<PAGE>
UNITED STATES 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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________to___________
Commission file number 0-3021
THE ST. PAUL COMPANIES, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-0518860
------------ ------------
(State or other jurisdiction of (I.R.S. Employer
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 651-310-7911
------------
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. ( )
The aggregate market value of the outstanding Common Stock held by nonaffiliates
of the Registrant on March 11, 1999, was $7,435,808,686. The number of shares of
the Registrant's Common Stock, without par value, outstanding at March 11, 1999,
was 228,924,899.
An Exhibit Index is set forth at page 38 of this report.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's 1998 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 4, 1999 are incorporated by reference into Parts III and IV of this
report.
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PART I
ITEM 1. BUSINESS.
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 constitute 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 providing property-liability
and life insurance, and reinsurance products and services worldwide. The St.
Paul also has a presence in the asset management industry through its majority
ownership of The John Nuveen Company (Nuveen). As a management company, The St.
Paul oversees the operations of its subsidiaries and provides them with capital,
management and administrative services. At March 1, 1999, The St. Paul and its
subsidiaries employed approximately 14,000 persons.
USF&G MERGER
On April 24, 1998, The St. Paul completed its merger with USF&G Corporation
(USF&G), a Baltimore, Maryland-based holding company for property-liability and
life insurance and reinsurance operations. The St. Paul issued 66.5 million of
its common shares in exchange for all of the outstanding common stock of USF&G
in a business combination accounted for as a pooling of interests. Accordingly,
the consolidated financial statements for all periods prior to the combination
were restated to include the accounts and results of operations of USF&G. The
merged organization operates under The St. Paul name with headquarters in St.
Paul, Minnesota. The merger was valued at approximately $3.7 billion, which
included the assumption of USF&G's debt and capital security obligations.
The St. Paul recorded a pretax merger-related charge to earnings of $292 million
in 1998, primarily for severance and facilities exit costs. The integration of
the two companies is expected to result in annualized pretax expense savings of
approximately $200 million, as measured against the combined 1997 pre-merger
expenses of The St. Paul and USF&G. The expense savings are expected to result
primarily from the reduction in employee salaries and benefits after the
elimination of redundant employee positions from the merged organization. Note 2
to the consolidated financial statements included in The St. Paul's 1998 Annual
Report to Shareholders, which includes additional information regarding the
merger, including the components of and cash payments relating to the
merger-related charges, is incorporated herein by reference.
The St. Paul also recorded a $250 million pretax provision to increase USF&G's
loss and loss adjustment expense reserves subsequent to the merger. Note 7 to
the consolidated financial statements included in The St. Paul's 1998 Annual
Report to Shareholders, which includes additional information about the $250
million provision, is incorporated herein by reference.
Before the merger, The St. Paul was ranked as the 263rd-largest U.S.-based
corporation in "Fortune" magazine's rankings of total 1997 revenues. On a pro
forma revenue basis, the combined operations of The St. Paul and USF&G would
have ranked No. 160 on the 1997 Fortune list.
BUSINESS SEGMENTS
The St. Paul's property-liability insurance operations, composed of five
distinct underwriting business segments and an investment operations segment,
accounted for at least 92% of consolidated revenues from continuing
operations in each of the years 1998, 1997 and 1996. The St. Paul's life
insurance segment, Fidelity and Guaranty Life Insurance Company and
subsidiaries (F&G Life), accounted for 4% of revenues in each of those years,
and Nuveen accounted for virtually all of the remaining revenues in each
year. Financial information about The St. Paul's business segments is set
forth in Note 17 to the consolidated financial statements included in The St.
Paul's 1998 Annual Report to Shareholders, and is incorporated herein by
reference.
2
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The following table summarizes the sources of The St. Paul's consolidated
revenues from continuing operations for each of the last three years. Following
the table is a narrative description of each of The St. Paul's business
segments.
<TABLE>
<CAPTION>
Percentage of Consolidated Revenues
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
PROPERTY-LIABILITY INSURANCE:
PRIMARY INSURANCE OPERATIONS
U.S. UNDERWRITING:
Commercial lines 28.7% 30.3% 30.2%
Specialty commercial 15.9 15.0 15.3
Personal insurance 15.3 13.5 14.4
---- ---- ------
TOTAL U.S. UNDERWRITING 59.9 58.8 59.9
International 3.6 2.9 2.9
----- ----- -----
TOTAL PRIMARY INSURANCE OPERATIONS 63.5 61.7 62.8
Reinsurance 11.4 12.7 13.4
---- ---- ----
TOTAL UNDERWRITING 74.9 74.4 76.2
INVESTMENT OPERATIONS
Net investment income 14.3 13.8 13.4
Realized investment gains 2.1 4.2 2.9
----- ----- -----
Total investment operations 16.4 18.0 16.3
Other 0.7 0.6 0.6
----- ----- -----
TOTAL PROPERTY-LIABILITY INSURANCE 92.0 93.0 93.1
LIFE INSURANCE 4.3 4.2 3.9
ASSET MANAGEMENT 3.4 2.7 2.5
PARENT COMPANY, OTHER OPERATIONS AND
ELIMINATIONS 0.3 0.1 0.5
----- ------ -----
TOTAL 100.0% 100.0% 100.0%
----- ------ -----
----- ------ -----
</TABLE>
NARRATIVE DESCRIPTION OF BUSINESS
PROPERTY-LIABILITY INSURANCE
The St. Paul's property-liability insurance underwriting operations consist of
three U.S.-based primary underwriting segments collectively referred to as U.S.
UNDERWRITING, an international underwriting segment (INTERNATIONAL) and a
reinsurance segment (ST. PAUL RE). The St. Paul's U.S. Underwriting operations
underwrite property and liability insurance and provide insurance-related
products and services to commercial, professional and individual customers
throughout the United States. International underwrites primary property and
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 and The St. Paul's operations at
Lloyd's of London. St. Paul Re underwrites reinsurance for leading property-
liability insurance companies worldwide. The St. Paul's property-liability
operations also include an investment segment responsible for overseeing the
property-liability investment portfolio.
The primary sources of property-liability revenues are premiums earned from
insurance policies and reinsurance contracts, income earned from the investment
portfolio and gains from 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, as a result
from the merger, The St. Paul's underwriting operations would rank 8th on the
basis of 1997 written premiums.
PRINCIPAL DEPARTMENTS AND PRODUCTS. The "Property-Liability Underwriting Results
by Segment" table included in "Management's Discussion and Analysis" in The St.
Paul's 1998 Annual Report to Shareholders, which summarizes written premiums,
underwriting results and statutory combined ratios for each of its underwriting
segments for the last three years, is incorporated herein by reference. The
following discussion summarizes the business structure of The St. Paul's
property-liability insurance underwriting operations.
3
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U.S. UNDERWRITING
U.S. Underwriting operates through the following business segments:
COMMERCIAL LINES. The Commercial Lines segment includes the SMALL COMMERCIAL and
MIDDLE MARKET COMMERCIAL business centers, which offer general liability,
umbrella and excess liability, commercial auto and fire, inland marine, workers'
compensation and package coverages to a broad range of small to midsized
commercial enterprises. Tailored coverages and products are marketed to specific
customer groups such as golf courses, museums, colleges and schools,
multipurpose recreational facilities, manufacturers, wholesalers and processors.
Coverages marketed specifically to small commercial customers include the
Package Accounts for Commercial Enterprises (PACE) policy and the Business
Insurance Policy (BIP) for individuals, groups or franchise operations,
including retailers, offices and family restaurants.
The Commercial Lines segment includes the SURETY business center, which
underwrites surety bonds, primarily for construction contractors, which
guarantee that third parties will be indemnified against the nonperformance of
contractual obligations. Based on 1997 written premiums of $319 million, the
Surety underwriting operations of The St. Paul ranked as the largest underwriter
of surety bonds in the United States.
The Commercial Lines segment also includes several business centers that provide
specialized products and services for targeted industry groups. CONSTRUCTION
provides insurance to a broad range of general contractors, highway contractors
and specialty contractors. 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. SPECIAL PROPERTY underwrites
large property accounts, layered and excess property programs, large deductible
accounts, stop-loss and loss limit programs and other customized property
business. NATIONAL PROGRAMS underwrites coverages for nationwide,
multiple-policyholder programs through a single agency source. TRANSPORTATION
provides large motor carriers with customized insurance programs. The
CATASTROPHE RISK business center provides personal property coverages, such as
monoline earthquake coverage in California, through GeoVera Insurance Company,
and homeowners coverage in selected coastal states through USF&G Specialty
Insurance Company.
The St. Paul's participation in insurance pools and associations, which provide
specialized underwriting skills and risk management services for the classes of
business that they write, is also included in Commercial Lines 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. The St. Paul's participation in these pools and
associations is limited.
SPECIALTY COMMERCIAL. The Specialty Commercial segment includes the MEDICAL
SERVICES, CUSTOM MARKETS and PROFESSIONAL MARKETS business centers. This
segment, 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.
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, such as hospital networks and managed care systems.
Specialized claim and loss control services are vital components of Medical
Services' insurance products and services. The Medical Services business center
is the second-largest medical liability insurer in the United States, with
premium volume accounting for approximately 7% of the U.S. market based on 1997
premium data published in "Best's Review."
4
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Custom Markets includes the following business units serving specific commercial
customer groups. OCEAN MARINE provides a variety of property-liability insurance
related to ocean and inland waterways traffic, including cargo and hull property
protection. Effective Jan. 1, 1999, the Ocean Marine business center was
transferred to The St. Paul's International segment to form a new Global Marine
underwriting unit. 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.
TECHNOLOGY underwrites a range of specialized coverages for information
technology firms, including manufacturers of electronics, industrial machinery
and medical equipment. OIL AND GAS provides standard and specialty insurance
coverages for customers involved in the exploration and production of oil and
gas, including operators, drillers and oil servicing contractors. SPECIALTY
LINES provides unsupported umbrellas, policies and SIR products in the specialty
admitted market. ST. PAUL ATHENA is a specialty underwriting facility dedicated
to business generated through Swett & Crawford, a wholesale insurance brokerage
subsidiary of Aon Corporation (Aon).
Professional Markets is composed of FINANCIAL AND PROFESSIONAL SERVICES, which
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; and PUBLIC
SECTOR SERVICES, which markets insurance products and services, including
professional liability insurance, to all levels of government entities.
PERSONAL INSURANCE. This segment provides a broad portfolio of
property-liability insurance products and services for individuals. Through a
variety of single-line policies and multi-line 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. The Personal
Insurance segment also provides nonstandard auto coverages, which are marketed
to individuals who are unable to obtain standard coverage due to their inability
to meet certain underwriting criteria.
INTERNATIONAL
The St. Paul's International business segment is responsible for most of The St.
Paul's primary insurance written outside the United States. International has a
presence through insurance companies licensed in Canada and 11 countries in
Europe, Africa and Latin America. It also includes business generated from The
St. Paul's participation in Lloyd's of London as a provider of capital to
selected underwriting syndicates and as the owner of three 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 segment
predominantly markets specialty commercial insurance in the international arena,
offering a broad range of products and services tailored to meet the unique
needs of both its multinational customers as well as its customers in each of
the domestic markets which it serves. The St. Paul sold its personal insurance
business in the United Kingdom in early 1998 to Norwich Union Insurance Ltd.
ST. PAUL RE
St. Paul Re underwrites reinsurance worldwide, with clients in North America,
Latin America, the Caribbean, Europe, Australia and the Asia-Pacific region.
Reinsurance is an agreement by which an insurance company will transfer, or
"cede," a portion of the risk it has underwritten to a reinsurer, paying a
premium 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 several specialty
coverages.
The merger added USF&G's reinsurance operation, F&G Re, to The St. Paul's
reinsurance segment. F&G Re brought a diverse mix of reinsurance products and
enhanced St. Paul Re's capabilities in several areas, including
"non-traditional" reinsurance, an area of increasing demand that combines
elements of traditional underwriting risk with financial risk protections.
5
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The merger also added Discover Re Managers, Inc. (Discover Re) to The St. Paul's
reinsurance segment. Discover Re provides primary insurance, reinsurance and
related services to the alternative risk transfer market, primarily in the
municipalities, transportation, education and retail markets. Through
alternative risk transfer, a company self-insures, or insures through a captive
insurer, the portion of its own losses which are predictable and purchases
insurance for the less predictable, high-severity losses that could have a major
financial impact on the company.
According to data published by the Reinsurance Association of America, St. Paul
Re's written premium volume of $833 million through the first nine months of
1998 ranked it as the sixth-largest reinsurer in the United States. According to
data published in "Best's Review," The St. Paul would rank as the 14th- largest
property-liability reinsurer in the world, based on 1997 written premiums.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The St. Paul's U.S. Underwriting operations are licensed to transact business in
all 50 states, the District of Columbia, Puerto Rico, Guam and the Virgin
Islands. At least five percent of U.S. Underwriting's 1998 property-liability
written premiums were produced in each of Illinois, California, Florida and New
York.
U.S. Underwriting's business is produced primarily through approximately 8,400
independent insurance agencies and insurance brokers. The needs of agents,
brokers and policyholders are addressed through 40 service offices in major
cities throughout the United States and 85 additional offices in the United
States.
St. Paul Re produces reinsurance business from its New York headquarters, as
well as from offices in London, Miami, Chicago, Atlanta, Philadelphia, Brussels,
Morristown NJ, Munich, Singapore, Hong Kong, Tokyo, Sydney and San Francisco. It
underwrites business through brokers and, for certain types of reinsurance and
in certain markets, on a direct basis. Discover Re underwrites alternative risk
transfer business from its Farmington, CT headquarters, from regional U.S.
offices in Atlanta, Pittsburgh, Dallas, Minneapolis and San Francisco, and from
a correspondent office in London.
Our International operations are headquartered in London and underwrite
insurance through domestic operations in 11 markets outside the United States
(Argentina, Botswana, Canada, France, Germany, Ireland, Mexico, South Africa,
Spain, The Netherlands and the United Kingdom). These operations distribute
their products principally through independent brokers. Through its presence at
Lloyd's of London, International has access to business markets in virtually
every country of the world for its specialty products including aviation, kidnap
and ransom, malicious product tampering, creditor/payment protection and
personal accident. International's group of three Lloyd's of London managing
agencies underwrites business for eight syndicates, collectively representing
approximately 4% of Lloyd's total capacity.
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 at Dec. 31, 1998
cover claims that were incurred not only in 1998 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 reduced for estimates of
salvage and subrogation.
Loss reserves for certain workers' compensation business and certain assumed
reinsurance contracts are discounted to present value. Additional information
about these discounted liabilities is set forth in Note 1 to the consolidated
financial statements included in The St. Paul's 1998 Annual Report to
Shareholders, and is incorporated herein by reference. During 1998, $3.8 million
of discount was amortized and $5.0 million of discount was accrued.
6
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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.
For certain reinsurance contracts entered into prior to the issuance of
Statement of Financial Accounting Standards (SFAS) No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," (for
GAAP accounting purposes) and Chapter 22 - Reinsurance (for statutory accounting
purposes), The St. Paul follows deposit accounting for GAAP purposes and
reinsurance accounting for statutory purposes. Since the statutory accounting
was implemented on a prospective basis, however, a difference between GAAP and
statutory reserves exists for contracts entered into prior to Chapter 22
implementation. Such difference amounted to $124 million at Dec. 31, 1998.
TEN-YEAR DEVELOPMENT. The table on page 9 presents a development of net loss and
LAE reserve liabilities and payments for the years 1988 through 1998. The top
line on the table shows the estimated liability for unpaid losses and LAE, net
of reinsurance recoverables, recorded at the balance sheet date for each of the
years indicated.
In 1997, The St. Paul changed the method by which it assigns loss activity to a
particular year for assumed reinsurance written by its U.K.-based reinsurance
operation. Prior to 1997, that loss activity was assigned to the year in which
the underlying reinsurance contract was written. In 1997, The St. Paul's
analysis indicated that an excess amount of loss activity was being assigned to
prior years because of this practice. As a result, The St. Paul implemented an
improved procedure in 1997 that more accurately assigns loss activity for this
business to the year in which it occurred. This change had the impact of
increasing favorable development on previously established reserves by
approximately $110 million in 1997. There was no net impact on total incurred
losses, however, because there was a corresponding increase in the provision for
current year loss activity in 1997. Development data for individual years prior
to 1997 in this table were not restated to reflect this new procedure because
reliable data to do so was not available.
The upper portion of the table, which shows the re-estimated amounts relating to
the previously recorded liabilities, is based upon experience as of the end of
each succeeding year. These estimates are either increased or decreased as
further information becomes known about individual claims and as changes in the
trend of claim frequency and severity become apparent.
The "Cumulative redundancy (deficiency)" line on the table for any given year
represents the aggregate change in the estimates for all years subsequent to the
year the reserves were initially established. For example, the 1991 reserve of
$12,848 million developed to $12,479 million, or a $369 million redundancy, by
the end of 1993. By the end of 1998, the 1991 reserve had developed a redundancy
of $949 million. The changes in the estimate of 1991 loss reserves were
reflected in operations during the past seven years.
In 1993, The St. Paul adopted the provisions of 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 1998),
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,
1998) 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, 1998, $8,812 million of the currently estimated $11,899
million of losses and LAE that have been incurred for the years up to and
including 1991 have been paid. Thus, as of Dec. 31, 1998, it is estimated that
$3,087 million of incurred losses and LAE have yet to be paid for the years up
to and including 1991.
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 1988 losses is included in the cumulative
redundancy (deficiency) for the years 1988 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 7 to the consolidated financial statements, which is included in The St.
Paul's 1998 Annual Report to Shareholders, includes a reconciliation of
beginning and ending loss reserve liabilities for each of the last three years
and 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" of The St. Paul's 1998 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 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- - ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for
unpaid losses and LAE $10,679 11,343 11,881 12,848 13,211 13,258 13,290 13,732 15,021 15,100 15,194
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Liability re-estimated
as of:
One year later 10,519 11,305 12,228 12,684 12,911 12,874 12,954 13,286 14,350 14,822
Two years later 10,370 11,517 12,130 12,479 12,589 12,501 12,518 12,690 13,953
Three years later 10,670 11,480 12,058 12,280 12,384 12,200 12,035 12,371
Four years later 10,822 11,518 11,930 12,222 12,144 11,815 11,861
Five years later 10,943 11,503 11,918 12,065 11,915 11,677
Six years later 10,970 11,544 11,850 11,944 11,818
Seven years later 11,060 11,538 11,869 11,899
Eight years later 11,098 11,646 11,844
Nine years later 11,306 11,642
Ten years later 11,325
Cumulative redundancy
(deficiency) $(646) (299) 37 949 1,393 1,581 1,429 1,361 1,068 278
------ ------ ----- ----- ----- ----- ----- ----- ----- -----
------ ------ ----- ----- ----- ----- ----- ----- ----- -----
Cumulative redundancy
(deficiency) excluding
foreign exchange (1) $(644) (326) 28 949 1,382 1,571 1,425 1,355 1,077 324
------ ------ ----- ----- ----- ----- ----- ----- ----- -----
------ ------ ----- ----- ----- ----- ----- ----- ----- -----
Net liability for
unpaid losses and LAE 13,211 13,258 13,290 13,732 15,021 15,100 15,194
Reinsurance recoverable on
unpaid losses 3,903 2,585 2,537 2,827 2,868 3,053 3,264
------ ------ ------ ------ ------ ------ -------
Gross liability 17,114 15,843 15,827 16,559 17,889 18,153 18,458
------ ------ ------ ------ ------ ------ -------
------ ------ ------ ------ ------ ------ -------
Gross re-estimated liability:
One year later 16,467 15,435 15,912 16,140 17,325 18,022
Two years later 16,143 15,459 15,554 15,387 17,077
Three years later 15,998 15,245 14,954 15,260
Four years later 15,825 14,771 14,959
Five years later 15,536 14,798
Six years later 15,565
Gross cumulative
redundancy 1,549 1,045 868 1,299 812 131
------ ------ ----- ----- ----- -----
------ ------ ----- ----- ----- -----
Gross cumulative
redundancy excluding
foreign exchange (1) 1,519 1,030 843 1,301 838 191
------ ------ ----- ----- ----- -----
------ ------ ----- ----- ----- -----
Cumulative amount of net
liability paid through:
One year later $2,735 3,041 3,105 3,027 3,017 2,850 2,787 3,029 3,453 3,632
Two years later 4,658 5,004 5,107 5,027 4,970 4,699 4,698 5,003 5,816
Three years later 5,996 6,390 6,433 6,380 6,263 6,003 6,037 6,493
Four years later 6,982 7,271 7,371 7,276 7,173 6,915 7,065
Five years later 7,613 7,931 8,006 7,917 7,838 7,632
Six years later 8,096 8,388 8,470 8,424 8,329
Seven years later 8,464 8,745 8,875 8,812
Eight years later 8,743 9,077 9,196
Nine years later 9,052 9,337
Ten years later 9,276
Cumulative amount of
gross liability paid
through:
One year later 4,072 3,443 3,389 3,547 3,837 4,079
Two years later 6,585 5,683 5,700 5,582 6,508
Three years later 8,178 7,282 7,082 7,301
Four years later 9,304 8,233 8,291
Five years later 10,009 9,083
Six years later 10,597
</TABLE>
(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 for all years presented. 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.
9
<PAGE>
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 15 to the consolidated financial statements, which
is included in The St. Paul's 1998 Annual Report to Shareholders, provides a
schedule of ceded reinsurance information and is incorporated herein by
reference.
PROPERTY - LIABILITY INVESTMENT OPERATIONS
OBJECTIVES. The St. Paul's board of directors approves the overall aggregate
investment plan for the companies within The St. Paul group. Each subsidiary
adopts its own specific investment policy tailored to comply with domestic laws
and regulations and the overall corporate investment plan. 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 and enhance shareholder value through investments in certain
other investment classes, such as equity securities, venture capital
and real estate.
The St. Paul has had limited involvement with derivative financial instruments
for purposes of hedging against fluctuations in foreign currency and interest
rates. The St. Paul has not participated in the derivatives market for trading
or speculative purposes.
FIXED MATURITIES. Fixed maturities constituted 77% of The St. Paul's property-
liability insurance operations' investment portfolio at Dec. 31, 1998. The
portfolio is primarily composed of high-quality, intermediate-term taxable U.S.
government agency and corporate bonds and tax-exempt U.S. municipal bonds. The
following table presents information about the fixed maturities portfolio for
the last three years (dollars in millions).
<TABLE>
<CAPTION>
Pretax Net
Amortized Cost at Estimated Fair Investment Weighted Average Weighted Average
Year Year-end Value at Year-end Income Pre-tax Yield After-tax Yield
----- ----------------- ----------------- ----------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
1998 $16,761.6 $17,777.7 $1,217.6 6.8% 5.1%
1997 17,215.1 18,067.9 1,241.3 7.1% 5.2%
1996 16,927.3 17,455.5 1,160.1 7.0% 5.1%
</TABLE>
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
1998 consisted of intermediate-term, investment-grade taxable and tax-exempt
securities. The fixed maturities portfolio is carried on The St. Paul's balance
sheet at estimated fair value, with unrealized appreciation and depreciation
(net of taxes) recorded in common shareholders' equity. At December 31, 1998,
pretax unrealized appreciation totaled $1.02 billion.
10
<PAGE>
The fixed maturities portfolio is managed conservatively to provide reasonable
returns while limiting exposure to risks. Approximately 95% of the fixed
maturities portfolio is rated at investment grade levels (BBB or better).
Nonrated and non-investment grade (high-yield) securities comprise the remainder
of the portfolio. The high-yield investments, acquired in the merger with USF&G,
represent a minimal percentage of the portfolio.
EQUITIES. Equity securities comprised 4% of the property-liability operations'
investments (at cost) at December 31, 1998, and consist of a diversified
portfolio of common stocks, which are held with the primary objective of
achieving capital appreciation. Sales of equities generated $158 million of
pretax realized investment gains in 1998, and dividend income totaled $15
million. The portfolio's carrying value at year-end included $300 million of
pretax unrealized appreciation.
REAL ESTATE AND MORTGAGE LOANS. The St. Paul's property-liability operations'
real estate holdings consist of a diversified portfolio of commercial office and
warehouse properties that The St. Paul owns directly or has partial interest in
through joint ventures. The properties are geographically distributed throughout
the United States. The St. Paul also has a portfolio of real estate mortgage
investments acquired in the merger with USF&G. The real estate and mortgage loan
portfolio produced $82 million of pretax investment income in 1998, and sales of
these investments in 1998 generated $8 million of pretax realized gains.
VENTURE CAPITAL. Securities of small- to medium-sized companies spanning a
variety of industries comprise The St. Paul's venture capital holdings, which
accounted for 2% of property-liability investments (at cost) at December 31,
1998. These investments are in the form of limited partnership interests or
direct equity investments. Venture capital investments generated pretax realized
investment gains of $25 million in 1998. The carrying value of venture capital
investments at December 31, 1998 included $182 million of pretax unrealized
appreciation.
SECURITIES LENDING COLLATERAL. This investment class consists of collateral held
on certain fixed-maturity securities loaned to other institutions through a
lending agent for short periods of time. The collateral is maintained at 102%,
marked to market daily, of the fair value of the loaned securities. The St. Paul
retains full ownership of the loaned securities and is indemnified by the
lending agent in the event a borrower becomes insolvent or fails to return the
securities.
OTHER INVESTMENTS. The St. Paul's portfolio also includes short-term securities
and other miscellaneous investments, which in the aggregate comprised 5% of
property-liability investments at December 31, 1998.
Notes 1, 4, 5 and 6 to the consolidated financial statements, which are
included in The St. Paul's 1998 Annual Report to Shareholders, provide
additional information about The St. Paul's investment portfolio and are
incorporated herein by reference. The "Investment Operations" and "Exposures
to Market Risk" sections of "Management's Discussion and Analysis" in said
Annual Report are also incorporated herein by reference.
LIFE INSURANCE
Fidelity and Guaranty Life Insurance Company (F&G Life) and its subsidiaries
market many forms of annuity and life insurance products, including
equity-indexed annuities, single premium deferred annuities, tax sheltered
annuities, single premium immediate annuities and universal life and term life
insurance.
Single premium deferred annuities and equity indexed annuities are sold
primarily through independent agents and insurance brokers. Tax sheltered
annuities are sold through a national wholesaler. Structured settlements are
annuities sold predominantly to property-liability companies (including The
St. Paul's U.S. Underwriting operations) in settlement of certain of their
insurance claims.
Note 7 to the consolidated financial statements, which is included in The St.
Paul's 1998 Annual Report to Shareholders, provides a table of F&G Life's future
policy benefit reserves by type of product and is incorporated herein by
reference.
11
<PAGE>
LIFE INSURANCE INVESTMENT OPERATIONS. F&G Life's investment portfolio totaled
$3.8 billion at December 31, 1998, consisting of investment grade government
and corporate securities (59% of the total); asset-backed and mortgage-backed
securities (19%); high-yield investments (9%); real estate mortgage loans and
other investments (13%). F&G Life uses derivative instruments in the form of
over-the-counter indexed call options for the purpose of hedging interest
credited on its equity-indexed annuity products. The cost of derivatives
amounts to less than 1% of invested assets.
ASSET MANAGEMENT
The John Nuveen Company (Nuveen) is The St. Paul's asset management subsidiary.
The St. Paul and its largest property-liability insurance subsidiary, St. Paul
Fire and Marine Insurance Company (Fire and Marine) hold a combined 78% interest
in Nuveen.
Nuveen's principal businesses are asset management and related research; the
development, marketing and distribution of investment products and services; and
municipal and corporate investment banking services. Nuveen distributes its
investment products, including mutual funds, exchange-traded funds (closed-end
funds), defined portfolio products (formerly referred to as unit trusts), and
individually managed accounts through registered representatives associated with
unaffiliated firms including broker/dealers, commercial banks, affiliates of
insurance providers, financial planners, accountants, consultants, and
investment advisers.
Nuveen's primary business activities generate three principal sources of
revenue: (1) ongoing advisory fees earned on assets under management, including
mutual funds, exchange-traded funds, and individually managed accounts; (2)
transaction-based revenue earned upon the distribution of mutual fund and
defined portfolio products; and (3) investment banking revenues, consisting of
underwriting and advisory fees.
Nuveen's operations are organized around five subsidiaries: John Nuveen & Co.
Incorporated (Nuveen & Co.), a registered broker and dealer in securities under
the Securities Exchange Act of 1934 and four investment advisory subsidiaries
registered under the Investment Advisers Act of 1940. The four investment
advisory subsidiaries are Nuveen Advisory Corp. (NAC), Nuveen Institutional
Advisory Corp. (NIAC), Nuveen Asset Management Inc. (NAM) and Rittenhouse
Financial Services, Inc. (Rittenhouse). Nuveen & Co. provides investment product
distribution and related services for Nuveen's managed funds and defined
portfolios, and houses Nuveen's investment banking activities. NAC and NIAC
provide investment management services for and administer the business affairs
of the Nuveen managed funds. Rittenhouse and NAM provide investment management
services to individually managed accounts and Rittenhouse also acts as
sub-adviser and portfolio manager to a mutual fund managed by NIAC.
At December 31, 1998, Nuveen's assets under management totaled $55.3 billion,
consisting of $26.2 billion of exchange-traded funds, $16.4 billion of managed
accounts, and $12.7 billion of mutual funds. Municipal securities accounted for
71% of the underlying managed assets.
In 1998, Nuveen repurchased 732,700 of its outstanding common shares (solely
from minority shareholders) for a total cost of $27 million. In 1997, Nuveen
repurchased 1.8 million of its outstanding common shares for a total cost of $55
million. The repurchases in 1997 were proportioned between The St. Paul and
minority shareholders to maintain the combined 77% ownership interest in Nuveen
then held by The St. Paul and Fire and Marine. The St. Paul received proceeds of
$41 million from Nuveen's share repurchases in 1997.
12
<PAGE>
COMPETITION AND REGULATION
PROPERTY-LIABILITY INSURANCE. 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 prior approval by state regulatory authorities. During 1998, The St. Paul
received from its U.S. Underwriting operations $200 million of cash dividends.
In 1999, up to $295 million in cash dividends can be paid by the U.S.
Underwriting operations 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 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
insurance regulators, which in the U.S. are state authorities. Such regulation,
supervision and administration of the underwriting subsidiaries may relate,
among other things, to the standards of solvency which must be met and
maintained; the licensing of insurers and their agents; the nature of and
limitations on investments; restrictions on the size of risk which may be
insured under a single policy; deposits of securities for the benefit of
policyholders; regulation of policy forms and premium rates; periodic
examination of the affairs of insurance companies; annual and other reports
required to be filed on the financial condition of insurers or for other
purposes; requirements regarding reserves for unearned premiums, losses and
other matters; the nature of and limitations on dividends to policyholders and
shareholders; the nature and extent of required participation in insurance
guaranty funds; and the involuntary assumption of hard-to-place or high-risk
insurance business, primarily in the personal auto and workers' compensation
insurance lines.
Loss ratio trends in property-liability insurance underwriting experience may be
improved by, among other things, changing the kinds of coverages provided by
policies, providing loss prevention 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 laws which require prior
approval by insurance regulatory authorities of changes in policy forms and
premium rates. The St. Paul's U.S. Underwriting operations do business in all 50
states and the District of Columbia, Puerto Rico, Guam and the U.S. 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 Financial Services Authority (FSA). The FSA'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 Lloyd's of
London operation is currently regulated by the Council of Lloyd's, a
self-regulatory organization, but will in due course be regulated by the FSA.
The St. Paul is also subject to regulations in the other countries and
jurisdictions in which it writes insurance business.
LIFE INSURANCE. The St. Paul's life insurance subsidiaries operate in a
competitive environment, with approximately 1,200 companies nationwide in the
industry including stock and mutual companies. F&G Life ranked 173rd based on
1997 statutory net premiums written, 144th based on 1997 statutory assets, and
173rd based on 1997 statutory capital and surplus. In the life insurance
industry, interest crediting rates, underwriting philosophy, policy features,
13
<PAGE>
financial stability and service quality are important competitive factors.
F&G Life's products compete not only with those offered by other life
insurance companies, but also with other income accumulation-oriented
products offered by other financial services companies. The life insurance
industry has experienced considerable competitive pressure in recent periods
as a result of fluctuating interest rates.
F&G Life is subject to licensing and supervision by government regulatory
agencies in the jurisdictions in which it does business. The nature and
extent of regulation vary but generally have their source in statutes which
delegate regulatory, supervisory and administrative powers to state insurance
commissioners. Such regulation and supervision of F&G Life may relate, among
other things, to the standards of solvency which must be met and maintained;
the licensing of insurers and agents, the nature of and limitations on
investments, deposits of securities for the benefit of policyholders;
regulation of policy forms; periodic examination of the affairs of the
company; annual and other reports required to be filed; requirements
regarding reserves for policyholder benefits; fixing maximum interest rates
on life insurance policy loans and minimum rates for accumulation of
surrender values; the nature of and limitations on dividends to policyholders
and shareholder; and the nature and extent of required participation in
insurance guaranty funds.
ASSET MANAGEMENT. Nuveen is subject to substantial competition in all aspects of
its business. Investment products are sold to the public by broker-dealers,
banks, insurance companies and others. Nuveen competes with these other
providers of products primarily on the basis of the range of products offered,
the investment performance of such products, quality of service, fees charged,
the level and type of broker compensation, the manner in which such products are
marketed and distributed, and the services provided to investors.
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,
Nuveen & Co., is a broker and dealer registered 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 and self-regulatory organizations. It is also subject
to net capital requirements that restrict its ability to pay dividends. Nuveen's
other four subsidiaries are investment advisers registered under the Investment
Advisers Act of 1940. As such, they are subject to regulation by the Securities
and Exchange Commission.
YEAR 2000 READINESS DISCLOSURE
The "Year 2000 Readiness Disclosure" section of "Management's Discussion and
Analysis" included in The St. Paul's 1998 Annual Report to Shareholders is
incorporated herein by reference.
FORWARD-LOOKING STATEMENT DISCLOSURE
This report contains certain forward-looking statements within the meaning of
the Private Litigation Reform Act of 1995. Forward-looking statements are
statements other than historical information or statements of current condition.
Words such as expects, anticipates, intends, plans, believes, seeks or
estimates, or variations of such words, and similar expressions are also
intended to identify forward-looking statements. Examples of these
forward-looking statements include statements concerning the effects of
competition and other factors on premiums and revenues, costs and income,
anticipated cost savings as a result of the USF&G merger, and expectations
regarding Year 2000 issues and The St. Paul's efforts to address them.
In light of the risks and uncertainties inherent in future projections, many of
which are beyond The St. Paul's control, actual results could differ materially
from those in the forward-looking statements. These statements should not be
regarded as a representation that anticipated events will occur or that expected
objectives will be achieved. Risks and uncertainties include, but are not
limited to, the following: general economic conditions including changes in
interest rates and the performance of financial markets; changes in domestic and
foreign laws, regulations and taxes; changes in the demand for, pricing of, or
supply of reinsurance or insurance; catastrophic events of unanticipated
frequency or severity; loss of significant customers; judicial decisions and
rulings; and various other matters, including the effects of the merger with
USF&G. Actual results and experience relating to Year 2000 issues could differ
materially from anticipated results or other expectations as a result of a
variety of risks and uncertainties, including the impact of systems faults, the
failure to successfully remediate material systems of The St. Paul, the time to
remediate system
14
<PAGE>
failures once they occur, the failure of third parties (including public
utilities, agents and brokers) to properly remediate material Year 2000
problems, and unanticipated judicial interpretations of the scope of its
reinsurance or the insurance coverage provided by The St. Paul's policies. The
St. Paul undertakes no obligation to release publicly the results of any future
revisions it may make to forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 2. PROPERTIES.
Fire and Marine owns The St. Paul's corporate headquarters buildings, located at
385 Washington Street and 130 West Sixth Street, St. Paul, MN. These buildings
are adjacent to one another and connected by skyway, and consist of
approximately 1.1 million square feet of gross floor space. Fire and Marine also
owns a building in Freeport, Illinois that houses a portion of its personal
insurance operations, and property in Woodbury, MN where its Administrative
Services Building and off-site computer processing operations are located. The
St. Paul also owns the former USF&G headquarters campus known as Mount
Washington Center, located in Baltimore, MD. The campus currently houses offices
for certain executives of The St. Paul, as well as offices for certain
underwriting, legal and claim personnel. A training and development center also
resides on the Mount Washington campus. The St. Paul has entered into an
agreement to lease a substantial portion of one of the buildings on the campus
to an outside party.
St. Paul International Insurance Company Ltd. owns a building in London,
England, which houses a portion of its operations. One of the two Minet
buildings in London that The St. Paul retained ownership of after the sale of
Minet to Aon in 1997 was sold at the end of 1998. In March 1999, The St. Paul
reached an agreement to lease the other Minet building to an outside party.
Fire and Marine and its subsidiary, St. Paul Properties, Inc., own a portfolio
of income-producing properties in various locations across the United States
that they have purchased for investment. A portion of the real estate investment
portfolio of the former USF&G is being integrated into The St. Paul's portfolio,
with the remainder being held for sale to third parties.
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.
ITEM 3. LEGAL PROCEEDINGS.
The information set forth in the "Legal Matters" section of Note 12 to the
consolidated financial statements, and the "Environmental and Asbestos Claims"
section of "Management's Discussion and Analysis," which are included in The St.
Paul's 1998 Annual Report to Shareholders, 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 of 1992 but has now also been placed
in provisional insolvent liquidation. Weavers Underwriting Agency (Weavers), an
LUI subsidiary, managed these insurers. Minet, a former insurance brokerage
subsidiary of The St. Paul, 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 Ltd. (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. When The St. Paul sold Minet in May 1997, it agreed
to indemnify the purchaser for most of Minet's preclosing liabilities, including
liabilities relating to the Weavers matter. Any proceedings relating to the
Weavers matter will be 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.
15
<PAGE>
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
December 31, 1998.
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. The officers listed in the chart
below, except Thomas A. Bradley, Michael J. Conroy, James E. Gustafson, James
Hom, Stephen W. Lilienthal, Paul J. Liska, John A. MacColl and David R. Nachbar,
have held 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.
Messrs. Thomas A. Bradley, Stephen W. Lilienthal and John A. MacColl held
positions and were employees of USF&G Corporation or one of its subsidiaries for
five or more years prior to its merger with The St. Paul. in April of 1998.
James E. Gustafson joined the company on Jan. 30, 1999. He had been an employee
of General Re Corporation since 1969 where he held various executive positions
until being named President and Chief Operating Officer of General Re
Corporation in 1995. Paul J. Liska joined The St. Paul in January of 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.
Michael J. Conroy joined The St. Paul in August of 1994. For five years prior to
that date, Mr. Conroy held various manager positions with The Home Insurance
Company, including executive vice president and chief administrative officer.
James Hom joined The St. Paul in October of 1994. Prior to that, Mr. Hom served
as vice president-corporate claims and project management for The Home Insurance
Company. David R. Nachbar joined The St. Paul in August 1998. For two years
prior to that date, Mr. Nachbar was employed as vice president, human resources
and chief of staff-Asia for Citibank. From 1995 - 1996 he was the area human
resources director for Frito-Lay, a PepsiCo unit. From 1989 through 1995, Mr.
Nachbar was employed in various capacities in the human resources area by the
Pizza Hut division of PepsiCo.
<TABLE>
<CAPTION>
TERM OF OFFICE AND PERIOD OF
NAME AGE POSITIONS PRESENTLY HELD SERVICE
---- --- ------------------------ ----------------------------
<S> <C> <C> <C>
Douglas W. Leatherdale 62 Chairman and Chief Executive Serving at the pleasure of the
Officer Board from 5-90
(The St. Paul Companies, Inc.)
James E. Gustafson 52 President and Chief Operating Serving at the pleasure of the
Officer Board from 1-99
(The St. Paul Companies, Inc.)
Paul J. Liska 43 Executive Vice President and Serving at the pleasure of the
Chief Financial Officer Board from 1-97
(The St. Paul Companies, Inc.)
James F. Duffy 55 Chairman, President and Chief Serving at the pleasure of the
Executive Officer (St. Paul Re) Board from 9-93
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
TERM OF OFFICE AND PERIOD OF
NAME AGE POSITIONS PRESENTLY HELD SERVICE
---- --- ------------------------ ----------------------------
<S> <C> <C> <C>
John A. MacColl 50 Executive Vice President - Serving at the pleasure of the
Baltimore Operations Board from 5-98
(The St. Paul Companies, Inc.)
Mark L. Pabst 52 President and Chief Operating Serving at the pleasure of the
Officer (St. Paul International) Board from 2-95
Michael J. Conroy 57 Executive Vice President and Serving at the pleasure of the
Chief Administrative Officer Board from 8-95
(Fire and Marine )
Stephen W. Lilienthal 49 Executive Vice President (Fire Serving at the pleasure of the
and Marine) Board from 4-98
Joseph B. Nardi 54 Executive Vice President & Serving at the pleasure of the
President - Specialty Commercial Board from 2-98
(Fire and Marine)
Bruce A. Backberg 50 Senior Vice President and Chief Serving at the pleasure of the
Legal Counsel Board from 11-97
(The St. Paul Companies, Inc.)
James L. Boudreau 63 Senior Vice President - Corporate Serving at the pleasure of the
Finance Board from 3-98
(The St. Paul Companies, Inc.)
Thomas A. Bradley 41 Senior Vice President and Serving at the pleasure of the
Corporate Controller Board from 5-98
(The St. Paul Companies, Inc.)
Karen L. Himle 43 Senior Vice President - Corporate Serving at the pleasure of the
Affairs Board from 11-97
(The St. Paul Companies, Inc.)
James Hom 43 Senior Vice President - Strategic Serving at the pleasure of the
Planning and Development Board from 10-94
(The St. Paul Companies, Inc.)
David R. Nachbar 36 Senior Vice President - Human Serving at the pleasure of the
Resources Board from 8-98
(The St. Paul Companies, Inc.)
Sandra Ulsaker Wiese 39 Senior Corporate Counsel and Serving at the pleasure of the
Corporate Secretary Board from 2-98
(The St. Paul Companies, Inc.)
</TABLE>
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The St. Paul's common stock is traded 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 The St. Paul's common stock was 24,179 as of March 1,
1999.
The "Stock Trading" and "Stock Price and Dividend Rate" portions of the
"Shareholder Information" section of The St. Paul's 1998 Annual Report to
Shareholders are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The "Six-Year Summary of Selected Financial Data" included in The St. Paul's
1998 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" included in The St. Paul's 1998
Annual Report to Shareholders is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The "Exposures to Market Risk" section in The St. Paul's 1998 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The "Management's Responsibility for Financial Statements," "Independent
Auditors' Report," Consolidated Balance Sheets, Consolidated Statements of
Income, Comprehensive Income, Shareholders' Equity and Cash Flows, and Notes to
Consolidated Financial Statements included in The St. Paul's 1998 Annual Report
to Shareholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
18
<PAGE>
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 4, 1999, is incorporated herein by reference. James E. Gustafson, 52,
elected President and Chief Operating Officer of The St. Paul Companies, Inc. by
the board of directors in January of 1999, is standing for election by
shareholders for the first time at the 1999 Annual Meeting of Shareholders.
Norman P. Blake, Jr., 57, is currently a director of The St. Paul, but is not
standing for re-election at the 1999 Annual Meeting of Shareholders. Information
regarding The St. Paul's executive officers is included in Part I of this
report.
The "Section 16(a) Beneficial Ownership Reporting Compliance" section on page 40
of The St. Paul's Proxy Statement relating to the Annual Meeting of Shareholders
to be held May 4, 1999, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The "Executive Compensation" section on pages 22 to 35 and the "Election of
Directors - Board of Directors Compensation" section on pages 7 to 10 of the
Proxy Statement relating to the Annual Meeting of Shareholders to be held May 4,
1999, 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 37 to 39 of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held May 4, 1999, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The "Indebtedness of Management" section on page 36 of the Proxy Statement
relating to the Annual Meeting of Shareholders to be held May 4, 1999, is
incorporated herein by reference.
19
<PAGE>
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, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income -
Years Ended December 31, 1998, 1997 and 1996
Consolidated Balance Sheets - December 31, 1998
and 1997
Consolidated Statements of Shareholders'
Equity - Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
The foregoing documents are incorporated by reference to The
St. Paul's 1998 Annual Report to Shareholders.
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
VII. Predecessor Auditors' Reports on Consolidated Financial
Statements and Financial Statement Schedules
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 38 of this report.
(2) The definitive Agreement and Plan of Merger
among The St. Paul, USF&G Corporation and SP
Merger Corporation is incorporated herein by
reference to the Form 8-K Current Report
dated January 19, 1998.
(3) (a) The current articles of incorporation of The St. Paul are
filed herewith.
(b) The current bylaws of The St. Paul are incorporated herein
by reference to Form 10-Q for the quarter ended March 31,
1994.
20
<PAGE>
(4) (a) A specimen certificate of The St. Paul's common stock is
filed herewith.
(b) 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)(a) The Employment Agreement between The St. Paul and Mr.
James E. Gustafson dated as of January 6, 1999 is filed
herewith.
(b) The Restricted Stock Award Plan, as amended, is filed
herewith.
(c) The 1988 Stock Option Plan as in effect for options
granted prior to June 1994, as amended, is filed herewith.
(d) The Non-Employee Director Stock Retainer Plan is filed
herewith.
(e) The Amended and Restated Special Severance Policy is
filed herewith.
(f) The Confidential Separation Agreement between The St. Paul
and Mr. Patrick A. Thiele dated as of September 1, 1998
is filed herewith.
(g) The Annual Incentive Plan is incorporated by reference
to the Proxy Statement relating to the Annual Meeting
of Shareholders to be held May 4, 1999.
(h) The Amended and Restated 1994 Stock Incentive Plan is
incorporated by reference to the Proxy Statement relating
to the Annual Meeting of Shareholders to be held May 4,
1999.
(i) The Deferred Management Incentive Awards Plan is
incorporated by reference to Form 10-K for the year ended
December 31, 1997.
(j) The Directors' Deferred Compensation Plan is incorporated
by reference to Form 10-K for the year ended December 31,
1997.
(k) The Relocation Loan Payback Agreement with Mr. James F.
Duffy is incorporated by reference to Form 10-K for the
year ended December 31, 1997.
(l) The Benefit Equalization Plan - 1995 Revision is
incorporated by reference to Form 10-K for the year ended
December 31, 1997.
(m) First Amendment to Benefit Equalization Plan - 1995
Revision is incorporated by reference to Form 10-K for the
year ended December 31, 1997.
(n) Executive Post-Retirement Life Insurance Plan - Summary
Plan Description is incorporated by reference to Form 10-K
for the year ended December 31, 1997.
(o) Executive Long-Term Disability Plan - Summary Plan
Description is incorporated by reference to Form 10-K for
the year ended December 31, 1997.
21
<PAGE>
(p) Letter Agreement dated Jan. 18, 1998 among The St. Paul,
USF&G Corporation, SP Merger Corporation and Mr. Norman P.
Blake, Jr. pertaining to Mr. Blake's duties with The St.
Paul subsequent to the consummation of the proposed merger
of The St. Paul and USF&G Corporation is incorporated by
reference to Form 10-K for the year ended December 31,
1997.
(q) The St. Paul Re Long-Term Incentive Plan is incorporated
by reference to the Form S-8 Registration Statement filed
March 17, 1998 (Commission File No. 333-48121).
(r) Letter Agreement between The St. Paul and Mr. Paul J.
Liska relating to the terms of his employment is
incorporated by reference to Form 10-Q for the quarter
ended March 31, 1997.
(s) Letter Agreement between The St. Paul and Mr. Paul J.
Liska relating to severance benefits is incorporated by
reference to Form 10-Q for the quarter ended March 31,
1997.
(t) The Special Leveraged Stock Purchase Plan is incorporated
by reference to Form 10-Q for the quarter ended March 31,
1997.
(u) Amendment to Deferred Stock Agreement with Mr. Mark L.
Pabst is incorporated by reference to Form 10-Q for the
quarter ended March 31, 1997.
(v) 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.
(w) The Directors' Charitable Award Program is incorporated by
reference to the Form 10-K for the year ended December 31,
1994.
(x) The Long-Term Incentive Plan is incorporated by reference
to Form 10-Q for the quarter ended March 31, 1994.
(y) 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 4, 1999.
(11) A statement regarding the computation of per share earnings
is filed herewith.
(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 is filed
herewith.
(13) The St. Paul's 1998 Annual Report to Shareholders is
furnished to the Commission in paper format pursuant to Rule
14a-3(c). 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:
22
<PAGE>
<TABLE>
<CAPTION>
Location of
Information
Portions of Annual Report for the Year Ended Incorporated by
December 31, 1998 Reference
---------------------------------------------------- ------------------
<S> <C>
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
Six-Year Summary of Selected Financial Data Item 6
Shareholder Information Item 5
</TABLE>
(21) List of subsidiaries of The St. Paul Companies, Inc. is filed
herewith.
(23) Consents of independent auditors to incorporation by
reference of certain reports into Registration Statements on
Form S-8 (SEC File No. 33-15392, No. 33-23446, No. 33-23948,
No. 33-24220, No. 33-24575, No. 33-26923, No. 33-49273, No.
33-56987, No. 333-01065, No. 333-22329, No. 333-25203, No.
333-28915, No. 333-48121, No. 333-50935, No. 333-50937, No.
333-50941, No. 333-50943 and No. 333-67983) and Form S-3 (SEC
File No. 33-33931, No. 33-50115, No. 33-58491, No. 333- 06465
and No. 333-67139) are filed herewith.
(24) Power of attorney is filed herewith.
(27) Financial data schedule is filed herewith.
(b) Reports on Form 8-K.
A Form 8-K Current Report dated October 12, 1998 was filed
relating to the announcement of the anticipated impact of
catastrophe losses on The St. Paul's third quarter 1998 financial
results, and the anticipated impact of adverse market conditions
in the general commercial property/casualty marketplace on The St.
Paul's third and fourth quarter 1998 financial results.
A Form 8-K Current Report dated November 3, 1998 was filed
relating to the announcement of The St. Paul's financial results
for the quarter ended Sept. 30, 1998.
A Form 8-K Current Report dated January 6, 1999 was filed
relating to the election of James E. Gustafson as president and
chief operating officer of The St. Paul.
A Form 8-K Current Report dated January 29, 1999 was filed
relating to the announcement of The St. Paul's financial results
for the year ended Dec. 31, 1998.
A Form 8-K Current Report dated March 4, 1999 was filed relating
to the announcement of The St. Paul's revised financial results
for the year ended Dec. 31, 1998.
23
<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 31, 1999 By /s/ Sandra Ulsaker Wiese
-------------- ------------------------
Sandra Ulsaker Wiese
Senior Corporate Counsel 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 31, 1999 By /s/ Douglas W. Leatherdale
-------------- --------------------------
Douglas W. Leatherdale,
Director, Chairman of the
Board and Chief Executive Officer
Date: March 31, 1999 By /s/ James E. Gustafson
-------------- ----------------------
James E. Gustafson,
Director, President and Chief
Operating Officer
Date: March 31, 1999 By /s/ Paul J. Liska
-------------- -----------------
Paul J. Liska,
Executive Vice President and Chief
Financial Officer
Date: March 31, 1999 By /s/ Thomas A. Bradley
-------------- ---------------------
Thomas A. Bradley,
Senior Vice President and Chief
Accounting Officer
Date: March 31, 1999 By /s/ H. Furlong Baldwin
-------------- ----------------------
H. Furlong Baldwin*, Director
Date: March 31, 1999 By /s/ Norman P. Blake, Jr.
-------------- ------------------------
Norman P. Blake, Jr.*, Director
Date: March 31, 1999 By /s/ Michael R. Bonsignore
-------------- -------------------------
Michael R. Bonsignore*, Director
Date: March 31, 1999 By /s/ John H. Dasburg
-------------- -------------------
John H. Dasburg*, Director
Date: March 31, 1999 By /s/ W. John Driscoll
-------------- --------------------
W. John Driscoll*, Director
Date: March 31, 1999 By /s/ Kenneth M. Duberstein
-------------- -------------------------
Kenneth M. Duberstein*, Director
Date: March 31, 1999 By /s/ Pierson M. Grieve
-------------- ---------------------
Pierson M. Grieve*, Director
Date: March 31, 1999 By /s/ Thomas R. Hodgson
-------------- ---------------------
Thomas R. Hodgson*, Director
24
<PAGE>
Date: March 31, 1999 By /s/ David G. John
-------------- -----------------
David G. John*, Director
Date: March 31, 1999 By /s/ William H. Kling
-------------- --------------------
William H. Kling*, Director
Date: March 31, 1999 By /s/ Bruce K. MacLaury
-------------- ---------------------
Bruce K. MacLaury*, Director
Date: March 31, 1999 By /s/ Glen D. Nelson, M.D.
-------------- ------------------------
Glen D. Nelson, M.D.*, Director
Date: March 31, 1999 By /s/ Anita M. Pampusch
-------------- ---------------------
Anita M. Pampusch*, Director
Date: March 31, 1999 By /s/ Gordon M. Sprenger
-------------- ----------------------
Gordon M. Sprenger*, Director
Date: March 31, 1999 *By /s/ Sandra Ulsaker Wiese
-------------- ------------------------
Sandra Ulsaker Wiese,
Attorney-in-fact
25
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Shareholders
The St. Paul Companies, Inc.:
Under date of March 2, 1999, we reported on the consolidated balance sheets of
The St. Paul Companies, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, shareholders' equity,
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998, as contained in the 1998 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 1998.
In connection with our audits of the aforementioned consolidated financial
statements we also have audited the related financial statement schedules I
through V, as 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.
The consolidated financial statements and financial statement schedules as of
December 31, 1997 and for each of the years in the two-year period then ended
have been restated to reflect the pooling of interests with USF&G Corporation.
We did not audit the consolidated financial statements or financial statement
schedules of USF&G Corporation as of December 31, 1997 or for either of the
years in the two-year period ended December 31, 1997, which statements reflect
total assets constituting 43 percent as of December 31, 1997 and total revenues
constituting 35 percent and 38 percent for the years ended December 31, 1997 and
1996, respectively, of the related consolidated totals. Those statements and
financial statement schedules were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the amounts
included for USF&G Corporation, as of December 31, 1997 and for each of the
years in the two-year period then ended, is based solely on the reports of the
other auditors.
In our opinion, based on our audits and the reports of the other auditors, such
financial statement schedules I through V, 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
March 2, 1999 -------------------------
KPMG Peat Marwick LLP
26
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
Amount at
which shown
in the
Cost* Value* balance sheet
------------ ---------- -------------
Type of investment:
<S> <C> <C> <C>
FIXED MATURITIES:
United States Government and
government agencies and
authorities $ 2,672,630 $2,881,094 $ 2,881,094
States, municipalities and
political subdivisions 6,113,669 6,558,821 6,558,821
Foreign governments 909,353 978,216 978,216
Corporate securities 6,747,847 7,096,370 7,096,370
Asset-backed securities 661,259 684,440 684,440
Mortgage-backed securities 2,791,677 2,857,318 2,857,318
---------- ---------- ----------
Total fixed maturities 19,896,435 21,056,259 21,056,259
---------- ---------- ----------
EQUITY SECURITIES:
Common stocks:
Public utilities 57,341 86,100 86,100
Banks, trusts and insurance
companies 104,951 122,705 122,705
Industrial, miscellaneous and
all other 779,431 1,049,704 1,049,704
---------- ---------- ----------
Total equity securities 941,723 1,258,509 1,258,509
---------- ---------- ----------
Venture capital 389,225 571,340 571,340
------- ----------- -------
Real estate and mortgage loans 1,519,227** 1,507,448
Securities lending collateral 1,368,322 1,368,322
Other investments 371,526 371,526
Short-term investments 982,488 982,488
---------- ----------
Total investments $25,468,946 $27,115,892
----------- -----------
----------- -----------
</TABLE>
* See Notes 1, 4, 5 and 6 to the consolidated financial statements included in
The St. Paul's 1998 Annual Report to Shareholders.
** The cost of real estate represents the cost of properties before valuation
provisions. (See Schedule V on page 35).
27
<PAGE>
THE ST. PAUL COMPANIES, INC. (Parent Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET INFORMATION
December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Assets: 1998 1997
---------- ----------
<S> <C> <C>
Investment in subsidiaries $7,207,450 $7,078,111
Investments:
Fixed maturities 124,640 159,957
Equity securities 70,332 52,834
Short-term investments 11,832 11,472
Cash 8,796 -
Deferred income taxes 359,463 455,445
Other assets 599,445 257,925
---------- ---------
Total assets $8,381,958 $8,015,744
---------- ----------
---------- ----------
Liabilities:
Debt $1,406,339 $1,091,995
Dividends payable to shareholders 58,320 39,305
Other liabilities 280,912 276,276
---------- ----------
Total liabilities 1,745,571 1,407,576
---------- ----------
Shareholders' Equity:
Preferred:
Convertible preferred stock 134,181 137,892
Guaranteed obligation - PSOP (118,605) (121,167)
---------- ----------
Total preferred shareholders' equity 15,576 16,725
---------- ----------
Common:
Common stock, authorized 480,000 shares;
issued 233,750 shares (233,130 in 1997) 2,127,671 2,057,108
Retained earnings 3,480,057 3,720,140
Guaranteed obligation - ESOP - (8,453)
Accumulated other comprehensive income:
Unrealized appreciation of investments 1,027,390 845,811
Unrealized loss on foreign currency translation (14,307) (23,163)
---------- ----------
Total accumulated other comprehensive income 1,013,083 822,648
---------- ----------
Total common shareholders' equity 6,620,811 6,591,443
---------- ----------
Total shareholders' equity 6,636,387 6,608,168
---------- ----------
Total liabilities and shareholders' equity $8,381,958 $8,015,744
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed financial information.
28
<PAGE>
THE ST. PAUL COMPANIES, INC. (Parent Only)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF INCOME INFORMATION
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Net investment income $ 17,693 $ 17,472 $ 12,695
Realized investment gains 6,478 7,211 8,810
-------- -------- --------
Total revenues 24,171 24,683 21,505
-------- -------- --------
Expenses:
Interest expense 66,784 66,726 64,731
Administrative and other 66,479 52,160 39,906
-------- -------- --------
Total expenses 133,263 118,886 104,637
-------- -------- --------
Loss before
income tax benefit (109,092) (94,203) (83,132)
Income tax benefit (79,799) (113,366) (46,462)
-------- -------- --------
Net income (loss) from continuing
operations- parent only (29,293) 19,163 (36,670)
Provision for loss on disposal of
discontinued operations - (67,750) (88,543)
-------- -------- --------
Net loss - parent only (29,293) (48,587) (125,213)
Equity in net income
of subsidiaries 118,641 977,879 857,915
-------- -------- --------
Consolidated net income $ 89,348 $929,292 $732,702
--------- -------- --------
--------- -------- --------
</TABLE>
See accompanying notes to condensed financial information.
29
<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, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities:
Net loss $ (29,293) $ (48,587) $(125,213)
Cash dividends from subsidiaries 223,228 216,301 200,648
Tax payments from subsidiaries 71,445 166,423 93,928
Federal tax refund from carryback claim 81,403 - -
Federal income tax payments (27,437) (61,000) (70,000)
Adjustments to reconcile net (loss)
to net cash provided by
operating activities:
Deferred tax benefit -operations (78,062) (59,779) (21,891)
Realized investment gains (6,478) (7,211) (8,810)
Provision for loss on discontinued operations - 67,750 88,543
Other (3,901) (19,458) (3,951)
--------- --------- ---------
Cash provided by operating activities 230,905 254,439 153,254
--------- --------- ---------
Investing Activities:
Purchases of investments (46,617) (55,756) (104,322)
Proceeds from sales and maturities
of investments 80,714 75,674 109,958
Capital contributions and loans
to subsidiaries (178,112) (107,120) (55,922)
Discontinued operations (20,218) (54,018) -
Other 10,417 (3,221) (268)
--------- --------- ---------
Cash used in
investing activities (153,816) (144,441) (50,554)
--------- --------- ---------
Financing Activities:
Dividends paid to shareholders (210,318) (165,809) (155,268)
Proceeds from issuance of debt 239,041 117,572 53,000
Repayment of debt (25,000) (100,000) (17,711)
Repurchase of common shares (135,088) (26,503) (74,217)
Proceeds from Nuveen stock repurchase - 41,069 73,966
Stock options exercised and other 63,072 23,673 17,530
--------- --------- ---------
Cash used in financing activities (68,293) (109,998) (102,700)
--------- --------- ---------
Change in cash 8,796 - -
Cash at beginning of year - - -
--------- --------- ---------
Cash at end of year $ 8,796 $ - $ -
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to condensed financial information.
30
<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 1998 Annual Report to Shareholders. The Annual Report
includes The St. Paul's Consolidated Statements of Shareholders' Equity and
Comprehensive Income.
Some data in the accompanying condensed financial information for the years
1997 and 1996 were reclassified to conform with the 1998 presentation.
2. Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Medium-term notes $ 636,913 $ 511,920
Convertible subordinated debentures (1) 262,026 262,026
Commercial paper 257,461 168,429
Guaranteed PSOP debt (1) 118,606 121,167
Zero coupon convertible notes 111,333 -
Intercompany loan (1) 20,000 20,000
Guaranteed ESOP debt (1) - 5,673
Guaranteed ESOP debt - 2,780
---------- ------------
Total debt $1,406,339 $1,091,995
---------- ----------
---------- ----------
</TABLE>
(1) Eliminated in consolidation.
See Note 9 to the consolidated financial statements included in the 1998
Annual Report to Shareholders for further information on debt outstanding
at Dec. 31, 1998.
The amount of debt, other than debt eliminated in consolidation, that
becomes due during each of the next five years (including the debt
discussed in Note 3 below) is as follows: 1999, $277.5 million; 2000, none;
2001, $195.2; 2002, $48.7 million; and 2003, $67.3 million.
3. Subsequent Event: The St. Paul Companies, Inc. merged with USF&G
Corporation on April 24, 1998 in a business combination accounted for as a
pooling of interests. (See Note 2, "Merger with USF&G Corporation," to the
consolidated financial statements included in The St. Paul's 1998 Annual
Report to Shareholders). Effective Jan. 1, 1999, the former holding company
for USF&G Corporation was merged into St. Paul Fire and Marine Insurance
Company, and the holding company was dissolved. Prior to that merger, the
debt obligations of USF&G's holding company were assumed by The St. Paul
Companies, Inc. As a result, The St. Paul Companies, Inc. parent-only
financial statements in 1999 will include $150 million of 8-3/8% Senior
Notes and $80 million of 7-1/8% Senior Notes assumed from the former USF&G
holding company.
