
Total revenues $ 5,409,630 $ 4,701,285 $ 4,460,172
========= ========= =========
INCOME (LOSS)
BEFORE INCOME TAXES
U.S. $ 706,741 $ 520,983 $ 559,512
Non-U.S. (50,508) 42,595 (36,906)
--------- --------- ---------
Total income
before income taxes $ 656,233 $ 563,578 $ 522,606
======== ======== ========
(In thousands)
December 31 1995 1994 1993
---- ---- ----
IDENTIFIABLE ASSETS
U.S. $16,113,823 $14,716,603 $14,703,637
Non-U.S. 3,542,679 2,779,217 2,445,559
--------- --------- ---------
Total assets $19,656,502 $17,495,820 $17,149,196
========= ========= =========
Industry - Our industry segments consist of underwriting, insurance
brokerage and investment banking-asset management. The summary on the
next page 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>
(In thousands)
Year ended December 31 1995 1994 1993
---- ---- ----
REVENUES
Underwriting:
St. Paul Fire and Marine:
Specialized Commercial $1,230,790 $1,015,397 $1,011,439
Personal Insurance 655,347 619,414 360,305
Medical Services 605,468 638,413 688,980
Commercial 587,016 498,543 543,894
--------- --------- ---------
Total St. Paul Fire and Marine 3,078,621 2,771,767 2,604,618
St. Paul Re 654,981 483,368 395,008
International Underwriting 237,727 156,946 178,712
--------- --------- ---------
Total premiums earned 3,971,329 3,412,081 3,178,338
Net investment income 731,096 674,818 646,396
Realized investment gains 74,403 35,967 49,429
Other 37,282 29,053 31,723
--------- --------- ---------
Total underwriting 4,814,110 4,151,919 3,905,886
--------- --------- ---------
Insurance brokerage:
Fees and commissions 322,961 315,977 294,579
Net investment income 30,700 21,322 21,213
Other 12,219 8,377 4,725
--------- --------- ---------
Total insurance brokerage 365,880 345,676 320,517
--------- --------- ---------
Investment banking-asset management 236,230 220,303 245,732
--------- --------- ---------
Total industry segments 5,416,220 4,717,898 4,472,135
Parent company and
consolidating eliminations (6,590) (16,613) (11,963)
--------- --------- ---------
Total revenues $5,409,630 $4,701,285 $4,460,172
========= ========= =========
INCOME (LOSS) BEFORE INCOME TAXES
UNDERWRITING:
St. Paul Fire and Marine:
Specialized Commercial $(124,078) $(89,116) $(116,126)
Personal Insurance (33,000) (26,315) (15,314)
Medical Services 76,399 118,379 132,922
Commercial (3,668) (62,988) (70,836)
--------- --------- ---------
Total St. Paul Fire and Marine (84,347) (60,040) (69,354)
St. Paul Re 4,490 (21,802) (18,230)
International Underwriting (23,188) (31,166) (62,671)
--------- --------- ---------
Total GAAP underwriting result (103,045) (113,008) (150,255)
Net investment income 731,096 674,818 646,396
Realized investment gains 74,403 35,967 49,429
Other (50,542) (37,068) (38,389)
--------- --------- ---------
Total underwriting 651,912 560,709 507,181
--------- --------- ---------
Insurance brokerage (13,092) (9,947) (12,629)
--------- --------- ---------
Investment banking-asset management:
Pretax income before
minority interest 113,770 94,635 111,663
Minority interest (25,573) (22,777) (29,076)
--------- --------- ---------
Total investment banking-
asset management 88,197 71,858 82,587
--------- --------- ---------
Total industry segments 727,017 622,620 577,139
Parent company and
consolidating eliminations (70,784) (59,042) (54,533)
--------- --------- ---------
Total income before income taxes $656,233 $563,578 $522,606
========= ========= =========
<PAGE>
(In thousands)
December 31 1995 1994 1993
---- ---- ----
IDENTIFIABLE ASSETS
Underwriting $17,541,329 $15,397,173 $15,144,260
Insurance brokerage 1,590,464 1,738,060 1,616,574
Investment banking-
asset management 402,512 348,847 410,764
--------- --------- ---------
Total industry segments 19,534,305 17,484,080 17,171,598
Parent company and
consolidating eliminations 122,197 11,740 (22,402)
--------- --------- ---------
Total assets $19,656,502 $17,495,820 $17,149,196
========== ========== ==========
Note 16
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited summary of our quarterly results for the
last three years.
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
------- ------- ------- -------
1995
Revenues $1,267,459 $1,330,728 $1,364,866 $1,446,577
Net income 110,596 112,967 142,399 155,247
Net income per common share:
Primary 1.27 1.30 1.64 1.78
Fully diluted 1.23 1.24 1.54 1.67
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
------- ------- ------- -------
1994
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
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter
------- ------- ------- -------
1993
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
<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. The stock is also
listed on the London Stock Exchange under the symbol SPA. The number
of holders of record, including individual owners, of our common stock
was 7,652 as of March 1, 1996.
