<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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, 1996
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
--------------------- ------------------------------
(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
--- ----
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 21, 1997, was
$5,742,457,489. The number of shares of the Registrant's Common
Stock, without par value, outstanding at March 21, 1997, was
83,516,157.
An Exhibit Index is set forth at page 32 of this report.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's 1996 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 6, 1997, are incorporated by
reference into Parts III and IV of this report.
Page 1 of 32 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
property-liability insurance and reinsurance underwriting. The St. Paul
also has a presence in the investment banking-asset management industry
through its majority ownership of The John Nuveen Company. 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 244th largest U. S. corporation, based on total 1995 revenues. At
March 17, 1997, The St. Paul and its subsidiaries employed approximately
10,200 persons.
In 1996, The St. Paul decided to exit the insurance brokerage business and
to dispose of Minet, its brokerage operations. Discussions concerning
a sale are ongoing, but there can be no assurance as to when or
on what terms such a sale will occur. Minet had experienced
operating losses for several years amid highly competitive conditions in
worldwide brokerage markets. Minet was classified as a discontinued
operation in 1996, and results for 1995 and 1994 were restated to be
consistent with the 1996 classification. Note 13 on page 66 of The St.
Paul's 1996 Annual Report to Shareholders, which contains additional
information relating to The St. Paul's discontinued operations, is
incorporated herein by reference.
The St. Paul's underwriting segment accounted for 96% of consolidated
revenues from continuing operations in 1996. The investment banking-asset
management segment accounted for the remaining 4% of 1996 revenues. Note
16 on pages 67 and 68 of The St. Paul's 1996 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 from continuing operations for each of the last three years:
Percentage of
Consolidated Revenues
1996 1995 1994
---- ---- ----
Underwriting:
Worldwide Insurance Operations
St. Paul Fire and Marine:
Specialized Commercial 22.2% 24.3% 23.2%
Commercial 15.0 11.6 11.4
Personal Insurance 12.4 13.0 14.2
Medical Services 10.5 12.0 14.6
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Total Fire and Marine 60.1 60.9 63.4
St. Paul International Underwriting 4.6 4.7 3.6
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Total Worldwide Insurance Operations 64.7 65.6 67.0
St. Paul Re 12.8 13.0 11.1
Net investment income 13.9 14.5 15.4
Realized investment gains 3.6 1.5 0.8
Other 0.8 0.6 0.7
----- ----- -----
Total underwriting 95.8 95.2 95.0
Investment banking-asset management 4.1 4.7 5.0
Parent company and eliminations 0.1 0.1 -
----- ----- -----
Total 100.0% 100.0% 100.0%
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UNDERWRITING
Overview. The St. Paul's primary insurance underwriting business is
conducted through its Worldwide Insurance Operations, which include St.
Paul Fire and Marine (Fire and Marine) and St. Paul International
Underwriting (International). Fire and Marine, The St. Paul's U.S.
insurance operation, underwrites property and liability insurance and
provides insurance-related products and services to commercial,
professional and individual customers throughout the United States.
International underwrites primary property-liability insurance coverages
outside the United States. International also includes insurance written
for foreign exposures of U.S.-based corporations and U.S. exposures of
foreign-based companies. The St. Paul's reinsurance business operates
under the name St. Paul Re, which underwrites reinsurance for leading
property-liability insurance companies worldwide.
The primary sources of the underwriting operations' revenues are premiums
earned from insurance policies and reinsurance contracts, income earned
from the investment portfolio and sales of investments. 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 14th on the basis of 1995 written
premiums.
Principal Departments and Products
The "Underwriting Results by Operation" table on page 22 of The St. Paul's
1996 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.
WORLDWIDE INSURANCE 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 which serve specific commercial customer
segments or provide specialized products and services for targeted industry
groups. 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 specific customer segments consist of the following:
Financial and Professional Services provides fidelity and property-
liability coverages for depository institutions, and markets errors and
omissions coverages for lawyers, insurance agents and other nonmedical
professionals, including directors and officers. Ocean Marine provides a
variety of property and liability insurance related to ocean and inland
waterways traffic, including cargo and hull property protection. Public
Sector Services markets insurance products and services, including
professional liability insurance, to all levels of government entities.
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. Based on 1995
written premiums, The St. Paul ranked as the eighth-largest U.S.-based
surplus lines underwriter. Technology underwrites a range of specialized
coverages for information technology firms, including manufacturers of
electronics, synthetics, industrial machinery and medical equipment.
The following operations provide products and services for targeted
industry groups. 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. Surety underwrites surety bonds, primarily for construction
contractors, which guarantee that third parties
<PAGE>
will be indemnified against the nonperformance of contractual obligations.
Based on 1995 written premiums, Fire and Marine's surety operation ranked
as the sixth-largest underwriter of surety bonds in the United States.
Manufacturing provides liability insurance and risk management products and
services for large manufacturing operations. Service Industries provides
large service-related businesses with insurance and risk management
programs. Businesses served include retailers, wholesalers, insurance
companies, and hospitality and entertainment firms. National Programs
underwrites coverages for nationwide, multiple-policyholder programs
through a single agency source. Transportation provides large motor
carriers with customized insurance programs.
Specialized Commercial also includes Fire and Marine's Special Property
operation, which underwrites large property accounts, layered and excess
property programs, large deductible accounts, stop-loss and loss limit
programs and other customized property business. Fire and Marine's limited
participation in insurance pools and associations, which provide
specialized underwriting skills and risk management services for the
classes of business that they write, is included in Specialized Commercial
results. These pools and associations serve to increase the underwriting
capacity of 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.
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, multipurpose recreational
facilities, manufacturers, wholesalers and processors. Coverages marketed
to the small commercial customer include the Package Accounts for
Commercial Enterprises (PACE) policy for offices, retailers and family
restaurants.
On July 31, 1996, Fire and Marine acquired Northbrook Holdings, Inc.
(Northbrook) and its three commercial underwriting subsidiaries from
Allstate Insurance Company. Northbrook underwrites various property-
liability commercial insurance coverages throughout the United States.
Northbrook accounted for $140 million of incremental written premiums in
Fire and Marine's Commercial operations in 1996.
Personal Insurance. This operation provides a broad portfolio of property
and liability insurance products and services 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 9% of the
U.S. market in 1995 based on premium data published in "Best's Review."
St. Paul International Underwriting
St. Paul International Underwriting includes most primary insurance written
outside the United States. International has a domestic presence as a
licensed insurance company in several countries in Europe, Africa and Latin
America, and in Canada. It also includes The St. Paul's participation in
Lloyd's of London as an investor and as the owner of two managing agencies.
International 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.
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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 sixth largest
U.S. reinsurance underwriter based on written premium volume for the first
nine months of 1996.
In December 1996, The St. Paul completed a $68.5 million securitized
reinsurance transaction that will provide St. Paul Re with additional
property catastrophe reinsurance capacity of $45.1 million for up to three
years and up to $21.1 million in the subsequent seven years. A newly
formed, single-purpose reinsurance company called George Town Re was
organized in 1996 to reinsure only St. Paul Re. Collateral for claims is
provided from the proceeds raised in a private placement. This reinsurance
allows St. Paul Re to write more catastrophe-exposed property business
without having to seek additional capital and without any impact on The
St. Paul's consolidated balance sheet.
In January 1997, St. Paul Re acquired the right to renew Constitution
Reinsurance Corporation's approximately $20 million book of U.S. casualty
facultative reinsurance business.
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 1996 property-liability written premiums were produced in each of
Illinois, California, Minnesota, New York and Texas.
Fire and Marine's business is produced primarily through approximately
6,500 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, Munich, Singapore and Tokyo.
St. Paul Re obtains business primarily through the broker or intermediary
market. Approximately 45% of St. Paul Re's business in 1996 originated
from outside the United States.
St. Paul International Underwriting is headquartered in London and
underwrites insurance through local operations in several markets outside
the United States, including South Africa, Botswana, Lesotho, Argentina,
Canada, the Netherlands, the Republic of Ireland, Spain and the United
Kingdom.
A portion of The St. Paul's property-liability insurance written premium
volume originates with insurance brokers. In the first quarter of 1997,
two large brokerage firms finalized their merger and two other large
brokerage firms announced plans to merge. In January 1997, Aon Corporation
finalized its acquisition of Alexander and Alexander Services Inc. In
March 1997, Marsh & McLennan Companies, Inc. announced an agreement to
acquire Johnson & Higgins. In 1996, approximately 15% of The St. Paul's
underwriting operations' gross written premium volume originated with these
four brokerage firms.
<PAGE>
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). The St. Paul establishes reserves 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 1996 but also in
prior years. They include estimates of the total cost of claims that have
already been reported but not yet settled ("case" reserves), and those that
have been incurred but not yet reported ("IBNR" reserves). Loss reserves
are not discounted, but they are reduced for estimates of salvage and
subrogation.
Management continually reviews loss 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. 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. Reserves established in
prior years are adjusted as loss experience develops and new information
becomes available. Adjustments to previously estimated reserves are
reflected in results in the year in which they are made.
Ten-year Development. The table on page 8 presents a development of net
loss and LAE reserve liabilities and payments for the years 1986 through
1996. 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 1996, and the reinsurance operations
are included on an underwriting year basis.
The upper portion of the table, which shows the re-estimated amount
relating to the previously recorded liability, is based upon experience as
of the end of each succeeding year. This estimate is either increased or
decreased as further information becomes known about individual claims and
as changes in the trend of claim frequency and severity become apparent.
The "Cumulative redundancy" 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 1986 reserve of
$4,043 million developed up to $4,087 million, or a $44 million deficiency,
by the end of 1987. By the end of 1996, the 1986 reserve had developed a
redundancy of $30 million. The changes in the estimate of 1986 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 1996),
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, 1996) 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.
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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, 1996, $3,634 million of the
currently estimated $4,013 million of losses and LAE that have been
incurred for the years up to and including 1986 have been paid. Thus, as
of Dec. 31, 1996, it is estimated that $379 million of incurred losses and
LAE have yet to be paid for the years up to and including 1986.
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 1995 reserves that relates to 1986 losses is
included in the cumulative redundancy for the years 1986 through 1995.
In addition, the 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, economic and legal conditions and
other trends which have 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.
Note 6 on page 58 of the 1996 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 "Loss and
Loss Adjustment Expense Reserves" and "Environmental and Asbestos Claims"
sections of "Management's Discussion and Analysis" on pages 31 through 36
of the 1996 Annual Report to Shareholders, which are incorporated herein by
reference.
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Analysis of Loss and Loss Adjustment Expense (LAE) Development
(in millions)
<TABLE>
<CAPTION>
Year ended December 31 1986 1987 1987 1989 1990 1991 1992 1993 1994 1995 1996
- ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S>
Net liability for <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
unpaid losses and LAE $4,043 4,745 5,502 5,907 6,279 6,688 7,207 7,640 7,890 8,393 9,783
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Liability re-estimated
as of:
One year later 4,087 4,727 5,313 5,656 6,037 6,436 6,984 7,312 7,642 8,141
Two years later 4,078 4,489 4,914 5,338 5,787 6,260 6,703 7,027 7,330
Three years later 3,955 4,268 4,789 5,135 5,628 6,066 6,563 6,781
Four years later 3,874 4,226 4,731 5,027 5,490 6,063 6,384
Five years later 3,874 4,178 4,707 4,975 5,521 5,960
Six years later 3,885 4,180 4,682 5,058 5,472
Seven years later 3,914 4,169 4,796 5,038
Eight years later 3,951 4,163 4,798
Nine years later 3,983 4,183
Ten years later 4,013
Cumulative redundancy $ 30 562 704 869 807 728 823 859 560 252
===== ==== ===== ===== ===== ===== ===== ===== ===== =====
Cumulative redundancy
excluding foreign
exchange (1) $ 30 562 713 848 805 733 814 851 553 239
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Net liability for
unpaid losses and LAE 7,207 7,640 7,890 8,393 9,783
Reinsurance recoverable on
unpaid losses 1,606 1,545 1,533 1,854 1,890
----- ----- ----- ------ ------
Gross liability 8,813 9,185 9,423 10,247 11,673
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Gross re-estimated
liability:
One year later 8,692 8,842 9,599 9,980
Two years later 8,389 8,934 9,273
Three years later 8,622 8,665
Four years later 8,426
Gross cumulative
redundancy 387 520 150 267
=== === === ===
Gross cumulative
redundancy excluding
foreign exchange(1) 346 493 108 246
=== === === ===
Cumulative amount of net
liability paid through:
One year later 1,008 1,101 1,196 1,318 1,450 1,452 1,547 1,566 1,591 1,839
Two years later 1,787 1,884 2,044 2,209 2,361 2,493 2,576 2,608 2,751
Three years later 2,332 2,466 2,646 2,797 3,015 3,155 3,245 3,373
Four years later 2,732 2,869 3,043 3,216 3,442 3,584 3,745
Five years later 3,012 3,132 3,348 3,496 3,713 3,922
Six years later 3,205 3,322 3,554 3,674 3,942
Seven years later 3,343 3,453 3,691 3,846
Eight years later 3,447 3,573 3,819
Nine years later 3,551 3,666
Ten years later 3,634
Cumulative amount of
gross liability paid
through:
One year later 1,935 1,872 1,958 2,160
Two years later 3,199 3,136 3,352
Three years later 4,047 4,065
Four years later 4,678
(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 1996. The
foreign currency translation impact on the cumulative redundancy
arises from the difference between reserve developments
translated at the exchange rates at the end of the year in which the
liabilities were originally estimated, and the exchange rates at the
end of the year in which the liabilities were re-estimated.
</TABLE>
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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.
With respect to ceded reinsurance, The St. Paul strives to protect its
assets from large individual risk and occurrence losses, and 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 14 on page 67
of the 1996 Annual Report to Shareholders, which provides a schedule of
ceded reinsurance information, is incorporated herein by reference.
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 hold a combined
78% interest in Nuveen. Nuveen is headquartered in Chicago and maintains
regional sales offices in other cities across the United States.
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, Nuveen also serves state and local
governments and their authorities by financing community projects through
both negotiated and competitive financings.
Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp., wholly-owned
subsidiaries of John Nuveen & Co. Incorporated, provide investment advice
to and administer the business affairs of the Nuveen family of management
investment companies. Nuveen Institutional Advisory Corp. also provides
investment management services for individuals and public utility nuclear
power plant decommissioning and postretirement benefits trust funds.
In 1996, Nuveen purchased a minority ownership interest in Institutional
Capital Corporation (ICAP), an institutional equity manager. ICAP served
as subadviser to the Nuveen Growth and Income Stock Fund, which was
introduced in 1996 and generated new assets under management of almost $500
million by year-end.
As the leading sponsor of tax-free UITs, Nuveen currently sponsors trusts
with assets at Dec. 31, 1996 of approximately $14 billion in 3,520
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 57 exchange-traded funds with
approximately $25 billion in net assets, which are traded on national stock
exchanges.
In 1996, Nuveen repurchased 3.8 million of its outstanding common shares
for a total cost of $101 million. The repurchases were proportioned
between The St. Paul and minority shareholders to maintain the combined 78%
ownership interest in Nuveen held by The St. Paul and Fire and Marine. The
St. Paul received proceeds of $74 million from Nuveen's share repurchases.
In early 1997, Nuveen completed its acquisition of Flagship Resources Inc.,
a tax-exempt mutual fund and money management firm, which added $4.6
billion to assets under management.
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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 for purposes of hedging against fluctuations in interest rates.
The St. Paul has not participated in the derivatives market for trading or
speculative purposes.
Fixed Maturities. Fixed maturities constituted 83% of The St. Paul's
investment portfolio at Dec. 31, 1996. 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
- ---- -------- -------- ---------- -------- ---------
1996 $11,485.0 $11,944.1 $738.4 7.0% 5.4%
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%
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 1996 were comprised of intermediate-term, investment-
grade taxable and tax-exempt securities. The acquisition of Northbrook in
1996 added $1.14 billion of fixed maturities to The St. Paul's portfolio,
which accounted for $25 million of incremental investment income in 1996.
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, 1996,
pretax unrealized appreciation totaled $459 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 securities comprised 6% of The St. Paul's investments at
Dec. 31, 1996, and consist of a diversified portfolio of common stocks,
which are held with the primary objective of achieving capital
appreciation. This portfolio provided $129 million of pretax realized
investment gains and $16 million of dividend income in 1996, and its
carrying value at year-end included $186 million of unrealized
appreciation.
Real Estate. The St. Paul's real estate holdings, which comprised 5% of
total investments at Dec. 31, 1996, consist primarily of a diversified
portfolio of commercial office and warehouse buildings geographically
distributed throughout the United States. This portfolio produced $36
million of pretax investment income in 1996. The St. Paul does not have a
portfolio of real estate mortgage investments.
<PAGE>
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 4% of total investments at Dec. 31, 1996.
These investments are in the form of limited partnership interests or
direct equity investments. Sales of venture capital investments in 1996
generated pretax realized investment gains of $86 million. The carrying
value of venture capital investments at year-end included $292 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 2% of total investments at Dec. 31, 1996.
Notes 3, 4 and 5 on pages 56 through 58 of the 1996 Annual Report to
Shareholders, and the "Investments" section of "Management's Discussion and
Analysis" on pages 36 through 41 of said Annual Report, which provide
additional information about The St. Paul's investment portfolio, are
incorporated herein by reference.
COMPETITION AND REGULATION
The insurance underwriting and investment banking-asset management
industries are both highly competitive.
Underwriting. The St. Paul's domestic and international underwriting
subsidiaries compete with a large number of other insurers and reinsurers.
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. 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 1996, The St. Paul received from Fire and Marine
$186.5 million of cash dividends, and a noncash dividend in the form of common
shares of The John Nuveen Company with a carrying value of $30.8 million
and a market value of $75.0 million. In 1997, up to $477.3 million in cash
dividends can be paid by Fire and Marine to The St. Paul without regulatory
approval. In addition, 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 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
<PAGE>
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 and risk management
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.
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. St. Paul Fire and Marine Insurance Company also owns a building in
Freeport, Illinois that houses a portion of its personal insurance
operations.
St. Paul International Insurance Company Ltd. owns its building in London,
England which houses its 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 most
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.
<PAGE>
Item 3. Legal Proceedings.
- ------ -----------------
The information set forth in the "Legal Matters" section of Note 11 on page
66 of the 1996 Annual Report to Shareholders, the "Legal Matters" section
of "Management's Discussion and Analysis" on page 36 of said Annual Report,
and the "Environmental and Asbestos Claims" section of "Management's
Discussion and Analysis" on pages 34 through 36 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 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.
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, 1996.
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 International
Underwriting or St. Paul Re. There are no family relationships between any
of The St. Paul's executive officers and directors, and there are no
arrangements or understandings between any of these officers and any other
person pursuant to which the officer was selected as an officer. All of
the following officers except Paul J. Liska, Michael J. Conroy, 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. Paul J. Liska joined The St. Paul in January 1997. For three years
prior to that date, Mr. Liska held various management positions with
Specialty Foods Corporation, including the position of president and chief
executive officer from January 1996 to January 1997. For six years prior
to joining Specialty Foods Corporation, Mr. Liska held several executive
positions with Kraft General Foods. 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. 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.
<PAGE>
Positions Term of Office
Presently and Period of
Name Age Held Service
- ---- --- --------- --------------
Douglas W. 60 Chairman, President Serving at the
Leatherdale and Chief Executive pleasure of the
Officer-The St. Paul Board from 5-90
Companies, Inc.
Patrick A. Thiele 46 Executive Vice Serving at the
President, President pleasure of the
and Chief Executive Board from 5-96
Officer-Worldwide
Insurance Operations
Paul J. Liska 41 Executive Vice Serving at the
President and pleasure of the
Chief Financial Board from 1-97
Officer
Michael J. Conroy 55 Executive Vice Serving at the
President and pleasure of the
Chief Administrative Board from 8-95
Officer-Fire and
Marine
James F. Duffy 53 President and Serving at the
Chief Executive pleasure of the
Officer- Board from 9-93
St. Paul Re
Mark L. Pabst 50 President and Serving at the
Chief Executive pleasure of the
Officer-St. Paul Board from 2-95
International
Underwriting
Susan J. Albrecht 50 President- Serving at the
Major Markets- pleasure of the
Fire and Marine Board from 12-94
Stephen J. Klingel 46 President- Serving at the
Personal pleasure of the
Insurance- Board from 8-95
Fire and Marine
Joseph B. Nardi 52 President- Serving at the
Medical Services- pleasure of the
Fire and Marine Board from 8-82
Janet R. Nelson 47 President- Serving at the
Custom Markets- pleasure of the
Fire and Marine Board from 5-94
James A. Schulte 47 President- Serving at the
Commercial- pleasure of the
Fire and Marine Board from 10-93
<PAGE>
Howard E. Dalton 59 Senior Vice Serving at the
President and pleasure of the
Chief Accounting Board from 9-87
Officer
Andrew I. Douglass 53 Senior Vice Serving at the
President and pleasure of the
General Counsel Board from 8-93
James Hom 41 Senior Vice Serving at the
President- pleasure of the
Corporate Planning Board from 10-94
Greg A. Lee 47 Senior Vice Serving at the
President- pleasure of the
Human Resources Board from 1-93
Bruce A. Backberg 48 Vice President Serving at the
and Corporate pleasure of the
Secretary Board from 5-92
James L. Boudreau 61 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 1996 Annual Report to Shareholders are incorporated herein by
reference.
As partial consideration for the acquisition of the economic interest of
Gravett & Tilling (Holdings) Limited, a United Kingdom corporation, The St.
Paul, on Dec. 31, 1996, issued 28,748 shares of its common stock in an
exempt transaction pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the "Act"). As part of this acquisition, The St. Paul, pursuant
to the November 13, 1996 acquisition agreement, is also to issue, to the
eleven former shareholders of Gravett & Tilling (Holdings) Limited,
an additional number of shares, having a market value of
approximately one million pounds sterling, on Dec. 31, 1997. In
transactions that are also exempt from registration pursuant to Section 4(2) of
the Act, during 1996 The St. Paul also entered into Deferred Stock Grant
Agreements with seven non-U.S. based employees pursuant to which The St. Paul is
to issue a total of 7,500 shares of common stock to the employees if they
remain employed with The St. Paul for various periods of time.
Item 6. Selected Financial Data.
- ------ -----------------------
The "Eleven-year Summary of Selected Financial Data" section on pages 46
and 47 of the 1996 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 45 of the
1996 Annual Report to Shareholders is incorporated herein by reference.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
The financial statements and supplementary data on pages 48 to 69 of the
1996 Annual Report to Shareholders are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on
- ------ Accounting and Financial Disclosure.
-----------------------------------
None.
Part III
--------
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
The "Election of Directors - 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 6, 1997, 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 17 to 27 and the "Election of
Directors - Board of Directors Compensation" section on pages 7 to 9 of the
Proxy Statement relating to the annual meeting of shareholders to be held
May 6, 1997, 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 28 to 30 of the Proxy Statement relating to the annual
meeting of shareholders to be held May 6, 1997, 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, 1996, 1995 and 1994
Consolidated Balance Sheets - December 31, 1996
and 1995
Consolidated Statements of Shareholders'
Equity - Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
<PAGE>
2. Financial Statement Schedules.
The St. Paul Companies, Inc. and Subsidiaries:
Independent Auditors' Report on Financial
Statement Schedules
I. Summary of Investments - Other than Investments in
Related Parties
II. Condensed Financial Information of Registrant
III. Supplementary Insurance Information
IV. Reinsurance
V. Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable, not required, or the information is included
elsewhere in the Consolidated Financial Statements or Notes
thereto.
3. Exhibits. An Exhibit Index is set forth at page 32 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 Management Incentive Awards Plan.
The Directors' Deferred Compensation Plan.
The Deferred Stock Grant Agreement with Mr. Mark
L. Pabst is incorporated by reference to the Form 10-K for
the year ended December 31, 1995.
The Directors' Charitable Award Program 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.
<PAGE>
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.
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 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 fixed charges and the ratio of earnings to
combined fixed charges and preferred stock dividends.
<PAGE>
(13) The 1996 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, 1996 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 1996 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.
(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, No. 333-
01065 and No. 333-22329) and Form S-3 (SEC File No. 33-
33931, No. 33-50115, No. 33-58491 and No. 333-06456).
(24) Power of attorney.
(27) Financial data schedule.
(b) Reports on Form 8-K.
A Form 8-K Current Report dated October 1, 1996, was filed
relating to the announcement of the anticipated impact of weather
related losses on The St. Paul's third-quarter 1996 operating
results.
A Form 8-K Current Report dated October 29, 1996 was filed
relating to the announcement of The St. Paul's financial results
for the quarter ended September 30, 1996.
A Form 8-K Current Report dated January 27, 1997, was filed
relating to the announcement of The St. Paul's financial results
for the year ended December 31, 1996.
A Form 8-K Current Report dated February 7, 1997, was filed
relating to the announcement of The St. Paul's share repurchase
and stock ownership plans.
<PAGE>
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 25, 1997 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 25, 1997 By /s/ Douglas W. Leatherdale
-------------- --------------------------
Douglas W. Leatherdale,
Director, Chairman of the
Board, President and Chief
Executive Officer
Date March 25, 1997 By /s/ Patrick A. Thiele
-------------- ---------------------
Patrick A. Thiele, Director,
Executive Vice President,
President and Chief
Executive Officer -
Worldwide Insurance
Operations
Date March 25, 1997 By /s/ Paul J. Liska
-------------- -----------------
Paul J. Liska, Executive
Vice President and Chief
Financial Officer
Date March 25, 1997 By /s/ Howard E. Dalton
-------------- --------------------
Howard E. Dalton, Senior
Vice President and Chief
Accounting Officer
Date March 25, 1997 By /s/ Michael R. Bonsignore
-------------- -------------------------
Michael R. Bonsignore*,
Director
Date March 25, 1997 By /s/ John H. Dasburg
-------------- -------------------
John H. Dasburg*, Director
Date March 25, 1997 By /s/ W. John Driscoll
-------------- --------------------
W. John Driscoll*, Director
Date March 25, 1997 By /s/ Pierson M. Grieve
-------------- ---------------------
Pierson M. Grieve*, Director
Date March 25, 1997 By /s/ Ronald James
-------------- ----------------
Ronald James*, Director
Date March 25, 1997 By /s/ David G. John
-------------- -----------------
David G. John*, Director
Date March 25, 1997 By /s/ William H. Kling
-------------- ---------------------
William H. Kling*, Director
<PAGE>
Date March 25, 1997 By /s/ Bruce K. MacLaury
-------------- ---------------------
Bruce K. MacLaury*, Director
Date March 25, 1997 By /s/ Glen D. Nelson
-------------- ------------------
Glen D. Nelson*, Director
Date March 25, 1997 By /s/ Anita M. Pampusch
-------------- ---------------------
Anita M. Pampusch*, Director
Date March 25, 1997 By /s/ Gordon M. Sprenger
-------------- ----------------------
Gordon M. Sprenger*,
Director
Date March 25, 1997 *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 27, 1997, we reported on the consolidated balance
sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31,
1996 and 1995, 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, 1996, as contained in the 1996 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 1996. 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.
Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP
January 27, 1997 -------------------------
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, 1996
(In thousands)
1996
-------------------------------------
Amount at
which shown
in the
Cost* Value* balance sheet
----------- --------- ------------
Type of investment:
Fixed maturities:
- ----------------
United States Government and
government agencies and
authorities $ 2,401,760 $ 2,444,966 $ 2,444,966
States, municipalities and
political subdivisions 4,992,485 5,287,966 5,287,966
Foreign governments 1,077,869 1,125,606 1,125,606
Corporate securities 1,546,721 1,586,262 1,586,262
Mortgage-backed securities 1,466,168 1,499,285 1,499,285
---------- ---------- ----------
Total fixed maturities 11,485,003 11,944,085 11,944,085
---------- ========== ----------
Equity securities:
- -----------------
Common stocks:
Public utilities 12,213 15,902 15,902
Banks, trusts and insurance
companies 65,639 87,155 87,155
Industrial, miscellaneous and
all other 544,028 705,238 705,238
---------- ---------- ----------
Total equity securities 621,880 808,295 808,295
---------- ---------- ----------
Venture capital 293,837 $ 586,222 586,222
---------- ========== ----------
Real estate 707,910** 693,910
Other investments 43,311 43,311
Short-term investments 289,793 289,793
---------- ----------
Total investments $13,441,734 $14,365,616
========== ==========
* See Notes 1, 3, 4 and 5 to the consolidated financial statements
included in The St. Paul's 1996 Annual Report to Shareholders.
** The cost of real estate represents the cost of properties before
valuation provisions. (See Schedule V on page 31).
<PAGE>
THE ST. PAUL COMPANIES, INC. (Parent Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET INFORMATION
December 31, 1996 and 1995
(In thousands)
Assets: 1996 1995
---- ----
Investment in subsidiaries $4,533,106 $4,514,440
Investments:
Fixed maturities 162,895 138,552
Equity securities 40,424 52,235
Short-term investments 25,271 40,130
Deferred income taxes 453,560 136,427
Other assets 102,280 89,283
--------- ---------
Total assets $5,317,536 $4,971,067
========= =========
Liabilities:
Debt $1,090,477 $1,074,657
Dividends payable to shareholders 36,579 33,559
Other liabilities 186,660 132,730
--------- ---------
Total liabilities 1,313,716 1,240,946
--------- ---------
Shareholders' Equity:
Preferred:
Convertible preferred stock 142,131 144,165
Guaranteed obligation - PSOP (126,068) (133,293)
--------- ---------
Total preferred shareholders' equity 16,063 10,872
--------- ---------
Common:
Common stock, authorized 240,000 shares;
issued 83,198 shares (83,976 in 1995) 475,710 460,458
Retained earnings 2,935,928 2,704,075
Guaranteed obligation - ESOP (20,353) (32,294)
Unrealized appreciation of investments 616,968 627,791
Unrealized loss on
foreign currency translation (20,496) (40,781)
--------- ---------
Total common shareholders' equity 3,987,757 3,719,249
--------- ---------
Total shareholders' equity 4,003,820 3,730,121
--------- ---------
Total liabilities and
shareholders' equity $5,317,536 $4,971,067
========= =========
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, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Revenues:
Net investment income $ 12,695 $ 9,165 $ 4,470
Realized investment gains 8,810 8,800 4,240
------- ------- -------
Total revenues 21,505 17,965 8,710
------- ------- -------
Expenses:
Interest expense 75,409 63,744 48,457
Administrative and other 29,228 29,476 21,312
------- ------- -------
Total expenses 104,637 93,220 69,769
------- ------- -------
Loss before
income tax benefit (83,132) (75,255) (61,059)
Income tax benefit (46,462) (18,941) (22,608)
------- ------- -------
Net loss from continuing
operations- parent only (36,670) (56,314) (38,451)
------- ------- -------
Income tax benefit - discontinued
operations (291,493) - -
------- ------- -------
Net income (loss) - parent only 254,823 (56,314) (38,451)
Equity in net income
of subsidiaries and
loss from discontinued operations 195,276 577,523 481,279
------- ------- -------
Consolidated net income $450,099 $521,209 $442,828
======= ======= =======
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, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
---- ---- ----
Operating Activities:
Net income (loss) $ 254,823 $ (56,314) $ (38,451)
Cash dividends from subsidiaries 200,648 206,118 210,523
Tax payments from subsidiaries 93,928 159,216 104,509
State and federal income tax payments (70,000) (103,000) (84,910)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Tax benefit - discontinued
operations (291,493) - -
Deferred tax benefit -operations (21,891) (1,077) (19,660)
Realized investment gains (8,810) (8,800) (4,240)
Other (3,951) (110) 1,897
------- ------- -------
Cash provided by operating activities 153,254 196,033 169,668
------- ------- -------
Investing Activities:
Purchases of investments (104,322) (218,525) (93,601)
Proceeds from sales and maturities
of investments 109,958 93,919 84,337
Capital contributions to
subsidiaries (55,922) (223,623) (53,466)
Acquisitions - - (10,643)
Other (268) (870) 14
------- ------- -------
Cash used in
investing activities (50,554) (349,099) (73,359)
------- ------- -------
Financing Activities:
Dividends paid to shareholders (155,268) (144,662) (136,062)
Proceeds from issuance of debt 53,000 455,028 87,721
Repayment of debt (17,711) (125,446) (20,350)
Repurchase of common shares (74,217) (41,714) (34,150)
Proceeds from Nuveen stock repurchase 73,966 - -
Stock options exercised and other 17,530 9,860 6,532
------- ------- -------
Cash provided by
(used in) financing activities (102,700) 153,066 (96,309)
------- ------- -------
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 1996 Annual Report to Shareholders.
2. Debt consists of the following (in thousands):
December 31,
---------------------------
1996 1995
---- ----
Medium-term notes $ 430,427 $ 397,433
Convertible
subordinated debentures (1) 262,026 262,026
Commercial paper 131,610 149,629
Guaranteed PSOP debt (1) 126,068 133,293
9-3/8% notes 99,994 99,982
Intercompany loan (1) 20,000 -
Guaranteed ESOP debt 13,890 25,001
Guaranteed ESOP debt (1) 6,462 7,293
--------- ---------
Total debt $1,090,477 $1,074,657
========= =========
(1) Eliminated in consolidation.
See Note 8 to the consolidated financial statements included in the
1996 Annual Report to Shareholders for further information on debt
outstanding at Dec. 31, 1996.
The amount of debt, other than debt eliminated in consolidation, that
becomes due during each of the next five years is as follows: 1997,
$111.1 million; 1998, $27.8 million; 1999, $20.0 million; 2000, $144.8
million; and 2001, $45.5 million.
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
At December 31,
---------------------------------------------
Gross loss
Deferred and loss Other policy
policy adjustment Gross claims and
acquisition expense unearned benefits
expenses reserves premiums payable
--------- ------------- --------- ----------
1996
- ----
Property-Liability
Insurance Underwriting:
Worldwide Insurance Operations:
Fire and Marine:
Specialized Commercial $120,222 $3,345,102 $719,969 -
Commercial 78,702 2,629,381 483,135 -
Personal Insurance 59,803 483,414 303,658 -
Medical Services 60,087 2,053,221 650,199 -
------- ---------- --------- ------
Total Fire and Marine 318,814 8,511,118 2,156,961 -
International 17,700 1,122,397 138,029 -
------- ---------- --------- ------
Total Worldwide Insurance 336,514 9,633,515 2,294,990
St. Paul Re 65,254 2,039,633 271,561 -
------- ---------- --------- ------
Total $401,768 $11,673,148 $2,566,551 -
======= ========== ========= ======
1995
- ----
Property-Liability
Insurance Underwriting:
Worldwide Insurance Operations:
Fire and Marine:
Specialized Commercial $119,150 $ 3,377,431 $ 753,479 -
Commercial 60,561 1,399,928 290,475 -
Personal Insurance 58,153 405,266 286,121 -
Medical Services 58,777 2,129,471 647,878 -
------- ---------- --------- ------
Total Fire and Marine 296,641 7,312,096 1,977,953 -
International 18,277 1,091,131 133,699 -
------- ---------- --------- ------
Total Worldwide Insurance 314,918 8,403,227 2,111,652
St. Paul Re 57,256 1,843,843 249,376 -
------- ---------- --------- ------
Total $372,174 $10,247,070 $2,361,028 -
======= ========== ========= ======
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
Insurance
losses Amortization
Net and loss of policy Other
Premiums investment adjustment acquisition operating Premiums
earned income expenses expenses expenses written
--------- -------- --------- ---------- ------- --------
Worldwide
Insurance
Operations:
Fire and Marine:
Specialized
Commercial $1,272,561 - $826,670 $303,206 $97,935 $1,278,814
Commercial 862,092 - 637,693 204,904 83,957 778,487
Personal
Insurance 707,299 - 694,551 156,109 58,456 724,616
Medical
Services 601,679 - 409,124 100,086 38,680 585,876
--------- ------- --------- ------- ------- -------
Total Fire
and Marine 3,443,631 - 2,568,038 764,305 279,028 3,367,793
International 268,830 - 196,948 47,308 46,360 267,805
--------- ------- --------- ------- ------- ---------
Total
Worldwide
Insurance 3,712,461 - 2,764,986 811,613 325,388 3,635,598
St. Paul Re 735,787 - 553,315 163,843 55,327 760,524
Net investment
income - $794,901 - - - -
Other - - - - 131,761 -
--------- ------- --------- ------- ------- ---------
Total $4,448,248 $794,901 $3,318,301 $975,456 $512,476 $4,396,122
========= ======= ========= ======= ======= =========
1995
- ----
Worldwide Insurance
Operations:
Fire and Marine:
Specialized
Commercial $1,230,790 - $ 961,801 $298,765 $ 98,328 $1,304,062
Commercial 587,016 - 378,754 155,125 57,580 617,767
Personal
Insurance 655,347 - 486,275 145,547 56,524 673,347
Medical
Services 605,468 - 387,716 97,695 44,557 673,980
--------- ------- --------- ------- ------- ---------
Total Fire
and Marine 3,078,621 - 2,214,546 697,132 256,989 3,269,156
International 237,727 - 188,728 27,326 44,857 260,582
--------- ------- --------- ------- ------- ---------
Total
Worldwide
Insurance 3,316,348 - 2,403,274 724,458 301,846 3,529,738
St. Paul Re 654,981 - 461,033 132,521 56,936 713,475
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
- ----
Worldwide Insurance
Operations:
Fire and Marine:
Specialized
Commercial $1,015,397 - $ 764,760 $252,577 $ 88,046 $1,085,514
Commercial 498,543 - 365,555 137,661 59,079 529,741
Personal
Insurance 619,414 - 455,879 138,512 51,338 635,557
Medical
Services 638,413 - 369,571 109,517 38,848 689,716
--------- ------- --------- ------- ------- ---------
Total Fire
and Marine 2,771,767 - 1,955,765 638,267 237,311 2,940,528
International 156,946 - 133,920 25,398 28,797 169,176
--------- ------- --------- ------- ------- ---------
Total
Worldwide
Insurance 2,928,713 - 2,089,685 663,665 266,108 3,109,704
St. Paul Re 483,368 - 372,013 90,281 42,877 513,322
Net investment
income - $674,818 - - - -
Other - - - - 66,581 -
--------- ------- --------- ------- ------- ---------
Total $3,412,081 $674,818 $2,461,698 $753,946 $375,566 $3,623,026
========= ======= ========= ======= ======= =========
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
Years Ended December 31, 1996, 1995 and 1994
(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
--------- -------- --------- -------- ---------
1996 $4,001,384 528,409 975,273 4,448,248 21.9%
========= ======= ======= =========
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%
========= ======= ======= =========
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1995 and 1994
(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
- ----------- ---------- ---------- ---------- ---------- --------
1996
- ----
Real estate valuation
adjustment $34,000 - - 20,000 14,000
====== ====== ===== ====== ======
Allowance for
uncollectible:
Agency loans $1,664 - - - 1,664
====== ====== ===== ====== ======
Premiums receivable
from underwriting
activities $18,918 5,073 - 2,832 21,159
====== ====== ===== ====== ======
Reinsurance $21,531 1,150 - - 22,681
====== ====== ===== ====== ======
1995
- ----
Real estate valuation
adjustment $24,000 10,000 - - 34,000
====== ====== ===== ====== ======
Allowance for
uncollectible:
Agency loans $ 1,664 - - - 1,664
====== ====== ===== ====== ======
Premiums receivable
from underwriting
activities $20,938 4,192 - 6,212 18,918
====== ====== ===== ====== ======
Reinsurance $25,823 - - 4,292 21,531
====== ====== ===== ====== ======
1994
- ----
Real estate valuation
adjustment $14,000 10,000 - - 24,000
====== ====== ===== ====== ======
Allowance for
uncollectible:
Agency loans $ 4,750 - - 3,086 1,664
====== ====== ===== ====== ======
Premiums receivable
from underwriting
activities $22,218 2,373 - 3,653 20,938
====== ====== ===== ====== ======
Reinsurance $26,202 492 - 871 25,823
====== ====== ===== ====== ======
(1) Deductions include write-offs of amounts determined to be
uncollectible, unrealized foreign exchange gains and losses and, for
real estate, a reduction in the valuation allowance for properties sold
during the year.
<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 Management Incentive Awards Plan.........(1)
(b) The Directors' Deferred Compensation Plan.............(1)
(c) The Deferred Stock Grant Agreement
with Mr. Mark L. Pabst***............................
(d) The Directors' Charitable Award Program***............
(e) Relocation Loan Payback Agreement
with Mr. James F. Duffy***...........................
(f) Pension Service Agreement
with Mr. Andrew I. Douglass***.......................
(g) 1994 Stock Incentive Plan***..........................
(h) 1994 Annual Incentive Plan***.........................
(i) Long-Term Incentive Plan***...........................
(j) Non-Employee Director Stock Retainer Plan***..........
(k) Outside Directors' Retirement Plan***.................
(l) Amended 1988 Stock Option Plan***.....................
(m) Restricted Stock Award Plan***........................
(n) Benefit Equalization Plan***..........................
(o) Special Severance Policy***...........................
(p) Directors' Deferred Compensation Agreement -
Prime Rate***........................................
(q) Directors' Deferred Compensation Agreement -
Phantom Stock***.....................................
(r) Alternative Long-Term Incentive Plan***...............
(s) Annual Incentive Plan***..............................
(t) Executive Post-Retirement Life Insurance Plan***......
(u) Executive Excess Long-Term Disability Plan***.........
(11) Statements re computation of per share earnings.........(1)
(12) Statements 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) Consent of experts and counsel..........................(1)
(24) Power of attorney.......................................(1)
(27) Financial data schedule.................................(1)
(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.
<PAGE>
THE ST. PAUL COMPANIES, INC
DEFERRED MANAGEMENT INCENTIVE AWARDS PLAN
-----------------------------------------
(As Amended and Restated Effective as of January 1, 1996)
Section 1
---------
Introduction
1.1 The Plan and Its Effective Date. The St. Paul
Companies, Inc. Deferred Management Incentive Awards Plan
("Plan") was established as of January 1, 1984. The effective
date of the amendment and restatement of the Plan as set forth
herein is January 1, 1996.
1.2 Purpose. The St. Paul Companies, Inc. (the "Company")
has established the Plan for a select group of management and
highly compensated employees of the Company or any subsidiary or
affiliate that adopts the Plan in accordance with Section 6 to
retain and attract highly qualified personnel by offering the
benefits of a non-qualified, unfunded plan of deferred
compensation. The Plan is intended to be a top-hat plan
described in Sections 201(2), 301(a)(3) and 401(a)(1) of the
Employee Retirement Income Security Act of 1974 ("ERISA").
1.3 Administration. The Plan shall be administered by the
Plan Administrator who shall be appointed by the Personnel and
Compensation Committee (the "Committee") of the board of
directors of the Company (the "Board of Directors"). In the
absence of the appointment of a Plan Administrator, the officer
of the Company having direct responsibility for compensation and
benefits shall be the Plan Administrator. The Plan Administrator
shall have the authority to delegate, from time to time, his
responsibilities under the Plan to such person or persons as he
deems advisable and may revoke any such delegation of
responsibility. Any action by the delegate in the exercise of
delegated responsibilities shall have the same force and effect
as if such action was taken by the Plan Administrator.
Section 2
---------
Participation and Deferral Elections
2.1 Eligibility and Participation. Subject to the
conditions and limitations of the Plan, officers of the Company
or an Employer (as defined in Section 6.1) who both
(i) participate in the Company's Annual Incentive Plan (the
"Employees' Incentive Plan") or the Company's Annual Incentive
Plan for executive officers (the "Executive Officers' Incentive
Plan") and (ii) have an annual base salary equal to or greater
than $95,000 shall be eligible to participate in the Plan
("Eligible Employees"). Any Eligible Employee who makes a
Deferral Election as described in Section 2.2 below shall become
a participant in the Plan ("Participant") and shall remain a
Participant until the entire balance of all his Deferred
Compensation Accounts (defined in Section 3.1 below) are
distributed to him.
<PAGE>
2.2 Rules for Deferral Elections. Any Eligible Employee
may make an irrevocable election ("Deferral Election") to defer
receipt of all or any percentage of his annual incentive
compensation award ("Incentive Award") under the Employees'
Incentive Plan or the Executive Officers' Incentive Plan for a
calendar year in accordance with the rules set forth below:
(a) An individual shall be eligible to make a Deferral
Election only if he is an Eligible Employee on the date
such election is made.
(b) The minimum amount that may be deferred for any
year is $1,000. If the amount or percentage specified
for deferral in an Eligible Employee's Deferral
Election would result in the deferral of less than
$1,000, the amount or percentage specified will not be
deferred hereunder but will be paid to the Eligible
Employee at the time that Incentive Awards are
otherwise payable.
(c) All Deferral Elections must be made in writing on
such form as the Plan Administrator may prescribe and
must be received by the Plan Administrator no later
than October 31 of the calendar year immediately
preceding the calendar year in which such Incentive
Award is otherwise payable.
(d) Amounts will be deferred to the date specified by
the Eligible Employee at the time of his Deferral
Election (the "Distribution Date") and payment will be
made or will commence within 30 days after the
Valuation Date (as defined in Section 3.4) coinciding
with or next following the Distribution Date. Except
as provided in subsection (j), the Distribution Date
specified at the time of the Eligible Employee's
Deferral Election is irrevocable.
(e) The Distribution Date shall be one of the
following as specified by the Participant at the time
of his Deferral Election:
(1) the earliest date following
the Participant's Termination of Employment
(as defined in subsection (f) below) on which
the Participant is entitled to commence
receiving retirement benefits under The St.
Paul Companies, Inc. Employees' Retirement
Plan;
(2) the Participant's Termination
of Employment (as defined in subsection (f)
below);
<PAGE>
(3) a specified date (the
"Designated Distribution Date"), which may
include a specified date coinciding with or
next following the Eligible Employee's
Termination of Employment (e.g., January 1
coinciding with or next following the
Eligible Employee's Termination of
Employment); or
(4) the earliest to occur of (1)
and (3), above, or (2) and (3), above, as
elected by the Participant.
In addition, a Participant may elect, in his
Deferral Election, to receive a distribution of his
Deferral Account in the event the Participant becomes
Disabled (as defined in Section 4.2 below).
(f) For purposes of this Plan, a "Termination of
Employment" occurs when a person leaves the employ of
the Company (including all subsidiaries and affiliates)
by reason of a resignation, discharge, retirement,
disability or death.
(g) At the time of the Participant's Deferral
Election, the Participant must elect, in writing on
such form as the Plan Administrator may prescribe, the
form of payment of the Participant's Deferred
Compensation Account. The Deferred Compensation
Account may be paid in a single lump sum or in
substantially equal annual installments over a period
of up to ten years in accordance with Section 4.1.
(h) At the time of the Participant's Deferral
Election, the Participant shall specify, in writing on
such form as may be prescribed by the Plan
Administrator, the manner in which income, gains,
losses and expenses are credited or charged to a
Participant's Deferred Compensation Accounts in
accordance with Section 3.
(i) A Deferral Election filed with the Plan
Administrator shall remain in effect for the current
and all future Incentive Awards unless the Eligible
Employee files a change in his Deferral Election. A
change in Deferral Election will not be effective with
respect to an Incentive Award unless the change in
Deferral Election is filed with the Plan Administrator
on or before October 31 of the calendar year
immediately preceding the calendar year in which such
Incentive Award is otherwise payable. Notwithstanding
the foregoing, if a Participant receives a distribution
on account of hardship under any qualified plan that is
<PAGE>
described in Section 401(k) of the Internal Revenue
Code (the "Code") and which is maintained by the
Company, an Employer or a commonly controlled entity
(as defined in Code Sections 414(b) and (c)) of the
Company or an Employer (a "401(k) Plan"), then no
amounts may be deferred under the Plan for a period of
12 months following the date the Participant receives
the distribution on account of hardship from the 401(k)
Plan.
(j) A Participant may make a one-time election with
respect to each Deferred Compensation Account after the
Participant's Deferral Election with respect to such
Deferred Compensation Account to extend the
Distribution Date; provided that such election shall
not be effective unless the Plan Administrator receives
the election at least one year and one day before the
Distribution Date elected by the Participant in his
Deferral Election; and further provided, that an
election under this Section 2.2(j) by a Section 16b
Insider (as defined in Section 4.7) shall be
conditioned upon the approval of the Committee and
shall not be effective unless the Committee approves
the election at least one year and one day before the
Distribution Date elected by the Section 16b Insider in
his Deferral Election.
Section 3
---------
Deferred Compensation Accounts
3.1 Deferred Compensation Accounts. A bookkeeping account
shall be established in the Participant's name for each year for
which a Participant defers an Incentive Award pursuant to a
Deferral Election ("Deferred Compensation Account"). Amounts
deferred pursuant to a Deferral Election shall be credited to the
Deferred Compensation Account as of the date (the "Deferral
Crediting Date") on which, in the absence of a Deferral Election,
the Participant would otherwise have received the deferred
amounts.
3.2 Investment Elections.
A Participant must make an investment election at the time of his
Deferral Election. The investment election shall designate the
portion of the amounts deferred which are to be treated as
invested in each Investment Fund (as defined in Section 3.3
below). A Participant's investment election shall remain in
effect with respect to each subsequent deferral until the
<PAGE>
Participant files a change in investment election with the Plan
Administrator. A Participant may change his investment election
either with respect to new deferrals following the change in
investment election (in increments of 1%) or with respect to the
investment allocation of all of the Participant's existing
Deferred Compensation Accounts (in increments of 10%), as the
Participant may elect.
A change in investment election must be filed with the Plan
Administrator on a form prescribed by the Plan Administrator. A
change in investment election will become effective on the first
business day of the calendar month following the Plan
Administrator's receipt of the change in investment election;
provided that the Plan Administrator receives the change in
investment election no later than the 15th day of the preceding
calendar month (or such earlier or later date as may be permitted
or required by the Plan Administrator).
3.3 Investment Funds.
The "Investment Funds" shall consist of the following two funds:
(a) Prime Rate Fund: An Investment Fund that is
deemed to be invested in an interest bearing account
which is credited with interest at the prime rate of
interest charged by First Bank, N.A. in the manner
described in Section 3.4(a).
(b) Phantom Stock Fund: An Investment Fund that is
deemed to be invested in common stock of the Company
("Company Stock").
The Plan Administrator may, in his sole discretion,
designate additional Investment Funds which provide a rate of
return equal to the rate of return that an employee would earn if
the amounts credited to such Investment Fund were invested in a
mutual fund, insurance company separate account or such other
investment vehicle designated by the Plan Administrator.
<PAGE>
3.4 Valuation of Investment Funds.
As of the last business day of each calendar month (or such
other dates as the Plan Administrator, in his discretion, may
designate) ("Valuation Date"), each Participant's Deferred
Compensation Account will be credited with income, gains and
deposits and charged with losses and distributions equal to the
amount by which the Deferred Compensation Account would have been
credited or charged since the prior Valuation Date had the
Participant's Deferred Compensation Account been invested in the
Investment Funds selected by the Participant in accordance with
the Participant's investment elections. The manner in which a
Participant's deemed investment in each Investment Fund is
calculated is described below.
(a) Prime Rate Fund. The value of the portion of the
Participant's Deferred Contribution Account deemed to
be invested in the Prime Rate Fund as of a Valuation
Date shall equal the Participant's deemed account
balance in such fund as of the immediately preceding
Valuation Date plus interest and deposits credited to
the account since the immediately preceding Valuation
Date and reduced by distributions since such preceding
Valuation Date.
As of each Valuation Date, interest shall be
credited to the portion of the Participant's Deferred
Compensation Account deemed to be invested in the Prime
Rate Fund at the prime rate of interest charged by
First Bank, N.A. in effect as of the Valuation Date for
daily balances (determined without regard to any
interest credited to the Deferred Compensation Account
during the calendar year containing such Valuation
Date) for the period commencing the day after the later
of the immediately preceding Valuation Date or the
Deferral Crediting Date, as applicable, and ending on
the Valuation Date calculated on the basis of a three
hundred sixty (360) day year compounded annually.
(b) Phantom Stock Fund. The value of the
Participant's Deferred Contribution Account treated as
invested in the Phantom Stock Fund as of a Valuation
Date shall equal the fair market value of the shares of
the Company Stock deemed to be credited to the
Participant's Deferred Compensation Account on such
Valuation Date.
<PAGE>
Dividends shall be deemed to be reinvested in
shares of Company Stock valued at fair market value as
of the record date for the dividend.
The portion of the amount deferred that a
Participant designates for investment in the Phantom
Stock Fund shall be deemed to be invested in Company
Stock valued at fair market value as of the Deferral
Crediting Date.