31
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------
Gross loss,
Deferred loss Other policy
policy adjustment Gross claims and
acquisition expense reserves and unearned benefits
expenses policy benefits* premiums* payable
---------- -------------------- -------- ------------
<S> <C> <C> <C>
1998
- - ----
Property-Liability Insurance:
Commercial Lines $338,644 $ 8,964,612 $ 1,169,361 -
Specialty Commercial 122,802 3,659,826 886,353 -
Personal Insurance 111,553 1,077,105 596,699 -
---------- ----------- ----------- ---------
Total U. S. Underwriting 572,999 13,701,543 2,652,413 -
International 19,630 1,280,316 162,850 -
---------- ----------- ----------- ---------
Total Primary Underwriting 592,629 14,981,859 2,815,263 -
Reinsurance 84,436 3,476,062 450,499 -
---------- ----------- ----------- ---------
Property-Liability 677,065 18,457,921 3,265,762 -
Life Insurance 201,107 4,142,277 - $76,242
---------- ----------- ----------- ---------
Total $878,172 $22,600,198 $3,265,762 $76,242
---------- ----------- ----------- ---------
---------- ----------- ----------- ---------
1997
- - ----
Property-Liability Insurance:
Commercial Lines $343,862 $ 8,040,145 $ 1,377,740 -
Specialty Commercial 119,714 3,537,850 910,383 -
Personal Insurance 117,643 944,176 550,166 -
---------- ----------- ----------- ---------
Total U. S. Underwriting 581,219 12,522,171 2,838,289 -
International 20,715 1,227,370 154,181 -
---------- ----------- ----------- ---------
Total Primary Underwriting 601,934 13,749,541 2,992,470 -
Reinsurance 83,123 3,231,588 418,673 -
Reinsurance Recoverables - 1,171,951 117,091 -
---------- ----------- ----------- ---------
Property-Liability 685,057 18,153,080 3,528,234 -
Life Insurance 187,403 3,816,050 - $61,370
---------- ----------- ----------- ---------
Total $872,460 $21,969,130 $3,528,234 $61,370
---------- ----------- ----------- ---------
---------- ----------- ----------- ---------
</TABLE>
* 1997 segment data included for the former USF&G Corporation in these
columns is presented net of reinsurance, because such data on a gross basis
by segment is unavailable. As a result, reinsurance recoverables relating to
the former USF&G Corporation are included, separately, to present The St.
Paul's consolidated loss and loss adjustment reserves and unearned premium
reserve in total on a gross basis.
32
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
<TABLE>
<CAPTION>
Insurance
losses, Amortization
Net loss of policy Other
Premiums investment adjustment expenses acquisition operating Premiums
1998 earned income and policy benefits expenses expenses written
- - ------- ------------ --------- ------------------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Property-Liability
Insurance:
Commercial Lines $2,614,645 - $ 2,312,273 $755,194 $ 249,262 2,492,483
Specialty Commercial 1,446,937 - 1,176,182 288,983 104,158 1,348,278
Personal Insurance 1,392,325 - 1,153,352 299,641 123,023 1,418,230
---------- ---------- ----------- -------- --------- ----------
Total U. S.
Underwriting 5,453,907 - 4,641,807 1,343,818 476,443 5,258,991
International 333,186 - 277,304 68,627 56,698 377,948
---------- ---------- ----------- -------- --------- ----------
Total Primary
Underwriting 5,787,093 - 4,919,111 1,412,445 533,141 5,636,939
Reinsurance 1,038,687 - 684,450 225,692 121,809 1,056,229
Net investment income - $1,306,828 - - - -
Other - - - - 352,035 -
---------- ---------- ----------- -------- --------- ----------
Property-Liability 6,825,780 1,306,828 5,603,561 1,638,137 1,006,985 6,693,168
Life Insurance 118,795 275,741 272,756 15,476 84,105 -
---------- ---------- ----------- -------- --------- ----------
Total $6,944,575 $1,582,569 $5,876,317 $1,653,613 $1,091,090 $6,693,168
---------- ---------- ----------- -------- --------- ----------
---------- ---------- ----------- -------- --------- ----------
1997
- - -------
Property-Liability
Insurance:
Commercial Lines $2,912,393 - $ 1,987,597 $798,116 $ 304,182 $2,788,018
Specialty Commercial 1,441,835 - 1,012,387 256,402 103,791 1,400,565
Personal Insurance 1,302,110 - 1,022,212 273,355 117,136 1,250,068
---------- ---------- ----------- -------- --------- ----------
Total U. S.
Underwriting 5,656,338 - 4,022,196 1,327,873 525,109 5,438,651
International 277,778 - 231,912 49,989 46,357 293,641
---------- ---------- ----------- -------- --------- ----------
Total Primary
Underwriting 5,934,116 - 4,254,108 1,377,862 571,466 5,732,292
Reinsurance 1,226,913 - 839,413 318,715 76,742 1,200,245
Net investment income - $1,323,967 - - - -
Other - - - - 116,170 -
---------- ---------- ----------- -------- --------- ----------
Property-Liability 7,161,029 1,323,967 5,093,521 1,696,577 764,378 6,932,537
Life Insurance 137,071 252,572 276,848 12,462 36,515 -
---------- ---------- ----------- -------- --------- ----------
Total $7,298,100 $1,576,539 $5,370,369 $1,709,039 $800,893 $6,932,537
---------- ---------- ----------- -------- --------- ----------
---------- ---------- ----------- -------- --------- ----------
1996
- - ----
Property-Liability
Insurance:
Commercial Lines $2,775,349 - $ 1,910,057 $730,695 $ 342,239 $2,709,758
Specialty Commercial 1,416,577 - 944,705 296,857 43,507 1,418,350
Personal Insurance 1,335,451 - 1,225,196 313,435 132,324 1,351,289
---------- ---------- ----------- -------- --------- ----------
Total U. S.
Underwriting 5,527,377 - 4,079,958 1,340,987 518,070 5,479,397
International 269,266 - 197,249 47,308 46,360 268,762
---------- ---------- ----------- -------- --------- ----------
Total Primary
Underwriting 5,796,643 - 4,277,207 1,388,295 564,430 5,748,159
Reinsurance 1,237,467 - 876,358 286,023 59,398 1,286,324
Net investment income - $1,236,013 - - - -
Other - - - - 131,761 -
---------- ---------- ----------- -------- --------- ----------
Property-Liability 7,034,110 1,236,013 5,153,565 1,674,318 755,589 7,034,483
Life Insurance 144,572 269,243 312,737 8,470 43,257 -
---------- ---------- ----------- -------- --------- ----------
Total $7,178,682 $1,505,256 $5,466,302 $1,682,788 $798,846 $7,034,483
---------- ---------- ----------- -------- --------- ----------
---------- ---------- ----------- -------- --------- ----------
</TABLE>
33
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed to
amount companies companies amount net
------ --------- --------- ------ ----------
1998
- - ----
<S> <C> <C> <C> <C> <C>
Life insurance in force $ 10,637,329 $2,304,635 $ 136,426 $8,469,120 1.6%
------------ ---------- --------- ---------- ------
------------ ---------- --------- ---------- ------
Premiums earned:
Life insurance 130,869 13,492 1,418 118,795 1.2%
Property-liability 6,311,124 874,610 1,389,266 6,825,780 20.4%
------------ ---------- --------- ----------
Total premiums $6,441,993 $888,102 $1,390,684 $6,944,575 20.0%
------------ ---------- --------- ---------- ------
------------ ---------- --------- ---------- ------
1997
- - ----
Life insurance in force $10,613,288 $1,784,965 $134,410 $8,962,733 1.5%
------------ ---------- --------- ---------- ------
------------ ---------- --------- ---------- ------
Premiums earned:
Life insurance 143,153 7,607 1,525 137,071 1.1%
Property-liability 6,528,712 898,652 1,530,969 7,161,029 21.4%
------------ ---------- --------- ----------
Total premiums $6,671,865 $906,259 $1,532,494 $7,298,100 21.0%
------------ ---------- --------- ---------- ------
------------ ---------- --------- ---------- ------
1996
- - ----
Life insurance in force $10,579,505 $1,219,897 $149,339 $9,508,947 1.6%
------------ ---------- --------- ---------- ------
------------ ---------- --------- ---------- ------
Premiums earned:
Life insurance 152,042 9,329 1,859 144,572 1.3%
Property-liability 6,347,572 897,737 1,584,275 7,034,110 22.5%
------------ ---------- --------- ----------
Total premiums $6,499,614 $907,066 $1,586,134 $7,178,682 22.1%
------------ ---------- --------- ---------- ------
------------ ---------- --------- ---------- ------
</TABLE>
34
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS Years Ended
December 31, 1998,
1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Additions
-------------------------------
Balance at Charged to Charged to Balance
beginning costs and other at end
Description of year expenses accounts Deductions(1) of year
- - ----------------- ----------- ------------ ------------ ------------- ---------
1998
- - ----
<S> <C> <C> <C> <C> <C>
Real estate valuation
adjustment $11,779 - - - 11,779
------- ----- ----- ----- ------
Allowance for uncollectible:
Agency loans $ 2,321 859 - - 3,180
------- ----- ----- ----- ------
Premiums receivable from
underwriting activities $28,593 5,241 - 7,180 26,654
------- ----- ----- ----- ------
Reinsurance $29,753 - - 2,043 27,710
------- ----- ----- ----- ------
Uncollectible deductibles $18,951 7,557 - 3,571 22,937
------- ----- ----- ----- ------
1997
- - ----
Real estate valuation
adjustment $19,000 1,779 - 9,000 11,779
------- ----- ----- ----- ------
Allowance for uncollectible:
Agency loans $ 2,153 168 - - 2,321
------- ----- ----- ----- ------
Premiums receivable from
underwriting activities $25,579 10,227 - 7,213 28,593
------- ----- ----- ----- ------
Reinsurance $25,681 5,784 - 1,712 29,753
------- ----- ----- ----- ------
Uncollectible deductibles $15,694 3,257 - - 18,951
------- ----- ----- ----- ------
1996
- - ----
Real estate valuation
adjustment $39,000 - - 20,000 19,000
------- ----- ----- ----- ------
Allowance for uncollectible:
Agency loans $ 2,173 - - 20 2,153
------- ----- ----- ----- ------
Premiums receivable from
underwriting activities $22,680 5,731 - 2,832 25,579
------- ----- ----- ----- ------
Reinsurance $25,081 1,150 - 550 25,681
------- ----- ----- ----- ------
Uncollectible deductibles $16,000 - - 306 15,694
------- ----- ----- ----- ------
</TABLE>
(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.
35
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE VII - PREDECESSOR AUDITORS' REPORT ON
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Board of Directors
USF&G Corporation
We have audited the consolidated statement of financial position of USF&G
Corporation as of December 31, 1997, and the related consolidated statements of
operations, cash flows and shareholders' equity for each of the years in the
two-year period then ended (not presented separately herein). These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of USF&G Corporation
at December 31, 1997, and the consolidated results of its operations and its
cash flows for each of the years in the two-year period then ended, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Baltimore, Maryland
February 20, 1998
36
<PAGE>
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
SCHEDULE VII - PREDECESSOR AUDITORS' REPORT ON
FINANCIAL STATEMENT SCHEDULES
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 20, 1998, with respect to the
consolidated financial statements of USF&G Corporation for the year ended
December 31, 1997 (not included separately herein) included as Schedule VII in
The St. Paul Companies, Inc.'s Annual Report (Form 10-K) for the year ended
December 31, 1998, filed with the Securities and Exchange Commission.
Our audits also included the financial statement schedules of USF&G Corporation
listed in Item 14(a) of USF&G Corporation's Annual Report (Form 10-K) for the
year ended December 31, 1997 (not included separately herein). These schedules
are the responsibility of management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration
Statements on Form S-8 (SEC File No. 33-15392, No. 33-23446, No. 33-23948,
No. 33-24220, No. 33-24575, No. 33-26923, No. 33-49273, No. 33-56987, No.
333-01065, No. 333-22329, No. 333-25203, No. 333-28915, No. 333-48121, No.
333-50935, No. 333-50937, No. 333-50941, No. 333-50943 and No. 333-67983),
and Form S-3 (SEC File No. 33-33931, No. 33-50115, No. 33-58491, No.
333-06465 and No. 333-67139), of The St. Paul Companies, Inc., of our report
dated February 20, 1998, with respect to the consolidated financial
statements and schedules of USF&G Corporation (these financial statements and
schedules are not presented herein) included as Schedule VII in The St. Paul
Companies, Inc. Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Baltimore, Maryland
March 31, 1999
37
<PAGE>
EXHIBIT INDEX*
<TABLE>
<CAPTION>
Exhibit
<S> <C>
(2) Plan of acquisition, reorganization, arrangement, liquidation, or succession.....
(a) Definitive Agreement and Plan of Merger among The St. Paul,
USF&G Corporation and SP Merger Corporation***..............................
(3) Articles of incorporation and by-laws
(a) Articles of Incorporation................................................... (1)
(b) By-laws***..................................................................
(4) Instruments defining the rights of security holders, including indentures
(a) Specimen Common Stock Certificate............................................ (1)
(b) Amended and Restated Shareholder Protection Rights Agreement***..............
(9) Voting trust agreements**........................................................
(10) Material contracts
(a) Employment Agreement between The St. Paul and Mr. James E.
Gustafson dated as of Jan. 6, 1999........................................... (1)
(b) Restricted Stock Award Plan, as amended...................................... (1)
(c) The 1988 Stock Option Plan................................................... (1)
(d) Non-Employee Director Stock Retainer Plan.................................... (1)
(e) The Amended and Restated Special Severance Policy............................ (1)
(f) The Confidential Separation Agreement between The St. Paul and Mr. Patrick
A. Thiele dated as of Sept. 1, 1998.......................................... (1)
(g) The Annual Incentive Plan....................................................
(h) The Amended and Restated 1994 Stock Incentive Plan...........................
(i) The Deferred Management Incentive Awards Plan***.............................
(j) The Directors' Deferred Compensation Plan***.................................
(k) Relocation Loan Payback Agreement with Mr. James F. Duffy***.................
(l) Benefit Equalization Plan - 1995 Revision***.................................
(m) First Amendment to Benefit Equalization Plan - 1995 Revision***..............
(n) Executive Post-Retirement Life Insurance Plan - Summary Plan Description***..
(o) Executive Long-Term Disability Plan - Summary Plan Description***............
(p) Letter Agreement dated Jan. 18, 1998 among The St. Paul,
USF&G Corporation, SP Merger Corporation and Mr.
Norman P. Blake, Jr. pertaining to Mr. Blake's duties with
The St. Paul subsequent to the consummation of the proposed
merger of The St. Paul and USF&G Corporation***..............................
(q) The St. Paul Re Long-Term Incentive Plan***..................................
(r) Letter Agreement dated May 8, 1997 between The St. Paul
and Mr. Paul J. Liska related to the terms of his employment***..............
(s) Letter Agreement, agreed to January 20, 1997 between The
St. Paul and Mr. Paul J. Liska related to severance benefits***..............
(t) The Special Leveraged Stock Purchase Plan***.................................
(u) Amendment to Deferred Stock Agreement with Mr. Mark L. Pabst***..............
(v) The Deferred Stock Grant Agreement with Mr. Mark L. Pabst***.................
(w) The Directors' Charitable Award Program***...................................
(x) Long-Term Incentive Plan***..................................................
(y) Outside Directors' Retirement Plan -Summary Description***...................
(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 St. Paul.................................................... (1)
(22) Published report regarding matters submitted to vote
of security holders**...........................................................
(23) Consents of experts and counsel.................................................
(a) Consent of KPMG Peat Marwick LLP............................................ (1)
(b) Consent of Ernst & Young LLP................................................ (1)
(24) Power of attorney............................................................... (1)
(27) Financial data schedule......................................................... (1)
(99) Additional exhibits**...........................................................
</TABLE>
* 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 herewith.
38
<PAGE>
EXHIBIT 3
RESTATED ARTICLES OF INCORPORATION
OF
THE ST. PAUL COMPANIES, INC.
ARTICLE I
The name of the corporation is THE ST. PAUL COMPANIES, INC.
ARTICLE II
The address of the registered office of the corporation is 385 Washington
Street, St. Paul, Minnesota 55102.
ARTICLE III
The aggregate number of shares that the corporation has authority to issue
is four hundred eight-five million shares which shall consist of five million
undesignated shares and four hundred eighty million shares of voting common
stock. All shares of voting common stock shall have equal rights and
preferences. The board of directors of the corporation is authorized to
establish, from the undesignated shares, one or more classes and series of
shares, to designate each such class and series and to fix the relative rights
and preferences of each such class and series, provided that in no event shall
the board of directors fix a preference with respect to a distribution in
liquidation in excess of $100 per share plus accrued and unpaid dividends, if
any. No shares shall confer on the holder any right to cumulate votes in the
election of directors. All shareholders are denied preemptive rights, unless,
with respect to some or all of the undesignated shares, the board of directors
shall grant preemptive rights. The corporation may, without any new or
additional consideration, issue shares of voting common stock or any other class
or series pro rata to the holders of the same or one or more other classes or
series of shares.
Each share of common stock with a par value of One Dollar Fifty Cents which
is issued and outstanding (and has not been reacquired by the corporation) as of
the effective date of these Restated Articles of Incorporation is hereby
reclassified into one share of voting common stock and each certificate
representing a share or shares of common stock with a par value of One Dollar
Fifty Cents shall represent the same number of shares of voting common stock.
[AMENDED ON 5/5/98.]
<PAGE>
ARTICLE IV
An action required or permitted to be taken at a board meeting may be taken
by written action signed by the number of directors that would be required to
act in taking the same action at a meeting of the board at which all directors
were present.
ARTICLE V
Where shareholder approval, authorization or adoption is required by
Chapter 302A, Minnesota Statutes, for any of the following transactions, the
vote required for such approval, authorization or adoption shall be the
affirmative vote of the holders of at least two-thirds of the voting power of
all voting shares:
(a) Any plan of merger;
(b) Any plan of exchange;
(c) Any sale, lease, transfer or other disposition of all or substantially
all of the corporation's property and assets, including its good will,
not in the usual and regular course of its business; or
(d) Any dissolution of the corporation.
The shareholder vote required for approval, authorization or adoption of an
amendment to these Restated Articles of Incorporation (other than an amendment
to this article) shall be the affirmative vote of the holders of at least
one-half of the voting power of all voting shares. The shareholder vote
required for approval, authorization or adoption of an amendment to this article
shall be the affirmative vote of the holders of at least two-thirds of the
voting power of all voting shares. The provisions of this article are not
intended either to require that the holders of the shares of any class or series
of shares vote separately as a class or series or to affect or increase any
class or series vote requirement of Chapter 302A, Minnesota Statutes.
ARTICLE VI
A director of the Corporation shall have no personal liability to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, to the full extent such immunity is permitted from time to
time under the Minnesota Business Corporation Act.
Any repeal or modification of the foregoing paragraph by the shareholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
<PAGE>
STATEMENT OF THE ST. PAUL COMPANIES, INC.
WITH RESPECT TO
SERIES B CONVERTIBLE PREFERRED STOCK
Pursuant to Section 302A.401, Subd. 3(b)
of Minnesota Statutes
The undersigned officers of The St. Paul Companies, Inc. (the
"Corporation"), being duly authorized by the Board of Directors of the
Corporation, do hereby certify that the following resolution was duly adopted by
the Board of Directors of the Corporation on January 24, 1990 pursuant to
Minnesota Statutes, Section 302A.401, Subd. 3(a):
RESOLVED, That there is hereby established, out of the presently
available undesignated shares of the Corporation, a series of Preferred Stock of
the Corporation designated as stated below and having the relative rights and
preferences that are set forth below (the "Series"):
1. Designation and Amount. The Series shall be designated as "Series B
Convertible Preferred Stock" (the "Series B Preferred"). The number of shares
constituting the Series shall be one million four hundred fifty thousand
(1,450,000), which number may from time to time be decreased (but not below the
number of shares then outstanding) by action of the Board of Directors of the
Corporation (the "Board of Directors"). Shares of Series B Preferred shall have
a preference upon liquidation, dissolution or winding up of the Corporation of
One Hundred Dollars ($100.00) per share, which preference amount does not
represent a determination by the Board of Directors for the purpose of the
Corporation's capital accounts.
2. Rank. The Series B Preferred shall, with respect to dividend rights
and rights on liquidation, winding up or dissolution of the Corporation, rank
prior to the Corporation's Series A Junior Participating Preferred Stock and to
the Corporation's voting common stock (the "Common Stock") (together, the
"Junior Stock") and shall, with respect to dividend rights and rights on
liquidation, winding up or dissolution of the Corporation, rank junior to all
other classes and series of equity securities of the Corporation, now or
hereafter authorized, issued or outstanding, other than any classes or series of
equity securities of the Corporation ranking on a parity with the Series B
Preferred as to dividend rights and rights upon liquidation, winding up or
dissolution of the Corporation (the "Parity Stock").
3. Dividends. (a) Holders of outstanding shares of Series B Preferred
shall be entitled to receive, when, as and if declared by the Board of
Directors, to the extent permitted by applicable law, cumulative quarterly cash
dividends at the annual rate of Eleven and 724/1000 Dollars ($11.724) per share,
in preference to and in priority over any dividends with respect to Junior
Stock.
<PAGE>
(b) Dividends on the outstanding shares of Series B Preferred shall
begin to accrue and be cumulative (regardless of whether such dividends shall
have been declared by the Board of Directors) from and including the date of
original issuance of each share of the Series B Preferred, and shall be payable
in arrears on January 17, April 17, July 17 and October 17 of each year (each of
such dates a "Dividend Payment Date"), commencing April 17, 1990. Each such
dividend shall be payable to the holder or holders of record as they appear on
the stock books of the Corporation at the close of business on such record
dates, not more than thirty (30) calendar days and not less than ten (10)
calendar days preceding the Dividend Payment Dates therefor, as are determined
by the Board of Directors (each of such dates a "Record Date"). In any case
where the date fixed for any dividend payment with respect to the Series B
Preferred shall not be a Business Day, then such payment need not be made on
such date but may be made on the next preceding Business Day with the same force
and effect as if made on the date fixed therefor, without interest.
(c) The amount of any dividends "accumulated" on any share of Series B
Preferred at any Dividend Payment Date shall be deemed to be the amount of any
unpaid dividends accrued thereon to and excluding such Dividend Payment Date
regardless of whether declared, and the amount of dividends "accumulated" on any
share of Series B Preferred at any date other than a Dividend Payment Date shall
be calculated as the amount of any unpaid dividends accrued thereon to and
excluding the last preceding Dividend Payment Date regardless of whether
declared, plus an amount calculated on the basis of the annual dividend rate for
the period from and including such last preceding Dividend Payment Date to and
excluding the date as of which the calculation is made (regardless of whether
declared). The amount of dividends payable with respect to a full dividend
period on outstanding shares of Series B Preferred shall be computed by dividing
the annual dividend rate by four and the amount of dividends payable for any
period shorter than a full quarterly dividend period (including the initial
dividend period) shall be computed on the basis of thirty (30)-day months, a
three hundred sixty (360)-day year and the actual number of days elapsed in the
period.
(d) So long as the shares of Series B Preferred shall be outstanding,
if (i) the Corporation shall be in default or in arrears with respect to the
payment of dividends (regardless of whether declared) on any outstanding shares
of Series B Preferred or any other classes or series of equity securities of the
Corporation other than Junior Stock or (ii) the Corporation shall be in default
or in arrears with respect to the mandatory or optional redemption, purchase or
other acquisition, retirement or other requirement of, or with respect to, any
sinking or other similar fund or agreement for the redemption, purchase or other
acquisition, retirement or other requirement of, or with respect to, any shares
of the Series B Preferred or any other classes or series of equity securities of
the Corporation other than Junior Stock, then the Corporation may not (A)
declare, pay or set apart for payment any dividends on any shares of Junior
Stock, or (B) make any payment on account of, or set apart payment for, the
purchase or other acquisition, redemption, retirement or other requirement of,
or with respect to, any sinking or other similar fund or agreement for the
purchase or other acquisition, redemption, retirement or other requirement of,
or with respect to, any shares of Junior Stock or any warrants, rights, calls or
options exercisable or exchangeable for or convertible into Junior Stock, other
than with respect to any rights that are now or in the future may be issued and
outstanding under or pursuant
<PAGE>
to the Shareholder Protection Rights Agreement dated as of December 4, 1989
between the Corporation and First Chicago Trust Company of New York as Rights
Agent, as it may be amended in any respect or extended from time to time or
replaced by a new shareholders' rights plan of any scope or nature (provided
that in any amended or extended plan or in any replacement plan any redemption
of rights feature permits only nominal redemption payments) (the "Rights
Agreement"), or (C) make any distribution in respect of any shares of Junior
Stock or any warrants, rights, calls or options exercisable or exchangeable for
or convertible into Junior Stock, whether directly or indirectly, and whether in
cash, obligations, or securities of the Corporation or other property, other
than dividends or distributions of Junior Stock which is neither convertible
into nor exchangeable or exercisable for any securities of the Corporation other
than Junior Stock or rights, warrants, options or calls exercisable or
exchangeable for or convertible into Junior Stock or (D) permit any corporation
or other entity controlled directly or indirectly by the Corporation to purchase
or otherwise acquire or redeem any shares of Junior Stock or any warrants,
rights, calls or options exercisable or exchangeable for or convertible into
shares of Junior Stock.
(e) Dividends in arrears with respect to the outstanding shares of
Series B Preferred may be declared and paid or set apart for payment at any time
and from time to time, without reference to any regular Dividend Payment Date,
to the holder or holders of record as they appear on the stock books of the
Corporation at the close of business on the Record Date established with respect
to such payment in arrears. If there shall be outstanding shares of Parity
Stock, and if the payment of dividends on any shares of the Series B Preferred
or the Parity Stock is in arrears, the Corporation, in making any dividend
payment on account of any shares of the Series B Preferred or Parity Stock,
shall make such payment ratably upon all outstanding shares of the Series B
Preferred and Parity Stock in proportion to the respective amounts of
accumulated dividends in arrears upon such shares of the Series B Preferred and
Parity Stock to the date of such dividend payment. The Holder or holders of
Series B Preferred shall not be entitled to any dividends, whether payable in
cash, obligations or securities of the Corporation or other property, in excess
of the accumulated dividends on shares of Series B Preferred. No interest, or
sum of money in lieu of interest, shall be payable in respect of any dividend or
other payment or payments which may be in arrears with respect to the Series B
Preferred. All dividends paid with respect to the Series B Preferred shall be
paid pro rata to the holders entitled thereto.
(f) Subject to the foregoing provisions hereof and applicable law, the
Board of Directors (i) may declare and the Corporation may pay or set apart for
payment dividends on any Junior Stock or Parity Stock, (ii) may make any payment
on account of or set apart payment for a sinking fund or other similar fund or
agreement for the purchase or other acquisition, redemption, retirement or other
requirement of, or with respect to, any Junior Stock or Parity Stock or any
warrants, rights, calls or options exercisable or exchangeable for or
convertible into any Junior Stock or Parity Stock, (iii) may make any
distribution in respect to any Junior Stock or Parity Stock or any warrants,
rights, calls or options exercisable or exchangeable for or convertible into any
Junior Stock or Parity Stock, whether directly or indirectly, and whether in
cash, obligations or securities of the Corporation or other property and (iv)
may purchase or otherwise acquire, redeem or retire any Junior Stock or Parity
Stock or any warrants, rights, calls or options
<PAGE>
exercisable or exchangeable for or convertible into any Junior Stock or Parity
Stock, and the holder or holders of the Series B Preferred shall not be entitled
to share therein.
4. Voting Rights. The holder or holders of Series B Preferred shall
have no right to vote for any purpose, except as required by applicable law and
except as provided in this Section 4.
(a) So long as any shares of Series B Preferred remain outstanding, the
affirmative vote of the holder or holders of at least a majority (or such
greater number as required by applicable law) of the votes entitled to be cast
with respect to the then outstanding Series B Preferred, voting separately as
one class, at a meeting duly held for that purpose, shall be necessary to
repeal, amend or otherwise change any of the provisions of the articles of
incorporation of the Corporation in any manner which materially and adversely
affects the rights or preferences of the Series B Preferred. For purposes of the
preceding sentence, the increase (including the creation or authorization) or
decrease in the amount of authorized capital stock of any class or series
(excluding the Series B Preferred) shall not be deemed to be an amendment which
materially and adversely affects the rights or preferences of the Series B
Preferred.
(b) The holder or holders of Series B Preferred shall be entitled to
vote on all matters submitted to a vote of the holders of Common Stock, voting
together with the holders of Common Stock as if one class. Each share of Series
B Preferred in such case shall be entitled to a number of votes equal to the
number of shares of Common Stock into which such share of Series B Preferred
could have been converted on the record date for determining the holders of
Common Stock entitled to vote on a particular matter.
5. Optional Redemption. (a) The Series B Preferred shall be redeemable,
in whole or in part at any time and from time to time, to the extent permitted
by applicable law, at the option of the Corporation, (i) on or before December
31, 1994, if (A) there is a change in any statute, rule or regulation of the
United States of America which has the effect of limiting or making unavailable
to the Corporation all or any of the tax deductions for amounts paid (including
dividends) on the Series B Preferred when such amounts are used as provided
under Section 404(k)(2) of the Internal Revenue Code of 1986, as amended and in
effect on the date shares of Series B Preferred are initially issued, or (B) the
Plan is not initially determined by the Internal Revenue Service to be qualified
within the meaning of ss. 401(a) and ss. 4975(e)(7) of the Internal Revenue Code
of 1986, as amended, or (C) the Plan is terminated by the Board of Directors or
otherwise, at the greater of (1) $144.30 per share plus accumulated and unpaid
dividends, without interest, to and excluding the date fixed for redemption, or
(2) the Fair Market Value of the Series B Preferred redeemed, or (ii) after
December 31, 1994, at the following redemption prices per share if redeemed
during the twelve (12)-month period ending on and including December 31 in each
of the following years:
<PAGE>
<TABLE>
<CAPTION>
REDEMPTION PRICE
YEAR PER SHARE
---- ----------------
<S> <C>
1995 $149.52
1996 148.22
1997 146.92
1998 145.62
1999 and thereafter 144.30
</TABLE>
plus accumulated and unpaid dividends, without interest, to and excluding the
date fixed for redemption.
(b) Payment of the redemption price shall be made by the Corporation in
cash or shares of Common Stock, or a combination thereof, as permitted by
paragraph (d) of this Section S. On and after the date fixed for redemption,
dividends on shares of Series B Preferred called for redemption shall cease to
accrue, such shares shall no longer be deemed to be outstanding and all rights
in respect of such shares shall cease, except the right to receive the
redemption price.
(c) Unless otherwise required by law, notice of redemption shall be
sent to the holder or holders of Series B Preferred at the address shown on the
books of the Corporation by first class mail, postage prepaid, mailed not less
than twenty (20) days nor more than sixty (60) days prior to the redemption
date. Each such notice shall state: (i) the redemption date; (ii) the total
number of shares of the Series B Preferred to be redeemed and, if fewer than all
the shares are to be redeemed, the number of such shares to be redeemed; (iii)
the redemption price; (iv) the place or places where certificates for such
shares are to be surrendered for payment of the redemption price; (v) that
dividends on the shares to be redeemed will cease to accrue from and after such
redemption date; and (vi) the conversion rights of the shares to be redeemed,
the period within which conversion rights may be exercised, and the then current
Conversion Price and number of shares of Common Stock issuable upon conversion
of a share of Series B Preferred at the time. Upon surrender of the certificates
for any shares so called for redemption and not previously converted (properly
endorsed or assigned for transfer, if the Board of Directors shall so require
and the notice shall so state), such shares shall be redeemed by the Corporation
at the date fixed for redemption and at the redemption price.
(d) The Corporation, at its option, may make payment of the redemption
price required upon redemption of shares of Series B Preferred in cash or in
shares of Common Stock, or in a combination of such shares and cash, any such
shares to be valued for such purpose at the average Current Market Price for the
five (5) consecutive trading days ending on the trading day next preceding the
date of redemption.
6. Other Redemption Rights. Shares of Series B Preferred shall be
redeemed by the Corporation at the option of the holder at any time and from
time to time, to the extent permitted by applicable law, upon notice to the
Corporation accompanied by the properly endorsed certificate or certificates
given not less than five (5) Business Days prior to the date fixed by the holder
in such notice for such redemption, when and to the extent necessary (a) for
such holder to provide for distributions required to be made under The
<PAGE>
St. Paul Companies, Inc. Savings Plus Preferred Stock Ownership Plan and Trust,
an employee stock ownership plan and trust within the meaning of ss. 4975(e)(7)
of the Internal Revenue Code of 1986, as amended (the "Plan and Trust"), as the
same may be amended, or any successor plans, or (b) for such holder to make
payment of principal or interest due and payable (whether as scheduled or upon
acceleration) on the 9.40% Note dated January 24, 1990, due January 31, 2005
made by Norwest Bank Minnesota, National Association, not individually but
solely as Trustee for the Plan and Trust, payable to the order of St. Paul Fire
and Marine Insurance Company or registered assigns, in the principal amount of
One Hundred Fifty Million Dollars ($150,000,000) or other indebtedness of the
Plan and Trust or if funds otherwise available are not adequate to make a
required payment pursuant to such Note or other indebtedness, in each case at a
redemption price of the greater of (1) $144.30 per share plus accumulated and
unpaid dividends, without interest, to and excluding the date fixed for
redemption, or (2) the Fair Market Value of the Series B Preferred redeemed.
Upon surrender of the shares to be redeemed, such shares shall be redeemed by
the Corporation on the date fixed for redemption and at the applicable
redemption price and such price shall be paid within five (5) Business Days
after such date of redemption, without interest. The terms and provisions of
Sections 5(b) and 5(d) are applicable to any redemption under this Section 6.
7. Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the holder or holders
of outstanding shares of Series B Preferred shall be entitled to receive out of
the assets of the Corporation available for distribution to shareholders, before
any distribution of assets shall be made to the holders of shares of Junior
Stock, an amount equal to One Hundred Dollars ($100.00) per share. If, upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the amounts payable with respect to the Series B Preferred and any
Parity Stock are not paid in full, the holder or holders of the Series B
Preferred and of such Parity Stock shall share ratably in any such distribution
of assets of the Corporation in proportion to the full respective preferential
amounts to which they are entitled. After payment to the holder or holders of
the Series B Preferred of the full preferential amount provided for in this
Section 7 and after the payment of any other preferential amounts to the holder
or holders of other equity securities of the Corporation, the holder or holders
of the Series B Preferred shall be entitled to share in distributions of any
remaining assets with the holders of Common Stock, pro-rata on an
as-if-converted basis, to the extent of $44.30 per share plus accumulated and
unpaid dividends, without interest, to and excluding the date fixed for such
distribution of assets. Written notice of any liquidation, dissolution or
winding up of the Corporation shall be given to the holder or holders of Series
B Preferred not less than twenty (20) days prior to the payment date. Neither
the voluntary sale, conveyance exchange or transfer (for cash, securities or
other consideration) of all or any part of the property or assets of the
Corporation, nor the consolidation or merger or other business combination of
the Corporation with or into any other corporation or corporations, shall be
deemed to be a voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, unless such voluntary sale, conveyance, exchange or transfer
shall be in connection with a plan of liquidation, dissolution or winding up of
the Corporation.
<PAGE>
8. Conversion Rights. (a) The holder of any Series B Preferred shall
have the right, at the holder's option, at any time and from time to time, to
convert any or all of such shares into the number of shares of Common Stock of
the Corporation determined by dividing One Hundred Forty-four and 30/100 Dollars
($144.30) for each share of Series B Preferred to be converted by the then
effective Conversion Price per share of Common Stock, except that if any shares
of Series B Preferred are called for redemption by the Corporation or submitted
for redemption by the holder thereof, according to the terms and provisions of
this Resolution, the conversion rights pertaining to such shares shall terminate
at the close of business on the date fixed for redemption (unless the
Corporation defaults in the payment of the applicable redemption price). No
fractional shares of Common Stock shall be issued upon conversion of Series B
Preferred, but if such conversion results in a fraction, an amount shall be paid
in cash by the Corporation to the converting holder equal to same fraction of
the Current Market Price of the Common Stock on the effective date of the
conversion.
(b) The initial conversion price, which is Seventy-two and 15/100
Dollars ($72.15) per share of Common Stock, shall be subject to appropriate
adjustment from time to time as follows and such initial conversion price or the
latest adjusted conversion price is referred to in this Resolution as the
"Conversion Price":
(i) In case the Corporation shall, at any time or from time to time
while any of the shares of the Series B Preferred is outstanding (A) pay a
dividend in shares of Common Stock, (B) subdivide outstanding shares of Common
Stock into a larger number of shares or (C) combine outstanding shares of Common
Stock into a smaller number of shares, the Conversion Price in effect
immediately prior to such action shall be adjusted so that the holder of any
shares of the Series B Preferred thereafter surrendered for conversion shall be
entitled to receive the number of shares of Common Stock of the Corporation
which such holder would have owned or have been entitled to receive immediately
following such action had such shares of the Series B Preferred been converted
immediately prior thereto. An adjustment made pursuant to this Section 8(b)(i)
shall become effective retroactively to immediately after the record date for
determination of the shareholders entitled to receive the dividend in the case
of a dividend and shall become effective immediately after the effective date in
the case of a subdivision or combination.
(ii) In case the Corporation shall, at any time or from time to time
while any of the shares of the Series B Preferred is outstanding, distribute or
issue rights, warrants, options or calls to all holders of shares of Common
Stock entitling them to subscribe for or purchase shares of Common Stock (or
securities convertible into or exercisable or exchangeable for Common Stock), at
a per share price less than the Current Market Price on the record date referred
to below, the Conversion Price shall be adjusted so that it shall equal the
Conversion Price determined by multiplying the Conversion Price in effect
immediately prior to the record date of the distribution or issuance of such
rights, warrants, options or calls by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding on such record date plus the
number of shares which the aggregate offering price of the total number of
shares of Common Stock so offered would purchase at such Current Market Price,
and the denominator of which shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional
<PAGE>
shares of Common Stock offered for subscription or purchase. For the purpose of
this Section 8(b)(ii), the distribution or issuance of rights, warrants, options
or calls to subscribe for or purchase securities convertible into Common Stock
shall be deemed to be the issuance of rights, warrants, options or calls to
purchase the shares of Common Stock into which such securities are convertible
at an aggregate offering price equal to the aggregate offering price of such
securities plus the minimum aggregate amount (if any) payable upon conversion of
such securities into shares of Common Stock; provided, however, that if all of
the shares of Common Stock subject to such rights, warrants, options or calls
have not been issued when such rights, warrants, options or calls expire, then
the Conversion Price shall promptly be readjusted to the Conversion Price which
would then be in effect had the adjustment upon the distribution or issuance of
such rights, warrants, options or calls been made on the basis of the actual
number of shares of Common Stock issued upon the exercise of such rights,
warrants, options or calls. An adjustment made pursuant to this Section 8(b)(ii)
shall become effective retroactively immediately after the record date for the
determination of shareholders entitled to receive such rights, warrants, options
or calls. This Section 8(b)(ii) shall be inapplicable with respect to any rights
issued or to be issued pursuant to or governed by the Rights Agreement.
(iii) In the event the Corporation shall, at any time or from time to
time while any of the shares of Series B Preferred are outstanding, issue, sell
or exchange shares of Common Stock (other than pursuant to (a) any right or
warrant now or hereafter outstanding to purchase or acquire shares of Common
Stock (including as such a right or warrant any security convertible into or
exchangeable for shares of Common Stock), (b) any rights issued or to be issued
pursuant to or governed by the Rights Agreement and (c) any employee, officer or
director incentive or benefit plan or arrangement (including any employment,
severance or consulting agreement) of the Corporation or any subsidiary of the
Corporation heretofore or hereafter adopted) for a consideration having a Fair
Market Value, on the date of such issuance, sale or exchange, less than the Fair
Market Value of such shares on the date of issuance, sale or exchange, then,
subject to the provisions of Sections 8(b)(v) and (vii), the Conversion Price
shall be adjusted by multiplying such Conversion Price by the fraction the
numerator of which shall be the sum of (x) the Fair Market Value of all the
shares of Common Stock outstanding on the day immediately preceding the first
public announcement of such issuance, sale or exchange plus (y) the Fair Market
value of the consideration received by the Corporation in respect of such
issuance, sale or exchange of shares of Common Stock, and the denominator of
which shall be the product of (a) the Fair Market Value of a share of Common
Stock on the day immediately preceding the first public announcement of such
issuance, sale or exchange multiplied by (b) the sum of the number of shares of
Common Stock outstanding on such day plus the number of shares of Common Stock
so issued, sold or exchanged by the Corporation. In the event the Corporation
shall, at any time or from time to time while any shares of Series B Preferred
are outstanding, issue, sell or exchange any right or warrant to purchase or
acquire shares of Common Stock (including as such a right or warrant any
security convertible into or exchangeable for shares of Common Stock), other
than any such issuance (a) to holders of shares of Common Stock as a dividend or
distribution (including by way of a reclassification of shares or a
recapitalization of the Corporation), (b) pursuant to any employee, officer or
director incentive or benefit plan or arrangement (including any employment,
<PAGE>
severance or consulting agreement) of the Corporation or any subsidiary of the
Corporation heretofore or hereafter adopted, (c) of rights issued or to be
issued pursuant to or governed by the Rights Agreement and (d) which is covered
by the terms and provisions of Section 8(b)(ii) hereof, for a consideration
having a Fair Market Value, on the date of such issuance, sale or exchange, less
than the Non-Dilutive Amount, then, subject to the provisions of Sections
8(b)(v) and (vii) hereof, the Conversion Price shall be adjusted by multiplying
such Conversion Price by a fraction the numerator of which shall be the sum of
(I) the Fair Market Value of all the shares of Common Stock outstanding on the
day immediately preceding the first public announcement of such issuance, sale
or exchange plus (II) the Fair Market Value of the consideration received by the
Corporation in respect of such issuance, sale or exchange of such right or
warrant plus (III) the Fair Market Value at the time of such issuance of the
consideration which the Corporation would receive upon exercise in full of all
such rights or warrants, and the denominator of which shall be the product of
(x) the Fair Market Value of a share of Common Stock on the day immediately
preceding the first public announcement of such issuance, sale or exchange
multiplied by (y) the sum of the number of shares of Common Stock outstanding on
such day plus the maximum number of shares of Common Stock which could be
acquired pursuant to such right or warrant at the time of the issuance, sale or
exchange of such right or warrant (assuming shares of Common Stock could be
acquired pursuant to such right or warrant at such time).
(iv) In the event the Corporation shall, at any time or from time to
time while any of the shares of Series B Preferred are outstanding, make an
Extraordinary Distribution in respect of the Common Stock, whether by dividend,
distribution, reclassification of shares or recapitalization of the Corporation
(including a recapitalization or reclassification effected by a merger or
consolidation to which Section 8(c) hereof does not apply) or effect a Pro Rata
Repurchase of Common Stock, the Conversion Price in effect immediately prior to
such Extraordinary Distribution or Pro Rata Repurchase shall, subject to
Sections 8(b)(v) and (vii) hereof, be adjusted by multiplying such Conversion
Price by the fraction the numerator of which is the difference between (a) the
product of (x) the number of shares of Common Stock outstanding immediately
before such Extraordinary Distribution or Pro Rata Repurchase multiplied by (y)
the Fair Market Value of a share of Common Stock on the day before the
ex-dividend date with respect to an Extraordinary Distribution which is paid in
cash and on the distribution date with respect to an Extraordinary Distribution
which is paid other than in cash, or on the applicable expiration date
(including all extensions thereof) of any tender offer which is a Pro Rata
Repurchase, or on the date of purchase with respect to any Pro Rata Repurchase
which is not a tender offer, as the case may be, and (b) the Fair Market Value
of the Extraordinary Distribution or the aggregate purchase price of the Pro
Rata Repurchase, as the case may be, and the denominator of which shall be the
product of (x) the number of shares of Common Stock outstanding immediately
before such Extraordinary Dividend or Pro Rata Repurchase minus, in the case of
a Pro Rata Repurchase, the number of shares of Common Stock repurchased by the
Corporation multiplied by (y) the Fair Market Value of a share of Common Stock
on the day before the ex-dividend date with respect to an Extraordinary
Distribution which is paid in cash and on the distribution date with respect to
an Extraordinary Distribution which is paid other than in cash, or on the
applicable expiration date (including all extensions thereof) of any tender
offer which is a Pro Rata Repurchase or
<PAGE>
on the date of purchase with respect to any Pro Rata Repurchase which is not a
tender offer, as the case may be. The Corporation shall send each holder of
Series B Preferred (i) notice of its intent to make any dividend or distribution
and (ii) notice of any offer by the Corporation to make a Pro Rata Repurchase,
in each case at the same time as, or as soon as practicable after, such offer is
first communicated (including by announcement of a record date in accordance
with the rules of any stock exchange on which the Common Stock is listed or
admitted to trading) to holders of Common Stock. Such notice shall indicate the
intended record date and the amount and nature of such dividend or distribution,
or the number of shares subject to such offer for a Pro Rata Repurchase and the
purchase price payable by the Corporation pursuant to such offer, as well as the
Conversion Price and the number of shares of Common Stock into which a share of
Series B Preferred may be converted at such time.
(v) If the Corporation shall make any dividend or distribution on the
Common Stock or issue any Common Stock, other capital stock or other security of
the Corporation or any rights or warrants to purchase or acquire any such
security, which transaction does not result in an adjustment to the Conversion
Price pursuant to this Section 8, the Board of Directors shall consider whether
such action is of such a nature that an adjustment to the Conversion Price
should equitably be made in respect of such transaction. If in such case the
Board of Directors determines that an adjustment to the Conversion Price should
be made, an adjustment shall be made effective as of such date, as determined by
the Board of Directors (which adjustment shall in no event adversely affect the
rights or preferences of the Series B Preferred as set forth herein). The
determination of the Board of Directors as to whether an adjustment to the
Conversion Price should be made pursuant to the foregoing provisions of this
Section 8(b)(v), and, if so, as to what adjustment should be made and when,
shall be final and binding on the Corporation and all shareholders of the
Corporation.
(vi) In addition to the foregoing adjustments, the Corporation may, but
shall not be required to, make such adjustments in the Conversion Price as it
considers to be advisable in order that any event treated for federal income tax
purposes as a dividend of stock or stock rights shall either not be taxable to
the recipients or shall be taxable to the recipients to the minimum extent
reasonable under the circumstances, as determined by the Board of Directors in
its sole discretion.
(vii) In no event shall an adjustment in the Conversion Price be
required unless such adjustment would result in an increase or decrease of at
least one percent (1%) in the Conversion Price then in effect; provided,
however, that any such adjustments that are not made shall be carried forward
and taken into account in determining whether any subsequent adjustment is
required. In no event shall the Conversion Price be adjusted to an amount less
than any minimum required by law. Except as set forth in this Section 8, the
Conversion Price shall not be adjusted for the issuance of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
carrying the right or option to purchase or otherwise acquire the foregoing, in
exchange for cash, other property or services.
(viii) Whenever an adjustment in the Conversion Price is required, the
Corporation shall forthwith place on file with its transfer agent (or if the
<PAGE>
Corporation performs the functions of a transfer agent, with the corporate
secretary) a statement signed by its chief executive officer or a vice president
and by its secretary, assistant secretary or treasurer, stating the adjusted
Conversion Price determined as provided herein. Such statements shall set forth
in reasonable detail such facts as shall be necessary to show the reason and the
manner of computing such adjustment. As soon as practicable after the adjustment
of the Conversion Price, the Corporation shall mail a notice thereof to each
holder of shares of the Series B Preferred of such adjustment.
(ix) In the event that at any time, as a result of an adjustment made
pursuant to this Section 8, the holder of any shares of Series B Preferred
hereafter surrendered for conversion shall be entitled to receive any securities
other than shares of Common Stock, thereafter the amount of such other
securities so receivable upon conversion of any shares of Series B Preferred
shall be subject to adjustment from time to time in a manner and on terms as
nearly as equivalent as practicable to the provisions with respect to the Common
Stock contained in this Section 8, and the provisions of this Section 8 with
respect to the Common Stock shall apply on like terms to any such other
securities.
(c) In case of any consolidation or merger of the Corporation with or
into any other corporation (other than a merger in which the Corporation is the
surviving corporation), or in case of any sale or transfer of substantially all
the assets of the Corporation, or in case of reclassification, capital
reorganization or change of outstanding shares of Common Stock (other than
combinations or subdivisions described in Section 8(b)(i) and other than
Extraordinary Distributions described in Section 8(b)(iv)), there shall be no
adjustment to the Conversion Price then in effect, but appropriate provisions
shall be made so that any holder of Series B Preferred shall be entitled, after
the occurrence (or, if applicable, the record date) of any such event
("Transaction"), to receive on conversion the consideration which the holder
would have received had the holder converted such holder's Series B Preferred to
Common Stock immediately prior to the occurrence of the Transaction and had such
holder, if applicable, elected to receive the consideration in the form and
manner elected by the plurality of the electing holders of Common Stock. In any
such Transaction, effective provisions shall be made to ensure that the holder
or holders of the Series B Preferred shall receive the consideration that they
are entitled to receive pursuant to the provisions hereof, and in particular, as
a condition to any consolidation or merger in which the holders of securities
into which the Series B Preferred is then convertible are entitled to receive
equity securities of another corporation, such other corporation shall expressly
assume the obligation to deliver, upon conversion of the Series B Preferred,
such equity securities as the holder or holders of the Series B Preferred shall
be entitled to receive pursuant to the provisions hereof. Notwithstanding the
foregoing provisions of this Section 8(c), in the event the consideration to be
received pursuant to the provisions hereof is not to be constituted solely of
employer securities within the meaning of Section 409(l) of the Internal Revenue
Code of 1986, as amended, or any successor provisions of law, and of a cash
payment in lieu of any fractional securities, then the outstanding shares of
Series B Preferred shall be deemed converted by virtue of the Transaction
immediately prior to the consummation thereof into the number and kind of
securities into which such shares of Series B Preferred
<PAGE>
could have been voluntarily converted at such time and such securities shall be
entitled to participate fully in the Transaction as if such securities had been
outstanding on the appropriate record, exchange or distribution date. In the
event the Corporation shall enter into any agreement providing for any
Transaction, then the Corporation shall as soon as practicable thereafter (and
in any event at least ten (10) Business Days before consummation of the
Transaction) give notice of such agreement and the material terms thereof to
each holder of Series B Preferred and each such holder shall have the right, to
the extent permitted by applicable law, to elect, by written notice to the
Corporation, to receive, upon consummation of the Transaction (if and when the
Transaction is consummated), from the Corporation or the successor of the
Corporation, in redemption of such Series B Preferred, a cash payment per share
equal to the amount determined according to the following table, with the
redemption date to be deemed to be the same date that the Transaction giving
rise to the redemption election is consummated:
<TABLE>
<CAPTION>
TRANSACTION
CONSUMMATED IN YEAR REDEMPTION PRICE
ENDING DECEMBER 31 PER SHARE
- - ------------------- ----------------
<S> <C>
1990 $156.02
1991 154.72
1992 153.42
1993 152.12
1994 150.82
1995 149.52
1996 148.22
1997 146.92
1998 145.62
1999 and thereafter 144.30
</TABLE>
plus accumulated and unpaid dividends, without interest, to and excluding such
deemed redemption date. No such notice of redemption by the holder of Series B
Preferred shall be effective unless given to the Corporation prior to the close
of business at least two (2) Business Days prior to consummation of the
Transaction.
(d) The holder or holders of Series B Preferred as they appear on the
stock books of the Corporation at the close of business on a dividend payment
Record Date shall be entitled to receive the dividend payable on such shares on
the corresponding Dividend Payment Date notwithstanding the subsequent
conversion thereof or the Corporation's default on payment of the dividend due
on such Dividend Payment Date; provided, however, that the holder or holders of
Series B Preferred subject to redemption on a redemption date after such Record
Date and before such Dividend Payment Date shall not be entitled under this
provision to receive such dividend on such Dividend Payment Date. However,
shares of Series B Preferred surrendered for conversion during the period after
any dividend payment Record Date and before the corresponding Dividend Payment
Date (except shares subject to redemption on a redemption date during such
period) must be accompanied by payment of an amount equal to the dividend
payable on such shares on such Dividend Payment Date. The holder or holders of
Series B Preferred as they appear on the stock books of the Corporation at the
close of business on a dividend payment Record Date who
<PAGE>
convert shares of Series B Preferred on a Dividend Payment Date shall be
entitled to receive the dividend payable on such Series B Preferred by the
Corporation on such Dividend Payment Date, and the converting holders need not
include payment in the amount of such dividend upon surrender of shares of
Series B Preferred for conversion. Except as provided above, the Corporation
shall make no payment or allowance for unpaid dividends (whether or not
accumulated and in arrears) on converted shares or for dividends on the shares
of Common Stock issuable upon such conversion.
(e) Each conversion of shares of Series B Preferred into shares of
Common Stock shall be effected by the surrender of the certificate or
certificates representing the shares to be converted, accompanied by instruments
of transfer satisfactory to the Corporation and sufficient to transfer such
shares to the Corporation free of any adverse claims (the "Converting Shares"),
at the principal executive office of the Corporation (or such other office or
agency of the Corporation as the Corporation may designate by written notice to
the holder or holders of Series B Preferred) at any time during its respective
usual business hours, together with written notice by the holder of such
Converting Shares, stating that such holder desires to convert the Converting
Shares, or a stated number of the shares represented by such certificate or
certificates, into such number of shares of Common Stock into which such shares
may be converted (the "Converted Shares"). Such notice shall also state the name
or names (with addresses and federal taxpayer identification numbers) and
denominations in which the certificate or certificates for the Converted Shares
are to be issued, shall include instructions for the delivery thereof and shall
include such other information as the Corporation or its agents may reasonably
request. Promptly after such surrender and the receipt of such written notice
and the receipt of any required transfer documents and payments representing
dividends as described above, the Corporation shall issue and deliver in
accordance with the surrendering holder's instructions the certificate or
certificates evidencing the Converted Shares issuable upon such conversion, and
the Corporation will deliver to the converting holder (without cost to the
holder) a certificate (which shall contain such legends as were set forth on the
surrendered certificate or certificates) representing any shares of Series B
Preferred which were represented by the certificate or certificates that were
delivered to the Corporation in connection with such conversion, but which were
not converted.
(f) Such conversion, to the extent permitted by applicable law, shall
be deemed to have been effected at the close of business on the date on which
such certificate or certificates shall have been surrendered and such notice and
any required transfer documents and payments representing dividends shall have
been received by the Corporation, and at such time the rights of the holder of
the Converting Shares as such holder shall cease, and the person or persons in
whose name or names the certificate or certificates for the Converted Shares are
to be issued upon such conversion shall be deemed to have become the holder or
holders of record of the Converted Shares. Upon issuance of shares in accordance
herewith, such Converted Shares shall be deemed to be fully paid and
nonassessable. From and after the effectiveness of any such conversion, shares
of the Series B Preferred so converted shall, upon compliance with applicable
law, be restored to the status of authorized but unissued undesignated shares,
until such shares are once more designated as part of a particular series by the
Board of Directors.
<PAGE>
(g) Notwithstanding any provision herein to the contrary, the
Corporation shall not be required to record the conversion of, and no holder of
shares shall be entitled to convert, shares of Series B Preferred into shares of
Common Stock unless such conversion is permitted under applicable law; provided,
however, that the Corporation shall be entitled to rely without independent
verification upon the representation of any holder that the conversion of shares
by such holder is permitted under applicable law, and in no event shall the
Corporation be liable to any such holder or any third party arising from any
such conversion whether or not permitted by applicable law.
(h) The Corporation will pay any and all stamp, transfer or other
similar taxes that may be payable in respect of the issuance or delivery of
Common Stock received upon conversion of the shares of Series B Preferred, but
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issuance or delivery of Common Stock in a name
other than that in which such shares of Series B Preferred were registered and
no such issuance or delivery shall be made unless and until the person
requesting such conversion shall have paid to the Corporation the amount of any
and all such taxes or shall have established to the satisfaction of the
Corporation that such taxes have been paid in full.
(i) The Corporation shall at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued stock, for the
purpose of effecting the conversion of the shares of the Series B Preferred,
such number of its duly authorized shares of Common Stock or other securities as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series B Preferred.
(j) Whenever the Corporation shall issue shares of Common Stock upon
conversion of shares of Series B Preferred as contemplated by this Section 8,
the Corporation shall issue together with each such share of Common Stock one
Right (as defined in the Rights Agreement) pursuant to the terms and provisions
of the Rights Agreement.
9. Transfer Restriction. Shares of Series B Preferred shall be issued
only to the Plan and Trust and the certificate or certificates representing such
shares so issued may be registered in the name of the Plan and Trust or in the
name of one or more Trustees acting on behalf of the Plan and Trust (or the
nominee name of any such trustee). In the event the Plan and Trust, acting
through any such trustee or otherwise, should transfer beneficial or record
ownership of one or more shares of Series B Preferred to any person or entity,
the shares of Series B Preferred so transferred, upon such transfer and without
any further action by the Corporation or the Plan and Trust or anyone else,
shall be automatically converted, as of the time of such transfer, into shares
of Common Stock on the terms otherwise provided for the voluntary conversion of
shares of Series B Preferred into shares of Common Stock pursuant to Section 8
hereof and no transferee of such share or shares shall thereafter have or
receive any of the rights and preferences of the shares of Series B Preferred so
converted. Certificates representing shares of Series B Preferred shall be
legended to reflect the aforesaid restriction on transfer. Shares of Series B
Preferred may also be subject to restrictions on transfer which relate to the
securities laws of the United States of America or any state or other
jurisdiction thereof.
<PAGE>
10. No other Rights. The shares of Series B Preferred shall not have
any rights or preferences, except as set forth herein or as otherwise required
by applicable law.
11. Rules and Regulations. The Board of Directors shall have the right
and authority from time to time to prescribe rules and regulations as it may
determine to be necessary or advisable in its sole discretion
for the administration of the Series B Preferred in accordance with the
foregoing provisions and applicable law.
12. Definitions. For purposes of this Resolution, the following
definitions shall apply:
"Adjustment Period" shall mean the period of five (5) consecutive trading days
preceding the date as of which the Fair Market Value of a security is to be
determined.
"Business Day" shall mean each day that is not a Saturday, Sunday or a day on
which state or federally chartered banking institutions in New York, New York
are not required to be open.
"Current Market Price" of publicly traded shares of Common Stock or any other
class of capital stock or other security of the Corporation or any other issuer
for any day shall mean the last reported sales price, regular way, or, in the
event that no sale takes place on such day, the average of the reported closing
bid and asked prices, regular way, in either case as reported on the New York
Stock Exchange Composite Tape or, if such security is not listed or admitted to
trading on the New York Stock Exchange, on the principal national securities
exchange on which such security is listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ") or, if such security is not quoted on such
National Market System, the average of the closing bid and asked prices on each
such day in the over-the-counter market as reported by NASDAQ or, if bid and
asked prices for such security on each such day shall not have been reported
through NASDAQ, the average of the bid and asked prices for such day as
furnished by any New York Stock Exchange member firm regularly making a market
in such security selected for such purpose by the Board of Directors or a
committee thereof.
"Extraordinary Distribution" shall mean any dividend or other distribution to
holders of Common Stock (effected while any of the shares of Series B Preferred
are outstanding) (i) of cash (other than a regularly scheduled quarterly
dividend not exceeding 135% of the average quarterly dividend for the four
quarters immediately preceding such dividend), where the aggregate amount of
such cash dividend or distribution together with the amount of all cash
dividends and distributions made during the preceding period of twelve (12)
months, when combined with the aggregate amount of all Pro Rata Repurchases (for
this purpose, including only that portion of the aggregate purchase price of
such Pro Rata Repurchase which is in excess of the Fair Market Value of the
Common Stock repurchased as determined on the applicable expiration date
(including all extensions thereof) of any tender offer or exchange offer which
is a Pro Rata Repurchase, or the date of purchase with
<PAGE>
respect to any other Pro Rata Repurchase which is not a tender offer or exchange
offer made during such period), exceeds ten percent (10%) of the aggregate Fair
Market Value of all shares of Common Stock outstanding on the day before the
ex-dividend date with respect to such Extraordinary Distribution which is paid
in cash and on the distribution date with respect to an Extraordinary
Distribution which is paid other than in cash, and/or (ii) of any shares of
capital stock of the Corporation (other than shares of Common Stock), other
securities of the Corporation (other than securities of the type referred to in
Section 8(b)(ii) or (iii) hereof), evidences of indebtedness of the Corporation
or any other person or any other property (including shares of any subsidiary of
the Corporation) or any combination thereof. The Fair Market Value of an
Extraordinary Distribution for purposes of Section 8(b)(iv) hereof shall be
equal to the sum of the Fair Market Value of such Extraordinary Distribution
plus the amount of any cash dividends (other than regularly scheduled dividends
not exceeding 135% of the aggregate quarterly dividends for the preceding period
of twelve (12) months) which are not Extraordinary Distributions made during
such 12-month period and not previously included in the calculation of an
adjustment pursuant to Section 8(b)(iv) hereof.
"Fair Market Value" shall mean, as to shares of Common Stock or any other class
of capital stock or securities of the Corporation or any other issue which are
publicly traded, the average of the Current Market Prices of such shares or
securities for each day of the Adjustment Period. The "Fair Market Value" of any
security which is not publicly traded or of any other property shall mean the
fair value thereof as determined by an independent investment banking or
appraisal firm experienced in the valuation of such securities or property
selected in good faith by the Board of Directors or a committee thereof, or, if
no such investment banking or appraisal firm is in the good faith judgment of
the Board of Directors or such committee available to make such determination,
as determined in good faith by the Board of Directors or such committee. The
Fair Market Value of the Series B Preferred for purposes of Section 5(a) hereof
and for purposes of Section 6 hereof shall be as determined by an independent
appraiser, appointed by the Corporation in accordance with the provisions of the
Plan and Trust, as of the most recent Valuation Date, as defined in the Plan and
Trust.
"Non-Dilutive Amount" in respect of an issuance, sale or exchange by the
Corporation of any right or warrant to purchase or acquire shares of Common
Stock (including any security convertible into or exchangeable for shares of
Common Stock) shall mean the difference between (i) the product of the Fair
Market Value of a share of Common Stock on the day preceding the first public
announcement of such issuance, sale or exchange multiplied by the maximum number
of shares of Common Stock which could be acquired on such date upon the exercise
in full of such rights and warrants (including upon the conversion or exchange
of all such convertible or exchangeable securities), whether or not exercisable
(or convertible or exchangeable) at such date, and (ii) the aggregate amount
payable pursuant to such right or warrant to purchase or acquire such maximum
number of shares of Common Stock; provided, however, that in no event shall the
Non-Dilutive Amount be less than zero. For purposes of the foregoing sentence,
in the case of a security convertible into or exchangeable for shares of Common
Stock, the amount payable pursuant to a right or warrant to purchase or acquire
shares of Common Stock shall be the
<PAGE>
Fair Market Value of such security on the date of the issuance, sale or exchange
of such security by the Corporation.
"Pro Rata Repurchase" shall mean any purchase of shares of Common Stock by the
Corporation or any subsidiary thereof, whether for cash, shares of capital stock
of the Corporation, other securities of the Corporation, evidences of
indebtedness of the Corporation or any other person or any other property
(including shares of a subsidiary of the Corporation), or any combination
thereof, effected while any of the shares of Series B Preferred are outstanding,
pursuant to any tender offer or exchange offer subject to Section 13(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any
successor provision of law, or pursuant to any other offer available to
substantially all holders of Common Stock; provided, however, that no purchase
of shares by the Corporation or any subsidiary thereof made in open market
transactions shall be deemed a Pro Rata Repurchase. For purposes of this
definition, shares shall be deemed to have been purchased by the Corporation or
any subsidiary thereof "in open market transactions" if they have been purchased
substantially in accordance with the requirements of Rule 10b-18, as in effect
under the Exchange Act, on the date shares of Series B Preferred are initially
issued by the Corporation or on such other terms and conditions as the Board of
Directors or a committee thereof shall have determined are reasonably designed
to prevent such purchases from having a material effect on the trading market
for the Common Stock.
<PAGE>
CERTIFICATE OF DESIGNATION
OF
THE ST. PAUL COMPANIES, INC.