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
1995 High Low Declared
- ---- ---- --- --------
First Quarter $50 3/4 $43 5/8 $0.40
Second Quarter 51 1/2 48 0.40
Third Quarter 58 3/8 46 3/8 0.40
Fourth Quarter 59 1/4 50 0.40
Cash dividend paid in 1995 was $1.58.
Cash
Dividend
1994 High Low Declared
- ---- ---- --- --------
First Quarter $44 3/8 $38 13/16 $0.375
Second Quarter 41 11/16 37 7/8 0.375
Third Quarter 44 1/2 39 1/2 0.375
Fourth Quarter 45 1/8 40 0.375
Cash dividend paid in 1994 was $1.48.
<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) St. Paul Medical Liability 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
(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
(2) Minet Holdings, Inc.* New York
Subsidiaries:
(i) The Swett & Crawford Group, Inc. California
(ii) Minet Re North America, Inc. New York
(iii) Minet, Inc. New Jersey
(iv) Minet Settlement Services, Inc. Minnesota
(v) Special Risk Services, Inc. New York
(vi) SRS Insurance Services, Inc. California
(vii) Minet Limited - Bermuda Bermuda
(viii) Continental Underwriters Ltd. Louisiana
(ix) Minet Risk Services (Vermont), Inc. Vermont
<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) JH Minet Reinsurance Brokers
Limited United Kingdom
(b) Minet Consultancy Services Limited United Kingdom
(c) Minet Hong Kong Limited Hong Kong
(d) Minet Inc. Canada
(e) Minet Limited United Kingdom
(f) M.I.B. Group (Pty) Limited South Africa
(g) Minet Australia Limited Australia
(h) Minet Burn & Roche Pty Limited Australia
(vii) Camperdown UK United Kingdom
(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
(8) St. Paul Capital L.L.C. Delaware
(9) St. Paul Multinational Holdings, Inc. Delaware
(10) St. Paul Bermuda Holdings, Inc. Delaware
*Minet Holdings, Inc. and Minet Group and their listed subsidiaries
also conduct insurance brokerage business through a number of
wholly-owned subsidiaries and through partial ownership in a number
of other brokerage companies. These additional operations, considered
in the aggregate as a single subsidiary, would not constitute a
significant subsidiary as of Dec. 31, 1995.
**The John Nuveen Company is a majority-owned subsidiary jointly
owned by The St. Paul, which holds a 41% 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, No. 33-56987 and No. 333-01065) and Form S-
3 (SEC File No. 33-33931, No. 33-50115 and No. 33-58491) of The St.
Paul Companies, Inc., of our reports dated January 29, 1996,
relating to the consolidated balance sheets of The St. Paul
Companies, Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, shareholders'
equity and cash flows for each of the years in the three-year
period ended December 31, 1995, and all related schedules, which
reports appear in the December 31, 1995 annual report on Form 10-K
of The St. Paul Companies, Inc. Our reports refer to changes in
the method of accounting for certain investments.
Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP
March 13, 1996 -------------------------
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,
1995, 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 6, 1996 Signature: /s/ Michael R. Bonsignore
-------------------------
Name: Michael R.Bonsignore
Dated: February 6, 1996 Signature: /s/ John H. Dasburg
-------------------------
Name: John H. Dasburg
Dated: February 6, 1996 Signature: /s/ W. John Driscoll
-------------------------
Name: W. John Driscoll
Dated: February 6, 1996 Signature: /s/ Pierson M. Grieve
-------------------------
Name: Pierson M. Grieve
Dated: February 6, 1996 Signature: /s/ Ronald James
-------------------------
Name: Ronald James
Dated: February 6, 1996 Signature: /s/ William H. Kling
-------------------------
Name: William H. Kling
Dated: February 6, 1996 Signature: /s/ Bruce K. MacLaury
-------------------------
Name: Bruce K. MacLaury
<PAGE>
Dated: February 6, 1996 Signature: /s/ Ian A. Martin
-------------------------
Name: Ian A. Martin
Dated: February 6, 1996 Signature: /s/ Glen D. Nelson
-------------------------
Name: Glen D. Nelson
Dated: February 6, 1996 Signature: /s/ Anita M. Pampusch
-------------------------
Name: Anita M. Pampusch
Dated: February 6, 1996 Signature: /s/ Gordon M. Sprenger
-------------------------
Name: Gordon M. Sprenger
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 10,372,890
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 711,471
<MORTGAGE> 0
<REAL-ESTATE> 611,656
<TOTAL-INVEST> 13,066,920
<CASH> 34,440
<RECOVER-REINSURE> 74,568
<DEFERRED-ACQUISITION> 372,174
<TOTAL-ASSETS> 19,656,502
<POLICY-LOSSES> 10,247,070
<UNEARNED-PREMIUMS> 2,361,028
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207,000
10,872
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3,971,329
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<UNDERWRITING-OTHER> 1,032,111
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<INCOME-TAX> 135,024
<INCOME-CONTINUING> 521,209
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<NET-INCOME> 521,209
<EPS-PRIMARY> 5.99
<EPS-DILUTED> 5.68
<RESERVE-OPEN> 9,423,429
<PROVISION-CURRENT> 3,112,193
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