The amount transferred into the Phantom Stock
Fund pursuant to a change in investment election shall
be deemed to be invested in Company Stock valued at
fair market value as of the Valuation Date on which
such investment election becomes effective.
For purposes of this subsection (b), the fair
market value of a share of Company Stock as of any day
shall mean the closing price of Company Stock on the
New York Stock Exchange on such day (or the last
business day preceding such day on which Company Stock
was traded).
(c) If the Plan Administrator designates one or more
additional Investment Funds, the Plan Administrator
shall establish a valuation and income crediting
methodology for determining the value of the portion of
a Deferred Contribution Account treated as invested in
such Investment Fund which methodology shall be similar
to the methodology described in subsection (b) above.
3.5 Vesting. A Participant shall be fully vested at all
times in the balance of his Deferred Compensation Account.
<PAGE>
Section 4
---------
Payment of Benefits
4.1 Time and Method of Payment. Payment of a Participant's
Deferred Compensation Account shall be made in the form of a
single lump sum or shall commence in the form of installments as
elected by the Participant in his Deferral Election.
Notwithstanding the foregoing, a Participant may make a one-time
election with respect to each Deferred Contribution Account to
change the form of payment previously elected by the Participant;
provided that such election shall not be effective unless the
election to change the form of payment is received by the Plan
Administrator at least one year and one day before the
Participant's Distribution Date; and further provided, that an
election under this Section 4.1 by a Section 16b Insider (as
defined in Section 4.7) shall be conditioned upon the approval of
the Committee and shall not be effective unless the Committee
approves the election at least one year and one day before the
Section 16b Insider's Distribution Date. A Participant who makes
an election pursuant to this Section 4.1 to receive payment of
his Deferred Compensation Account in the form of installments
shall designate the number of years, up to a maximum of ten
years, over which the installments will be paid.
If a Participant's Deferred Compensation Account is payable
in a single lump sum, the payment shall be made within 30 days
after the Valuation Date coinciding with or next following the
Participant's Distribution Date in an amount equal to the value
of the Participant's Deferred Compensation Account as of the
Valuation Date coinciding with or immediately preceding the date
on which the balance of the Deferred Compensation Account is paid
to the Participant.
If a Participant's Deferred Compensation Account is payable
in the form of installment payments, then the Participant's
Deferred Compensation Account shall be paid in substantially
equal annual installments over the period elected by the
Participant; provided that the number of annual installments
shall not exceed the Participant's Deferred Compensation Account
balance as of the Valuation Date coinciding with or next
following the Distribution Date divided by $1,000 (rounded down
to the next whole number). If the Participant's entire Deferred
Compensation Account balance is less than $1,000 as of the
Valuation Date coinciding with or next following the Distribution
Date it will be distributed in a single lump payment. The
initial installment payment shall be paid within 30 days after
the Valuation Date coinciding with or next following the
Participant's Distribution Date. Subsequent installment payments
shall be paid each January commencing with the first January
following the Participant's Distribution Date.
<PAGE>
Each installment payment shall be computed by dividing the
balance of the Participant's Deferred Compensation Account as of
the Valuation Date coinciding with or immediately preceding the
installment payment date by the number of remaining installment
payments.
4.2 Payment Upon Disability. If a Participant elects, in
his Deferral Election, to receive a distribution in the event he
becomes Disabled (as defined below) before his Distribution Date,
payment of the Participant's Deferred Compensation Account shall
be made or shall commence (in the form of payment elected by the
Participant in accordance with Sections 2.2(g) and 4.1) within 30
days after the Valuation Date coinciding with or next following
the date on which the Plan Administrator determines that the
Participant is Disabled.
For purposes of this Section 4.2, a Participant shall be
"Disabled" if he has a physical or mental condition resulting
from a bodily injury, disease, or mental disorder, which renders
the Participant incapable of engaging in any suitable gainful
employment or occupation and such physical or mental condition is
expected to be permanent and continuous during the remainder of
the Participant's life. Such determination shall be made by the
Plan Administrator on the basis of such medical and other
competent evidence as the Plan Administrator shall deem relevant.
4.3 Payment Upon Death of a Participant. Notwithstanding
any election by the Participant regarding the timing and manner
of payment of his Deferred Compensation Account, a Participant's
Deferred Compensation Account shall be paid to the Participant's
Beneficiary (designated in accordance with Section 4.4) in a
single lump sum as soon as practical following the Valuation Date
coinciding with or next following the date of the Participant's
death.
4.4 Beneficiary. A Participant's Beneficiary or
Beneficiaries shall be the beneficiary or beneficiaries
designated by the Participant under the Company's group life
insurance plan. If no Beneficiary is named by a Participant
under the Company's group life insurance plan, or if he survives
all of his named beneficiaries, the Deferred Compensation Account
shall be paid to the Participant's estate.
4.5 Form of Payment. All payments shall be made in cash.
4.6 Withholding of Taxes. The Company shall withhold any
applicable Federal, state or local income tax from payments due
under the Plan. The Company shall also withhold Social Security
taxes, including the Medicare portion of such taxes, and any
other employment taxes as necessary to comply with applicable
laws.
<PAGE>
4.7 Limitations for Section 16b Insiders. A "Section 16b
Insider" shall include any Participant who has been deemed to be
subject to Section 16 of the Securities and Exchange Act of 1934
(the "Exchange Act") by the Board of Directors. Notwithstanding
any provision of the Plan, the Plan Administrator may impose such
limitations and restrictions on the Section 16b Insiders'
investment elections under Sections 2.2(h) and 3.2 as he deems
necessary or appropriate so that transactions by Section 16b
Insiders do not present a risk of possible liability under
Section 16b of the Exchange Act.
Section 5
---------
Miscellaneous
5.1 Funding. Benefits payable under the Plan to any
Participant shall be paid directly by the Participant's Employer
(including the Company if the Participant is employed by the
Company). No Employer (including the Company) shall have any
obligation to pay any benefits under the Plan with respect to an
employee of any other Employer. The Company and the Employers
shall not be required to fund, or otherwise segregate assets to
be used for payment of benefits under the Plan. While the
Company and the Employers may make investments (a) in shares of
Company Stock through open market purchases or (b) in other
investments in amounts equal or unequal to Participants'
investment elections hereunder, the Company and the Employers
shall not be under any obligation to make such investments and
any such investment shall remain an asset of the Company or the
Employer subject to the claims of its general creditors.
Notwithstanding the foregoing, the Company and the Employers, in
the discretion of the Board of Directors or the Committee, may
maintain one or more grantor trusts ("Trust") to hold assets to
be used for payment of benefits under the Plan. The assets of
the Trust with respect to benefits payable to the employees of an
Employer shall remain subject to the claims of such Employer's
general creditors. Any payments by a Trust of benefits provided
to a Participant under the Plan shall be considered payment by
the Company or the Employer and shall discharge the Company or
the Employer of any further liability under the Plan for such
payments.
5.2 Benefit Statements. As soon as practical after the end
of each calendar quarter (or after such additional date or dates
as the Plan Administrator, in his discretion, may designate), the
Plan Administrator shall provide each Participant with a
statement of the balance of each of his Deferred Compensation
Accounts hereunder as of the last day of such calendar quarter
(or as of such other dates as the Plan Administrator, in his
discretion may designate).
<PAGE>
5.3 Employment Rights. Establishment of the Plan shall not
be construed to give any Eligible Employee the right to be
retained in the Company's or any Employer's service or to any
benefits not specifically provided by the Plan.
5.4 Interests Not Transferable. Except as to withholding
of any tax under the laws of the United States or any state or
locality and the provisions of Section 4.4, no benefit payable at
any time under the Plan shall be subject in any manner to
alienation, sale, transfer, assignment, pledge, attachment, or
other legal process, or encumbrance of any kind. Any attempt to
alienate, sell, transfer, assign, pledge or otherwise encumber
any such benefits, whether currently or thereafter payable, shall
be void. No person shall, in any manner, be liable for or
subject to the debts or liabilities of any person entitled to
such benefits. If any person shall attempt to, or shall
alienate, sell, transfer, assign, pledge or otherwise encumber
his benefits under the Plan, or if by any reason of his
bankruptcy or other event happening at any time, such benefits
would devolve upon any other person or would not be enjoyed by
the person entitled thereto under the Plan, then the Plan
Administrator, in his discretion, may terminate the interest in
any such benefits of the person entitled thereto under the Plan
and hold or apply them for or to the benefit of such person
entitled thereto under the Plan or his spouse, children or other
dependents, or any of them, in such manner as the Plan
Administrator may deem proper.
5.5 Forfeitures and Unclaimed Amounts. Unclaimed amounts
shall consist of the amounts of the Deferred Compensation Account
of a Participant that cannot be distributed because of the Plan
Administrator's inability, after a reasonable search, to locate a
Participant or his Beneficiary, as applicable, within a period of
two (2) years after the Valuation Date upon which the payment of
benefits become due. Unclaimed amounts shall be forfeited at the
end of such two-year period. These forfeitures will reduce the
obligations of the Company under the Plan. After an unclaimed
amount has been forfeited, the Participant or Beneficiary, as
applicable, shall have no further right to his Deferred
Compensation Account.
5.6 Controlling Law. The law of Minnesota, except its law
with respect to choice of law, shall be controlling in all
matters relating to the Plan to the extent not preempted by
ERISA.
5.7 Gender and Number. Words in the masculine gender shall
include the feminine, and the plural shall include the singular
and the singular shall include the plural.
<PAGE>
5.8 Action by the Company. Except as otherwise
specifically provided herein, any action required of or permitted
by the Company under the Plan shall be by resolution of either
the Board of Directors or the Committee or by action of such
person(s) authorized by resolution of the Board of Directors or
the Committee.
Section 6
---------
Employer Participation
6.1 Adoption of Plan. Any subsidiary or affiliate of the
Company (an "Employer") may, with the approval of the Board of
Directors or the Committee and under such terms and conditions as
the Board of Directors or Committee may prescribe, adopt the Plan
by resolution of the Employer's board of directors. An adopting
Employer shall not have the authority to amend or terminate the
Plan under Section 7.
6.2 Withdrawal from the Plan by Employer. Any such
Employer shall have the right, at any time, upon the approval of
and under such conditions as may be provided by the Board of
Directors or the Committee, to withdraw from the Plan by
delivering to the Board of Directors or the Committee written
notice of its election so to withdraw. The portion of the Trust
assets attributable to amounts deferred while Participants were
employees of such withdrawing Employer shall be disposed of in
accordance with the terms of the Trust.
<PAGE>
Section 7
---------
Amendment and Termination
The Company intends the Plan to be permanent, but reserves
the right at any time to modify, amend or terminate the Plan,
provided, however, that any amendment or termination of the Plan
shall not reduce or eliminate any Deferred Compensation Account
accrued through the date of such amendment or termination. Upon
termination of the Plan, the Company may elect either (a) to
continue making payments of Deferred Compensation Accounts in
accordance with the terms of the Deferral Elections in effect at
the time of the termination and crediting Participant's Deferred
Compensation Accounts with income and gains and charging their
Deferred Compensation Accounts for losses and distributions in
accordance with Section 3.4, or (b) to distribute the
Participant's Deferred Compensation Accounts in a single lump
sum.
Executed this 31st day of December, 1996.
THE ST. PAUL COMPANIES, INC.
By: /s/ Greg A. Lee
-----------
Greg A. Lee
Title: Senior Vice President -
Human Resources
<PAGE>
THE ST. PAUL COMPANIES, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
-------------------------------------
(As Amended and Restated Effective as of January 1, 1997)
Section 1
Introduction
1.1 The Plan and Its Effective Date. The St. Paul
Companies, Inc. Directors' Deferred Compensation Plan ("Plan")
was established as of January 1, 1986. The effective date of the
amendment and restatement of the Plan as set forth herein is
January 1, 1997.
1.2 Purpose. The St. Paul Companies, Inc. (the "Company")
has established the Plan for its nonemployee directors to retain
and attract highly qualified individuals to serve as directors by
offering the benefits of a non-qualified, unfunded plan of
deferred compensation.
1.3 Administration. The Plan shall be administered by the
Plan Administrator who shall be appointed by the Personnel and
Compensation Committee (the "Committee") of the board of
directors of the Company (the "Board of Directors"). In the
absence of the appointment of a Plan Administrator, the officer
of the Company having direct responsibility for compensation and
benefits shall be the Plan Administrator. The Plan Administrator
shall have the authority to delegate, from time to time, his
responsibilities under the Plan to such person or persons as he
deems advisable and may revoke any such delegation of
responsibility. Any action by the delegate in the exercise of
delegated responsibilities shall have the same force and effect
as if such action was taken by the Plan Administrator.
Section 2
---------
Participation and Deferral Elections
2.1 Eligibility and Participation. Subject to the
conditions and limitations of the Plan, nonemployee members of
the Board of Directors ("Eligible Directors") shall be eligible
to participate in the Plan. Any Eligible Director who makes a
Deferral Election as described in Section 2.2 below shall become
a participant in the Plan ("Participant") and shall remain a
Participant until the entire balance of all his Deferred
Compensation Accounts (defined in Section 3.1 below) are
distributed to him.
2.2 Rules for Deferral Elections. Any Eligible Director
may make an irrevocable election ("Deferral Election") to defer
receipt of all or any percentage of his annual fees and/or
meeting fees (collectively "Fees") payable for a calendar year
("Attendance Year") by the Company in accordance with the rules
set forth below:
<PAGE>
(a) An individual shall be eligible to make a Deferral
Election only if he is an Eligible Director on the date
such election is made.
(b) The minimum amount that may be deferred for any
year is $1,000. If the amount or percentage specified
for deferral in an Eligible Director's Deferral
Election would result in the deferral of less than
$1,000, the amount or percentage of Fees specified in
the Deferral Election will not be deferred hereunder
but will be paid to the Eligible Director at the time
that such Fees are otherwise payable.
(c) All Deferral Elections must be made in writing on
such form as the Plan Administrator may prescribe and
must be received by the Plan Administrator no later
than October 31 of the calendar year immediately
preceding the Attendance Year for which such Fees are
otherwise payable. Notwithstanding the foregoing, an
individual may file a Deferral Election for the
Attendance Year in which he becomes an Eligible
Director at any time prior to the commencement of his
term as Eligible Director.
(d) Amounts will be deferred to the date specified by
the Eligible Director at the time of his Deferral
Election (the "Distribution Date") and payment will be
made or will commence within 30 days after the
Valuation Date (as defined in Section 3.4) coinciding
with or next following the Distribution Date. Except
as provided in subsection (h), the Distribution Date
specified at the time of the Eligible Director's
Deferral Election is irrevocable.
(e) At the time of the Participant's Deferral
Election, the Participant must elect, in writing on
such form as the Plan Administrator may prescribe, the
form of payment of the Participant's Deferred
Compensation Account. The Deferred Compensation
Account may be paid in a single lump sum or in
substantially equal annual installments over a period
of up to ten years in accordance with Section 4.1.
(f) At the time of the Participant's Deferral
Election, the Participant shall specify, in writing on
such form as may be prescribed by the Plan
Administrator, the manner in which income, gains,
losses and expenses are credited or charged to a
Participant's Deferred Compensation Accounts in
accordance with Section 3.
<PAGE>
(g) A Deferral Election filed with the Plan
Administrator shall remain in effect for all future
Attendance Years unless the Eligible Director files a
change in his Deferral Election. A change in Deferral
Election will not be effective with respect to an
Attendance Year unless the change in Deferral Election
is filed with the Plan Administrator on or before
October 31 of the calendar year immediately preceding
the Attendance Year.
(h) A Participant may make a one-time election with
respect to each Deferred Compensation Account after the
Participant's Deferral Election with respect to such
Deferred Compensation Account to extend the
Distribution Date; provided that an election under this
Section 2.2(h) shall be conditioned upon the approval
of the Committee and shall not be effective unless the
Committee approves the election at least one year and
one day before the Distribution Date elected by the
Participant in his Deferral Election.
Section 3
---------
Deferred Compensation Accounts
3.1 Deferred Compensation Accounts. A bookkeeping account
shall be established in the Participant's name for each
Attendance Year for which a Participant defers Fees pursuant to a
Deferral Election ("Deferred Compensation Account"). Amounts
deferred pursuant to a Deferral Election shall be credited to the
Deferred Compensation Account as of the date (the "Deferral
Crediting Date") on which, in the absence of a Deferral Election,
the Participant would otherwise have received the Fees.
3.2 Investment Elections.
A Participant must make an investment election at the time of his
Deferral Election. The investment election shall designate the
portion of the amounts deferred which are to be treated as
invested in each Investment Fund (as defined in Section 3.3
below). A Participant's investment election shall remain in
effect with respect to each subsequent deferral until the
Participant files a change in investment election with the Plan
Administrator. A Participant may change his investment election
either with respect to new deferrals following the change in
investment election (in increments of 1%) or with respect to the
investment allocation of all of the Participant's existing
Deferred Compensation Accounts (in increments of 10%), as the
Participant may elect.
<PAGE>
A change in investment election must be filed with the Plan
Administrator on a form prescribed by the Plan Administrator. A
change in investment election will become effective on the first
business day of the calendar month following the Plan
Administrator's receipt of the change in investment election;
provided that the Plan Administrator receives the change in
investment election no later than the 15th day of the preceding
calendar month (or such earlier or later date as may be permitted
or required by the Plan Administrator).
3.3 Investment Funds.
The "Investment Funds" shall consist of the following two funds:
(a) Prime Rate Fund: An Investment Fund that is
deemed to be invested in an interest bearing account
which is credited with interest at the prime rate of
interest charged by First Bank, N.A. in the manner
described in Section 3.4(a).
(b) Phantom Stock Fund: An Investment Fund that is
deemed to be invested in common stock of the Company
("Company Stock").
The Plan Administrator may, in his sole discretion,
designate additional Investment Funds which provide a rate of
return equal to the rate of return that the Eligible Director
would earn if the amounts credited to such Investment Fund were
invested in a mutual fund, insurance company separate account or
such other investment vehicle designated by the Plan
Administrator.
3.4 Valuation of Investment Funds.
As of the last business day of each calendar month (or such
other dates as the Plan Administrator, in his discretion, may
designate) ("Valuation Date"), each Participant's Deferred
Compensation Account will be credited with income, gains and
deposits and charged with losses and distributions equal to the
amount by which the Deferred Compensation Account would have been
credited or charged since the prior Valuation Date had the
Participant's Deferred Compensation Account been invested in the
Investment Funds selected by the Participant in accordance with
the Participant's investment elections. The manner in which a
Participant's deemed investment in each Investment Fund is
calculated is described below.
<PAGE>
(a) Prime Rate Fund. The value of the portion of the
Participant's Deferred Contribution Account deemed to
be invested in the Prime Rate Fund as of a Valuation
Date shall equal the Participant's deemed account
balance in such fund as of the immediately preceding
Valuation Date plus interest and deposits credited to
the account since the immediately preceding Valuation
Date and reduced by distributions since such preceding
Valuation Date.
As of each Valuation Date, interest shall be
credited to the portion of the Participant's Deferred
Compensation Account deemed to be invested in the Prime
Rate Fund at the prime rate of interest charged by
First Bank, N.A. in effect as of the Valuation Date for
average daily balances (determined without regard to
any interest credited to the Deferred Compensation
Account during the calendar year containing such
Valuation Date) for the period commencing the day after
the later of the immediately preceding Valuation Date,
and ending on the Valuation Date calculated on the
basis of a three hundred sixty (360) day year
compounded annually.
(b) Phantom Stock Fund. The value of the
Participant's Deferred Contribution Account treated as
invested in the Phantom Stock Fund as of a Valuation
Date shall equal the fair market value of the shares of
the Company Stock deemed to be credited to the
Participant's Deferred Compensation Account on such
Valuation Date.
Dividends shall be deemed to be reinvested in
shares of Company Stock valued at fair market value as
of the record date for the dividend.
The portion of any Fees deferred that a
Participant designates for investment in the Phantom
Stock Fund shall be deemed to be invested in Company
Stock valued at fair market value as of the Deferral
Crediting Date.
The amount transferred into the Phantom Stock
Fund pursuant to a change in investment election shall
be deemed to be invested in Company Stock valued at
fair market value as of the Valuation Date on which
such investment election becomes effective.
For purposes of this subsection (b), the fair
market value of a share of Company Stock as of any day
shall mean the closing price of Company Stock on the
New York Stock Exchange on such day (or the last
business day preceding such day on which Company Stock
was traded).
<PAGE>
(c) If the Plan Administrator designates one or more
additional Investment Funds, the Plan Administrator
shall establish a valuation and income crediting
methodology for determining the value of the portion of
a Deferred Contribution Account treated as invested in
such Investment Fund which methodology shall be similar
to the methodology described in subsection (b) above.
3.5 Vesting. A Participant shall be fully vested at all
times in the balance of his Deferred Compensation Account.
Section 4
---------
Payment of Benefits
4.1 Time and Method of Payment. Payment of a Participant's
Deferred Compensation Account shall be made in the form of a
single lump sum or shall commence in the form of installments as
elected by the Participant in his Deferral Election.
Notwithstanding the foregoing, a Participant may make a one-time
election with respect to each Deferred Contribution Account to
change the form of payment previously elected by the Participant;
provided that an election under this Section 4.1 shall be
conditioned upon the approval of the Committee and shall not be
effective unless the Committee approves the election at least one
year and one day before the Eligible Director's Distribution
Date. A Participant who makes an election pursuant to this
Section 4.1 to receive payment of his Deferred Compensation
Account in the form of installments shall designate the number of
years, up to a maximum of ten years, over which the installments
will be paid.
If a Participant's Deferred Compensation Account is payable
in a single lump sum, the payment shall be made within 30 days
after the Valuation Date coinciding with or next following the
Participant's Distribution Date in an amount equal to the value
of the Participant's Deferred Compensation Account as of the
Valuation Date coinciding with or immediately preceding the date
on which the balance of the Deferred Compensation Account is paid
to the Participant.
If a Participant's Deferred Compensation Account is payable
in the form of installment payments, then the Participant's
Deferred Compensation Account shall be paid in substantially
equal annual installments over the period elected by the
Participant; provided that the number of annual installments
shall not exceed the Participant's Deferred Compensation Account
<PAGE>
balance as of the Valuation Date coinciding with or next
following the Distribution Date divided by $1,000 (rounded down
to the next whole number). If the Participant's entire Deferred
Compensation Account balance is less than $1,000 as of the
Valuation Date coinciding with or next following the Distribution
Date it will be distributed in a single lump payment. The
initial installment payment shall be paid within 30 days after
the Valuation Date coinciding with or next following the
Participant's Distribution Date. Subsequent installment payments
shall be paid each January commencing with the first January
following the Participant's Distribution Date.
Each installment payment shall be computed by dividing the
balance of the Participant's Deferred Compensation Account as of
the Valuation Date coinciding with or immediately preceding the
installment payment date by the number of remaining installment
payments.
4.2 Payment Upon Death of a Participant. Notwithstanding
any election by the Participant regarding the timing and manner
of payment of his Deferred Compensation Account, a Participant's
Deferred Compensation Account shall be paid to the Participant's
Beneficiary (designated in accordance with Section 4.3) in a
single lump sum as soon as practical following the Valuation Date
coinciding with or next following the date of the Participant's
death.
4.3 Beneficiary. A Participant may designate a Beneficiary
or Beneficiaries to receive the balance of the Participant's
Deferral Account in the event the Participant dies before the
payment of his entire Deferred Compensation Account by filing a
written Beneficiary designation with the Plan Administrator on
such form as the Plan Administrator may prescribe. A Participant
may revoke an existing Beneficiary designation by filing another
written Beneficiary designation with the Plan Administrator. The
latest Beneficiary designation received by the Committee shall be
controlling.
If no Beneficiary is named by a Participant or if he
survives all of his named Beneficiaries, the Deferral Account
shall be paid in the following order of precedence:
(1) the Participant's spouse;
(2) the Participant's children (including adopted
children), per stirpes; or
(3) the Participant's estate.
<PAGE>
4.4 Form of Payment. All payments shall be made in cash.
4.5 Withholding of Taxes. The Company may withhold from
payments due under the Plan such amount as it deems proper to
protect the Company against liability for the payment of any
applicable Federal, state or local income or other taxes.
4.6 Limitations for Section 16b Insiders. Notwithstanding
any provision of the Plan, the Plan Administrator may impose such
limitations and restrictions on Participants' investment
elections under Sections 2.2(f) and 3.2 as he deems necessary or
appropriate so that transactions by Participants do not present a
risk of possible liability under Section 16b of the Securities
and Exchange Act of 1934.
Section 5
---------
Miscellaneous
5.1 Funding. Benefits payable under the Plan to any
Participant shall be paid directly by the Company. The Company
shall not be required to fund, or otherwise segregate assets to
be used for payment of benefits under the Plan. While the
Company may make investments (a) in shares of Company Stock
through open market purchases or (b) in other investments in
amounts equal or unequal to Participants' investment elections
hereunder, the Company shall not be under any obligation to make
such investments and any such investment shall remain an asset of
the Company subject to the claims of its general creditors.
Notwithstanding the foregoing, the Company may maintain one or
more grantor trusts ("Trust") to hold assets to be used for
payment of benefits under the Plan. The assets of the Trust
shall remain subject to the claims of the Company's general
creditors. Any payments by a Trust of benefits provided to a
Participant under the Plan shall be considered payment by the
Company and shall discharge the Company of any further liability
under the Plan for such payments.
5.2 Benefit Statements. As soon as practical after the end
of each calendar quarter (or after such additional date or dates
as the Plan Administrator, in its discretion, may designate), the
Plan Administrator shall provide each Participant with a
statement of the balance of each of his Deferred Compensation
Accounts hereunder as of the last day of such calendar quarter
(or as of such other dates as the Plan Administrator, in his
discretion may designate).
<PAGE>
5.3 Interests Not Transferable. Except as to withholding
of any tax under the laws of the United States or any state or
locality and the provisions of Section 4.3, no benefit payable at
any time under the Plan shall be subject in any manner to
alienation, sale, transfer, assignment, pledge, attachment, or
other legal process, or encumbrance of any kind. Any attempt to
alienate, sell, transfer, assign, pledge or otherwise encumber
any such benefits, whether currently or thereafter payable, shall
be void. No person shall, in any manner, be liable for or
subject to the debts or liabilities of any person entitled to
such benefits. If any person shall attempt to, or shall
alienate, sell, transfer, assign, pledge or otherwise encumber
his benefits under the Plan, or if by any reason of his
bankruptcy or other event happening at any time, such benefits
would devolve upon any other person or would not be enjoyed by
the person entitled thereto under the Plan, then the Plan
Administrator, in his discretion, may terminate the interest in
any such benefits of the person entitled thereto under the Plan
and hold or apply them for or to the benefit of such person
entitled thereto under the Plan or his spouse, children or other
dependents, or any of them, in such manner as the Plan
Administrator may deem proper.