Series C Cumulative Convertible Preferred Stock
THE UNDERSIGNED, Bruce A. Backberg, the Vice President and Corporate
Secretary of The St. Paul Companies, Inc. (the "Corporation"), does hereby
certify that pursuant to Minnesota Statutes Section 302A.401, Subd.3(a),
resolutions as hereinafter set forth were adopted by written consent executed by
a majority of the Directors as of May 9, 1995.
RESOLVED, that there is hereby established, out of the presently
available undesignated shares of the Corporation, a series of Preferred
Stock of the Corporation designated and having such terms and relative
rights, preferences and privileges as set forth in Exhibit A attached
hereto (the "Series C Preferred Stock").
RESOLVED FURTHER, that the Vice President and Corporate Secretary or
any Assistant Secretary of the Corporation shall prepare a Certificate
of Designation describing the Series C Preferred Stock and cause the
same to be filed with the Secretary of State of the State of Minnesota.
IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Designation this 16th day of May, 1995.
/s/ BRUCE A. BACKBERG
---------------------
Bruce A. Backberg
Vice President and Corporate
Secretary
<PAGE>
EXHIBIT A
SECTION 1. Designation and Amount; Special Purpose;
Restriction on Senior Series.
(A) The shares of this series of Preferred Stock shall be
designated as "Series C Cumulative Convertible Preferred Stock" ("Series C
Preferred Stock") and the number of shares constituting such series shall be
41,400, without par value.
(B) Shares of Series C Preferred Stock shall be issued by the
conversion and exchange agent (the "Conversion Agent") for the Series C
Preferred Stock only upon the exchange of 6% Convertible Subordinated Debentures
due 2025 of the Corporation (the "Subordinated Debentures"), and accrued
interest thereon following a valid exchange election (an "Exchange Election") by
the holders of a majority of the aggregate liquidation preference of the
outstanding 6% Convertible Monthly Income Preferred Securities, liquidation
preference $50 per security (the "St. Paul Capital Preferred Securities"), of
St. Paul Capital L.L.C., a Delaware limited liability company ("St. Paul
Capital"), to cause the St. Paul Capital Preferred Securities then outstanding
to be exchanged for depositary shares, each representing a one hundredth
(1/100th) interest in a share of Series C Preferred Stock (the "Depositary
Shares"), issued pursuant to the Deposit Agreement, dated as of May 16, 1995,
among the Corporation, The Chase Manhattan Bank (National Association), as
Depositary, and the holders from time to time of the receipts described therein
(the "Deposit Agreement"), in the manner prescribed in the Amended and Restated
Limited Liability Company Agreement of St. Paul Capital, dated as of May 16,
1995 (the "L.L.C. Agreement").
(C) So long as any St. Paul Capital Preferred Securities are
outstanding, the Corporation shall not authorize or issue any other class or
series of capital stock ranking senior as to the payment of dividends or amounts
upon liquidation, dissolution or winding-up to the Series C Preferred Stock
without the approval of the holders of not less than 66% of the aggregate
liquidation preference of the St. Paul Capital Preferred Securities then
outstanding.
SECTION 2. Dividends and Distributions.
(A)(1) The holders of shares of Series C Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of Directors of
the Corporation out of funds legally available therefor, cumulative cash
dividends in an amount per share per annum equal to $300 (equivalent to a rate
per annum of 6% of the stated liquidation preference of $5,000 per share of
Series C Preferred Stock), calculated on the basis of a 360-day year consisting
of 12 months of 30 days each, and for any period shorter than a full monthly
dividend period, dividends will be computed on the basis of the actual number of
days elapsed in such period, and payable in United States dollars monthly in
arrears on the last day of each calendar month of each year.
(2) Dividends, when, as and if declared by the Board of
Directors of the Corporation out of funds legally available therefor, shall be
<PAGE>
paid on the last day of each month. Such dividends will accrue and be cumulative
whether or not they have been earned or declared and whether or not there are
funds of the Corporation legally available for the payment of dividends.
Dividends on the Series C Preferred Stock shall be cumulative from the date of
the Exchange Election. Accumulated but unpaid dividends, if any (including
arrearages at the rate of 6% per annum compounded monthly), on the St. Paul
Capital Preferred Securities on the date of the Exchange Election shall
constitute, and be treated as, accumulated and unpaid dividends on the Series C
Preferred Stock as of the date of the issuance thereof. The record date for each
dividend payment date shall be the day immediately preceding such dividend
payment date, provided that such day is a day on which banking institutions in
The City of New York are not authorized or obligated by law or executive order
to be closed (a "Business Day"). In the event that any date on which dividends
are payable on the Series C Preferred Stock is not a Business Day, then payment
of the dividend payable on such date will be made on the next succeeding day
that is a Business Day (and without any interest or other payment in respect of
any such delay) except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on such date.
(B) In the event that full cumulative dividends on the Series
C Preferred Stock have not been declared and paid or set apart for payment when
due, then the Corporation shall not, and shall not permit any direct or indirect
majority-owned subsidiary of the Corporation (except any of The John Nuveen
Company, a Delaware corporation, and its consolidated subsidiaries) to, declare
or pay any dividend on, or redeem, purchase, acquire for value or make a
liquidation payment with respect to, any Pari Passu Stock or Junior Stock (each
as defined herein) (other than as a result of a reclassification of Pari Passu
Stock or Junior Stock or the exchange or conversion of one class or series of
Pari Passu Stock or Junior Stock for another class or series of Pari Passu Stock
or Junior Stock, respectively), or make any guarantee payments with respect to
the foregoing (other than payments under the Guarantee Agreement dated as of May
16, 1995 of the Corporation in favor of the holders of St. Paul Capital
Preferred Securities with respect to such securities or dividends or guarantee
payments to the Corporation).
When dividends are not paid in full, all dividends declared
upon the Series C Preferred Stock and all dividends declared upon any Pari Passu
Stock shall be paid ratably in proportion to the respective amounts of dividends
accumulated and unpaid on the Series C Preferred Stock and accumulated and
unpaid on such Pari Passu Stock. "Pari Passu Stock" means the Series B
Convertible Preferred Stock, liquidation preference $100 per share (the "Senior
B Preferred Stock") of the Corporation, together with any preference stock or
preferred stock of the Corporation, or any guarantee now or hereafter entered
into by the Corporation in respect of any preferred or preference stock of any
affiliate of the Corporation, ranking, in such case, as to the payment of
dividends and amounts upon liquidation, dissolution and winding-up on a parity
with the Series C Preferred Stock. "Junior Stock" means Common Stock, the Series
A Junior Participating Preferred Stock, without par value, of the Corporation,
and any other class or series of capital stock of the Corporation or any of its
affiliates which by its express terms ranks
<PAGE>
junior in the payment of dividends or amounts upon liquidation, dissolution or
winding-up to the Series C Preferred Stock.
SECTION 3. Voting Rights.
(A) In the event that full cumulative dividends on the Series
C Preferred Stock have not been paid for 18 monthly dividend periods (including
for this purpose any arrearage with respect to St. Paul Capital Preferred
Securities), the number of directors of the Corporation constituting the entire
Board of Directors shall be increased by two (2) persons and the holders of the
Series C Preferred Stock shall have the right to elect two persons to fill such
positions at any regular meeting of shareholders or special meeting held in
place thereof, or at a special meeting of the holders of the Series C Preferred
Stock called as hereinafter provided. Whenever all arrearages of dividends on
the Series C Preferred Stock then outstanding shall have been paid and dividends
thereon for the current monthly period shall have been paid or declared and set
apart for payment, then the right of the holders of the Series C Preferred Stock
to elect such additional two (2) directors shall cease (but subject always to
the same provisions for the vesting of such voting rights in the case of any
similar future arrearages in dividends), and the terms of office of all persons
elected as directors by the holders of the Series C Preferred Stock shall
forthwith terminate and the number of directors of the Corporation shall be
reduced accordingly. At any time after such voting power shall have been so
vested in the holders of shares of the Series C Preferred Stock, the Secretary
of the Corporation may, and upon the written request for a special meeting
signed by the holders of at least 10% of all outstanding Series C Preferred
Stock (addressed to the Secretary at the principal office of the Corporation)
shall, call a special meeting of the holders of the Series C Preferred Stock for
the election of the two (2) directors to be elected by them as herein provided;
such call to be made by notice similar to that provided for in the by-laws for a
special meeting of the shareholders or as required by law. If any such special
meeting required to be called as above provided shall not be called by the
Secretary within 20 days after receipt of any such request, then any holder of
Series C Preferred Stock may call such meeting, upon the notice above provided,
and for that purpose shall have access to the stock books and records of the
Corporation. The directors elected at any such special meeting shall hold office
until the next regular meeting of the shareholders or special meeting held in
place thereof if such office shall not have previously terminated as above
provided. In case any vacancy shall occur among the directors elected by the
holders of the Series C Preferred Stock, a successor shall be elected by the
Board of Directors to serve until the next regular meeting of the shareholders
or special meeting held in place thereof upon the nomination of the then
remaining director elected by the holders of the Series C Preferred Stock or the
successor of such remaining director.
(B) Except as otherwise required by law or set forth herein,
holders of Series C Preferred Stock shall have no voting rights and their
consent shall not be required for the taking of any corporate action. So long as
any shares of Series C Preferred Stock are outstanding, the consent of the
holders of not less than 66% of the outstanding shares of Series C Preferred
Stock, given in person or by proxy either at a regular meeting or at a special
meeting called for that purpose, at which the holders of Series C Preferred
<PAGE>
Stock shall vote separately as a series, shall be necessary for effecting,
validating or authorizing any one or more of the following:
(1) The amendment, alteration or repeal of any of the
provisions of the Restated Articles of Incorporation, as amended, of
the Corporation, or any amendment thereto or any other certificate
filed pursuant to law (including any such amendment, alteration or
repeal effected by any merger or consolidation to which the Corporation
is a party) that would adversely affect any of the rights, powers or
preferences of outstanding shares of Series C Preferred Stock;
PROVIDED, HOWEVER, that any amendment or amendments to the provisions
of the Restated Articles of Incorporation, as amended, so as to
authorize or create, or to increase the authorized amount of, any Pari
Passu Stock or any Junior Stock shall not be deemed to adversely affect
the voting powers, rights or preferences of the holders of the Series C
Preferred Stock;
(2) The creation of any shares of any class or series or any
security convertible into shares of any class or series of capital
stock ranking prior to the Series C Preferred Stock in the distribution
of assets on any liquidation, dissolution or winding-up of the
Corporation or in the payment of dividends; or
(3) Any merger or consolidation with or into, or any sale,
transfer, exchange or lease of all or substantially all of the assets
of the Corporation to, any other corporation, in either case that would
adversely affect any of the rights, powers or preferences of
outstanding shares of Series C Preferred Stock; provided, that so long
as the convertible subordinated debentures of the Corporation issued
pursuant to the Indenture, dated as of May 16, 1995, among the
Corporation, St. Paul Capital L.L.C. ("St. Paul Capital") and The Chase
Manhattan Bank (National Association), as Trustee, are exchangeable for
shares of Series C Preferred Stock, that the consent of the holders of
not less than 66_% of the aggregate liquidation preference of the 6%
Convertible Monthly Income Preferred Securities of St. Paul Capital,
given in person or by proxy at a meeting called for that purpose, shall
be necessary for effecting validity or authorizing any one or more of
the foregoing actions.
(C) For purposes of this Section 3, while St. Paul Capital
Preferred Securities are outstanding and owned by any entity other than the
Corporation, St. Paul Capital, or their subsidiaries or affiliates, any St. Paul
Capital Preferred Securities owned by the Corporation, St. Paul Capital or their
subsidiaries or affiliates shall not have the voting rights referred to in this
Section.
SECTION 4. Redemption.
(A) If at any time following the Conversion Expiration Date
(as defined below), less than five percent (5%) of the shares of Series C
Preferred Stock remain outstanding, such shares of Series C Preferred Stock are
redeemable, at the option of the Corporation, in whole but not in part, from
time to time, at a redemption price equal to the liquidation preference,
<PAGE>
plus accumulated and unpaid dividends, whether or not earned or declared, to the
date of redemption (the "Redemption Price").
(B) Unless otherwise required by law, notice of redemption
will be sent to the holders of Series C Preferred Stock by first-class mail,
postage prepaid, mailed not less than thirty (30), nor more than sixty (60) days
prior to the redemption date. Each such notice shall state: (i) the redemption
date; (ii) the Redemption Price; (iii) the place or places where receipts for
Depositary Shares representing such shares are to be surrendered for payment of
the Redemption Price; and (iv) that dividends on the shares to be redeemed will
cease to accrue on such redemption date. Upon surrender of the receipts for
Depositary Shares representing the shares so called for redemption (properly
endorsed or assigned for transfer, if the Board of Directors of the Corporation
shall so require and the notice shall so state), such shares shall be redeemed
by the Corporation on the date fixed for redemption at the Redemption Price.
SECTION 5. Liquidation, Dissolution or Winding-Up.
(A) Upon any voluntary or involuntary liquidation,
dissolution, winding-up or termination of the Corporation, the holders of Series
C Preferred Stock at the time outstanding will be entitled to receive out of the
net assets of the Corporation available for payment to shareholders and subject
to the rights of the holders of any stock of the Corporation ranking senior to
or on a parity with the Series C Preferred Stock in respect of distributions
upon liquidation, dissolution, winding-up or termination of the Corporation,
before any amount shall be paid or distributed with respect to any Junior Stock,
liquidating distributions in the amount of $50 per share plus an amount equal to
all accrued and unpaid dividends thereon (whether or not earned or declared) to
the date fixed for distribution. If, upon any liquidation, dissolution,
winding-up or termination of the Corporation, the amounts payable with respect
to the Series C Preferred Stock and the Pari Passu Stock are not paid in full,
the holders of the Series C Preferred Stock and the Pari Passu Stock shall share
ratably in any distribution of assets based on the proportion of their full
respective liquidation preference to the entire amount of the unpaid aggregate
liquidation preference of the Series C Preferred Stock and the Pari Passu Stock.
After payment of the full amount to which they are entitled as provided by the
foregoing provisions of this Section 5(A), the holders of shares of Series C
Preferred Stock shall not be entitled to any further right or claim to any of
the remaining assets of the Corporation.
(B) Neither the merger or consolidation of the Corporation
with or into any other corporation, nor the merger or consolidation of any other
corporation with or into the Corporation, nor the sale, transfer, exchange or
lease of all or any portion of the assets of the Corporation, shall be deemed to
be a dissolution, liquidation or winding-up of the affairs of the Corporation
for purposes of this Section 5.
(C) Written notice of any voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, stating the payment
date or dates when, and the place or places where, the amounts distributable to
holders of Series C Preferred Stock in such circumstances shall be payable,
<PAGE>
shall be given by first-class mail, postage prepaid, mailed not less than twenty
(20) days prior to any payment date stated therein, to the holders of Series C
Preferred Stock, at the address shown on the books of the Corporation or the
transfer agent for the Series C Preferred Stock; PROVIDED, HOWEVER, that a
failure to give notice as provided above or any defect therein shall not affect
the Corporation's ability to consummate a voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation.
SECTION 6. Conversion Rights of Series C Preferred Stock.
The shares of Series C Preferred Stock are convertible at any
time before the close of business on the Conversion Expiration Date (as defined
in the L.L.C. Agreement), at the option of the holder thereof, into shares of
Common Stock at the initial conversion price of $59 per share of Common Stock,
subject to adjustment, as provided in Section 7 (as so adjusted, the "Conversion
Price"). For this purpose, each share of Series C Preferred Stock shall be taken
at $5,000.
Holders of record of Series C Preferred Stock at the close of
business on a dividend payment record date will be entitled to receive the
dividend payable on such shares of Series C Preferred Stock on the corresponding
dividend payment date notwithstanding the conversion thereof following such
dividend payment record date but on or prior to such dividend payment date.
Except as provided in the immediately preceding sentence, the Corporation will
make no payment or allowance for accumulated and unpaid dividends, whether or
not in arrears, on converted shares of Series C Preferred Stock.
No fractional shares of Common Stock will be issued as a
result of conversion, but in lieu thereof, the Corporation shall pay a cash
adjustment in an amount equal to the same fraction of the Closing Price (as
hereinafter defined) on the date on which the certificate or certificates for
such shares were duly surrendered for conversion, or, if such date is not a
Trading Day (as hereinafter defined), on the next Trading Day.
Any holder of shares of Series C Preferred Stock desiring to
convert such shares into shares of Common Stock shall surrender the certificate
or certificates representing the shares of Series C Preferred Stock being
converted, duly assigned or endorsed for transfer to the Corporation (or
accompanied by duly executed stock powers relating thereto), at the principal
executive office of the Corporation or the offices of the transfer agent for the
Series C Preferred Stock or such office or offices in the continental United
States of an agent for conversion as may from time to time be designated by
notice to the holders of the Series C Preferred Stock by the Corporation or the
transfer agent for the Series C Preferred Stock, accompanied by written notice
of conversion, on any day prior to the Conversion Expiration Date that is a
Business Day. Such notice of conversion shall specify (i) the number of shares
of Series C Preferred Stock to be converted and the name or names in which such
holder desires the certificate or certificates for Common Stock and for any
shares of Series C Preferred Stock not to be so converted to be issued (subject
to compliance with applicable legal requirements if any of such certificates are
to be issued in a name other than the name of the holder), and (ii) the address
to which such
<PAGE>
holder wishes delivery to be made of such new certificates to be issued upon
such conversion.
Upon surrender of a certificate representing a share or shares
of Series C Preferred Stock for conversion, the Corporation shall issue and send
by hand delivery (with receipt to be acknowledged) or by first-class mail,
postage prepaid, to the holder thereof, at the address designated by such
holder, a certificate or certificates representing the number of shares of
Common Stock to which such holder shall be entitled upon conversion. In the
event that there shall have been surrendered a certificate or certificates
representing shares of Series C Preferred Stock, only part of which are to be
converted, the Corporation shall issue and deliver to such holder or such
holder's designee in the manner provided in the immediately preceding sentence a
new certificate or certificates representing the number of shares of Series C
Preferred Stock that shall not have been converted.
The issuance by the Corporation of shares of Common Stock upon
a conversion of shares of Series C Preferred Stock into shares of Common Stock
made at the option of the holder thereof shall be effective upon the surrender
by such holder or such holder's designee of the certificate or certificates for
the shares of Series C Preferred Stock to be converted, duly assigned or
endorsed for transfer to the Corporation (or accompanied by duly executed stock
powers relating thereto). The person or persons entitled to receive the Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of the close of
business on the effective date of the conversion. No allowance or adjustment
shall be made in respect of dividends payable to holders of Common Stock of
record as of any date prior to such effective date.
Whenever the Corporation shall issue shares of Common Stock
upon conversion of shares of Series C Preferred Stock as contemplated by this
Section 6, the Corporation shall issue, together with each such share of Common
Stock, one right to purchase Series A Junior Participating Preferred Stock of
the Corporation (or other securities in lieu thereof) pursuant to the
Shareholder Protection Rights Agreement, dated as of December 4, 1989 (the
"Rights Agreement"), between the Corporation and First Chicago Trust Company of
New York, as Rights Agent, as such Rights Agreement may from time to time be
amended, or any similar rights issued to holders of Common Stock of the
Corporation in addition thereto or in replacement therefor (such rights,
together with any additional or replacement rights, being collectively referred
to as the "Rights"), whether or not such Rights shall be exercisable at such
time, but only if such Rights are issued and outstanding and held by other
holders of Common Stock of the Corporation (or are evidenced by outstanding
share certificates representing Common Stock) at such time and have not expired
or been redeemed.
(i) On and after May 31, 1999, the Corporation shall have the
right, at its option, to cause the conversion rights set forth in this Section
to expire, provided that the Current Market Price (as defined below) of the
Common Stock of the Corporation on each of 20 Trading Days within any period of
30 consecutive Trading Days, including the last Trading Day of such period,
exceeds 120% of the Conversion Price in effect on such Trading Day;
<PAGE>
(ii) In order to exercise its option to cause the conversion
rights of holders of shares of Series C Preferred Stock to expire, the
Corporation must issue a press release for publication on the Dow Jones News
Service and such other print and electronic media as the Corporation shall
select announcing the Conversion Expiration Date (the "Press Release") prior to
the opening of business on the second Trading Day after a period in which the
condition in the preceding paragraph has been met (but in no event prior to May
31, 1999). The Press Release shall state that the Corporation has elected to
exercise its right to extinguish the conversion rights of holders of shares of
Series C Preferred Stock, specify the Conversion Expiration Date and provide the
Conversion Price of the Series C Preferred Stock and the Current Market Price of
the Common Stock, in each case as of the close of business on the Trading Day
next preceding the date of the Press Release. If the Corporation exercises the
option described in this paragraph, the "Conversion Expiration Date" shall be a
date selected by the Corporation which date shall be not less than 30 or more
than 60 days after the date on which the Corporation issues the Press Release;
and
(iii) In addition to issuing the Press Release, the Company
shall send notice of the expiration of conversion rights (a "Notice of
Conversion Expiration") by first-class mail to each record holder of shares of
Series C Preferred Stock not more than four (4) Business Days after the
Corporation issues the Press Release. Such Notice of Conversion Expiration shall
state: (1) the Conversion Expiration Date; (2) the Conversion Price of the
Series C Preferred Stock and the Current Market Price of the Common Stock, in
each case as of the close of business on the Trading Day next preceding the date
of the Notice of Conversion Expiration; (3) the place or places at which
receipts for Depositary Shares representing shares of Series C Preferred Stock
are to be surrendered prior to the Conversion Expiration Date for certificates
representing shares of Common Stock; and (4) such other information or
instructions as the Corporation deems necessary or advisable to enable a holder
of shares of Series C Preferred Stock to exercise its conversion right
hereunder. No defect in the Notice of Conversion Expiration or in the mailing
thereof with respect to any shares of Series C Preferred Stock shall affect the
validity of such notice with respect to any other share of Series C Preferred
Stock. As of the close of business on the Conversion Expiration Date, the Series
C Preferred Stock shall no longer be convertible into Common Stock. As used in
this Section, "Current Market Price" of publicly traded shares of Common Stock
for any day means the last reported sales price, regular way on such day, or, if
no sale takes place on such day, the average of the reported closing bid and
asked prices on such day, regular way, in either case as reported on the New
York Stock Exchange Consolidated Transaction Tape, or, if the Common Stock is
not listed or admitted to trading on the New York Stock Exchange, on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading if the Common Stock is listed on a national securities
exchange, or the National Market System of the National Association of
Securities Dealers, Inc., or, if the Common Stock is not quoted or admitted to
trading on such quotation system, on the principal quotation system on which the
Common Stock may be listed or admitted to trading or quoted, or, if not listed
or admitted to trading or quoted on any national securities exchange or
quotation system, the average of the closing bid and asked prices of the Common
Stock in the over-the-counter market on the day in question as reported by the
National Quotation Bureau
<PAGE>
Incorporated, or a similar generally accepted reporting service, or, if not so
available in such manner, as furnished by any New York Stock Exchange member
firm selected from time to time by the Board of Directors of the Corporation for
that purpose or, if not so available in such manner, as otherwise determined in
good faith by the Board of Directors.
The Corporation shall at all times reserve and keep available
out of its authorized and unissued Common Stock, solely for issuance upon the
conversion of shares of Series C Preferred Stock as herein provided, free from
any preemptive or other similar rights, such number of shares of Common Stock as
shall from time to time be issuable upon the conversion of all the shares of
Series C Preferred Stock then outstanding. All shares of Common Stock delivered
upon conversion of the Series C Preferred Stock shall be duly authorized,
validly issued, fully paid and non-assessable, free and clear of all liens,
claims, interests and other encumbrances. The Corporation shall prepare and
shall use its best efforts to obtain and keep in force such governmental or
regulatory permits or other authorizations as may be required by law, and shall
comply with all applicable requirements as to registration or qualification of
the Common Stock (and all requirements to list the Common Stock issuable upon
conversion of Series C Preferred Stock that are at the time applicable), in
order to enable the Corporation lawfully to issue and deliver to each holder of
record of Series C Preferred Stock such number of shares of its Common Stock as
shall from time to time be sufficient to effect the conversion of all shares of
Series C Preferred Stock then outstanding and convertible into shares of Common
Stock.
SECTION 7. Adjustment of Conversion Price.
(A) Adjustment of Conversion Price. The Conversion Price at
which a share of Series C Preferred Stock is convertible into Common Stock shall
be subject to adjustment from time to time as follows:
(i) In case the Corporation shall pay or make a dividend or
other distribution on any class or series of capital stock of the Corporation
exclusively in Common Stock, the Conversion Price in effect at the opening of
business on the day following the date fixed for the determination of
shareholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination and the denominator shall
be the sum of such number of shares and the total number of shares constituting
such dividend or other distribution or exchange, such reduction to become
effective immediately after the opening of business on the day following the
date fixed for such determination. For the purposes of this subparagraph (i),
the number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Corporation. The Corporation shall not pay
any dividend or make any distribution on shares of any class or series of
capital stock of the Corporation exclusively in Common Stock held in the
treasury of the Corporation.
(ii) In case the Corporation shall pay or make a dividend or
other distribution on its Common Stock consisting exclusively of, or shall
otherwise issue to all holders of its Common Stock, rights or warrants
<PAGE>
entitling the holders thereof to subscribe for or purchase shares of Common
Stock at a price per share less than the current market price per share
(determined as provided in subparagraph (vii) of this Section 7(a)) of the
Common Stock on the date fixed for the determination of shareholders entitled to
receive such rights or warrants, the Conversion Price in effect at the opening
of business on the day following the date fixed for such determination shall be
reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the date fixed for such determination plus the number of shares
of Common Stock which the aggregate of the offering price of the total number of
shares of Common Stock so offered for subscription or purchase would purchase at
such current market price and the denominator shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately after
the opening of business on the day following the date fixed for such
determination. In case any rights or warrants referred to in this subparagraph
(ii) in respect of which an adjustment shall have been made shall expire
unexercised within 45 days after the same shall have been distributed or issued
by the Corporation, the Conversion Price shall be readjusted at the time of such
expiration to the Conversion Price that would have been in effect if no
adjustment had been made on account of the distribution or issuance of such
expired rights or warrants.
(iii) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion Price
in effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately reduced, and
conversely, in case outstanding shares of Common Stock shall each be combined
into a smaller number of shares of Common Stock, the Conversion Price in effect
at the opening of business on the day following the day upon which such
combination becomes effective shall be proportionately increased, such reduction
or increase, as the case may be, to become effective immediately after the
opening of business on the day following the day upon which such subdivision or
combination becomes effective.
(iv) Subject to the last sentence of this subparagraph (iv),
in case the Corporation shall, by dividend or otherwise, distribute to all
holders of its Common Stock evidences of its indebtedness, shares of any class
or series of capital stock, cash or assets (including securities, but excluding
any rights or warrants referred to in subparagraph (ii) of this Section 7(A),
any dividend or distribution paid exclusively in cash and any dividend or
distribution referred to in subparagraph (i) of this Section 7(A)), the
Conversion Price shall be reduced so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the effectiveness of the Conversion Price reduction contemplated by this
subparagraph (iv) by a fraction of which the numerator shall be the current
market price per share (determined as provided in subparagraph (vii) of this
Section 7(A)) of the Common Stock on the date fixed for the payment of such
distribution (the "Reference Date") less the fair market value (as determined in
good faith by the Board of Directors, whose determination shall be conclusive
and described in a resolution of the Board of Directors), on the Reference Date,
of the portion of the evidences of indebtedness, shares of
<PAGE>
capital stock, cash and assets so distributed applicable to one share of Common
Stock and the denominator shall be such current market price per share of the
Common Stock, such reduction to become effective immediately prior to the
opening of business on the day following the Reference Date. If the Board of
Directors determines the fair market value of any distribution for purposes of
this subparagraph (iv) by reference to the actual or when issued trading market
for any securities comprising such distribution, it must in doing so consider
the prices in such market over the same period used in computing the current
market price per share of Common Stock pursuant to subparagraph (vii) of this
Section 7(A). For purposes of this subparagraph (iv), any dividend or
distribution that includes shares of Common Stock or rights or warrants to
subscribe for or purchase shares of Common Stock shall be deemed instead to be
(1) a dividend or distribution of the evidences of indebtedness, shares of
capital stock, cash or assets other than such shares of Common Stock or such
rights or warrants (making any Conversion Price reduction required by this
subparagraph (iv)) immediately followed by (2) a dividend or distribution of
such shares of Common Stock or such rights or warrants (making any further
Conversion Price reduction required by subparagraph (i) or (ii) of this Section
7(A)), except (A) the Reference Date of such dividend or distribution as defined
in this subparagraph (iv) shall be substituted as "the date fixed for the
determination of shareholders entitled to receive such dividend or other
distribution," "the date fixed for the determination of shareholders entitled to
receive such rights or warrants" and "the date fixed for such determination"
within the meaning of subparagraphs (i) and (ii) of this Section 7(A) and (B)
any shares of Common Stock included in such dividend or distribution shall not
be deemed "outstanding at the close of business on the date fixed for such
determination" within the meaning of subparagraph (i) of this Section 7(A).
(v) In case the Corporation shall pay or make a dividend or
other distribution on its Common Stock exclusively in cash (excluding, in the
case of any regular cash dividend on the Common Stock, the portion thereof that
does not exceed the per share amount of the next preceding regular cash dividend
on the Common Stock (as adjusted to appropriately reflect any of the events
referred to in subparagraphs (i), (ii), (iii), (iv), (v) and (vi) of this
Section 7(A)), or excluding all of such regular cash dividend if the annualized
amount thereof per share of Common Stock does not exceed 15% of the current
market price per share (determined as provided in subparagraph (vii) of this
Section 7(A)) of the Common Stock on the Trading Day (as defined in Section
7(E)) next preceding the date of declaration of such dividend), the Conversion
Price shall be reduced so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the
effectiveness of the Conversion Price reduction contemplated by this
subparagraph (v) by a fraction of which the numerator shall be the current
market price per share (determined as provided in subparagraph (vii) of this
Section 7(A)) of the Common Stock on the date fixed for the payment of such
distribution less the amount of cash so distributed and not excluded as provided
above applicable to one share of Common Stock and the denominator shall be such
current market price per share of the Common Stock, such reduction to become
effective immediately prior to the opening of business on the day following the
date fixed for the payment of such distribution.
<PAGE>
(vi) In case a tender or exchange offer made by the
Corporation or any subsidiary of the Corporation for all or any portion of the
Corporation's Common Stock shall expire and such tender or exchange offer shall
involve the payment by the Corporation or such subsidiary of consideration per
share of Common Stock having a fair market value (as determined in good faith by
the Board of Directors, whose determination shall be conclusive and described in
a resolution of the Board of Directors) at the last time (the "Expiration Time")
tenders or exchanges may be made pursuant to such tender or exchange offer (as
it shall have been amended) that exceeds 10% of the current market price per
share (determined as provided in subparagraph (vii) of this Section 7(A)) of the
Common Stock on the Trading Day (as defined in Section 7(E)) next succeeding the
Expiration Time, the Conversion Price shall be reduced so that the same shall
equal the price determined by multiplying the Conversion Price in effect
immediately prior to the effectiveness of the Conversion Price reduction
contemplated by this subparagraph (vi) by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding (including any
tendered or exchanged shares) at the Expiration Time multiplied by the current
market price per share (determined as provided in subparagraph (vii) of this
Section 7(A)) of the Common Stock on the Trading Day next succeeding the
Expiration Time and the denominator shall be the sum of (x) the fair market
value (determined as aforesaid) of the aggregate consideration payable to
holders of Common Stock based on the acceptance (up to any maximum specified in
the terms of the tender or exchange offer) of all shares validly tendered or
exchanged and not withdrawn as of the Expiration Time (the shares deemed so
accepted, up to any such maximum, being referred to as the "Purchased Shares")
and (y) the product of the number of shares of Common Stock outstanding (less
any Purchased Shares) at the Expiration Time and the current market price per
share (determined as provided in subparagraph (vii) of this Section 7(A)) of the
Common Stock on the Trading Day next succeeding the Expiration Time, such
reduction to become effective immediately prior to the opening of business on
the day following the Expiration Time.
(vii) For the purpose of any computation under subparagraphs
(ii), (iv), (v) and (vi) of this Section 7(A), the current market price per
share of Common Stock on any date in question shall be deemed to be the average
of the daily Closing Prices (as defined in Section 7(E)) for the five
consecutive Trading Days selected by the Company commencing not more than 20
Trading Days before, and ending not later than, the earlier of the day in
question and, if applicable, the day before the "ex" date with respect to the
issuance or distribution requiring such computation; PROVIDED, however, that if
another event occurs that would require an adjustment pursuant to subparagraphs
(i) through (vi), inclusive, the Board of Directors may make such adjustments to
the Closing Prices during such five Trading Day period as it deems appropriate
to effectuate the intent of the adjustments in this Section 7(A), in which case
any such determination by the Board of Directors shall be set forth in a
resolution of the Board of Directors and shall be conclusive. For purposes of
this paragraph, the term "ex" date, (1) when used with respect to any issuance
or distribution, means the first date on which the Common Stock trades regular
way on the New York Stock Exchange or on such successor securities exchange as
the Common Stock may be listed or in the relevant market from which the Closing
Price was obtained without the right to receive such issuance or distribution,
and (2) when used with respect to any tender or exchange offer
<PAGE>
means the first date on which the Common Stock trades regular way on such
securities exchange or in such market after the Expiration Time of such offer.
(viii) The Corporation may make such reductions in the
Conversion Price, in addition to those required by subparagraphs (i), (ii),
(iii), (iv), (v) and (vi) of this Section 7(A), as it considers to be advisable
to avoid or diminish any income tax to holders of Common Stock or rights to
purchase Common Stock resulting from any dividend or distribution of stock (or
rights to acquire stock) or from any event treated as such for income tax
purposes. The Corporation from time to time may reduce the Conversion Price by
any amount for any period of time if the period is at least twenty (20) days,
the reduction is irrevocable during the period, and the Board of Directors of
the Corporation shall have made a determination that such reduction would be in
the best interest of the Corporation, which determination shall be conclusive.
Whenever the Conversion Price is reduced pursuant to the preceding sentence, the
Corporation shall mail to holders of record of the Series C Preferred Stock a
notice of the reduction at least fifteen (15) days prior to the date the reduced
Conversion Price takes effect, and such notice shall state the reduced
Conversion Price and the period it will be in effect.
(ix) Notwithstanding anything herein to the contrary, no
adjustment in the Conversion Price shall be required unless such adjustment
would require an increase or decrease of at least 1% in the Conversion Price;
PROVIDED, HOWEVER, that any adjustments which by reason of this subparagraph
(ix) are not required to be made shall be carried forward and taken into account
in any subsequent adjustment.
(x) Whenever the Conversion Price is adjusted as herein
provided:
(1) the Corporation shall compute the adjusted
Conversion Price and shall prepare a certificate signed by the
Chief Financial Officer or the Treasurer of the Corporation
setting forth the adjusted Conversion Price and showing in
reasonable detail the facts upon which such adjustment is
based, and such certificate shall forthwith be filed with the
transfer agent for the Series C Preferred Stock; and
(2) a notice stating that the Conversion Price has
been adjusted and setting forth the adjusted Conversion Price
shall as soon as practicable be mailed by the Corporation to
all record holders of shares of Series C Preferred Stock at
their last addresses as they shall appear upon the stock
transfer books of the Corporation.
(B) Reclassification, Consolidation, Merger or Sale of Assets.
In the event that the Corporation shall be a party to any transaction (including
without limitation any recapitalization or reclassification of the Common Stock
(other than a change in par value, or from par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination of the
Common Stock), any consolidation of the Corporation with, or merger of the
Corporation into, any other person, any merger of another person into the
Corporation (other than a merger which does not result in a
<PAGE>
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock of the Corporation), any sale or transfer of all or substantially
all of the assets of the Corporation or any compulsory share exchange) pursuant
to which the Common Stock is converted into the right to receive other
securities, cash or other property), then lawful provision shall be made as part
of the terms of such transaction whereby the holder of each share of Series C
Preferred Stock then outstanding shall have the right thereafter, to convert
such share only into (i) in the case of any such transaction other than a Common
Stock Fundamental Change (as defined in Section 7(E)), the kind and amount of
securities, cash and other property receivable upon such transaction by a holder
of the number of shares of Common Stock of the Corporation into which such share
of Series C Preferred Stock could have been converted immediately prior to such
transaction, after giving effect, in the case of any Non-Stock Fundamental
Change (as defined in Section 7(E)), to any adjustment in the Conversion Price
required by the provisions of Section 7(D), and (ii) in the case of a Common
Stock Fundamental Change, common stock of the kind received by holders of Common
Stock as a result of such Common Stock Fundamental Change in an amount
determined pursuant to the provisions of Section 7(D). The Corporation or the
person formed by such consolidation or resulting from such merger or which
acquires such assets or which acquires the Corporation's shares, as the case may
be, shall make provision in its certificate or articles of incorporation or
other constituent document to establish such right. Such certificate or articles
of incorporation or other constituent document shall provide for adjustments
which, for events subsequent to the effective date of such certificate or
articles of incorporation or other constituent document, shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
7. The above provisions shall similarly apply to successive transactions of the
foregoing type.
(C) Prior Notice of Certain Events. In case:
(i) the Corporation shall (1) declare any dividend (or any
other distribution) on its Common Stock, other than (A) a
dividend payable in shares of Common Stock or (B) a dividend
payable in cash out of its retained earnings that would not
require an adjustment pursuant to 7(A)(iv) or (v) or (2)
authorize a tender or exchange offer that would require an
adjustment pursuant to 7(A)(vi);
(ii) the Corporation shall authorize the granting to all
holders of Common Stock of rights or warrants to subscribe for
or purchase any shares of stock of any class or series or of
any other rights or warrants;
(iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or
a change in par value, or from par value to no par value, or
from no par value to par value), or of any consolidation or
merger to which the Corporation is a party and for which
approval of any shareholders of the Corporation shall be
required, or of the sale or transfer of all or substantially
all of the assets of the Corporation or of any compulsory
share exchange whereby the Common
<PAGE>
Stock is converted into other securities, cash or other
property; or
(iv) of the voluntary or involuntary dissolution, liquidation
or winding-up of the Corporation;
then the Corporation shall cause to be filed with the transfer agent for the
Series C Preferred Stock, and shall cause to be mailed to the holders of record
of the Series C Preferred Stock, at their last addresses as they shall appear
upon the stock transfer books of the Corporation, at least fifteen (15) days
prior to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record (if any) is to be taken for the purpose
of such dividend, distribution, redemption, repurchase, rights or warrants or,
if a record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distribution, redemption, repurchase,
rights or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding-up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, share exchange, dissolution, liquidation or winding-up (but no failure
to mail such notice or any defect therein or in the mailing thereof shall affect
the validity of the corporate action required to be specified in such notice).
(D) Adjustments in Case of Fundamental Changes.
Notwithstanding any other provision in this Section 7 to the contrary, if any
Fundamental Change (as defined in Section 7(E)) occurs, then the Conversion
Price in effect will be adjusted immediately after such Fundamental Change as
described below. In addition, in the event of a Common Stock Fundamental Change,
each share of Series C Preferred Stock shall be convertible solely into common
stock of the kind and amount received by holders of Common Stock as the result
of such Common Stock Fundamental Change as more specifically provided in the
following clauses (D)(i) and (D)(ii).
For purposes of calculating any adjustment to be made pursuant to this Section
7(D) in the event of a Fundamental Change, immediately after such Fundamental
Change:
(i) in the case of a Non-Stock Fundamental Change, the
Conversion Price of the Series C Preferred Stock shall thereupon become the
lower of (A) the Conversion Price in effect immediately prior to such Non-Stock
Fundamental Change, but after giving effect to any other prior adjustments
effected pursuant to this Section 7, and (B) the result obtained by multiplying
the greater of the Applicable Price (as defined in Section 7(E)) or the then
applicable Reference Market Price (as defined in Section 7(E)) by a fraction of
which the numerator shall be $50 and the denominator shall be an amount per
share of Series C Preferred Stock determined by the Corporation in its sole
discretion, after consultation with a nationally recognized investment banking
firm, to be the equivalent of the hypothetical redemption price that would have
been applicable if the Series C Preferred Stock had been redeemable during such
period; and
<PAGE>
(ii) in the case of a Common Stock Fundamental Change, the
Conversion Price of the Series C Preferred Stock in effect immediately prior to
such Common Stock Fundamental Change, but after giving effect to any other prior
adjustments effected pursuant to this Section 7, shall thereupon be adjusted by
multiplying such Conversion Price by a fraction of which the numerator shall be
the Purchaser Stock Price (as defined in Section 7(E)) and the denominator shall
be the Applicable Price; PROVIDED, HOWEVER, that in the event of a Common Stock
Fundamental Change in which (A) 100% by value of the consideration received by a
holder of Common Stock is common stock of the successor, acquiror or other third
party (and cash, if any, is paid with respect to any fractional interests in
such common stock resulting from such Common Stock Fundamental Change) and (B)
all of the Common Stock shall have been exchanged for, converted into or
acquired for common stock (and cash with respect to fractional interests) of the
successor, acquiror or other third party, the Conversion Price of the Series C
Preferred Stock in effect immediately prior to such Common Stock Fundamental
Change shall thereupon be adjusted by multiplying such Conversion Price by a
fraction of which the numerator shall be one (1) and the denominator shall be
the number of shares of common stock of the successor, acquiror, or other third
party received by a shareholder for one share of Common Stock as a result of
such Common Stock Fundamental Change.
(E) Definitions. The following definitions shall apply to
terms used in this Section 7:
(1) "Applicable Price" shall mean (i) in the event of a
Non-Stock Fundamental Change in which the holders of the Common Stock receive
only cash, the amount of cash received by a shareholder for one share of Common
Stock and (ii) in the event of any other Non-Stock Fundamental Change or any
Common Stock Fundamental Change, the average of the daily Closing Prices of the
Common Stock for the ten (10) consecutive Trading Days prior to and including
the record date for the determination of the holders of Common Stock entitled to
receive securities, cash or other property in connection with such Non-Stock
Fundamental Change or Common Stock Fundamental Change, or, if there is no such
record date, the date upon which the holders of the Common Stock shall have the
right to receive such securities, cash or other property, in each case, as
adjusted in good faith by the Board of Directors of the Corporation to
appropriately reflect any of the events referred to in subparagraphs (i), (ii),
(iii), (iv), (v) and (vi) of Section 7(A).
(2) "Closing Price" of any common stock on any day shall mean
the last reported sale price regular way on such day or, in case no such sale
takes place on such day, the average of the reported closing bid and asked
prices regular way of such common stock, in each case on the principal national
securities exchange on which such common stock is listed, if the common stock is
listed on a national securities exchange, or the NASDAQ National Market System
of the National Association of Securities Dealers, Inc., or, if the common stock
is not quoted or admitted to trading on such quotation system, on the principal
national securities exchange or quotation system on which the common stock is
listed or admitted to trading or quoted, or, if not listed or admitted to
trading or quoted on any national securities exchange or quotation system, the
average of the closing bid and asked prices
<PAGE>
of the common stock in the over-the-counter market on the day in question as
reported by the National Quotation Bureau Incorporated, or a similarly generally
accepted reporting service, or, if not so available in such manner, as furnished
by any New York Stock Exchange member firm selected from time to time by the
Board of Directors of the Corporation for that purpose or, if not so available
in such manner, as otherwise determined in good faith by the Board of Directors.
(3) "Common Stock Fundamental Change" shall mean any
Fundamental Change in which more than 50% by value (as determined in good faith
by the Board of Directors of the Corporation) of the consideration received by
holders of Common Stock consists of common stock that for each of the ten (10)
consecutive Trading Days referred to with respect to such Fundamental Change in
Section 7(E)(1) above has been admitted for listing or admitted for listing
subject to notice of issuance on a national securities exchange or quoted on the
NASDAQ National Market System of the National Association of Securities Dealers,
Inc.; PROVIDED, HOWEVER, that a Fundamental Change shall not be a Common Stock
Fundamental Change unless either (i) the Corporation continues to exist after
the occurrence of such Fundamental Change and the outstanding shares of Series C
Preferred Stock continue to exist as outstanding shares of Series C Preferred
Stock, or (ii) not later than the occurrence of such Fundamental Change, the
outstanding shares of Series C Preferred Stock are converted into or exchanged
for shares of convertible preferred stock of a corporation succeeding to the
business of the Corporation, which convertible preferred stock has powers,
preferences and relative, participating, optional or other rights, and
qualifications, limitations and restrictions, substantially similar to those of
the Series C Preferred Stock.
(4) "Fundamental Change" shall mean the occurrence of any
transaction or event in connection with a plan pursuant to which all or
substantially all of the Common Stock shall be exchanged for, converted into,
acquired for or constitute solely the right to receive securities, cash or other
property (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise); PROVIDED, HOWEVER, in the case of a plan involving more than one
such transaction or event, for purposes of adjustment of the Conversion Price,
such Fundamental Change shall be deemed to have occurred when substantially all
of the Common Stock of the Corporation shall be exchanged for, converted into,
or acquired for or constitute solely the right to receive securities, cash or
other property, but the adjustment shall be based upon the highest weighted
average of consideration per share which a holder of Common Stock could have
received in such transactions or events as a result of which more than 50% of
the Common Stock of the Corporation shall have been exchanged for, converted
into, or acquired for or constitute solely the right to receive securities, cash
or other property.
(5) "Non-Stock Fundamental Change" shall mean any Fundamental
Change other than a Common Stock Fundamental Change.
(6) "Purchaser Stock Price" shall mean, with respect to any
Common Stock Fundamental Change, the average of the daily Closing Prices of the
common stock received in such Common Stock Fundamental Change for the ten (10)
consecutive Trading Days prior to and including the record date for the
<PAGE>
determination of the holders of Common Stock entitled to receive such common
stock, or, if there is no such record date, the date upon which the holders of
the Common Stock shall have the right to receive such common stock, in each
case, as adjusted in good faith by the Board of Directors of the Corporation to
appropriately reflect any of the events referred to in subparagraphs (i), (ii),
(iii), (iv), (v) and (vi) of Section 7(A).
(7) "Reference Market Price" shall initially mean $32.25 and
in the event of any adjustment to the Conversion Price other than as a result of
a Non-Stock Fundamental Change, the Reference Market Price shall also be
adjusted so that the ratio of the Reference Market Price to the Conversion Price
after giving effect to any such adjustment shall always be the same as the ratio
of $32.25 to the initial Conversion Price per share.
(8) "Trading Day" shall mean a day on which securities are
traded on the national securities exchange or quotation system or in the
over-the-counter market used to determine the Closing Price.
(F) Dividend or Interest Reinvestment Plans. Notwithstanding
the foregoing provisions, the issuance of any shares of Common Stock pursuant to
any plan providing for the reinvestment of dividends or interest payable on
securities of the Corporation and the investment of additional optional amounts
in shares of Common Stock under any such plan, and the issuance of any shares of
Common Stock or options or rights to purchase such shares pursuant to any
employee benefit plan or program of the Corporation or pursuant to any option,
warrant, right or exercisable, exchangeable or convertible security outstanding
as of the date the Series C Preferred Stock is first issued, shall not be deemed
to constitute an issuance of Common Stock or exercisable, exchangeable or
convertible securities by the Corporation to which any of the adjustment
provisions described above applies.
(G) Certain Additional Rights. In case the Corporation shall,
by dividend or otherwise, declare or make a distribution on its Common Stock
referred to in Section 7(A)(iv) or 7(A)(v) (including, without limitation,
dividends or distributions referred to in the last sentence of Section
7(A)(iv)), the holder of each share of Series C Preferred Stock, upon the
conversion thereof subsequent to the close of business on the date fixed for the
determination of shareholders entitled to receive such distribution and prior to
the effectiveness of the Conversion Price adjustment in respect of such
distribution, shall also be entitled to receive for each share of Common Stock
into which such share of Series C Preferred Stock is converted, the portion of
the shares of Common Stock, rights, warrants, evidences of indebtedness, shares
of capital stock, cash and assets so distributed applicable to one share of
Common Stock; PROVIDED, HOWEVER, that, at the election of the Corporation (whose
election shall be evidenced by a resolution of the Board of Directors) with
respect to all holders so converting, the Corporation may, in lieu of
distributing to such holder any portion of such distribution not consisting of
cash or securities of the Corporation, pay such holder an amount in cash equal
to the fair market value thereof (as determined in good faith by the Board of
Directors, whose determination shall be conclusive and described in a resolution
of the Board of Directors). If any conversion of a share of Series C Preferred
Stock described in the immediately preceding sentence occurs prior to the
payment date for a distribution to
<PAGE>
holders of Common Stock which the holder of the share of Series C Preferred
Stock so converted is entitled to receive in accordance with the immediately
preceding sentence, the Corporation may elect (such election to be evidenced by
a resolution of the Board of Directors) to distribute to such holder a due bill
for the shares of Common Stock, rights, warrants, evidences of indebtedness,
shares of capital stock, cash or assets to which such holder is so entitled,
provided that such due bill (i) meets any applicable requirements of the
principal national securities exchange or other market on which the Common Stock
is then traded and (ii) requires payment or delivery of such shares of Common
Stock, rights, warrants, evidences of indebtedness, shares of capital stock,
cash or assets no later than the date of payment or delivery thereof to holders
of shares of Common Stock receiving such distribution.
(H) Stock Issuances; Multiple Adjustments. There shall be no
adjustment of the Conversion Price in case of the issuance of any stock (or
securities convertible into or exchangeable for stock) of the Corporation except
as specifically described in this Section 7. If any action would require
adjustment of the Conversion Price pursuant to more than one of the provisions
described above, only one adjustment shall be made and such adjustment shall be
the amount of adjustment which has the highest absolute value to holders of
Series C Preferred Stock.
SECTION 8. Ranking; Attributable Capital and Adequacy of
Surplus; Retirement of Shares.
(A) The Series C Preferred Stock shall rank senior to all
shares of Junior Stock and PARI PASSU (i.e., on a parity) with Pari Passu Stock
of the Corporation as to the payment of dividends and amounts upon the
liquidation, dissolution or winding-up of the Corporation. The ranking of any
subsequent series of Preferred Stock issued by the Corporation as compared to
the Series C Preferred Stock as to the payment of dividends and amounts upon the
liquidation, dissolution or winding-up of the Corporation shall be as specified
in the Restated Articles of Incorporation, as amended, of the Corporation, the
Certificate of Designation pertaining thereto and, if appropriate, shall also be
subject to the provisions of paragraph (C) of Section 1 and paragraph (B) of
Section 3 hereof.
(B) The capital of the Corporation allocable to the Series C
Preferred Stock for purposes of the Minnesota Business Corporation Act shall be
$5,000 per share.
(C) Any shares of Series C Preferred Stock acquired by the
Corporation by reason of the conversion or redemption of such shares, or
otherwise so acquired, shall be retired as shares of Series C Preferred Stock
and restored to the status of authorized but unissued undesignated shares of the
Corporation and may thereafter be reissued as part of a new series of Preferred
Stock as permitted by law.
SECTION 9. Miscellaneous.
(A) All notices referred to herein shall be in writing, and
all notices hereunder shall be deemed to have been given upon the earlier of
receipt thereof or three business days after the mailing thereof if sent by
<PAGE>
registered or certified mail (unless first-class mail shall be specifically
permitted for such notice) with postage prepaid addressed: (i) if to the
Corporation, to its office at 385 Washington Street, St. Paul, Minnesota 55102
(Attention: Secretary) or to the transfer agent for the Series C Preferred
Stock, or such other agent of the Corporation designated as permitted by this
paragraph, or (ii) if to any holder of the Series C Preferred Stock or Common
Stock, as the case may be, to such holder at the address of such holder as
listed in the stock record books of the Corporation (which may include the
records of any transfer agent for the Series C Preferred Stock or Common Stock,
as the case may be) or (iii) to such other address as the Corporation or any
such holder, as the case may be, shall have designated by notice similarly
given.
(B) The term "Common Stock" as used herein means the
Corporation's Common Stock, without par value, as the same exists at the date of
filing of the Certificate of Designation relating to the Series C Preferred
Stock (the "Certificate of Designation") with the Secretary of State of the
state of Minnesota, or any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value. However, subject to the provisions of Section 7(B), shares of Common
Stock issuable on conversion of shares of Series C Preferred Stock shall include
only shares of the class designated as Common Stock of the Corporation at the
date of the filing of the Certificate of Designation with the Secretary of State
of the state of Minnesota or shares of any class or classes resulting from any
reclassification or reclassifications thereof and which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation and which
are not subject to redemption by the Corporation; PROVIDED that if at any time
there shall be more than one such resulting class, the shares of each such class
then so issuable shall be substantially in the proportion which the total number
of shares of such class resulting from all such reclassifications bears to the
total number of shares of such classes resulting from all such
reclassifications.
(C) The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in respect of any issuance or
delivery of shares of Series C Preferred Stock or shares of Common Stock or
other securities issued on account of Series C Preferred Stock pursuant hereto
or certificates representing such shares or securities. The Corporation shall
not, however, be required to pay any such tax that may be payable in respect of
any transfer involving the issuance or delivery of shares of Series C Preferred
Stock or Common Stock or other securities in a name other than that in which the
shares of Series C Preferred Stock with respect to which such shares or other
securities are issued or delivered were registered, or in respect of any payment
to any person with respect to any such shares or securities other than a payment
to the registered holder thereof, and shall not be required to make any such
issuance, delivery or payment unless and until the person otherwise entitled to
such issuance, delivery or payment has paid to the Corporation the amount of any
such tax or has established, to the satisfaction of the Corporation, that such
tax has been paid or is not payable.
<PAGE>
(D) In the event that a holder of shares of Series C Preferred
Stock shall not by written notice designate the name in which shares of Common
Stock to be issued upon conversion of such shares should be registered or to
whom payment upon redemption of shares of Series C Preferred Stock should be
made or the address to which the certificate or certificates representing such
shares, or such payment, should be sent, the Corporation shall be entitled to
register such shares, and make such payment, in the name of the holder of such
Series C Preferred Stock as shown on the records of the Corporation and to send
the certificate or certificates representing such shares, or such payment, to
the address of such holder shown on the records of the Corporation.
(E) The Corporation may appoint, and from time to time
discharge and change, a transfer agent for the Series C Preferred Stock. Upon
any such appointment or discharge of a transfer agent, the Corporation shall
send notice thereof by first-class mail, postage prepaid, to each holder of
record of Series C Preferred Stock.
<PAGE>
COMMON STOCK COMMON STOCK
NUMBER SHARES
M-364270 [LOGO]
THIS CERTIFICATE IS CUSIP 792860 10
TRANSFERABLE IN NEW YORK,
NY OR MINNEAPOLIS, MN
SEE REVERSE SIDE FOR CERTAIN
DEFINITIONS AND FOR STATEMENT
REGARDING RIGHTS AND RESTRICTION
THE ST. PAUL COMPANIES, INC.
THIS CERTIFIES THAT
SPECIMEN
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE VOTING COMMON STOCK OF
THE ST. PAUL COMPANIES, INC. EACH TRANSFERABLE ON THE BOOKS OF THE CORPORATION
BY THE HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED ATTORNEY ON SURRENDER OF
THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNLESS
COUNTERSIGNED BY THE TRANSFER AGENT AND REGISTRAR.
WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES
OF ITS DULY AUTHORIZED OFFICERS.
DATED:
<TABLE>
<CAPTION>
<S> <C> <C>
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT
AND REGISTRAR
[SEAL] /s/ Sandra Ulsaker Wiese
BY /s/ L.M. Kaufman --------------------
------------ CORPORATE SECRETARY
AUTHORIZED SIGNATURE
/s/ D.W. Leatherdale
--------------------
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
</TABLE>
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<C> <S> <C>
TEN COM as tenants in common UNIF GIFT MIN ACT ............... Custodian ...............
TEN ENT -- as tenants by the entireties (Cust) (Minor)
under Uniform Gifts to Minors
JT TEN -- as joint tenants with right of
survivorship and not as tenants Act............................
in common (State)
Additional abbreviations may also be used though not in the above list.
</TABLE>
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - -------------------------------------------
- - -------------------------------------------
FOR VALUE RECEIVED,_____________________________________hereby sell, assign
and transfer unto ____________________________________________________________
Please print or typewrite name and address of assignee
______________________________________________________________________________
_______________________________________________________________________ Share
of the Voting Common Stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint_____________________________________
Attorney, to transfer said stock on the books of the within-named
Corporation, with full power of substitution in the premises.
Dated________________________________
___________________________________________
SIGNATURE GUARANTEED NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the Certificate, in every
particular, without alteration or
enlargement, or any change whatever.
Until the close of business on the Separation Date (as
defined in the Rights Agreement referred to below), this
certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement, dated as of
December 4, 1989 (as such may be amended from time to time,
the "Rights Agreement"), between The St. Paul Companies, Inc.
and First Chicago Trust Company of New York, as Rights Agent,
the terms of which are hereby incorporated herein by reference
and a copy of which is on file at the principal executive
offices of The St. Paul Companies, Inc. Under certain
circumstances, as set forth in the Rights Agreement, such
Rights may be redeemed, may be exchanged for shares of Common
Stock or other securities or assets of the Company or a
Subsidiary of the Company, may expire, may become void (if
they are "Beneficially Owned" by an "Acquiring Person" or
"Adverse Person" or an Affiliate thereof, as such terms are
defined in the Rights Agreement, or by any transferee of any
of the foregoing) or may be evidenced by separate certificates
and may no longer be evidenced by this certificate. The St.
Paul Companies, Inc. will mail or arrange for the mailing of a
copy of the Rights Agreement to the holder of this certificate
without charge within five days after the receipt of a written
request therefor.
ON DECEMBER 11, 1998 NORWEST BANK MINNESOTA, N.A. WAS
NAMED SUCCESSOR RIGHTS AGENT REPLACING FIRST CHICAGO
TRUST COMPANY OF NEW YORK.
- - -------------------------------------------------------------------------------
The Corporation will furnish to any shareholder, without charge and upon
request addressed to the Corporation at its principal office at 385
Washington Street, St. Paul, Minnesota 55102, a full statement of the
designations, preferences, limitations, and relative rights of the shares of
each class or series authorized to be issued, so far as they have been
determined, and the authority of the Corporation's Board of Directors to
determine the relative rights and preferences of subsequent classes or series
of shares.
- - -------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10(a)
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of January 6, 1999, by and between THE
ST. PAUL COMPANIES, INC., a Minnesota corporation (the "Company"), and James E.
Gustafson (hereinafter called the "Executive").
WHEREAS, the Company desires to employ the Executive and the
Executive is willing to serve as an employee of the Company, subject to the
terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants
contained herein, and other good and valuable consideration, the parties hereto
agree as follows:
Section 1. EMPLOYMENT
During the Term of Employment, as defined in Section 2 hereof,
the Company shall employ the Executive, and the Executive shall perform services
for the Company, on the terms and conditions set forth in this Agreement.
Section 2. TERM OF EMPLOYMENT
The Term of Employment of this Agreement shall be the period
commencing January 30, 1999 (the "Commencement Date") and ending on December 31,
2002; PROVIDED, that commencing on January 1, 2001 and on each subsequent
January 1, the Term of Employment shall automatically be extended for an
additional year, unless, no later than 90 days before each such anniversary,
either party provides notice to the other party of an intention not to
extend, and PROVIDED FURTHER, that the Term of Employment and this Agreement
may be sooner terminated if the Executive's employment is terminated pursuant
to Section 7 hereof.
<PAGE>
Section 3. DUTIES
During the Term of Employment, the Executive shall serve as the
President and Chief Operating Officer of the Company and shall have such duties
and responsibilities as are assigned to him by the Chairman and Chief Executive
Officer of the Company and/or the Board of Directors of the Company (the
"Board"). The Executive shall report directly to the Chairman and Chief
Executive Officer of the Company. The Executive shall be elected as a member of
the Board as of the Commencement Date and shall serve on the Board during the
Term of Employment.
Section 4. CASH AND CERTAIN STOCK BASED COMPENSATION
(a) BASE SALARY. The Executive shall receive, as compensation
for his duties and obligations to the Company, a salary at the annual rate of
$850,000. Executive's annual salary shall be payable in substantially equal
installments in accordance with the Company's payroll practice. The Board shall
review the annual salary annually and in light of such review may, in its
discretion, increase such base annual salary taking into account any change in
Executive's then responsibilities, performance by the Executive, and other
pertinent factors. (Such base annual salary, as it may be increased from time
to time, is referred to hereinafter as the "Base Salary".)
(b) ANNUAL BONUS. The Executive shall be eligible for an annual
cash bonus pursuant to the terms of the Company's incentive plans for each
fiscal year of the Company during the Term of Employment with a target level of
85% of Base Salary, as determined by the Compensation Committee of the Board
(the "Compensation Committee").
(c) INCENTIVE AWARDS. The Company shall grant the Executive on
the Commencement Date options to purchase 375,000 shares of the Company's common
stock (the "Performance Stock Options") pursuant to the terms of the Company's
1994 Stock Incentive Plan (the "1994 Plan"). Except as otherwise provided
herein, if the Executive remains an employee of the Company until at least
December 2, 2000, (i) 50% of the
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<PAGE>
Performance Stock Options shall vest on the later of such date or the date the
daily closing price of the Company's common stock on the New York Stock Exchange
during any 20 consecutive trading days exceeds $50 per share and (ii) an
additional 50% of the Performance Stock Options shall vest on the later of
December 2, 2000 or the date the daily closing price of the Company's common
stock on the New York Stock Exchange during any 20 consecutive trading days
exceeds $55 per share. To the extent that the Performance Stock Options either
have not become exercisable or have not been exercised by the Executive on or
prior to December 1, 2001, such Performance Stock Options shall expire.
In addition, on the Commencement Date, the Company shall make an
award of 30,000 shares of restricted stock pursuant to the terms of the 1994
Plan (the "Restricted Stock"). The Restricted Stock shall vest in three equal
installments commencing on the first anniversary of the Commencement Date (and
all restrictions on such portion of the Restricted Stock shall then lapse, other
than as required by applicable law) if the Executive is employed by the Company
on such anniversary; provided, however, that all such Restricted Stock may vest
at an earlier date as specified in this Agreement.
Section 5. OTHER BENEFIT AND COMPENSATION PROGRAMS AND PLANS
(a) EMPLOYEE BENEFIT PROGRAMS. During the Term of Employment,
the Executive shall be entitled to participate in all employee benefit programs
of the Company in effect from time to time for employees and senior executive
officers of the Company.
(b) EXECUTIVE COMPENSATION PLANS. In addition to the
compensation, the Performance Stock Options and the Restricted Stock provided
for in Section 4 hereof and the employee benefit programs provided for in
paragraph (a) of this Section, the Executive shall be entitled to participate in
the Company's executive compensation plans, as presently in effect or as they
may be modified or added to by the Company from time to time. It is expected
that the annual target grant of stock options would cover 130,000 shares of the
Company's common stock and that the first grant thereof would be made in
February or March of 1999 when grants are generally made to other senior
executives of the Company.
-3-
<PAGE>
(c) VACATIONS AND SICK LEAVE. The Executive shall be entitled
to vacation and sick leave each year, in accordance with the Company's policies
in effect from time to time, provided, however, that the Executive shall be
entitled to a minimum of five weeks vacation per year.
(d) EXPENSES. The Company shall reimburse the Executive for
reasonable expenses and disbursements in carrying out his duties and
responsibilities under this Agreement, in accordance with the Company's
established policies.
(e) PENSION CREDIT. For purposes of the calculations of pension
benefits under the Company's Benefit Equalization Plan, the Company shall credit
the Executive with five years of service as of the Commencement Date. The
Executive shall be fully vested in the benefits accrued under the Company's
Benefit Equalization Plan during the Term of Employment.
(f) LEVERAGED STOCK PURCHASE PROGRAM. As soon as practicable
following the Commencement Date, the Company shall provide the Executive with an
opportunity to participate in the Company's Special Leveraged Stock Purchase
Program for the purpose of purchasing shares of the common stock of the Company,
subject to a maximum loan amount of $2,500,000.
Section 6. PAYMENTS RELATING TO CHANGE OF EMPLOYMENT
(a) CASH BONUS. In consideration of the Executive's entering
into this Agreement and serving as an employee of the Company, within five days
from the Commencement Date, the Company will pay the Executive the sum of
$1,000,000 to replace the estimated 1998 incentive award to which the Executive
would have been entitled had he continued in employment with his prior employer.
(b) EQUITY AWARDS. In addition, in consideration of the
Executive's entering into this Agreement and serving as an employee of the
Company, on the Commencement Date the Company shall grant the Executive (i)
options to purchase 125,000 shares of the Company's common stock (the
"Replacement Stock Options")
-4-
<PAGE>
pursuant to the terms of the 1994 Plan which shall vest in full as of the first
anniversary of the Commencement Date and (ii) 85,000 shares of restricted stock
pursuant to the terms of the 1994 Plan (the "Replacement Restricted Stock")
which shall vest in full on the third anniversary of the Commencement Date (and
all restrictions on such Replacement Restricted Stock shall then lapse, other
than as required by applicable law) in each case if the Executive is then
employed by the Company; provided, however, that all such Replacement Stock
Options and Replacement Restricted Stock may vest at an earlier date as
specified in this Agreement.
(c) SUPPLEMENTAL RETIREMENT BENEFITS. The Executive represents
that he may be entitled to certain benefits under the Supplemental Benefit
Equalization Plan of his prior employer. In the event that the prior employer
refuses to pay all or a portion of such benefits to the Executive or contests
the Executive's entitlement to such benefits, the Company shall reimburse
Executive on a current basis for all reasonable legal fees and expenses, if any,
incurred by the Executive in seeking to enforce his rights to payments of such
benefits.
Section 7. TERMINATION
(a) TERMINATION FOR CAUSE. In order to terminate the employment
of Executive for Cause, the Company must deliver to Executive a Notice of
Termination given within ninety (90) days after the Board both (i) has actual
knowledge of conduct or an event allegedly constituting Cause, and (ii) has
reason to believe that such conduct or event could be grounds for Cause. For
purposes of this Agreement a "Notice of Termination" shall mean a copy of a
resolution duly adopted by the affirmative vote of not less than a majority of
the membership of the Board, excluding Executive, at a meeting called for the
purpose of determining that Executive has engaged in conduct which constitutes
Cause (and at which Executive had a reasonable opportunity, in consultation with
his counsel, to be heard before the Board prior to such vote).
-5-
<PAGE>
For purposes of this Agreement "Cause" shall mean (A) the
Executive is convicted of, or has plead guilty or NOLO CONTENDERE to, a felony
involving intentional conduct; (B) the Executive is convicted of, or has plead
guilty or NOLO CONTENDERE to any lesser crime or offense involving the illegal
use or conversion of property of the Company or its subsidiaries; (C) the
willful and continued failure by the Executive to perform substantially his
duties with the Company (other than any such failure resulting from incapacity
due to physical or mental illness or Disability) after a demand for substantial
performance is delivered to the Executive by the Company which specifically
identifies the manner in which the Company believes the Executive has not
substantially performed his duties and which provides the Executive with an
opportunity to cure by substantially performing his duties; (D) the Executive
engages in willful misconduct in carrying out his duties with the Company (which
shall not be deemed to include any action taken by the Executive in good faith
in the best interest of the Company); or (E) the Executive engages in actions in
his business or personal life which demonstrably harm the reputation or damage
the good name of the Company.
In the event of termination of the Executive's employment by the
Company for Cause, the Executive shall only be entitled to:
(w) any accrued but unpaid Base Salary through his date of
termination;
(x) any earned but unpaid bonus from a prior fiscal year;
(y) reimbursement of reasonable business expenses incurred prior
to the date of termination; and
(z) other or additional benefits, if any, in accordance with (i)
the applicable employee benefit programs of the Company referred to in
Section 5(a) and (ii) Section 6(c).
(b) DEATH OR DISABILITY. In the event of the death or
Disability of the Executive, the Executive's employment shall be terminated as
of the date of such death or Disability and the Executive, or the Executive's
estate or legal representative, as appropriate, shall be entitled to the amounts
referred to in paragraph (a) of this Section,
-6-
<PAGE>
together with (x) any applicable amounts under the Company's executive
compensation plans referred to in Section 5(b) and (y) full vesting in the
Replacement Stock Options and Replacement Restricted Stock referred to in
Section 6(b). In addition, in the event of the Executive's Disability, the
Executive shall receive service credit under the Company's Benefit Equalization
Plan from the date of his termination of employment pursuant to this Section
7(b) through the end of the Term of Employment (determined as if no extensions
thereof occurred after such termination of employment).
For purposes of this Agreement, "Disability" shall mean "total
and permanent disability", as defined in the Company's long-term disability plan
for senior executives (or such other Company-provided long-term disability
benefit plan sponsored by the Company in which Executive participates at the
time the determination of Disability is made).
(c) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If the
Company should terminate the Executive's employment other than for Cause, or in
the event the Executive terminates employment for Good Reason, the Company shall
pay the Executive, in a lump sum within ten (10) days following his termination
of employment, an amount equal to three times the sum of (i) the Executive's
highest Base Salary during the 12-month period prior to his termination of
employment and (ii) the average of the annual bonus payable to the Executive for
each of the two fiscal years of the Company (or the bonus for the 1999 fiscal
year if the Executive's employment is terminated prior to December 31, 2000)
during the Term of Employment preceding the fiscal year in which his termination
of employment occurs; provided, however, that in the event that the Executive's
employment is terminated pursuant to this Section 7(c) prior to December 31,
1999, the Executive's target bonus in the year of termination shall be
substituted for purposes of this clause (ii). The Executive shall also be
entitled to:
(A) the amounts referred to in paragraph (a) of this Section;
(B) any applicable amounts to which he is entitled under the
Company's executive compensation plans referred to in Section 5(b) including the
full vesting of
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annual stock options granted to the Executive after the date hereof;
(C) continued participation in the medical, dental,
hospitalization and group life insurance coverage plans of the Company ("Welfare
Plans") in which he was participating on the date of the termination of his
employment until the earlier of:
(x) the end of the 36-month period following his termination of
employment; and
(y) the date, or dates, he receives coverage and benefits under
the plans and programs of a subsequent employer;
PROVIDED, HOWEVER, if the Executive cannot continue to participate in the
Company's Welfare Plans, the Company shall otherwise provide such benefits on
the same after-tax basis as if continued participation has been permitted; and
PROVIDED FURTHER, HOWEVER, nothing herein shall be deemed to limit any amounts
or benefits to which the Executive is otherwise entitled under the terms of any
benefit plans of the Company as in effect from time to time;
(D) Full vesting in the Replacement Stock Options and the
Replacement Restricted Stock referred to in Section 6(b);
(E) Full vesting of the Restricted Stock referred to in Section
4(c);
(F) The Performance Stock Options referred to in Section 4(c)
shall become exercisable by the Executive on December 2, 2000 (but not prior
thereto) (i) with respect to 50% of such Performance Stock Options if the $50
target price referred to in Section 4(c) has been achieved prior to the
Executive's termination of employment and (ii) with respect to the remaining 50%
of such Performance Stock Options if the $55 target price referred to in Section
4(c) has been achieved prior to the Executive's termination of employment;
provided, however, that all other terms and conditions applicable to the grant
of the Performance Stock Options shall continue to apply; and
(G) The Executive shall receive outplacement services at the
Company's expense for a period of up to one year following the date of
termination of employment in accordance with the policies of the Company as in
effect from time to time.
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Executive must, within ninety (90) days after the Executive has
actual knowledge of the occurrence of an event or circumstances which would give
him reason to believe constitutes Good Reason, give thirty (30) days prior
written notice of his intent to terminate employment for Good Reason which
notice sets forth the event or circumstances believed to constitute Good Reason.
Upon receipt of such notice, the Company shall have ten (10) days to cure its
conduct, to the extent such cure is possible.
For purposes of this Agreement, "Good Reason" shall mean any of
the following (without Executive's express written consent):
(i) a reduction in the amount of the Executive's then current
Base Salary;
(ii) (A) the removal of or failure to elect or reelect the
Executive as President or Chief Operating Officer of the Company prior to
May 7, 2002 (other than for Cause or as a result of the election of the
Executive as Chairman or Chief Executive Officer of the Company), or (B)
the failure by the Company to elect the Executive as Chairman or Chief
Executive Officer of the Company on May 7, 2002 or on an earlier date in
the event that the current Chairman and Chief Executive Officer of the
Company is no longer serving in such capacities, it being understood that
if the current Chairman and Chief Executive Officer continues to serve as
Chairman in the Board's discretion, the Executive shall have Good Reason
hereunder if he is elected to serve as Chief Executive Officer.
(iii) the assignment to the Executive of duties or
responsibilities which are materially inconsistent with his then current
position; and
(iv) any requirement by the Company that the Executive relocate
to Company headquarters which are more than 50 miles from where such
headquarters are located on the Commencement Date.
(d) TERMINATION WITHOUT GOOD REASON. In the event of a
termination of employment by the Executive without Good Reason (other than a
termination due to death
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or Disability), the Executive shall have the same entitlements as provided in
paragraph (a) of this Section for termination for Cause.
(e) CHANGE IN CONTROL. In the event of a Change in Control of
the Company (as such term is defined in the Company's Special Severance Policy
(the "Policy"), the Executive shall be entitled to the benefits provided under
the Policy if his employment terminates under the circumstances provided under
the Policy or the severance compensation and benefits provided in Section (c) of
this Section, whichever is greater. Notwithstanding anything contained in the
Policy to the contrary, if the Executive is required, pursuant to Section 4999
of the Internal Revenue Code of 1986, as amended (the "Code"), to pay (through
withholding or otherwise) an excise tax on "excess parachute payments" (as
defined in Section 280G of the Code) by reason of the Change in Control of the
Company, the Company shall pay the Executive the minimum amount necessary to
place the Executive in the same after-tax financial position that he would have
been in if he had not incurred any excise tax liability under Section 4999 of
the Code.
Section 8. NO MITIGATION
The Executive shall not be required to mitigate the amount of any
payments or benefits provided for in Section 7(c) or 7(e) hereof by seeking
other employment or otherwise and no amounts earned by the Executive shall be
used to reduce or offset the amounts payable hereunder, except as otherwise
provided in Section 7(c).
Section 9. NONCOMPETITION AND NONSOLICITATION
(a) The Executive hereby covenants and agrees that at no time
during the period of his employment nor for a period of two years following the
termination thereof for any reason will he, without the prior written consent of
the Board, for himself or on behalf of any other person, partnership, company or
corporation, directly or indirectly, acquire any financial or beneficial
interest in (except as provided in the next sentence), provide consulting
services to, be employed by, or own, manage, operate or control any
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business which is in competition with a business engaged in by the Company or
any of its subsidiaries or affiliates in any state of the United States or in
any foreign country in which any of them are engaged in business at the time of
such termination of employment for as long as they carry on a business therein.
Notwithstanding the preceding sentence, the Executive shall not be prohibited
from owning less than five (5%) percent of any publicly traded corporation,
whether or not such corporation is in competition with the Company.
(b) The Executive hereby covenants and agrees that, at all
times during the period of his employment and for a period of two years
immediately following termination for any reason, the Executive shall not,
without the prior written consent of the Board, solicit or take any action to
cause the solicitation of any person who as of that date was a client, customer,
policyholder, vendor, consultant or agent of the Company to discontinue
business, in whole or in part with the Company.
(c) The Executive hereby covenants and agrees that, at all
times during the period of his employment and for a period of one year
immediately following the termination thereof for any reason, the Executive
shall not, without the prior written consent of the Board, employ or seek to
employ any person employed at that time by the Company or any of its
subsidiaries, or otherwise encourage or entice such person or entity to leave
such employment.
(d) Notwithstanding the foregoing, paragraphs (a), (b) and (c)
of this Section 9 shall not apply to the Executive in the event that the
Executive's employment is terminated for any reason within the two-year period
following a Change in Control of the Company, within the meaning of the Policy
referred to in Section 7(e).
(e) It is the intention of the parties hereto that the
restrictions contained in this Section be enforceable to the fullest extent
permitted by applicable law. Therefore, to the extent any court of competent
jurisdiction shall determine that any portion of the foregoing restrictions is
excessive, such provision shall not be entirely void, but rather shall be
limited or revised only to the extent necessary to make it enforceable.
Specifically, if any court of competent jurisdiction should hold that any
portion of the foregoing
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description is overly broad as to one or more states of the United States or one
or more foreign jurisdictions, then that state or states or foreign jurisdiction
or jurisdictions shall be eliminated from the territory to which the
restrictions of paragraph (a) of this Section applies and the restrictions shall
remain applicable in all other states of the United States and foreign
jurisdictions.
Section 10. CONFIDENTIAL INFORMATION
The Executive agrees to keep secret and retain in the strictest
confidence all confidential matters which relate to the Company, its
subsidiaries and affiliates, including, without limitation, customer lists,
client lists, trade secrets, pricing policies and other business affairs of the
Company, its subsidiaries and affiliates learned by him from the Company or any
such subsidiary or affiliate or otherwise before or after the date of this
Agreement, and not to disclose any such confidential matter to anyone outside
the Company or any of its subsidiaries or affiliates, whether during or after
his period of service with the Company, except (i) as such disclosure may be
required or appropriate in connection with his work as an employee of the
Company or (ii) when required to do so by a court of law, by any governmental
agency having supervisory authority over the business of the Company or by any
administrative or legislative body (including a committee thereof) with apparent
jurisdiction to order him to divulge, disclose or make accessible such
information. The Executive agrees to give the Company advance written notice of
any disclosure pursuant to clause (ii) of the preceding sentence and to
cooperate with any efforts by the Company to limit the extent of such
disclosure. Upon request by the Company, the Executive agrees to deliver
promptly to the Company upon termination of his services for the Company, or at
any time thereafter as the Company may request, all Company, subsidiary or
affiliate memoranda, notes, records, reports, manuals, drawings, designs,
computer files in any media and other documents (and all copies thereof)
relating to the Company's or any subsidiary's or affiliate's business and all
property of the Company
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or any subsidiary or affiliate associated therewith, which he may then possess
or have under his direct control, other than personal notes, diaries, rolodexes
and correspondence.
Section 11. REMEDY
Should the Executive engage in or perform, either directly or
indirectly, any of the acts prohibited by Sections 9 or 10 hereof, it is agreed
that the Company shall be entitled to full injunctive relief, to be issued by
any competent court of equity, enjoining and restraining the Executive and each
and every other person, firm, organization, association, or corporation
concerned therein, from the continuance of such violative acts. The foregoing
remedy available to the Company shall not be deemed to limit or prevent the
exercise by the Company of any or all further rights and remedies which may be
available to the Company hereunder or at law or in equity.
Section 12. ARBITRATION.
Any dispute among the parties hereto, except as provided by
Section 11 of this Agreement, shall be settled by final and binding arbitration
in Minneapolis/St. Paul, Minnesota, in accordance with the then effective rules
of the American Arbitration Association, and judgment upon the award rendered
may be entered in any court having jurisdiction thereover.
Section 13. SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and inure to the benefit of
the heirs and representatives of the Executive and the assigns and successors of
the Company, but neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive (except by
will or by operation of the laws of intestate succession) or by the Company
except that the Company shall be required to assign this Agreement to any
successor (whether by purchase or otherwise) to all or substantially all of the
assets or businesses of the Company, unless otherwise requested by the
Executive.
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Section 14. REPRESENTATIONS
The Company represents and warrants that it is fully authorized
and empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any material agreement to
which it is a party or by which it is bound. The Executive represents that he
is not a party or bound by any agreement that would be violated by the
performance of his obligations under this Agreement.
Section 15. GOVERNING LAW
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Minnesota, without reference to rules
relating to conflicts of law.
Section 16. ENTIRE AGREEMENT
This Agreement constitutes the full and complete understanding
and agreement of the parties with respect to the subject matter hereof and
supersedes all prior understandings and agreements as to employment of the
Executive by the Company. This Agreement cannot be amended, changed, modified
or terminated without the written consent of the parties hereto.
Section 17. WAIVER OF BREACH.
The waiver by either party of a breach of any term of this
Agreement shall not operate nor be construed as a waiver of any subsequent
breach thereof. Any waiver must be in writing and signed by the Executive or an
authorized officer of the Company, as the case may be.
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Section 18. SURVIVORSHIP
The respective rights and obligations of the parties hereunder
shall survive any termination of the Executive's employment to the extent
necessary to the intended preservation of such rights and obligations.
Section 19. NOTICES
Any notice, report, request or other communication given under
this Agreement shall be written and shall be effective upon delivery personally
or when sent by certified or registered mail, postage prepaid, return receipt
requested.
Unless otherwise notified by any of the parties, notices shall be
sent to the parties as follows:
To the Company:
The St. Paul Companies, Inc.
385 Washington Street
St. Paul, Minnesota 55102
Attention: General Counsel
With a copy to:
The St. Paul Companies, Inc.
385 Washington Street
St. Paul, Minnesota 55102
Attention: Senior Vice President, Human Resources
To the Executive:
James E. Gustafson
4292 North Pine Valley
Lecanto, Florida 32661
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Section 20. SEVERABILITY
If any one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect under any applicable
law, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired thereby.
Section 21. HEADINGS
The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.
Section 22. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each
of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
THE ST. PAUL COMPANIES, INC.
By: /s/ Douglas W. Leatherdale
---------------------------------
Douglas W. Leatherdale
/s/ James E. Gustafson
------------------------------------
James E. Gustafson
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THE ST. PAUL COMPANIES, INC.
RESTRICTED STOCK AWARD PLAN
as Amended
(1) as of December 1, 1987
(2) as of March 25, 1988
(3) as of March 5, 1990
June 20, 1986
<PAGE>
SECTION 1 - PURPOSE
The St. Paul Companies, Inc. Restricted Stock Award Plan is designed to
enable Selected Employees of The St. Paul Companies, Inc. and its
Subsidiaries to acquire a proprietary interest or an increased proprietary
interest in the Company and thus to share in the future success of the
Company's business. Accordingly, the Plan is intended as a further means, not
only of attracting, retaining and motivating outstanding management
personnel, but also of promoting a closer identity of interests between the
Selected Employees and the Company's stockholders.
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SECTION 2 - DEFINITIONS
For the purpose of this Plan, unless the context clearly indicates otherwise,
the following terms shall have the following meanings:
a) "Beneficiary" means the person or persons designated in writing by the
Selected Employee as his or her beneficiary under the Company's, or its
Subsidiaries' group life insurance program, unless otherwise designated
in writing and provided to the Company. Any such designation may be
revoked and a new designation substituted therefore at any time before
the Selected Employee's death.
b) "Board" means the Board of Directors of the Company.
c) "CEO" means the Chief Executive Officer of The St. Paul Companies, Inc.
d) "Committee" means the Executive Compensation Committee of the Board of
any successor committee designated by Board action.
e) "Common Stock" means the Company's common stock, without par value.
f) "Company" means The St. Paul Companies, Inc.
g) "Disability" means a disability as defined in the Company's, or its
Subsidiaries' long term disability plan.
h) "Division" means a non-incorporated business operating or staff group of
the Company or any Subsidiary.
i) "Fair Market Value" on a specified day means the last sale price on that
day of the Company's Common Stock as reported on the National Association
of Securities Dealers Automated Quotation (NASDAQ) National Market
System, or, if no sale of the Company's Common Stock shall have occurred
on that day, on the next preceding day on which there was such a sale.
j) "Plan" means The St. Paul Companies, Inc. Restricted Stock Award Plan.
k) "Plan Year" means the calendar year.
l) "RESTRICTED PERIOD" MEANS THE PERIOD OF NO MORE THAN TEN YEARS FROM THE
DATE OF THE AWARD, AS DESIGNATED BY THE CEO, OR AS DESIGNATED BY THE
COMMITTEE IF THE SELECTED EMPLOYEE IS THE CEO, PURSUANT TO SECTION
3.2(c).
m) "Restricted Shares" or "Restricted Stock" (used interchangeably) means
Common Stock which has been awarded to a Selected Employee subject to
the restrictions referred to in Section 7, so long as such restrictions
are in effect.
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n) "Restricted Stock Award and Custody Agreement" means the agreement
between the Company and a Selected Employee, pursuant to the terms of
which an award of Restricted Stock is made.
o) "RETIREMENT" MEANS A SELECTED EMPLOYEE'S TERMINATION OF EMPLOYMENT WITH
THE COMPANY OR A SUBSIDIARY AT SUCH TIME AS THE SELECTED EMPLOYEE IS
ENTITLED TO AN IMMEDIATE REGULAR BENEFIT UNDER THE TERMS OF A
RETIREMENT/PENSION PLAN OF THE COMPANY OR A SUBSIDIARY, AS AMENDED FROM
TIME TO TIME.
p) "SELECTED EMPLOYEES" MEANS EMPLOYEES, INCLUDING, AMONG OTHERS, OFFICERS
OF THE COMPANY OR OF ANY SUBSIDIARY OR DIVISION, WHO ARE RESPONSIBLE FOR
THE MANAGEMENT AND GROWTH OF THE BUSINESS OF THE COMPANY, OR SUCH
SUBSIDIARY OR DIVISION, AND/OR WHO ARE EXPECTED TO CONTINUE MAKING
SUBSTANTIAL CONTRIBUTIONS TO SUCH GROWTH, AS DESIGNATED BY THE CEO (OR
BY THE COMMITTEE IF THE SELECTED EMPLOYEE IS THE CEO) AND APPROVED BY
THE COMMITTEE.
q) "Stock" or "Shares" (used interchangeably) means shares of the Company's
Common Stock.
r) "Subsidiary" means any corporation or other legal entity, domestic or
foreign, more than fifty percent of the equity securities of which are
owned or controlled, directly or indirectly, by the Company.
s) "Unrestricted Shares" means Shares awarded under the provisions of this
Plan as to which all restrictions against disposition have lapsed.
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SECTION 3 - ADMINISTRATION OF THE PLAN
3.1 The plan shall be administered by the Executive Compensation Committee,
who shall, at their discretion delegate certain administrative
responsibilities to certain officers of the Company or any Subsidiary.
3.2 Subject to the provisions of the Plan, and Committee review and
approval, the CEO, or his delegate, shall have authority to:
a) Interpret the provisions of the Plan and decide all questions of
fact arising in its application;
b) Prescribe, amend and rescind rules and regulations relating to the
Plan;
c) DETERMINE THE SELECTED EMPLOYEES TO PARTICIPATE HEREUNDER; THE TIME
WHEN SUCH INDIVIDUALS SHALL BE GRANTED A RESTRICTED STOCK AWARD;
THE NUMBER OF RESTRICTED SHARES TO BE AWARDED TO SUCH INDIVIDUALS;
THE RESTRICTED PERIOD WHICH SHALL APPLY TO SUCH AWARDS AND WHETHER
OR NOT THE RESTRICTIONS IN SECTION 7.2 SHALL LAPSE UNDER SECTION
7.4 UPON THE SELECTED EMPLOYEE'S RETIREMENT. IF THE CEO IS A
SELECTED EMPLOYEE, THE DETERMINATIONS REQUIRED UNDER THIS SECTION
3.2 c) SHALL BE MADE BY THE COMMITTEE.
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SECTION 4 - EFFECTIVE DATE OF PLAN
The Plan shall become effective when adopted by the Board, and, unless sooner
terminated in accordance with Section 11 hereof, the Plan shall remain in
effect for a period of ten years following adoption by the Board. No Plan
Year shall begin after December 31, 1995.
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SECTION 5 - NUMBER AND SOURCE OF SHARES SUBJECT TO THE PLAN
5.1 Shares to be awarded to Selected Employees under this Plan shall be made
available at the Committee's discretion either from authorized but
unissued Shares or from Shares reacquired by the Company, including
Shares purchased in the open market.
5.2 Subject to adjustment as provided in Section 8 an aggregate of 500,000
Shares will be available and reserved for issuance to Selected
Employees under the Plan.
5.3 Any Restricted Shares that are forfeited to the Company pursuant to the
terms of Section 7.3 shall thereafter be available for further
Restricted Stock awards.
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SECTION 6 - AWARDS TO SELECTED EMPLOYEES
6.1 SUBJECT TO COMMITTEE REVIEW AND APPROVAL, AND IN ACCORDANCE WITH SECTION
3.2(c), THE CEO (OR IF THE CEO IS THE SELECTED EMPLOYEE, THEN THE
COMMITTEE) WILL SELECT THE EMPLOYEES TO RECEIVE A RESTRICTED STOCK
AWARD, AND DETERMINE THE NUMBER OF RESTRICTED SHARES TO BE AWARDED TO
EACH SELECTED EMPLOYEE. THE PRIME CONSIDERATION FOR SELECTING EMPLOYEES
FOR SUCH AN AWARD IS THE ACQUISITION AND RETENTION OF KEY INDIVIDUALS
WHOSE POTENTIAL OR CONTINUED CONTRIBUTION TO THE COMPANY, OR ANY
SUBSIDIARY OR DIVISION, IS IMPORTANT TO ITS FUTURE SUCCESS, WITH MAJOR
EMPHASIS ON THE ATTRACTION OF NEW EXECUTIVE PERSONNEL. AN EMPLOYEE MAY
ALSO BE SELECTED FOR AN AWARD BECAUSE OF HIS OR HER PAST CONTRIBUTIONS
TO THE SUCCESS OF THE COMPANY, OR ANY SUBSIDIARY OR DIVISION.
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SECTION 7 - RESTRICTIONS
7.1 AN AWARD OF RESTRICTED STOCK SHALL ENTITLE A SELECTED EMPLOYEE TO THE
NUMBER OF RESTRICTED SHARES DESIGNATED BY VIRTUE OF THE PROVISIONS OF
SECTION 6.1, AS OF THE DATE OR DATES DESIGNATED. THE COMPANY SHALL
RETAIN CUSTODY OF SUCH SHARES UNTIL ALL RESTRICTIONS LAPSE. RESTRICTED
STOCK AWARDS SHALL BE EXPRESSLY SUBJECT TO THE TERMS AND CONDITIONS
DESCRIBED IN THIS SECTION.
7.2 DURING THE RESTRICTED PERIOD, SHARES OF RESTRICTED STOCK AWARDED TO THE
SELECTED EMPLOYEE MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR
OTHERWISE ENCUMBERED, EXCEPT AS HEREINAFTER PROVIDED. EXCEPT FOR SUCH
RESTRICTIONS, THE SELECTED EMPLOYEE, AS OWNER OF SUCH SHARES, SHALL HAVE
ALL THE RIGHTS OF A STOCKHOLDER, INCLUDING (BUT NOT LIMITED TO) THE
RIGHT TO RECEIVE ALL DIVIDENDS PAID ON SUCH SHARES (SUBJECT TO THE
PROVISIONS OF SECTION 8 AND 9) AND THE RIGHT TO VOTE SUCH SHARES.
7.3 If a Selected Employee ceases to be an employee of the Company or any of
its Subsidiaries during the Restricted Period for any reason other than
death, Disability or Retirement, all Restricted Shares theretofore
awarded to him or her which are still subject to the restrictions
imposed by Section 7.2 shall, upon such termination of employment, be
forfeited to and retained by the Company.
7.4 EXCEPT IN THE CASE OF A RESTRICTED STOCK AWARD IN WHICH THE RESTRICTIONS
IN SECTION 7.2 DO NOT LAPSE UPON RETIREMENT AS DETERMINED UNDER SECTION
3.2 c), IF A SELECTED EMPLOYEE CEASES TO BE AN EMPLOYEE OF THE COMPANY
OR ANY OF ITS SUBSIDIARIES DURING THE RESTRICTED PERIOD BY REASON OF
DEATH, DISABILITY OR RETIREMENT, SHARES OF RESTRICTED STOCK SHALL BECOME
UNRESTRICTED SHARES, FREE OF THE RESTRICTIONS IN SECTION 7.2, AND THE
COMPANY WILL DELIVER TO HIM/HER OR HIS/HER BENEFICIARY, AS THE CASE MAY
BE, WITHIN 60 DAYS OF THE DATE OF SUCH OCCURRENCE, SUCH SHARES PURSUANT
TO SECTION 7.9.
7.5 When the termination of employment of a Selected Employee would
otherwise result in forfeiture as described in Section 7.3, the CEO, in
his sole discretion, may elect to waive all or any portion of any
restrictions remaining.
7.6 Each Selected Employee awarded Shares of Restricted Stock shall enter
into a Restricted Stock Award and Custody Agreement with the Company
substantially in the form attached hereto.
7.7 Each certificate issued in respect of Shares of Restricted Stock awarded
under the Plan shall be registered in the name of the Selected Employee,
shall be deposited by him or her with the Company together with a stock
power endorsed in blank and shall bear the following (or similar) legend:
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"The Shares of Company Common Stock evidenced by this certificate
are subject to the terms and restrictions of The St. Paul
Companies, Inc. Restricted Stock Award Plan; such Shares shall not
be sold, transferred, assigned, pledged, encumbered or otherwise
alienated or hypothecated except pursuant to the provisions of said
Plan, a copy of which Plan is available from the Company upon
request."
7.8 The Restricted Stock Award and Custody Agreement shall specify, among
other terms, the Restricted Period as defined in Section 2.1.
7.9 When all restrictions imposed under Section 7 or other similar
restrictions expire or have otherwise been satisfied with respect to any
Restricted Shares, the Company shall deliver to the Selected Employee
(or his or her legal representative, Beneficiary or heir) a certificate
representing such Shares, without the legend referred to in Section 7.7.
At that time, the Restricted Stock Award and Custody Agreement referred
to in Section 7.6, as it relates to such Shares shall be terminated.
7.10 At the end of the Restricted Period, or after occurrence of any of the
events described in Section 7.4, no restrictions shall lapse and the
Company shall not deliver a certificate representing the Shares with
respect to which the Restricted Period has just ended, until the Company
receives full payment of any F.I.C.A. Federal, State and/or local income
tax withholding which may become due as a result of the lifting of the
restrictions.
7.11 (a) NOTWITHHOLDING ANY PROVISIONS OF THIS PLAN TO THE CONTRARY, UPON
THE OCCURRENCE OF A CHANGE IN CONTROL (AS DEFINED BELOW) ALL RESTRICTED
SHARES THERETOFORE AWARDED TO A SELECTED EMPLOYEE WHICH ARE STILL
SUBJECT TO THE RESTRICTIONS IMPOSED BY SECTION 7.2 SHALL BECOME
UNRESTRICTED SHARES, FREE OF THE RESTRICTIONS IMPOSED BY SECTION 7.2;
PROVIDED, HOWEVER, THAT IF THE ACCELERATION OF THE LAPSING OF THE
RESTRICTIONS ON ANY SHARES PURSUANT TO THE PROVISIONS OF THIS SECTION
7.11, WHEN TAKEN TOGETHER WITH ANY OTHER PAYMENTS WHICH THE SELECTED
EMPLOYEES HAS THE RIGHT TO RECEIVE FROM THE COMPANY OR ANY CORPORATION
WHICH IS A MEMBER OF AN "AFFILIATED GROUP" (AS DEFINED IN SECTION
1504(a) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"),
WITHOUT REGARD TO SECTION 1504(b) OF THE CODE) OF WHICH THE COMPANY IS A
MEMBER, WOULD CONSTITUTE A "PARACHUTE PAYMENT" (AS DEFINED IN SECTION
280G(b)(2) OF THE CODE), THEN THE ACCELERATION OF THE LAPSING OF THE
RESTRICTIONS PURSUANT TO THE PROVISIONS OF THIS SECTION 7.11 SHALL BE
LIMITED TO THE LARGEST WHOLE NUMBER OF SHARES AS WILL RESULT IN NO
PORTION OF SUCH SHARES AND SUCH OTHER PAYMENTS BEING SUBJECT TO THE
EXCISE TAX IMPOSED BY SECTION 4999 OF THE CODE.
(b) FOR PURPOSES OF THIS SECTION 7.11, THE DETERMINATION AS TO WHETHER
ANY LIMITATION IN THE ACCELERATION OF THE LAPSING OF RESTRICTIONS ON ANY
SHARES PURSUANT TO SECTION 7.11(a) IS NECESSARY: (i) SHALL NOT TAKE INTO
ACCOUNT ANY
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SUCH OTHER PAYMENTS TO THE EXTENT THAT SUCH OTHER PAYMENTS ARE OR WOULD
BE MADE PURSUANT TO A "SEVERANCE AGREEMENT" WHICH CONTAINS A "PARACHUTE
PAYMENT" LIMITATION (SUBSTANTIALLY SIMILAR TO THE PARACHUTE PAYMENT
LIMITATION SET FORTH IN THIS SECTION 7.11) THAT WOULD TAKE INTO ACCOUNT
THE EFFECTS OF THE ACCELERATION PROVISIONS SET FORTH IN THIS SECTION
7.11; (ii) SHALL BE MADE BY THE AFFECTED SELECTED EMPLOYEE IN GOOD
FAITH; AND (iii) SHALL BE CONCLUSIVE AND BINDING ON THE COMPANY WITH
RESPECT TO ITS TREATMENT OF THE PAYMENT FOR TAX REPORTING PURPOSES.
(c) FOR PURPOSES OF THIS SECTION 7.11, A "CHANGE IN CONTROL" OF THE
COMPANY SHALL MEAN A CHANGE IN CONTROL OF A NATURE THAT WOULD BE
REQUIRED TO BE REPORTED (ASSUMING SUCH EVENT HAS NOT BEEN "PREVIOUSLY
REPORTED") IN RESPONSE TO ITEM 1(a) OF THE CURRENT REPORT ON FORM 8-K,
AS IN EFFECT ON FEBRUARY 2, 1988 PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934; PROVIDED THAT, WITHOUT LIMITATION, SUCH
A CHANGE IN CONTROL SHALL BE DEEMED TO HAVE OCCURRED AT SUCH TIME AS (i)
ANY "PERSON" (WITHIN THE MEANING OF SECTION 14(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, OTHER THAN THE COMPANY, A SUBSIDIARY OF THE
COMPANY OR ANY EMPLOYEE BENEFIT PLAN(S) SPONSORED BY THE COMPANY OR A
SUBSIDIARY OF THE COMPANY) IS OR BECOMES THE "BENEFICIAL OWNER" (AS
DEFINED IN RULE 13(d)-3 UNDER THE SECURITIES EXCHANGE ACT OF 1934),
DIRECTLY OR INDIRECTLY, OF 50% OR MORE OF THE COMBINED VOTING POWER OF
THE COMPANY'S OUTSTANDING SECURITIES ORDINARILY HAVING THE RIGHT TO VOTE
AT ELECTIONS OF DIRECTORS; OR (ii) INDIVIDUALS WHO CONSTITUTE THE BOARD
OF DIRECTORS OF THE COMPANY ON FEBRUARY 2, 1988, CEASE FOR ANY REASON TO
CONSTITUTE AT LEAST A MAJORITY THEREOF, PROVIDED THAT ANY PERSON
BECOMING A DIRECTOR SUBSEQUENT TO FEBRUARY 2, 1988 WHOSE ELECTION, OR
NOMINATION FOR ELECTION BY THE COMPANY'S SHAREHOLDERS, WAS APPROVED BY A
VOTE OF AT LEAST THREE QUARTERS OF THE DIRECTORS COMPRISING THE BOARD OF
DIRECTORS OF THE COMPANY ON FEBRUARY 2, 1988 (EITHER BY A SPECIFIC VOTE
OR BY APPROVAL OF THE PROXY STATEMENT OF THE COMPANY IN WHICH SUCH
PERSON IS NAMED AS A NOMINEE FOR DIRECTOR, WITHOUT OBJECTION TO SUCH
NOMINATION) SHALL BE, FOR PURPOSES OF THIS CLAUSE (ii), CONSIDERED AS
THOUGH SUCH PERSON WERE A MEMBER OF THE BOARD OF DIRECTORS OF THE
COMPANY ON FEBRUARY 2, 1988.
(d) IN THE EVENT THAT APPLICATION OF THE LIMITATION IMPOSED BY SECTION
7.11(a) RESULTS IN THE ACCELERATION OF LAPSING OF RESTRICTIONS ON LESS
THAN ALL OF A SELECTED EMPLOYEE'S RESTRICTED SHARES, ACCELERATION SHALL
FIRST OCCUR FOR THOSE RESTRICTIONS EXTENDING FURTHEST INTO THE FUTURE
AND THEN PROCEED IN REVERSE CHRONOLOGICAL ORDER. TO THE EXTENT THAT THE
ACCELERATION OF LAPSING OF RESTRICTIONS ON RESTRICTED SHARES BECAUSE OF
THE OCCURRENCE OF A CHANGE IN CONTROL DOES NOT OCCUR BECAUSE OF THE
LIMITATION IMPOSED BY SECTION 7.11(a), SUCH RESTRICTED SHARES SHALL
REMAIN VALID AND SUBJECT TO THE LAPSE OF RESTRICTIONS IN ACCORDANCE WITH
THE TERMS OF THIS PLAN.
(e) NOTWITHSTANDING ANY PROVISIONS OF SECTION 11 OF THIS PLAN TO THE
CONTRARY, THE PROVISIONS OF THIS SECTION 7.11 MAY NOT BE TERMINATED,
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SUSPENDED OR MODIFIED, IN WHOLE OR IN PART, WITH RESPECT TO ANY PRIOR
GRANTED RESTRICTED STOCK AWARDS FOLLOWING A CHANGE IN CONTROL WITHOUT
THE PRIOR WRITTEN CONSENT OF THE SELECTED EMPLOYEES WHOSE RESTRICTED
STOCK AWARDS WOULD BE AFFECTED THEREBY; PROVIDED, FIRST, THAT, NOTHING
CONTAINED IN THIS SECTION 7.11(e) OR IN SECTION 11 SHALL PREVENT THE
COMPANY FROM TERMINATING, SUSPENDING OR MODIFYING THIS SECTION 7.11, IN
WHOLE OR IN PART, PRIOR TO THE OCCURRENCE OF A CHANGE IN CONTROL; AND,
SECOND, THAT, NOTWITHSTANDING THE OCCURRENCE OF A CHANGE IN CONTROL, FOR
SO LONG AS THE INDIVIDUALS WHO CONSTITUTE THE BOARD OF DIRECTORS OF THE
COMPANY ON DECEMBER 1, 1987 CONSTITUTE AT LEAST A MAJORITY OF THE BOARD
OF DIRECTORS, THE COMPANY MAY TERMINATE, SUSPEND OR MODIFY SECTION 7.11
OF THIS PLAN, IN WHOLE OR IN PART.
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SECTION 8 - ADJUSTMENT FOR CHANGES IN CAPITALIZATION
In the event of any change in the outstanding Shares of Common Stock by reason
of any stock dividend or split, recapitalization, merger, consolidation,
combination or exchange of Shares or other similar corporate change, the
maximum aggregate number and class of Shares in which awards may be granted
under the Plan, and the number of Restricted Shares outstanding shall be
appropriately adjusted by the Committee, whose determination shall be
conclusive. Any Shares of stock or other securities received by a Selected
Employee with respect to shares of Restricted Stock will be subject to the
same restrictions and shall be deposited with the Company under the terms of
the related Restricted Stock Award and Custody Agreement.
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SECTION 9 - EFFECT OF MERGER OR OTHER REORGANIZATION
If the Company shall be consolidated or merged with another corporation, each
Selected Employee who has received Shares of Restricted Stock that are still
subject to the restrictions imposed by Section 7.2 may be required to deposit
with the successor corporation the stock, securities or other property that
he or she is entitled to receive by reason of his or her ownership of the
Shares of Restricted Stock, and such stock, securities or other property
shall become subject to the restrictions imposed by Section 7.2 and shall
bear an appropriate legend similar in form and substance to the legend set
forth in Section 7.7.
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SECTION 10 - EXCLUSION FROM BENEFITS COMPUTATION
NO AWARD UNDER THE PLAN SHALL BE TAKEN INTO ACCOUNT IN DETERMINING A SELECTED
EMPLOYEE'S COMPENSATION FOR THE PURPOSES OF ANY GROUP LIFE INSURANCE OR OTHER
EMPLOYEE BENEFIT OR PENSION, RETIREMENT, THRIFT, PROFIT SHARING, 401(k), OR
SIMILAR PLAN OF THE COMPANY OR ANY SUBSIDIARY; PROVIDED, HOWEVER, THAT SUCH
AWARDS MAY BE TAKEN INTO ACCOUNT UNDER ANY SUCH PLANS TO THE EXTENT THAT SUCH
AWARDS ARE RELEVANT TO THE DETERMINATION OF ANY LIMITATIONS ON "PARACHUTE
PAYMENTS" WITHIN THE MEANING OF CODE SECTION 280G OR CODE SECTION 4999.
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SECTION 11 - TERMINATION, SUSPENSION OR MODIFICATION OF THE PLAN
The Board may, by a majority vote of the members present and voting at any
time terminate, suspend or modify the Plan. No termination, suspension or
modification of the Plan shall adversely affect any prior granted Restricted
Stock awards to Selected Employees.
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SECTION 12 - LIABILITY OF THE COMPANY
The liability of the Company and its Subsidiaries under this Plan and any
Restricted Shares or Unrestricted Shares transferred hereunder is limited to
the obligations set forth with respect to those Restricted Shares or
Unrestricted Shares, and nothing herein contained shall be construed to
impose any liability on the Company in favor of the recipient of any
Restricted Stock award with respect to any loss, cost or expense which the
recipient may incur in connection with the award.
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SECTION 13 - MISCELLANEOUS
13.1 The Plan shall not be deemed an exclusive method of providing incentive
compensation for the Selected Employees of the Company and its
Subsidiaries, nor shall it preclude the Board from authorizing or
approving other forms of incentive compensation.
13.2 All expenses and costs in connection with the operation of the Plan
shall be borne by the Company (or its Subsidiaries, where appropriate).
13.3 The CEO may in any Plan Year refrain from designating Selected
Employees and refrain from granting any Restricted Stock awards, but
such action shall not be deemed a termination of the Plan. No Selected
Employee or any officer or employee shall have any claim or right to be
granted awards under the Plan.
13.4 Nothing in this Plan shall be construed to constitute or be evidence of
an agreement or understanding, express or implied, on the part of the
Company to employ any Selected Employee for any specific period of time.
The granting of a Restricted Stock award to a Selected Employee in any
year shall not give that individual any right to any similar award in
future years.
13.5 The Plan shall be construed and its provision enforced and administered
in accordance with the laws of Minnesota except to the extent that such
laws may be superceded by any Federal law.
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THE ST. PAUL COMPANIES, INC.
1988 STOCK OPTION PLAN
1. PURPOSE
This Plan is intended to strengthen the ability of the Company and its
Subsidiaries to attract and retain Key Executives (and Non-Employee
Directors) of outstanding competence by providing them with added
incentive to render high levels of performance and effective service in
connection with their employment in management positions (or service as
Non-Employee Directors), and, in certain cases to reward Key Executives
(and Non-Employee Directors) for having done so, through the opportunity
for Common Stock ownership and benefits of Common Stock appreciation.
2. DEFINITION
For the purpose of the Plan, except where the context otherwise
indicates the following definitions shall apply.
"Board" means the Board of Directors of the Company.
"Change in Control" means a change in control of the Company of a nature
that would be required to be reported (assuming such event has not been
"previously reported") in response to Item 1(a) of the Current Report on
Form 8-K, as in effect on May 4, 1988, pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934; provided that, without
limitation, such a change in control shall be deemed to have occurred at
such time as (a) any "person" within the meaning of Section 14(d) of the
Securities Exchange Act of 1934, other than the Company, a Subsidiary or
any employee benefit plan(s) sponsored by the Company or any Subsidiary
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of 50% or more
of the Common Stock; or (b) individuals who constitute the Board on
May 4, 1988, cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to
May 4, 1988, whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least three quarters of the
directors comprising the Board on May 4, 1988 (either by a specific vote
or by approval of the proxy statement of the Company in which such
person is named as a nominee for director, without objection to such
nomination) shall be, for purposes of this clause (b), considered as
though such person were a member of the Board on May 4, 1988.
"Code" means the Internal Revenue code of 1986, as amended from time to
time.
"Committee" means the Executive Compensation Committee or any other
committee designated by the Board to have administrative responsibility
with respect to the Plan.
"Common Stock" means the Company's common stock, without par value.
"Company" means The St. Paul Companies, Inc.
"Date of Grant" means the date an Option or any related SAR becomes
effective under the terms of the governing Option Agreement.
"Disinterested Person" means "disinterested person" as defined in
Rule 16b-3 of the Securities and Exchange Commission, as amended from
time to time, and, generally, means any member of the Board who is not
at the time of acting on a matter, and within the previous year has not
been, a Key Executive of the Company or a Subsidiary.
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"Exercise Notice" means a written notice from an Optionee to the
Company, made on a form and in a manner as the Committee may from time
to time determine, pursuant to which the Optionee irrevocably elects to
exercise all or any portion of an Option and irrevocably directs the
Company to deliver the Optionee's Common Stock certificates to be issued
to such Optionee upon such Option exercise directly to a "broker" or
"dealer" (within the meaning of Section 3(a) of the Securities Exchange
Act of 1934, as amended from time to time). An Exercise Notice must be
accompanied by or contain irrevocable instructions to the broker or
dealer (i) to promptly sell a sufficient number of shares of such Common
Stock, or to loan the Optionee a sufficient amount of money, to pay the
exercise price for the Options and to fund any related employment or
withholding tax obligations to which the Exercise Notice relates, and
(ii) to promptly remit such sums to the Company upon the broker's or
dealer's receipt of the certificates.
"Fair Market Value" means the fair market value of Common Stock
determined by the Committee.
"Incentive Stock Option" means an Option granted as an incentive stock
option as defined in Section 422A of the Code.
"Key Executive" means any person designated by the Committee who is
employed by the company or a Subsidiary on a salaried basis (including
an officer who may also be a director but excluding any director who is
not such an employee of the Company or a Subsidiary) and whose
performance, in the judgment of the Committee, could have or did have a
significant effect on either (or both) the current or long-term success
of the Company or a Subsidiary (or both).
"Non-Employee Director" means any member of the Board who is not a
current or former employee of the Company or any Subsidiary.
"Nonqualified Stock Option" means an Option that does not qualify as an
Incentive Stock Option. The terms of the Option Agreement for a
Nonqualified Stock Option shall expressly state that the Option is a
Nonqualified Stock Option.
"Option" means the rights granted to a Key Executive (or a Non-Employee
Director in accordance with Section 15 of the Plan) to purchase Common
Stock pursuant to the terms and conditions of an Option Agreement,
including both Incentive Stock Options and Nonqualified Stock Options.
"Option Agreement" means a written agreement (and any amendment or
supplement thereto) between the Company and a Key Executive (or
Non-Employee Director) designating the terms and conditions of an
Option, including any related SAR.
"Optionee" means a Key Executive (or Non-Employee Director) to whom an
Option and any related SAR are granted.
"Plan" means The St. Paul Companies, Inc. 1988 Stock Option Plan.
"Stock Appreciation Right" or "SAR" means a right (which shall not exist
separately from a related unexercised Option) granted pursuant to the
terms and conditions of an Option Agreement to surrender an unexercised
Option, or some portion of an unexercised Option, and to receive from
the Company either shares of Common Stock (valued at Fair Market Value
on the Date of Exercise of the SAR), cash, or a combination thereof,
equal in amount to the excess of the aggregate Fair Market Value (on the
Date of Exercise of the SAR) of the shares as to which the Option is
surrendered, over the aggregate Option price of such shares, subject to
any limitations in Section 7. Notwithstanding any other provision of
this Plan or of an Option Agreement to the contrary, in no event shall
the amount payable to the Optionee upon exercise of an SAR related to an
Incentive Stock Option exceed 100% of
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the difference between the exercise price of the related Incentive Stock
Option and the Fair Market Value of the Common Stock at the Date of
Exercise of the SAR.
"Subsidiary" means any entity of which, at the time such Subsidiary
status is to be determined, at least 50% of the combined voting power of
such entity is directly or indirectly owned or controlled by the Company.
3. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee (whose members shall be
appointed by the Board) consisting solely of four or more members of the
Board who are Disinterested Persons. A majority of the Committee shall
constitute a quorum, and all acts of the Committee must be approved by a
majority (at least three) of its members.
Subject to the provisions of the Plan and except where inconsistent with
the provisions of Section 15 of the Plan with respect to Options granted
to Non-Employee Directors, the Committee shall have authority in its sole
discretion:
(a) To interpret the provisions of the Plan and decide all questions of
fact arising in its application;
(b) To prescribe, amend and rescind rules and regulations relating to
the Plan;
(c) To determine the Key Executives to who, the time or times at which,
the price at which, and the extent to which Options and any SARs
shall be granted based upon the nature of the services rendered to
be rendered by the persons it deems eligible, their past, present
and potential contributions to the success of the Company and/or
any of its Subsidiaries, their other compensation from the Company
or any Subsidiary, and such other factors as the Committee in its
discretion shall deem relevant;
(d) To determine the time or times when Options and any SARs become
exercisable and the duration of the exercise period;
(e) To determine whether any shares of Common Stock under any Option
must be purchased before any related SAR becomes exercisable;
(f) To prescribe and amend the form or forms of the Option Agreements;
(g) To determine the form or forms of consideration which will be
accepted by the Company from an Optionee in payment of the purchase
price upon the exercise of any Option; and
(h) To determine which Options shall be Incentive Stock Options and
which Options shall be Nonqualified Options.
The Committee's determinations of the foregoing matters shall be final
and conclusive.
4. ELIGIBILITY
Options and any SARs may be granted under the Plan only to Key
Executives (or Non-Employee Directors in accordance with Section 15 of
the Plan). Any Key Executive (or Non-Employee Director) may be granted
and may hold more than one Option and, with respect to Key Executives,
more than one SAR. In no event shall an Incentive Stock Option be
granted to a Key Executive if the grant of such Incentive Stock Option
would cause the aggregate Fair Market Value (on the Date of Grant) of
the Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by
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such Key Executive during any calendar year (under all plans of the
Company and any parent or subsidiary corporations of the Company within
the meaning of Code Section 425) to exceed $100,000.
5. SHARES AVAILABLE
Subject to adjustments as provided in Section 9 hereof, an aggregate of
1,000,000 shares of Common Stock will be available and reserved for
issue or transfer with respect to options or SARs granted under the
Plan. When the right to purchase shares or a combination thereof, the
aggregate number of shares covered by the related Option shall be
reduced by the number of shares with respect to which the SAR was
exercised, and such shares shall not be available for granting further
Options and SARs. If an Option shall terminate for any reason without
having been exercised in full or surrendered on exercise of a SAR, the
unpurchased and nonsurrendered shares subject thereto shall become
available for further Options and SARs.
6. OPTIONS
Each Option granted shall be subject to the following conditions:
(a) The Option price per share of Common Stock shall be set by the
Option agreement but shall in no instance be less than 100% of the
Fair Market Value on the Date of Grant with respect to any
Incentive Stock Option.
(b) Each Option will become exercisable in part or in full on the date
or dates specified in the Option Agreement.
(c) Upon the occurrence of a Change in Control of the Company, subject
to any limitation set forth in the Option agreement, all
outstanding Options shall become immediately exercisable in full.
(d) Each Option and any related SARs shall terminate:
(1) If the Optionee is then living, at the earliest of the
following times:
(i) ten years after the Date of Grant of the Option;
(ii) five years after termination of employment because of
retirement;
(iii) one month after termination of employment other than
termination because of retirement or through discharge
for cause provided, however, that if any Option is not
fully exercisable at the time of such termination of
employment, such Option shall expire on the date of
such termination of employment to the extent not then
exercisable;
(iv) immediately upon termination of employment through
discharge for cause; or
(v) any earlier time set forth in the Option Agreement.
(2) If the Optionee dies while employed by the Company or any
Subsidiary, or if no longer so employed, prior to termination
of the entire Option under Section 6(d)(1)(ii) or (iii)
hereof, one year after the date of death, but subject to
earlier termination pursuant to Sections 6(d)(1)(i) or (v).
However, notwithstanding the provisions of Sections
6(d)(1)(v), to the extent an Option is exercisable on the date
of the Optionee's death, it shall remain exercisable until the
sixtieth (60th) day following
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the date of death. To the extent an Option is exercisable
afrter the death of the Optionee, it may be exercised by the
person or persons to whom the Optionee's rights under the
Option Agreement have passed by will or by the applicable laws
of descent and distribution.
(e) Other conditions set forth in the Plan.
If the Optionee exercises any Option or SAR with respect to some,
but not all, of the shares of Common Stock subject to such Option
or SAR, the right to exercise such Option or SAR with respect to
the remaining shares shall continue until it lapses or terminates.
No Option shall be exercisable except in respect of whole shares.
The exercise of an Option or SAR may be made with respect to no
fewer than ten shares at one time unless fewer than ten shares
remain subject to the Option or SAR.
Any exercise of an Option shall be effective on the Date of
Exercise, provided the full purchase price of such shares or an
effective Exercise Notice has been tendered with the notice of
exercise. Payment of the purchase price upon the exercise of any
Option shall be made in cash (including check, bank draft or money
order), provided, however, that the Committee may, at its
discretion, allow such payments to be made, in whole or in part, in
shares of Common Stock delivered by the Optionee valued at Fair
Market Value or by promissory note (containing such terms and
conditions as the Committee may in its discretion determine) or by
any combination thereof.
Nothing in the Plan or in any Option Agreement shall in any way
diminish the right of the company or any Subsidiary to reduce the
compensation or to terminate the employment of any Optionee or Key
Executive.
7. STOCK APPRECIATION RIGHTS
The Committee may in its discretion grant SARs either concurrently with
or subsequent to the Date of Grant of the related Option. A SAR shall be
evidenced by provisions in the Option Agreement or an amendment or
supplement thereto. SARs shall be subject to the following terms and
conditions.
(a) GRANT. The number of shares of Common Stock covered by a SAR shall
not exceed the number of shares of Common Stock covered by the
related Option.
(b) EXERCISE. A SAR shall be exercisable, in whole or in part, at such
time or times, on the conditions and to the extent set forth in the
Option Agreement, but in no event will such SAR be exercisable;
(i) At any time that the related Option is not exercisable;
or
(ii) At any time that the Fair Market Value of a share of
Common Stock does not exceed the Option price of the
related Option share.
A SAR will terminate on the same date as the related Option.
An Optionee shall be entitled upon exercise of a SAR to receive payment
in the amount described in the definition of "Stock Appreciate Right".
In connection with the exercise of a SAR, the Optionee thereof may,
subject to the provisions of the following paragraph, request by
application to the Committee to receive payment in the form of cash,
shares of Common Stock, or a combination thereof. However, the
Committee, in its sole discretion, shall determine the form of payment.
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If a person who, in the opinion of the Committee, is or may be subject
to Section 16 of the Securities Exchange Act of 1934, as amended from
time to time, wishes to exercise a SAR and make application to receive
payment in cash or partly in cash, such person shall do so only during
the period beginning on the third business day following the date of
release for publication of the Company's regular quarterly or annual
summary statement of revenues and income (assuming such financial data
appears on a wire service, in a financial news service, or in a
newspaper of general circulation, or is otherwise made publicly
available) and ending on the twelfth business day following such date
and during the period described in the next sentence. A SAR may also be
exercised and application to receive payment in cash or partly in cash
made by such a person, subject to any limitations set forth in the
Option Agreement, during the 30 day period that commences on the later
of (a) the date of a Change in Control or (b) the date that is 6 months
after the Date of Grant of the SAR provided that a Change in Control has
occurred since the Date of Grant.
The Committee may impose such additional conditions or limitations on
exercise of a SAR as it may deem necessary or desirable to secure the
Optionees the benefit of Rule 16b-3 of the Securities and Exchange
Commission, as amended from time to time.
8. RESTRICTED SHARES
Any shares of Common Stock issued or transferred pursuant to the Plan
shall not be sold, transferred or otherwise disposed of by Optionees
except in compliance with applicable registration requirements of state
and federal securities laws unless in the opinion of counsel for the
Company, such sale, transfer or disposition is exempt from registration.
9. ADJUSTMENT OF SHARES
If any change is made in the Common Stock subject to the Plan, or
subject to any Option or SAR, through merger, consolidation,
reorganization, recapitalization, stock dividend, stock split,
combination of shares, rights offerings, change in corporate structure
of the Company, or otherwise, the Board in its discretion may make
appropriate adjustment as to the number and type of securities subject
to and reserved for issue or transfer under the Plan and, in order to
prevent dilution or enlargement of the rights of Optionees, the number,
type and Option price of securities subject to outstanding Options and
SARs.
10. NONTRANSFERABILITY
No Option or SAR is transferable by the Optionee other than by will or
the laws of descent and distribution, and no Option or SAR is
exercisable during the Optionee's lifetime by anyone other than the
Optionee.
11. SHAREHOLDER'S RIGHTS
Neither the Optionee nor the Optionee's legal representative, legatees
or distributees, as the case may be, shall have any of the rights or
privileges of a shareholder of the Company by virtue of the grant of an
Option or SAR except with respect to any shares of Common Stock
actually issues or transferred of record and delivered to one of the
aforementioned persons.
12. TERMINATION, SUSPENSION OR MODIFICATION OF PLAN
The Board may at any time terminate, suspend or modify the Plan. No
termination, suspension or modification of the Plan shall adversely
affect any right acquired by any Optionee under the terms of an Option or
SAR granted before the date of such termination, suspension or
modification, unless such Optionee shall consent.
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13. GOVERNING LAWS
The Plan and all rights and obligations thereunder shall be construed in
accordance with and governed by the laws of the State of Minnesota.
14. TERM
Unless previously terminated by the Board, the Plan shall terminate at
the close of business on May 1, 1998. No Options or SARs shall be
granted after Plan termination, but such termination shall not affect
any Option or SAR previously granted.
15. AUTOMATIC GRANT TO NON-EMPLOYEE DIRECTORS
Commencing with the first meeting of the Board in November 1990, each
year on the date of the first meeting of the Board in November of each
such year, each Non-Employee Director who is a director of the Company
as of such date shall, without any Committee action, automatically be
granted a Nonqualified Stock Option to purchase 500 shares of Common
Stock (subject to adjustment upon changes in capitalization of the
Company as provided in Section 9 of the Plan) at an exercise price per
share equal to 100% of the Fair Market Value of one share of Common
Stock on the date the Option is granted. Payment of the exercise price
of the shares to be purchased under such Options must be made in cash
only (including check, bank draft or money order) at the time of exercise
of such Option. No SARs shall be granted in connection with such Options
either concurrently with or subsequent to the Date of Grant of such
Options. Each Option shall be evidenced by an appropriate form of
agreement setting forth the terms described in this Section 15 and such
additional terms of the Plan as are not inconsistent with the terms of
this Section 15.
Options granted pursuant to this Section 15 shall be immediately
exercisable in full and shall remain exercisable until terminated in
accordance with Section 6(d) of the Plan, provided that references in
Section 6(d) to "employment" and "termination of employment" shall, for
purposes of this Section 15, refer to "service as a director" and
"termination of service as a director."
The provisions of this Section 15 shall control with respect to such
Options over any other inconsistent provisions of the Plan. It is
intended that the provisions of this Section 15 shall not cause the
Non-Employee Directors to cease to be considered Disinterested Persons
and, as a result, the provisions of this Section 15 shall be interpreted
to be consistent with the foregoing intent.
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THE ST. PAUL COMPANIES, INC.
NON-EMPLOYEE DIRECTOR STOCK RETAINER PLAN
1. PURPOSE. The purpose of the Non-Employee Director Stock Retainer
Plan (the "Plan") is to advance the interests of The St. Paul Companies, Inc.
(the "Company") and its shareholders by providing non-employee directors with
the ability to increase their proprietary interest in the Company's long-term
success and progress and more closely identify themselves with the interests
of the Company's shareholders through the payment of all or a portion of
their annual retainer in the form of common stock of the Company that is
subject to certain service-related restrictions.
2. ADMINISTRATION. The Plan shall be administered by a committee (the
"Committee") consisting solely of three or more members of the Board of
Directors of the Company (the "Board"). All questions of interpretation of
the Plan or of any stock issued under it shall be determined by the
Committee, and such determination shall be final and binding upon all persons
having an interest in the Plan. The Committee, however, shall have no power
to (a) determine the eligibility for participation in the Plan or the timing,
pricing, amount or other terms and conditions of stock issued to any
participant, or (b) take any action specifically delegated to the Board under
the Plan. Members of the Committee shall be appointed from time-to-time by
the Board, shall serve at the pleasure of the Board and may resign at any
time upon written notice to the Board. A majority of the members of the
Committee shall constitute a quorum. The Committee shall act by majority
approval of the members present at a meeting and shall keep minutes of its
meetings. Action of the Committee may be taken without a meeting if the
written consent of all the members is given.
3. PARTICIPATION IN THE PLAN. Directors of the Company who are not
employees of the Company or any subsidiary of the Company ("Eligible
Directors") shall be eligible to participate in the Plan.
4. STOCK SUBJECT TO THE PLAN.
(a) NUMBER OF SHARES. The maximum number of shares of Common
Stock that shall be reserved for issuance under the Plan shall be 50,000
shares of the Company's common stock without par value (the "Common Stock"),
subject to adjustment upon changes in capitalization of the Company as
provided in Section 4(b) below. The maximum number of shares authorized may
be increased from time-to-time by approval of the Board and, if required
pursuant to Rule 16b-3 of the Securities and Exchange Commission or the
applicable rules of any stock exchange, the shareholders of the Company.
Shares of Common Stock that are issued under the Plan shall be applied to
reduce the maximum number of shares of Common Stock remaining available for
use under the Plan.
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(b) CHANGES IN STOCK. If any change is made in the terms or
provisions of the Common Stock subject to the Plan (whether by reason of
reorganization, merger, consolidation, recapitalization, stock dividend,
stock split, combination of shares, exchange of shares, change in corporate
structure or otherwise), then appropriate adjustments shall be made to the
maximum number of shares subject to and reserved under the Plan.
5. ANNUAL RETAINER ELECTION.
(a) ELECTION TO RECEIVE STOCK. Each Eligible Director shall be
given an opportunity by the Company, on an annual basis, to elect to receive
all or a portion of his or her Annual Retainer (as defined below) for the
succeeding calendar year in the form of shares of Common Stock that are
subject to the service-related restrictions described in Section 5(b) below
(the "Restricted Stock"). An election pursuant to this Section 5(a) must be
in writing, must be effective before January 1 of the calendar year to which
the election relates and must be irrevocable. Such an election will entitle
the Eligible Director to be issued a number of shares of Restricted Stock
determined by dividing 110% of the Annual Retainer for which the election is
being made by the average of the Fair Market Value (as defined in Section
5(e) below) of one share of Common Stock as of the last trading day of each
calendar quarter of the calendar year to which the election relates. In the
event any person becomes an Eligible Director other than on January 1 of a
year, such person shall not be entitled to participate in the Plan until the
following year. An Eligible Director whose service on the Board terminates
prior to the last trading day of a year shall not receive payment in the form
of Common Stock regardless of whether he or she has made an election as
described in this Section 5(a) but, rather, shall receive the portion of the
Annual Retainer earned as of the date of service termination in cash. For
purposes of the Plan, "Annual Retainer" for any given year shall mean the
cash retainer to be paid to such Eligible Director in respect of service as a
director but shall not include any per diem amounts paid with respect to
Board or committee meeting attendance.