5.4 Forfeitures and Unclaimed Amounts. Unclaimed amounts
shall consist of the amounts of the Deferred Compensation Account
of a Participant that cannot be distributed because of the Plan
Administrator's inability, after a reasonable search, to locate a
Participant or his Beneficiary, as applicable, within a period of
two (2) years after the Valuation Date upon which the payment of
benefits become due. Unclaimed amounts shall be forfeited at the
end of such two-year period. These forfeitures will reduce the
obligations of the Company under the Plan. After an unclaimed
amount has been forfeited, the Participant or Beneficiary, as
applicable, shall have no further right to his Deferred
Compensation Account.
5.5 Controlling Law. The law of Minnesota, except its law
with respect to choice of law, shall be controlling in all
matters relating to the Plan to the extent not preempted by
ERISA.
5.6 Gender and Number. Words in the masculine gender shall
include the feminine, and the plural shall include the singular
and the singular shall include the plural.
5.7 Action by the Company. Except as otherwise
specifically provided herein, any action required of or permitted
by the Company under the Plan shall be by resolution of either
the Board of Directors or the Committee or by action of such
person(s) authorized by resolution of the Board of Directors or
the Committee.
<PAGE>
Section 6
---------
Amendment and Termination
The Company intends the Plan to be permanent, but reserves
the right at any time to modify, amend or terminate the Plan,
provided, however, that any amendment or termination of the Plan
shall not reduce or eliminate any Deferred Compensation Account
accrued through the date of such amendment or termination. Upon
termination of the Plan, the Company may elect either (a) to
continue making payments of Deferred Compensation Accounts in
accordance with the terms of the Deferral Elections in effect at
the time of the termination and crediting Participant's Deferred
Compensation Accounts with income and gains and charging their
Deferred Compensation Accounts for losses and distributions in
accordance with Section 3.4, or (b) to distribute the
Participant's Deferred Compensation Accounts in a single lump
sum.
Executed this 31st day of December, 1996.
THE ST. PAUL COMPANIES, INC.
By: /s/ Greg A. Lee
-----------
Greg A. Lee
Title: Senior Vice President -
Human Resources
<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,
---------------------------
1996 1995 1994
----- ----- -----
INCOME AVAILABLE TO COMMON SHARES:
PRIMARY
Net income, as reported $450,099 $521,209 $442,828
Adjusted for:
Preferred dividends (net of taxes) (8,664) (8,582) (8,448)
Premium on preferred shares redeemed (1,033) (823) -
------- ------- -------
Net income available to common shares $440,402 $511,804 $434,380
======= ======= =======
FULLY DILUTED
Net income, as reported $450,099 $521,209 $442,828
Adjusted for:
Additional PSOP expense (net of taxes)
due to assumed conversion of
preferred stock (3,015) (3,477) (3,782)
Dividends on monthly income preferred
securities (net of taxes) 8,073 5,046 -
Premium on preferred shares redeemed (1,033) (823) -
------- ------- -------
Net income available to common shares $454,124 $521,955 $439,046
======= ======= =======
WEIGHTED AVERAGE SHARES:
PRIMARY
Common shares 83,474 84,385 84,183
Adjusted for:
Outstanding stock options (based on
treasury stock method using average
market price) 945 1,014 633
------- ------- -------
Weighted average, as adjusted 84,419 85,399 84,816
======= ======= =======
FULLY DILUTED
Common shares 83,474 84,385 84,183
Adjusted for:
Assumed conversion of preferred stock 3,969 4,027 4,073
Assumed conversion of monthly income
preferred securities 3,509 2,211 -
Outstanding stock options (based on
treasury stock method using market
price at end of period) 1,088 1,220 811
------- ------- -------
Weighted average, as adjusted 92,040 91,843 89,067
======= ======= =======
EARNINGS PER COMMON SHARE:
Primary $5.22 $5.99 $5.12
======= ======= =======
Fully diluted $4.93 $5.68 $4.93
======= ======= =======
<PAGE>
EXHIBIT 12
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Ratios
(In thousands, except ratios)
Twelve Months Ended
December 31,
---------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
EARNINGS:
Income from continuing
operations before
income taxes $699,136 $669,325 $573,525 $535,235 $207,464
Add: fixed charges 70,802 65,590 58,355 59,881 60,082
Less: capitalized interest - - - - 4,580
------- ------- ------- ------- -------
Income as adjusted $769,938 $734,915 $631,880 $595,116 $262,966
======= ======= ======= ======= =======
FIXED CHARGES AND
PREFERRED DIVIDENDS:
Fixed charges:
Interest costs $ 48,703 $ 46,376 $ 39,659 $ 40,921 $ 40,292
Rental expense (1) 22,099 19,214 18,696 18,960 19,790
------- ------- ------- ------- -------
Total fixed charges 70,802 65,590 58,355 59,881 60,082
Preferred stock dividends 17,863 18,120 18,337 18,488 18,395
Dividend on monthly income
preferred securities 12,420 7,763 - - -
------- ------- ------- ------- -------
Total fixed charges
and preferred
dividends $ 101,085 $ 91,473 $ 76,692 $ 78,369 $ 78,477
======= ======= ======= ======= =======
Ratio of earnings to
fixed charges 10.87 11.20 10.83 9.94 4.38
======= ======= ======= ======= =======
Ratio of earnings to
combined fixed charges
and preferred
stock dividends 7.62 8.03 8.24 7.59 3.35
======= ======= ======= ======= =======
1) Interest portion deemed implicit in total rent expense.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Management's Discussion and Analysis
The St. Paul Companies
INVESTMENT GAINS PUSH PRETAX INCOME TO NEW HIGH;
COMMITMENT TO SELL MINET LOWERS NET INCOME IN 1996
The St. Paul's pretax income from continuing operations grew to a new
high of $699 million in 1996. Pretax realized investment gains of $219
million, a record amount for The St. Paul, mitigated the impact of the
second-most severe catastrophe experience in our history. Our
investment banking-asset management operation, The John Nuveen
Company, recorded its second consecutive year of record earnings amid
challenging conditions in the municipal bond market. After several
years of unsatisfactory results from Minet, we decided in 1996 to exit
the insurance brokerage business and dispose of all of our brokerage
operations. As a result, Minet is classified as a discontinued operation,
and we've restated 1995 and 1994 results to be consistent with our
1996 presentation.
(GRAPHIC IMAGE NO. 1 - SEE APPENDIX)
The 1996 loss from discontinued operations, which included an $89
million after-tax provision for loss on disposal of Minet, pushed net
income down to $450 million, 14% lower than 1995 net income of $521
million.
The following table summarizes our results for each of the last
three years:
(In millions) Year ended December 31
----------------------
1996 1995 1994
---- ---- ----
Pretax income (loss):
Underwriting $686 $652 $561
Investment banking-asset management 92 88 72
Parent company and consolidating eliminations (79) (71) (59)
---- ---- ----
Pretax income from continuing operations 699 669 574
Income tax expense 141 131 114
---- ---- ----
Income from continuing operations 558 538 460
Loss from discontinued operations, net of taxes (108) (17) (17)
---- ---- ----
Net income $450 $521 $443
==== ==== ====
Per share $4.93 $5.68 $4.93
==== ==== ====
<PAGE>
In 1995, earned premium growth, reduced expense levels and strong
investment returns in our underwriting segment drove pretax income
from continuing operations to $669 million, 17% higher than equivalent
1994 income of $574 million. The John Nuveen Company also contributed
to our strong results in 1995.
After-tax operating earnings from continuing operations, which
exclude realized investment gains, totaled $415 million in 1996,
compared with earnings of $481 million and $431 million in 1995 and
1994, respectively.
Common shareholders' equity at the end of 1996 stood at $4 billion,
which translated into a book value per common share of $47.93.
The following table summarizes the source of our consolidated
revenues for the last three years:
(In millions) Year ended December 31
----------------------
1996 1995 1994
---- ---- ----
Revenues:
Premiums earned $4,448 $3,971 $3,412
Net investment income 807 741 673
Investment banking-asset management 220 221 212
Realized investment gains 219 85 42
Other 40 38 29
----- ----- -----
Total revenues $5,734 $5,056 $4,368
===== ===== =====
Change from prior year 13% 16% 5%
===== ===== =====
Earned premium growth of 12% in 1996 was centered in our reinsurance
operation, St. Paul Re, and in our commercial underwriting operations.
Our acquisition of Northbrook Holdings, Inc. and its three commercial
underwriting companies (Northbrook) accounted for $214 million of
incremental earned premiums in 1996. The additional increase in 1996
was more a reflection of the residual effect of strong written premium
growth in 1995 than a significant increase in 1996 volume. Nuveen's
revenues in 1996 were level with 1995, but Nuveen succeeded in
reducing expenses, and the result was a second year of record
earnings. The majority of 1996 realized investment gains originated
from sales of venture capital investments and equity securities.
(GRAPHIC IMAGE NO. 2 - SEE APPENDIX)
In 1995, revenue growth was driven by an increase in earned
premiums, resulting from new business in our commercial underwriting
operations and at St. Paul Re, chiefly due to business acquired from Cigna
Corporation. Our other underwriting business centers also experienced
strong growth in premium revenues in 1995.
<PAGE>
In the following pages, we take a more detailed look at 1996 results
for our underwriting and investment banking-asset management business
segments. We underwrite property-liability insurance through our Worldwide
Insurance Operations organization, which includes St. Paul Fire and
Marine, our U.S. underwriting operation, and St. Paul International
Underwriting. We also underwrite reinsurance through St. Paul Re. We are
involved in the investment banking-asset management industry through
our 78% ownership interest in The John Nuveen Company, based in Chicago.
SEVERE CATASTROPHE LOSSES, COMPETITIVE MARKETS
TAKE TOLL ON UNDERWRITING RESULTS
1996 was characterized by very competitive conditions in virtually all
property-liability insurance and reinsurance markets worldwide. In
that environment, our efforts in 1996 were focused on maintaining our
premium volume without compromising profitability.
Written premiums of $4.40 billion in 1996 were $153 million, or 4%,
higher than 1995 premium volume of $4.24 billion. On July 31, 1996, we
acquired Northbrook from Allstate Insurance Company for approximately
$190 million. Our written premium growth in 1996 was largely due to
$140 million of volume from Northbrook. Medical Services experienced
an $88 million decline in premiums in 1996, which was substantially
offset by premium increases in Personal Insurance and St. Paul Re.
In 1995, written premiums grew 17% over 1994 volume of $3.62
billion. Premium growth in Fire and Marine was centered in the
Specialized Commercial and Commercial operations. At St. Paul Re, the
impact of business acquired from 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.
Our underwriting results in 1996 were dominated by catastrophe
losses of $207 million. In our history, that total was second only to
the $305 million of losses we incurred during 1992 - the Hurricane
Andrew year. 1996 was an unusually active year for weather-related
insured damage. The catastrophes that impacted us in 1996 included
a blizzard on the East Coast; numerous spring and summer storms in the
Midwest; flooding in western and southwestern states; and several
hurricanes, including Hurricane Fran. An increase in noncatastrophe,
but weather-related, loss experience in Personal Insurance was also a
major contributing factor to the deterioration in our 1996
underwriting result.
(GRAPHIC IMAGE NO. 3 - SEE APPENDIX)
<PAGE>
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). With our current
mix of business, we believe our catastrophe experience should fall
between 2.5 and 3.5 points of earned premium in a "normal" year. As
the table indicates, our 1996 experience was well outside of that
range.
(Dollars in millions) Year ended December 31
----------------------
1996 1995 1994
---- ---- ----
Actual:
GAAP underwriting loss $(216) $(103) $(113)
Combined ratio 105.5 101.8 102.3
Adjustment:
Catastrophe losses $(207) $(124) $(105)
Impact on combined ratio 4.6 3.1 3.1
----- ----- -----
Excluding catastrophe losses:
GAAP underwriting result $ (9) $ 21 $ (8)
Combined ratio 100.9 98.7 99.2
===== ===== =====
Our combined ratio (the combination of a loss ratio and an expense ratio)
of 105.5 in 1996 slipped from 1995's 101.8. The loss ratio, which
measures losses and loss adjustment expenses as a percentage of earned
premiums, was 2.5 points worse than 1995. The expense ratio, which
measures underwriting expenses as a percentage of written premiums,
edged up to 30.9 in 1996, reflecting a decline in the written premium
growth rate in 1996 and additional expenses associated with Northbrook
integration efforts. Our expense ratio in 1995 was 29.7.
Despite the severity of underwriting losses in 1996, pretax earnings
in our underwriting segment grew to $686 million, 5% ahead of
comparable 1995 earnings of $652 million. Pretax gains from the sale
of investments totaled $209 million in 1996, nearly three times the
1995 total of $74 million. In addition, investment income generated by
our portfolio in 1996 increased by $64 million over 1995,
approximately $25 million of which was incremental investment income
resulting from the Northbrook acquisition.
In 1995, underwriting pretax earnings were 16% higher than
comparable 1994 earnings of $561 million, primarily due to an
improvement in noncatastrophe underwriting results and an 8% increase
in investment income. Our loss ratio in 1995 was level with 1994, but
the expense ratio improved by one-half point.
<PAGE>
Underwriting Outlook for 1997 - We do not anticipate any significant
improvement in property-liability market conditions in 1997. As a result,
we will focus on maintaining a satisfactory combined ratio while striving to
identify profitable new market niches, particularly in our commercial
operations. Improving our Personal Insurance results will be a top
priority, as will maintaining Medical Services' market leadership
position. We anticipate completing the full integration of Northbrook
into our existing operations in 1997. We expect our International
Underwriting operations to grow more rapidly in 1997 as we pursue new
opportunities in emerging markets around the world.
(GRAPHIC IMAGE NO. 4 - SEE APPENDIX)
(PHOTO IMAGE NO. 1 - SEE APPENDIX)
<PAGE>
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. The table
reflects the reporting format of our underwriting operations in 1996.
Following the table, we take a closer look at each operation's 1996
results and look ahead to 1997.
(Dollars in millions) % of 1996 Year ended December 31
Written ----------------------
Premiums 1996 1995 1994
---- ---- ----
Worldwide Insurance Operations
St. Paul Fire and Marine
Specialized Commercial
Written premiums 29% $ 1,279 $ 1,304 $ 1,086
Underwriting result $ 49 $ (124) $ (89)
Combined ratio 96.2 109.0 107.1
Commercial
Written premiums 18% $ 778 $ 618 $ 530
Underwriting result $ (60) $ (3) $ (63)
Combined ratio 109.9 99.6 111.7
Personal Insurance
Written premiums 17% $ 725 $ 673 $ 635
Underwriting result $ (202) $ (33) $ (26)
Combined ratio 128.2 104.6 103.9
Medical Services
Written premiums 13% $586 $ 674 $ 690
Underwriting result $ 55 $ 76 $ 118
Combined ratio 91.8 86.6 80.3
------ ------ ------
Total St. Paul Fire and Marine
Written premiums 77% $ 3,368 $ 3,269 $ 2,941
Underwriting result $ (158) $ (84) $ (60)
Combined ratio 105.3 101.8 101.0
St. Paul International Underwriting
Written premiums 6% $ 267 $ 261 $ 169
Underwriting result $ (21) $ (23) $ (31)
Combined ratio 108.1 109.4 117.6
------ ------ ------
Total Worldwide Insurance Operations
Written premiums 83% $ 3,635 $ 3,530 $ 3,110
Underwriting result $ (179) $ (107) $ (91)
Combined ratio 105.5 102.4 101.9
St. Paul Re
Written premiums 17% $ 761 $ 713 $ 513
Underwriting result $ (37) $ 4 $ (22)
Combined ratio 105.3 99.1 105.1
------ ------ ------
Total Underwriting
Written premiums 100% $ 4,396 $ 4,243 $ 3,623
Underwriting result $ (216) $ (103) $ (113)
====== ====== ======
Combined ratio:
Loss and loss expense ratio 74.6 72.1 72.1
Underwriting expense ratio 30.9 29.7 30.2
------ ------ ------
Combined ratio 105.5 101.8 102.3
====== ====== ======
Combined ratio including
policyholders' dividends 105.7 102.0 102.3
====== ====== ======
Amounts are on a GAAP basis, except for combined ratios, which are not
derived from our GAAP financial statements.
(GRAPHIC IMAGE NO. 5 - SEE APPENDIX)
<PAGE>
(PHOTO IMAGE NO. 2 - SEE APPENDIX)
WORLDWIDE INSURANCE OPERATIONS
St. Paul Fire and Marine
St. Paul 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.
Fire and Marine ranked as the 14th-largest U.S. property-liability
underwriter based on 1995 premium volume. Its Medical Services
operation ranked as the largest medical liability insurance
underwriter in the United States.
(PHOTO IMAGE NO. 3 - SEE APPENDIX)
St. Paul Fire and Marine
Specialized Commercial
- ----------------------
Specialized Commercial is composed of Custom Markets, which serves
specific commercial customer segments (Financial and Professional
Services, Ocean Marine, Public Sector Services, Surplus Lines and
Technology), and Major Markets, which provides specialized products
and services for targeted industry groups (Construction, Surety,
Manufacturing, Service Industries, National Programs and Transportation).
The results of our Special Property operation and our
participation in insurance pools are also included here.
Premiums - Written premiums in 1996 totaled $1.28 billion, down
slightly from last year's volume of $1.30 billion. New business in
Financial and Professional Services, Surety, Public Sector and Ocean
Marine offset a decline in Construction and Technology volume
resulting from competitive market conditions. After
several years of unsatisfactory results, we withdrew from several
insurance pool arrangements in 1996, which negatively impacted
Specialized Commercial premium volume by $47 million in 1996.
<PAGE>
(PHOTO IMAGE NO. 4 - SEE APPENDIX)
(PHOTO IMAGE NO. 5 - SEE APPENDIX)
Underwriting Result - Specialized Commercial's underwriting profit of
$49 million in 1996 represented a significant turnaround from a loss
of $124 million in 1995. Our withdrawal from several insurance pools
that experienced severe losses in 1995 was the primary cause of the
improvement in 1996 results. Pool results in 1995 were also adversely
impacted by reserve reallocations relating to asbestos and environmental
losses. Financial and Professional Services and Surety posted particularly
strong results in 1996. Results in our Technology operation were
$13 million worse than 1995, due to less favorable loss experience.
We experienced strong premium growth in 1995, and stated then that we
had not relaxed our underwriting standards for the sake of growth. The
strong improvement in our core Specialized Commercial underwriting
results in 1996 reflects our success in identifying and capitalizing
on profitable new business opportunities in the comparatively more
favorable market conditions of 1995.
1995 vs. 1994 - New business initiatives during 1995 in Specialized
Commercial operations fueled a 20% increase in premium volume over
1994, as we obtained a substantial amount of new business and retained
a greater portion of that business. Specialized Commercial's
underwriting loss in 1995 was $35 million worse than 1994's loss of
$89 million, due to a net provision of $31 million for environmental
and asbestos losses on certain business written prior to 1980, and an
increase in losses from our participation in insurance pools. Those
losses masked significant underlying improvement in our Construction
and Technology business sectors.
Outlook for 1997 - We do not anticipate appreciable premium growth in
1997 due to unfavorable conditions in most of the markets served by
Specialized Commercial. We will focus on maintaining current levels of
volume and profitability while continuing to pursue our successful
strategy of identifying and developing insurance products for newly
emerging niches in the commercial marketplace.
(SIDEBAR CAPSULE NO. 1 - SEE APPENDIX)
<PAGE>
(PHOTO IMAGE NO. 6 - SEE APPENDIX)
St. Paul Fire and Marine
Commercial
- ------------------------
Commercial provides property and liability insurance to small to
midsized commercial enterprises. 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, colleges and schools,
manufacturers, wholesalers and processors. The small-commercial
product line includes our Package Accounts for Commercial Enterprises
(PACE) policies for individuals, groups or franchise operations,
including offices, retailers and family restaurants.
Premiums - Premium volume in 1996 increased $160 million, or 26%, over
1995. Our acquisition of Northbrook in July provided $140 million of
incremental written premiums in 1996. Fiercely competitive conditions
in the small and midsized commercial markets in 1996 resulted in
downward pressure on rates, making it very difficult to achieve real
premium growth without sacrificing quality in our book of business. In
that environment, we focused on maintaining a favorable business mix
in 1996. The historically profitable general liability and commercial
auto lines comprised almost half of our Commercial product mix, while
the more volatile workers' compensation line accounted for just 10% of
our business.
Underwriting Result - Commercial's underwriting loss of $60 million in
1996 deteriorated significantly from 1995's loss of $3 million.
Catastrophe losses of $56 million and underwriting losses of $27
million from Northbrook dominated 1996 results. Catastrophe losses in
1995 totaled $30 million. Expenses associated with our initial
Northbrook integration efforts caused the expense ratio to increase to
35.9 in 1996; excluding the Northbrook effect, the expense ratio
improved nearly a point from 1995. We expect the Northbrook business
to positively contribute to our results in 1997 as we selectively
reunderwrite the book of business we acquired.
1995 vs. 1994 - Commercial premiums in 1995 grew 17% over 1994 volume
of $530 million, driven by new business across a wide spectrum of
commercial coverages and higher retention levels. Improved loss
experience in general liability and a reduction in workers'
compensation losses in several states were the major factors
contributing to Commercial's $60 million improvement in underwriting
results in 1995. Expense savings also played a role in the 1995
results, as evidenced by a more than three-point improvement in the
expense ratio.
Outlook for 1997 - We anticipate that competition from other
commercial carriers will remain intense during the coming year. We expect
slow growth in Commercial's core book of business as we selectively target
and price new accounts. However, the incremental impact of Northbrook
should result in significant premium growth overall. Over time, Northbrook
integration efforts should result in a reduced expense ratio. In 1997,
training costs will increase. We'll continue to develop an operationally
efficient model for servicing small commercial accounts.
(SIDEBAR CAPSULE NO. 2 - SEE APPENDIX)
<PAGE>
(PHOTO IMAGE NO. 7 - SEE APPENDIX)
(PHOTO IMAGE NO. 8 - SEE APPENDIX)
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 - Written premiums of $725 million in 1996 were 8% higher
than 1995 volume of $673 million. The increase resulted primarily from
new business in our two package products - PAK II and Combo - which
accounted for $43 million of premium growth in 1996.
Underwriting Result - The Personal Insurance underwriting loss of $202
million in 1996 was significantly worse than 1995's loss of $33
million. In 1996, results were severely impacted by an increase in the
severity of noncatastrophe, but weather-related, losses on current-
year business and adverse development on prior-year business.
Catastrophe losses of $74 million were $54 million higher than last
year, another major factor in the 1996 loss.
1995 vs. 1994 - New business in our PAK II line was the major factor
in the 1995 increase of 6% in premiums over 1994. The Personal
Insurance underwriting loss in 1995 was $7 million worse than 1994's
loss of $26 million, due to a deterioration in loss experience for
several monoline coverages. Catastrophe losses in 1995 were $6 million
less than in 1994.
Outlook for 1997 - We have launched an aggressive 1997 operational
plan aimed at turning around Personal Insurance's poor financial
performance in 1996. We are pursuing several corrective actions that
we believe will significantly improve our combined ratio in 1997.
These measures include improving the quality of our book of business,
implementing effective pricing strategies, increasing the efficiency
of claim handling and reducing expenses.
(SIDEBAR CAPSULE NO. 3 - SEE APPENDIX)
<PAGE>
(PHOTO IMAGE NO. 9 - SEE APPENDIX)
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 $586 million in 1996 were down $88
million, or 13%, from 1995 premiums of $674 million. The decline in
premiums was largely due to our mid-1995 transition to annual policy
terms for a portion of our business, which essentially resulted in a
one-time phenomenon in which 18 months of premiums for about half of our
physicians and surgeons book of business were recorded during 1995. Very
competitive conditions in the medical liability marketplace, which
negatively impacted pricing on existing business and opportunities for new
business, were also a contributing factor to the decline
in premiums in 1996. Premium volume in Major Accounts and Health Care
Facilities was virtually level with 1995. Despite the decline in 1996
premiums, we are holding our own in terms of market share, with the number
of hospital beds and doctors insured slightly above 1995 levels.
Underwriting Result - Medical Services posted an underwriting profit
of $55 million in 1996, down from the 1995 profit of $76 million. The
trend of declining underwriting profits over the last several years is
the result of a sustained period of flat pricing coupled with the
diminishing impact of favorable development on loss reserves
established in prior years. The Health Care Professionals line, which
has been most severely impacted by competitive market pressures,
experienced a $23 million decline in underwriting profits in 1996.
Medical Services nonetheless continued to produce strong results amid
the market challenges it faces - the 1996 result represented its
eighth consecutive annual underwriting profit.
1995 vs. 1994 - Written premiums in 1995 declined 2% from 1994,
reflecting intense competition in the medical liability marketplace
and an industrywide trend toward higher levels of self-insured
retentions on large accounts. Medical Services' 1995 underwriting
profit declined $42 million from 1994's profit of $118 million, due to
a reduction in the extent of favorable development on previously
established loss reserves.
<PAGE>
Outlook for 1997 - The trends of flat pricing and the diminishing
impact of favorable developments with respect to loss reserves
established in prior years are expected to continue in 1997. We
anticipate continued profitability, although our combined ration will
continue to edge higher as the extent of favorable prior-year loss
development diminishes. We expect competitive market conditions to persist
in 1997, hindering our ability to achieve significant premium growth.
Our capability to serve the sophisticated risk-transfer needs of large
national and regional health care entities should serve us well as we keep
pace with the evolving health care delivery system. We will also increase
our emphasis on new product development and introductions in 1997 as
we strive to maintain our leadership position in the medical liability
market.
(SIDEBAR CAPSULE NO. 4 - SEE APPENDIX)
(PHOTO IMAGE NO. 10 - SEE APPENDIX)
WORLDWIDE INSURANCE OPERATIONS
St. Paul International Underwriting
- -----------------------------------
International includes most insurance written outside the United
States. We have a presence as a licensed insurance company in nine countries
in Europe, Africa, Latin America and in Canada. Our participation in
Lloyd's of London as an investor and as the owner of two managing agencies is
also a part of our International operations, as is the arrangement of
insurance programs for multinational clients. International offers a range
of commercial and personal products and services tailored to meet the unique
needs of international customers.