(b) FORFEITURE RESTRICTIONS. If, within five years from the date
Restricted Stock is issued to an Eligible Director, the Eligible Director's
service on the Board is terminated for any reason other than death,
Disability or Retirement (as these terms are defined below), such Restricted
Stock shall be forfeited on the date the Eligible Director's service on the
Board is terminated (the "Forfeiture Restrictions"). For purposes of the
Plan, "Disability" shall mean the disability of the Eligible Director as
defined in the long-term disability plan of the Company then covering the
Eligible Director or, if no such plan exists or is not applicable to Eligible
Directors, the permanent and total disability of the Eligible Director within
the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended, and "Retirement" shall mean the termination of service of an
Eligible Director as a director of the
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Company pursuant to and in accordance with the Board's tenure policy or other
regular or, if approved by the Board for the purposes of the plan, early
retirement/pension plan or other practice or policy then covering the
Eligible Director. If an Eligible Director's service on the Board is
terminated due to death, Disability or Retirement, the Forfeiture
Restrictions with respect to all Restricted Stock then held by an Eligible
Director shall lapse as of the date of such termination. (SECTION 5(b), AS
AMENDED 11/2/93.)
(c) DIVIDENDS AND DISTRIBUTIONS. Any dividends or distributions
(including dividends or distributions paid in cash) paid with respect to
shares of Common Stock subject to the Forfeiture Restrictions shall be paid
to such Eligible Directors.
(d) ENFORCEMENT OF RESTRICTIONS. For purposes of enforcing the
Forfeiture Restrictions, a legend shall be placed on the stock certificates
referring to such restrictions, and such stock certificates shall be kept,
duly endorsed, in the custody of the Company. As a condition to the receipt
of Restricted Stock, each Eligible Director shall grant to the Company a
possessory lien on the Restricted Stock related thereto in order to secure
retransfer of such shares into the name of the Company.
(e) FAIR MARKET VALUE. For purposes of the Plan, "Fair Market
Value" shall mean, as of any date, (i) if the Common Stock is listed or
admitted to unlisted trading privileges on any national securities exchange
or is not so listed or admitted but transactions in the Common Stock are
reported by the NASDAQ National Market System, the closing sale price of the
Common Stock on such exchange or by the NASDAQ National Market System as of
such date (or, if no such shares were traded on such date, as of the next
preceding day on which there was such a trade); or (ii) if the Common Stock
is not so listed or admitted to unlisted trading privileges or reported on
the NASDAQ National Market System, and bid and asked prices therefor in the
over-the-counter market are reported by the NASDAQ System or the National
Quotation Bureau, Inc. (or any comparable reporting service), the mean of the
closing bid and ask prices of the Common Stock as of such date, as so
reported.
(f) FRACTIONS OF SHARES. Whenever under the terms of the Plan a
fractional share would be required to be issued, the fractional share shall
be rounded up to the next full share.
6. ISSUANCE OF CERTIFICATES AND WITHHOLDING.
(a) As promptly as practicable following December 31 of each year,
the Company shall issue stock certificates registered in the name of each
Eligible Director entitled to receive Restricted Stock representing the
number of shares of Restricted Stock issued to such Eligible Director
pursuant to Section
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5 above, and the last trading day of each year shall be deemed to be the date
of issuance.
(b) Anything to the contrary herein notwithstanding, the Company
shall not be required to issue any shares of Common Stock under the Plan if,
in the sole opinion of the Committee, the issuance and delivery of such
shares would constitute a violation by the Eligible Director or the Company
of any applicable law or regulation of any governmental authority, including
without limitation federal and state securities laws, or the regulations of
any stock exchange on which the Common Stock may then be listed. The
certificates for the shares of Common Stock issued under the Plan shall be
restricted by the Company as to transfer unless the Company receives an
opinion of counsel satisfactory to the Company to the effect that
registration under state or federal securities laws is not required with
respect to such transfer.
(c) The Company may make such provisions as it may deem appropriate
for the withholding of any taxes which the Company determines it is required
to withhold in connection with any stock issuance under this Plan.
7. RIGHTS AS A SHAREHOLDER. Subject to the restrictions described in
Section 5 above, upon issuance and registration of the stock certificates the
Eligible Director in whose name the certificates are registered shall have
all of the rights of a shareholder with respect to such shares, including the
right to vote the stock and to receive dividends and distributions with
regard to the stock. Shares of Common Stock issued under the Plan shall be
fully paid and non-assessable.
8. NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the
issuing of Common Stock nor any other action taken pursuant to the Plan, shall
constitute or be evidence of any agreement or understanding, express or
implied, that the Company will retain an Eligible Director for any period of
time, or at any particular rate of compensation. Nothing in this Plan shall
in any way limit or affect the right of the Board or the shareholders of the
Company to remove any Eligible Director or otherwise terminate his or her
service as a director of the Company.
9. AMENDMENT OF THE PLAN. The Board may suspend or terminate the Plan
or any portion thereof at any time and may amend the Plan from time-to-time
in any respect the Board may deem to be in the best interests of the Company;
provided, however, that (a) no such amendment shall be effective without
approval of the shareholders of the Company, if shareholder approval of the
amendment is then required pursuant to Rule 16b-3 under the Securities
Exchange Act of 1934, or the applicable rules of any securities exchange, and
(b) to the extent prohibited by Rule 16b-3(c)(2)(ii)(B) under the Securities
Exchange Act of 1934, the Plan may not be amended more than once every six
months.
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10. EFFECTIVE DATE AND DURATION OF THE PLAN. The Plan shall, subject
to approval at the 1992 Annual Meeting of Shareholders, be deemed effective
January 1, 1992. Issuances of Common Stock under the Plan shall be subject to
such shareholder approval. The Plan shall operate through December 31, 2006
and shall terminate after the December 31, 2006 issuances of Restricted
Stock, but may be terminated prior thereto by action of the Board. No
issuances shall be made after termination of the Plan.
11. GOVERNING LAWS. The Plan and all rights and obligations under the
Plan shall be construed in accordance with and governed by the laws of the
State of Minnesota.
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THE ST. PAUL COMPANIES, INC.
AMENDED AND RESTATED
SPECIAL SEVERANCE POLICY
The Board of Directors of The St. Paul Companies, Inc. (the
"Company") has determined that it is in the best interests of the Company and
its stockholders to adopt The St. Paul Companies, Inc. Amended and Restated
Special Severance Policy (the "Policy") to provide severance benefits to all
Employees of the Company and its Subsidiaries, excluding John Nuveen & Co.
Incorporated and its Subsidiaries, in the event their employment terminates
following a Change in Control. The purpose of the Policy is to secure the
continued services, dedication and objectivity of the employees of the
Company and its Subsidiaries in the event of any threat or occurrence of a
Change in Control without concern as to whether such employees might be
hindered or distracted by personal uncertainties and risks created by any
such actual or threatened Change in Control.
1. DEFINITIONS. The following definitions shall apply for purposes
of the Policy:
(a) "Base Salary" means the highest annual rate of salary or wages
(excluding all bonus, overtime and incentive compensation) payable by the
Company and its Subsidiaries to the Participant during the 12-month
period immediately prior to the Participant's Date of Termination.
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(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means:
(i) for Tier 1 Employees (A) the willful and continued failure of
Participant to perform substantially Participant's duties with the
Company (other than any such failure resulting from Participant's
incapacity due to physical or mental illness) after a written demand for
substantial performance is delivered to Participant by the Board which
specifically identifies the manner in which the Board believes that
Participant has not substantially performed Participant's duties, or
(B) the willful engaging by Participant in illegal conduct or gross
misconduct which is demonstrably and materially injurious to the Company
or its affiliates. For purposes of this paragraph, no act or failure to
act by Participant shall be considered "willful" unless done or omitted
to be done by Participant in bad faith and without reasonable belief
that Participant's action or omission was in the best interests of the
Company or its affiliates. Any act, or failure to act, based upon
authority given pursuant to a resolution duly adopted by the Board,
based upon the advice of counsel for the Company shall be conclusively
presumed to be done, or omitted to be done, by Participant in good faith
and in the best interests of the Company. Cause shall not exist unless
and until the Company has delivered to
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Participant a copy of a resolution duly adopted by three-quarters (3/4)
of the entire Board (excluding Participant if Participant is a Board
member) at a meeting of the Board called and held for such purpose
(after reasonable notice to Participant and an opportunity for
Participant, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board an event set forth
in clauses (A) or (B) has occurred and specifying the particulars
thereof in detail;
(ii) for Tier 2 Employees (A) the willful and continued failure of
Participant to perform substantially Participant's duties with the
Company (other than any such failure resulting from Participant's
incapacity due to physical or mental illness) after a written demand for
substantial performance is delivered to Participant by the Board which
specifically identifies the manner in which the Board believes that
Participant has not substantially performed Participant's duties, or
(B) the willful engaging by Participant in illegal conduct or gross
misconduct which is demonstrably and materially injurious to the Company
or its affiliates. For purposes of this paragraph, no act or failure to
act by Participant shall be considered "wilful" unless done or omitted
to be done by Participant in bad faith and without reasonable belief
that Participant's action or
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omission was in the best interests of the Company or its affiliates; and
(iii) for Tier 3 Employees (A) the willful and continued failure of
Participant to perform substantially Participant's duties with the
Company (other than any such failure resulting from Participant's
incapacity due to physical or mental illness) or (B) the engaging by
Participant in illegal conduct or gross misconduct which is injurious to
the Company or its affiliates.
(d) "Change in Control" means the occurrence of any one of the
following events:
(i) individuals who, on February 1, 1999, constitute the Board (the
"Incumbent Directors") cease for any reason to constitute at least a
majority of the Board, provided that any person becoming a director
subsequent to February 1, 1999, whose election or nomination for
election was approved by a vote of at least two-thirds of the Incumbent
Directors then on the Board (either by a specific vote or by approval of
the proxy statement of the Company in which such person is named as a
nominee for director, without written objection to such nomination)
shall be an Incumbent Director; PROVIDED, HOWEVER, that no individual
initially elected or nominated as a director of the Company as a result
of an actual or threatened election contest (as described in Rule 14a-11
under the
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Securities Exchange Act of 1934 (the "Act")) ("Election Contest") or any
other actual or threatened solicitation of proxies or consents by or on
behalf of any "person" (as such term is defined in Section 3(a)(9) of
the Act) other than the Board ("Proxy Contest"), including by reason of
any agreement intended to avoid or settle any Election Contest or Proxy
Contest, shall be deemed to be an Incumbent Director;
(ii) any person is or becomes a "beneficial owner" (as defined in
Rule 13d-3 under the Act), directly or indirectly, of securities of the
Company representing 30% or more of the combined voting power of the
Company's then outstanding securities eligible to vote for the election
of the Board (the "Company Voting Securities"); PROVIDED, HOWEVER, that
the event described in this paragraph (ii) shall not be deemed to be a
Change in Control of the Company by virtue of any of the following
acquisitions: (A) by the Company or any Subsidiary, (B) by any employee
benefit plan (or related trust) sponsored or maintained by the Company
or any Subsidiary, (C) by any underwriter temporarily holding securities
pursuant to an offering of such securities, or (D) pursuant to any
acquisition by Participant or any group of persons including Participant
(or any entity controlled by Participant or any group of persons
including Participant);
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(iii) the consummation of a merger, consolidation, statutory share
exchange or similar form of corporate transaction involving the Company
or any of its Subsidiaries that requires the approval of the Company's
stockholders, whether for such transaction or the issuance of securities
in the transaction (a "Reorganization"), or sale or other disposition of
all or substantially all of the Company's assets to an entity that is
not an affiliate of the Company (a "Sale"), unless immediately following
such Reorganization or Sale: (A) more than 60% of the total voting power
of (x) the corporation resulting from such Reorganization or Sale (the
"Surviving Company"), or (y) if applicable, the ultimate parent
corporation that directly or indirectly has beneficial ownership of 100%
of the voting securities eligible to elect directors of the Surviving
Company (the "Parent Company"), is represented by Company Voting
Securities that were outstanding immediately prior to such
Reorganization or Sale (or, if applicable, is represented by shares into
which such Company Voting Securities were converted pursuant to such
Reorganization or Sale), and such voting power among the holders thereof
is in substantially the same proportion as the voting power of such
Company Voting Securities among the holders thereof immediately prior to
the Reorganization of Sale, (B) no person (other than any employee
benefit plan (or related trust) sponsored or maintained by the
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Surviving Company or the Parent Company), is or becomes the beneficial
owner, directly or indirectly, of 30% or more of the total voting power
of the outstanding voting securities eligible to elect directors of the
Parent Company (or, if there is no Parent Company, the Surviving
Company) and (C) at least a majority of the members of the board of
directors of the Parent Company (or, if there is no Parent Company, the
Surviving Company) following the consummation of the Reorganization or
Sale were Incumbent Directors at the time of the Board's approval of the
execution of the initial agreement providing for such Reorganization or
Sale (any Reorganization or Sale which satisfies all of the criteria
specified in (A), (B) and (C) above shall be deemed to be a
"Non-Qualifying Transaction"); or
(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company.
Notwithstanding the foregoing, a Change in Control of the
Company shall not be deemed to occur solely because any person acquires
beneficial ownership of more than 30% of the Company Voting Securities
as a result of the acquisition of Company Voting Securities by the
Company which reduces the number of Company Voting Securities
outstanding; PROVIDED THAT if after such acquisition by the Company such
person becomes the beneficial owner of additional Company Voting
Securities that increases the percentage of outstanding
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Company Voting Securities beneficially owned by such person, a Change in
Control of the Company shall then occur.
(e) "Committee" means the Personnel and Compensation Committee of
the Board.
(f) "Compensation Rate" means, with respect to a Tier 3 Employee,
the result of dividing (i) the sum of (A) the Employee's highest annual
base salary earned with the Employer within the one-year period prior to
such Employee's Date of Termination (or if employed by the Employer for
less than one year, such Employee's annualized base salary) and (B) the
Employee's highest total annual bonus and overtime pay earned in any of
the three calendar years prior to such Employee's Date of Termination,
by (ii) 52.
(g) "Date of Termination" means the date on which a Participant's
employment with the Participant's Employer terminates.
(h) "Effective Date" means the date set forth in Section 14(b) of
this Policy as the effective date of this Policy.
(i) "Employee" means any regular, full-time employee of an Employer.
(j) "Employer" means the Company or any Subsidiary which is covered
by this Policy pursuant to Section 8.
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(k) "Good Reason" means:
(i) for Tier 1 Employees and Tier 2 Employees, the occurrence of
any of the following events within the two-year period following a
Change in Control without such Participant's express written consent:
(A) (1) any change in the duties or responsibilities (including
reporting responsibilities) of Participant that is inconsistent in any
material and adverse respect with Participant's position(s), duties,
responsibilities or status with the Company immediately prior to such
Change in Control (including any material and adverse diminution of such
duties or responsibilities) or (2) a material and adverse change in
Participant's titles or offices (including, if applicable, membership on
the Board) with the Company as in effect immediately prior to such
Change in Control;
(B) any reduction in Participant's rate of annual base salary or
annual target bonus opportunity (including any material and adverse
change in the formula for such annual bonus target) as in effect
immediately prior to such Change in Control or as the same may be
increased from time to time thereafter;
(C) any requirement of the Company that Participant (1) be based
anywhere more than thirty (30) miles from the office where Participant
is located at the time of the Change in Control or (2) travel on
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Company business to an extent substantially greater than the travel
obligations of Participant immediately prior to such Change in Control;
or
(D) the failure of the Company to (1) continue in effect any
employee benefit plan, compensation plan, welfare benefit plan or fringe
benefit plan in which Participant is participating immediately prior to
such Change in Control, or the taking of any action by the Company which
would materially adversely affect Participant's participation in or
reduce Participant's benefits under any such plan, unless Participant is
permitted to participate in plans providing Participant with
substantially equivalent benefits (at substantially equivalent cost with
respect to welfare benefit plans), or (2) provide Participant with paid
vacation in accordance with the most favorable vacation policies of the
Employer as in effect for Participant immediately prior to such Change
in Control, including the crediting of all service for which Participant
had been credited under such vacation policies prior to the Change in
Control.
An isolated, insubstantial and inadvertent action taken in good
faith and which is remedied by the Company within thirty (30) days after
receipt of written notice thereof given by Participant to the Company's
Senior Vice President, Human Resources shall not constitute Good Reason.
Participant's right to terminate employment for Good Reason shall not be
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affected by Participant's incapacities due to mental or physical illness
and Participant's continued employment shall not constitute consent to,
or a waiver of rights with respect to, any event or condition
constituting Good Reason; and
(ii) for Tier 3 Employees, the occurrence of any of the following
events within the two-year period following a Change in Control without
such Participant's express written consent:
(A) any reduction of such Participant's Base Salary; or
(B) any requirement of the Company that Participant be based
anywhere more than thirty (30) miles from the office where Participant
is located at the time of the Change in Control.
An isolated, insubstantial and inadvertent action taken in good
faith and which is remedied by the Company within thirty (30) days after
receipt of written notice thereof given by Participant to the Company's
Senior Vice President, Human Resources shall not constitute Good Reason.
Participant's right to terminate employment for Good Reason shall not be
affected by Participant's incapacities due to mental or physical illness
and Participant's continued employment shall not constitute consent to,
or a waiver of rights with respect to, any event or condition
constituting Good Reason.
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(l) "Qualifying Termination" means (i) a termination of a
Participant's employment by the Employer other than for Cause during the
two-year period following a Change in Control, (ii) a termination of a
Participant's employment by such Participant for Good Reason during the
two-year period following a Change in Control or (iii) the termination
of employment by a Participant who is a Tier 1 Employee for any reason
(or no reason at all) during the 30-day period commencing one year after
the date of a Change in Control. Termination of a Participant's
employment on account of Participant's death or on account of
Participant's disability, as defined under the Employer's long-term
disability plan, shall not be treated as a Qualifying Termination.
Notwithstanding the foregoing, a Tier 3 Employee who has an Offer of
Continued Employment, as defined below, shall in no event be deemed to
have a Qualifying Termination. For purposes of this paragraph, "Offer of
Continued Employment" means a job offer to a Tier 3 Employee by an
Employer or an affiliate of an Employer (or a purchaser or transferee in
the case of a sale or transfer of all or any portion of a Subsidiary,
division or business operation of the Company or any Employer) for a
position (x) with base compensation equal to or greater than the
Employee's then current Base Salary and (y) at the Employee's then
current work site or a location less than thirty (30) miles from the
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Employee's then current work site (or in the case of virtual office
Employees, a location less than thirty (30) miles from the office to
which the Employee is assigned.
(m) "Participant" means, as applicable, a Tier 1 Employee, a Tier 2
Employee or a Tier 3 Employee.
(n) "Policy" means The St. Paul Companies, Inc. Amended and Restated
Special Severance Policy.
(o) "Separation Benefit" means the benefit payable in accordance
with Section 3(a)(2) of this Policy.
(p) "Subsidiary" means any corporation or other entity in which the
Company has a direct or indirect ownership interest of 50% or more of
the total combined voting power of the then outstanding securities or
interests of such corporation or other entity entitled to vote generally
in the election of directors or in which the Company has the right to
receive 50% or more of the distribution of profits or 50% of the assets
or liquidation or dissolution.
(q) "Tier 1 Employee" means the Chairman of the Company, an
executive officer of the Company who reports directly to the Chairman of
the Company and any other Employee designated by the Committee as a
Tier 1 Employee based on a determination that such Employee is in a
position to contribute in substantial measure to
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the successful achievement of the Employer's objectives.
(r) "Tier 2 Employee" means an Employee whose annual Base Salary is
at least $100,000, other than a Tier 1 Employee, and any other Employee
who has substantially equivalent responsibilities and is designated by
the Chief Executive Officer of the Company as a Tier 2 Employee.
(s) "Tier 3 Employee" means an Employee other than a Tier 1 Employee
or a Tier 2 Employee.
2. ELIGIBILITY. Each Tier 1 Employee who is an Employee at the
time of the Change in Control and each Tier 2 and Tier 3 Employee who (a) is
an Employee at the time of the Change in Control and (b) has completed at
least three months of service with an Employer at the time such Employee's
employment terminates shall be eligible to participate in this Policy.
Notwithstanding the foregoing, if a Participant ceases to be an Employee
prior to a Change in Control, such Participant shall have no further rights
under this Policy; PROVIDED, HOWEVER, if such Participant is a Tier 1
Employee or a Tier 2 Employee and (i) such Participant's employment is
terminated prior to a Change in Control for reasons that would have
constituted a Qualifying Termination if they had occurred following a Change
in Control; (ii) such Participant reasonably demonstrates that such
termination (or Good Reason event) was at the request of a third party who
had indicated an intention or taken
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steps reasonably calculated to effect a Change in Control; and (iii) a Change
in Control involving such third party (or a party competing with such third
party to effectuate a Change in Control) does occur, then for purposes of
this Policy, the date immediately prior to the date of such termination of
employment or event constituting Good Reason shall be treated as a Change in
Control. With respect to a Participant described in the immediately preceding
sentence, the timing of payments and benefits to Participant under Section 3
shall be determined by treating the date of the actual Change in Control as
the Tier 1 Employee's or Tier 2 Employee's Date of Termination hereunder.
3. PAYMENTS UPON TERMINATION OF EMPLOYMENT.
If during the two-year period following a Change in Control the
employment of a Participant shall terminate, by reason of a Qualifying
Termination, then the Company shall provide to such Participant the following
benefits:
(1) Within thirty (30) days following the Participant's Date of
Termination, the Company shall pay to such Participant a lump-sum cash
amount equal to the sum of (A) the Participant's Base Salary (without
regard to any reduction constituting Good Reason) through the Date of
Termination and any bonus awards that have been awarded, but are not yet
payable, (B) any accrued vacation or sick pay, and (C) any other accrued
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compensation in each case to the extent not theretofore paid.
(2) (A) Within thirty (30) days following the Date of Termination of
a Tier 1 or Tier 2 Employee, the Company shall pay to such Tier 1 or
Tier 2 Employee a lump-sum Separation Benefit, based upon the
Participant's position (without regard to any change in position
following a Change in Control which would constitute Good Reason
hereunder) as of the Participant's Date of Termination, equal to:
(i) for a Tier 1 Employee, three (3) times the sum of such
Participant's Base Salary and target bonus for the year in which the
Date of Termination occurs.
(ii) for a Tier 2 Employee, two (2) times the sum of such
Participant's Base Salary and target bonus for the year in which the
Date of Termination occurs.
(B) For a Tier 3 Employee, severance pay at the Employee's
Compensation Rate, payable biweekly, equal to four weeks for each year
of "vesting service" (as defined in the Employer's retirement plan, as
in effect immediately prior to the Change in Control) with the Employer;
provided, however, that no Employee shall receive such severance pay for
less than 8 weeks or more than 52 weeks and, provided, further, that, if
any
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such biweekly payment is not timely paid, all remaining biweekly
payments shall immediately become due and payable in full.
(3) For a period commencing on the Date of Termination and
continuing for the number of years equal to (i) the multiple used to
determine the Separation Benefit for a Tier 1 or Tier 2 Employee and
(ii) one year for a Tier 3 Employee, the Company shall continue to keep
in full force and effect (or otherwise provide) all policies of medical,
dental, accident, disability (other than long-term disability) and life
insurance with respect to the Participant and Participant's dependents
with the same level of coverage, upon the same terms and otherwise to
the same extent as such policies shall have been in effect for such
Participant immediately prior to the Date of Termination (or, if more
favorable to the Participant, immediately prior to the Change in
Control), and the Company and the Participant shall share the costs of
the continuation of such insurance coverage in the same proportion as
such costs were shared immediately prior to the Date of Termination. If
the Participant cannot continue to participate in the policies of the
Company (or the Participant's Employer) providing such benefits, the
Company shall otherwise provide such benefits outside of the policies on
the same
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after-tax basis as if participation had continued. Notwithstanding the
foregoing, if such Participant becomes reemployed with another employer
and is eligible to receive any of the welfare benefits described in this
Section 3(a)(3) from such employer, the Participant shall cease
receiving such benefit under this Policy.
(4) Outplacement assistance no less favorable than under the terms
of the relevant outplacement assistance plan in effect at the time of
the Change in Control for Employees at the same level of compensation,
seniority and position with the Employer as the Participant; provided,
however, that the Participant may elect prior to the Date of Termination
in accordance with procedures established by the Committee to receive in
lieu of outplacement assistance a lump sum cash payment equal to the
cost of such outplacement assistance.
4. ADDITIONAL PAYMENTS OR LIMITATIONS ON PAYMENTS.
(a) Payments made to a Tier 1 Employee shall be subject to the
additional provisions of Exhibit A hereto.
(b) Payments made to a Tier 2 Employee shall be subject to the
additional provisions of Exhibit B hereto.
5. WITHHOLDING TAXES. The Company may withhold from all payments
due to a Participant (or Participant's
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beneficiary or estate) hereunder all taxes which, by applicable federal,
state, local or other law, the Company or any Employer is required to
withhold therefrom.
6. FULL SETTLEMENT; RESOLUTION OF DISPUTES. The Company's
obligation to make the payments provided for in this Agreement and otherwise
to perform its obligations hereunder shall not be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action which the
Company may have against the Participant or others. In no event shall the
Participant be obligated to seek other employment or take any other action by
way of mitigation of the amounts payable to the Participant under any of the
provisions of this Agreement, and, except as set forth in Section 3(a)(3),
such amounts shall not be reduced whether or not the Participant obtains
other employment.
7. REIMBURSEMENT OF EXPENSES; ARBITRATION. The Company agrees to
pay as incurred all legal fees and expenses which the Participant may
reasonably incur as a result of any contest pursued or defended against in
good faith by the Participant regarding the Policy plus in each case interest
on any delayed payment at the applicable Federal rate provided for in
Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"). Any dispute or controversy arising under or in connection with this
Policy shall be settled exclusively by arbitration in the city nearest to the
place of residence of the Employee in which a United States District Court is
situated by three arbitrators in accordance with the rules of the American
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Arbitration Association then in effect. Judgment may be entered on the
arbitrators' award in any court having jurisdiction; provided, however, that
the Employee shall be entitled to seek specific performance of such
Employee's right to be paid under this Policy during the pendency of any
dispute or controversy arising under or in connection with this Policy. The
Company shall bear all costs and expenses arising in connection with any
arbitration proceeding pursuant to this Section.
8. PARTICIPATING EMPLOYERS. Each U.S. based Subsidiary of the
Company, except for the Subsidiaries set forth on Exhibit C hereto, shall,
automatically and without action on the part of such Subsidiary, be deemed to
be an Employer and the provisions of this Policy shall be fully applicable to
the Employees of such Subsidiary. Any Subsidiary based outside of the U.S.
shall, if approved by the Chief Executive Officer of the Company, be an
Employer and the Employees of any such approved Subsidiary shall be covered
hereunder pursuant to such terms and conditions as are approved by the Chief
Executive Officer of the Company and set forth on Exhibit D, which shall not
provide greater benefits than those provided to Employees of Employers which
are U.S. based Subsidiaries of the Company.
9. TERMINATION OR AMENDMENT OF POLICY.
(a) Subject to paragraph (b) below, this Policy shall be in effect
as of the Effective Date. This Policy supersedes in its entirety the Special
Severance Policy of
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The St. Paul Companies which was approved by the Board on February 2, 1988.
(b) The Company shall have the right prior to a Change in Control,
in its sole discretion pursuant to action by the Board, to approve the
termination or amendment of this Policy; PROVIDED, HOWEVER, that no such
action which would adversely affect the rights or potential rights of
Participants shall be effective if taken or approved by the Board during the
twelve (12) month period prior to a Change in Control; and PROVIDED, FURTHER,
that notwithstanding anything in paragraph (a) of this Section 9 to the
contrary, in no event shall this Policy be terminated or amended following a
Change in Control in any manner which would adversely affect the rights or
potential rights of Participants under this Policy with respect to such
Change in Control.
10. SUCCESSORS.
(a) This Policy shall not be terminated by any merger,
consolidation, share exchange or similar event involving the Company whereby
the Company is or is not the surviving or resulting entity. In the event of
any merger, consolidation, share exchange or similar event, the provisions of
this Policy shall be binding upon the surviving or resulting corporation or
the person or entity to which such assets are transferred.
(b) This Policy shall inure to the benefit of and be enforceable by
each Participant's personal or legal
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representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If a Participant shall die while any amounts are
payable to the Participant hereunder (including any payments which may be
owed under Section 4), all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Policy to such person or
persons appointed in writing by the Participant to receive such amounts or,
if no person is so appointed, to the Participant's estate.
11. NON-SOLICITATION; NON-DISCLOSURE. The following conditions
apply to the receipt of the payments and benefits provided for under this
Policy;
(a) The Participant, at all times during Participant's employment
and for a period of one year immediately following termination for any
reason, shall not, without the prior written consent of the Committee (or its
delegate), solicit or take any action to cause the solicitation of any person
who as of that date was a client, customer, policyholder, vendor, consultant
or agent of the Company to discontinue business, in whole or in part with the
Company.
(b) The Participant, at all times during Participant's employment
and for a period of one year immediately following the termination thereof
for any reason, shall not, without the prior written consent of the Committee
(or its delegate), employ or seek to employ any person employed at that time
by the Company or any of its
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Subsidiaries, or otherwise encourage or entice such person or entity to leave
such employment.
(c) The Participant shall keep secret and retain in the strictest
confidence all confidential matters which relate to the Company, its
Subsidiaries and affiliates, including, without limitation, customer lists,
client lists, trade secrets, pricing policies and other business affairs of
the Company, its Subsidiaries and affiliates learned by him from the Company
or any such Subsidiary or affiliate or otherwise, and not to disclose any
such confidential matter to anyone outside the Company or any of its
Subsidiaries or affiliates, whether during or after Participant's period of
service with the Company, except (i) as such disclosure may be required or
appropriate in connection with Participant's work as an employee of the
Company or (ii) when required to do so by a court of law, by any governmental
agency having supervisory authority over the business of the Company or by
any administrative or legislative body (including a committee thereof) with
apparent jurisdiction to order Participant to divulge, disclose or make
accessible such information. The Participant must give the Company advance
written notice of any disclosure pursuant to clause (ii) of the preceding
sentence and to cooperate with any efforts by the Company to limit the extent
of such disclosure. Upon request by the Company, the Participant will deliver
promptly to the Company upon termination of Participant's services for the
Company, or at any time thereafter as the Company may request, all Company,
Subsidiary or affiliate
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<PAGE>
memoranda, notes, records, reports, manuals, drawings, designs, computer
files in any media and other documents (and all copies thereof) relating to
the Company's or any Subsidiary's or affiliate's business and all property of
the Company or any subsidiary or affiliate associated therewith, which
Participant may then possess or have under Participant's direct control,
other than personal notes, diaries, rolodexes and correspondence.
12. GOVERNING LAW; VALIDITY. The interpretation, construction and
performance of this Policy, unless preempted by the Employee Retirement
Income Act of 1974, as amended, ("ERISA"), shall be governed by and construed
and enforced in accordance with the laws of the State of Minnesota without
regard to the principle of conflicts of laws. The invalidity or
unenforceability of any provision of this Policy shall not affect the
validity or enforceability of any other provision of this Policy, which other
provisions shall remain in full force and effect.
13. ADMINISTRATION. The Policy shall be administered by the
Committee. Consistent with the requirements of ERISA and the regulations
thereunder of the Department of Labor, the Committee shall provide adequate
written notice to any Participant whose claim for Separation Benefits has
been denied, setting forth specific reasons for such denial, written in a
manner calculated to be understood by such Participant, and affording such
Participant a full and fair review of the decision denying the claim.
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14. MISCELLANEOUS.
(a) Neither the Company nor any Employer shall be required to fund
or otherwise segregate assets to be used for the payment of any benefits
under the Policy. The Company shall make such payments only out of its
general corporate funds, and therefore its obligation to make such payments
shall be subject to any claims of its other creditors having priority as to
its assets.
(b) The "Effective Date" of the Policy is February 1, 1999.
(c) This Policy does not constitute a contract of employment or
impose on the Company or the Participant's Employer any obligation to retain
the Participant as an Employee, to change the status of the Participant's
employment, or to change the policies of the Company or its Subsidiaries
regarding termination of employment.
(d) Any amounts payable to any Participant pursuant to any other
plan, policy of, or agreement with, the Company or other Employer on account
of Participant's termination of employment shall be offset against any
payments made to such Participant pursuant to this Policy to the extent
necessary to avoid the duplication of benefits.
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EXHIBIT A
CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.
(a) Anything in this Policy to the contrary notwithstanding, in the
event it shall be determined that any payment, award, benefit or distribution
(or any acceleration of any payment, award, benefit or distribution) by the
Company (or any of its affiliated entities) or any entity which effectuates a
Change in Control (or any of its affiliated entities) to or for the benefit
of a Participant who is a Tier 1 Employee (whether pursuant to the terms of
this Policy or otherwise, but determined without regard to any additional
payments required under this Exhibit A) (the "Payments") would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), or any interest or penalties are incurred by the
Participant with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to as
the "Excise Tax"), then the Company shall pay to the Participant an
additional payment (a "Gross-Up Payment") in an amount such that after
payment by the Participant of all taxes (including any Excise Tax) imposed
upon the Gross-Up Payment, the Participant retains an amount of the Gross-Up
Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and
(y) the product of any deductions disallowed because of the inclusion of the
Gross-Up Payment in the Participant's adjusted gross income and the highest
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applicable marginal rate of federal income taxation for the calendar year in
which the Gross-Up Payment is to be made. For purposes of determining the
amount of the Gross-up Payment, the Participant shall be deemed to (i) pay
federal income taxes at the highest marginal rates of federal income taxation
for the calendar year in which the Gross-up Payment is to be made, (ii) pay
applicable state and local income taxes at the highest marginal rate of
taxation for the calendar year in which the Gross-up Payment is to be made,
net of the maximum reduction in federal income taxes which could be obtained
from deduction of such state and local taxes and (iii) have otherwise
allowable deductions for federal income tax purposes at least equal to those
which could be disallowed because of the inclusion of the Gross-up Payment in
the Participant's adjusted gross income. Notwithstanding the foregoing
provisions of this Exhibit A, if it shall be determined that the Participant
is entitled to a Gross-Up Payment, but that the Payments would not be subject
to the Excise Tax if the Payments were reduced by an amount that is less than
10% of the portion of the Payments that would be treated as "parachute
payments" under Section 280G of the Code, then the amounts payable to the
Participant under this Policy shall be reduced (but not below zero) to the
maximum amount that could be paid to Participant without giving rise to the
Excise Tax (the "Safe Harbor Cap"), and no Gross-Up Payment shall be made to
the Participant. The reduction of the amounts payable hereunder, if
applicable, shall be made by reducing first
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the payments under Section 3(a) (2), unless an alternative method of
reduction is elected by the Participant. For purposes of reducing the
Payments to the Safe Harbor Cap, only amounts payable under this Policy (and
no other Payments) shall be reduced. If the reduction of the amounts payable
hereunder would not result in a reduction of the Payments to the Safe Harbor
Cap, no amounts payable under this Policy shall be reduced pursuant to this
provision.
(b) All determinations required to be made under this Exhibit A,
including whether and when a Gross-Up Payment is required, the amount of such
Gross-Up Payment, the reduction of the Payments to the Safe Harbor Cap and
the assumptions to be utilized in arriving at such determinations, shall be
made by the public accounting firm that is retained by the Company as of the
date immediately prior to the Change in Control (the "Accounting Firm") which
shall provide detailed supporting calculations both to the Company and the
Participant within fifteen (15) business days of the receipt of notice from
the Company or the Participant that there has been a Payment, or such earlier
time as is requested by the Company (collectively, the "Determination"). In
the event that the Accounting Firm is serving as accountant or auditor for
the individual, entity or group affecting the Change in Control, the
Participant may appoint another nationally recognized public accounting firm
to make the determinations required hereunder (which accounting firm shall
then be referred to as the Accounting Firm hereunder). All fees and expenses
of the Accounting
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Firm shall be borne solely by the Company and the Company shall enter into
any Agreement requested by the Accounting Firm in connection with the
performance of the services hereunder. The Gross-up Payment with respect to
any Payments shall be made no later than thirty (30) days following such
Payment. If the Accounting Firm determines that no Excise Tax is payable by
the Participant, it shall furnish the Participant with a written opinion to
such effect, and to the effect that failure to report the Excise Tax, if any,
on the Participant's applicable federal income tax return will not result in
the imposition of a negligence or similar penalty. In the event the
Accounting Firm determines that the Payments shall be reduced to the Safe
Harbor Cap, it shall furnish the Participant with a written opinion to such
effect. The Determination by the Accounting Firm shall be binding upon the
Company and the Participant. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the Determination, it
is possible that Gross-Up Payments which will not have been made by the
Company should have been made ("Underpayment") or Gross-up Payments are made
by the Company which should not have been made ("Overpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Participant thereafter is required to make payment of any Excise Tax or
additional Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment (together with
interest at the rate provided in Section 1274 (b) (2) (B) of the Code)
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shall be promptly paid by the Company to or for the benefit of the
Participant. In the event the amount of the Gross-up Payment exceeds the
amount necessary to reimburse the Participant for Participant's Excise Tax,
the Accounting Firm shall determine the amount of the Overpayment that has
been made and any such Overpayment (together with interest at the rate
provided in Section 1274 (b) (2) of the Code) shall be promptly paid by the
Participant (to the extent he has received a refund if the applicable Excise
Tax has been paid to the Internal Revenue Service) to or for the benefit of
the Company. The Participant shall cooperate, to the extent Participant's
expenses are reimbursed by the Company, with any reasonable requests by the
Company in connection with any contests or disputes with the Internal Revenue
Service in connection with the Excise Tax.
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EXHIBIT B
LIMITATION ON PAYMENTS BY THE COMPANY.
(a) Notwithstanding anything in this Policy to the contrary, in the
event it shall be determined that any payment, award, benefit or distribution
(or any acceleration of any payment, award, benefit or distribution) by the
Company (or any of its affiliated entities) or any entity which effectuates a
Change in Control (or any of its affiliated entities) to or for the benefit
of a Participant who is a Tier 2 Employee (whether pursuant to the terms of
this Policy or otherwise) (the "Payments") would be subject to the excise tax
(the "Excise Tax") under Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), then the amounts payable to the Participant under
this Policy shall be reduced (reducing first the payments under Section 3(a)
(2), unless an alternative method of reduction is elected by Participant) to
the maximum amount as will result in no portion of the Payments being subject
to such excise tax (the "Safe Harbor Cap"). For purposes of reducing the
Payments to the Safe Harbor Cap, only amounts payable to the Participant
under this Policy (and no other Payments) shall be reduced, unless consented
to by the Participant.
(b) All determinations required to be made under this Exhibit B
shall be made by the public accounting firm that is retained by the Company
as of the date immediately prior to the Change in Control (the "Accounting
Firm"). In the event that the Accounting Firm is serving as accountant or
auditor for the individual, entity or group effecting the Change in Control,
the Participant may select another
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nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees, costs and expenses (including, but not
limited to, the costs of retaining experts) of the Accounting Firm shall be
borne by the Company. The determination by the Accounting Firm shall be
binding upon the Company and the Participant (except as provided in paragraph
(c) below).
(c) If it is established pursuant to a final determination of a
court or an Internal Revenue Service (the "IRS") proceeding which has been
finally and conclusively resolved, that Payments have been made to, or
provided for the benefit of, the Participant by the Company, which are in
excess of the limitations provided in this Exhibit B (hereinafter referred to
as an "Excess Payment"), such Excess Payment shall be deemed for all purposes
to be a loan to the Participant made on the date the Participant received the
Excess Payment and the Participant shall repay the Excess Payment to the
Company on demand, together with interest on the Excess Payment at the
applicable federal rate (as defined in Section 1274(d) of the Code) from the
date of the Participant's receipt of such Excess Payment until the date of
such repayment. As a result of the uncertainty in the application of Section
4999 of the Code at the time of the determination, it is possible that
Payments which will not have been made by the Company should have been made
(an "Underpayment"), consistent with the calculations required to be made
under this Exhibit B. In the event that it is determined (1) by the
Accounting Firm, the Company (which shall include the position taken by the
Company, or together with its consolidated group, on its
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federal income tax return) or the IRS or (2) pursuant to a determination by a
court, that an Underpayment has occurred, the Company shall pay an amount
equal to such Underpayment to the Participant within ten (10) days of such
determination together with interest on such amount at the applicable federal
rate from the date such amount would have been paid to the Participant until
the date of payment.
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EXHIBIT C
EXCLUDED SUBSIDIARIES
This Policy shall not apply to John Nuveen & Co. Incorporated or any
of its Subsidiaries.
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CONFIDENTIAL SEPARATION AGREEMENT
This Confidential Separation Agreement ("Agreement") is made and entered
into as of the date indicated below between THE ST. PAUL COMPANIES, INC.,
including all of its subsidiaries, affiliates and related entities (collectively
"St. Paul"), and Patrick A. Thiele ("EXECUTIVE").
St. Paul and Executive wish to provide for the separation of their
employment relationship and all agreements that may have existed between them,
and fully and finally to settle any and all disputes arising out of Executive's
employment by St. Paul or the separation of that employment, without any
admission of any kind by either party.
Therefore, in consideration of the mutual promises and agreements set
forth in this Agreement, St. Paul and Executive agree as follows:
I. EMPLOYMENT SEPARATION
A. SEPARATION DATE. Effective as of September 4, 1998 (the
"Separation Date"), Executive's employment relationship with St. Paul will
cease. Executive hereby resigns, effective as of the Separation Date, from all
active employment with St. Paul and, effective as of August 21, 1998, from all
directorships, offices and positions with St. Paul, including, without
limitation, as a director of The St. Paul Companies, Inc. and The John Nuveen
Company.
B. SEPARATION. Effective on the Separation Date, Executive shall
have no duties and no authority to make any representations or commitments on
behalf of St. Paul. Thereafter, Executive shall have no further rights deriving
from Executive's employment by St. Paul, and shall not be entitled to any
further compensation or non-vested benefits, except as provided in this
Agreement. Executive agrees to vacate St. Paul premises on the Separation Date.
II. CONSIDERATION
Subject to Executive's compliance with, and in exchange for, the
promises contained in Section III, and subject further to the effectiveness of
the Waiver and Release of Claims and Covenant Not To Sue set forth in
Section IV, and to the terms and conditions set forth in this Agreement,
St. Paul agrees to provide Executive with the payments and benefits set forth in
this Section II ("Consideration"). The payments and other benefits to be
provided hereunder are in place of, and not in addition to, payments otherwise
provided under The St. Paul Companies, Inc. Severance Plan or any other St. Paul
severance plan or policy. No payments will be made hereunder until the
Effective Date, as defined in Section IV.
In no event shall Executive be obligated to seek other employment or
take other action by way of mitigation of the amounts payable to Executive under
any of the provisions of this Agreement.
(1)
<PAGE>
A. SEPARATION PAYMENT.
1. SEPARATION PAYMENT; BASE SALARY CONTINUATION. St. Paul
will pay Executive a separation payment of $900,000, on or promptly after the
Separation Date. In addition, St. Paul will pay Executive a separation payment
equal to One Million, Two Hundred Thousand Dollars ($1,200,000.00), payable in
equal installments over a twenty-four (24) month period on the first of each
month in advance, PROVIDED that the first installment hereunder will be paid as
of the first day of the month following the month in which Effective Date
occurs.
2. ADDITIONAL PAYMENT. Executive will be eligible to
receive an annual incentive bonus for the calendar year containing Executive's
Separation Date, (1998) and for the two calendar years following such year (1999
and 2000) payable on the date that incentive bonuses with respect to such
calendar years are paid to active employees under the terms of The St. Paul
Companies, Inc. Annual Incentive Plan. The bonus amount payable pursuant to
this Subsection in respect of 1998 will equal the incentive bonus to which
Executive would have been entitled to receive at Executive's opportunity level
immediately prior to the Separation Date in accordance with the terms of said
Annual Incentive Plan multiplied by the achievement percentage which applies to
the Chief Executive Officer of The St. Paul Companies, Inc. for 1998, and the
bonus amount payable pursuant to this Subsection in respect of each of 1999 and
2000 shall be $300,000 per year.
B. STOCK OPTIONS.
1. 1998 GRANT. The option to purchase 98,982 shares of
common stock of The St. Paul Companies, Inc. granted to Executive in 1998
pursuant to the 1994 Stock Incentive Plan shall expire as of the Separation
Date. St. Paul will grant Executive a stock appreciation right in the form
attached hereto as Appendix A (the "1998 SAR") in respect of 98,982 shares of
common stock of The St. Paul Companies, Inc.
2. OTHER OPTIONS. All options held by Executive which are
vested and exercisable as of the Separation Date will remain exercisable for a
period of one month following the Separation Date (the "Expiration Date") in
accordance with the terms of The St. Paul Companies, Inc. 1988 or 1994 Stock
Incentive Plan, as the case may be. St. Paul will grant Executive a stock
appreciation right (the "Vested SAR") in the form attached hereto as Appendix A
with respect to options which are vested and remain unexercised as of the
Expiration Date. All options, other than the 1998 Grant, which have not vested
as of the Separation Date, including without limitation the "mega-grant," which
will be canceled, will be treated in accordance with the terms of the applicable
grant and shall expire as of the Separation Date.
(2)
<PAGE>
3. COMPENSATION COMMITTEE APPROVAL. St. Paul represents to
Employee that the grant of the 1998 SAR and the Vested SAR to Executive have
been approved, or will have been approved prior to September 4, 1998, by the
Compensation Committee of The St. Paul Companies, Inc. Board of Directors, which
is comprised solely of Non-Employee Directors (as defined in Rule 16b-3 under
the Securities Exchange Act of 1934).
C. RESTRICTED STOCK. St. Paul will allow the sale restrictions
applicable to the 8,000 (post-stock split) shares of restricted stock granted to
Executive on May 2, 1994 which remain subject to restrictions as of the
Separation Date to lapse as of their regular vesting date of May 2, 1999.
D. LTIP PAYMENT. Executive will receive a long-term incentive award
under The St. Paul Companies, Inc. Long-Term Incentive Plan for the 1996-1998
performance period, payable in a single lump sum at the same time that active
employees will receive payment of their long-term incentive awards for the
1996-1998 performance period. This payment will equal the amount that would
have been payable to Executive had Executive remained employed with St. Paul
through December 31, 1998.
E. EXECUTIVE RETIREMENT PLAN BENEFITS. Executive will be entitled
to receive a benefit under the Executive Retirement Plan component of The St.
Paul Companies, Inc. Benefit Equalization Plan equal to the actuarial present
value of Executive's Executive Retirement Plan benefits, if any, under the
Executive Retirement Plan provisions of The St. Paul Companies, Inc. Benefit
Equalization Plan as of the date Executive becomes eligible to receive benefits
under the Plan (the "Benefit Commencement Date"). For purposes of the preceding
sentence, the actuarial present value of Executive's Executive Retirement Plan
benefits shall be computed in the same manner and using the same actuarial
assumptions used by The St. Paul Companies, Inc. Employees' Retirement Plan to
determine the actuarial present value of a person's retirement benefits
thereunder as of the Benefit Commencement Date; PROVIDED, HOWEVER, that for this
purpose Executive will be credited with an additional two years of service.
The Executive Retirement Plan benefit (including any death
benefit) payable pursuant to this Subsection E. shall be in full satisfaction of
the Executive Retirement Plan benefits payable to Executive pursuant to the
Executive Retirement Plan provisions of The St. Paul Companies, Inc. Benefit
Equalization Plan.
F. BENEFITS CONTINUATION. St. Paul will continue to provide, for a
period of twenty-four (24) months following the Separation Date, or until the
date that Executive becomes eligible to participate in the welfare plans of a
new employer, if earlier, the Executive's family medical and dental coverage,
life, long-term disability and AD&D insurance currently provided under The St.
Paul Companies, Inc. Employee Benefit Plan under substantially the same terms
and conditions (including contributions or premium payments required from
Executive for such benefits) as
(3)
<PAGE>
applicable from time to time to senior executives of The St. Paul Companies,
Inc., PROVIDED, that if Executive cannot continue to participate in any such
Employee Benefit Plan under its terms, St. Paul will otherwise provide
comparable benefits on the same after-tax basis as if continued participation
had been permitted.
After the expiration of the continuation coverage period,
Executive may elect to convert his employee/dependent life insurance coverage to
an individual policy in accordance with the provisions of The St. Paul
Companies, Inc. Employee Benefit Plan.
G. MISCELLANEOUS PAYMENTS. St. Paul will pay Executive One Hundred
Thirty-Six Thousand, Seven Hundred and Ninety-Eight Dollars ($136,798) as soon
as practicable following the Separation Date.
H. VACATION. Executive will receive payment for any unused, earned
regular, banked or purchased vacation days, as well as any unused floating
holidays, credited to Executive as of the Separation Date. Such payment will be
made with Executive's final regular payroll check.
I. OUTPLACEMENT SERVICES. Executive will receive outplacement
services from Lee Hecht Harrison at St. Paul's expense, for a period of up to
one-year following the Separation Date. Such outplacement services will include
the provision of an office and secretarial, telephone and telecopier services
for use by the Executive during such one-year period; PROVIDED THAT St. Paul may
elect to provide Executive with office, secretarial, telephone and telecopier
services on the Company's premises or in other office space provided for
Executive.
J. ACKNOWLEDGMENT. Executive acknowledges that the Consideration
provided in this Agreement, which is in place of other payments and benefits, is
good and valuable consideration in exchange for this Agreement, and includes
payments and benefits to which Executive is not otherwise entitled.
K. WITHHOLDING. St. Paul will withhold from the compensation and
benefits payable to Executive under Section II of this Agreement all appropriate
deductions for employee benefits, if applicable, and the amounts necessary for
St. Paul to satisfy its withholding obligations under Federal, state and local
income and employment tax laws.
III. EXECUTIVE'S COVENANTS TO ST. PAUL
The parties desire to provide for the protection of the business, good
will, confidential information, relationship and other proprietary rights of St.
Paul. Accordingly, Executive agrees to the following:
(4)
<PAGE>
A. PROPERTY OF ST. PAUL. By the Separation Date, Executive will
return to St. Paul all Company property, including, but not limited to all
identification cards; files; computer hardware, software, equipment and disks;
keys; Company owned or leased vehicles; credit cards; and records.
B. FUTURE CONDUCT. Executive agrees that he shall refer any
inquiries from the media, financial analysts or St. Paul shareholder communities
concerning the reasons for his departure from St. Paul to the Senior Vice
President-Human Resources or Senior Vice President-Chief Legal Counsel of
St. Paul and shall not provide any such persons with any information concerning
the reasons for his departure beyond that described in St. Paul's announcement
of Executive's departure. Executive further agrees not to engage in any
discussion with any former or present director of St. Paul concerning his
reasons for departure without first informing the Senior Vice President-Human
Resources of St. Paul or its Senior Vice President-Chief Legal Counsel. For
purposes of this paragraph, St. Paul and Executive further agree, however, that,
subject to the following sentence and the other provisions of this agreement,
Executive may explain, solely in connection with his search for future
employment, that the primary reason for his departure was the decision of the
Board of Directors of The St. Paul Companies, Inc. that Executive would not be
considered as a candidate to become President or CEO of The St. Paul Companies,
Inc. and that, although Executive was offered another executive position within
St. Paul, he would not continue as President of world wide insurance operations.
Executive agrees not to engage in any form of conduct, or make any statements or
representations, that disparage or otherwise harm the reputation, goodwill or
commercial interests of St. Paul or its management.
In addition, Executive agrees to cooperate fully with St. Paul,
including its attorneys or accountants, in connection with any potential or
actual litigation, or other real or potential disputes, which directly or
indirectly involves St. Paul. Executive agrees to appear as a witness and be
available to attend depositions, consultations or meetings regarding litigation
or potential litigation as reasonably requested by St. Paul. St. Paul
acknowledges that these efforts, if necessary, will impose on Executive's time
and would likely interfere with other commitments Executive may have in the
future. Consequently, St. Paul shall attempt to schedule such depositions,
consultations or meetings in coordination with Executive's schedule, but
Executive recognizes that scheduling of certain court proceedings, including
depositions, may be beyond St. Paul's control. Likewise, St. Paul agrees to
provide Executive with reasonable compensation for Executive's time spent
traveling to and from and attending such depositions, consultations or meetings,
not to include ancillary time spent at hotels and related locations during
evenings between proceedings. St. Paul also agrees to reimburse Executive for
the out-of-pocket expenditures actually and reasonably incurred by Executive in
connection with the performance of the services contemplated by this Subsection,
including hotel accommodations, air fare transportation and meals consistent
with St. Paul's generally-applicable expense reimbursement policies. It is
expressly understood by the parties that any compensation paid by St. Paul to
Executive under this Subsection shall be in exchange for Executive's time and is
not intended or
(5)
<PAGE>
understood to be dependent upon the character of content of any information
Executive discloses in good faith in any such proceedings, meetings or
consultation.
C. CONFIDENTIALITY OF THIS AGREEMENT. Executive and St. Paul agree
that this Agreement and its terms will be regarded as privileged and
confidential communications between the parties, and that neither they nor their
counsel will reveal or disclose either the terms or the substance of this
Agreement to any other person, except as required by law (including the
securities laws), subpoena, court order or other legal process. This
restriction applies to any members of the public, and to any current, future or
former employees of St. Paul. If disclosure is compelled by law (including the
securities laws), subpoena, court order or other legal process, or as otherwise
required by law, the party so compelled agrees to notify the other party as soon
as notice of such requirement or process is received and before disclosure takes
place. Notwithstanding these provisions, Executive may disclose the terms of
this Agreement to members of Executive's immediate family, Executive's
accountant or financial advisor, and Executive's attorney upon their agreement
to maintain this Agreement in strict confidence, as set forth in this
Subsection. Further, nothing in this Subsection limits St. Paul's ability to
disclose the information internally to those persons with a legitimate business
reason to have access to the information.
D. CONFIDENTIAL INFORMATION. Executive acknowledges that he has had
access to confidential Company business information (including, but not limited
to, future business plans, pricing strategies, marketing plans, customer lists,
agent/broker lists, underwriting objectives, financial information and personnel
information) concerning the business, plans, finances and assets of St. Paul
("Confidential Information") and which is not generally known outside St. Paul.
For all time, Executive agrees that he shall not, without the proper written
authorization of St. Paul, directly or indirectly use, divulge, furnish or make
accessible to any person any Confidential Information, but instead shall keep
all Confidential Information strictly and absolutely confidential. Executive
will use reasonable and prudent care to safeguard and prevent the unauthorized
use or disclosure of Confidential Information.
Further, Executive expressly acknowledges that the terms of this
Subsection are material to this Agreement, and if Executive breaches the terms
of this Subsection, Executive shall be responsible for all damages and, at the
election of St. Paul, the return of all consideration paid hereunder, without
prejudice to any other rights and remedies that St. Paul may have.
Executive acknowledges and agrees that the Confidential
Information and special knowledge acquired during Executive's employment with
St. Paul is valuable and unique, and that breach by Executive of the provisions
of this Agreement as described in this Subsection will cause St. Paul
irreparable injury and damage, which cannot be reasonably or adequately
compensated by money damages. Executive, therefore, expressly agrees that St.
Paul shall be entitled to injunctive or other equitable relief in order to
prevent a breach of this Agreement or any part thereof, in
(6)
<PAGE>
addition to such other remedies legally available to St. Paul. Executive
expressly waives the claim that St. Paul has an adequate remedy at law.
E. SOLICITATION OF EMPLOYEES. Executive shall not, at any time
prior to the Separation Date or during twenty-four (24) month period following
the Separation Date, solicit, participate in or promote the solicitation of any
person who was employed by St. Paul on the Separation Date to leave the employ
of St. Paul or, on behalf of himself or any other person, hire, employ or engage
any such person. Executive further agrees that, during such time, if an
employee of St. Paul contacts Executive about prospective employment, Executive
will inform such employee that he or she cannot discuss the matter further
without informing St. Paul.
F. SOLICITATION OF CLIENTS, CUSTOMERS, ETC. Executive shall not, at
any time prior to the Separation Date or during the twenty-four (24) month
period following the Separation Date, solicit or take any action to cause the
solicitation of any person who, as of the Separation Date was a client,
customer, policyholder, vendor, consultant or agent of St. Paul to discontinue
business, in whole or in part with St. Paul. This provision is not intended to
apply to situations in which an independent agent, who has a pre-existing
relationship with an insurer or other subsequent employer of Executive, decides
of his or her own volition to do business with such insurer or other employer
which has the effect of reducing the business of St. Paul with such independent
agent; PROVIDED, that Executive has not personally instigated or caused such
independent agent to discontinue business with St. Paul. Executive further
agrees that, during such time, if a client, customer, policyholder, vendor,
consultant or agent of St. Paul contacts Executive about discontinuing business
with St. Paul and/or moving that business elsewhere, Executive will inform such
person that he cannot discuss the matter further without informing St. Paul.
IV. GENERAL WAIVER, RELEASE AND COVENANT NOT TO SUE BY EXECUTIVE
A. GENERAL WAIVER AND RELEASE BY EXECUTIVE.
1. As a material inducement to St. Paul to enter into this
Agreement, and in consideration of St. Paul's promise to make the payments and
provide the benefits set forth in this Agreement, Executive hereby knowingly and
voluntarily releases and forever discharges St. Paul, and all of its Affiliates,
parents, subsidiaries and related entities, and all of their past, present and
future respective agents, officers, directors, shareholders, employees,
attorneys and assigns from any federal, state or local charges, claims, demands,
actions, liabilities, suits, or causes of action, at law or equity or otherwise
and any and all rights to or claims for continued employment after the
Separation Date, attorneys fees or damages including contract, compensatory,
punitive or liquidated damages) or equitable relief, which he may ever have had,
has now or may ever have or which Executive's heirs, executors or assigns can or
shall have, against any or all of them,
(7)
<PAGE>
whether known or unknown, on account of or arising out of Executive's employment
with St. Paul or the termination thereof.
2. This release includes, but is not limited to, rights and
claims arising under the Age Discrimination in Employment Act of 1967, as
amended by the Older Workers Benefit Protection Act of 1990, Title VII of the
Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, the
Fair Labor Standards Act, any state or local human rights statute or ordinance,
any claims or rights of action relating to breach of contract, public policy,
personal or emotional injury, defamation, additional compensation, or fringe
benefits. Executive specifically waives the benefit of any statute or rule of
law which, if applied to this Agreement, would otherwise exclude from its
binding effect any claims not now known by Executive to exist. This release
does not purport to waive claims arising under these laws after the date of this
Agreement.
3. Executive acknowledges that he has reviewed the
information about the severance offer described above as part of this Agreement.
Executive confirms that he has been given at least twenty-one (21) days within
which to consider this Agreement and the General Waiver and Release contained
herein. Executive further confirms that he has been advised in writing prior to
his execution of this Agreement to consult with legal counsel. Executive
acknowledges that if he executes this Agreement prior to the expiration of
twenty-one (21) days, or chooses to forgo the advice of legal counsel, or any
personal or financial advisor, he does so freely and knowingly, and waives any
and all future claims that such action or actions would affect the validity of
this Agreement. Executive acknowledges that any changes made to this Agreement
after its first presentation to Executive, whether material or immaterial, do
not restart the tolling of this twenty-one (21) day period.
4. Executive understands that he may revoke this Agreement
at any time on or before the fifteenth (15th) day following the date on which he
signs the Agreement. To be effective, the decision to revoke must be in writing
and delivered to St. Paul, personally or by certified mail, to the attention of:
Bruce A. Backberg, Esq.
Senior Vice President
The St. Paul Companies, Inc.
385 Washington Street
St. Paul, Minnesota 55102-1396
on or before the fifteenth (15th) day after Executive signs the Agreement. In
no case will this Agreement become effective or enforceable against the
Executive or St. Paul until the expiration of the fifteen (15) day revocation
period (the "Effective Date"). If Executive exercises this limited right to
revoke, or if the release provisions of Section V are held invalid for any
reason
(8)
<PAGE>
whatsoever, Executive agrees to return any consideration received under the
terms of this Agreement and that St. Paul is released from any obligations under
this Agreement.
B. COVENANT NOT TO SUE. Executive covenants and agrees not to sue
or bring any action, whether federal, state, or local, judicial or
administrative, now or at any future time, against St. Paul, its Affiliates, its
or their respective agents, directors, officers or employees, with respect to
any claim released hereby or arising out of Executive's employment with St. Paul
or its Affiliates. Nevertheless, this Agreement does not purport to limit any
right Executive may have to file a charge under the ADEA or other civil rights
statute or to participate in an investigation or proceeding conducted by the
Equal Employment Opportunity Commission or other investigatory agency. This
Agreement does, however, waive and release any right to recover damages under
the ADEA or other civil rights statute.
V. MISCELLANEOUS PROVISIONS
A. NON-ASSIGNMENT OF CLAIMS. Executive represents and warrants that
Executive has not sold, assigned, transferred, conveyed or otherwise disposed of
to any third-party, by operation of law or otherwise, any action, cause of
action, suit, debt, obligation, account, contract, agreement, covenant,
guarantee, controversy, judgment, damage, claim, counterclaim, liability or
demand of any nature whatsoever relating to any matter covered by this
Agreement.
B. SUCCESSORS. This Agreement shall be binding upon, enforceable by
and inure to the benefit of Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees and St. Paul and any successor company, but neither this Agreement nor
any rights or payments arising hereunder may be assigned, pledged, transferred
or hypothecated by Executive.
C. CONTROLLING LAW AND VENUE. THE VALIDITY OF THIS AGREEMENT AND
ANY OF ITS PROVISIONS AND CONDITIONS, AS WELL AS THE RIGHTS AND DUTIES OF THE
PARTIES, SHALL BE INTERPRETED AND CONSTRUED PURSUANT TO AND IN ACCORDANCE WITH
THE INTERNAL LAWS, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF MINNESOTA. THE
PARTIES SELECT AND IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY
MINNESOTA OR UNITED STATES FEDERAL COURT SITTING IN THE STATE OF MINNESOTA FOR
ANY ACTION TO ENFORCE, CONSTRUE OR INTERPRET THIS AGREEMENT. THE PARTIES
FURTHER WAIVE ANY OBJECTION TO VENUE IN SUCH STATE ON THE BASIS OF FORUM NON
CONVENIENS OR OF CONVENIENCE OF THE PARTY.
D. AMENDMENT. Any amendment to this Agreement shall only be made in
writing and signed by the parties.
(9)
<PAGE>
E. WAIVER. No claim or right arising out of a breach or default
under this Agreement can be discharged by a waiver of that claim or right unless
the waiver is in writing signed by the party hereto to be bound by such waiver.
A waiver by any party of a breach or default by the other party of any provision
of this Agreement shall not be deemed a waiver of future compliance with such
provision, and such provision shall remain in full force and effect.
F. NOTICE. All notices, requests, demands and other communications
under the Agreement shall be in writing and delivered in person or sent by
certified mail, postage prepaid, and properly addressed as follows:
To Executive: Patrick A. Thiele
3 Edgcumbe Place
St. Paul, Minnesota 55116
To St. Paul: Bruce A. Backberg
Senior Vice President
The St. Paul Companies, Inc.
385 Washington Street, Mail Code: 102U
St. Paul, Minnesota 55102-1396
The parties agree to notify each other promptly of any change in mailing
address.
G. HEADINGS. Headings used in this Agreement are for reference
purposes only and shall not be deemed to be a part of this Agreement.
H. ENTIRE AGREEMENT. St. Paul and Executive each represent and
warrant that no promise or inducement has been offered or made except as set
forth and that the consideration stated is the sole consideration for this
Agreement. This Agreement and the Exhibit(s) hereto is a complete agreement and
states fully all agreements, understandings, promises and commitments as between
Executive and St. Paul as to the separation of Executive from employment by St.
Paul. This Agreement supersedes any prior agreements, whether oral or written,
between Executive and St. Paul. Except as expressly provided herein, Executive
is not entitled to any other or further compensation or remuneration.
I. STATUTORY INDEMNIFICATION. Pursuant to Minn. Stat. Section
181-970, Subd. 1, "An employer shall defend and indemnify its employee for civil
damages, penalties or fines claimed or levied against the employee provided that
the employee: (1) was acting in the performance of the duties of the employee's
position; (2) was not guilty of intentional misconduct, willful neglect of the
duties of the employee's position, or bad faith; and (3) has not been
indemnified by another Person for the same damages, penalties or fines."
St. Paul warrants to Executive that it will
(10)
<PAGE>
comply with the requirements of this statute and with any other indemnity
obligations owing to Executive arising out of Executive's service as a director
or officer of St. Paul.
J. UNEMPLOYMENT COMPENSATION. In the event that Executive files a
claim for unemployment compensation or re-employment insurance benefits, St.
Paul agrees that it will not contest Executive's claims on any grounds,
including, without limitation, that Executive has voluntarily resigned from
employment or committed acts of disqualifying misconduct. Nothing contained in
this paragraph prohibits St. Paul from correcting misstatements made by
Executive.
K. REFERENCES. St. Paul warrants that those employees who were made
aware of the circumstances of Executive's termination from St. Paul's employ
shall not make statements or representations that disparage or otherwise harm
the reputation of Executive. St. Paul agrees that if requested by Executive St.
Paul will cause its officers and directors to provide favorable oral or written
employment references.
L. ASSISTANCE. St. Paul agrees to assist Executive in satisfying
Executive's obligations to complete and file Forms 4 and/or 5 under the
Securities Exchange Act of 1934.
M. AMBIGUITY. Executive and St. Paul and counsel for both Executive
and St. Paul have reviewed this Agreement. Therefore the normal rule of
construction that any ambiguity or uncertainty in a writing shall be interpreted
against the Party drafting the writing shall not apply to any action on this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year set forth below:
PATRICK A. THIELE THE ST. PAUL COMPANIES, INC.
/s/ Patrick A. Thiele By: /s/ Bruce A. Backberg
- - ------------------------- -------------------------
Its: SVP
Date: September 1, 1998 Date: September 1, 1998
(11)
<PAGE>
Appendix A
[Letterhead of The St. Paul Companies, Inc.]
September __, 1998
Patrick A. Thiele
3 Edgcumbe Place
St. Paul, Minnesota 55116
Re: STOCK APPRECIATION RIGHTS
Dear Mr. Thiele:
In connection with your Separation Agreement with The St. Paul
Companies, Inc. ("St. Paul") dated September 1, 1998, you have been awarded
Stock Appreciation Rights (the "SARs") on the terms and conditions set forth
below.
I. 1998 SARS
You are hereby granted 98,982 SARs, each entitling you to receive
any increase in the fair market value of one share of common stock, without par
value (the "Common Stock") of the St. Paul over $43.9375 per share (the "1998
SARs"). You may elect to receive payment as described below with respect to all
or any part of the 1998 SARs remaining outstanding beginning on February 3, 1999
through and until September 4, 2000. After September 4, 2000, all 1998 SARs
then outstanding will expire and you shall have no right to receive any
corresponding payment.
II. VESTED SARS
You hold options that are presently exercisable and that were
granted in February of each year from 1992 through 1997 (each an "Annual Option
Grant"). These options will, by their terms, terminate on the date (the "Option
Termination Date") one month after your termination of employment with St. Paul,
and you and St. Paul wish to provide a contractual replacement for any options
that are so terminated prior to exercise ("Unexercised Vested Options") on terms
that will give you the potential to benefit in the appreciation through
September 4, 2000 of the fair market value of Common Stock over the original
exercise price of the option so terminated.
You are hereby granted SARs (the "Vested SARs") in respect of the
number of shares of Common Stock (if any) in each Annual Option Grant that after
the Option Termination Date are Unexercised Vested Options. Each such SAR shall
entitle you to receive any increase in the fair market value of one share of
Common Stock over the Exercise Price set forth below in
<PAGE>
STOCK APPRECIATION RIGHTS
September 4, 1998
Page 2
respect of such Annual Option Grant. You may elect to receive payment as
described below with respect to all or any part of the Vested SARs remaining
outstanding beginning on January 1, 1999 through and until September 4, 2000.
After September 4, 2000, all Vested SARs then outstanding shall expire and you
shall have no rights to receive any corresponding payment. You agree that you
will not seek to exercise any outstanding option after the Option Termination
Date.
<TABLE>
<CAPTION>
Annual Option Outstanding Unexercised
Grant Date Options (8/21/98) Vested Options Exercise Price
------------- ----------------- -------------- --------------
<S> <C> <C> <C>
2/3/92 26,000 * $ 17.9375
2/2/93 30,000 * 19.7500
2/1/94 41,600 * 21.5938
2/7/95 60,000 * 23.9375
2/6/96 70,000 * 29.0000
2/3/97 89,628 * 31.5000
----------
</TABLE>
* Equals number of options granted at annual option grant date and not
exercised on or prior to Option Termination Date.
III. PAYMENT
As soon as practicable after the exercise of any SARs granted
hereunder, St. Paul shall pay to you in cash (after first withholding an amount
sufficient to satisfy St. Paul's obligation to withhold federal, state and local
taxes in connection with such exercise) any amounts owing hereunder.
The SARs granted herein may be exercised by giving written notice
to the Secretary of the Company, which notice shall specify the Annual Option
Grant(s) to which the SAR exercise relates, the number of shares with respect to
each such Annual Options Grant(s) as to which SARs are then being exercised and
the exercise price of such exercised SAR under the Annual Option Grant(s). The
Notice of Exercise shall be delivered personally to the Secretary of the Company
or mailed certified mail return receipt requested, to her attention at the
principal office of the Company, and exercise shall be deemed to have taken
place when the notice is received by the Secretary or, if mailed, by her office.
In the event of any transaction or event resulting in any
adjustment to or modification of the securities issuable upon exercise or the
exercise price or any other change or modification of any of the Annual Option
Grants, then the SARs represented by this letter shall be adjusted equitably by
St. Paul's Compensation Committee in a manner as similar as is practicable to
the manner in which Annual Option Grants are adjusted.
<PAGE>
STOCK APPRECIATION RIGHTS
September 4, 1998
Page 3
Neither the SARs nor any right to payment or other right in
respect of this Agreement may be assigned, sold or otherwise transferred by you
except by will or the laws of descent and distribution and any purported
assignment, sale or other transfer shall render all SARs void.
Very truly yours,
THE ST. PAUL COMPANIES, INC.
By: /s/ Bruce A. Backberg
--------------------------------
Name: Bruce A. Backberg
Title: Senior Vice President and
Chief Legal Counsel
<PAGE>
EXHIBIT 11
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings per Common Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
EARNINGS:
Basic:
Net income as reported $ 89,348 $929,292 $732,702
Preferred stock dividends, net of taxes (8,504) (10,304) (28,893)
Premium on preferred shares redeemed (4,282) (4,441) (1,033)
-------- -------- --------
Net income available to common shareholders 76,562 914,547 702,776
-------- -------- --------
-------- -------- --------
Diluted:
Net income available to common shareholders 76,562 914,547 702,776
Effect of dilutive securities:
Convertible preferred stock - 5,998 9,478
Zero coupon convertible notes - 3,143 5,133
Convertible monthly income preferred securities - 8,073 8,073
-------- -------- --------
Net income available to common shareholders $ 76,562 $931,761 $725,460
-------- -------- --------
-------- -------- --------
COMMON SHARES:
Basic:
Weighted average common shares outstanding 235,360 230,158 233,340
-------- -------- --------
-------- -------- --------
Diluted:
Weighted average common shares outstanding 235,360 230,158 233,340
Effect of dilutive securities::
Stock options 3,322 4,399 3,089
Convertible preferred stock - 7,788 9,152
Zero coupon convertible notes - 2,923 3,263
Convertible monthly income preferred securities - 7,017 7,017
-------- -------- --------
Weighted average, as adjusted 238,682 252,285 255,861
-------- -------- --------
-------- -------- --------
EARNINGS PER COMMON SHARE:
Basic $0.33 $3.97 $3.01
Diluted $0.32 $3.69 $2.84
</TABLE>
The assumed conversion of preferred stock, zero coupon notes and monthly income
preferred securities are each anti-dilutive to The St. Paul's net income for the
year ended Dec. 31, 1998. As a result, the potentially dilutive effect of those
securities is not considered in the calculation of EPS amounts.
38
<PAGE>
EXHIBIT 12
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Computation of Ratios
(In thousands, except ratios)
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
EARNINGS:
Income (loss) from continuing
operations before
income taxes ($46,287) $ 1,335,708 $ 991,098 $ 896,742 $577,272
Add: fixed charges 115,871 116,677 126,463 129,726 254,355
--------- ----------- --------- --------- --------
Income as adjusted $69,584 $1,452,385 $1,117,561 $1,026,468 $831,627
--------- ----------- --------- --------- --------
--------- ----------- --------- --------- --------
FIXED CHARGES AND
PREFERRED DIVIDENDS:
Fixed charges:
Interest costs $75,391 $ 86,202 $ 87,419 $ 90,800 $76,659
Rental expense (1) 40,480 30,475 39,044 38,926 177,696
--------- ----------- --------- --------- --------
Total fixed charges 115,871 116,677 126,463 129,726 254,355
Preferred stock dividends 13,082 19,810 38,092 46,098 64,337
Dividend on preferred
capital securities 37,726 33,312 12,585 7,763 -
--------- ----------- --------- --------- --------
Total fixed charges
and preferred
dividends $166,679 $ 169,799 $177,140 $183,587 $318,692
--------- ----------- --------- --------- --------
--------- ----------- --------- --------- --------
Ratio of earnings to
fixed charges (2) - 12.45 8.84 7.91 3.27
--------- ----------- --------- --------- --------
--------- ----------- --------- --------- --------
Ratio of earnings to
combined fixed charges
and preferred
stock dividends (2) - 8.55 6.31 5.59 2.61
--------- ----------- --------- --------- --------
--------- ----------- --------- --------- --------
</TABLE>
(1) Interest portion deemed implicit in total rent expense. Amounts 1998 and
1994 include $11 million and $130 million, respectively, of net present
value of rents representative of interest included in facilities exit
costs.
(2) The 1998 loss is inadequate to cover "fixed charges" by $46.3 million and
"combined fixed charges and preferred stock dividends" by $97.1 million.
39
<PAGE>
[LOGO]
THE ST. PAUL COMPANIES, INC.
ANNUAL REPORT TO SHAREHOLDERS
1998
<PAGE>
[LOGO]
March 29, 1999
To Our Shareholders:
Enclosed is The St. Paul Companies, Inc. 1998 Annual Report to Shareholders,
including the consolidated financial statements, notes to the financial
statements, management's discussion and analysis, certain additional financial
data, and other information.
The full-color Annual Report to Shareholders will be sent to you prior to
our annual shareholders' meeting, which will be held on Tuesday, May 4.
Sincerely,
/s/ Sandra Ulsaker Wiese
- - ------------------------------
Sandra Ulsaker Wiese
Corporate Secretary
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
ON APRIL 24, 1998, THE ST. PAUL COMPANIES, INC. ("THE ST. PAUL") MERGED WITH
USF&G CORPORATION ("USF&G"), A BALTIMORE, MD-BASED INSURANCE HOLDING COMPANY, IN
A TAX-FREE EXCHANGE OF STOCK ACCOUNTED FOR AS A POOLING OF INTERESTS. THE
FOLLOWING DISCUSSION AND ANALYSIS IS BASED ON THE COMBINED RESULTS OF THE MERGED
ENTITY, WHICH OPERATES UNDER THE ST. PAUL NAME, FOR ALL PERIODS PRESENTED.
EARNINGS DOWN SHARPLY IN LANDMARK YEAR; STRONG BALANCE SHEET AND CAPITAL BASE
INTACT
1998 WAS ONE OF THE MOST NOTEWORTHY YEARS IN THE ST. PAUL'S 146-YEAR
HISTORY, YET IT WAS ALSO A DIFFICULT YEAR FROM AN OPERATING AND PROFITABILITY
STANDPOINT. OUR MERGER WITH USF&G COMBINED TWO ORGANIZATIONS THAT SHARED A
SIMILAR SPECIALTY UNDERWRITING FOCUS, EXPANDED OUR PRESENCE IN MANY KEY MARKETS,
AND MOST IMPORTANTLY, PROVIDED THE CRITICAL MASS NECESSARY TO EFFECTIVELY
COMPETE IN THE EXTREMELY CHALLENGING AND RAPIDLY CONSOLIDATING
PROPERTY-LIABILITY INSURANCE INDUSTRY. OPERATING RESULTS, HOWEVER, WERE SEVERELY
IMPACTED IN 1998 BY CATASTROPHE LOSSES IN EXCESS OF $400 MILLION, SEVERAL
SIGNIFICANT EARNINGS CHARGES AND DETERIORATING GLOBAL MARKET CONDITIONS FOR OUR
INSURANCE PRODUCTS.
The following table summarizes our results for each of the last three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Pretax income (loss):
Property-liability insurance..................................... $ 131 $ 1,391 $ 950
Life insurance................................................... 21 78 (8)
Asset management................................................. 104 93 92
Parent company and other operations.............................. (302) (226) (43)
--------- --------- ---------
Pretax income (loss) from continuing operations................ (46) 1,336 991
Income tax expense (benefit)....................................... (135) 339 151
--------- --------- ---------
Income from continuing operations.............................. 89 997 840
Loss from discontinued operations.................................. -- (68) (107)
--------- --------- ---------
Net income....................................................... $ 89 $ 929 $ 733
--------- --------- ---------
--------- --------- ---------
Per share........................................................ $ 0.32 $ 3.69 $ 2.84
--------- --------- ---------
--------- --------- ---------
</TABLE>
Our 1998 results included $617 million of pretax charges which we believe
warrant separate discussion for a better understanding of our 1998 performance.
The pretax charges consist of the following components:
- $292 million of expenses related to the merger with USF&G (discussed
below);
- $250 million provision to strengthen loss reserves (discussed on pages 5
and 6 of this report);
- $41 million writedown in the carrying value of deferred policy acquisition
costs in our life insurance segment (discussed on page 19 of this report);
- $34 million of expenses related to the restructuring of our commercial
insurance operations (discussed on page 6 of this report).
The sharp decline in property-liability insurance pretax income in 1998
reflects the impact of catastrophes and an increase in other insurance losses,
and $441 million of earnings charges. Fidelity and Guaranty Life, new to The St.
Paul from the merger, recorded a solid year of operating results, reduced by $50
million of earnings charges. The remaining $126 million of
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earnings charges were recorded in "parent company and other operations,"
accounting for the deterioration in that category from 1997. Our asset
management operation, The John Nuveen Company, posted a fourth consecutive year
of record earnings. The tax benefit recorded in 1998 was disproportionately
large compared with our pretax loss from continuing operations, due to the
substantial amount of tax-exempt investment income we have.
"Operating results," which exclude after-tax realized investment gains and
losses, is a common measure of an insurance company's financial performance. Our
consolidated after-tax operating loss was $40 million in 1998, compared with
operating earnings of $743 million and $640 million in 1997 and 1996,
respectively.
Despite our low level of earnings in 1998, common shareholders' equity of
$6.62 billion at the end of the year was slightly higher than year-end 1997
equity, primarily due to a $182 million net increase in unrealized appreciation
on our investment portfolio. After issuing 66.5 million common shares to
consummate the merger and executing a 2-for-1 stock split in 1998, 234 million
common shares were outstanding at the end of the year, translating into a book
value per share of $28.32. We repurchased 3.8 million of our common shares in
1998 for a total cost of $135 million.
MERGER-RELATED CHARGE--As part of the integration plan to merge The St. Paul
and USF&G operations, management performed a comprehensive review of the
operations of the separate companies. The review identified redundant job
functions, staffing levels, geographical locations, leased space and technology
platforms. To address these redundancies and implement our plan of integration,
we recorded a $292 million pretax merger-related charge in 1998. The merger-
related charge consisted of the following components:
- $141 million of severance and other employee-related costs, representing
$89 million to be paid under the USF&G Senior Executive Severance Plan in
effect at the time of the merger, and $52 million of other severance and
related benefits, such as out-placement counseling, vacation buy-out and
medical coverage, for terminated employees not covered under the Senior
Executive Severance Plan. We estimated that approximately 2,000 positions
would be eliminated due to the combination of the two organizations,
resulting from efficiencies to be realized by the larger organization and
the elimination of redundant functions. All levels of employees, from
technical staff to senior management, were affected by the reductions. The
total number of positions expected to be reduced by function include
approximately 950 in our property-liability underwriting operations, 350
in claim and 700 in finance and other administrative positions. The
reductions will occur throughout the United States. Through Dec. 31, 1998,
approximately 1,400 positions had been eliminated, and $78 million in
severance and other employee-related costs had been paid. The majority of
the remaining positions are expected to be eliminated by the end of 1999.
- $70 million of facilities exit costs, consisting of a $36 million
writedown in the carrying value of a former USF&G headquarters building in
Baltimore, MD, and $34 million of expenses related to the consolidation of
redundant branch office locations. We determined that the merger would
result in excess space at the Baltimore headquarters location, and
developed a plan to lease that space to outside parties. Based on an
analysis of potential future undiscounted cash flows, we determined that
an impairment in the carrying value had occurred and recorded the $36
million writedown to its estimated fair value.
For certain redundant branch office locations, the lease is expected to be
terminated. For leases not expected to be terminated, the amount of
expense recorded was calculated as the percent of excess space (20% to
100%) times the net of: remaining rental payments plus capitalized
leasehold improvements less
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actual sub-lease income. No amounts were discounted to present value in
the calculation.
- $30 million of transaction costs, consisting of registration fees, costs
of furnishing information to stockholders, consultant fees, investment
banker fees, and legal and accounting fees.
- $23 million writedown of certain long-lived assets. We determined that
several of USF&G's real estate investments were not consistent with our
real estate investment strategy, and developed a plan to sell them, with
an expected disposal date in 1999. We determined that four of these
investments should be written down to estimated fair value. We calculated
fair value based on a discounted cash flow analysis, or market prices for
similar assets.
- $10 million of depreciation expense resulting from shortening the
estimated useful life of redundant software.
- $10 million of expense for writedowns and lease buy-outs of redundant
computer equipment.
- $8 million writedown in the carrying value of excess furniture and
equipment in Baltimore, MD. The charge was calculated based on the book
value of assets at that location.
On our Statement of Income, $269 million of the merger-related charge was
recorded in the "Operating and administrative" expense caption and $23 million
was recorded in the "Realized investment gains" revenue caption.
The integration of the two companies is expected to result in annualized
expense savings of approximately $200 million, as measured against the combined
1997 pre-merger expenses of The St. Paul and USF&G. We began realizing expense
savings in the second half of 1998. The expense savings primarily result from
the reduction in employee salaries and benefits after the elimination of
redundant positions from the merged organization. No material increases in other
expenses are expected to offset these expense reductions over the long-term. As
merger-related costs were paid, there was a short-term negative impact on
operational cash flows in 1998. Merger-related payments will negatively impact
our operational cash flows to a lesser extent in 1999.
REVENUES--The following table summarizes the source of our consolidated
revenues for the last three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues:
Insurance premiums earned:
Property-liability............... $6,826 $7,161 $7,034
Life............................. 119 137 145
Net investment income.............. 1,585 1,578 1,513
Realized investment gains.......... 202 423 262
Asset management................... 302 262 220
Other.............................. 74 62 58
------ ------ ------
Total revenues................. $9,108 $9,623 $9,232
------ ------ ------
------ ------ ------
Change from prior year......... (5)% 4% 8%
</TABLE>
The 5% reduction in revenues in 1998 was driven by a $335 million decline in
property-liability premiums earned, primarily in our Commercial Lines segment,
and a $221 million reduction in realized investment gains. Those gains were
unusually high in 1997, largely due to the sale of one venture capital
investment that generated a $129 million gain. The growth in earned premiums and
investment income in 1997 over 1996 was primarily due to our 1996 acquisitions
of Northbrook Holdings, Inc., a commercial lines insurance company, and
Afianzadora Insurgentes, S.A. de C.V., a surety underwriting company in Mexico.
1997 VS. 1996--The 35% increase in consolidated 1997 pretax income from
continuing operations compared with 1996 was centered in our property-liability
insurance operations, where a decline in catastrophe losses, improvement in our
core book of Personal Insurance business and significant growth in realized
investment gains led to a $441 million increase in pretax earnings. F&G Life's
pretax earnings also rebounded in 1997 after being heavily impacted by realized
investment losses of $57 million in 1996, which largely consisted of asset
writedowns.
4
<PAGE>
The after-tax losses from discontinued operations of $68 million and $107
million in 1997 and 1996, respectively, were related to our sale of Minet, an
insurance brokerage operation, to Aon Corporation in 1997. We recorded the
initial loss in 1996 to reduce Minet's carrying value to its estimated net
realizable value after our decision to exit the brokerage business. The loss
recorded in 1997 reflects the costs associated with the actual Minet
divestiture, primarily to recognize our commitment to Aon for certain severance,
employee benefits, lease commitments and other costs.
The following pages include a detailed discussion of results produced by the
five distinct business segments which underwrite property-liability insurance
and provide related services for particular market sectors. We also review the
performance of our underwriting operations' investment segment. After the
property-liability discussion, we discuss the results of our life insurance
segment, F&G Life, and our asset management segment, The John Nuveen Company.
PROPERTY-LIABILITY INSURANCE OVERVIEW
CATASTROPHES AND DETERIORATING
MARKET CONDITIONS PUSH
UNDERWRITING LOSSES PAST
$1 BILLION MARK IN 1998
OUR UNDERWRITING RESULTS CONTINUED TO SUFFER FROM THE EFFECTS OF INTENSE
COMPETITION THROUGHOUT THE PROPERTY-LIABILITY INSURANCE INDUSTRY IN 1998.
DESPITE ACCELERATING LOSS COSTS, PRICING LEVELS IN VIRTUALLY ALL COMMERCIAL
INSURANCE MARKETS CONTINUED TO DECLINE DURING THE YEAR, REFLECTING AN
OVERABUNDANCE OF CAPITAL IN THE MARKET. THE COMPETITIVE PRESSURES AND SOFT
PRICING ENVIRONMENT, WHICH HAVE PERSISTED FOR SEVERAL YEARS, WERE MAJOR
CONTRIBUTORS, ALONG WITH CATASTROPHES AND A RESERVE STRENGTHENING CHARGE, TO THE
$1.26 BILLION DECLINE IN PROPERTY-LIABILITY PRETAX INCOME IN 1998.
Consolidated net written premiums of $6.69 billion in 1998 were down 3% from
1997 premium volume of $6.93 billion. The decline in 1998 volume reflects the
loss of business in certain markets following the merger with USF&G, as well as
the soft pricing environment throughout global primary and reinsurance markets.
Significant premium declines in our commercial insurance segments and the
Reinsurance segment were partially offset by growth in our Personal Insurance
segment, due to an acquisition in late 1997, and our International segment, due
to new business expansion.
Our consolidated GAAP underwriting loss, representing premiums earned less
losses incurred and underwriting expenses, totaled $1.04 billion in 1998, more
than $800 million worse than the 1997 loss of $233 million. Catastrophe losses
of $419 million in 1998 were the second-highest total in our history, trailing
only the $445 million of losses recorded in 1992 when Hurricane Andrew struck
the southeastern U.S. coast. The nature of our catastrophe experience in 1998
differed from 1992, however, in that the majority of losses resulted from an
unusually high number of relatively low-severity storms across the United
States. Several of these storms struck our home state of Minnesota, where we
have a heavy concentration of business, and the southeastern United States,
where we also have a strong presence. Hurricane Georges, one of the most severe
hurricanes since Andrew, accounted for $118 million, or 28%, of our catastrophe
experience in 1998. By comparison, our total catastrophe losses in 1997 were
$132 million.
Our underwriting results in 1998 were also impacted by a $250 million
provision to strengthen loss reserves, reflecting the application of our loss
reserving policies to USF&G's loss and loss adjustment expense reserves
subsequent to the merger.
Prior to the merger, both The St. Paul and USF&G, in accordance with
generally accepted accounting principles, recorded their best estimate of
reserves within a range of estimates bounded by a high point and a low point.
Subsequent to the consummation of the merger in April 1998, we obtained the raw
data underlying, and documentation supporting, USF&G's December 31, 1997,
reserve analysis. The St. Paul's actuaries reviewed such information and
concurred with the
5
<PAGE>
reasonableness of USF&G's range of estimates for their reserves. However,
applying their judgment and interpretation to the range, our actuaries, who
would be responsible for setting reserve amounts for the combined entity,
concluded that strengthening the reserves would be appropriate, resulting in the
$250 million adjustment. The adjustment was allocated to the following business
segments: Commercial Lines ($197 million); Personal Insurance ($35 million); and
Specialty Commercial ($18 million).
Catastrophes and reserve strengthening notwithstanding, 1998 underwriting
results were significantly worse than comparable 1997 results. The deterioration
was centered in our Commercial Lines segment, and in the Medical Services
business center of our Specialty Commercial segment. The factors driving 1998
results in these operations, and the corrective actions under way, are
specifically addressed in the respective segment discussions in the following
pages.
A common measurement of a property-liability insurer's underwriting
performance is its combined ratio, which is the sum of its loss ratio and
expense ratio. The lower the ratio, the better the result. Our consolidated
combined ratio was 116.2 in 1998, over 12 points worse than the 1997 ratio of
103.8. The loss ratio of 82.1, measuring losses and loss adjustment expenses
incurred as a percentage of earned premiums, was 11 points worse than the
comparable 1997 ratio of 71.1. The $250 million provision to strengthen loss
reserves added 3.7 points to the 1998 ratio. Catastrophe losses accounted for
6.1 points of our loss ratio in 1998, compared with a 1.8 point impact in 1997.
We expect catastrophes in a given year to account for approximately three points
of our annual loss ratio based on historical average experience for our mix of
business.
The expense ratio, which measures underwriting expenses as a percentage of
premiums written, deteriorated 1.4 points to 34.1 in 1998, reflecting the impact
of a 3% decline in premium volume and a slight increase in underwriting
expenses. Expenses incurred in the second half of 1998 declined when compared
with earlier in the year, reflecting the initial impact of operational
efficiencies realized from the merger.
Late in the fourth quarter of 1998, we recorded a $34 million pretax charge
to earnings in "Operating and administrative expenses" related to the
restructuring of our Commercial Lines and Specialty Commercial segments. We
implemented a plan to cut the number of our regional offices in half and
streamline our underwriting structure. Approximately $26 million of the charge
related to the anticipated termination of approximately 520 employees in the
following operations: Claim, Commercial Lines, Information Systems, Medical
Services and Professional Markets. The remaining charge of $8 million related to
costs to be incurred to exit lease contracts. As of Dec. 31, 1998, no employees
had been terminated under the restructuring plan. Actions to take place under
the plan are expected to be completed by the end of 1999. We expect to realize
annual expense savings of approximately $50 million in 1999 as a result of this
plan, primarily due to a reduction in salaries and related costs. These savings
are separate from the $200 million of expected savings related to the merger.
1997 VS. 1996--Premium volume in 1997 of $6.93 billion was down less than 2%
from the equivalent 1996 total of $7.04 billion. Declines in Personal Insurance
and Reinsurance volume were largely offset by premium gains in the Commercial
Lines and International segments. The GAAP underwriting result improved by $117
million compared with 1996, primarily due to a decline in catastrophe losses and
significant improvement in our Personal Insurance segment.
OUTLOOK FOR 1999--We do not expect market conditions to improve in 1999.
However, we believe the substantial economies of scale afforded by the merger
with USF&G, coupled with the corrective underwriting initiatives and
restructuring efforts already under way to improve our commercial insurance
results, provide the opportunity for substantial earnings improvement in 1999.
We will adhere to strict underwriting standards with respect to risk selection
and pricing throughout our property-liability operations in 1999, and we are
prepared to sacrifice premium volume and market share to restore profitability.
6
<PAGE>
PROPERTY-LIABILITY INSURANCE RESULTS BY SEGMENT--The following table
summarizes written premiums, underwriting results and statutory combined ratios
for each of our property-liability insurance underwriting segments for the last
three years. All data for 1997 and 1996 were reclassified to conform to the 1998
presentation. Following the table, we take a closer look at 1998 results for
each segment and look ahead to 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
% OF 1998 -------------------------------
WRITTEN PREMIUMS 1998 1997 1996
------------------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
PRIMARY INSURANCE OPERATIONS:
U.S. UNDERWRITING
COMMERCIAL LINES
Written premiums............................................... 37% $ 2,493 $ 2,788 $ 2,710
Underwriting result............................................ $ (659) $ (91) $ (95)
Combined ratio................................................. 127.3 104.9 104.6
SPECIALTY COMMERCIAL
Written premiums............................................... 20% $ 1,348 $ 1,401 $ 1,418
Underwriting result............................................ $ (147) $ 18 $ 71
Combined ratio................................................. 111.8 99.6 94.1
PERSONAL INSURANCE
Written premiums............................................... 22% $ 1,418 $ 1,250 $ 1,351
Underwriting result............................................ $ (175) $ (111) $ (319)
Combined ratio................................................. 113.1 107.3 123.3
----- --------- --------- ---------
TOTAL U.S. UNDERWRITING
Written premiums............................................... 79% $ 5,259 $ 5,439 $ 5,479
Underwriting result............................................ $ (981) $ (184) $ (343)
Combined ratio................................................. 119.5 104.1 106.4
INTERNATIONAL
Written premiums............................................... 5% $ 378 $ 294 $ 269
Underwriting result............................................ $ (67) $ (53) $ (24)
Combined ratio................................................. 116.7 118.1 108.7
----- --------- --------- ---------
TOTAL PRIMARY INSURANCE OPERATIONS
Written premiums................................................. 84% $ 5,637 $ 5,733 $ 5,748
Underwriting result.............................................. $ (1,048) $ (237) $ (367)
Combined ratio................................................... 119.4 104.8 106.4
REINSURANCE
Written premiums............................................... 16% $ 1,056 $ 1,200 $ 1,286
Underwriting result............................................ $ 7 $ 4 $ 17
Combined ratio................................................. 98.7 99.0 99.0
----- --------- --------- ---------
TOTAL PROPERTY-LIABILITY INSURANCE
Written premiums................................................. 100% $ 6,693 $ 6,933 $ 7,034
Underwriting result.............................................. $ (1,041) $ (233) $ (350)
Combined ratio:
Loss and loss expense ratio.................................... 82.1 71.1 73.2
Underwriting expense ratio..................................... 34.1 32.7 31.9
--------- --------- ---------
Combined ratio................................................. 116.2 103.8 105.1
--------- --------- ---------
--------- --------- ---------
</TABLE>
7
<PAGE>
PROPERTY-LIABILITY INSURANCE
PRIMARY INSURANCE OPERATIONS
OUR PRIMARY INSURANCE UNDERWRITING OPERATIONS CONSIST OF THREE U.S.-BASED
BUSINESS SEGMENTS AND AN INTERNATIONAL SEGMENT, WHICH UNDERWRITE
PROPERTY-LIABILITY INSURANCE AND PROVIDE INSURANCE-RELATED PRODUCTS AND SERVICES
TO COMMERCIAL, PROFESSIONAL AND INDIVIDUAL CUSTOMERS. WE UTILIZE A NETWORK OF
INDEPENDENT INSURANCE AGENTS AND BROKERS TO DISTRIBUTE OUR INSURANCE PRODUCTS.
BASED ON 1997 PREMIUM VOLUME, THE ST. PAUL RANKED AS THE 8TH-LARGEST U.S.
PROPERTY-LIABILITY UNDERWRITER.
U.S. UNDERWRITING
COMMERCIAL LINES
The Commercial Lines segment includes our SMALL COMMERCIAL and MIDDLE MARKET
COMMERCIAL operations, which serve small and mid-sized customers in the general
commercial market, our SURETY business center, and several business centers
which provide specialized products and services for targeted industry groups
(CONSTRUCTION, MANUFACTURING, SERVICE INDUSTRIES, SPECIAL PROPERTY, NATIONAL
PROGRAMS AND TRANSPORTATION). Our CATASTROPHE RISK operation and the results of
our limited participation in insurance POOLS are also included in this segment.
PREMIUMS--Written premiums of $2.49 billion in 1998 were nearly $300
million, or 11%, below 1997 volume of $2.79 billion. The premium decline was
centered in our Middle Market and Construction operations, which together
accounted for 57% of this segment's business volume in 1998. Pricing levels in
these market sectors continued to erode in 1998 despite accelerating loss costs,
reflecting the intense competition for market share among U.S.
property-liability insurers. Our decision late in the year to selectively reduce
exposures in these markets also contributed to the decline in premium volume. In
addition, USF&G's exit from its unprofitable Trucking line of business in 1997
negatively impacted year-to-year premium comparisons. Small Commercial premiums
of $429 million, accounting for 17% of Commercial Lines volume, were down 3% in
1998. Premiums generated by our Surety operation, now the largest in the U.S. as
a result of the USF&G merger, grew to $376 million in 1998, an 18% increase over
1997. The increase primarily resulted from new business initiatives during the
year.
UNDERWRITING RESULT--Commercial Lines' 127.3 combined ratio for the year was
over 22 points worse than the comparable 1997 ratio of 104.9. Approximately $197
million of the provision to increase USF&G's loss reserves was recorded in this
segment, adding 7.5 points to the combined ratio. In addition, catastrophe
losses of $138 million accounted for 5.3 points of the 1998 ratio. Catastrophe
losses in 1997 totaled $62 million, adding 2.1 points to the combined ratio.
Excluding the reserve strengthening provision in 1998 and catastrophes in both
years, Commercial Lines' 1998 combined ratio of 114.5 was still significantly
worse than 1997's comparable ratio of 102.8. Adverse development on reserves
established in prior years, primarily for Middle Market and Construction
business, was the chief factor in the deterioration from 1997. Deficiencies in
prior risk selection, coupled with a sustained period of inadequate pricing
levels, were the driving force behind our poor 1998 results in these operations.
In addition, an increase in commission expenses resulting from efforts to retain
certain business after the USF&G merger contributed to a 2.2 point increase in
the 1998 expense ratio over 1997. Our large Surety operation, however,
maintained its high level of profitability in 1998, posting a combined ratio of
79.0, virtually level with last year's ratio of 78.9.
1997 VS. 1996--Premium volume in 1997 of $2.79 billion was slightly ahead of
1996 written premiums of $2.71 billion. The increase resulted from the
incremental impact on 1997 written premiums of two acquisitions made during
1996--Northbrook Holdings, Inc., a commercial insurance underwriting operation,
and Afianzadora Insurgentes, S.A. de C.V., the largest surety bond underwriter
in Mexico. Excluding these acquisitions, premiums in 1997 were down slightly
from 1996, reflecting the competitive conditions prevailing throughout the
commercial insurance marketplace. The 1997 combined ratio of 104.9 was virtually
level with
8
<PAGE>
the 1996 ratio of 104.6. Improvement in Middle Market Commercial results,
largely due to a decline in catastrophe losses, was offset by deteriorating loss
experience in the Construction and Transportation business centers. The 1997
expense ratio was almost a point worse than 1996, reflecting the impact of
ongoing integration efforts from the two 1996 acquisitions.
OUTLOOK FOR 1999--Market conditions will likely continue to deteriorate in
1999. In the second half of 1998, we began implementing comprehensive plans to
address the profitability issues impacting Commercial Lines in general, and our
Middle Market and Construction business centers in particular. We will focus on
strict adherence to sound underwriting principles to ensure rate adequacy for
individual risks, and work closely with our agents and brokers to take
corrective actions on underpriced accounts and aggressive steps to retain
profitable business. We expect our actions to result in a reduction of
approximately $250 million in Commercial Lines' written premiums in 1999, which
prompted our restructuring plan and the related charges to earnings in the
fourth quarter of 1998.
U.S. UNDERWRITING
SPECIALTY COMMERCIAL
The Specialty Commercial segment includes Medical Services, Custom Markets
and Professional Markets. MEDICAL SERVICES provides a wide range of insurance
products and services to the entire health care delivery system. CUSTOM MARKETS
serves the following specific commercial customer groups: OCEAN MARINE, SURPLUS
LINES, TECHNOLOGY, OIL AND GAS, and SPECIALTY LINES. PROFESSIONAL MARKETS is
composed of FINANCIAL AND PROFESSIONAL SERVICES, which provides property and
liability coverages for financial institutions and a variety of professionals,
such as lawyers and real estate agents, and PUBLIC SECTOR SERVICES, which
markets insurance products and services to all levels of government entities.
PREMIUMS--Specialty Commercial written premiums totaled $1.35 billion in
1998, down 4% from comparable 1997 volume of $1.40 billion. In our Medical
Services business center, 1998 premiums of $490 million fell 8% short of 1997's
total of $530 million. The medical malpractice market, like most other
commercial markets, was characterized by intense competition and product
underpricing in 1998. We elected not to aggressively participate in that
environment, resulting in fewer new business opportunities and downward pressure
on renewal pricing. Custom Markets' 1998 written premiums of $437 million were
down 6% from 1997 volume of $467 million, predominantly reflecting a reduction
in Surplus Lines business resulting from excess capacity in primary insurance
markets. Premiums generated by Professional Markets of $421 million in 1998 grew
4% over the 1997 total of $404 million, primarily due to the addition of a book
of Public Sector Services business resulting from our acquisition of Titan
Holdings, Inc. (Titan), a Texas-based property-liability insurer, at the end of
1997. Our Financial and Professional Services operation experienced a 4% decline
in premiums from the 1997 total of $269 million.
UNDERWRITING RESULT--Losses in our Medical Services operation were the
primary factor in the 12.2 point deterioration in Specialty Commercial's 1998
combined ratio. We experienced a sharp increase in the severity, or average
cost, per claim in Medical Services in 1998. In addition, unfavorable
development on reported prior year claims, as well as a higher than expected
level of newly reported claims from prior years, contributed to the $120 million
deterioration in Medical Services' underwriting results compared with 1997. The
magnitude of these losses overshadowed solid performances by several of our
Specialty Commercial business units, including Technology, which posted a
profitable 86.8 combined ratio, and Financial and Professional Services, where
the combined ratio of 80.7 for the year was nearly five points better than the
comparable 1997 ratio. The provision to strengthen USF&G's loss reserves had a
minimal impact of $18 million on our Specialty Commercial segment in 1998.
Catastrophe losses totaled $38 million in 1998, compared with losses of $21
million in 1997.
1997 VS. 1996--Premium volume of $1.40 billion in 1997 was down slightly
from the 1996 total of $1.42 billion. Medical Services' written premiums of $530
million in 1997 were
9
<PAGE>
9% lower than comparable 1996 premiums of $585 million, reflecting the
challenging market environment which was particularly prevalent in the health
care professionals sector throughout 1996. For the remainder of Specialty
Commercial, premium growth generated by new business opportunities in the
Technology and Public Sector Services lines of business in 1997 was partially
offset by a decline in Surplus Lines production compared with 1996. Specialty
Commercial's 1997 combined ratio, while still profitable at 99.6, was 5.5 points
worse than 1996 primarily due to a $56 million decline in Medical Services'
profitability. Improvement in the Financial and Professional Services and
Technology lines in 1997 was offset by the deterioration in Surplus Lines
results.
OUTLOOK FOR 1999--We do not foresee dramatic changes in operating
environments for the variety of markets served by this segment. Throughout the
Specialty Commercial arena in 1999, we will intensify new product development,
strengthen our agent and broker relationships and implement corrective
underwriting actions in those lines where we have not achieved desired results.
Aggressive expense management will also remain a priority. In Medical Services,
we will continue to implement price increases for all underperforming lines of
business in 1999, while at the same time taking steps to preserve our customer
base and capitalize on opportunities for profitable growth in the future. In
Custom Markets, we will pursue growth in our profitable Technology line, while
continuing to build our new Oil and Gas and Specialty Lines operations. In
Professional Markets, we will focus on maintaining and solidifying the
leadership positions in the marketplace that were enhanced by the merger.
U.S. UNDERWRITING
PERSONAL INSURANCE
Personal Insurance provides a broad portfolio of property-liability
insurance products and services for individuals. Through a variety of single
line and package policies, individuals can acquire coverages for personal
property--such as homes, autos and boats--and for personal liability.
PREMIUMS--Personal Insurance written premiums of $1.42 billion in 1998 grew
13% over comparable 1997 premiums of $1.25 billion. Virtually all of the
increase resulted from our December 1997 acquisition of Titan, which added a
substantial book of Nonstandard Auto business to our Personal Insurance segment.
Nonstandard Auto coverages are marketed to individuals who are unable to obtain
standard coverage due to their inability to meet certain underwriting criteria.
The addition of Titan pushed Nonstandard Auto premiums to $245 million in 1998,
substantially higher than the comparable total of $76 million in 1997. Premium
volume in our standard personal lines operation, at $1.17 billion, was level
with 1997, reflecting the competitive marketplace conditions for homeowners and
auto coverages which have reduced opportunities for appreciable rate increases
or new business growth.
UNDERWRITING RESULT--Catastrophe losses of $152 million dominated our
Personal Insurance segment results in 1998. These losses, which accounted for
10.9 points of this segment's 1998 loss ratio, were largely the result of
numerous storms throughout the United States, including several major spring
storms in our home state of Minnesota that generated over 22,000 claims and $95
million in losses. Catastrophe losses in this segment totaled $45 million in
1997. In addition, $35 million of the reserve strengthening provision was
recorded in this segment, accounting for 2.5 points of the loss ratio. The
expense ratio of 30.3 in 1998 was 1.5 points worse than 1997's 28.8, primarily
due to a change in one of our property reinsurance treaties during the year
which resulted in an increase in commission expenses retained. Our Nonstandard
Auto business center posted a profitable 97.7 combined ratio in 1998, a slight
improvement over the comparable 1997 ratio of 99.3.
1997 VS. 1996--Written premiums of $1.25 billion in 1997 were down $102
million, or 8%, from the 1996 total of $1.35 billion. The decline was primarily
due to the ceding of $109 million of premiums under a new personal lines quota
share reinsurance treaty we entered into in 1997 in connection with our efforts
to realign a portion of our catastrophe reinsurance
10
<PAGE>
coverage. The combined ratio in our Personal Insurance segment improved by 16
points in 1997 when compared to 1996, reflecting the impact of minimal
catastrophe losses and corrective pricing and underwriting measures implemented
in the wake of 1996's sizable losses.
OUTLOOK FOR 1999--Capitalizing on the opportunities provided by the
integration of The St. Paul's operations and systems with those of USF&G will be
a key priority in 1999. We are in the process of applying the same corrective
underwriting and pricing actions on USF&G's standard personal lines business
that were successful in improving The St. Paul's book of this business after
severe losses in 1996. The personal lines market is reaching maturity with
limited potential for real growth. In that environment, our success will depend
on maximizing operational efficiencies while adhering to rational underwriting
standards in a marketplace characterized by an increase in price-cutting and an
emphasis on brand identity.
11
<PAGE>
PRIMARY INSURANCE OPERATIONS
INTERNATIONAL
THE INTERNATIONAL SEGMENT INCLUDES MOST PRIMARY INSURANCE WRITTEN OUTSIDE
THE UNITED STATES. WE HAVE A PRESENCE AS A LICENSED INSURANCE COMPANY IN CANADA,
AND 11 COUNTRIES IN EUROPE, AFRICA, AND LATIN AMERICA. THE INTERNATIONAL SEGMENT
INCLUDES BUSINESS GENERATED FROM OUR PARTICIPATION IN LLOYD'S OF LONDON AS AN
INVESTOR AND AS THE OWNER OF THREE MANAGING AGENCIES. THIS SEGMENT ALSO PROVIDES
COVERAGE FOR THE NON-U.S. RISKS OF U.S. CORPORATE POLICYHOLDERS AND FOREIGN-
BASED POLICYHOLDERS' EXPOSURES IN THE UNITED STATES. WE ARE PREDOMINANTLY A
SPECIALTY COMMERCIAL INSURER IN THE INTERNATIONAL ARENA, MARKETING OUR SPECIALLY
DESIGNED POLICIES AND RISK MANAGEMENT CAPABILITIES TO TARGETED CUSTOMER GROUPS.
PREMIUMS--Written premiums in 1998 totaled $378 million, 29% higher than
1997 premium volume of $294 million. Virtually all of our International business
centers recorded premium growth in 1998. Our Lloyd's of London operation
generated premiums of $123 million in 1998, more than double the equivalent 1997
total of $61 million. Our agency group manages eight underwriting syndicates
collectively representing approximately 4% of Lloyd's total capacity. Premiums
generated in Africa and Latin America more than tripled to $34 million in 1998,
primarily due to our acquisition of full ownership in an underwriting company in
Botswana and the expansion of our South African operations. Our European
operations' $166 million of written premiums in 1998 were 5% higher than 1997
despite the sale early in the year of our United Kingdom personal insurance
business to Norwich Union Insurance Ltd. We exited this market, which had
accounted for $57 million of written premiums in 1997, to concentrate on
strengthening our position as a commercial insurance specialist in the United
Kingdom.
UNDERWRITING RESULT--The International segment's 1998 combined ratio of
116.7 was slightly better than the 1997 ratio of 118.1, primarily due to an
improvement in the expense ratio. Improvement in loss experience across almost
all of our International business centers compared with 1997 was offset by
significant losses incurred in our Canadian operations, which posted a 148.8
combined ratio for the year. An unusually severe ice storm, which struck eastern
Canada in early 1998, accounted for the majority of the deterioration in our
underwriting results for Canada. Adverse development on prior years' business
also contributed to the Canadian loss experience. Our European operations and
the fast-growing operations in Africa and Latin America showed strong
improvement over 1997, reflecting the benefit of corrective underwriting
measures over the last several years.
1997 VS. 1996--Premium volume in 1997 grew 9% over 1996, largely due to the
favorable impact of foreign currency translation in our European underwriting
operations. Premiums generated through our Lloyd's of London operation were only
slightly ahead of comparable 1996 volume, reflecting our strategic decision in
1997 to focus on a limited number of syndicates that offered profitable growth
prospects. The 1997 combined ratio of 118.1 was almost ten points worse than the
1996 ratio, primarily due to reserve strengthening for medical liability and
personal coverages in the United Kingdom and losses incurred in one of the
Lloyd's syndicates in which we were an investor. Our commercial underwriting
operations in the United Kingdom, as well as our operations in Ireland, posted
strong results in 1997.
OUTLOOK FOR 1999--We anticipate further growth in our International segment
in 1999. We plan to build on our strategy of exporting our expertise in key
specialty insurance lines to selected international markets which offer
opportunities for profitable growth. An example is medical liability insurance,
where our proven expertise has been a source of competitive differentiation for
The St. Paul in several international markets. We have implemented corrective
actions to swiftly address unprofitable results in our Canadian operations. We
expect to continue to increase our capacity at Lloyd's of London, while at the
same time pursuing efficiencies through the consolidation of our managing agency
operations. In early 1999, we established a Global Ocean Marine business center
in our International segment, designed to capitalize on our substantial market
share in North America and our growing presence at Lloyd's.
12
<PAGE>
REINSURANCE
ST. PAUL RE
OUR REINSURANCE SEGMENT UNDERWRITES REINSURANCE FOR LEADING
PROPERTY-LIABILITY INSURANCE COMPANIES WORLDWIDE. ST. PAUL RE WRITES TRADITIONAL
TREATY AND FACULTATIVE REINSURANCE FOR PROPERTY, LIABILITY, OCEAN MARINE, SURETY
AND CERTAIN SPECIALTY CLASSES OF COVERAGE AND ALSO UNDERWRITES FINITE RISK
REINSURANCE, WHICH PROVIDES COVERAGE AT LOWER MARGINS THAN TRADITIONAL
REINSURANCE IN RETURN FOR A LOWER POSSIBILITY OF LOSS. OUR REINSURANCE SEGMENT,
THROUGH DISCOVER RE MANAGERS, INC., ALSO UNDERWRITES PRIMARY INSURANCE AND
REINSURANCE AND PROVIDES RELATED INSURANCE PRODUCTS AND SERVICES TO SELF-INSURED
COMPANIES AND INSURANCE POOLS, IN ADDITION TO CEDING TO AND REINSURING CAPTIVE
INSURERS. THE MERGER OF USF&G'S REINSURANCE OPERATIONS (F&G RE) WITH THOSE OF
THE ST. PAUL IN 1998 CREATED THE 14TH-LARGEST PROPERTY-LIABILITY REINSURER IN
THE WORLD, BASED ON COMBINED 1997 WRITTEN PREMIUMS.
PREMIUMS--Written premiums of $1.06 billion for the year were down 12% from
premium volume of $1.20 billion in 1997. The decline reflects a continuing
worldwide erosion of rates for reinsurance products, and increasing capacity
within the industry and from new product offerings in the capital markets. Our
property reinsurance premiums declined sharply in 1998, reflecting a reduction
in our exposures due to inadequate pricing on both new and renewal business.
International and marine premiums were also down in 1998 as a result of soft
pricing conditions and a decrease in demand for reinsurance coverages in those
markets. Discover Re's written premiums of $39 million in 1998 were down $6
million from its 1997 total.
UNDERWRITING RESULT--Despite the large decline in premium volume, our
Reinsurance segment recorded a profitable combined ratio of 98.7 in 1998,
slightly better than the 1997 ratio of 99.0. Catastrophe losses totaled $86
million in 1998, resulting largely from Hurricane Georges. Catastrophes in 1997
were just $3 million. The deterioration in catastrophe experience was offset in
1998 by favorable loss development on prior years' business. The underwriting
divisions of St. Paul Re and F&G Re were substantially integrated in 1998.
1997 VS. 1996--In 1997, written premiums declined 7% from 1996, reflecting
severe pricing competition in global markets. The magnitude of premium declines
in 1997 was partially mitigated by growth in Discover Re's captive business and
changes in its reinsurance program which resulted in an increase in net written
premiums. We also capitalized on several new business opportunities which
partially offset the impact of soft market conditions on 1997 premium volume.
The 99.0 combined ratio in 1997 was level with 1996. Catastrophe losses were not
a major factor in Reinsurance segment results in 1997 or 1996.
OUTLOOK FOR 1999--We anticipate that current market conditions will persist
in 1999, with continued deterioration in pricing levels. We are undertaking new
initiatives designed to capture more business and become a preferred reinsurer
in our traditional coverages, while continuing to exercise underwriting
discipline in our risk selection. We will seek to take advantage of the
opportunities created by the merger by developing new customized products to
meet our customers' increasingly sophisticated reinsurance needs. We anticipate
expanding our involvement with securitized reinsurance vehicles to provide us
with additional reinsurance capacity.
PROPERTY-LIABILITY INSURANCE
INVESTMENT OPERATIONS
Our primary investment objective is to maintain a high-quality portfolio
designed to maximize investment returns and generate sufficient liquidity to
fund our cash disbursements. To that end, we deploy the majority of funds
available for investment in a widely diversified portfolio of predominantly
investment-grade fixed maturities. We also invest lesser amounts in equity
securities, venture capital, real estate and mortgage loans with the goal of
producing long-term growth in the value of our invested asset base and
ultimately enhancing shareholder value. The latter investment classes have the
potential for higher returns, but also involve a greater degree of risk,
13
<PAGE>
including less stable rates of return and less liquidity. Funds to be invested
can be generated by underwriting cash flows, consisting of the excess of
premiums collected over losses and expenses paid, and investment cash flows,
which consist of income on existing investments and proceeds from sales and
maturities of investments.
Pretax investment income produced by our property-liability investment
segment totaled $1.31 billion in 1998, down slightly from income of $1.32
billion in 1997. Our underwriting cash flows in 1998 were negatively affected by
the combination of a 3% decline in written premiums and a 6% increase in loss
and loss adjustment expense payments. Funds available for investment were
reduced further in 1998 by cash outflows resulting from the USF&G merger,
primarily severance and other employee-related expenses, and other
integration-related expenses. In addition, investments maturing during 1998 were
generally reinvested at lower current market yields, contributing to the overall
decline in investment income in 1998.
In 1997, pretax investment income of $1.32 billion was 7% higher than the
1996 total of $1.24 billion. The majority of the increase resulted from
underlying growth in invested assets fueled by investment cash flows in 1997.
The incremental impact of a full year's worth of income on Northbrook assets
acquired in July 1996 also contributed to investment income growth in 1997.
The following table summarizes the composition and carrying value of our
property-liability investment segment's portfolio at the end of the last two
years. More information on each of our investment classes follows the tables.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
--------- ---------
(IN MILLIONS)
<S> <C> <C>
CARRYING VALUE
Fixed maturities................... $ 17,778 $ 18,068
Equities........................... 1,193 1,006
Real estate and mortgage loans..... 1,148 1,212
Venture capital.................... 571 462
Securities lending collateral...... 1,367 515
Short-term investments............. 859 849
Other investments.................. 286 319
--------- ---------
Total investments................ $ 23,202 $ 22,431
--------- ---------
--------- ---------
</TABLE>
FIXED MATURITIES--Our 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 bond portfolio
conservatively, investing almost exclusively in investment-grade (BBB or better)
securities. Approximately 95% of our portfolio at the end of 1998 was rated
investment grade, with the remaining 5% consisting of high-yield and nonrated
securities.
The primary factors considered in determining the mix of taxable and
tax-exempt security purchases are our consolidated tax position and the
relationship between taxable and tax-exempt yields. Taxable securities accounted
for 82% of our new bond purchases in 1998 and comprised 65% of our fixed
maturities portfolio at the end of 1998. The bond portfolio in total carried a
weighted average pretax yield of 6.8% at the end of the year and produced pretax
investment income of $1.22 billion in 1998, compared with $1.24 billion and
$1.16 billion in 1997 and 1996, respectively.
We carry bonds on our balance sheet at estimated fair value, with the
corresponding unrealized appreciation or depreciation recorded in shareholders'
equity, net of taxes. The estimated fair values of our bonds fluctuate based on
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 market values. At the end of 1998, the pretax unrealized
appreciation on our bond portfolio totaled $1.02 billion, compared with $853
million at the end of 1997. The increase in appreciation corresponds to the
downward trend in market interest rates. The amortized cost of our bond
portfolio at the end of 1998 was $16.76 billion, compared with $17.22 billion at
the end of 1997. The decline from 1997 to 1998 is primarily due to the net sale
of bonds in 1998 to fund our cash flow requirements.
EQUITIES--Our equity holdings consist of a diversified portfolio of common
stocks which accounted for 4% of total investments (at cost) at year-end 1998.
The quality of our portfolio and favorable market conditions over the last
14
<PAGE>
several years have resulted in substantial appreciation in our equity holdings.
The pretax unrealized appreciation included in the carrying value of our equity
portfolio totaled $300 million at the end of 1998, compared with $229 million at
the end of 1997.
REAL ESTATE AND MORTGAGE LOANS--Real estate and mortgage loans comprised 5%
of our total investments at the end of 1998. Our real estate holdings consist
primarily 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 acquired the
portfolio of mortgage loans, which totaled $356 million at the end of 1998, in
the USF&G merger. The loans are collateralized by income-producing real estate.
VENTURE CAPITAL--Venture capital comprised 2% of our invested assets (at
cost) at the end of 1998. These private investments span a variety of industries
but are concentrated in information technology, health care and consumer
products. The carrying value of the venture capital portfolio at year-end 1998
and 1997 included pretax unrealized appreciation of $182 million and $138
million, respectively.
SECURITIES LENDING COLLATERAL--This investment class consists of collateral
held on certain securities from our fixed maturities portfolio that we have
loaned to other institutions through our lending agent for short periods of
time. We receive a fee from the borrower in return. We require collateral from
the borrower equal to 102% of the fair value of the loaned securities, and we
maintain full ownership of the securities loaned. We are indemnified by the
lending agent in the event a borrower becomes insolvent or fails to return
securities. We record the collateral received as an asset, with a corresponding
liability for the same amount.
REALIZED GAINS (LOSSES)--The following table summarizes our realized gains
and losses by investment class for each of the last three years.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
PRETAX REALIZED INVESTMENT GAINS
(LOSSES)
Fixed maturities................. $ 1 $ (18) $ (13)
Equities......................... 158 155 201
Real estate and mortgage loans... 8 53 (10)
Venture capital.................. 25 213 86
Other investments................ (4) 9 7
--------- --------- ---------
Total.......................... $ 188 $ 412 $ 271
--------- --------- ---------
--------- --------- ---------
</TABLE>
Realized gains on sales of real estate and mortgage loans in 1998 were
reduced by writedowns of $14 million. Venture capital gains in 1997 included a
$129 million gain on the sale of the stock of Advanced Fibre Communications,
Inc., one of our direct investments. Realized gains generated from equities in
1996 included a $78 million gain on the sale of our ownership interest in
Chancellor Management, Inc. Realized losses on other investments in 1998 and
1997 primarily represent writedowns of miscellaneous investments.
1999 INVESTMENT OUTLOOK--We will continue to purchase investment-grade fixed
maturities with the majority of funds available for investment in 1999, with a
portion of funds allocated to our other asset classes as market conditions
warrant. We expect cash flows available for investment to decline further in
1999, due to the anticipated reduction in written premium volume and ongoing
cash disbursement requirements related to merger-related and restructuring
costs. The current low interest rate environment also negatively affects
prospects for investment income growth in 1999. As a result, we expect pretax
investment income to fall below 1998 levels. We will retain the portfolio of
real estate mortgage loans acquired in the USF&G merger, but we have ceased new
mortgage loan originations.
15
<PAGE>
PROPERTY-LIABILITY INSURANCE
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 include losses that have been reported but not
settled and losses that have been incurred but not reported to us (IBNR). Loss
reserves for certain workers' compensation business and certain assumed
reinsurance contracts are discounted to present value. We reduce our loss
reserves for estimates of salvage and subrogation.
For reported losses, we establish reserves on a "case" basis within the
parameters of coverage provided in the insurance policy or reinsurance
agreement. For IBNR losses, we estimate reserves using established actuarial
methods. Both our case and IBNR reserve estimates reflect such variables as past
loss experience, changes in legislative conditions, changes in judicial
interpretation of legal liability and policy coverages, and inflation. We
consider 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.
Subjective judgments as to our ultimate exposure to losses are an integral
and necessary component of our loss reserving process because many of the
coverages we offer involve claims that may not ultimately be settled for many
years after they are incurred. We record our reserves by considering a range of
estimates bounded by a high and low point. Within that range, we record our best
estimate. 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.
A reconciliation of our beginning and ending loss and loss adjustment
expense reserves for each of the last three years is included in Note 7 on page
50 of this report. That reconciliation shows that we have recorded reductions in
the loss provision for claims incurred in prior years totaling $271 million,
$627 million and $414 million in 1998, 1997 and 1996, respectively.
The reduction in prior year losses recorded in 1998 was significantly less
than the reductions recorded in 1997 and 1996. The 1998 total was affected by
the $250 million provision to strengthen loss reserves after the merger with
USF&G, of which $189 million was classified as an increase in losses incurred in
prior years. In addition, while the favorable prior year development on workers'
compensation and medical professional liability coverages continued in 1998, the
magnitude of that development was significantly less than that experienced in
1997 and 1996. We also experienced unfavorable prior year loss development in
several commercial underwriting operations that have been affected by severe
pricing pressures over the last several years, particularly our Middle Market
and Construction business centers.
The favorable prior year development on workers' compensation business in
our commercial insurance segments over the last several years was largely
attributable to the impact of legal and regulatory reforms throughout the
country in the early 1990s which caused us to reduce our estimate of ultimate
loss costs associated with those coverages. As the benefit of those reform
efforts became apparent in the mid-1990s, we reduced our prior year loss
provisions accordingly. During 1998, there were no significant additional
improvements in our hindsight view of ultimate loss provisions for workers'
compensation coverages. As a result, while we still generated a reduction in
prior year losses, it was not of the same magnitude as in the preceding several
years.
With regard to medical professional liability coverages, the frequency and
severity of claims can change suddenly. As a result, our reserving philosophy
for this business, which has evolved over many years, requires that we wait for
the
16
<PAGE>
prior year experience to mature before recognizing any significant favorable
adjustments to prior year loss provisions. In contrast, when loss activity
indicates an unfavorable change in the frequency or severity of claims our
reserving philosophy requires that we respond quickly and cautiously. Such was
the case in 1998, when loss activity indicated an increase in the severity of
claims incurred in the years 1995 through 1997. Accordingly, we adopted a more
cautious view of ultimate loss provisions for those years, resulting in a much
smaller reduction in prior year loss provisions than those recorded in recent
years.
Favorable development on assumed reinsurance also contributed to the
reduction in prior year loss provisions in 1998, 1997 and 1996.
The reduction in the prior year loss provision in 1997 was also
significantly impacted by a change in the way we assigned loss activity to a
particular year for assumed reinsurance written by our U.K.-based reinsurance
operation. Our analysis indicated that an excess amount of loss activity was
being assigned to the year that the underlying reinsurance contract was written.
As a result, we implemented an improved procedure that more accurately assigned
loss activity to the year in which it occurred. This change had the effect of
increasing favorable prior year development by approximately $110 million in
1997, with a corresponding increase in the provision for current year loss
activity. We did not reclassify the current year/ prior year split in 1996
because reliable data to do so was not available.
PROPERTY-LIABILITY INSURANCE
ENVIRONMENTAL AND ASBESTOS CLAIMS
We continue to receive claims alleging injuries from environmental pollution
or alleging covered property damages for the cost to clean up polluted sites. We
also receive asbestos injury and property damage claims arising out of product
liability coverages under general liability policies. The vast majority of these
claims arise from policies written many years ago. Our alleged liability for
both environmental and asbestos claims is complicated by significant legal
issues, primarily pertaining to the scope of coverage. In our opinion, court
decisions in certain jurisdictions have tended to broaden insurance coverage
beyond the intent of original insurance policies.
Our ultimate liability for environmental claims is difficult to estimate
because of these legal issues. Insured parties have submitted claims for losses
not covered in their respective insurance policies, and the ultimate resolution
of these claims may be subject to lengthy litigation, making it difficult to
estimate our potential liability. In addition, variables, such as the length of
time necessary to clean up a polluted site and controversies surrounding the
identity of the responsible party and the degree of remediation deemed
necessary, make it difficult to estimate the total cost of an environmental
claim.
Estimating our ultimate liability for asbestos claims is equally difficult.
The primary factors influencing our estimate of the total cost of these claims
are case law and a history of prior claim development.