Premiums - Written premiums in 1996 of $267 million grew 3% over 1995
premium volume of $261 million. Much like our U.S. markets,
international property-liability insurance markets are experiencing
competitive conditions, hindering premium growth opportunities.
Premiums generated by our subsidiary Camperdown Corporation, our
vehicle for writing primary business through Lloyd's of London,
increased 9% in 1996. We also recorded premiums of $6 million from our
newly acquired operation in Argentina.
Underwriting Result - International's underwriting loss of $21 million
in 1996 was slightly better than 1995's loss of $23 million. An
improvement in underwriting results in Canada was substantially offset
by deterioration in results from personal insurance in the United
Kingdom.
<PAGE>
1995 vs. 1994 - Written premiums in 1995 grew 54% over 1994, largely
the result of $54 million in initial premiums recorded for Camperdown.
Personal insurance premiums generated in the United Kingdom and
premiums written in Canada also increased over 1994. Underwriting results
improved $8 million in 1995, primarily the result of reduced losses
from personal and commercial business in the United Kingdom.
Outlook for 1997 - Our commitment to international expansion will
continue in 1997, with new operations planned in France, Germany and
Mexico. We will continue to develop regional strategies for emerging
commercial markets in Europe, Latin America and Africa within the
framework of our successful customer-focused underwriting philosophy.
We anticipate additional growth in our international premium volume
through our access to the worldwide markets served by Lloyd's of London.
(SIDEBAR CAPSULE NO. 5 - SEE APPENDIX)
(PHOTO IMAGE NO. 11 - SEE APPENDIX)
Underwriting
St. Paul Re
- ------------
St. Paul Re underwrites reinsurance for leading property-liability
insurance companies worldwide, obtaining business primarily in the
broker or intermediary market. St.Paul Re writes both treaty and
facultative reinsurance for property, liability, ocean marine, surety
and certain specialty classes of coverage.
Premiums - Written premiums of $761 million in 1996 were 7% higher
than 1995, despite competitive market conditions throughout the year,
which put downward pressure on reinsurance rates. North American
property-liability treaty premiums increased in 1996, reflecting
growth in excess-of-loss business as well as a shift on the part of
customers to more financially secure reinsurers. In late 1994, we
acquired the opportunity to renew Cigna Corporation's book of
international business. In 1996, we wrote $128 million of that
business, compared with $119 million in 1995.
Underwriting Result - St. Paul Re's underwriting loss of $37 million
in 1996 reflected an increase in noncatastrophe loss experience
compared with 1995, when we posted a $4 million underwriting profit.
The majority of losses in 1996 were centered in our North American
casualty reinsurance coverages. Over the last few years, we've taken
several measures to reduce the magnitude of catastrophe losses. The
success of that effort was evident in 1996 - our reinsurance
catastrophe losses totaled only $18 million, compared with $37 million
in 1995.
<PAGE>
1995 vs. 1994 - St. Paul Re's 1995 premium volume was $200 million
higher than 1994. The Cigna international reinsurance acquisition
contributed $119 million of incremental premiums in 1995. We also
wrote a significant amount of other new reinsurance business in the
the favorable market conditions of 1995. St. Paul Re's 1995 underwriting
result improved $26 million over 1994, reflecting a decline in losses
on property coverages.
Outlook for 1997 - We will focus on profitability objectives in 1997
amid expectations of continuing competitive pressures in the
reinsurance markets. At the end of 1996, we completed a $69 million
securitized reinsurance transaction that will provide St. Paul Re with
additional catastrophe reinsurance capacity for up to 10 years.
In early 1997, we acquired the right to renew Constitution
Reinsurance Corporation's book of U.S. casualty facultative business,
which we expect will contribute to premium growth in 1997.
(SIDEBAR CAPSULE NO. 6 - SEE APPENDIX)
(PHOTO IMAGE NO. 12 - SEE APPENDIX)
<PAGE>
Underwriting
Loss and Loss Adjustment Expense Reserves
- -----------------------------------------
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 reserves include losses that
have been reported but not settled and losses that have been incurred
but not reported to us (IBNR). Our loss reserves are not discounted,
but they are reduced for estimates of salvage and subrogation.
For reported losses, we establish reserves on a "case" basis within
the parameters of coverage provided in the 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 58. As shown in that
reconciliation, we have recorded reductions in the loss provision for
claims incurred in prior years totaling $252 million, $248 million and
$328 million in 1996, 1995 and 1994, respectively.
(GRAPHIC IMAGE NO. 6 - SEE APPENDIX)
A number of factors have contributed to the favorable development on
previously established reserves, experience which runs contrary to
that of many of our peers in the property-liability insurance
industry. First and foremost, we believe that in general, our
reserving philosophy is more conservative than most others in the
industry. Second, we underwrite more medical liability coverages than
any of our peers, and that business has been a major factor in reserve
reductions 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 on commercial policies
written prior to 1985.
<PAGE>
Favorable prior-year loss development in several of our Specialized
Commercial business sectors, particularly in general liability and
workers' compensation, has been a major factor in our reserve
reductions in the last three years. 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.
Medical Services has also accounted for a significant amount of our
favorable prior-year loss development for the last several years,
although not at the same magnitude as that experienced during the
early 1990s. Our conservative medical liability reserving philosophy
results from the unique nature of these claims. Changes in the
frequency and severity of medical liability claims can occur
suddenly, but it can be several years before we know how those changes
will ultimately impact our claim costs. The current pricing of our Medical
Services' coverages takes into account the favorable loss development
on previously established reserves.
Underwriting
Environmental and Asbestos Claims
- ---------------------------------
We receive claims under policies underwritten many years ago alleging
injuries from environmental pollution or alleging covered property
damages for the cost to clean up polluted sites. We also receive
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. In addition, variables, such as
the length of time necessary to clean up a polluted site,
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 claim
experience, both of which are still developing.
<PAGE>
In 1994, we specifically reallocated, for environmental and asbestos
claims, a portion of our previously established IBNR reserves. Prior to that,
we made no specific allocation of our IBNR reserves for these claims, but
rather identified reserves only for reported claims.
In 1995, we recorded additional gross reserves of $360 million and
specifically reallocated $113 million of previously recorded net
reserves for North American environmental and asbestos losses on
policies written in the United Kingdom prior to 1980.
The following table represents a reconciliation of total gross and
net environmental reserve development for each of the years in the
three-year period ended Dec. 31, 1996. Amounts in the "net" column are
reduced by reinsurance recoverable.
(In millions) 1996 1995 1994
----------- ----------- -----------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
ENVIRONMENTAL
Beginning reserves $528 $319 $275 $200 $105 $ 73
Northbrook reserves acquired 18 7 - - - -
Incurred losses 67 72 59 68 71 56
Reserve reallocation - - 233 79 132 95
Paid losses (32) (30) (39) (28) (33) (24)
--- --- --- --- --- ---
Ending reserves $581 $368 $528 $319 $275 $200
=== === === === === ===
Many significant environmental claims 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.
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, 1996. Gross and net incurred
losses in 1995 are negative because of favorable loss development in
our U.S. commercial business.
<PAGE>
(In millions) 1996 1995 1994
----------- ----------- -----------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
ASBESTOS
Beginning reserves $283 $158 $185 $145 $ 62 $ 48
Northbrook reserves acquired 6 6 - - - -
Incurred losses 12 18 (13) (9) 13 14
Reserve reallocation - - 127 34 127 95
Paid losses (23) (13) (16) (12) (17) (12)
--- --- --- --- --- ---
Ending reserves $278 $169 $283 $158 $185 $145
=== === === === === ===
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 used the industry
standard absolute pollution exclusion, which we believe applies to
asbestos claims.
Based on all information currently available to us, our reserves for
environmental and asbestos losses as of Dec. 31, 1996, represent our
best estimate of our ultimate liability for such losses. Because of
the difficulty inherent in estimating such losses, however, 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 as of Dec. 31, 1996,
of $859 million represented approximately 7% of gross consolidated
reserves of $11.67 billion.
<PAGE>
Underwriting
Legal Matters
- -------------
In 1996, we settled two significant lawsuits on which we have
previously reported. In May 1995, three of our subsidiaries were
served with a purported class action lawsuit brought in the District
Court of Brazoria County, Texas, on behalf of persons who had
purchased interests in certain limited partnerships for which Damson
Oil Corporation served as general partner. The plaintiffs subsequently
demanded $400 million of alleged actual damages and attorneys' fees to
settle their claims. We settled all claims and related expenses
associated with this lawsuit in 1996.
In 1993, the Superior Court of California entered judgment in an
action brought against St. Paul Fire and Marine in 1987 by Arntz
Contracting Company and certain affiliates. The judgment affirmed a
jury's award of approximately $16.5 million in compensatory damages
and $100 million in punitive damages. That portion of the judgment
granting punitive damages was subsequently vacated. In 1996, we
settled all claims associated with this lawsuit.
We are not aware of any legal matters that might have a material
impact on our overall financial position.
Underwriting
Investments
- ------------
Fixed maturity investments, consisting of securities issued by
government agencies, corporate bonds and municipal tax-exempt
securities, account for 84% of our underwriting operations' investment
portfolio. We maintain a widely diversified, high-quality fixed
maturity portfolio structured to maximize investment income while
minimizing credit risk. In an effort to provide for long-term growth
in the value of our investment portfolio and ultimately enhance
shareholder value, we also invest in equity securities, venture
capital and real estate. These investment classes have the potential
for higher returns but also involve a greater degree of risk,
including less stable rates of return and less liquidity. We have been
involved with derivative financial instruments on a limited basis for
purposes of hedging against fluctuations in interest rates.
(GRAPHIC IMAGE NO. 7 - SEE APPENDIX)
<PAGE>
Pretax investment income in our underwriting operations totaled $795
million in 1996, 9% higher than 1995 income of $731 million. Our
acquisition of Northbrook in July 1996, which added $1.14 billion of
high-quality fixed maturities to our portfolio, accounted for
approximately $25 million of incremental investment income in 1996.
Investment income in 1995 grew 8% over the 1994 total of $675 million.
Funds provided by underwriting cash flows and investment cash flows
are the source of growth in our investment portfolio. Underwriting
cash flows consist of the excess of premiums collected over losses and
expenses paid. Investment cash flows consist of income on existing
investments and proceeds from sales and maturities of investments.
Underwriting cash flows declined in 1996 due to a reduction in the
rate of written premium growth and an increase in insurance loss
payments due to catastrophes. Investment cash flows, however, remained
strong in 1996 and were the primary contributor to the growth in our
invested assets (excluding the impact of Northbrook).
(PHOTO IMAGE NO. 13 - SEE APPENDIX)
Strong capital markets in 1996 contributed to record-high realized
gains from the sale of investments and an increase in the unrealized
appreciation of our venture capital and equity security investment
classes. Virtually all of the $209 million of pretax realized gains
in 1996 originated from sales of venture capital and equity
securities. Pretax realized gains in 1995 and 1994 were $74 million
and $36 million, respectively.
The following table provides a look at the composition and carrying
value of our underwriting segment's investment portfolio at the end of
the last three years, followed by additional information about each of
our major investment classes.
(In millions) December 31
------------------------
1996 1995 1994
---- ---- ----
Fixed maturities $11,908 $10,395 $ 8,938
Equities 768 659 490
Real estate 694 612 528
Venture capital 586 389 330
Short-term investments 193 318 342
Other investments 43 42 47
------ ------ ------
Total investments $14,192 $12,415 $10,675
====== ====== ======
<PAGE>
Fixed Maturities - The fixed maturities portfolio is composed of high-
quality, intermediate-term taxable U.S. government agency and
corporate bonds and tax-exempt U.S. municipal bonds. We manage our
fixed maturity portfolio conservatively, investing almost exclusively
in investment-grade (BBB or better) securities. Approximately 96% of
our portfolio at the end of 1996 was rated at investment grade, with
the remaining 4% consisting of nonrated securities, most of which, in
our opinion, would be considered investment grade if rated. Our
consolidated tax position, along with the yield relationship between
taxable and tax-exempt securities, are the predominant factors in
determining the mix of our taxable and tax-exempt security purchases.
Taxable bonds, which accounted for the majority of our new investment
purchases in 1996, comprised 57% of our fixed maturity portfolio at
the end of 1996.
(GRAPHIC IMAGE NO. 8 - SEE APPENDIX)
Since the end of 1993, we've carried fixed maturities on our balance sheet
at market value, with the corresponding appreciation or depreciation recorded
in shareholders' equity net of taxes. The extent of actual growth in
these invested assets is distorted by fluctuations in their market
value, which largely result from changes in the relationship between
the stated yields of securities we own and prevailing market yields at
any given time. Movement in market interest rates
and anticipated future trends in market yields can quickly and
significantly impact bond values, resulting in substantial swings in
carrying value over a relatively short period of time. While there was
a lack of significant actual interest rate movement in 1996, a variety
of conflicting economic indicators caused uncertainty in the bond
markets, and the result was a decline in bond values.
At the end of 1996, the pretax unrealized appreciation on our fixed
maturities portfolio of $483 million was down from comparable 1995
appreciation of $682 million despite a $1.71 billion increase in the
amortized cost of investments. Conversely, after a year of declining
interest rates in 1995, the unrealized appreciation of fixed
maturities by the end of 1995 was $760 million higher than the previous
year. The amortized cost of fixed maturity investments at the end of 1996,
1995 and 1994, which excludes market appreciation and depreciation, was
$11.42 billion, $9.71 billion and $9.02 billion, respectively. The growth in
1996 reflected the impact of the Northbrook acquisition and strong
operational cash flows, which fueled net purchases of $571 million of
new securities in 1996.
<PAGE>
Fixed maturities produced investment income of $738 million in 1996,
compared with $672 million in 1995 and $637 million in 1994. The fixed
maturities portfolio carried a weighted average pretax yield of 7.0%
and had a weighted average maturity period of 9.1 years at the end of
1996.
Equities - Our equity holdings account for 5% of the underwriting
segment's total investments and consist of a diversified portfolio of
common stocks. Favorable stock market conditions in 1996 resulted in
sizable growth in both realized and unrealized gains, translating into
a 23% total return on our portfolio. Pretax realized gains from the
sale of equities in 1996 totaled $122 million, and the carrying value
of our portfolio at year-end included $177 million of pretax
unrealized appreciation. Realized gains in 1995 and 1994 were $43
million and $20 million, respectively. Dividend income in 1996 totaled
$15 million, compared with $14 million in 1995 and $13 million in
1994. Our carrying value at the end of 1995 included $157 million of
unrealized appreciation.
Real Estate - Real estate comprises 5% of our total investments. Our
investments in this asset class primarily consist of commercial office
and warehouse properties that we own directly or in which we have a
partial interest through joint ventures. Our properties are
geographically distributed throughout the United States. We do not
invest in real estate mortgage loans, but a warehouse complex we
purchased in 1996 is subject to a $13.2 million mortgage. The mortgage
is included in our debt outstanding at the end of 1996. Pretax
investment income from real estate totaled $36 million in 1996,
compared with income of $33 million in 1995 and $28 million in 1994.
Operational cash flows from our real estate investments were $62
million in 1996, compared with $60 million in 1995 and $51 million in
1994.
(GRAPHIC IMAGE NO. 9 - SEE APPENDIX)
Venture Capital - This investment class comprises only 4% of our total
invested assets at the end of 1996, but accounted for a significant
portion of both our realized and unrealized gains during the year.
These private investments span a variety of industries but are
concentrated in information technology, health care and consumer
products. Pretax realized gains for the year totaled $86 million,
compared with $38 million in 1995 and $18 million in 1994. The
carrying value of this portfolio at year-end 1996 included $292
million of unrealized appreciation, representing 100% growth over the
cost of these investments.
Outlook for 1997 - We anticipate pretax investment income growth to
fall in the upper single-digit range, unless interest rates or
operational cash flows differ significantly from our expectations. 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. In 1996, we took steps to
expand our international equity investment portfolio, and we
anticipate continuing that effort in 1997.
<PAGE>
(PHOTO IMAGE NO. 14 - SEE APPENDIX)
NUVEEN POSTS SECOND CONSECUTIVE
YEAR OF RECORD EARNINGS
Investment Banking-Asset Management
The John Nuveen Company
- ------------------------------------
The John Nuveen Company comprises our investment banking-asset
management business segment. Nuveen's core businesses are asset
management; the development, marketing and distribution of investment
products; and municipal and corporate investment banking services.
Nuveen markets open-end and closed-end (exchange-traded) mutual funds
as well as individual managed accounts. Nuveen also provides municipal
and corporate investment banking services and underwrites and trades
municipal bonds. We held a 78% ownership interest in Nuveen at the end
of 1996.
The John Nuveen Company posted its second consecutive year of record
earnings in 1996 amid challenging conditions in the municipal bond
markets. Nuveen's 1996 pretax earnings totaled $118 million, slightly
higher than earnings of $114 million in 1995. Our portion of Nuveen's
pretax earnings in 1996 was $92 million, compared with $88 million in
1995.
(SIDEBAR CAPSULE NO. 7 - SEE APPENDIX)
Nuveen's total revenues of $232 million (including investment
income) in 1996 were slightly below the 1995 total of $236 million.
The strength of the stock market, coupled with investor uncertainty
about interest rate movements in 1996, lessened market
demand for municipal bond funds and trusts. As a result, Nuveen's
underwriting and distribution revenues were down slightly
from 1995. Profits recognized on securities held for sale
declined $5 million from 1995 levels, reflecting the less favorable
interest rate environment in 1996. Asset management fee revenues of
$186 million in 1996 increased $3 million over 1995. Total expenses in
1996 declined $7 million from 1995, primarily due to a reduction
in operating expenses.
Assets under management totaled $33.19 billion at the end of 1996,
slightly higher than 1995. Nuveen became involved in managing equity
securities for the first time in 1996, successfully introducing
the Nuveen Growth and Income Stock Fund, which generated nearly
$500 million of new assets under management by year-end.
Institutional Capital Corporation, an institutional equity
manager in which Nuveen holds preferred stock convertible into a 20%
interest, serves as subadviser to and manages the investments of this
fund.
<PAGE>
In early 1997, Nuveen completed its acquisition of Flagship
Resources Inc., a tax-exempt mutual fund and money management firm,
which added $4.6 billion to Nuveen's assets under management. The
total cost of the Flagship acquisition was $63 million, plus as much
as $20 million contingent upon meeting future growth targets.
Nuveen repurchased and retired 3.8 million of its common shares in
1996 for a total cost of $101 million. The repurchases were proportioned
between our holdings and those of minority shareholders to maintain
our 78% ownership interest in Nuveen. Our total proceeds from Nuveen's
repurchase were $74 million.
In 1995, Nuveen's pretax earnings of $114 million grew 20% over 1994
earnings of $95 million, largely due to gains recognized from changes
in the market value of tax-free securities held for sale to investors.
Those pretax gains totaled $5 million in the declining interest rate
environment of 1995, compared with pretax losses of $8 million
on its inventory holdings in 1994. This turnaround in inventory
profits and successful efforts to reduce costs accounted
for the improvement in Nuveen's 1995 results. Nuveen's assets
under management at the end of 1995 were $2.65 billion higher
than the previous year, largely due to an increase in the market value
of underlying fund investments.
<PAGE>
SHAREHOLDERS' EQUITY EXCEEDS $4 BILLION,
DEBT REMAINS AT CONSERVATIVE LEVEL
The St. Paul Companies
Capital Resources
- ----------------------
(GRAPHIC IMAGE NO. 10 - SEE APPENDIX)
Capital resources represent those funds deployed or available to be
deployed to support our business operations and are composed of
shareholders' equity, debt and monthly income preferred securities.
The following table summarizes our capital resources at the end of the
last three years:
(In millions) December 31
------------------------
1996 1995 1994
---- ---- ----
Shareholders' equity:
Common shareholders' equity:
Common stock and retained earnings $3,412 $3,165 $2,808
Unrealized appreciation of investments 617 628 14
ESOP obligation and unrealized
foreign exchange loss (41) (74) (89)
----- ----- -----
Total common shareholders' equity 3,988 3,719 2,733
Preferred shareholders' equity 16 11 4
----- ----- -----
Total shareholders' equity 4,004 3,730 2,737
Debt 689 697 616
Company-obligated mandatorily
redeemable preferred securities
of St. Paul Capital L.L.C. 207 207 -
----- ----- -----
Total capitalization $4,900 $4,634 $3,353
===== ===== =====
Ratio of debt to total capitalization 14% 15% 18%
===== ===== =====
Net income of $450 million in 1996 pushed our shareholders' equity
past the $4 billion mark for the first time. The after-tax appreciation of
our investments at the end of 1996 was virtually unchanged from 1995, as a
decline in the market value of our fixed maturity holdings was offset by
strong growth in the unrealized appreciation of our equity and venture
capital portfolios. In 1996, we returned nearly $220 million of
capital to shareholders, in the form of common dividends and share
repurchases.
<PAGE>
In 1995, total capitalization grew by nearly $1.28 billion over 1994
due to growth in unrealized appreciation, our record earnings and the
issuance of convertible monthly income preferred securities (MIPS). We
used the $207 million of MIPS proceeds to pay down commercial paper
debt and for general corporate purposes.
At the end of 1996, our debt outstanding totaled $689 million, down
slightly from year-end 1995. We filed a shelf registration statement
with the Securities and Exchange Commission in 1996, which gave us the
capacity to issue up to $275 million of additional debt. We
subsequently issued $33 million of medium-term notes under this
registration statement, bringing our total medium-term debt to $430
million. Proceeds from the notes issued in 1996 were used for
general corporate purposes and for paying down commercial paper
outstanding. Medium-term notes account for over 60% of debt
outstanding at year-end 1996 and bear a weighted average interest rate
of 7.1%. At the end of 1996, we had the capacity to issue an
additional $242 million of debt under the shelf registration. We may
issue additional debt in 1997.
At the end of 1995, debt outstanding was 13% higher than a year
earlier, due to the issuance of medium-term notes during the year.
We paid common shareholder dividends of $144 million in 1996,
compared with dividends of $133 million and $125 million in 1995 and
1994, respectively. In February 1997, our board of directors increased
our common dividend rate to $1.88 per share, representing the 11th
consecutive year of dividend rate increases. We have paid dividends
without interruption for the last 125 years, and our dividend rate has
grown at a compound rate of 7% over the last five years.
(GRAPHIC IMAGE NO. 11 - SEE APPENDIX)
We purchased Northbrook Holdings, Inc. from Allstate Insurance
Company in 1996 for a total cost of approximately $190 million. The
acquisition was financed with internally generated funds.
We repurchased 1.4 million of our common shares in 1996 for a total
cost of $74 million. We also repurchased 778,000 shares in 1995 and
860,000 shares in 1994 for total costs of $42 million and $34 million,
respectively. The share repurchases in the last three years were
funded internally and were consistent with our goal of enhancing
shareholder value through the sound use of our capital. We may
continue to repurchase our shares from time to time in the future.
We do not anticipate any major capital expenditures in 1997, 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 1997. We anticipate funding the maturity of
our $100 million, 9 3/8% notes in June 1997 either through the issuance
of new debt or internally generated funds.
<PAGE>
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 losses 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, through the sale of readily marketable
fixed maturities, equity securities and short-term investments, as
well as longer-term investments that have appreciated in value.
Underwriting's net positive cash flows from underwriting and
investment activities 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 $650 million
(not including increases in market value and the Northbrook
acquisition) in 1996.
(GRAPHIC IMAGE NO. 12 - SEE APPENDIX)
Because of the nature of our underwriting operations, where premiums
are collected and invested in most cases before related losses are
paid, we believe long-term liquidity requirements beyond 1997 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.
The $89 million provision for loss on disposal of discontinued
operations recorded in 1996 was a noncash charge and did not impact
our consolidated liquidity position.
Cash flows from operations were $970 million in 1996, compared with
$906 million in 1995 and $900 million in 1994. Our underwriting
segment's operational cash flows in 1996 were slightly below 1995
levels, as an increase in insurance loss payments due to catastrophes
was substantially offset by growth in premium revenues and in investment
income. The John Nuveen Company experienced strong growth in operational cash
flows in 1996, accounting for the increase in our consolidated total
for the year.
In 1995, cash flows from our underwriting segment were virtually
level with 1994, but The John Nuveen Company's cash flows were down $20
million from 1994.
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 both 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.
<PAGE>
APPENDIX TO ITEM 7 - NARRATIVE DESCRIPTION OF GRAPHIC AND
PHOTO IMAGES AND SIDEBAR CAPSULES 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 from
Continuing Operations per Common Share for the
years 1992 through 1996.
1992: $1.06
1993: $4.50
1994: $4.80
1995: $5.25
1996: $4.55
CAPTION: "Severe catastrophe losses in 1996 contributed to the
drop in operating earnings, after three record
years."
GRAPHIC IMAGE NO. 2 - Bar graph depicting Return on Beginning Equity
for the years 1992 through 1996.
1992: 3.6%
1993: 18.1%
1994: 14.1%
1995: 17.3%
1996: 10.9%
CAPTION: "We calculate return on equity by dividing operating
earnings (less preferred dividends) by common
shareholders' equity at the beginning of the year."
GRAPHIC IMAGE NO. 3 - Bar graph depicting Underwriting Operations
Written Premiums for the years 1992 through 1996.
(in billions)
1992: $3.1
1993: $3.2
1994: $3.6
1995: $4.2
1996: $4.4
CAPTION: "Written premium growth in 1996 was largely due to our
acquisition of Northbrook. Premium increases in
Personal Insurance and at St. Paul Re also
contributed to growth in 1996."
<PAGE>
GRAPHIC IMAGE NO. 4 - Pie chart depicting Underwriting Operations
Premium Distribution in 1996.
Specialized Commercial 29%
Commercial 18%
Personal Insurance 17%
Medical Services 13%
International Underwriting 6%
St. Paul Re 17%
CAPTION: "Our underwriting operations, which produced $4.4 billion
in written premiums in 1996, offer a wide range of
insurance products and services."
PHOTO IMAGE NO. 1 - Photo of two individuals at oil well.
CAPTION: "Sometimes, finding insurance coverage can be as
hard as, well, finding oil. St. Paul Athena,
part of St. Paul Fire and Marine's surplus lines
underwriting operation, is in the business of
insuring unique and hard-to-place risks. The
energy market niche - primarily oil and natural
gas drilling operations - has long been a core
business for Athena and is its single largest
program. The Hickman Drilling Company has been a
St. Paul Fire and Marine policyholder since 1991.