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, 1998. Amounts in the "net" column are reduced by reinsurance
recoverables.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ENVIRONMENTAL
Beginning reserves... $867 $677 $889 $676 $840 $631
Northbrook reserves
acquired........... -- -- -- -- 18 7
Incurred losses...... (16) 26 44 58 87 92
Paid losses.......... (68) (58) (66) (57) (56) (54)
----- ---- ----- ---- ----- ----
Ending reserves...... $783 $645 $867 $677 $889 $676
----- ---- ----- ---- ----- ----
----- ---- ----- ---- ----- ----
</TABLE>
The following table represents a reconciliation of total gross and net
reserve development for asbestos claims for each of the
17
<PAGE>
years in the three-year period ended Dec. 31, 1998.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASBESTOS
Beginning reserves... $397 $279 $413 $304 $421 $294
Northbrook reserves
acquired........... -- -- -- -- 6 6
Incurred losses...... 44 13 22 (5) 18 25
Paid losses.......... (39) (15) (38) (20) (32) (21)
----- ---- ----- ---- ----- ----
Ending reserves...... $402 $277 $397 $279 $413 $304
----- ---- ----- ---- ----- ----
----- ---- ----- ---- ----- ----
</TABLE>
USF&G's net reserves for environmental and asbestos claims at the time of
the merger totaled $304 million and $126 million, respectively. USF&G's reserve
development for the three-year period ended Dec. 31, 1998, is included in the
foregoing tables. USF&G's customer base generally did not include large
manufacturing companies, which tend to incur the majority of known environmental
and asbestos claims. In addition, USF&G had traditionally been a primary
coverage carrier, having written relatively little high-level excess coverage;
therefore, liability exposures were generally restricted to primary coverage
limits.
Our reserves for environmental and asbestos losses at Dec. 31, 1998
represent our best estimate of our ultimate liability for such losses, based on
all information currently available to us. Because of the inherent difficulty 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 continue to evaluate new information and developing loss patterns,
but we believe any future additional loss provisions for environmental and
asbestos claims will not materially impact the results of our operations,
liquidity or financial position.
Total gross environmental and asbestos reserves at Dec. 31, 1998, of $1.19
billion represented approximately 6% of gross consolidated reserves of $18.46
billion.
18
<PAGE>
NEW EQUITY-INDEXED PRODUCT FUELS SALES GROWTH IN 1998
LIFE INSURANCE
F&G LIFE
OUR LIFE INSURANCE SEGMENT CONSISTS OF FIDELITY AND GUARANTY LIFE INSURANCE
COMPANY AND SUBSIDIARIES ("F&G LIFE"). F&G LIFE'S PRIMARY PRODUCTS ARE DEFERRED
ANNUITIES (INCLUDING TAX SHELTERED ANNUITIES AND EQUITY-INDEXED ANNUITIES),
STRUCTURED SETTLEMENT ANNUITIES, AND IMMEDIATE ANNUITIES. F&G LIFE ALSO
UNDERWRITES TRADITIONAL LIFE INSURANCE PRODUCTS. F&G LIFE'S PRODUCTS ARE SOLD
THROUGHOUT THE UNITED STATES THROUGH INDEPENDENT AGENTS, MANAGING GENERAL AGENTS
AND SPECIALTY BROKERAGE FIRMS. OUR LIFE INSURANCE SEGMENT GENERATED 4% OF OUR
TOTAL REVENUES IN 1998 AND ACCOUNTED FOR 13% OF OUR CONSOLIDATED ASSETS.
Highlights of F&G Life's financial performance for the last three years are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Sales..................... $ 501 $ 446 $ 427
Premiums and policy
charges.................. 119 137 145
Policy surrenders......... 207 171 471
Net investment income..... 276 253 269
Pretax earnings (loss).... 21 78 (8)
Life insurance in force... $ 10,774 $ 10,748 $ 10,729
</TABLE>
F&G Life's pretax earnings in 1998 were reduced by a $41 million charge to
reflect a writedown of the carrying value of deferred policy acquisition costs
(DPAC) relating to universal life-type and investment-type contracts. According
to generally accepted accounting principles, DPAC amortization is based on the
present value of estimated gross profits expected to be realized over the life
of the contract. Estimates of expected gross profits used as a basis for
amortization are evaluated regularly and the total amortization to date should
be adjusted if actual experience or other evidence suggests that earlier
estimates should be revised.
The $41 million DPAC charge had three components. First, the persistency of
certain in-force business, particularly universal life and flexible premium
annuities, sold through some USF&G distribution channels, had begun to
deteriorate after the USF&G merger announcement. To mitigate this, management
decided, in the second quarter, to increase credited rates on certain universal
life business. This change lowered the estimated future profits on this
business, triggering $19 million of accelerated DPAC amortization. Second, the
low interest rate environment during the first half of 1998 led to assumption
changes as to the future "spread" on certain interest sensitive products,
lowering gross profit expectations and triggering a $16 million DPAC charge. The
remaining $6 million charge resulted from a change in annuitization assumptions
for certain tax-sheltered annuity products.
We also recorded pretax merger-related charges of $9 million in this segment
in 1998, primarily relating to severance and facilities exit costs.
The following table shows life insurance and annuity sales (premiums and
deposits) by distribution system and product type.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Distribution system:
Brokerage........................ $ 367 $ 268 $ 255
National wholesaler.............. 68 91 79
Direct structured settlements.... 55 74 79
Other............................ 11 13 14
--------- --------- ---------
Total............................ $ 501 $ 446 $ 427
--------- --------- ---------
--------- --------- ---------
Product type:
Equity-indexed annuities......... $ 209 -- --
Single premium deferred
annuities....................... 134 $ 248 $ 231
Tax sheltered annuities.......... 64 84 78
Structured settlement
annuities....................... 55 74 79
Other annuities.................. 24 23 27
Life insurance................... 15 17 12
--------- --------- ---------
Total............................ $ 501 $ 446 $ 427
--------- --------- ---------
--------- --------- ---------
</TABLE>
The 12% increase in sales in 1998 when compared to 1997 was driven by the
success of a new equity-indexed annuity product introduced in June 1998, which
accounted for $209 million, or 42%, of total sales for the year. Credited
interest rates on this product are tied to the performance of the S&P 500 equity
index. Sales
19
<PAGE>
of fixed interest rate annuities in 1998 declined from 1997 due to the
significantly lower level of interest rates and its negative impact on our fixed
interest rate products. The demand for our annuity products is affected by
fluctuating interest rates and the relative attractiveness of alternative
products.
The 13% decline in premiums earned in 1998 was largely due to a reduction in
sales of structured settlement annuities, which are sold primarily to
property-liability insurers to settle insurance claims. Sales of structured
settlement annuities and term life insurance are recognized as premiums earned
under GAAP. Sales of investment-type contracts, such as our equity-indexed,
deferred and tax sheltered annuities, and our universal life-type contracts are
recorded directly to our balance sheet on a deposit accounting basis and are not
recognized as premiums under GAAP. Sales of the structured settlement annuities
in the middle of the year suffered from disruptions caused by the merger, but
rebounded in the fourth quarter as the structured settlement program was
expanded into our newly combined property-liability operations.
Our deferred annuity and universal life products are subject to surrender by
policyholders. Nearly all of our surrenderable annuity policies allow a refund
of the cash value balance less a surrender charge. Surrender activity increased
in 1998 due to growth in the size and maturity of our annuity book of business,
as well as increased competition from alternative investments, particularly
equity-based products.
Net investment income grew 9% in 1998 as a result of an increasing asset
base generated by positive cash flow. We incurred pretax realized investment
losses of $2 million in 1998, down from gains of $14 million in 1997 primarily
due to writedowns in the carrying value of fixed maturity investments, which
offset gains of $13 million realized on real estate investments.
Excluding realized investment gains and losses, and the $50 million of
charges recorded in 1998, pretax earnings totaled $71 million, compared with $64
million in 1997. The increase resulted from improved investment spread
management of annuity and universal life products, and strong expense controls.
1997 VS. 1996--Sales of $446 million in 1997 were 4% higher than 1996,
primarily due to an increase in single premium deferred annuities (SPDA) sales.
The $300 million decline in policy surrender activity from 1996 to 1997
primarily resulted from a 1996 transaction whereby we entered into a coinsurance
contract with an unaffiliated life insurance company to cede all of our
remaining SPDAs that had originally been sold through brokerage firms. This
removed an underperforming block of business that had experienced high surrender
rates. The $16 million decline in investment income in 1997 when compared with
1996 was due to a lower asset base created by the transfer of $918 million in
fixed maturities under the 1996 coinsurance contract. The pretax loss of $8
million in 1996 was driven by writedowns in the carrying value of certain real
estate and fixed maturity investments.
OUTLOOK FOR 1999--We anticipate the sales momentum generated by our
equity-indexed product in the second half of 1998 to carry into 1999. We will
focus on repositioning our life products, increasing our marketing efforts and
intensifying new product development in an increasingly competitive life
insurance marketplace. We will also continue to expand F&G Life's structured
settlement program into our property-liability claim operation in 1999.
20
<PAGE>
NUVEEN POSTS DOUBLE-DIGIT GROWTH IN EARNINGS, MANAGED ASSETS
ASSET MANAGEMENT
THE JOHN NUVEEN COMPANY
WE HOLD A 78% INTEREST IN THE JOHN NUVEEN COMPANY (NUVEEN), WHICH COMPRISES
OUR ASSET MANAGEMENT SEGMENT. NUVEEN'S CORE BUSINESSES ARE ASSET MANAGEMENT; THE
DEVELOPMENT, MARKETING AND DISTRIBUTION OF INVESTMENT PRODUCTS AND SERVICES; AND
MUNICIPAL AND CORPORATE INVESTMENT BANKING SERVICES. NUVEEN SPONSORS AND MARKETS
OPEN-END AND CLOSED-END (EXCHANGE-TRADED) MANAGED FUNDS, DEFINED PORTFOLIOS
(UNIT INVESTMENT TRUSTS) AND MANAGES INDIVIDUAL ACCOUNTS. NUVEEN ALSO PROVIDES
MUNICIPAL AND CORPORATE INVESTMENT BANKING SERVICES AND UNDERWRITES AND TRADES
MUNICIPAL BONDS.
The following table summarizes Nuveen's key financial data for the last
three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues.................. $ 308 $ 269 $ 232
Expenses.................. 171 146 114
--------- --------- ---------
Pretax income............. 137 123 118
Minority interest......... (33) (30) (26)
--------- --------- ---------
The St. Paul's share of
pretax income........... $ 104 $ 93 $ 92
--------- --------- ---------
--------- --------- ---------
Assets under management... $ 55,267 $ 49,594 $ 33,191
--------- --------- ---------
--------- --------- ---------
</TABLE>
Nuveen's revenues in 1998 increased 14% over 1997, primarily due to growth
in asset management fees. The increase in those fees resulted from a higher
level of average assets under management during 1998 due to the acquisition of
Rittenhouse Financial Services in August 1997, and new product sales during the
year. Rittenhouse, an equity and balanced account management firm serving
affluent investors, added $9 billion to Nuveen's managed assets at acquisition.
The 16% increase in expenses over 1997 reflects goodwill amortization and the
expected incremental operating expenses resulting from the Rittenhouse
acquisition.
Nuveen's gross product sales totaled $7.8 billion in 1998, compared with
$3.0 billion in 1997. Additions to managed accounts provided the majority of the
increase over 1997. Volatility in equity markets during 1998 contributed to a
$600 million increase in Nuveen's mutual fund sales for the year, as investors
sought to deploy their funds in more conservative investments. Nuveen's net
flows (equal to the sum of sales, reinvestments and exchanges less redemptions)
totaled $5.7 billion in 1998, compared with $1.8 billion in 1997.
Assets under management at the end of 1998 consisted of $26.2 billion of
exchange-traded funds, $16.4 billion of managed accounts, and $12.7 billion of
mutual funds. The $5.7 billion increase in managed assets since the end of 1997
was primarily due to the increase in managed account and mutual fund sales
during 1998 and growth in the market value of underlying investments. Municipal
securities accounted for 71% of managed assets at the end of 1998, with the
remaining 29% consisting of equity securities.
Nuveen repurchased 732,700 common shares from minority shareholders in 1998
for a total cost of $27 million. Nuveen also made significant share repurchases
in 1997 and 1996, which were proportioned between our holdings and minority
shareholders to maintain our ownership percentage in Nuveen. Our proceeds from
Nuveen's repurchases were $41 million and $74 million in 1997 and 1996,
respectively. Nuveen's $147 million acquisition of Rittenhouse in 1997 was
funded through cash on hand and borrowings under a committed credit line, which
were subsequently paid down in the first quarter of 1998. Virtually all of the
Rittenhouse purchase price consisted of goodwill, which is being amortized over
30 years.
1997 VS. 1996--In 1997, Nuveen's pretax earnings increased $5 million over
1996. The 16% growth in revenue in 1997 was driven by an increase in investment
management fees resulting from managed assets acquired during the year. In
January 1997, Nuveen acquired Flagship Resources, Inc. for approximately $72
million, which added over $4 billion to assets
21
<PAGE>
under management. The addition of Rittenhouse in August 1997 added $9 billion to
Nuveen's managed assets. Demand for Nuveen's traditional municipal investment
products suffered in 1997 due to competition from strong equity markets and
investor concerns about the global economy and interest rate trends. Expenses
were 28% higher than in 1996, reflecting the impact of the two acquisitions, as
well as increased advertising and promotional expenses associated with the
launch of new equity and balanced mutual funds early in 1997.
OUTLOOK FOR 1999--As a result of investments made over the last two years in
new products and services, we expect Nuveen's current sales momentum to carry
into 1999. Nuveen will continue to focus on meeting the needs of financial
advisers working with affluent investors by leveraging its long heritage of
investment expertise through a wide array of investment vehicles.
STRONG CAPITAL BASE INTACT DESPITE DECLINE IN EARNINGS
THE ST. PAUL COMPANIES
CAPITAL RESOURCES
Our capital resources consist of shareholders' equity, debt and capital
securities, representing funds deployed or available to be deployed to support
our business operations. The following table summarizes our capital resources at
the end of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Shareholders' equity:
Common equity:
Common stock and retained
earnings..................... $ 5,608 $ 5,777 $ 4,993
Unrealized appreciation of
investments and other........ 1,013 814 638
--------- --------- ---------
Total common shareholders'
equity..................... 6,621 6,591 5,631
Preferred shareholders' equity... 15 17 216
--------- --------- ---------
Total shareholders' equity... 6,636 6,608 5,847
Debt............................... 1,260 1,304 1,171
Capital securities................. 503 503 307
--------- --------- ---------
Total capitalization......... $ 8,399 $ 8,415 $ 7,325
--------- --------- ---------
--------- --------- ---------
Ratio of debt to total
capitalization 15% 15% 16%
--------- --------- ---------
--------- --------- ---------
</TABLE>
EQUITY--Common shareholders' equity at the end of 1998 was slightly higher
than year-end 1997, as a decline in our retained earnings resulting from common
share repurchases and dividends was offset by an increase in the net unrealized
appreciation of our investment portfolio. Common equity at the end of 1997 grew
$960 million over a year earlier, primarily due to our record net income of $929
million in 1997.
Our preferred shareholders' equity consists of the par value of Series B
preferred shares we issued to our Preferred Stock Ownership Plan (PSOP) Trust,
less the remaining principal balance of the PSOP Trust debt. Preferred equity at
the end of 1996 also included $200 million of the former USF&G's Series A
Preferred Stock, which were redeemed in 1997 through the issuance of capital
securities.
DEBT--Consolidated debt outstanding at the end of 1998 was down $44 million
from year-end 1997, largely the result of a $75 million decline in Nuveen's
debt. We issued $150 million of medium-term notes in the fourth quarter of 1998
under a shelf registration statement filed with the Securities and Exchange
Commission in 1996. Proceeds were primarily used to fund our common share
repurchases. The maturity of our $145 million, 7% senior notes in May 1998, as
well as several medium-term note maturities throughout the year totaling $25
million, were funded through a combination of commercial paper issuances and
internally generated funds. Commercial paper outstanding at the end of 1998
increased $89 million over year-end 1997. At Dec. 31, 1998, medium-term notes
outstanding totaled $637 million, comprising just over one-half of our total
debt. These notes bear a weighted average interest rate of 6.9%.
The $133 million increase in debt outstanding at Dec. 31, 1997, compared to
a year earlier was due in part to $85 million in new debt issued by Nuveen for
general corporate purposes and to purchase securities for its investment
products. We also issued $82 million of medium-term notes in 1997 under our
shelf registration to partially fund the maturity of our 9 3/8% notes in June
1997. In addition, we borrowed $35 million under a standby credit
22
<PAGE>
facility to refinance receivables outstanding related to an insurance premium
finance company we acquired at the end of 1997.
CAPITAL SECURITIES--Our $503 million of capital securities consist of
company-obligated mandatorily redeemable preferred capital securities issued by
four entities wholly-owned by The St. Paul. Each entity was formed for the
purpose of issuing capital securities and the sole assets of each entity consist
of securities issued by The St. Paul. We issued $196 million of capital
securities in 1997 and $100 million in 1996, the proceeds of which were used to
redeem an issue of $4.10 Series A Cumulative Convertible Preferred Stock, repay
intercompany loans and retire borrowings outstanding against standby credit
facilities. The remaining $207 million of capital securities were issued in 1995
for general corporate purposes and to repay commercial paper debt, and are
convertible into shares of our common stock.
CAPITAL TRANSACTIONS--Our merger with USF&G in 1998 was a tax-free exchange
accounted for as a pooling-of-interests. The St. Paul issued 66.5 million of its
common shares for all of the outstanding shares of USF&G. The transaction was
valued at $3.7 billion, which included the assumption of USF&G's debt and
capital securities.
We repurchased 3.8 million common shares for a total cost of $135 million in
late 1998, largely funded through the issuance of medium-term notes. We also
repurchased 3.4 million shares in 1997 and 7.5 million shares in 1996 for a
total cost of $128 million and $225 million, respectively. Our common and
preferred dividend payments totaled $226 million in 1998, $198 million in 1997
and $200 million in 1996.
In 1997, we purchased Titan Holdings, Inc., a property-liability company in
San Antonio, Texas, for a total cost of $259 million, funded through the
issuance of common stock and borrowings against standby credit facilities. In
1996, we purchased Northbrook Holdings, Inc. from Allstate Insurance Company for
approximately $190 million in cash from internally generated sources. Also in
1996, 1.2 million common shares were issued to redeem all of the Series B
Cumulative Convertible Preferred Stock.
In February 1999, The St. Paul's board of directors increased our dividend
rate to $1.04 per share, a 4% increase over the 1998 rate of $1.00 per share.
Our dividend rate has grown at a compound annual rate of 7% over the last five
years.
We made no major capital improvements during 1998, 1997 or 1996. Through
March 1, 1999, we had repurchased a total of 8.9 million common shares at a cost
of $295 million under the $500 million repurchase program authorized by our
board of directors in November 1998. We may make additional repurchases during
the remainder of 1999 if we deem it a prudent use of capital.
THE ST. PAUL COMPANIES
LIQUIDITY
Liquidity is a measure of our ability to generate sufficient cash flows to
meet the short-and long-term cash requirements of our business operations. Our
underwriting operations' short-term cash needs primarily consist of paying
insurance loss and loss adjustment expenses and day-to-day operating expenses.
Those needs are met through cash receipts from operations, which consist
primarily of insurance premiums collected and investment income receipts. 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 which have appreciated in value. Cash flows from
these underwriting and investment activities are used to build the investment
portfolio and thereby increase future investment income.
Cash flows from operations were $69 million in 1998, compared with $848
million in 1997 and $1.3 billion in 1996. Our cash flows have trended downward
over the last three years due to deteriorating market conditions in our
property-liability operations, where loss and loss expense payments have been
increasing while net written premiums have gone down. Declining yields on new
investment securities have also been a factor contributing to the reduction in
cash flows
23
<PAGE>
during that three-year period. Our cash flow in 1998 was also negatively
impacted by payments of $108 million for liabilities incurred related to our
merger with USF&G Corporation, primarily severance and other employee-related
costs, and various transaction costs. Cash flow in 1997 was also adversely
affected by the increase in loss payments resulting from the runoff of
Northbrook loss reserves acquired in 1996.
We do not expect an increase in operational cash flows in 1999, due to the
anticipated decline in written premiums and investment income receipts. In
addition, cash payments related to the merger and restructuring charges recorded
in 1998 will negatively impact our 1999 cash flows, although to a lesser extent
than in 1998. On a long-term basis, we believe our operational cash flows will
benefit from the corrective underwriting and pricing actions under way in our
property-liability operations, as well as the opportunities for profitable
growth provided by our merger with USF&G in 1998. Our financial strength and
conservative level of debt provide us with the flexibility and capacity to
obtain funds externally through debt or equity financings on both a short-term
and long-term basis should the need arise. We anticipate funding our 1999 common
share repurchases primarily through the issuance of debt.
We are not aware of any current recommendations by regulatory authorities
that, if implemented, might have a material impact on our liquidity, capital
resources or operations.
THE ST. PAUL COMPANIES
EXPOSURES TO MARKET RISK
INTEREST RATE RISK--Our exposure to market risk for changes in interest
rates is concentrated in our investment portfolio, and to a lesser extent, our
debt obligations. However, changes in investment values attributable to interest
rate changes are mitigated by corresponding and partially-offsetting changes in
the economic value of our insurance reserves and debt obligations. We monitor
this exposure through periodic reviews of our asset and liability positions. Our
estimates of cash flows, as well as the impact of interest rate fluctuations
relating to our investment portfolio and insurance reserves, are modeled and
reviewed quarterly.
The following table provides principal runoff estimates by year for our Dec.
31, 1998 inventory of interest-sensitive financial instrument assets. Also
provided are the weighted-average interest rates associated with each year's
runoff. Principal runoff projections for collateralized mortgage obligations
were prepared using third-party prepayment analyses. Runoff estimates for
mortgage passthroughs were prepared using average prepayment rates for the prior
three months. Principal runoff estimates for callable bonds are either to
maturity or to the next call date depending on whether the call was projected to
be "in-the-money" assuming no change in interest rates. No projection of the
impact of reinvesting the estimated cash flow runoff is included in the table,
regardless of whether the runoff source is a short-term or long-term fixed
income security.
We have assumed that our "available-for-sale" securities are similar enough
to aggregate those securities for purposes of this disclosure.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------
WEIGHTED AVERAGE
INTEREST RATE
PRINCIPAL -----------------
CASH FLOWS
-------------
(IN MILLIONS)
<S> <C> <C>
FIXED MATURITIES AND
SHORT-TERM INVESTMENTS
1999...................... $ 3,612 6.2%
2000...................... 1,734 7.3
2001...................... 2,235 7.4
2002...................... 2,010 7.3
2003...................... 1,803 7.9
Thereafter................ 10,008 6.9
-------------
Total................... $ 21,402
-------------
-------------
Market Value at Dec. 31,
1998...................... $ 22,039
-------------
-------------
</TABLE>
The estimated principal runoff on our mortgage loan investments is as
follows: 1999, $42 million; 2000, $128 million; 2001, $58 million; 2002, $125
million; 2003, $117 million; thereafter, $164 million. The weighted average
interest rate on those investments was 7.65% at Dec. 31, 1998. The estimated
fair value of our mortgage loan investments at Dec. 31, 1998 was $629 million.
24
<PAGE>
The following table provides principal runoff estimates by year for our Dec.
31, 1998 inventory of interest-sensitive debt obligations and related weighted
average interest rates by stated maturity dates.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------
WEIGHTED AVERAGE
INTEREST RATE
PRINCIPAL -----------------
CASH FLOWS
-------------
(IN MILLIONS)
<S> <C> <C>
MEDIUM-TERM NOTES, ZERO
COUPON NOTES AND SENIOR
NOTES
1999...................... $ 20 7.6%
2000...................... -- --
2001...................... 196 8.1
2002...................... 49 7.5
2003...................... 67 6.5
Thereafter................ 710 5.2
------
Total................... $ 1,042
------
------
Fair Value at Dec. 31,
1998...................... $ 1,039
------
------
</TABLE>
FOREIGN CURRENCY EXPOSURE--Our exposure to market risk for changes in
foreign exchange rates is concentrated in our invested assets denominated in
foreign currencies, which are predominantly British pounds sterling. Cash flows
from our foreign operations are the primary source of funds for our purchase of
these investments. We purchase these investments primarily to hedge insurance
reserves and other liabilities denominated in the same currency, effectively
reducing our foreign currency exchange rate exposure.
The following table presents the U.S. dollar equivalent runoff estimates for
our Dec. 31, 1998, inventory of sterling-denominated fixed-maturity and
short-term investments. Also provided are the weighted-average interest rates
associated with each year's runoff. Principal runoff estimates for callable
bonds, if any, are either to maturity or to the next call date depending on
whether the call was projected to be "in-the-money" assuming no change in
interest rates. No projection of the impact of reinvesting the estimated cash
flow runoff is included in the table, regardless of whether the runoff source is
a short-term or long-term fixed income security.
Additionally, the table presents the quoted forward foreign currency
exchange rates on forward contracts available as of Dec. 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------
FORWARD
FOREIGN
WEIGHTED CURRENCY
AVERAGE EXCHANGE
INTEREST RATE RATE
PRINCIPAL CASH ------------- -----------
FLOWS
---------------
(IN MILLIONS)
<S> <C> <C> <C>
FIXED MATURITIES AND
SHORT-TERM INVESTMENTS
British pounds
sterling:
1999................... $ 91 6.5% 1.653
2000................... 58 8.9% 1.656
2001................... 75 8.5% 1.651
2002................... 132 7.0% 1.653
2003................... 14 7.2% 1.654
Thereafter............. 339 7.7% VARIOUS
-----
Total................ $ 709
-----
-----
Market Value at Dec.
31, 1998 $ 764
-----
-----
</TABLE>
EQUITY PRICE RISK--Our portfolio of marketable equity securities, which we
carry on our balance sheet at estimated fair value, has exposure to price risk.
This risk is defined as the potential loss in estimated fair value resulting
from an adverse change in prices. Our objective is to earn competitive relative
returns by investing in a diverse portfolio of high-quality, liquid securities.
Portfolio characteristics are analyzed regularly and market risk is actively
managed through a variety of modeling techniques. Our holdings are diversified
across industries, and concentrations in any one company or industry are limited
by parameters established by senior management.
Our portfolio of venture capital investments also has exposure to market
risks, primarily relating to the viability of the various entities in which we
have invested. These investments by their nature involve more risk than other
investments, and we actively manage our market risk in a variety of ways. First,
we allocate a comparatively small amount of funds to venture capital. At the end
of 1998, the cost of these investments accounted for only 2% of total invested
assets. Second, the investments are diversified to avoid concentration of risk
in a particular industry. Third, we perform extensive research prior to
investing in a new venture to
25
<PAGE>
gauge prospects for success. Fourth, we regularly monitor the operational
results of the entities in which we have invested. Finally, we generally sell
our holdings in these firms soon after they become publicly traded, thereby
reducing exposure to further market risk.
At Dec. 31, 1998, our marketable equity securities and venture capital
investments were recorded at their estimated fair value of $1.83 billion. A
hypothetical 10% decline in each stock's price would have resulted in a $183
million impact on fair value.
THE ST. PAUL COMPANIES
YEAR 2000 READINESS DISCLOSURE
Many computer systems in the world have the potential of being disrupted at
the turn of the century due to programming limitations that may cause the
two-digit year code of "00" to be recognized as the year 1900, instead of 2000.
We are heavily dependent on our many computer systems, and those of our
independent agents and brokers (our "distribution network") and our vendors, for
virtually every aspect of our operations, including underwriting, claims,
investments and financial reporting. Thus, the "Year 2000" issue involves
potentially serious operational risks for the Company.
For several years, we have been evaluating our computer systems to determine
the impact of the Year 2000 issue on their operation. With the completion of the
merger with USF&G Corporation on April 24, 1998, we have also been evaluating
USF&G's activities to become "Year 2000" compliant. As compliance evaluation of
The St. Paul and USF&G systems has progressed to an advanced stage, a shift of
emphasis from evaluation to correction and compliance testing has taken place.
We have also been working with vendors and members of our distribution network
in an effort to address Year 2000 issues that such relationships involve.
Finally, we have been reviewing and taking action to address non-systems related
issues that may arise as a result of the Year 2000 problem, including insurance
and reinsurance coverage issues, and have been seeking to reduce our Year
2000-related exposures through the development of contingency plans.
The following discussion describes our efforts to date and future plans to
deal with the Year 2000 issue. These plans have been and continue to be updated
and revised as additional information becomes available.
STATE OF READINESS--Since the late 1980s, we have required that all of the
internal computer systems supported by our Information Systems Division ("ISD")
use a four-digit date field. Early implementation of this design standard has
limited the number of systems requiring remediation.
We established a Review Board in the third quarter of 1997 to review and
certify the remediation of the hundreds of internally developed and externally
sourced systems we use through rigorous testing. To coordinate the Year 2000
remediation efforts, we have created the Year 2000 Project Office, which is
responsible for the oversight, coordination and monitoring of our Year 2000
efforts including, among other things, reviewing the compliance status of
information systems in all operating units and subsidiaries, both foreign and
domestic, directing the Year 2000 coordinators assigned to our operating units,
and formulating company-wide contingency plans.
Prior to the merger with USF&G, a separate "Y2K Action Committee" was
maintained by USF&G, and a comprehensive program to address each of three
identified aspects to the Year 2000 issue (readying USF&G's systems,
coordinating with agents and other third parties with whom USF&G interacts, and
managing the risk of claims from insured parties) had been established. The Year
2000 program developed by USF&G's Y2K Action Committee has now been integrated
into our overall Year 2000 response.
INFORMATION TECHNOLOGY SYSTEMS--All of our systems, whether internally
developed or externally sourced, are subject to the company-wide comprehensive
testing and compliance standards promulgated by ISD, the oversight and
monitoring of which is the responsibility of the Year 2000 Project Office.
Insofar as internal systems are concerned, Year 2000 compliance was achieved by
Dec. 31, 1998. Initial compliance validation of all such systems is
26
<PAGE>
scheduled to be completed by March 31, 1999. Additionally, all subsidiaries not
headquartered in Saint Paul, MN or Baltimore, MD are scheduled to complete
initial validation testing of their operating systems on or before June 30,
1999.
The Year 2000 Project Office's plan for remediation and validation of
externally sourced systems provides for us to work with the vendors of those
systems to ensure that those systems become Year 2000 compliant at the earliest
practicable date. Compliance testing in accordance with ISD standards takes
place as and when compliant versions and/or affirmations of compliance from
vendors are received. We have identified what we believe to be all of our
third-party supplied mission critical systems, and expect to receive Year 2000
compliant versions and/or affirmations of compliance for each of them, and to
complete the validation process, before Sept. 30, 1999.
THIRD-PARTY SERVICE PROVIDERS AND DISTRIBUTION NETWORK--We rely indirectly
on the information technology systems of our service providers and those of our
distribution network. The Year 2000 Project Office is communicating with our
service providers, including financial institutions providing custody and other
services, our independent agents and brokers, and other entities with which we
do business, to identify and resolve Year 2000 issues and to determine the
potential impact, where relevant, of the possible failure of certain of such
persons to achieve Year 2000 compliance on a timely basis. Results of this
process are expected to be used in our contingency planning efforts discussed
below.
NUVEEN SYSTEMS--Having started the development and implementation of
internal four-digit date code software and system standards in the early 1980s,
Nuveen's Year 2000 program consists primarily of Year 2000 compliance
examination and testing of the software packages and hardware provided by third
parties and of the systems and software of its service providers. Certification
of Year 2000 compliance and testing of critical third-party hardware and
software systems used in processing at Nuveen is expected to be complete by the
end of the first quarter of 1999, with the remaining certification and testing
to follow in the second quarter of 1999. Nuveen is in the process of developing
contingency plans based upon its examination of the Year 2000 readiness of its
third-party supplied systems and its service providers. Nuveen believes that the
costs associated with its Year 2000 efforts will not be material to its
operations and financial position.
EMBEDDED CHIP ISSUES--Given the nature of our business, and that of our
vendors and the members of our distribution network, we believe that our
exposure to embedded chip Year 2000 issues is minimal (other than our exposure
to possible disruptions in electricity, telecommunications and other essential
services provided by public utilities that are subject to embedded chip-related
disruption). We are, where deemed appropriate, coordinating with vendors to
obtain certificates of Year 2000 compliance for the embedded computer technology
equipment that we use.
YEAR 2000 COMPLIANCE PROGRAM COSTS--We have developed and implemented plans
to address the system modifications required to prepare for the Year 2000, and
do not expect the planning and implementation costs associated with Year 2000
efforts to be material to our results of operations, cash flows or consolidated
financial position. Through Dec. 31, 1997, the costs of Year 2000 remediation
measures incurred, including costs incurred by USF&G prior to the merger,
totaled approximately $6 million. We incurred costs of approximately $12 million
in 1998, and we anticipate additional costs of approximately $5 million in 1999.
CONTINGENCY PLANNING--The Year 2000 Project Office's contingency planning
team created a contingency planning model and template that focuses on
maintaining infrastructure and resuming critical business functions.
Infrastructure teams, business and staff units, field offices and subsidiary
location teams will create plans to address these areas. Infrastructure teams
are focusing on creating plans to maintain critical operations at corporate
headquarters. The corporate infrastructure team plans were completed during the
first quarter of 1999. Each business or staff unit team is focusing
27
<PAGE>
on creating plans to provide responsive actions for several potential disruption
duration scenarios, and resuming critical business processes, products and
services. For each disruption duration scenario, the business and staff unit
plans will identify alternative procedures designed to permit continued
operations and to minimize risk exposure. The business and staff unit
contingency plans are scheduled to be completed on March 31, 1999. The
contingency planning model and template will be distributed to all subsidiary
and field office locations along with infrastructure plans and business and
staff unit plans for leverage in creating their contingency plans. All plans
will be analyzed and rolled up to an enterprise level following completion and
will be modified as needed during 1999.
We believe that our most significant Year 2000 exposure is the potential
business disruptions that would be caused by widespread failure of public
utility systems, particularly in the power generation/distribution and the
telecommunication industries. While the contingency plans we are developing will
provide alternative procedures to lessen the impact of short duration
disruptions, prolonged failure of power and telecommunications systems could
have a material adverse effect on our results of operations, cash flows and
consolidated financial position.
As noted above, we indirectly rely on the information systems of the many
components of our distribution network, which includes thousands of independent
agents and brokers. We are aware that some of our independent agents and brokers
are currently Year 2000 non-compliant and expect that a much lesser number,
unknown at this time and expected to consist primarily of smaller agents, will
be non-compliant on Jan. 1, 2000. We believe that Year 2000-related difficulties
experienced by members of our distribution network have the potential to
materially disrupt our business and that such potential disruptions constitute
our second greatest area of potential exposure to the Year 2000 problem. As part
of our contingency planning effort, we have been providing information to
members of our distribution network intended to sensitize them to the Year 2000
issue and to encourage them to take appropriate steps to become Year 2000
compliant. Although our distribution network consists of thousands of agents and
brokers, the number of different systems used by the constituent members is far
less. For example, we believe that fewer than 20 types of agency management
systems are used by our property-liability insurance agents in the United
States. Contingency arrangements are being discussed with distribution network
members pursuant to which we may, among other provisional steps, provide data in
alternative formats and offer temporary direct billing services in the event of
a disruption in their individual systems.
We note that the Year 2000 issue by its nature carries the risk of
unforeseen and potentially very serious problems of internal or external origin.
Some commentators believe that the Year 2000 issue has the potential of
destabilizing the global economy or causing a global recession, both of which
could adversely affect us. While we believe we are taking appropriate action
with respect to third parties on whose systems and services we rely to a
significant extent, there can be no assurance that the systems of such third
parties will be Year 2000 compliant or that any third party's failure to have
Year 2000 compliant systems would not have a material adverse effect on our
earnings, cash flows or financial condition.
INSURANCE COVERAGE--We also face potential "Year 2000" claims under
coverages provided by our insurance and reinsurance policies sold to insured
parties who may incur losses as a result of the failure of such parties, or the
customers or vendors of such parties, to be Year 2000 compliant. Because
coverage determinations depend on unique factual situations, specific policy
language and other variables, it is not possible to determine in advance whether
and to what extent insured parties will incur losses, the amount of the losses
or whether any such losses would be covered under our insurance policies. In
some instances, coverage is not provided under the insurance policies or
reinsurance contracts, while in other instances, coverage may be provided under
certain circumstances.
28
<PAGE>
Our standard property and inland marine policies require, among other
things, direct physical loss or damage from a covered cause of loss as a
condition of coverage. In addition, it is a fundamental principle of all
insurance that a loss must be fortuitous to be considered potentially covered.
Given the fact that Year 2000-related losses are not unforeseen, and that we
expect that such losses will not, in most if not all cases, cause direct
physical loss or damage, we have concluded that our property and inland marine
policies do not generally provide coverage for losses relating to Year 2000
issues. To reinforce our view on coverage afforded by such policies, we have
developed and are implementing a specific Year 2000 exclusion endorsement.
We continue to assess our exposure to insurance claims arising from our
liability coverages, and we are taking a number of actions to address that
exposure, including individual risk evaluation, communications with insured
parties, the use of exclusions in certain types of policies, and classification
of high hazard exposures that in our view present unacceptable risk. We may also
face claims from the beneficiaries of our surety bonds resulting from Year
2000-related performance failures by the purchasers of the bonds. We are
assessing our exposure to such potential claims.
We do not believe that Year 2000-related insurance or reinsurance coverage
claims will have a material adverse effect on our earnings, cash flows or
financial position. However, the uncertainties of litigation are such that
unexpected policy interpretations could compel claim payments substantially
beyond our coverage intentions, possibly resulting in a material adverse effect
on our results of operations and/or cash flows and a material adverse effect on
our consolidated financial position.
THE ST. PAUL COMPANIES
IMPACT OF ACCOUNTING PRONOUNCEMENTS
TO BE ADOPTED IN THE FUTURE
In December 1997, the AICPA issued Statement of Position (SOP) No. 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." The SOP provides guidance for determining when a liability should
be recognized for guaranty fund and other insurance-related assessments and on
the measurement of that liability. It also provides guidance on when an asset
should be recognized for a portion or all of the liability or paid assessment
that can be recovered through premium tax offsets of policy surcharges. The SOP
is effective for fiscal years beginning after Dec. 31, 1998. We will adopt the
provisions of this SOP in the first quarter of 1999. The pretax cumulative
effect of such adoption is estimated to be an increase in our liabilities of
approximately $32 million for the quarter ended March 31, 1999. The cumulative
effect of adopting this accounting statement will be recorded separately on our
statement of income, net of taxes.
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which provides
guidance for determining when computer software developed or obtained for
internal use should be capitalized. It also provides guidance on the
amortization of capitalized costs and the recognition of impairment. The SOP is
effective for fiscal years beginning after Dec. 31, 1998. We will adopt the
provisions of this SOP in the first quarter of 1999. We currently estimate that
the effect of such adoption will be to record software having a value of
approximately $19 million as an asset in 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet, and measure those instruments at fair value. SFAS
29
<PAGE>
No. 133 is effective for all quarters of fiscal years beginning after June 15,
1999, and prohibits retroactive application to financial statements of prior
periods. We intend to implement the provisions of SFAS No. 133 in the first
quarter of the year 2000. We cannot at this time reasonably estimate the
potential impact of this adoption on our financial position or results of
operations for future periods.
In October 1998, the AICPA issued SOP No. 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk," which provides guidance for accounting for such contracts. The
SOP specifies that insurance and reinsurance contracts for which the deposit
method of accounting is appropriate should be classified in one of four
categories, and further specifies the accounting treatment for each of these
categories. The SOP is effective for fiscal years beginning after June 15, 1999.
We currently intend to implement the provisions of the SOP in the first quarter
of the year 2000. We cannot at this time reasonably estimate the potential
impact of this adoption on our financial position or results of operations for
future periods.
FORWARD-LOOKING STATEMENT DISCLOSURE
This discussion contains certain forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995. Forward-looking statements
are statements other than historical information or statements of current
condition. Words such as expects, anticipates, intends, plans, believes, seeks
or estimates, or variations of such words, and similar expressions are also
intended to identify forward-looking statements. Examples of these
forward-looking statements include statements concerning the effects of
competition on premiums and revenues, expectations regarding Year 2000 issues
and the company's efforts to address them.
In light of the risks and uncertainties inherent in future projections, many
of which are beyond our control, actual results could differ materially from
those in forward-looking statements. These statements should not be regarded as
a representation that anticipated events will occur or that expected objectives
will be achieved. Risks and uncertainties include, but are not limited to, the
following: general economic conditions including changes in interest rates and
the performance of financial markets; changes in domestic and foreign laws,
regulations and taxes; changes in the demand for, pricing of, or supply of
insurance or reinsurance; catastrophic events of unanticipated frequency or
severity; loss of significant customers; judicial decisions and rulings; and
various other matters, including the effects of the merger with USF&G
Corporation. Actual results and experience relating to Year 2000 issues could
differ materially from anticipated results or other expectations as a result of
a variety of risks and uncertainties, including the impact of systems faults,
the failure to successfully remediate material systems, the time it may take to
remediate system failures once they occur, the failure of third parties
(including public utilities, agents and brokers) to properly remediate material
Year 2000 problems, and unanticipated judicial interpretations of the scope of
the insurance or reinsurance coverage provided by our policies. We undertake no
obligation to release publicly the results of any future revisions we may make
to forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
30
<PAGE>
SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
Revenues from continuing operations............. $ 9,108 $ 9,623 $ 9,232 $ 8,515 $ 7,678 $ 7,474
Income from continuing operations............... 89 997 840 768 728 667
INVESTMENT ACTIVITY
Net investment income........................... 1,585 1,578 1,513 1,474 1,422 1,393
Pretax realized investment gains................ 202 423 262 92 47 64
OTHER SELECTED FINANCIAL DATA
(as of December 31)
Total assets.................................... 38,323 37,359 35,146 33,238 30,200 30,120
Debt............................................ 1,260 1,304 1,171 1,304 1,244 1,267
Capital securities.............................. 503 503 307 207 -- --
Common shareholders' equity..................... 6,621 6,591 5,631 5,342 3,675 3,910
Common shares outstanding....................... 233.8 233.1 230.9 235.4 227.5 221.0
PER COMMON SHARE DATA
Income from continuing operations............... 0.32 3.96 3.26 2.96 2.85 2.66
Book value...................................... 28.32 28.27 24.39 22.69 16.15 17.69
Year-end market price........................... 34.81 41.03 29.31 27.81 22.38 22.47
Cash dividends declared......................... 1.00 0.94 0.88 0.80 0.75 0.70
PROPERTY-LIABILITY INSURANCE
Written premiums................................ 6,693 6,933 7,034 6,806 6,012 5,681
Pretax operating earnings (loss)................ (56) 978 679 849 773 783
GAAP underwriting result........................ (1,041) (233) (350) (227) (267) (240)
Statutory combined ratio:
Loss and loss expense ratio................... 82.1 71.1 73.2 72.2 72.5 73.7
Underwriting expense ratio.................... 34.1 32.7 31.9 31.1 32.0 32.7
--------- --------- --------- --------- --------- ---------
Combined ratio................................ 116.2 103.8 105.1 103.3 104.5 106.4
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
LIFE INSURANCE
Product sales................................... 501 446 427 348 286 205
Premium income.................................. 119 137 145 174 152 129
Net income (loss)............................... 13 51 (5) 19 12 10
</TABLE>
31
<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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, comprehensive
income and cash flows for each of the years in the three-year period ended
December 31, 1998. 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.
The consolidated financial statements as of December 31, 1997 and for each
of the years in the two-year period then ended have been restated to reflect the
pooling of interests with USF&G Corporation. We did not audit the consolidated
financial statements of USF&G Corporation as of December 31, 1997 or for either
of the years in the two-year period ended December 31, 1997, which statements
reflect total assets constituting 43 percent as of December 31, 1997 and total
revenues constituting 35 percent and 38 percent for the years ended December 31,
1997 and 1996, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for USF&G
Corporation as of December 31, 1997 and for each of the years in the two-year
period then ended, is based solely on the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The St. Paul Companies, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
- - ------------------------------
KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
March 2, 1999
32
<PAGE>
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/ Paul J. Liska
- - -------------------- --------------------
Douglas W. Leatherdale Paul J. Liska
Chairman and Executive Vice President and Chief
Chief Executive Officer Financial Officer
33
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
THE ST. PAUL COMPANIES 1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES
Premiums earned......................................................... $ 6,944,575 $ 7,298,100 $ 7,178,682
Net investment income................................................... 1,584,982 1,577,805 1,512,575
Realized investment gains............................................... 201,689 423,048 261,989
Asset management........................................................ 302,150 261,715 219,922
Other................................................................... 75,005 62,511 58,369
------------ ------------ ------------
Total revenues...................................................... 9,108,401 9,623,179 9,231,537
------------ ------------ ------------
EXPENSES
Insurance losses and loss adjustment expenses........................... 5,603,561 5,093,521 5,153,565
Life policy benefits.................................................... 272,756 276,848 312,737
Policy acquisition expenses............................................. 1,653,613 1,709,039 1,682,788
Operating and administrative expenses................................... 1,624,758 1,208,063 1,091,349
------------ ------------ ------------
Total expenses...................................................... 9,154,688 8,287,471 8,240,439
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes............................................... (46,287) 1,335,708 991,098
Income tax expense (benefit)............................................ (135,635) 338,666 150,637
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS................................... 89,348 997,042 840,461
Discontinued operations:
Operating loss, net of taxes.......................................... -- -- (19,216)
Loss on disposal, net of taxes........................................ -- (67,750) (88,543)
------------ ------------ ------------
Loss from discontinued operations................................... -- (67,750) (107,759)
------------ ------------ ------------
NET INCOME.......................................................... $ 89,348 $ 929,292 $ 732,702
------------ ------------ ------------
------------ ------------ ------------
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations....................................... $ 0.33 $ 4.27 $ 3.47
Loss from discontinued operations....................................... -- (0.30) (0.46)
------------ ------------ ------------
NET INCOME.......................................................... $ 0.33 $ 3.97 $ 3.01
------------ ------------ ------------
------------ ------------ ------------
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations....................................... $ 0.32 $ 3.96 $ 3.26
Loss from discontinued operations....................................... -- (0.27) (0.42)
------------ ------------ ------------
NET INCOME.......................................................... $ 0.32 $ 3.69 $ 2.84
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
THE ST. PAUL COMPANIES 1998 1997 1996
---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income................................................................. $ 89,348 $ 929,292 $ 732,702
---------- ------------ ----------
Other comprehensive income (loss), net of taxes:
Change in unrealized appreciation........................................ 181,579 166,430 (219,738)
Change in unrealized loss on foreign currency translation................ 8,856 (2,663) 20,467
Adjustment for minimum pension liability................................. -- -- 100,312
---------- ------------ ----------
Other comprehensive income (loss)...................................... 190,435 163,767 (98,959)
---------- ------------ ----------
COMPREHENSIVE INCOME................................................... $ 279,783 $ 1,093,059 $ 633,743
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
THE ST. PAUL COMPANIES 1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities...................................................................... $21,056,259 $20,945,219
Equities.............................................................................. 1,258,509 1,052,370
Real estate and mortgage loans........................................................ 1,507,448 1,626,051
Venture capital....................................................................... 571,340 461,892
Securities lending collateral......................................................... 1,368,322 515,043
Other investments..................................................................... 371,526 408,890
Short-term investments................................................................ 982,488 970,568
----------- -----------
Total investments................................................................... 27,115,892 25,980,033
Cash.................................................................................... 119,841 113,175
Investment banking inventory securities................................................. 106,827 130,203
Reinsurance recoverables:
Unpaid losses......................................................................... 3,977,789 3,839,051
Paid losses........................................................................... 157,484 128,422
Ceded unearned premiums................................................................. 288,107 376,343
Receivables:
Underwriting premiums................................................................. 2,152,100 2,213,926
Interest and dividends................................................................ 361,133 355,970
Other................................................................................. 117,175 104,727
Deferred policy acquisition expenses.................................................... 878,172 872,460
Deferred income taxes................................................................... 1,193,292 1,213,790
Office properties and equipment......................................................... 518,497 602,381
Goodwill................................................................................ 592,057 618,528
Other assets............................................................................ 744,342 809,819
----------- -----------
TOTAL ASSETS...................................................................... $38,322,708 $37,358,828
----------- -----------
----------- -----------
LIABILITIES
Insurance reserves:
Losses and loss adjustment expenses................................................... $18,457,921 $18,153,080
Future policy benefits................................................................ 4,142,277 3,816,050
Unearned premiums..................................................................... 3,265,762 3,528,234
----------- -----------
Total insurance reserves............................................................ 25,865,960 25,497,364
Debt.................................................................................... 1,260,392 1,304,008
Payables:
Reinsurance premiums.................................................................. 291,207 258,495
Income taxes.......................................................................... 221,270 303,549
Accrued expenses and other............................................................ 1,238,139 1,327,549
Securities lending.................................................................... 1,368,322 515,043
Other liabilities....................................................................... 938,331 1,041,952
----------- -----------
TOTAL LIABILITIES................................................................. 31,183,621 30,247,960
----------- -----------
Company-obligated mandatorily redeemable preferred capital securities of subsidiaries or
trusts holding solely convertible subordinated debentures of the Company.............. 502,700 502,700
----------- -----------
SHAREHOLDERS' EQUITY
Preferred:
PSOP convertible preferred stock...................................................... 134,181 137,892
Guaranteed obligation-PSOP............................................................ (118,605) (121,167)
----------- -----------
TOTAL PREFERRED SHAREHOLDERS' EQUITY.............................................. 15,576 16,725
----------- -----------
Common:
Common stock.......................................................................... 2,127,671 2,057,108
Retained earnings..................................................................... 3,480,057 3,720,140
Guaranteed obligation-ESOP............................................................ -- (8,453)
Accumulated other comprehensive income:
Unrealized appreciation............................................................. 1,027,390 845,811
Unrealized loss on foreign currency translation..................................... (14,307) (23,163)
----------- -----------
Total accumulated other comprehensive income...................................... 1,013,083 822,648
----------- -----------
TOTAL COMMON SHAREHOLDERS' EQUITY................................................. 6,620,811 6,591,443
----------- -----------
TOTAL SHAREHOLDERS' EQUITY........................................................ 6,636,387 6,608,168
----------- -----------
TOTAL LIABILITIES, REDEEMABLE PREFERRED SECURITIES AND SHAREHOLDERS' EQUITY....... $38,322,708 $37,358,828
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
THE ST. PAUL COMPANIES 1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
PREFERRED SHAREHOLDERS' EQUITY
PSOP convertible preferred stock:
Beginning of year........................................................... $ 137,892 $ 142,131 $ 144,165
Redemptions during the year................................................. (3,711) (4,239) (2,034)
---------- ---------- ----------
End of year............................................................... 134,181 137,892 142,131
---------- ---------- ----------
Guaranteed obligation--PSOP:
Beginning of year........................................................... (121,167) (126,068) (133,293)
Principal payments.......................................................... 2,562 4,901 7,225
---------- ---------- ----------
End of year............................................................... (118,605) (121,167) (126,068)
---------- ---------- ----------
Convertible preferred stock:
Beginning of year........................................................... -- 199,996 213,873
Conversions during the year................................................. -- (511) (12,677)
Redemptions during the year................................................. -- (199,485) (1,200)
---------- ---------- ----------
End of year............................................................... -- -- 199,996
---------- ---------- ----------
TOTAL PREFERRED SHAREHOLDERS' EQUITY...................................... 15,576 16,725 216,059
---------- ---------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock:
Beginning of year........................................................... 2,057,108 1,895,608 1,869,241
Stock issued under stock incentive plans.................................... 69,578 32,421 32,956
Stock issued for preferred shares redeemed.................................. 7,993 8,708 8,338
Stock issued for acquisitions............................................... -- 113,264 1,664
Reacquired common shares.................................................... (34,732) (13,892) (28,808)
Other....................................................................... 27,724 20,999 12,217
---------- ---------- ----------
End of year............................................................... 2,127,671 2,057,108 1,895,608
---------- ---------- ----------
Retained earnings:
Beginning of year........................................................... 3,720,140 3,097,261 2,747,556
Net income.................................................................. 89,348 929,292 732,702
Dividends declared on common stock.......................................... (222,758) (186,036) (169,360)
Dividends declared on preferred stock, net of taxes......................... (8,503) (10,304) (28,893)
Reacquired common shares.................................................... (100,356) (114,232) (196,238)
Tax benefit on employee stock options and awards............................ 6,468 8,211 5,623
Premium on preferred shares converted or redeemed........................... (4,282) (4,052) 5,871
---------- ---------- ----------
End of year............................................................... 3,480,057 3,720,140 3,097,261
---------- ---------- ----------
Guaranteed obligation--ESOP:
Beginning of year........................................................... (8,453) (20,353) (32,294)
Principal payments.......................................................... 8,453 11,900 11,941
---------- ---------- ----------
End of year............................................................... -- (8,453) (20,353)
---------- ---------- ----------
Unrealized appreciation, net of taxes:
Beginning of year........................................................... 845,811 679,381 899,119
Change for the year......................................................... 181,579 166,430 (219,738)
---------- ---------- ----------
End of year............................................................... 1,027,390 845,811 679,381
---------- ---------- ----------
Unrealized loss on foreign currency translation, net of taxes:
Beginning of year........................................................... (23,163) (20,500) (40,967)
Currency translation adjustments............................................ 8,856 (2,663) (5,127)
Realized loss relating to discontinued operations........................... -- -- 25,594
---------- ---------- ----------
End of year............................................................... (14,307) (23,163) (20,500)
---------- ---------- ----------
Minimum pension liability, net of taxes:
Beginning of year........................................................... -- -- (100,312)
Change for the year......................................................... -- -- 100,312
---------- ---------- ----------
End of year............................................................... -- -- --
---------- ---------- ----------
TOTAL COMMON SHAREHOLDERS' EQUITY......................................... 6,620,811 6,591,443 5,631,397
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY................................................ $6,636,387 $6,608,168 $5,847,456
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
THE ST. PAUL COMPANIES 1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................... $ 89,348 $ 929,292 $ 732,702
Adjustments:
Change in property-liability insurance reserves.................... (24,969) (95,945) 162,242
Change in reinsurance balances..................................... 24,141 15,372 208,510
Change in premiums receivable...................................... 21,338 8,829 (105,395)
Change in asset management balances................................ (32,300) 153,887 81,996
Depreciation and amortization...................................... 132,900 107,981 98,014
Realized investment gains.......................................... (201,689) (423,048) (261,989)
Provision for loss on discontinued operations...................... -- 67,750 88,543
Other.............................................................. 59,869 83,387 295,033
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 68,638 847,505 1,299,656
------------- ------------- -------------
INVESTING ACTIVITIES
Purchases of investments............................................. (4,928,905) (5,447,411) (4,567,552)
Proceeds from sales and maturities of investments.................... 4,958,699 5,228,222 4,188,916
Change in short-term investments..................................... (3,938) (207,245) (107,087)
Change in open security transactions................................. (12,707) 28,418 (34,425)
Venture capital distributions........................................ 49,592 29,565 28,446
Discontinued operations.............................................. (20,218) (54,018) --
Net purchases of office properties and equipment..................... (84,321) (139,942) (83,564)
Acquisitions......................................................... (97,562) (235,876) (241,721)
Other................................................................ 68,003 (26,662) 4,058
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES............................ (71,357) (824,949) (812,929)
------------- ------------- -------------
FINANCING ACTIVITIES
Deposits for universal life and investment contracts................. 517,887 460,321 437,578
Withdrawals of universal life and investment contracts............... (186,405) (209,652) (534,762)
Dividends paid on common and preferred stock......................... (226,355) (198,489) (199,879)
Proceeds from issuance of debt....................................... 239,041 197,609 46,220
Repayment of debt.................................................... (224,938) (161,021) (142,532)
Repurchase of common shares.......................................... (135,088) (128,224) (225,046)
Proceeds from issuance of company-obligated mandatorily redeemable
preferred capital securities of subsidiary trusts.................. -- 195,700 100,000
Redemption of preferred shares....................................... -- (199,485) (1,200)
Stock options exercised and other.................................... 25,243 24,005 (1,509)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.............. 9,385 (19,236) (521,130)
------------- ------------- -------------
INCREASE (DECREASE) IN CASH...................................... 6,666 3,320 (34,403)
------------- ------------- -------------
Cash at beginning of year............................................ 113,175 109,855 144,258
------------- ------------- -------------
CASH AT END OF YEAR.............................................. $ 119,841 $ 113,175 $ 109,855
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE ST. PAUL COMPANIES
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 (FASB) 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. Our foreign underwriting
operations' results are recorded on a one-month to one-quarter lag due to time
constraints in obtaining and analyzing such results for inclusion in our
consolidated financial statements on a current basis. In the event that
significant events occur in the subsequent period, the impact is included in the
current period results.
DISCONTINUED OPERATIONS--In 1997, we sold our insurance brokerage operation,
Minet. As a result, the financial statements for 1997 and 1996 reflect insurance
brokerage results as discontinued operations.
RECLASSIFICATIONS--We reclassified some amounts in our 1997 and 1996
financial statements and notes to conform with the 1998 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 property-liability losses and
loss adjustment expenses and life policy benefits. 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 May 1998, we declared 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 unless otherwise noted.
ACCOUNTING FOR OUR PROPERTY-LIABILITY INSURANCE OPERATIONS
PREMIUMS EARNED--Premiums on insurance policies are our largest source of
revenue. We recognize the premiums as revenues evenly over the policy terms
using the daily pro rata method. We record the premiums that we have not yet
recognized as revenues as unearned premiums on our balance sheet. Assumed
reinsurance premiums are recognized as revenues proportionately over the
contract period. Premiums earned are recorded in our statement of income net of
our cost to purchase reinsurance.
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 ("LAE"). We record these items on our statement of income
net of reinsurance, meaning that we reduce our gross losses and loss adjustment
expenses incurred by the amounts we have recovered or will recover under
reinsurance contracts.
We establish reserves for the estimated total unpaid cost of losses and loss
adjustment expenses, which cover events that occurred in 1998 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
39
<PAGE>
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, how ever, 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.
We participate in Lloyd's of London as an investor in underwriting
syndicates and as the owner of three managing agencies. We record our pro rata
share of syndicate assets, liabilities, revenues and expenses, after making
adjustments to convert Lloyd's accounting to U.S. GAAP. The most significant
U.S. GAAP adjustments relate to income recognition. Lloyd's syndicates determine
underwriting results by year of account at the end of three years. We record
adjustments to recognize underwriting results as incurred, including the
expected ultimate cost of losses incurred. These adjustments to losses are based
on actuarial analysis of syndicate accounts, including forecasts of expected
ultimate losses provided by the syndicates. Financial information
is available on a timely basis for the syndicates controlled by the managing
agencies that we own, which make up the majority of the company's investment in
Lloyd's syndicates. Syndicate results are recorded on a one-quarter lag due to
time constraints in obtaining and analyzing such results for inclusion in our
consolidated financial statements on a current basis.
Our liabilities for unpaid losses and LAE related to tabular workers'
compensation and certain assumed reinsurance coverage are discounted to the
present value of estimated future payments. Prior to discounting, these
liabilities totaled $866.2 million and $776.2 million at Dec. 31, 1998 and 1997,
respectively. The total discounted liability reflected on our balance sheet was
$668.6 million and $575.8 million at Dec. 31, 1998 and 1997, respectively. The
liability for workers' compensation was discounted using rates of up to 3.5%,
based on state-prescribed rates. The liability for certain assumed reinsurance
coverage was discounted using rates up to 8.0%, based on our return on invested
assets or, in many cases, on yields contractually guaranteed to us on funds held
by the ceding companies.
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.
On a regular basis, we perform an analysis of the deferred policy
acquisition costs in relation to the expected recognition of revenues, and
reflect adjustments as period costs.
ACCOUNTING FOR OUR LIFE INSURANCE OPERATIONS
PREMIUMS--Premiums on life insurance policies with fixed and guaranteed
premiums and benefits, premiums on annuities with significant life contingencies
and premiums on structured settlement annuities are recognized when due.
Premiums received on universal life policies and investment-type annuity
contracts are not recorded as revenues; instead, they are recognized as deposits
on our balance sheet. Policy charges and surrender penalties are recorded as
revenues.
POLICY BENEFITS--Ordinary life insurance reserves are computed under the net
level premium method. A uniform portion of each year's premium is used for
calculating the reserve. The reserves also reflect assumptions we make for
future investment yields, mortality and withdrawal rates. These assumptions
reflect our experience, modified to reflect anticipated trends, and provide for
possible adverse deviation. Reserve interest rate assumptions are graded and
range from 2.5% to 6.0%.
Universal life and deferred annuity reserves are computed on the
retrospective deposit method, which produces reserves equal to the cash value of
the contracts. Such reserves are
40
<PAGE>
not reduced for charges that would be deducted from the cash value of policies
surrendered. Reserves on immediate annuities with guaranteed payments are
computed on the prospective deposit method, which produces reserves equal to the
present value of future benefit payments.
POLICY ACQUISITION EXPENSES--We consider anticipated policy benefits,
remaining costs of servicing the policies and anticipated investment income in
determining the recoverability of deferred acquisition costs for
interest-sensitive life and annuity products. Deferred policy acquisition costs
(DPAC) on ordinary life business are amortized over their assumed premium paying
periods based on assumptions consistent with those used for computing policy
benefit reserves. Universal life and investment annuity acquisition costs are
amortized in proportion to the present value of their estimated gross profits
over the products' assumed durations, which we regularly evaluate and adjust as
appropriate.
EQUITY-INDEXED ANNUITIES--Interest on our equity-indexed annuities is
credited to the equity portion of these annuities annually based on an average
gain in the S&P 500 index during the policy year. We purchase one-year options
with similar terms as the index component to provide us with the same return on
the S&P 500 index as we guarantee to the annuity contract holder. We carry a
reserve on these annuities at an amount equal to the premium deposited, plus the
increase in the market value of the option purchased based on the S&P 500 index,
plus the amortization of the original purchase price of the option.
ACCOUNTING FOR OUR ASSET MANAGEMENT OPERATIONS
The John Nuveen Company comprises our asset management segment. We held a
78% and 77% interest in Nuveen on Dec. 31, 1998 and 1997, respectively. Nuveen
sponsors and markets open-end and closed-end (exchange-traded) managed funds,
defined portfolios (unit investment trusts) and individual managed accounts.
They also underwrite and trade municipal bonds. They hold in inventory
securities 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 defined portfolios and managed fund investment products,
interest income, gains and losses from the sale of inventory securities, and
gains and losses from changes in the market value of investment products and
securities held temporarily.
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 $67.1 million and $63.1 million was recorded in other liabilities at
the end of 1998 and 1997, respectively.
Nuveen repurchased and retired 0.7 million and 1.8 million of its common
shares in 1998 and 1997, respectively, for a total cost of $27 million in 1998
and $55 million in 1997. Our proceeds from the Nuveen repurchases totaled $41
million in 1997.
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 fair value.
EQUITIES--Our equity securities are also classified as available-for-sale
and carried at estimated fair value.
REAL ESTATE AND MORTGAGE LOANS--Our real estate investments include
apartments and office buildings and other commercial land and properties that we
own directly or in which we have a partial interest through joint ventures with
other investors. Our mortgage loan investments consist of fixed-rate loans
collateralized by apartment, warehouse and office properties.
For direct real estate investments, we carry land at cost and buildings at
cost less accumulated depreciation and valuation adjustments. We depreciate real
estate assets on
41
<PAGE>
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 $108.4 million and $93.0 million at Dec. 31, 1998 and 1997,
respectively.