Here, Hickman Rig No. 3 is searching for oil in a
small canyon a few miles from the Caddo Jake
Bridge in Hinton, Okla. St. Paul Athena's Barb
Hadler, manager-casualty, and Mike Schaff,
manager-property, oversee the underwriting of the
Hickman account. Some of its customized features
include property coverage for physical damage to
the rig and "control of well" coverage to get a
well under control and back on line in the case
of an underground or above ground blow-out.
Liability coverages include general liability,
umbrella and pollution, which pays for the
cleanup caused by "sudden and accidental"
pollution of land - a common coverage for a rare
occurrence. Long after starting in the oil
drilling business in 1943, H.C. "Red" Hickman
founded his own company 22 years ago in Woodward,
Okla."
<PAGE>
GRAPHIC IMAGE NO. 5 - Bar graph depicting Underwriting
Operations Combined Ratio for the years
1992 through 1996.
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
Loss ratio 85.6 72.5 72.1 72.1 74.6
Expense ratio 32.2 32.0 30.2 29.7 30.9
----- ----- ----- ----- -----
Combined ratio 117.8 104.5 102.3 101.8 105.5
===== ===== ===== ===== =====
CAPTION: "Pretax catastrophe losses of $207 million were a
major factor in the increase in our 1996 combined
ratio. (The lower the combined ratio, the better
the result.)"
PHOTO IMAGE NO. 2 - Photo of Mr. Patrick A. Thiele
President and Chief Executive Officer,
Worldwide Insurance Operations
CAPTION: "Our goal in 1997, as it is every year, is
profitable growth. I believe we'll achieve that
goal in three ways: efficiency improvements,
human resources development and by leveraging new
business opportunities. We need to continually
refresh our portfolio of businesses since there
is a life cycle to each of them. We have to
ensure that we have new business units coming in
the front door as others mature."
PHOTO IMAGE NO. 3 - Photo of Mr. Michael J. Conroy
Executive Vice President,
Chief Administrative Officer,
St. Paul Fire and Marine
CAPTION: "We were hit hard by a number of storm losses in
1996. If we have a 'normal' catastrophe year in
1997, our results should improve. Market
conditions continue to be extremely competitive.
We'll succeed if we stay focused and maintain
traditional underwriting standards and pricing
discipline."
<PAGE>
PHOTO IMAGE NO. 4 - Photo of Ms. Susan J. Albrecht
President, Major Markets
Specialized Commercial
St. Paul Fire and Marine
CAPTION: "1996 was a year of organizational redesign. In
1997, we will execute our plans. We'll continue
to integrate our new underwriting niches, retain
and grow business in our defined markets, and
measure our service delivery to our large
customers. Our pace and execution will accelerate
as we continue to penetrate the large account
market."
PHOTO IMAGE NO. 5 - Photo of Ms. Janet R. Nelson
President, Custom Markets
Specialized Commercial
St. Paul Fire and Marine
CAPTION: "We recognize that the extremely competitive
marketplace will put significant pressure on
Custom Markets to maintain acceptable levels of
profitability in 1997. However, we're always
finding new growth areas that fit well with our
niche strategy. These pockets of opportunity,
coupled with our ongoing productivity efforts,
will be critical to achieving our goals in 1997."
SIDEBAR CAPSULE NO. 1 - Specialized Commercial
----------------------
Major Markets
- -------------
"St. Paul Construction underwrites 80 of the 'Engineering
News Record' Top 400 construction accounts in the United
States."
"In an effort to enhance claim service to its national
customers, Major Markets created the position of claim
service coordinator in 14 locations."
Custom Markets
- --------------
"Technology continues to increase its presence in the
international arena. In 1996, premium for international
exposures of U.S.-based Technology accounts grew 34
percent."
"Public Sector Services continued to strengthen its presence
and reputation as a provider of property and liability
insurance for a variety of government entities."
<PAGE>
PHOTO IMAGE NO. 6 - Photo of Mr. James A. Schulte
President, Commercial
St. Paul Fire and Marine
CAPTION: "In 1997, Commercial will be heavily involved in
executing Northbrook integration plans throughout
our 12 regions. On the small commercial side,
we'll continue to focus on the development of new
products and more efficient processes."
SIDEBAR CAPSULE NO. 2 - Commercial
----------
"The acquisition of Northbrook moves St. Paul Commercial
closer to its goal of becoming a major force in the U.S.
commercial insurance market for small to midsized
businesses."
"Our small-commercial insurance operation introduced agency
interface and an automated rating disk to selected agents in
1996. Agents who have completed interface training indicated
that this system is user-friendly and efficient."
"All commercial account managers and team leaders completed
a sales training program in 1996. The objectives of the
program were to improve relationships between agents and
underwriting team members and to help team members better
sell the benefits of doing business with Commercial and St.
Paul Fire and Marine."
PHOTO IMAGE NO. 7 - Photo of individuals in restaurant.
CAPTION: "Niche marketing - packaging specialized
underwriting expertise, processing systems and
distribution strategies to match a specific type
of customer and gain a competitive advantage -
has been a hallmark of The St. Paul's success.
One of St. Paul Fire and Marine's Major Markets
niches is Service Industries - including the
retail, wholesale, insurance, property
management, entertainment, hospitality and
automobile leasing markets. Seated in the
restaurant of the Wyndham Garden Hotel in
Bloomington, Minn., is The St. Paul's Lezlie
Taylor, vice president-service industries. St.
Paul Fire and Marine began underwriting general
liability and commercial auto coverage for
Wyndham in 1990. Headquartered in Dallas,
Wyndham Hotel Corporation has more than 80
locations in the United States, Canada and the
Caribbean. Wyndham has focused on developing a
brand name that is recognized in the upscale
hotel market and on earning the loyalty of its
<PAGE>
core upscale customers: individual business travelers,
business groups, other group customers and leisure
travelers. St. Paul customers like Wyndham have
needs unique to their industry and their size.
Most insurers have not specialized their business
segments as finely as The St. Paul has. That
allows Major Markets to differentiate itself from
others in the large accounts marketplace. St.
Paul niches, like Service Industries, have
experts that know their markets and speak their
language. Customers benefit from the specialty
expertise and experience The St. Paul brings to
the table."
PHOTO IMAGE NO. 8 - Photo of Mr. Steven J. Klingel
President, Personal Insurance
St. Paul Fire and Marine
CAPTION: "Our efforts in 1997 will focus on leveraging the
strengths we've gained through our integration of
Economy Fire & Casualty Company and eliminating
the obstacles that stand between us and
profitability. We have a strong plan and a clear
focus."
SIDEBAR CAPSULE NO. 3 - Personal Insurance
------------------
"Approximately 95 percent of Personal Insurance
policyholders surveyed recently agreed that St. Paul Fire
and Marine has an excellent reputation for providing
responsive service."
"1996 marked the first year of true integration between St.
Paul Fire and Marine and Economy Fire & Casualty Company.
All financial, billing and claim systems have been
consolidated, and product servicing has been moved to
Freeport, Ill."
"A new direct repair program will be offered to Personal
Insurance policyholders in 1997. The program is expected to
increase customer satisfaction, while reducing costs."
PHOTO IMAGE NO. 9 - Photo of Mr. Joseph B. Nardi
President, Medical Services
St. Paul Fire and Marine
<PAGE>
CAPTION: "During 1997, we intend to maintain our position
as the medical liability insurance market leader.
We're committed to insuring the business of
health care. Our customers can rely on our
experience and expertise in dealing with their
evolving risks and the ongoing changes in the
delivery system, including the almost universal
movement to a managed care environment."
SIDEBAR CAPSULE NO. 4 - Medical Services
----------------
"An enhanced Key Medical Producers' Program was unveiled in
Medical Services during 1996. The program provides sales
incentives, product training and sales skill communications
to 150 top-producing insurance agencies and brokerage
offices."
"In 1996, the Nevada State Medical Association endorsed St.
Paul Fire and Marine as the organization's preferred medical
liability insurance provider."
"St. Paul Medical Services now insures approximately one-
third of all privately owned hospitals in Puerto Rico."
PHOTO IMAGE NO. 10 - Photo of Mr. Mark L. Pabst
President, St. Paul
International Underwriting
CAPTION: "St. Paul International Underwriting will pursue
a three-pronged strategy: to build domestic
insurance operations in selected markets to serve
local insurance needs; to enter global and
regional customer segments through ownership of
two Lloyd's of London managing agencies; and to
build The St. Paul's capability of servicing the
non-U.S. risks of U.S. corporate policyholders
and underwriting foreign-based companies'
exposures in the United States."
SIDEBAR CAPSULE NO. 5 - St. Paul International Underwriting
-----------------------------------
"St. Paul International Insurance Company Ltd. won the
'General Insurer of the Year' award at the British Insurance
Awards."
"During 1996, St. Paul International Insurance Company Ltd.
maintained its position as the preferred property-liability
insurer of National Health Trusts in the United Kingdom."
<PAGE>
"Since purchasing a minority shareholder interest in El
Plata S.A. Argentina de Seguros in 1996, St. Paul
International Underwriting has increased its ownership in
the Argentine insurance company to 80 percent."
PHOTO IMAGE NO. 11 - Photo of Mr. James F. Duffy
President, St. Paul Re
CAPTION: "In 1997, we will continue to build our
leadership position in the reinsurance
marketplace, increasing our influence and
visibility in various markets. We will continue
to diversify both geographically and in our
product mix. Finally, we will grow, using our
financial strength and other competitive
advantages to seize opportunities."
SIDEBAR CAPSULE NO. 6 - St. Paul Re
-----------
"The portion of St. Paul Re's business underwritten outside
the United States grew from 25 percent in 1991 to 45 percent
in 1996, to better balance and diversify its book of
business and to enhance its position in a consolidating
global insurance marketplace. By 2000, that percentage is
expected to reach 50 percent."
PHOTO IMAGE NO. 12 - Photo of individuals in train station.
CAPTION: "The Gatwick Express, a 30-minute trip between
Gatwick Airport and London's Victoria Railway
Station, carries approximately 12,500 passengers
each day. The Gatwick Express was one of the
first train services removed from public
ownership in the British government's railway
privatization program. National Express plc
acquired the operating franchise in 1996. A team
of St. Paul employees - which included (from
left) Keith Purvis, deputy general manager-
commercial insurance; Michele Baron, risk
management adviser; and Colin Hamling, manager-
strategic innovation and development - identified
the property and liability coverage opportunities
afforded by the privatization program and created
products and services to meet the new demand.
Working together with specialist brokers, St.
Paul International Insurance Company Ltd. secured
13 of 16 passenger train operators in 1996. The
St. Paul's initiative was voted best new product
(commercial lines) in the United Kingdom's
Insurance Broker Industry Awards. The privatized
passenger railroad initiative accounted for about
$10 million in written premium for St. Paul
International in 1996."
<PAGE>
GRAPHIC IMAGE NO. 6 - Chart depicting The St. Paul's Claims-
paying Ratings as of December 31, 1996.
Organization Rating
----------------- ------
A.M. Best A+
Moody's Aa1
Standard & Poor's AAA
CAPTION: "Independent rating agencies have long recognized
St. Paul Fire and Marine Insurance Company for
its claims-paying ability."
GRAPHIC IMAGE NO. 7 - Pie chart depicting composition of
Underwriting Operations Investment
Portfolio.
Fixed maturities 84%
Equities 5%
Real Estate 5%
Venture Capital 4%
Short-term and
Other Investments 2%
CAPTION: "Our widely diversified fixed maturity portfolio
is structured to maximize investment income while
minimizing credit risk. Our equity securities and
venture capital investments performed well in the
strong 1996 capital markets."
PHOTO IMAGE NO. 13 - Photo of individual in front of
theater.
CAPTION: "Old meets new in Munich, a thriving center for
industry, culture and transportation. The German
nonlife reinsurance market totals an estimated
$15 billion, ranking it second only to the United
States. In August 1996, St. Paul Re opened a
Munich office, its third in Europe (the others
are in London and Brussels) to better serve its
clients and to develop reinsurance business in
Germany, Austria and Switzerland. Consolidations
within world reinsurance markets made available
to St. Paul Re an experienced management team for
the new Munich office. Joachim Rumpff, a St.
Paul underwriter, is pictured here next to a
bronze statue of King Maximilian I Joseph, first
king of Bavaria. The statue greets visitors to
the National Theater, home to the Bavarian State
Opera. Although the European reinsurance market
is dominated by established giants, St. Paul Re
is confident it can compete by delivering
underwriting expertise, especially in excess-of-
loss reinsurance, and the highly rated financial
security that European insurers seek."
<PAGE>
GRAPHIC IMAGE NO. 8 - Bar graph depicting Underwriting
Operations Net Investment Income for the
years 1992 through 1996.
(in millions)
1992: $642
1993: $646
1994: $675
1995: $731
1996: $795
CAPTION: "The Northbrook acquisition added $1.1 billion of
high-quality fixed maturities to our investment
portfolio, contributing to the increase in
investment income in 1996."
GRAPHIC IMAGE NO. 9 - Table depicting Underwriting
Operations Bond Portfolio Ratings.
Rating Percent
------------ -------------
AAA 58%
AA 21
A 14
BBB 3
Nonrated 4
---
100
CAPTION: "The carrying value of our underwriting
operations' bond portfolio at year-end included
$483 million of unrealized appreciation."
PHOTO IMAGE NO. 14 - Photo of Mr. Timothy R. Schwertfeger
Chairman, Chief Executive Officer
The John Nuveen Company
CAPTION "Our commitment is to preserve and build upon our
$50 billion relationship with Nuveen investors. We
will do this over the long term by offering an
increasingly broad array of investment products
and services which deliver consistent performance,
high quality and security throughout market
cycles."
<PAGE>
SIDEBAR CAPSULE NO. 7 - The John Nuveen Company
-----------------------
"Nuveen's return on beginning equity in 1996 was 22
percent."
"Since 1961, more than 1.3 million individuals have invested
over $65 billion in Nuveen funds and trusts."
"In four of the last five years, Nuveen has produced record
earnings."
GRAPHIC IMAGE NO. 10 - Bar graph depicting Total
Capitalization at the end of the years
1992 through 1996.
(in billions)
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
Debt $0.6 $0.6 $0.6 $0.7 $0.7
Redeemable
Preferred
Securities
and Share-
holders'
Equity 2.2 3.0 2.8 3.9 4.2
----- ----- ----- ----- -----
Total $2.8 $3.6 $3.4 $4.6 $4.9
===== ===== ===== ===== =====
CAPTION: "Total capitalization increased 6% over 1995.
Outstanding debt, comprising just 14% of total
capitalization, was down slightly from already
conservative levels."
GRAPHIC IMAGE NO. 11 - Bar graph depicting Book Value per
Common Share at the end of the years 1992
through 1996.
1992: $26.18
1993: $35.47
1994: $32.46
1995: $44.29
1996: $47.93
CAPTION: "At the end of 1996, common shareholders' equity
stood at nearly $4 billion, translating into a
book value per common share of $47.93, an 8%
increase over 1995."
<PAGE>
GRAPHIC IMAGE NO. 12 - Bar graph depicting Dividends Paid
per Common Share for the years 1992
through 1996.
1992: $1.35
1993: $1.39
1994: $1.48
1995: $1.58
1996: $1.72
CAPTION: "Dividends are an important aspect of our total
return to investors. We have paid a common share
dividend for 125 consecutive years and increased
dividends in 65 of those years."
<PAGE>
Item 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
<CAPTION>
Eleven-year Summary of Selected Financial Data
The St. Paul Companies
Year ended December 31
(Dollars in thousands) 1996 1995 1994 1993 1992 1991
<S> ---- ---- ---- ---- ---- ----
CONSOLIDATED <C> <C> <C> <C> <C> <C>
Revenues from continuing operations $ 5,734,156 $ 5,056,199 $ 4,368,434 $ 4,150,554 $ 4,180,145 $ 4,017,548
Operating earnings from
continuing operations 414,755 481,491 431,040 406,347 99,308 388,273
Net income (loss) 450,099 521,209 442,828 427,609 (156,038) 405,062
INVESTMENT ACTIVITY
Net investment income 807,305 740,912 673,272 639,893 636,930 635,163
Realized investment gains (losses),
net of taxes 143,103 56,357 28,962 40,981 101,270 24,258
Change in unrealized appreciation of
investments, net of taxes (10,823) 613,843 (574,896) 525,175 (23,815) 55,093
OTHER SELECTED FINANCIAL DATA
(As of December 31)
Total assets 20,680,976 18,519,294 16,141,739 15,913,554 14,298,616 13,709,649
Debt 689,141 697,045 616,151 639,729 566,717 486,779
Common shareholders' equity 3,987,757 3,719,249 2,732,934 3,005,128 2,202,499 2,532,841
Common shares outstanding 83,198,411 83,975,864 84,202,417 84,714,676 84,118,554 85,042,484
PER COMMON SHARE DATA
Operating earnings from
continuing operations 4.55 5.25 4.80 4.50 1.06 4.32
Net income (loss) 4.93 5.68 4.93 4.73 (1.94) 4.50
Book value 47.93 44.29 32.46 35.47 26.18 29.78
Year-end market price 58.63 55.63 44.75 44.94 38.50 36.44
Cash dividends declared 1.76 1.60 1.50 1.40 1.36 1.30
Operating Earnings Return on
Beginning Common Equity 10.9% 17.3% 14.1% 18.1% 3.6% 17.3%
Net Income Return on Beginning
Common Equity 11.9% 18.8% 14.5% 19.0% - 18.1%
Year ended December 31
(Dollars in thousands) 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
UNDERWRITING
Written premiums $4,396,122 $4,243,213 $3,623,026 $3,178,545 $3,142,419 $3,233,729
Statutory underwriting result (227,070) (152,703) (143,317) (143,599) (557,463) (170,894)
GAAP underwriting result (216,160) (103,045) (113,008) (150,255) (566,886) (163,782)
Net investment income 794,901 731,096 674,818 646,396 642,301 640,856
Pretax operating earnings 477,535 577,509 524,742 457,752 20,781 451,184
Pretax income 686,084 651,912 560,709 507,181 81,132 486,063
Statutory combined ratio:
Loss and loss expense ratio 74.6 72.1 72.1 72.5 85.6 75.2
Underwriting expense ratio 30.9 29.7 30.2 32.0 32.2 29.4
----- ----- ----- ----- ----- -----
Combined ratio 105.5 101.8 102.3 104.5 117.8 104.6
Combined ratio including
policyholders' dividends 105.7 102.0 102.3 104.7 118.2 105.0
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Eleven-year Summary of Selected Financial Data
The St. Paul Companies
Year ended December 31
(Dollars in thousands) 1990 1989 1988 1987 1986
<S> ---- ---- ---- ---- ----
CONSOLIDATED <C> <C> <C> <C> <C>
Revenues from continuing operations $ 3,691,811 $ 3,507,117 $ 3,397,564 $ 3,296,241 $ 3,120,549
Operating earnings from
continuing operations 389,985 317,064 353,260 323,550 146,578
Net income (loss) 391,270 398,158 355,257 356,523 217,115
INVESTMENT ACTIVITY
Net investment income 628,359 622,587 568,505 527,317 449,906
Realized investment gains (losses),
net of taxes 5,812 59,892 3,354 (5,489) 5,702
Change in unrealized appreciation of
investments, net of taxes (67,558) 60,045 20,428 (19,959) (13,396)
OTHER SELECTED FINANCIAL DATA
(As of December 31)
Total assets 12,862,538 12,126,981 11,186,778 9,531,050 8,459,565
Debt 473,829 293,802 417,140 96,576 344,299
Common shareholders' equity 2,196,371 2,349,254 2,015,219 1,711,362 1,440,565
Common shares outstanding 84,468,058 98,607,762 92,728,168 92,603,714 92,495,700
PER COMMON SHARE DATA
Operating earnings from
continuing operations 4.14 3.24 3.67 3.39 1.64
Net income (loss) 4.16 4.06 3.69 3.73 2.38
Book value 26.00 23.82 21.73 18.48 15.57
Year-end market price 31.38 29.57 21.75 23.00 20.13
Cash dividends declared 1.20 1.10 1.00 0.88 0.75
Operating Earnings Return on
Beginning Common Equity 16.3% 11.6% 20.6% 22.5% 14.5%
Net Income Return on Beginning
Common Equity 16.3% 14.6% 20.8% 24.7% 21.4%
Year ended December 31
(Dollars in thousands) 1990 1989 1988 1987 1986
---- ---- ---- ---- ----
UNDERWRITING
Written premiums $3,052,032 $2,807,223 $2,690,536 $2,704,165 $2,556,425
Statutory underwriting result (141,751) (207,977) (92,741) (145,061) (265,105)
GAAP underwriting result (120,730) (196,378) (90,209) (127,066) (275,184)
Net investment income 629,242 614,119 548,766 498,251 431,594
Pretax operating earnings 457,161 364,352 420,339 358,493 142,532
Pretax income 466,731 456,167 424,187 351,358 151,552
Statutory combined ratio:
Loss and loss expense ratio 73.2 75.7 73.6 76.2 82.0
Underwriting expense ratio 30.0 30.5 30.0 28.9 27.9
----- ----- ----- ----- -----
Combined ratio 103.2 106.2 103.6 105.1 109.9
Combined ratio including
policyholders' dividends 104.2 106.6 104.0 105.3 110.5
</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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
---------------------
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 27, 1997
<PAGE>
The St. Paul Companies
Consolidated Statements of Income
Year ended December 31
-----------------------------------
(in thousands) 1996 1995 1994
---- ---- ----
REVENUES
Premiums earned $4,448,248 $3,971,329 $3,412,081
Net investment income 807,305 740,912 673,272
Investment banking-asset management 219,922 221,007 211,789
Realized investment gains 218,525 84,572 41,974
Other 40,156 38,379 29,318
--------- --------- ---------
Total revenues 5,734,156 5,056,199 4,368,434
--------- --------- ---------
EXPENSES
Insurance losses and loss
adjustment expenses 3,318,301 2,864,307 2,461,698
Policy acquisition expenses 975,456 856,979 753,946
Operating and administrative 741,263 665,588 579,265
--------- --------- ---------
Total expenses 5,035,020 4,386,874 3,794,909
--------- --------- ---------
Income from continuing
operations before income taxes 699,136 669,325 573,525
Income tax expense (benefit):
Federal current 114,035 182,422 154,034
Other 27,243 (50,945) (40,511)
--------- --------- ---------
Total income tax expense 141,278 131,477 113,523
--------- --------- ---------
Income from continuing operations 557,858 537,848 460,002
Discontinued operations:
Operating loss, net of taxes (19,216) (16,639) (17,174)
Loss on disposal, net of taxes (88,543) - -
--------- --------- ---------
Loss from discontinued operations (107,759) (16,639) (17,174)
--------- --------- ---------
Net Income $ 450,099 $ 521,209 $ 442,828
========= ========= =========
PRIMARY EARNINGS PER COMMON SHARE
Income from continuing operations $ 6.49 $ 6.19 $ 5.32
Loss from discontinued operations (1.27) (0.20) (0.20)
--------- --------- ---------
Net Income $ 5.22 $ 5.99 $ 5.12
========= ========= =========
FULLY DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations $ 6.10 $ 5.86 $ 5.12
Loss from discontinued operations (1.17) (0.18) (0.19)
--------- --------- ---------
Net Income $ 4.93 $ 5.68 $ 4.93
========= ========= =========
See notes to consolidated financial statements.
<PAGE>
The St. Paul Companies
Consolidated Balance Sheets December 31
-------------------
(In thousands) 1996 1995
---- ----
ASSETS
Investments:
Fixed maturities $11,944,085 $10,372,890
Equities 808,295 711,471
Real estate 693,910 611,656
Venture capital 586,222 388,599
Other investments 43,311 42,776
Short-term investments 289,793 430,719
---------- ----------
Total investments 14,365,616 12,558,111
Cash 37,214 25,475
Investment banking inventory securities 143,594 249,662
Reinsurance recoverables:
Unpaid losses 1,890,105 1,853,817
Paid losses 68,692 74,568
Receivables:
Underwriting premiums 1,558,967 1,316,560
Interest and dividends 213,883 195,764
Other 104,865 91,334
Deferred policy acquisition expenses 401,768 372,174
Ceded unearned premiums 243,663 226,943
Deferred income taxes 908,220 521,864
Office properties and equipment 281,093 297,384
Goodwill 167,338 123,130
Other assets 295,958 612,508
---------- ----------
Total Assets $20,680,976 $18,519,294
========== ==========
LIABILITIES
Insurance reserves:
Losses and loss adjustment expenses $11,673,148 $10,247,070
Unearned premiums 2,566,551 2,361,028
---------- ----------
Total insurance reserves 14,239,699 12,608,098
Debt 689,141 697,045
Payables:
Reinsurance premiums 181,524 170,902
Income taxes 219,081 139,058
Accrued expenses and other 484,062 484,605
Other liabilities 656,649 482,465
---------- ----------
Total Liabilities 16,470,156 14,582,173
---------- ----------
Company-obligated mandatorily redeemable
preferred securities of St. Paul Capital L.L.C. 207,000 207,000
---------- ----------
SHAREHOLDERS' EQUITY
Preferred:
Convertible preferred stock 142,131 144,165
Guaranteed obligation - PSOP (126,068) (133,293)
---------- ----------
Total Preferred Shareholders' Equity 16,063 10,872
---------- ----------
Common:
Common stock 475,710 460,458
Retained earnings 2,935,928 2,704,075
Guaranteed obligation - ESOP (20,353) (32,294)
Unrealized appreciation of investments 616,968 627,791
Unrealized loss on foreign currency translation (20,496) (40,781)
---------- ----------
Total Common Shareholders' Equity 3,987,757 3,719,249
---------- ----------
Total Shareholders' Equity 4,003,820 3,730,121
---------- ----------
Total Liabilities, Redeemable Preferred
Securities and Shareholders' Equity $20,680,976 $18,519,294
========== ==========
See notes to consolidated financial statements.
<PAGE>
The St. Paul Companies
Consolidated Statements of Shareholders' Equity
Year ended December 31
-----------------------
(In thousands) 1996 1995 1994
---- ---- ----
PREFERRED SHAREHOLDERS' EQUITY
Series B convertible preferred stock:
Beginning of year $ 144,165 $ 146,102 $ 147,608
Redemptions during the year (2,034) (1,937) (1,506)
-------- -------- --------
End of year 142,131 144,165 146,102
-------- -------- --------
Guaranteed obligation - PSOP:
Beginning of year (133,293) (141,567) (148,929)
Principal payments 7,225 8,274 7,362
-------- -------- --------
End of year (126,068) (133,293) (141,567)
-------- -------- --------
Total Preferred Shareholders' Equity 16,063 10,872 4,535
-------- -------- --------
COMMON SHAREHOLDERS' EQUITY
Common stock:
Beginning of year 460,458 445,222 438,559
Stock issued under stock incentive plans 21,393 19,481 11,130
Stock issued for acquisition 1,664 - -
Reacquired common shares (7,805) (4,245) (4,467)
-------- -------- --------
End of year 475,710 460,458 445,222
-------- -------- --------
Retained earnings:
Beginning of year 2,704,075 2,362,286 2,082,832
Net income 450,099 521,209 442,828
Dividends declared on common stock,
$1.76 per share in 1996 ($1.60 in
1995 and $1.50 in 1994) (145,956) (133,956) (124,921)
Dividends declared on
preferred stock, net of taxes (8,664) (8,582) (8,448)
Reacquired common shares (67,445) (38,291) (30,005)
Tax benefit on employee
stock options and awards 3,819 1,409 -
--------- --------- ---------
End of year 2,935,928 2,704,075 2,362,286
--------- --------- ---------
Guaranteed obligation - ESOP:
Beginning of year (32,294) (44,410) (56,005)
Principal payments 11,941 12,116 11,595
--------- --------- ---------
End of year (20,353) (32,294) (44,410)
--------- --------- ---------
Unrealized appreciation of investments,
net of taxes:
Beginning of year 627,791 13,948 588,844
Change for the year (10,823) 613,843 (574,896)
--------- --------- ---------
End of year 616,968 627,791 13,948
--------- --------- ---------
Unrealized loss on foreign currency
translation, net of taxes:
Beginning of year (40,781) (44,112) (49,102)
Currency translation adjustments (5,309) 3,331 4,990
Realized loss relating to
discontinued operations 25,594 - -
--------- --------- ---------
End of year (20,496) (40,781) (44,112)
--------- --------- ---------
Total Common Shareholders' Equity 3,987,757 3,719,249 2,732,934
--------- --------- ---------
Total Shareholders' Equity $4,003,820 $3,730,121 $2,737,469
========= ========= =========
See notes to consolidated financial statements.
<PAGE>
The St. Paul Companies
Consolidated Statements of Cash Flows
Year ended December 31
--------------------------
(In thousands) 1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES
Underwriting:
Net income $ 551,293 $ 533,776 $ 452,756
Adjustments:
Change in net insurance reserves 344,259 753,543 445,791
Change in underwriting premiums receivable (56,347) (217,877) (89,147)
Deferred tax benefit (11,542) (55,192) (36,085)
Realized investment gains (208,549) (74,403) (35,967)
Other 254,541 (61,509) 146,886
--------- --------- ---------
Total underwriting 873,655 878,338 884,234
--------- --------- ---------
Investment banking-asset management:
Net income 56,601 54,746 44,196
Adjustments:
Change in inventory securities 107,453 (103,016) 156,823
Change in short-term borrowings (25,000) 25,000 (80,383)
Change in short-term investments (457) 45,659 (94,968)
Change in open security transactions (1,205) (10,138) 10,879
Other 2,694 25,642 21,051
--------- --------- ---------
Total investment banking-
asset management 140,086 37,893 57,598
--------- --------- ---------
Parent company, consolidating eliminations
and discontinued operations:
Net loss (157,795) (67,313) (54,124)
Adjustments:
Provision for loss on
disposal, net of taxes 88,543 - -
Realized investment gains (9,976) (10,169) (6,007)
Other 35,135 67,397 18,419
--------- --------- ---------
Total parent company, consolidating
eliminations and discontinued
operations (44,093) (10,085) (41,712)
--------- --------- ---------
Net Cash Provided by
Operating Activities 969,648 906,146 900,120
--------- --------- ---------
INVESTING ACTIVITIES
Purchases of investments (3,148,120)(2,857,778)(2,087,104)
Proceeds from sales and
maturities of investments 2,486,056 1,991,357 1,465,668
Change in short-term investments 141,647 (6,116) (66,783)
Change in open security transactions (35,556) 6,516 (6,156)
Net purchases of office
properties and equipment (38,454) (41,614) (49,338)
Purchase of Northbrook Holdings, Inc.,
net of cash acquired (184,568) - -
Other 32,504 (56,809) (16,312)
--------- --------- ---------
Net Cash Used in Investing Activities (746,491) (964,444) (760,025)
--------- --------- ---------
FINANCING ACTIVITIES
Dividends paid on common and preferred stock (155,268) (144,662) (136,062)
Proceeds from issuance of debt 46,220 193,002 87,721
Repayment of debt (17,711) (125,446) (20,350)
Repurchase of common shares (74,217) (41,714) (34,150)
Proceeds from issuance of company-
obligated mandatorily redeemable preferred
securities of St. Paul Capital L.L.C. - 207,000 -
Other (10,442) (25,216) (26,855)
--------- --------- ---------
Net Cash Provided by
(Used in) Financing Activities (211,418) 62,964 (129,696)
--------- --------- ---------
Increase in Cash 11,739 4,666 10,399
--------- --------- ---------
Cash at beginning of year 25,475 20,809 10,410
--------- --------- ---------
Cash at End of Year $ 37,214 $ 25,475 $ 20,809
========= ========= =========
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The St. Paul Companies
NOTE 1 - Summary of Significant Accounting Policies
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 foreign underwriting operations on a one-
quarter lag.
Discontinued Operations - In 1996, we decided to exit the
insurance brokerage business. As a result, we no longer
include the financial statements of our insurance brokerage
operations with our other subsidiaries. The financial
statements presented reflect insurance brokerage results
as discontinued operations.
Reclassifications - We reclassified some figures in our 1995
and 1994 financial statements and notes to conform with the
1996 presentation. These reclassifications had no effect on
net income, or common or preferred shareholders' equity, as
previously reported for those years.
Use of Estimates - We make estimates and assumptions that
have an effect on the amounts that we report in our
financial statements. Our most significant estimates are
those relating to our reserves for losses and loss
adjustment expenses. We continually review our estimates and
make adjustments as necessary, but actual results could turn
out significantly different than what we envisioned when we
made these estimates.
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.
<PAGE>
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. We record the
premiums that we have not yet recognized as revenues
as unearned premiums on our balance sheet.
Insurance Losses and Loss Adjustment Expenses - Losses
represent 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 known as loss
adjustment expenses. We record these items on our statement
of income net of reinsurance, meaning 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 1996 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 adjustment expenses are
reflected as assets.
We believe that the reserves we have established are
adequate to cover the ultimate costs of losses and loss
adjustment expenses. Final claim payments, however, may
differ from the established reserves, particularly when
these payments may not occur for several years. Any
adjustments we make to reserves are reflected in the results
for the year during which the adjustments are made.
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.
<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, 1996 and 1995. Nuveen develops and markets tax-
free open-end and closed-end (exchange-traded) managed funds
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. Those inventory securities are carried at market
value.
Nuveen's revenues include investment advisory fees,
revenues from the distribution of 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 $59.9 million and $71.4 million was
recorded in other liabilities at the end of
1996 and 1995, respectively.
Nuveen repurchased and retired 3.8 million of its common
shares in 1996 for a total cost of $101.1 million. The
repurchases were proportioned between us and minority
shareholders to maintain our 78% ownership of Nuveen.
Our proceeds from the Nuveen repurchases totaled
$74.0 million.
ACCOUNTING FOR OUR INVESTMENTS
Fixed Maturities - Our entire fixed maturity investment
portfolio is classified as available-for-sale. 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 that we own directly or in which we
have a partial interest through joint ventures with other
investors.
<PAGE>
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 investments was
$81.8 million and $68.8 million at Dec. 31, 1996
and 1995, 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 on 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.
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 $113.3 million and
$88.0 million at Dec. 31, 1996 and 1995, 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.
<PAGE>
OFFICE PROERTIES 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 $217.5 million and $194.7 million at the end of 1996 and
1995, respectively.
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
We paid interest of $48.4 million in 1996, $44.5 million in
1995 and $40.0 million in 1994. We paid federal income taxes
of $91.5 million in 1996, $184.4 million in 1995
and $122.7 million in 1994. Federal tax payments in 1995
included $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.
<PAGE>
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
----------------------
1996 1995 1994
---- ---- ----
PRIMARY
Net income, as reported $450,099 $521,209 $ 442,828
PSOP preferred dividends
declared (net of taxes) (8,664) (8,582) (8,448)
Premium on preferred shares redeemed (1,033) (823) -
------- ------- -------
Net income, as adjusted $440,402 $511,804 $434,380
======= ======= =======
FULLY DILUTED
Net income, as reported $450,099 $521,209 $442,828
Additional PSOP expense
(net of taxes) due to assumed
conversion of preferred stock (3,015) (3,477) (3,782)
Dividends on monthly income preferred
securities (net of taxes) 8,073 5,046 -
Premium on preferred shares redeemed (1,033) (823) -
------- ------- -------
Net income, as adjusted $454,124 $521,955 $439,046
======= ======= =======
ADJUSTED AVERAGE COMMON SHARES OUTSTANDING
Primary 84,419 85,399 84,816
Fully diluted 92,040 91,843 89,067
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 company-obligated mandatorily redeemable
preferred securities of St. Paul Capital L.L.C.(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.
(In thousands) December 31, 1996
--------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Market
Cost Appreciation Depreciation Value
----- ------------ ------------ ---------
Fixed maturities:
U.S. government $ 2,401,760 $ 56,345 $(13,139) $ 2,444,966
States and political
subdivisions 4,992,485 300,755 (5,274) 5,287,966
Foreign governments 1,077,869 59,421 (11,684) 1,125,606
Corporate securities 1,546,721 48,262 (8,721) 1,586,262
Mortgage-backed securities 1,466,168 39,452 (6,335) 1,499,285
--------- ---------- -------- ----------
Total fixed maturities 11,485,003 504,235 (45,153) 11,944,085
Equities 621,880 193,002 (6,587) 808,295
Venture capital 293,837 308,858 (16,473) 586,222
---------- ---------- -------- ----------
Total $12,400,720 $1,006,095 $(68,213) $13,338,602
========== ========== ======== ==========
(In thousands) December 31, 1995
---------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Market
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
========== ========= ======== ==========
Statutory Deposits - At Dec. 31, 1996, our underwriting operations
had investments in fixed maturities with an estimated market value of
$466.5 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) December 31, 1996
-------------------------
Amortized Estimated
Cost Market Value
--------- ------------
One year or less $ 174,382 $ 177,090
Over one year through five years 1,622,772 1,684,036
Over five years through 10 years 4,243,672 4,461,087
Over 10 years 3,978,009 4,122,587
Mortgage-backed securities with
various maturities 1,466,168 1,499,285
---------- ----------
Total $11,485,003 $11,944,085
========== ==========
NOTE 4 - Investment Transactions
Investment Activity - Here is a summary of our
investment purchases, sales and maturities.
(In thousands) Year ended December 31
----------------------------
1996 1995 1994
---- ---- ----
PURCHASES
Fixed maturities $1,885,428 $1,829,942 $1,235,653
Equities 1,037,185 837,288 700,568
Real estate 114,770 116,925 74,420
Venture capital 94,891 66,247 66,622
Other investments 15,846 7,376 9,841
--------- --------- ---------
Total purchases 3,148,120 2,857,778 2,087,104
--------- --------- ---------
PROCEEDS FROM SALES
AND MATURITIES
Fixed maturities:
Sales 506,999 326,382 181,126
Maturities and
redemptions 730,612 709,104 533,292
Equities 1,110,060 836,683 707,608
Real estate 17,608 14,428 6,718
Venture capital 118,011 87,512 28,817
Other investments 2,766 17,248 8,107
--------- --------- ---------
Total sales and
maturities 2,486,056 1,991,357 1,465,668
--------- --------- ---------
Net purchases $ 662,064 $ 866,421 $ 621,436
========= ========= =========
<PAGE>
Net Investment Income - Here is a summary of our
net investment income.
(In thousands) Year ended December 31
----------------------------
1996 1995 1994
---- ---- ----
Fixed maturities $738,396 $665,364 $626,263
Equities 15,655 14,644 12,984
Real estate 36,260 32,830 28,049
Venture capital 324 (171) (1,849)
Other investments (2,142) (965) 346
Short-term investments 31,008 38,842 24,571
------- ------- -------
Total 819,501 750,544 690,364
Investment expenses (12,196) (9,632) (17,092)
------- ------- -------
Net investment income $807,305 $740,912 $673,272
======= ======= =======
Realized and Unrealized Investment Gains (Losses) -
The following summarizes our pretax realized investment
gains and losses, and the change in unrealized appreciation
of investments recorded in common shareholders' equity.
(In thousands) Year ended December 31
----------------------------
1996 1995 1994
---- ---- ----
PRETAX REALIZED
INVESTMENT GAINS (LOSSES)
Fixed maturities:
Gross realized gains $ 7,033 $ 3,091 $ 5,232
Gross realized losses (8,236) (5,728) (1,849)
------- ------- -------
Total fixed maturities (1,203) (2,637) 3,383
------- ------- -------
Equities:
Gross realized gains 160,639 78,772 59,548
Gross realized losses (31,282) (29,548) (38,626)
------- ------- -------
Total equities 129,357 49,224 20,922
------- ------- -------
Real estate:
Gross realized gains 2,678 2,305 21
Gross realized losses (1,267) (474) (10,479)
------- ------- -------
Total real estate 1,411 1,831 (10,458)
------- ------- -------
Venture capital:
Gross realized gains 109,879 71,412 26,556
Gross realized losses (23,868) (33,237) (8,940)
------- ------- -------
Total venture capital 86,011 38,175 17,616
------- ------- -------
Other investments 2,949 (2,021) 10,511
------- ------- -------
Total pretax realized
investment gains $218,525 $ 84,572 $ 41,974
======= ======= =======
<PAGE>
CHANGE IN UNREALIZED APPRECIATION
Fixed maturities $(198,855) $ 742,626 $(847,554)
Equities 25,975 130,247 (30,106)
Venture capital 163,110 59,880 (4,064)
--------- --------- ---------
Total change in
pretax unrealized
appreciation (9,770) 932,753 (881,724)
Change in deferred tax asset (1,053) (318,910) 306,828
--------- --------- ---------
Total change in
unrealized appreciation,
net of taxes $ (10,823) $ 613,843 $(574,896)
========= ========= =========
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 for purposes of
hedging against fluctuations in interest rates. 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. We minimize our credit risk by conducting
derivative transactions only with reputable, investment-
grade counter parties.
We enter into interest rate swap agreements for the
purpose of minimizing the effect of interest rate
fluctuations on some of our debt and investments.
We are party to 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 2000.
At Dec. 31, 1996 and 1995, the estimated market value of
this swap agreement was an asset of $1.4 million and
$200,000, respectively.
At Dec. 31, 1995, we had investments in perpetual floating
rate notes totaling $35 million, and we were party to
interest rate swap agreements for notional amounts equaling
this total at that date. We recorded 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 the agreements been
terminated at the balance sheet date. At Dec. 31, 1995, we
recorded an asset of $941,000 associated with these
agreements. At Dec. 31, 1996, we had no investments in
perpetual floating rate notes, nor were we party to any
related interest rate swap agreements.
<PAGE>
NOTE 6 - Reserves for Losses and Loss Adjustment Expenses
Reconciliation of Loss Reserves - 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
---------------------------------
1996 1995 1994
---- ---- ----
Loss and LAE reserves at
beginning of year,
as reported $10,247,070 $ 9,423,429 $ 9,185,191
Less reinsurance recoverables
on unpaid losses at
beginning of year (1,853,817) (1,533,250) (1,545,026)
---------- --------- ---------
Net loss and LAE reserves
at beginning of year 8,393,253 7,890,179 7,640,165
Net reserves of acquired
companies 1,015,826 12,329 -
Provision for losses and LAE
for claims incurred:
Current year 3,570,545 3,112,193 2,790,164
Prior years (252,244) (247,886) (328,466)
--------- --------- ---------
Total incurred 3,318,301 2,864,307 2,461,698
--------- --------- ---------
Losses and LAE payments
for claims incurred:
Current year (1,101,077) (783,633) (667,255)
Prior years (1,839,463) (1,590,701) (1,566,083)
--------- --------- ---------
Total paid (2,940,540) (2,374,334) (2,233,338)
--------- --------- ---------
Unrealized foreign
exchange (gain) loss (3,797) 772 21,654
--------- --------- ---------
Net loss and LAE
reserves at end of year 9,783,043 8,393,253 7,890,179
Plus reinsurance recoverables on
unpaid losses at end of year 1,890,105 1,853,817 1,533,250
---------- ---------- ---------
Loss and LAE reserves at
end of year, as reported $11,673,148 $10,247,070 $9,423,429
========== ========== =========
<PAGE>
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, 1996 and 1995. Amounts in the "net" column
are reduced by reinsurance.
(In thousands) December 31
-----------------------------------
1996 1995
------------------ -----------------
Gross Net Gross Net
Environmental $581,000 $368,000 $528,000 $319,000
Asbestos 278,000 169,000 283,000 158,000
------- ------- ------- -------
Total environmental and
asbestos reserves $859,000 $537,000 $811,000 $477,000
======= ======= ======= =======
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.
<PAGE>
Income Tax Expense (Benefit) - Income tax expense or
benefits are recorded in various places in our financial
statements. A summary of the amounts and places follows:
(In thousands) Year ended December 31
----------------------------
1996 1995 1994
---- ---- ----
STATEMENTS OF INCOME
Expense on
continuing operations $141,278 $131,477 $113,523
Expense on
discontinued operations 401 3,547 7,227
Benefit on loss on disposal (291,493) - -
------- ------- -------
Total income tax expense
(benefit) included in
statements of income (149,814) 135,024 120,750
------- ------- -------
COMMON SHAREHOLDERS' EQUITY
Benefit for deductions relating to:
Dividends on unallocated
ESOP and PSOP shares (3,626) (4,094) (4,578)
Employee stock options
and awards (3,819) (1,409) -
Deferred expense (benefit)
for the change in unrealized
appreciation of investments
and unrealized foreign
exchange (1,561) 319,195 (308,073)
Total income tax expense
(benefit) included in
common shareholders'
equity (9,006) 313,692 (312,651)
-------- ------- -------
Total income tax expense
(benefit) included in
financial statements $(158,820) $448,716 $(191,901)
======== ======= ========
<PAGE>
Components of Income Tax Expense - The components of income
tax expense on continuing operations are as follows:
(In thousands) Year ended December 31
----------------------------
1996 1995 1994
---- ---- ----
Federal current tax expense $114,035 $182,422 $154,034
Federal deferred tax benefit (1,185) (58,330) (47,390)
------- ------- -------
Total federal income
tax expense 112,850 124,092 106,644
Foreign income taxes 22,074 1,791 1,680
State income taxes 6,354 5,594 5,199
------- ------- -------
Total income tax expense
on continuing operations $141,278 $131,477 $113,523
======= ======= =======
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
-----------------------------
1996 1995 1994
---- ---- ----
Federal income tax expense
at statutory rates $244,698 $234,264 $200,734
Increase (decrease) attributable to:
Nontaxable investment
income (94,156) (83,395) (87,630)
Foreign operations (22,915) (12,050) (11,168)
Other (14,777) (14,727) 4,708
------- ------- -------
Federal income tax
expense $112,850 $124,092 $106,644
======= ======= =======
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:
<PAGE>
(In thousands) December 31
---------------------
1996 1995
---- ----
DEFERRED TAX ASSETS
Loss reserves $ 808,248 $ 735,808
Loss on disposal of insurance
brokerage operations 370,900 -
Unearned premium reserves 172,382 141,882
Deferred compensation 78,006 83,543
Other 181,065 153,785
--------- ---------
Total gross deferred tax assets 1,610,601 1,115,018
Less valuation allowance (72,879) (21,084)
--------- ---------
Net deferred tax assets 1,537,722 1,093,934
--------- ---------
DEFERRED TAX LIABILITIES
Unrealized appreciation of investments 325,824 325,694
Deferred acquisition costs 135,455 124,178
Real estate 43,125 47,404
Other 125,098 74,794
--------- ---------
Total gross deferred tax liabilities 629,502 572,070
--------- ---------
Deferred income taxes $ 908,220 $ 521,864
========= =========
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 an increase
of $51.8 million in 1996 and a decrease of $20.7 million in
1995, relating to our foreign underwriting operations for
both years and our provision for loss on disposal of
insurance brokerage operations in 1996. 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 $10.0 million of our foreign
operations' undistributed earnings as of Dec. 31, 1996, 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.
<PAGE>
We have not provided taxes on approximately $131.0 million
of undistributed earnings related to our majority ownership
of The John Nuveen Company as of Dec. 31, 1996, 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 1992 and is currently
examining the years 1993 and 1994. We believe that any
additional taxes assessed as a result of these examinations
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
---------------------
1996 1995
---- ----
Debt $ 689,141 $ 697,045
Company-obligated mandatorily
redeemable preferred securities
of St. Paul Capital L.L.C. 207,000 207,000
Preferred shareholders' equity 16,063 10,872
Common shareholders' equity 3,987,757 3,719,249
--------- ---------
Total capital $4,899,961 $4,634,166
========= =========
Ratio of debt to total capital 14% 15%
--------- ---------
DEBT
Debt consists of the following:
(In thousands) December 31
-----------------------------------
1996 1995
Book Fair Book Fair
Value Value Value Value
------------------------------------
Medium-term notes $430,427 $435,500 $397,433 $419,500
Commercial paper 131,610 131,610 149,629 149,629
9 3/8% notes 99,994 101,500 99,982 105,300
Guaranteed ESOP debt 13,890 14,000 25,001 26,200
Real estate mortgage 13,220 13,220 - -
Short-term borrowings - - 25,000 25,000
------- ------- ------- -------
Total debt $689,141 $695,830 $697,045 $725,629
======= ======= ======= =======
<PAGE>
Fair Value - The fair value of our commercial paper and
short-term borrowings approximates their book value because
of their short-term nature. The fair value of the real
estate mortgage approximates its book value because we
entered into this debt near the end of 1996. 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%, with a weighted
average rate of 7.1%. Maturities range from five 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 1996, 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 1996 ranged
from 5.1% to 6.6%; in 1995 the range was 5.4% to 6.6%; and
in 1994 the range was 3.1% to 6.1%.
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.
Real Estate Mortgage - The real estate mortgage represents a
portion of the $31 million purchase price of our investment
in a warehouse complex in 1996. The mortgage bears a fixed
interest rate of 6.7% and matures in November 2000.
Interest Expense - Our interest expense was $48.5 million in
1996, $46.2 million in 1995 and $39.5 million in 1994.
Maturities - The amount of debt that becomes due
in each of the next five years is as follows: 1997, $111.1
million; 1998, $27.8 million; 1999, $20.0 million; 2000,
$144.8 million; and 2001, $45.5 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 securities 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 May 31, 1999, but we may redeem
them before then 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.
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
and the redemption of preferred shares to meet employee
distribution requirements. Upon the redemption of preferred
shares, we issue shares of our common stock to
the trust to fulfill the redemption obligations.
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.
<PAGE>
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 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.
Our cost for reacquired shares in 1996, 1995 and
1994 was $74.2 million, $41.7 million and $34.2 million,
respectively. 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. In 1996, we issued 28,748 shares of our
common stock valued at $1.7 million as partial consideration
for our acquisition of a Lloyd's of London managing agency.
A summary of our common stock activity for the last three
years is as follows:
(Shares) Year ended December 31
------------------------------
1996 1995 1994
---- ---- ----
Outstanding at beginning
of year 83,975,864 84,202,417 84,714,676
Shares issued:
Stock incentive plans 542,169 534,096 344,756
Conversion of preferred stock 56,047 17,543 3,125
Acquisition 28,748 - -
Reacquired shares (1,404,417) (778,192) (860,140)
---------- ---------- ----------
Outstanding at end of year 83,198,411 83,975,864 84,202,417
========== ========== ==========
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.
<PAGE>
Shareholder Protection Rights Plan - Our Shareholder
Protection Rights Plan is designed to protect the interests
of our shareholders in the event of unsolicited and unfair
or coercive attempts to acquire control of the company. Our
shareholders own one right for each common share owned,
which would enable them to initiate specified actions to
protect their interests. We may redeem this right under
circumstances specified in the plan.
Dividend Restrictions - We primarily depend on dividends
from our subsidiaries to pay dividends to our shareholders,
service our debt and pay expenses. Various state laws and
regulations limit the amount of dividends we may receive
from our U.S. underwriting subsidiary. In 1997, $477.3
million will be available for dividends free from such
restrictions. During 1996, we received cash dividends
of $186.5 million from our U.S. underwriting subsidiary, and
a $30.8 million noncash dividend of a portion of its
investment in The John Nuveen Company.
NOTE 9 - Retirement Plans
Pension Plans - We maintain funded defined benefit pension
plans for most of our U.S. employees. Benefits
are based on years of service and the employee's
compensation while employed by the company. Pension benefits
generally vest after five years of service.
Our pension plans are noncontributory. This means that
employees do not pay anything into the plans. Our funding
policy is to contribute amounts sufficient to meet the
minimum funding requirements of the Employee Retirement
Income Security Act and any additional amounts that may be
necessary. This may result in no contribution being made in
a particular year.
Net periodic pension cost for our funded pension plans was
$9.7 million, $13.9 million and $22.4 million for the years
1996, 1995 and 1994, respectively.
<PAGE>
The key components of our pension plans are summarized as
follows:
(In thousands) December 31
------------------------
1996 1995
---- ----
FUNDED STATUS
Accumulated benefit obligation $287,334 $288,680
Projected benefit obligation 368,158 367,707
Plan assets at fair value 407,404 350,266
ASSUMPTIONS
Discount rate 7.25% 6.75%
Rate of increase in compensation 4.00 3.75
Expected rate of return on plan assets 9.00 9.00
Plan assets are invested primarily in equities and fixed
maturities and included 380,172 shares of our common stock
with a market value of $22.3 million and $21.1 million at
Dec. 31, 1996 and 1995, respectively.
Employee Stock Ownership Plan - We maintain an ESOP for
qualified U.S. employees. 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.
We recorded ESOP expense of $6.2 million, $7.3 million and
$8.3 million for the years 1996, 1995 and 1994, respectively.
The ESOP allocated 498,715 shares in 1996, 500,834 shares
in 1995 and 505,776 shares in 1994. The remaining 603,627
shares at Dec. 31, 1996, will be released for allocation
annually through March 1, 1998.
<PAGE>
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 $11.72 annually and is currently
convertible into four shares of common stock. 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.
We recorded PSOP expense of $7.8 million, $7.3 million and
$10.7 million for the years 1996, 1995 and 1994,
respectively.
The PSOP allocated 60,803 shares in 1996, 59,998 shares in
1995 and 66,609 shares in 1994. The remaining 672,891 shares
at Dec. 31, 1996, 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.
<PAGE>
Net periodic postretirement benefits cost was $11.4
million, $11.0 million and $12.5 million for the years 1996,
1995 and 1994, respectively.
The key components of our postretirement benefits plans
are summarized as follows:
(In thousands) December 31
--------------------
1996 1995
---- ----
FUNDED STATUS
Accumulated postretirement benefit obligation $132,086 $134,497
Plan assets at fair value 17,107 16,430
ASSUMPTIONS
Discount rate 7.50% 7.00%
Rate of increase in compensation 4.00 3.75
Expected rate of return on plan assets 9.00 8.00
A health care inflation rate of 7.5% was assumed
to change to 7% in 1997, decrease annually to 5% in
2002 and then remain at that level. A 1% increase in the
health care cost trend rate assumption would not have
had a material impact on the accumulated postretirement
benefit obligation or the expense for the year.
NOTE 10 - Stock Incentive Plans
We have made fixed stock option grants to certain U.S.-based
company officers and outside directors. We also have made
separate fixed option grants to certain employees
of our non-U.S. operations. These plans are referred to
as "fixed plans" because the measurement date for
determining compensation costs is fixed on the date of
grant. In 1996, we also made a one-time variable stock
option grant to certain company officers. This was
considered a "variable" grant because the measurement date is
contingent upon future increases in the market price of
our common stock. At the end of 1996, approximately
1,790,000 shares remained available for grant under
our stock incentive plan.
We follow the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations in accounting for
our stock option plans. In 1996, we implemented the
disclosure provisions required by Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-
Based Compensation" for our option plans. SFAS No. 123
requires pro forma net income and earnings
per share information, which is calculated assuming
we had accounted for our stock option plans under
the "fair value" method described in that Statement.
<PAGE>
FIXED OPTION GRANTS
U.S.-based Plans - Our fixed option grants 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. Fixed stock options
granted under the stock incentive plan adopted
by our shareholders in May 1994 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.
Non-U.S. Plans - We also have separate stock option plans
for certain employees of our non-U.S. operations. 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 150,000 option shares
remained available at year-end for future grants under our
non-U.S. plans.
The following table summarizes the activity for our fixed
option plans for the last three years. All grants were made
at fair value on the date of grant.
Weighted
Option Average
Shares Exercise Price
--------- --------------
Outstanding Jan. 1, 1994 2,692,825 $32.66
Granted 554,100 40.85
Exercised (241,626) 28.77
Canceled (31,002) 34.70
--------- ------
Outstanding Dec. 31, 1994 2,974,297 34.48
Granted 670,050 48.52
Exercised (478,684) 33.11
Canceled (12,667) 38.65
--------- ------
Outstanding Dec. 31, 1995 3,152,996 37.65
Granted 773,100 54.04
Exercised (441,037) 33.99
Canceled (112,169) 35.92
--------- ------
Outstanding Dec. 31, 1996 3,372,890 $41.95
========= ======
<PAGE>
The following table summarizes the options exercisable at
the end of the last three years and the weighted average
fair value of options granted during 1996 and 1995. The fair
value of options is estimated on the date of grant using the
Black-Scholes option-pricing model, with the following
weighted-average assumptions used for grants in 1996 and
1995, respectively: dividend yield of 3.3% and 3.5%;
expected volatility of 18.9% and 16.9%; risk-free
interest rates of 6.3% and 7.1%; and an expected life of 7.2
years for both years. SFAS No. 123 does not require fair
value calculations for grants made prior to 1995.
1996 1995 1994
--------- --------- ---------
Options exercisable at
year-end 2,545,540 2,404,446 2,347,497
Weighted average fair value
of options granted
during the year $12.27 $10.93 N/A
The following tables summarize the status of fixed stock
options outstanding and exercisable at Dec. 31, 1996:
Options Outstanding
---------------------------------------
Weighted
Average Weighted
Range of Number of Remaining Average
Exercise Prices Options Contractual Life Exercise Price
- --------------- --------- ---------------- --------------
$21.63 - 34.25 957,123 3.6 years $31.56
35.00 - 43.00 854,017 6.1 years 38.01
43.19 - 50.88 1,203,500 8.4 years 48.44
52.75 - 58.00 358,250 9.1 years 57.26
- -------------- --------- --------- ------
$21.63 - 58.00 3,372,890 6.5 years $41.95
============== ========= ========= ======
Options Exercisable
-----------------------------------------
Weighted
Number of Average
Range of Exercise Prices Options Exercise Price
- ------------------------ --------- --------------
$21.63 - 34.25 957,123 $31.56
35.00 - 43.00 810,017 37.88
43.19 - 50.88 767,400 47.12
52.75 - 58.00 11,000 52.75
- -------------- --------- ------
$21.63 - 58.00 2,545,540 $38.36
============== ========= ======
<PAGE>
VARIABLE STOCK OPTION GRANT
In 1996, we made a one-time variable option grant of 825,300
shares from our 1994 stock incentive plan to certain of our
key officers. One-half of the options will vest when the
market price of our stock reaches a 20-consecutive-day
average of $100 per share. The remaining options will vest
when our stock price reaches a 20-consecutive-day average of
$110 per share. The exercise price of each option is equal
to the market price of our stock on the grant date, which
was $58.75. These options may be exercised between four and
five years after the date of grant provided the stock price
targets are achieved.
All of the variable options granted in 1996 were
outstanding at Dec. 31, 1996. These options have a remaining
contractual life of 4.9 years and an estimated fair value
of $9.08 per option. The fair value of the variable options
was estimated on the date of grant using a variable option-
pricing model with the following assumptions: dividend yield
of 3.0%; expected volatility of 20.0%; risk-free interest
rate of 5.8%; and an expected life of 5 years.
RESTRICTED STOCK AWARDS
Up to 20% of the 4 million shares available under our 1994
stock incentive 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. Up to 760,000 shares remain available
for restricted stock awards at Dec. 31, 1996.
PRO FORMA INFORMATION
Had we calculated compensation expense for our stock option
grants based on the "fair value" method described in SFAS
No. 123, our net income and earnings per share would have
been reduced to the pro forma amounts as indicated.
(In thousands) Year ended December 31
----------------------
1996 1995
---- ----
NET INCOME
As reported $450,099 $521,209
Pro forma 445,090 517,750
PRIMARY EARNINGS PER SHARE
As reported 5.22 5.99
Pro forma 5.16 5.95
FULLY DILUTED EARNINGS PER SHARE
As reported 4.93 5.68
Pro forma 4.88 5.65
<PAGE>
NOTE 11 - Commitments and Contingencies
Investment Commitments - We have long-term commitments to
fund venture capital and real estate investments totaling
$82.9 million as of Dec. 31, 1996. We estimate these
commitments will be paid as follows: $34.8 million in 1997;
$26.0 million in 1998; $14.4 million in 1999;
$7.2 million in 2000; $0.5 million in 2001.
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 $67.0 million in 1996, $58.2 million in
1995 and $55.1 million in 1994.
Certain leases are noncancelable, and we would remain
responsible for payment even if we stopped using the space
or equipment. On Dec. 31, 1996, the minimum annual rents for
which we would be liable under these types of leases are as
follows: $40.1 million in 1997, $35.2 million in 1998, $30.7
million in 1999, $20.2 million in 2000, $16.2 million in
2001 and $61.1 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.
NOTE 12 - Acquisition of Northbrook
On July 31, 1996, we acquired Northbrook Holdings, Inc. and
its three insurance subsidiaries from Allstate Insurance
Company. Northbrook and its subsidiaries, which had 1995 net
written premiums of $587 million, underwrite various
property-liability commercial insurance products throughout
the United States. Our total cost for this acquisition was
approximately $190 million, which was provided from internal
funds. We recorded goodwill of approximately $68 million
that we are amortizing over 15 years.
<PAGE>
In the Northbrook purchase agreement, we agreed
to pay Allstate additional consideration of up to $50
million in the event a redundancy develops on the acquired
Northbrook reserves between the purchase date and
July 31, 2000. Similarly, Allstate agreed to pay us
consideration of up to $100 million in the event a
deficiency develops on those reserves during the same time
period. Any amounts to be paid by either party will depend
on the extent of the redundancy or deficiency and will be
determined in accordance with terms described in the
purchase agreement.
We accounted for the acquisition as a purchase. As
a result, Northbrook's results were included in our
consolidated results from the date of purchase. Consolidated
results would not have been materially different had this
acquisition been completed at the beginning of 1995.
NOTE 13 - Discontinued Operations
In December 1996, we decided to sell our entire insurance
brokerage operation, Minet. As a result, Minet is accounted
for as a discontinued operation in 1996, and we've restated
1995 and 1994 results to be consistent with the 1996
presentation.
The following summarizes the discontinued operations for
the last three years:
(In thousands) Year ended December 31
----------------------------
1996 1995 1994
---- ---- ----
Revenues $348,887 $365,880 $345,676
======= ======= =======
Operating loss, before
income taxes $(18,815) $(13,092) $ (9,947)
Income tax expense 401 3,547 7,227
------- ------- -------
Operating loss, net of taxes (19,216) (16,639) (17,174)
------- ------- -------
Loss on disposal, before
income taxes (380,036) - -
Income tax benefit (291,493) - -
------- ------- -------
Loss on disposal,
net of taxes (88,543) - -
------- ------- -------
Loss from discontinued
operations $(107,759) $(16,639) $(17,174)
======= ======= =======
<PAGE>
The estimated pretax loss of $380 million on the disposal
of Minet in 1996 represents the estimated difference between
the fair value and the carrying value of Minet at the date
of disposal. The loss provision encompasses Minet's
estimated operating losses through the disposal date, the
realization of previously unrealized foreign exchange
losses, pension and postretirement curtailment gains, and
estimated selling costs.
We also recorded a net $291 million tax benefit in 1996,
consisting of a $353 million tax benefit on the provision
for loss on disposal reduced by a valuation allowance of $62
million. Our federal income tax carrying value of Minet was
substantially higher than our carrying value for
financial statement purposes, so the tax benefit was
not proportionate to the pretax loss.
The net assets of our discontinued operations at
Dec. 31, 1996, consisted of the estimated proceeds we'll
receive upon disposal, along with the net tax assets
associated with the disposal. We restated our Dec. 31, 1995,
balance sheet to record the net assets of discontinued
operations in other assets.
NOTE 14 - Reinsurance
Our financial statements reflect the effects of assumed
and ceded reinsurance transactions. Assumed reinsurance
refers to our acceptance of certain insurance risks that
other insurance companies have underwritten. Ceded
reinsurance means other insurance companies agree to share
certain risks with us. The primary purpose of ceded
reinsurance is to protect us from potential losses in excess
of what we are prepared to accept.
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.
<PAGE>
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
------------------------------
1996 1995 1994
---- ---- ----
PREMIUMS WRITTEN
Direct $3,945,053 $3,825,517 $3,491,466
Assumed 969,420 1,030,331 745,810
Ceded (518,351) (612,635) (614,250)
--------- --------- ---------
Net premiums written $4,396,122 $4,243,213 $3,623,026
========= ========= =========
PREMIUMS EARNED
Direct $4,001,384 $3,678,190 $3,296,215
Assumed 975,273 934,490 709,987
Ceded (528,409) (641,351) (594,121)
--------- --------- ---------
Net premiums earned $4,448,248 $3,971,329 $3,412,081
========= ========= =========
INSURANCE LOSSES AND
LOSS ADJUSTMENT EXPENSES
Direct $2,851,403 $2,926,261 $2,245,796
Assumed 671,401 743,740 595,492
Ceded (204,503) (805,694) (379,590)
--------- --------- ---------
Net insurance losses and
loss adjustment expenses $3,318,301 $2,864,307 $2,461,698
========= ========= =========
NOTE 15 - Statutory Accounting Practices
Our underwriting operations are required to file financial
statements with state and foreign regulatory authorities.
The accounting principles used to prepare these statutory
financial statements follow prescribed accounting
principles, which differ from GAAP. On a statutory
accounting basis, our underwriting operations reported net
income of $584.0 million in 1996, $476.3 million in 1995 and
$285.3 million in 1994. Statutory surplus (shareholder's
equity) of these operations was $3.0 billion and $2.5 billion as
of Dec. 31, 1996 and 1995, respectively.
<PAGE>
NOTE 16 - Segment Information
Geographic Areas - We provide international property-
liability insurance coverages. The following summary
presents financial data of our continuing operations based
on their location.
(In thousands) Year ended December 31
----------------------------------
1996 1995 1994
---- ---- ----
REVENUES
U.S. $5,051,190 $4,435,770 $3,954,560
Non-U.S. 682,966 620,429 413,874
--------- --------- ---------
Total revenues $5,734,156 $5,056,199 $4,368,434
========= ========= =========
INCOME (LOSS)
BEFORE INCOME TAXES
U.S. $ 622,834 $ 728,108 $ 546,062
Non-U.S. 76,302 (58,783) 27,463
-------- --------- ---------
Total income
before income taxes $ 699,136 $ 669,325 $ 573,525
======== ========= =========
(In thousands) December 31
-----------------------------------
1996 1995 1994
---- ---- ----
IDENTIFIABLE ASSETS
U.S. $17,571,323 $15,590,934 $14,258,779
Non-U.S. 2,633,783 2,352,907 1,487,241
---------- ---------- ----------
Total identifiable assets 20,205,106 17,943,841 15,746,020
Parent company, consolidating
eliminations and
discontinued operations 475,870 575,453 395,719
---------- ---------- ----------
Total assets $20,680,976 $18,519,294 $16,141,739
========== ========== ==========
<PAGE>
Industry - Our two industry segments are underwriting and
investment banking-asset management. The summary on the next
page presents revenues, income from continuing operations
before income taxes and identifiable assets for both
industry segments. Each segment's revenues and pretax income
include investment income.
(In thousands) Year ended December 31
-----------------------------------
1996 1995 1994
---- ---- ----
REVENUES FROM CONTINUING
OPERATIONS
Underwriting:
St. Paul Fire and Marine:
Specialized Commercial $ 1,272,561 $ 1,230,790 $ 1,015,397
Commercial 862,092 587,016 498,543
Personal Insurance 707,299 655,347 619,414
Medical Services 601,679 605,468 638,413
---------- ---------- -----------
Total St. Paul
Fire and Marine 3,443,631 3,078,621 2,771,767
St. Paul International
Underwriting 268,830 237,727 156,946
---------- ---------- -----------
Total Worldwide
Insurance Operations 3,712,461 3,316,348 2,928,713
St. Paul Re 735,787 654,981 483,368
---------- ---------- -----------
Total premiums earned 4,448,248 3,971,329 3,412,081
Net investment income 794,901 731,096 674,818
Realized investment gains 208,549 74,403 35,967
Other 40,619 37,282 29,053
---------- ---------- -----------
Total underwriting 5,492,317 4,814,110 4,151,919
---------- ---------- -----------
Investment banking-
asset management 232,347 236,230 220,303
---------- ---------- -----------
Total industry segments 5,724,664 5,050,340 4,372,222
Parent company and
consolidating eliminations 9,492 5,859 (3,788)
---------- ---------- -----------
Total revenues $ 5,734,156 $ 5,056,199 $ 4,368,434
========== ========== ===========
<PAGE>
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
Underwriting:
St. Paul Fire and Marine:
Specialized Commercial $ 49,186 $ (124,078) $ (89,116)
Commercial (60,228) (3,668) (62,988)
Personal Insurance (201,815) (33,000) (26,315)
Medical Services 55,179 76,399 118,379
---------- ---------- ----------
Total St. Paul
Fire and Marine (157,678) (84,347) (60,040)
St. Paul International
Underwriting (21,784) (23,188) (31,166)
---------- ---------- ----------
Total Worldwide
Insurance Operations (179,462) (107,535) (91,206)
St. Paul Re (36,698) 4,490 (21,802)
---------- ---------- ----------
Total GAAP underwriting
result (216,160) (103,045) (113,008)
Net investment income 794,901 731,096 674,818
Realized investment gains 208,549 74,403 35,967
Other (101,206) (50,542) (37,068)
---------- ---------- ----------
Total underwriting 686,084 651,912 560,709
---------- ---------- ----------
Investment banking-
asset management:
Pretax income before
minority interest 117,502 113,770 94,635
Minority interest (25,805) (25,573) (22,777)
---------- ---------- ----------
Total investment banking-
asset management 91,697 88,197 71,858
---------- ---------- ----------
Total industry segments 777,781 740,109 632,567
Parent company and
consolidating eliminations (78,645) (70,784) (59,042)
---------- ---------- ----------
Total income from continuing
operations before income taxes $ 699,136 $ 669,325 $ 573,525
========== ========== ==========
<PAGE>
(In thousands) December 31
----------------------------------
1996 1995 1994
---- ---- ----
IDENTIFIABLE ASSETS
Underwriting $19,848,788 $17,541,329 $15,397,173
Investment banking-
asset management 356,318 402,512 348,847
---------- ---------- ----------
Total industry segments 20,205,106 17,943,841 15,746,020
Parent company, consolidating
eliminations and discontinued
operations 475,870 575,453 395,719
---------- ---------- ----------
Total assets $20,680,976 $18,519,294 $16,141,739
========== ========== ==========
<PAGE>
NOTE 17 - Quarterly Results of Operations (Unaudited)
The following is an unaudited summary of our quarterly
results for the last three years.
(In thousands) 1996
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues $1,329,891 $1,364,474 $1,476,158 $1,563,633
Income from
continuing operations 144,411 135,295 114,823 163,329
Net income 128,821 130,053 128,934 62,291
Earnings per common share:
Primary:
Income from continuing operations 1.67 1.57 1.33 1.91
Net income 1.49 1.51 1.50 0.71
Fully diluted:
Income from continuing operations 1.57 1.48 1.26 1.79
Net income 1.40 1.42 1.42 0.69
(In thousands) 1995
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues $1,192,755 $1,244,183 $1,270,351 $1,348,910
Income from
continuing operations 127,384 118,341 137,108 155,015
Net income 110,596 112,967 142,399 155,247
Earnings per common share:
Primary:
Income from continuing operations 1.47 1.36 1.58 1.78
Net income 1.27 1.30 1.64 1.78
Fully diluted:
Income from continuing operations 1.42 1.30 1.48 1.67
Net income 1.23 1.24 1.54 1.67
(In thousands) 1994
------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues $1,090,928 $1,083,912 $1,107,136 $1,086,458
Income from
continuing operations 74,398 134,877 130,424 120,303
Net income 64,437 127,762 129,808 120,821
Earnings per common share:
Primary:
Income from continuing operations 0.85 1.57 1.51 1.39
Net income 0.73 1.49 1.51 1.40
Fully diluted:
Income from continuing operations 0.82 1.51 1.46 1.34
Net income 0.71 1.43 1.45 1.35
<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 7,685 as of Feb. 28, 1997.
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.
Cash
Dividend
1996 High Low Declared
- ---- ---- ---- --------
First Quarter $60 $54 $0.44
Second Quarter 56 1/8 50 7/8 0.44
Third Quarter 55 1/2 50 5/8 0.44
Fourth Quarter 59 5/8 54 0.44
Cash dividend paid in 1996 was $1.72.
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.
<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
(xii) Seaboard Surety Company New York
Subsidiary:
(a) Seaboard Surety Company of Canada Canada
(xiii) Northbrook Holdings, Inc. Delaware
Subsidiaries:
(a) Northbrook National Insurance Co. Delaware
(b) Northbrook Property and Casualty
Insurance Co. Delaware
(c) Northbrook Indemnity Co. Delaware
(xiv) St. Paul Lloyds Holdings, Inc. Texas
(xv) 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) Minet Risk Services (Vermont), Inc. Vermont
<PAGE>
(3) St. Paul Holdings Limited United Kingdom
Subsidiaries:
(i) St. Paul Reinsurance Company
Limited United Kingdom
(ii) St. Paul Management Limited United Kingdom
(iii) St. Paul Investment Services Ltd. United Kingdom
(iv) St. Paul Investments Ltd. United Kingdom
(v) St. Paul International Insurance
Company Limited United Kingdom
(vi) St. Paul Insurance Espana Seguros
Y Reaseguros, S.A. Spain
(vii) Camperdown UK Limited United Kingdom
(viii) New World Insurance Company Ltd. Guernsey
(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) El Plata SA Argentina De Seguros Argentina
(7) Camperdown Corporation Delaware
(8) St. Paul Capital L.L.C. Delaware
(9) St. Paul Multinational Holdings, Inc. Delaware
Subsidiary:
(i) St. Paul Insurance Company SA Limited South Africa
(10) St. Paul Bermuda Holdings, Inc. Delaware
Subsidiaries:
(i) St. Paul (Bermuda), Ltd. Bermuda
(ii) St. Paul Re (Bermuda), Ltd. Bermuda
(11) St. Paul Venture Capital, Inc. Delaware
(12) Minet Holdings Guernsey Limited Guernsey
Subsidiary:
(i) Minet Group Holdings United Kingdom
(a) Minet Group* United Kingdom
Subsidiaries:
(i) JH Minet Reinsurance Brokers
Limited United Kingdom
(ii) Minet Consultancy Services Limited United Kingdom
(iii) Minet Hong Kong Limited Hong Kong
(iv) Minet Inc. Canada
(v) Minet Limited United Kingdom
(vi) M.I.B. Group (Pty) Limited South Africa
(vii) Minet Australia Limited Australia
(viii) Minet Burn & Roche Pty Limited Australia
<PAGE>
*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, 1996.
**The John Nuveen Company is a majority-owned subsidiary jointly
owned by The St. Paul, which holds a 47% interest, and Fire and
Marine, which holds a 31% 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, No. 333-01065 and No.
333-22329) and Form S-3 (SEC File No. 33-33931, No. 33-50115, No.
33-58491 and No. 333-06456) of The St. Paul Companies, Inc., of our
reports dated January 27, 1997, relating to the consolidated
balance sheets of The St. Paul Companies, Inc. and subsidiaries as
of December 31, 1996 and 1995, 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, 1996, and
all related schedules, which reports appear in the December 31,
1996 annual report on Form 10-K of The St. Paul Companies, Inc.
Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP
March 17, 1997 ---------------------
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, 1996, 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 4, 1997 Signature: /s/ Michael R. Bonsignore
-------------------------
Name: Michael R. Bonsignore
Dated: February 4, 1997 Signature: /s/ John H. Dasburg
-------------------------
Name: John H. Dasburg
Dated: February 4, 1997 Signature: /s/ W. John Driscoll
-------------------------
Name: W. John Driscoll
Dated: February 4, 1997 Signature: /s/ Pierson M. Grieve
-------------------------
Name: Pierson M. Grieve
Dated: February 4, 1997 Signature: /s/ Ronald James
-------------------------
Name: Ronald James
Dated: February 4, 1997 Signature: /s/ David G. John
-------------------------
Name: David G. John
Dated: February 4, 1997 Signature: /s/ William H. Kling
-------------------------
Name: William H. Kling
Dated: February 4, 1997 Signature: /s/ Bruce K. MacLaury
-------------------------
Name: Bruce K. MacLaury
Dated: February 4, 1997 Signature: /s/ Glen D. Nelson
-------------------------
Name: Glen D. Nelson
<PAGE>
Dated: February 4, 1997 Signature: /s/ Anita M. Pampusch
-------------------------
Name: Anita M. Pampusch
Dated: February 4, 1997 Signature: /s/ Gordon M. Sprenger
-------------------------
Name: Gordon M. Sprenger
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<DEBT-HELD-FOR-SALE> 11,944,085 10,372,890 8,828,684
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 808,295 711,471 531,042
<MORTGAGE> 0 0 0
<REAL-ESTATE> 693,910 611,656 528,144
<TOTAL-INVEST> 14,365,616 12,558,111 10,728,393
<CASH> 37,214 25,475 20,809
<RECOVER-REINSURE> 68,692 74,568 88,900
<DEFERRED-ACQUISITION> 401,768 372,174 324,358
<TOTAL-ASSETS> 20,680,976 18,519,294 16,141,739
<POLICY-LOSSES> 11,673,148 10,247,070 9,423,429
<UNEARNED-PREMIUMS> 2,566,551 2,361,028 2,109,170
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 689,141 697,045 616,151
207,000 207,000 0
16,063 10,872 4,535
<COMMON> 475,710 460,458 445,222
<OTHER-SE> 3,512,047 3,258,791 2,287,712
<TOTAL-LIABILITY-AND-EQUITY> 20,680,976 18,519,294 16,141,739
4,448,248 3,971,329 3,412,081
<INVESTMENT-INCOME> 807,305 740,912 673,272
<INVESTMENT-GAINS> 218,525 84,572 41,974
<OTHER-INCOME> 260,078 259,386 241,107
<BENEFITS> 3,318,301 2,864,307 2,461,698
<UNDERWRITING-AMORTIZATION> 975,456 856,979 753,946
<UNDERWRITING-OTHER> 741,263 665,588 579,265
<INCOME-PRETAX> 699,136 669,325 573,525
<INCOME-TAX> 141,278 131,477 113,523
<INCOME-CONTINUING> 557,858 537,848 460,002
<DISCONTINUED> (107,759) (16,639) (17,174)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 450,099 521,209 442,828
<EPS-PRIMARY> 5.22 5.99 5.12
<EPS-DILUTED> 4.93 5.68 4.93
<RESERVE-OPEN> 10,247,070 9,423,429 9,185,191
<PROVISION-CURRENT> 3,570,545 3,112,193 2,790,164
<PROVISION-PRIOR> (252,244) (247,886) (328,466)
<PAYMENTS-CURRENT> 1,101,077 783,633 667,255
<PAYMENTS-PRIOR> 1,839,463 1,590,701 1,566,083
<RESERVE-CLOSE> 11,673,148 10,247,070 9,423,429
<CUMULATIVE-DEFICIENCY> 246,000 (199,000) 343,000
</TABLE>