We use the equity method of accounting for our direct real estate 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.
We carry our mortgage loans at estimated fair value, representing the unpaid
principal balances less any valuation adjustments. Valuation allowances are
recognized for loans with deterioration in collateral performance that are
deemed other than temporary. The estimated fair value of mortgage loans at Dec.
31, 1998 was $629 million.
VENTURE CAPITAL--We invest in 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 investments we own
directly are carried at estimated fair value.
SECURITIES LENDING--We participate in a securities lending program whereby
certain securities from our portfolio are loaned to other institutions for short
periods of time. We receive a fee from the borrower in return. Our policy is to
require collateral equal to 102 percent of the fair value of the loaned
securities. We maintain full ownership rights to the securities loaned. In
addition, we have the ability to sell the securities while they are on loan. We
have an indemnification agreement with the lending agents in the event a
borrower becomes insolvent or fails to return securities.
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 fair
value of our investments. If any of our investments experience a decline in
value that we believe 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-- For investments we carry at
estimated fair value, we record the difference between cost and fair value, net
of deferred taxes, as a part of common shareholders' equity. This difference is
referred to as unrealized appreciation or depreciation. In our life insurance
operations, deferred policy acquisition costs and certain reserves are adjusted
for the impact on estimated gross margins as if the net unrealized gains and
losses on securities had actually been realized. The change in unrealized
appreciation or depreciation during the year is a component of comprehensive
income.
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 40 years. The
accumulated amortization of goodwill was $203.5 million and $153.1 million at
Dec. 31, 1998 and 1997, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
We monitor the value of our long-lived assets to be held and used for
recoverability based on our estimate of the future cash flows (undiscounted and
without interest charges) expected to result from the use of the asset and its
eventual disposition considering any events or changes in circumstances which
indicate that the carrying value of an asset may not be recoverable. We monitor
the value of our goodwill based on our estimates of discounted future earnings.
If either estimate is less than the carrying amount of the asset, we reduce the
carrying value to fair value with a corresponding charge to expenses. We monitor
the value of our long-lived assets, and certain identifiable intangibles, to be
disposed of and report them at the lower of carrying value or fair value less
our estimated cost to sell.
42
<PAGE>
OFFICE PROPERTIES AND EQUIPMENT
We carry office properties and equipment at depreciated cost. We depreciate
these assets on a straight-line basis over the estimated useful lives of the
assets. The accumulated depreciation for office properties and equipment was
$405.3 million and $369.4 million at the end of 1998 and 1997, 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 remeasured 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.
The change in unrealized foreign currency translation gain or loss during the
year is a component of comprehensive income. Both the remeasurement and
translation are calculated using current exchange rates for the balance sheets
and average exchange rates for the statements of income.
In highly inflationary economies, the functional currency is the U.S.
dollar. Monetary assets and liabilities are translated into U.S. dollars using
exchange rates in effect at the balance sheet date, whereas nonmonetary balances
are translated using historical exchange rates. Revenue and expense accounts are
translated using the average exchange rates prevailing during the year for
monetary transactions and historical exchange rates for nonmonetary
transactions. Realized gains or losses resulting from translation are included
in the statement of income.
SUPPLEMENTAL CASH FLOW INFORMATION
INTEREST AND INCOME TAXES PAID--We paid interest of $71.1 million in 1998,
$81.1 million in 1997 and $85.5 million in 1996. We paid federal income taxes of
$68.3 million in 1998, $99.3 million in 1997 and $96.3 million in 1996.
NONCASH FINANCING ACTIVITIES--The John Nuveen Company issued $45 million of
preferred stock in 1997 to fund a portion of its purchase of Flagship Resources,
Inc. In December 1997, we issued $112 million of common stock in consideration
for our acquisition of TITAN Holdings, Inc. Cash provided from operating
activities in 1997 does not include a $104 million portion of a coinsurance
contract purchased to cede certain structured settlement annuity obligations
(see Note 15 "Reinsurance"). During 1996, we entered into a coinsurance contract
with an unaffiliated life insurance company to cede a portion of our block of
single premium deferred annuities (the "broker SPDA block"). As part of the
noncash transaction, we transferred $932 million of investments and other assets
to the coinsurer, and recorded a reinsurance receivable of $964 million.
2. MERGER WITH USF&G CORPORATION
On April 24, 1998, The St. Paul issued 66.5 million of its common shares (as
adjusted for the May 6, 1998 two-for-one stock split) in a tax-free exchange for
all of the outstanding common stock of USF&G Corporation (USF&G), a holding
company for property-liability and life insurance operations. This business
combination was accounted for as a pooling of interests; accordingly, the
consolidated financial statements for all periods prior to the combination were
restated to include the accounts and results of operations of USF&G. There were
no material intercompany transactions between The St. Paul and USF&G prior to
the merger.
43
<PAGE>
The following summarizes the results of operations previously reported by
The St. Paul and USF&G, and the combined amounts included in the accompanying
consolidated financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Total Revenues:
The St. Paul Companies,
Inc....................... $6,219,273 $5,734,156
USF&G Corporation........... 3,403,906 3,497,381
---------- ----------
Combined.................. $9,623,179 $9,231,537
---------- ----------
---------- ----------
Net Income:
The St. Paul Companies,
Inc....................... $ 705,473 $ 450,099
USF&G Corporation........... 193,866 260,977
---------- ----------
Combined.................. $ 899,339 $ 711,076
---------- ----------
Conforming accounting
adjustment, net of
taxes..................... 29,953 21,626
---------- ----------
Net income included in
accompanying consolidated
financial statements...... $ 929,292 $ 732,702
---------- ----------
---------- ----------
</TABLE>
Prior to the merger, USF&G discounted all of its workers' compensation
reserves to present value, whereas The St. Paul did not discount any of its loss
reserves. Subsequent to the merger, The St. Paul and USF&G on a combined basis
discounted tabular workers' compensation reserves using an interest rate of up
to 3.5%. These reserves have an ultimate cost and payment pattern that are fixed
and determinable, and accordingly, may be discounted in accordance with Staff
Accounting Bulletin No. 62, "Discounting by Property-Casualty Insurance
Companies." The St. Paul has determined that the discounting of such reserves is
the preferable accounting treatment. The conforming accounting adjustment in the
preceding table represents the net reduction in insurance losses and loss
adjustment expenses to conform the discounting policies of the two companies
with regard to these reserves.
We recorded a pretax charge to earnings of $292 million ($221 million
after-tax) in 1998 related to the merger, primarily consisting of severance and
other employee-related costs, facilities exit costs, asset impairments and
transaction costs. We estimated that approximately 2,000 positions would be
eliminated due to the combination of the two organizations, resulting from
efficiencies to be realized by the larger organization and the elimination of
redundant functions. All levels of employees, from technical staff to senior
management, are affected by the reductions. The number of positions expected to
be reduced by function include approximately 950 in our property-liability
underwriting operation, 350 in claims and 700 in finance and other
administrative positions. The reductions will occur throughout the United
States. Through Dec. 31, 1998, approximately 1,400 positions had been
eliminated, and the cost of termination benefits paid was $78.2 million. We
expect to realize annualized pretax expense savings of approximately $200
million as a result of our plan to merge the two organizations, primarily due to
the reduction in employee salaries and benefits.
The merger-related charge was determined in accordance with Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity," Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," SFAS No. 5,
"Accounting for Contingencies," and Accounting Principles Board Opinion No. 16,
"Business Combinations."
44
<PAGE>
The following table provides information about the components of the charge
taken during the second quarter, payments made and the balance of accrued
amounts remaining at Dec. 31, 1998.
<TABLE>
<CAPTION>
PRE-TAX
CHARGE
--------------
(IN THOUSANDS)
<S> <C>
CHARGES TO EARNINGS:
USF&G corporate
headquarters....... $ 36,400
Long-lived assets.... 22,835
Software depreciation
acceleration....... 9,678
Computer leases and
equipment.......... 9,600
Other equipment &
furniture.......... 7,700
--------------
Subtotal........... 86,213
--------------
</TABLE>
<TABLE>
<CAPTION>
RESERVE
PRE-TAX AT DEC. 31,
CHARGE PAYMENTS 1998
-------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ACCRUED CHARGES
SUBJECT TO
ROLLFORWARD:
Executive
severance.......... 89,352 $ (51,939) $ 37,413
Other severance...... 52,200 (26,275) 25,925
Branch lease exit
costs.............. 34,150 (105) 34,045
Transaction costs.... 29,676 (29,681) (5)
-------------- ----------- -----------
Subtotal........... 205,378 $(108,000) 97,378
-------------- ----------- -----------
Total............ $ 291,591 $ 97,378
-------------- -----------
-------------- -----------
</TABLE>
On our Statement of Income, $268.8 million of the merger-related charge was
recorded in the "Operating and administrative" expense caption and $22.8 million
was recorded in the "Realized investment gains" revenue caption.
The following discussion provides more information regarding the rationale
for and calculation of each component of the merger-related charge:
USF&G CORPORATE HEADQUARTERS
The Founders Building had been one of USF&G's headquarters buildings in
Baltimore, MD. Upon consummation of the merger, it was determined that the
headquarters for the combined entity would reside in St. Paul, MN, and that a
significant number of personnel working in Baltimore would be terminated, thus
vacating a significant portion of the Founders Building. We developed a plan to
lease that space to outside parties and thus categorized it as an "asset to be
held or used" as defined in SFAS No. 121 for purposes of evaluating the
potential impairment of its $64 million carrying value. That evaluation, based
on the anticipated undiscounted future cash flows from potential lessees,
indicated that an impairment in the carrying value had occurred, and the
building was written down by $36 million to its fair value of $28 million. The
writedown is reflected in our "parent company and other" segment results. We
continue to depreciate this building over its estimated remaining useful life.
LONG-LIVED ASSETS
Upon consummation of the merger, we determined that several of USF&G's real
estate investments were not consistent with our real estate investment strategy.
A plan was developed to sell a number of apartment buildings and various other
miscellaneous holdings, with an expected disposal date in 1999. In applying the
provisions of SFAS No. 121, we determined that four of these miscellaneous
investments should be written down to fair value, based on our plan to sell
them. Fair value was determined based on a discounted cash flow analysis, or
based on market prices for similar assets. The impairment writedown is reflected
in our Statement of Income in "Realized investment gains." The investments are
as follows:
1 -- DESCRIPTION OF INVESTMENT: Percentage rents retained after sale of a
portfolio of stores to a third party.
CARRYING AMOUNT: $21.6 million prior to writedown of $16.6 million, for
current amount of $5.0 million.
2 -- DESCRIPTION OF INVESTMENT: 138-acre land parcel in New Jersey, with farm
buildings being rented out.
CARRYING AMOUNT: $4.9 million prior to writedown of $2.1 million, for
current amount of $2.8 million.
45
<PAGE>
3 -- DESCRIPTION OF INVESTMENT: Receivable representing cash flow guarantee
payments related to real estate partnerships.
CARRYING AMOUNT: $4.8 million prior to writedown of $1.7 million, for a
balance of $3.1 million.
4 -- DESCRIPTION OF INVESTMENT: Limited partnership interests in three citrus
groves. CARRYING AMOUNT: $7.4 million prior to writedown of $2.4 million,
for current amount of $5.0 million.
These writedowns are reflected in the following segment results: $14.1
million in property-liability investment; $6.2 million in parent company and
other; and $2.5 million in life.
ACCELERATION OF SOFTWARE DEPRECIATION
We conducted an extensive technology study upon consummation of the merger
as part of the business plan to merge the two companies. The resulting strategy
to standardize technology throughout the combined entity and maintain one data
center in St. Paul, MN, resulted in the identification of duplicate software
applications. As a result, the estimated useful life for that software was
shortened, resulting in an additional charge to earnings.
COMPUTER LEASES AND EQUIPMENT
The technology study also identified redundant computer hardware, resulting
in lease buy-out transactions and disposals of computer equipment.
OTHER EQUIPMENT AND FURNITURE
The decision to combine all corporate headquarters in St. Paul, MN created
excess equipment and furniture in Baltimore, MD. The charge was calculated based
on the book value of assets at that location.
EXECUTIVE SEVERANCE
Represents the obligations The St. Paul will be required to pay in
accordance with the USF&G Senior Executive Severance Plan in place at the time
of the merger. The plan provides for payments to participants in the event the
participant is terminated without cause by the company or for good reason by the
participant within two years of the effective date of a transaction covered by
the plan.
OTHER SEVERANCE
Represents severance and related benefits such as out-placement counseling,
vacation buy-out and medical coverage to be paid to terminated employees not
covered under the USF&G Senior Executive Severance Plan.
BRANCH LEASE EXIT COSTS
As a result of the merger, excess space will be created in several locations
due to the anticipated staff reduction in the combined organization. The charge
for branch lease exit costs was calculated by determining the percentage of
anticipated excess space at each site and the current lease costs over the
remaining lease period. In certain locations, the lease is expected to be
terminated. For leases not expected to be terminated, the amount of expense
included in the charge was calculated as the percentage of excess space (20% to
100%) times the net of: remaining rental payments plus capitalized leasehold
improvements less actual sub-lease income. No amounts were discounted to present
value in the calculation.
TRANSACTION COSTS
This amount consists of registration fees, costs of furnishing information
to stockholders, consultant fees, investment banker fees, and legal and
accounting fees.
46
<PAGE>
3. EARNINGS PER COMMON SHARE
Earnings per common share (EPS) amounts are calculated based on the
provisions of SFAS No. 128, "Earnings Per Share." Common shares for all periods
reflect the impact of the May 6, 1998 2-for-1 stock split.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BASIC
Net income, as reported...... $ 89,348 $ 929,292 $ 732,702
Preferred stock dividends,
net of taxes............... (8,504) (10,304) (28,893)
Premium on preferred shares
redeemed................... (4,282) (4,441) (1,033)
--------- --------- ---------
Net income available to
common shareholders.... $ 76,562 $ 914,547 $ 702,776
--------- --------- ---------
--------- --------- ---------
DILUTED
Net income available to
common shareholders........ $ 76,562 $ 914,547 $ 702,776
Effect of dilutive
securities:
Convertible preferred
stock.................... -- 5,998 9,478
Zero coupon convertible
notes.................... -- 3,143 5,133
Convertible monthly income
preferred securities..... -- 8,073 8,073
--------- --------- ---------
Net income available to
common shareholders.... $ 76,562 $ 931,761 $ 725,460
--------- --------- ---------
--------- --------- ---------
COMMON SHARES
BASIC
Weighted average common
shares outstanding......... 235,360 230,158 233,340
--------- --------- ---------
--------- --------- ---------
DILUTED
Weighted average common
shares outstanding......... 235,360 230,158 233,340
Effect of dilutive
securities:
Stock options.............. 3,322 4,399 3,089
Convertible preferred
stock.................... -- 7,788 9,152
Zero coupon convertible
notes.................... -- 2,923 3,263
Convertible monthly income
preferred securities..... -- 7,017 7,017
--------- --------- ---------
Total.................. 238,682 252,285 255,861
--------- --------- ---------
--------- --------- ---------
</TABLE>
The assumed conversion of preferred stock, zero coupon notes and monthly
income preferred securities are each anti-dilutive to The St. Paul's net income
per share for the year ended Dec. 31, 1998, and are therefore not included in
the EPS calculation.
47
<PAGE>
4. INVESTMENTS
VALUATION OF INVESTMENTS--The following presents the cost, gross unrealized
appreciation and depreciation, and estimated fair value of our investments in
fixed maturities, equities and venture capital.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE
------------- ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. government...................................... $ 2,672,630 $ 208,471 $ (7) $ 2,881,094
States and political subdivisions.................... 6,113,669 445,483 (331) 6,558,821
Foreign governments.................................. 909,353 70,378 (1,515) 978,216
Corporate securities................................. 6,747,847 375,100 (26,577) 7,096,370
Asset-backed securities.............................. 661,259 26,012 (2,831) 684,440
Mortgage-backed securities........................... 2,791,677 66,212 (571) 2,857,318
------------- ------------ ------------ -------------
Total fixed maturities............................. 19,896,435 1,191,656 (31,832) 21,056,259
Equities............................................... 941,723 360,576 (43,790) 1,258,509
Venture capital........................................ 389,225 200,969 (18,854) 571,340
------------- ------------ ------------ -------------
Total.............................................. $ 21,227,383 $ 1,753,201 $ (94,476) $ 22,886,108
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE
------------- ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. government...................................... $ 2,754,657 $ 120,750 $ (1,886) $ 2,873,521
States and political subdivisions.................... 6,280,554 419,744 (535) 6,699,763
Foreign governments.................................. 1,118,494 66,586 (23,875) 1,161,205
Corporate securities................................. 6,089,142 287,178 (5,613) 6,370,707
Asset-backed securities.............................. 692,536 14,946 (400) 707,082
Mortgage-backed securities........................... 3,053,327 80,607 (993) 3,132,941
------------- ------------ ------------ -------------
Total fixed maturities............................. 19,988,710 989,811 (33,302) 20,945,219
Equities............................................... 804,593 267,889 (20,112) 1,052,370
Venture capital........................................ 324,333 156,205 (18,646) 461,892
------------- ------------ ------------ -------------
Total.............................................. $ 21,117,636 $ 1,413,905 $ (72,060) $ 22,459,481
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
STATUTORY DEPOSITS--At Dec. 31, 1998, our property-liability and life
insurance operations had investments in fixed maturities with an estimated fair
value of $1.17 billion on deposit with regulatory authorities as required by
law.
48
<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.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
One year or less............ $ 895,252 $ 906,956
Over one year through five
years..................... 4,459,414 4,686,292
Over five years through 10
years..................... 5,721,337 6,101,179
Over 10 years............... 5,367,496 5,820,074
Asset-backed securities with
various maturities........ 661,259 684,440
Mortgage-backed securities
with various maturities... 2,791,677 2,857,318
----------- -----------
Total..................... $19,896,435 $21,056,259
----------- -----------
----------- -----------
</TABLE>
5. INVESTMENT TRANSACTIONS
INVESTMENT ACTIVITY--Following is a summary of our investment purchases,
sales and maturities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
PURCHASES
Fixed
maturities...... $3,213,663 $3,435,901 $3,077,119
Equities.......... 1,250,453 1,509,774 1,087,951
Real estate and
mortgage
loans........... 211,263 380,258 291,745
Venture capital... 153,146 97,413 94,891
Other
investments..... 100,380 24,065 15,846
---------- ---------- ----------
Total
purchases..... 4,928,905 5,447,411 4,567,552
---------- ---------- ----------
PROCEEDS FROM
SALES AND
MATURITIES
Fixed maturities:
Sales........... 1,098,212 1,705,234 1,096,544
Maturities and
redemptions... 2,012,366 1,322,330 1,432,263
Equities.......... 1,340,620 1,478,575 1,353,399
Real estate and
mortgage
loans........... 338,709 467,684 185,742
Venture capital... 63,894 250,015 118,011
Other
investments..... 104,898 4,384 2,957
---------- ---------- ----------
Total sales and
maturities.... 4,958,699 5,228,222 4,188,916
---------- ---------- ----------
Net purchases
(sales)....... $ (29,794) $ 219,189 $ 378,636
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NET INVESTMENT INCOME--Following is a summary of our net investment income.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed
maturities...... $1,376,038 $1,405,478 $1,368,654
Equities.......... 16,271 17,357 16,279
Real estate and
mortgage
loans........... 120,812 112,944 83,994
Venture capital... 297 352 324
Securities
lending......... 726 518 769
Other
investments..... 21,529 9,348 18,718
Short-term
investments..... 76,741 57,915 51,371
---------- ---------- ----------
Total........... 1,612,414 1,603,912 1,540,109
Investment
expenses........ (27,432) (26,107) (27,534)
---------- ---------- ----------
Net investment
income........ $1,584,982 $1,577,805 $1,512,575
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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 and in
comprehensive income.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
PRETAX REALIZED INVESTMENT
GAINS (LOSSES)
Fixed maturities:
Gross realized gains....... $ 10,268 $ 36,233 $ 23,033
Gross realized losses...... (21,376) (43,620) (40,037)
--------- --------- ---------
Total fixed maturities... (11,108) (7,387) (17,004)
--------- --------- ---------
Equities:
Gross realized gains....... 241,407 208,978 239,646
Gross realized losses...... (77,524) (46,412) (31,282)
--------- --------- ---------
Total equities........... 163,883 162,566 208,364
--------- --------- ---------
Real estate and
mortgage loans............. 13,883 45,259 (22,137)
Venture capital.............. 25,231 212,663 86,011
Other investments............ 9,800 9,947 6,755
--------- --------- ---------
Total pretax realized
investment gains....... $ 201,689 $ 423,048 $ 261,989
--------- --------- ---------
--------- --------- ---------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CHANGE IN UNREALIZED
APPRECIATION
Fixed maturities............. $ 203,315 $ 399,696 $(440,916)
Equities..................... 69,009 61,969 27,981
Venture capital.............. 44,556 (154,826) 163,110
Life deferred policy
acquisition costs and
policy benefits............ (653) (21,171) 53,469
Single premium immediate
annuity reserves........... (16,678) (27,411) --
Other........................ (16,765) (1,974) 11,074
--------- --------- ---------
Total change in pretax
unrealized
appreciation........... 282,784 256,283 (185,282)
Change in deferred taxes..... (101,205) (89,853) (34,456)
--------- --------- ---------
Total change in
unrealized
appreciation, net of
taxes.................. $ 181,579 $ 166,430 $(219,738)
--------- --------- ---------
--------- --------- ---------
</TABLE>
6. 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 market indices, foreign currency exchange rates and
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 seek to reduce our credit risk by conducting
derivative transactions only with reputable, investment-grade counterparties.
We enter into interest rate swap agreements for the purpose of reducing the
effect of interest rate fluctuations on some of our debt and investments. We
purchase foreign exchange forward contracts to minimize the impact of
fluctuating foreign currencies on our results of operations. We hedge our
obligation to pay credited rates on equity-indexed annuity products by
purchasing options tied to the S&P 500 index. Individually, and in the
aggregate, the impact of these transactions on our financial position and
results of operations is not material.
7. RESERVES FOR LOSSES, LOSS ADJUSTMENT EXPENSES AND LIFE POLICY BENEFITS
RECONCILIATION OF LOSS RESERVES--The following table represents a
reconciliation of beginning and ending consolidated property-liability insurance
loss and loss adjustment expense (LAE) reserves for each of the last three
years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss and LAE reserves at
beginning of year, as
reported................. $18,153,080 $17,888,536 $16,559,200
Less reinsurance
recoverables on unpaid
losses at beginning of
year..................... (3,053,425) (2,867,732) (2,826,942)
----------- ----------- -----------
Net loss and LAE reserves
at beginning of year... 15,099,655 15,020,804 13,732,258
Net reserves of acquired
companies................ -- 140,710 1,033,443
----------- ----------- -----------
Provision for losses and
LAE for claims incurred:
Current year............. 5,874,522 5,720,662 5,567,703
Prior years.............. (270,961) (627,141) (414,138)
----------- ----------- -----------
Total incurred......... 5,603,561 5,093,521 5,153,565
----------- ----------- -----------
Losses and LAE payments for
claims incurred:
Current year............. (1,840,328) (1,709,512) (1,864,832)
Prior years.............. (3,653,865) (3,453,073) (3,029,833)
----------- ----------- -----------
Total paid............. (5,494,193) (5,162,585) (4,894,665)
----------- ----------- -----------
Unrealized foreign exchange
loss (gain).............. (14,916) 7,205 (3,797)
----------- ----------- -----------
Net loss and LAE reserves
at end of year......... 15,194,107 15,099,655 15,020,804
Plus reinsurance
recoverables on unpaid
losses at end of year.... 3,263,814 3,053,425 2,867,732
----------- ----------- -----------
Loss and LAE reserves at
end of year, as
reported............... $18,457,921 $18,153,080 $17,888,536
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
In 1998, we recorded pretax loss and loss adjustment expenses of $250
million to reflect the application of our loss reserving policies to USF&G's
loss and loss adjustment expense reserves subsequent to the merger. In the
foregoing table, $60.7 million of the charge is reflected in the provision for
current year losses and LAE, and the remaining $189.3 million is reflected in
the provision for prior year losses and LAE.
Prior to the merger, both companies, in accordance with generally accepted
accounting principles, recorded their best estimate of
50
<PAGE>
reserves within a range of estimates bounded by a high point and a low point.
Subsequent to the consummation of the merger in April 1998, we obtained the raw
data underlying, and documentation supporting, USF&G's Dec. 31, 1997 reserve
analysis. Our actuaries reviewed such information and concurred with the
reasonableness of USF&G's range of estimates for their reserves. However,
applying their judgment and interpretation to the range, our actuaries, who
would be responsible for setting reserve amounts for the combined entity,
concluded that strengthening the reserves would be appropriate, resulting in the
$250 million adjustment. The adjustment was allocated to the following business
segments: Commercial Lines ($196.7 million); Personal Insurance ($35.1 million);
and Specialty Commercial ($18.2 million).
LIFE BENEFIT RESERVES--The following table shows our life insurance
operations future policy benefit reserves by type.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Single Premium Annuities:
Deferred.................... $1,366,137 $1,373,519
Immediate................... 1,118,586 1,047,744
Other annuities............... 1,031,871 367,475
Universal/term/group life..... 625,683 1,027,312
---------- ----------
Gross balance............... 4,142,277 3,816,050
Reinsurance recoverables...... 713,975 785,626
---------- ----------
Total future policy benefit
reserves.................. $3,428,302 $3,030,424
---------- ----------
---------- ----------
</TABLE>
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, 1998 and 1997. Amounts
in the "net" column are reduced by reinsurance.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------
1998 1997
-------------------- --------------------
GROSS NET GROSS NET
---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Environmental....... $ 783,000 $645,000 $ 867,000 $677,000
Asbestos............ 402,000 277,000 397,000 279,000
---------- -------- ---------- --------
Total
environmental
and asbestos
reserves........ $1,185,000 $922,000 $1,264,000 $956,000
---------- -------- ---------- --------
---------- -------- ---------- --------
</TABLE>
8. INCOME TAXES
METHOD FOR COMPUTING INCOME TAX EXPENSE (BENEFIT)--We are required to
compute our income tax expense under the liability method. This means deferred
income taxes reflect what we estimate we will pay or receive in future years. A
current tax liability is recognized for the estimated taxes payable for the
current year.
INCOME TAX EXPENSE (BENEFIT)--Income tax expense or benefits are recorded in
various places in our financial statements. A summary of the amounts and places
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF INCOME
Expense (benefit) on
continuing operations.... $(135,635) $ 338,666 $ 150,637
Expense on discontinued
operations............... -- -- 401
Benefit on loss on
disposal................. -- (35,530) (291,493)
--------- --------- ---------
Total income tax expense
(benefit) included in
statements of income... (135,635) 303,136 (140,455)
--------- --------- ---------
COMMON SHAREHOLDERS' EQUITY
Benefit for deductions
relating to:
Dividends on unallocated
ESOP and PSOP shares... (5,880) (3,112) (3,626)
Employee stock options
and awards............. (6,468) (8,211) (5,623)
Expense for the change in
unrealized appreciation
and unrealized foreign
exchange................. 98,538 89,232 31,891
--------- --------- ---------
Total income tax expense
included in common
shareholders' equity... 86,190 77,909 22,642
--------- --------- ---------
Total income tax expense
(benefit) included in
financial statements... $ (49,445) $ 381,045 $(117,813)
--------- --------- ---------
--------- --------- ---------
</TABLE>
51
<PAGE>
COMPONENTS OF INCOME TAX EXPENSE (BENEFIT)--The components of income tax
expense (benefits) on continuing operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal current tax
expense............. $ 19,650 $ 281,528 $ 117,035
Federal deferred tax
expense (benefit)... (177,433) 23,299 5,174
--------- --------- ---------
Total federal income
tax expense
(benefit)......... (157,783) 304,827 122,209
Foreign income
taxes............... 13,740 19,467 22,074
State income taxes.... 8,408 14,372 6,354
--------- --------- ---------
Total income tax
expense (benefit)
on continuing
operations........ $(135,635) $ 338,666 $ 150,637
--------- --------- ---------
--------- --------- ---------
</TABLE>
OUR TAX RATE IS DIFFERENT FROM THE STATUTORY RATE--Our total income tax
expense differs from the statutory rate of 35% of pretax income as shown in the
following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax
expense (benefit)
at statutory
rate............... $ (16,201) $ 467,498 $ 346,884
Increase (decrease)
attributable to:
Nontaxable
investment
income........... (112,882) (112,420) (96,156)
Valuation
allowance........ (35,408) (31,657) (106,519)
Nondeductible
merger expense... 31,036 -- --
Other.............. (2,180) 15,245 6,428
--------- --------- ---------
Total income tax
expense
(benefit) on
continuing
operations..... $(135,635) $ 338,666 $ 150,637
--------- --------- ---------
--------- --------- ---------
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS
Loss reserves................. $1,048,361 $1,122,326
Loss on disposal of insurance
brokerage operations........ 33,036 199,868
Unearned premium reserves..... 181,165 198,124
Net operating loss
carryforward................ 459,926 194,267
Other......................... 706,144 555,562
---------- ----------
Total gross deferred tax
assets.................... 2,428,632 2,270,147
Less valuation allowance...... (5,814) (41,222)
---------- ----------
Net deferred tax assets..... 2,422,818 2,228,925
---------- ----------
DEFERRED TAX LIABILITIES
Unrealized appreciation of
investments................. 536,334 437,947
Deferred acquisition costs.... 277,624 279,469
Real estate................... 115,051 65,036
Other......................... 300,517 232,683
---------- ----------
Total gross deferred tax
liabilities............... 1,229,526 1,015,135
---------- ----------
Deferred income taxes....... $1,193,292 $1,213,790
---------- ----------
---------- ----------
</TABLE>
If we believe that all of our deferred tax assets will not result in future
tax benefits, we must establish a "valuation allowance" for the portion of these
assets that we think will not be realized. The net change in the valuation
allowance for deferred tax assets was a decrease of $35.4 million in 1998, and a
decrease of $31.7 million in 1997, relating to our foreign underwriting
operations and our provision for loss on disposal of insurance brokerage
operations. Based upon a review of our refundable taxes, anticipated future
earnings, and all other available evidence, both positive and negative, we have
concluded it is "more likely than not" that our net deferred tax assets will be
realized.
NET OPERATING LOSS (NOL), FOREIGN TAX CREDIT (FTC), AND ALTERNATIVE MINIMUM
TAX (AMT) CREDIT CARRYFORWARDS--For tax return purposes, as of Dec. 31, 1998 we
had NOL carryforwards that expire, if unused, in 2004-2018 and FTC carryforwards
that expire, if unused, in 2000-2003. We have AMT credit carryforwards of
approximately $116.7 million
52
<PAGE>
which are available to reduce future federal regular income taxes over an
indefinite period. The amount and timing of realizing the benefits of NOL, FTC
and AMT credit carryforwards depends on future taxable income and limitations
imposed by tax laws. The approximate amounts of the NOLs on a regular tax basis
and an AMT basis at Dec. 31, 1998 were $1,314.1 million and $908.7 million,
respectively. The approximate amounts of the FTCs on a regular tax basis and an
AMT basis at Dec. 31, 1998 were $9.9 million and $8.1 million, respectively. The
benefits of the NOL, FTC and AMT credit carryforwards have been recognized in
our financial statements and are included in our net deferred tax assets.
UNDISTRIBUTED EARNINGS OF SUBSIDIARIES--U.S. income taxes have not been
provided on $35.0 million of our foreign operations' undistributed earnings as
of Dec. 31, 1998, as such earnings are intended to be permanently reinvested in
those operations. Furthermore, any taxes paid to foreign governments on these
earnings may be used as credits against the U.S. tax on any dividend
distributions from such earnings.
We have not provided taxes on approximately $194.5 million of undistributed
earnings related to our majority ownership of The John Nuveen Company as of Dec.
31, 1998, because we currently do not expect those earnings to become taxable to
us.
IRS EXAMINATIONS--The IRS is currently examining the USF&G Life Group's
premerger returns for the years 1992 and 1993 and USF&G's pre-merger
consolidated returns for the years 1994 through 1997. The IRS has examined The
St. Paul's pre-merger consolidated returns through 1994 and is currently
examining the years 1995 through 1997. 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.
9. CAPITAL STRUCTURE
The following summarizes our capital structure:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Debt......................... $1,260,392 $1,304,008
Company-obligated mandatorily
redeemable preferred
capital securities of
subsidiaries or trusts
holding solely convertible
subordinated debentures of
the Company................ 502,700 502,700
Preferred shareholders'
equity..................... 15,576 16,725
Common shareholders'
equity..................... 6,620,811 6,591,443
---------- ----------
Total capital............ $8,399,479 $8,414,876
---------- ----------
---------- ----------
Ratio of debt to total
capital.................... 15% 15%
</TABLE>
DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1998 1997
---------------------- ----------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Medium-term notes....... $ 636,913 $ 674,700 $ 511,920 $ 529,000
Commercial paper........ 257,461 257,461 168,429 168,429
8 3/8% senior notes..... 149,708 159,900 149,592 159,060
Zero coupon convertible
notes................. 111,333 118,000 106,838 122,307
7 1/8% senior notes..... 79,848 86,000 79,824 82,680
Real estate mortgages... 15,129 15,600 19,900 20,491
Nuveen short-term
borrowings............ 10,000 10,000 69,500 69,500
7% senior notes......... -- -- 145,225 145,744
Nuveen notes payable.... -- -- 15,000 15,100
Credit facility......... -- -- 35,000 35,000
Guaranteed ESOP debt.... -- -- 2,780 2,800
---------- ---------- ---------- ----------
Total debt.......... $1,260,392 $1,321,661 $1,304,008 $1,350,111
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
FAIR VALUE--The fair values of our commercial paper, credit facility and
short-term borrowings approximate their book values because of their short-term
nature. For our other debt, which has longer terms and fixed interest rates, our
fair value estimate is based on current interest rates available on debt
securities in the market that have terms similar to ours.
MEDIUM-TERM NOTES--The medium-term notes bear interest rates ranging from
5.9% to 8.3%, with a weighted average rate of 6.9%. Maturities range from five
to 15 years after the
53
<PAGE>
issuance date. During 1998, we issued $150 million of medium-term notes bearing
an interest rate of 6.4%.
COMMERCIAL PAPER--Our commercial paper is supported by a $400 million credit
agreement that expires in 2002. 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 1998,
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 1998 ranged from 4.5% to 6.3%;
in 1997 the range was 5.2% to 6.8%; and in 1996 the range was 5.1% to 6.6%.
8 3/8% SENIOR NOTES--The 8 3/8% senior notes mature in 2001.
ZERO COUPON CONVERTIBLE NOTES--The zero coupon convertible notes are
redeemable beginning in 1999 for an amount equal to the original issue price
plus accreted original issue discount. In addition, on March 3, 1999 and March
3, 2004, the holders of the zero coupon convertible notes may require us to
purchase their notes for the price of $640.82 and $800.51, respectively, per
$1,000 of principal amount due at maturity.
7 1/8% SENIOR NOTES--The 7 1/8% senior notes mature in 2005.
REAL ESTATE MORTGAGES--The real estate mortgages represent a portion of the
purchase price of two of our investments. One $13.2 million mortgage bears a
fixed interest rate of 6.7% and matures in November 2000. A second $1.9 million
mortgage bears a fixed rate of 8.1% and matures in February 2002.
NUVEEN SHORT-TERM BORROWINGS--Short-term borrowings at the end of 1998 and
1997 were obligations of our asset management segment that were collateralized
by some of its inventory securities. These borrowings bore a weighted average
interest rate of 6.3% and 7.4% at Dec. 31, 1998 and 1997, respectively.
7% SENIOR NOTES--The 7% senior notes matured in May 1998.
CREDIT FACILITY--We maintained two committed, standby credit facilities
totaling $450 million at Dec. 31, 1997. The facility in place for $200 million
expired in December 1998 and the remaining facility will expire in 2002. These
facilities require us to maintain a minimum net worth and debt-to-capital ratio.
We were in compliance with the provisions contained in these agreements at Dec.
31, 1998 and 1997.
INTEREST EXPENSE--Our interest expense was $75.4 million in 1998, $86.1
million in 1997 and $87.2 million in 1996.
MATURITIES--The amount of debt that becomes due in each of the next five
years is as follows: 1999, $287.5 million; 2000, $13.2 million; 2001, $195.2
million; 2002, $50.6 million; and 2003, $67.3 million.
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF
SUBSIDIARIES OR TRUSTS HOLDING SOLELY CONVERTIBLE SUBORDINATED DEBENTURES OF THE
COMPANY
In 1995, we issued, through St. Paul Capital L.L.C. (SPCLLC), 4,140,000
company-obligated mandatorily redeemable preferred capital 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
1.695 shares of our common stock (equivalent to a conversion price of $29.50 per
share). The MIPS are redeemable after May 31, 1999, but we may redeem them
before then upon the occurrence of certain events.
In 1997 and 1996, USF&G issued three series of capital securities. After
consummation of the merger with USF&G in 1998, The St. Paul assumed all
obligations relating to these capital securities. These Series A, Series B and
Series C Capital Securities were issued through separate wholly-owned business
trusts (USF&G
54
<PAGE>
Capital I, USF&G Capital II and USF&G Capital III, respectively) formed for the
sole purpose of issuing the securities. We have effectively fully and
unconditionally guaranteed all obligations of the three business trusts.
In December 1996, USF&G Capital I issued 100,000 shares of 8.5% Series A
Capital Securities, generating proceeds of $100 million. The proceeds were used
to purchase $100 million of USF&G Corporation 8.5% Series A subordinated
debentures, which mature on Dec. 15, 2045. The debentures are redeemable under
certain circumstances related to tax events at a price of $1,000 per debenture.
The proceeds of such redemptions will be used to redeem a like amount of the
Series A Capital Securities.
In January 1997, USF&G Capital II issued 100,000 shares of 8.47% Series B
Capital Securities, generating proceeds of $100 million. The proceeds were used
to purchase $100 million of USF&G Corporation 8.47% Series B subordinated
debentures, which mature on Jan. 10, 2027. The debentures are redeemable at our
option at any time beginning in January 2007 at scheduled redemption prices
ranging from $1,042 to $1,000 per debenture. The debentures are also redeemable
prior to January 2007 under certain circumstances related to tax and other
special events. The proceeds of such redemptions will be used to redeem a like
amount of the Series B Capital Securities.
In July 1997, USF&G Capital III issued 100,000 shares of 8.312% Series C
Capital Securities, generating proceeds of $100 million. The proceeds were used
to purchase $100 million of USF&G Corporation 8.312% Series C subordinated
debentures, which mature on July 1, 2046. The debentures are redeemable under
certain circumstances related to tax events at a price of $1,000 per debenture.
The proceeds of such redemptions will be used to redeem a like amount of the
Series C Capital Securities.
Under certain circumstances related to tax events, we have the right to
shorten the maturity dates of the Series A, Series B and Series C debentures to
no earlier than June 24, 2016, July 10, 2016 and April 8, 2012, respectively, in
which case the stated maturities of the related Capital Securities will likewise
be shortened.
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 a 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 eight 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.
During the first half of 1997, we redeemed all of the remaining outstanding
shares of USF&G's Series A Preferred Stock for $200 million cash.
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. The
number of authorized shares of the company is 480 million.
Our cost for reacquired shares in 1998, 1997 and 1996 was $135.1 million,
$128.1 million and $225.0 million, respectively. We reduced our capital stock
account and retained earnings for the cost of these repurchases. In December
1997, we issued approximately 2.9 million shares of common stock valued at $112
million as partial consideration for our acquisition of Titan. Also in 1997, we
issued 40,976 shares of our common stock valued at $1.7 million, and in 1996 we
issued 57,496 shares of our common stock (also valued at $1.7 million), as
partial consideration for our acquisition of a Lloyd's of
55
<PAGE>
London managing agency. We issued 1.2 million common shares during 1996 for the
conversion of USF&G Corporation Series B Preferred Stock.
A summary of our common stock activity for the last three years is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
----------- ----------- -----------
(SHARES)
<S> <C> <C> <C>
Outstanding at
beginning of year.... 233,129,721 230,851,306 235,433,487
Shares issued:
Stock incentive
plans.............. 4,243,354 1,501,532 1,597,983
Conversion of
preferred stock.... 204,765 1,223,571 1,310,849
Acquisitions......... -- 2,918,396 57,496
Reacquired shares...... (3,828,062) (3,365,084) (7,548,509)
----------- ----------- -----------
Outstanding at end of
year................. 233,749,778 233,129,721 230,851,306
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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.
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.
Pursuant to our Shareholder Protection Rights Plan we declared a dividend of
one right ("Right") in respect of each outstanding share of our voting common
stock held of record as of the close of business on Dec. 19, 1989. The Rights
become exercisable if a person or group acquires 15 percent or more of our
common stock and upon certain other events set forth in the agreement governing
the Rights. Each Right entitles our shareholders to purchase one four-thousandth
of a share of Series A Junior Participating Preferred Stock at an exercise price
of $46.25. When the Rights become exercisable, the holder of each Right (other
than the acquiring person or members of such group) is entitled (i) to purchase,
at the Right's then current exercise price, a number of the acquiring company's
common stock having a market value of twice such price, (ii) to purchase, at the
Right's then current exercise price, a number of shares of our common stock
having a market value of twice such price or (iii) under certain circumstances,
at the option of our Board of Directors, to exchange each Right (other than the
Rights owned by such acquiring person or group), at an exchange ratio of one
share of common stock per Right. At the option of our Board of Directors, under
certain circumstances, the Rights may be redeemed for $.005 per Right. The
agreement governing the Rights is due to expire on Dec. 19, 1999. The Company
will allow those rights to expire on that date, if not redeemed earlier.
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. property-liability underwriting subsidiaries and our
life insurance subsidiary. In 1999, $295 million will be available for dividends
free from such restrictions. During 1998, we received cash dividends of $200
million from our U.S. underwriting subsidiaries.
56
<PAGE>
10. RETIREMENT PLANS
PENSION PLANS--We maintain funded defined benefit pension plans for most of
our 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.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period ended Dec.
31, 1998, and a statement of the funded status as of Dec. 31, for both years.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
------------------------ ------------------------
1998 1997 1998 1997
------------ ---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year...................... $ 845,784 $ 770,303 $ 192,434 $ 181,337
Service cost............................................... 30,929 27,897 5,627 5,602
Interest cost.............................................. 58,410 56,422 13,181 13,152
Amendments................................................. -- -- -- 252
Actuarial loss............................................. 113,403 55,298 14,855 9,605
Benefits paid.............................................. (42,933) (56,128) (12,032) (13,568)
Curtailment gain........................................... -- (8,008) -- (3,946)
------------ ---------- ----------- -----------
Benefit obligation at end of year........................ 1,005,593 845,784 214,065 192,434
------------ ---------- ----------- -----------
Change in plan assets:
Fair value of plan at beginning of year.................... $ 953,259 $ 793,660 $ 18,612 $ 17,107
Actual return on plan assets............................... 176,203 170,250 3,581 1,505
Employer contribution...................................... 48,407 45,477 12,032 13,568
Benefits paid.............................................. (42,933) (56,128) (12,032) (13,568)
------------ ---------- ----------- -----------
Fair value of plan at end of year........................ 1,134,936 953,259 22,193 18,612
------------ ---------- ----------- -----------
Funded status................................................ 129,343 107,475 (191,872) (173,822)
Unrecognized transition asset.............................. (4,941) (6,756) -- --
Unrecognized prior service cost............................ (12,918) (16,681) (3,592) (3,935)
Unrecognized net actuarial loss (gain)..................... 64,346 34,859 11,314 (1,705)
------------ ---------- ----------- -----------
Prepaid (accrued) benefit cost........................... $ 175,830 $ 118,897 $ (184,150) $ (179,462)
------------ ---------- ----------- -----------
------------ ---------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average assumptions as of Dec. 31:
Discount rate.................................................. 6.25% 7.00% 6.50% 7.00%
Expected return on plan assets................................. 10.00 9.25 8.00 9.00
Rate of compensation increase.................................. 4.00 4.50 4.00 3.75
</TABLE>
Plan assets are invested primarily in equities and fixed maturities, and
included 804,035 shares of our common stock with a market value of $28.0 million
and $33.0 million at Dec. 31, 1998 and 1997, respectively.
57
<PAGE>
We maintain non-contributory, unfunded pension plans to provide certain
company employees with pension benefits in excess of limits imposed by federal
tax law.
The following table provides the components of our net periodic benefit cost
for the years 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
---------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost................................................... $ 30,929 $ 27,897 $ 5,627 $ 5,602
Interest cost.................................................. 58,410 56,422 13,181 13,152
Expected return on plan assets................................. (97,956) (70,875) (1,675) (1,518)
Amortization of transition asset............................... (1,814) (1,814) -- --
Amortization of prior service cost............................. (3,763) (3,765) (343) (346)
Recognized net actuarial loss (gain)........................... 5,668 6,883 (69) (74)
---------- ---------- ----------- -----------
Net periodic pension cost (income)........................... (8,526) 14,748 16,721 16,816
---------- ---------- ----------- -----------
Curtailment gain............................................... -- (8,070) -- (5,553)
---------- ---------- ----------- -----------
Net periodic benefit cost (income) after curtailment......... $ (8,526) $ 6,678 $ 16,721 $ 11,263
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSION-- We provide certain health care
and life insurance benefits for retired 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.
A health care inflation rate of 6.75% was assumed to change to 6.25% in
1999, decrease annually to 5% in 2002 and then remain at that level. A
one-percentage-point change in assumed health care cost trend rates would have
the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT POINT
INCREASE DECREASE
------------- -------------
<S> <C> <C>
Effect on total of service
and interest cost
components............... $ 3,740 $ (3,112)
Effect on postretirement
benefit obligation....... 33,262 (27,724)
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN
As of Jan. 1, 1998, the Preferred Stock Ownership Plan (PSOP) and the
Employee Stock Ownership Plan (ESOP) were merged into The St. Paul Companies,
Inc. Stock Ownership Plan (SOP). The plan allocates preferred shares
semiannually to those employees participating in our Savings Plus Plan. Under
the former PSOP, the match was 60% of employees' contributions up to a maximum
of 6% of their salary. This match has been enhanced to 100% of employees'
contributions up to a maximum of 4% of their salary plus shares equal to the
value of dividends on previously allocated shares. Additionally, this plan will
now provide an annual allocation to qualified U.S. employees based on company
performance.
To finance the preferred stock purchase for future allocation to qualified
employees, the SOP (formerly 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 eight shares of common stock. Preferred stock
dividends on all shares held by the trust are used to pay this SOP obligation.
In addition to dividends paid to the trust, we make additional cash
contributions to the SOP as necessary in order to meet the SOP's debt
obligation.
58
<PAGE>
The SOP (formerly the ESOP) borrowed funds to finance the purchase of common
stock for future allocation to qualified U.S. employees. The final principal
payment on the trust's loan was made in the first quarter of 1998. As the
principal of the trust loan was paid, a pro rata amount of our common stock was
released for allocation to eligible participants. The final allocation was made
as of Dec. 31, 1997. Common stock dividends on all shares held by the trust were
used to pay this SOP obligation. In addition to dividends paid to the trust, we
made additional cash contributions as necessary in order to meet the SOP's debt
obligation. Starting in the second quarter of 1998, common stock dividends on
shares allocated under the former ESOP were paid directly to participants.
All common shares and the common stock equivalent of all preferred shares
held by the SOP are considered outstanding for diluted EPS computations and
dividends paid on all shares are charged to retained earnings. Our SOP expense
was reduced by the dividends we paid to the SOP trust that were used to pay the
SOP debt obligations.
We follow the provisions of Statement of Position 76-3, "Accounting
Practices for Certain Employee Stock Ownership Plans," and related
interpretations in accounting for this plan. We recorded expense of $7.8
million, $16.6 million and $14.0 million for the years 1998, 1997 and 1996,
respectively.
The following table details the shares held in the SOP:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
1998 1997
------------------------ ------------------------
COMMON PREFERRED COMMON PREFERRED
----------- ----------- ----------- -----------
(SHARES)
<S> <C> <C> <C> <C>
Allocated......... 7,250,535 324,938 7,128,891 306,624
Committed to be
released........ -- 27,809 487,091 17,889
Unallocated....... -- 577,132 -- 631,081
----------- ----------- ----------- -----------
Total............. 7,250,535 929,879 7,615,982 955,594
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The SOP allocated 53,949 preferred shares in 1998, 41,810 preferred shares
in 1997 and 60,803 preferred shares in 1996. The remaining unallocated preferred
shares at Dec. 31, 1998 will be released for allocation annually through Jan.
31, 2005. The SOP (formerly ESOP) made its final allocation in 1997 totaling
1,207,254 common shares and allocated 997,430 common shares in 1996.
11. 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 1997 and 1996, we also made variable stock option
grants to certain company officers. These were considered "variable" grants
because the measurement date is contingent upon future increases in the market
price of our common stock. At the end of 1998, approximately 3,700,000 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 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.
Since the exercise price of our fixed options equals the market price of our
stock on the day the options are granted, there is no related compensation cost.
We have recorded compensation costs associated with our variable options and
restricted stock awards, and the former USF&G's Long-Term Incentive Program, of
$10.4 million, $17.5 million and $14.9 million in 1998, 1997 and 1996,
respectively.
In connection with the USF&G merger, The St. Paul assumed USF&G's
obligations under four stock option plans and its Long-Term Incentive Plan.
Exercise prices were based on the fair market value of USF&G's common stock on
the date of grant. As a result of the merger, all outstanding options under the
stock
59
<PAGE>
option plans were vested and converted into options to acquire The St. Paul's
common stock.
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
73,000 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.
<TABLE>
<CAPTION>
WEIGHTED
OPTION AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding Jan. 1, 1996... 10,419,127 $20.47
Granted.................... 3,444,162 26.42
Exercised.................. (1,395,719) 18.21
Canceled................... (586,775) 23.62
---------- ------
Outstanding Dec. 31,
1996..................... 11,880,795 22.60
Granted.................... 3,353,133 34.38
Exercised.................. (2,133,788) 20.07
Canceled................... (557,329) 31.77
---------- ------
Outstanding Dec. 31,
1997..................... 12,542,811 25.76
Granted.................... 3,693,511 42.65
Exercised.................. (3,663,620) 23.04
Canceled................... (1,428,810) 37.23
---------- ------
Outstanding Dec. 31,
1998..................... 11,143,892 $30.78
---------- ------
---------- ------
</TABLE>
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
those years. 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 1998, 1997 and 1996, respectively: dividend yield
of 3.0%, 2.1% and 2.0%; expected volatility of 18.9%, 20.1% and 22.7%; risk-free
interest rates of 5.6%, 6.5% and 6.2%; and an expected life of 5.9 years, 5.4
years and 6.2 years.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Options exercisable at
year-end................. 8,078,734 8,174,128 7,186,957
Weighted average fair value
of options granted during
the year................. $ 8.91 $ 8.88 $ 7.20
</TABLE>
The following tables summarize the status of fixed stock options outstanding
and exercisable at Dec. 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER OF CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OPTIONS LIFE PRICE
- - ------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
$11.08-20.03............ 1,992,242 3.3 YEARS $ 17.80
20.13-25.38............ 1,849,880 5.9 YEARS 23.67
25.44-29.00............ 2,322,290 6.8 YEARS 26.33
29.81-40.83............ 2,120,164 8.2 YEARS 36.17
41.38-50.76............ 2,859,316 9.1 YEARS 44.05
----------- ----------- -----------
$11.08-50.76............ 11,143,892 6.9 YEARS $ 30.78
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
----------------------------
WEIGHTED
NUMBER OF AVERAGE
RANGE OF EXERCISE PRICES OPTIONS EXERCISE PRICE
- - --------------------------- ----------- ---------------
<S> <C> <C>
$11.08-20.03............... 1,992,242 $ 17.80
20.13-25.38............... 1,849,880 23.67
25.44-29.00............... 2,254,290 26.32
29.81-40.83............... 1,943,664 36.23
41.38-50.76............... 38,658 49.33
----------- ------
$11.08-50.76............... 8,078,734 $ 26.11
----------- ------
----------- ------
</TABLE>
VARIABLE OPTION GRANTS
In 1997 and 1996, we made variable option grants of 316,200 and 1,650,000
shares, respectively, from our 1994 stock incentive plan to certain of our key
officers. One-half of the
60
<PAGE>
options will vest when the market price of our stock reaches a
20-consecutive-day average of $50 per share. The remaining options will vest
when our stock price reaches a 20-consecutive-day average of $55 per share. The
exercise price of each option is equal to the market price of our stock on the
grant date. These options may be exercised during the twelve months preceding
the Dec. 1, 2001, expiration date provided the stock price targets are achieved.
The following table summarizes the activity for our variable option grants
for the last three years.
<TABLE>
<CAPTION>
WEIGHTED
OPTION AVERAGE
SHARE EXERCISE PRICE
--------- ---------------
<S> <C> <C>
Outstanding Jan. 1, 1996.... -- $ --
Granted..................... 1,650,600 29.38
--------- ------
Outstanding Jan. 1, 1997.... 1,650,600 29.38
Granted..................... 316,200 33.56
--------- ------
Outstanding Jan. 1, 1998.... 1,966,800 30.05
Canceled.................... (468,600) 29.38
--------- ------
Outstanding Dec. 31, 1998... 1,498,200 $ 30.26
--------- ------
--------- ------
</TABLE>
The weighted average fair value of options granted during 1997 and 1996 is
$5.46 and $4.54 per option, respectively. The fair value of the variable options
was estimated on the date of grant using a variable option-pricing model with
the following weighted average assumptions in 1997 and 1996, respectively:
dividend yield of 2.8% and 3.0%; expected volatility of 20% for both years;
risk-free interest rate of 6.1% and 5.8%; and an expected life of 4.6 years and
5.0 years.
RESTRICTED STOCK AND DEFERRED STOCK AWARDS
Up to 20% of the 11.6 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 1,800,000 shares remain
available for restricted stock awards at Dec. 31, 1998.
We also have a Deferred Stock Award Plan for stock awards to non-U.S.
employees. Deferred stock awards are the same as restricted stock awards, except
that shares granted under the deferred plan are not issued until the vesting
conditions specified in the award are fulfilled. Up to 21,000 shares remain
available for deferred stock awards at Dec. 31, 1998.
PRO FORMA INFORMATION
Had we calculated compensation expense on a combined basis 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS,EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
NET INCOME
As reported................ $ 89,348 $ 929,292 $ 732,702
Pro forma.................. 75,983 914,831 721,209
BASIC EARNINGS PER SHARE
As reported................ 0.33 3.97 3.01
Pro forma.................. 0.27 3.91 2.96
DILUTED EARNINGS PER SHARE
As reported................ 0.32 3.69 2.84
Pro forma.................. 0.27 3.63 2.79
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
INVESTMENT COMMITMENTS--We have long-term commitments to fund venture
capital and real estate investments totaling $117.2 million as of Dec. 31, 1998.
We estimate these commitments will be paid as follows: $49.1 million in 1999;
$37.5 million in 2000; $22.1 million in 2001; and $8.5 million in 2002.
FINANCIAL GUARANTEES--We are contingently liable for financial guarantee
exposures ceded through reinsurance agreements with a company in which we
formerly had a minority ownership interest totaling approximately $76 million as
of Dec. 31, 1998.
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
61
<PAGE>
$88 million in 1998, $92 million in 1997 and $107 million in 1996.
Certain leases are noncancelable, and we would remain responsible for
payment even if we stopped using the space or equipment. On Dec. 31, 1998, the
minimum annual rents for which we would be liable under these types of leases
are as follows: $109 million in 1999, $104 million in 2000, $105 million in
2001, $70 million in 2002, $56 million in 2003 and $265 million thereafter.
We are also the lessor under various subleases on our office facilities. The
minimum rentals to be received in the future under noncancelable subleases is
$99 million at Dec. 31, 1998.
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.
In connection with our sale of Minet to Aon Corporation in 1997, we agreed
to indemnify Aon against any future professional liability claims for events
that occurred prior to the sale. Included in our 1997 provision for loss on
disposal of Minet was the cost of purchasing insurance to cover a portion of our
exposure to such claims (see Note 13 "Discontinued Operations").
It is possible that the settlement of these lawsuits or payments for
Minet-related liability claims may be material to our results of operations and
liquidity in the period in which they occur. However, we believe the total
amounts that we and our subsidiaries will ultimately have to pay in all of these
matters will have no material effect on our overall financial position.
13. DISCONTINUED OPERATIONS
In December 1996, we decided to sell our insurance brokerage, Minet, and in
May 1997, we completed the sale to Aon Corporation. As a result, we accounted
for Minet as a discontinued operation in 1997 and 1996. Proceeds from the sale
of Minet to Aon were $107 million.
The following table summarizes our discontinued operations for 1997 and
1996:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Operating loss, before income
taxes......................... $ -- $ (18,815)
Income tax expense.............. -- 401
--------- ---------
Operating loss, net of
taxes....................... -- (19,216)
--------- ---------
Loss on disposal, before income
taxes......................... (103,280) (380,036)
Income tax benefit.............. (35,530) (291,493)
--------- ---------
Loss on disposal, net of
taxes....................... (67,750) (88,543)
--------- ---------
Loss from discontinued
operations.................. $ (67,750) $(107,759)
--------- ---------
--------- ---------
</TABLE>
In 1996, we recorded a pretax loss of $380 million on the disposal of Minet,
which represented the estimated difference between its fair value and carrying
value by the time we would finalize the sale. That loss provision encompassed
Minet's estimated operating losses through the date of disposal, 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.
In 1997, we recorded an additional pretax loss on disposal of $103 million
(with a corresponding tax benefit of $36 million), which resulted primarily from
our agreement to be responsible for certain severance, employee benefits, future
lease commitments and other costs related to Minet.
We agreed to indemnify Aon against any future professional liability claims
for events that occurred prior to the sale. Since this indemnification relates
to claims that had not yet been discovered or reported, it is not possible to
62
<PAGE>
estimate a range of the potential liability. The company monitors its exposure
under these claims on a regular basis. We believe reserves for reported claims
are adequate, but the company still does not have information on unreported
claims to estimate a range of additional liability. The company purchased
insurance to cover a portion of its exposure to such claims. The insurance
covers claims reported three years from the date of sale, with the option to
renew the contract for an additional three years. The policy provides $125
million maximum coverage with a $25 million aggregate deductible.
14. ACQUISITIONS
In 1997, we acquired TITAN Holdings, Inc. (Titan), a property-liability
insurance company located in San Antonio, Texas, for $259 million including
assumed debt. Titan specializes in the non-standard automobile and government
entities insurance markets. The transaction resulted in goodwill of
approximately $151 million, which is being amortized over 40 years. The
consideration paid included shares of our common stock, valued at approximately
$112 million. As of Dec. 31, 1997, $47 million in cash payments were made to
reduce debt and cover certain other acquisition-related expenses. The remaining
consideration of $97 million, consisting of cash payments to Titan's
shareholders, was subsequently paid in February 1998.
In 1997, The John Nuveen Company (Nuveen), our asset management segment,
acquired Flagship Resources, Inc., a firm that manages the assets of both its
sponsored and marketed family of mostly tax-free mutual funds and its private
investment accounts, for a total cost of approximately $72 million, plus as much
as an additional $20 million contingent upon meeting future growth targets.
Nuveen also acquired Rittenhouse Financial Services, Inc., an equity and
balanced fund investment management firm, in 1997 for a total cost of
approximately $147 million. These acquisitions added approximately $13.8 billion
to Nuveen's assets under management. The cost of these acquisitions was largely
composed of goodwill of $213 million, which is being amortized over 30 years.
In late 1996, we acquired Afianzadora Insurgentes, S.A. de C.V.
(Afianzadora), a surety bond company in Mexico, for $65 million in cash. This
acquisition resulted in goodwill of $18 million, which is being amortized over
20 years.
In 1996, we acquired Northbrook Holdings, Inc. and its three insurance
subsidiaries from Allstate Insurance Company. Northbrook and its subsidiaries
underwrite various property-liability commercial insurance products throughout
the United States. Our total cost for this acquisition was approximately $193
million, which was provided from internal funds. We recorded goodwill of
approximately $71 million that we are amortizing over 15 years.
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.
All of these acquisitions were accounted for as purchases. As a result, the
acquired companies' results were included in our consolidated results from the
date of purchase.
15. 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
63
<PAGE>
not deducted from insurance reserves but are recorded as assets.
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.
Additionally, we have been active in the involuntary market as a servicing
carrier whereby we process business for a pool but take no net underwriting risk
because we are directly reimbursed for the cost of processing policies and
settling any related claims. Servicing carrier receivables of $805 million and
$710 million associated with this business are included in our balance sheet in
reinsurance recoverables on unpaid losses at Dec. 31, 1998 and 1997,
respectively.
In August 1996, our life insurance subsidiary entered into a coinsurance
contract with an unaffiliated life insurance company to cede a significant
portion of a block of single premium deferred annuities. As part of the
transaction, our life insurance subsidiary transferred $932 million of
investments and other assets to the coinsurer and recorded a reinsurance
recoverable of $964 million. In December 1997, our life insurance subsidiary
entered into another coinsurance agreement with an unaffiliated life reinsurance
company whereby it transferred approximately $144 million of investments and
other assets to the reinsurer and recorded a reinsurance recoverable of $131
million. For each of these transactions, the difference between the assets
transferred for the reinsurance contract and the amount of the reinsurance
recoverable was considered part of the net cost of reinsurance, and is
recognized over the remaining life of the underlying reinsurance contracts. The
reinsurance costs of the coinsurance transactions (net of related deferred
policy acquisition cost amortization) were deferred at the inception of the
contracts and are being amortized into expense over the remaining term of the
underlying reinsurance contracts. These transactions had no material effect on
our 1997 or 1996 net income.
The effect of assumed and ceded reinsurance on premiums written, premiums
earned and insurance losses, loss adjustment expenses and life policy benefits
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
PREMIUMS WRITTEN
Direct.................. $6,077,769 $6,340,767 $6,345,860
Assumed................. 1,400,655 1,502,887 1,589,900
Ceded................... (785,256) (911,117) (901,277)
---------- ---------- ----------
Net premiums
written........... $6,693,168 $6,932,537 $7,034,483
---------- ---------- ----------
---------- ---------- ----------
PREMIUMS EARNED
Direct.................. $6,311,124 $6,528,712 $6,347,572
Assumed................. 1,389,266 1,530,969 1,584,275
Ceded................... (874,610) (898,652) (897,737)
---------- ---------- ----------
Net premiums earned... 6,825,780 7,161,029 7,034,110
Life.................... 118,795 137,071 144,572
---------- ---------- ----------
Total premiums
earned............ $6,944,575 $7,298,100 $7,178,682
---------- ---------- ----------
---------- ---------- ----------
INSURANCE LOSSES, LOSS
ADJUSTMENT EXPENSES
AND POLICY BENEFITS
Direct.................. $5,367,878 $4,730,435 $4,539,951
Assumed................. 912,635 1,011,883 1,043,400
Ceded................... (676,952) (648,797) (429,786)
---------- ---------- ----------
Net insurance losses
and loss
adjustment
expenses.......... 5,603,561 5,093,521 5,153,565
---------- ---------- ----------
Life policy benefits.... 272,756 276,848 312,737
---------- ---------- ----------
Total insurance
losses, loss
adjustment
expenses and
policy benefits... $5,876,317 $5,370,369 $5,466,302
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
16. 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 or permitted
accounting principles, which differ from GAAP. Prescribed statutory accounting
practices include state laws, regulations and general administrative rules
issued by the state of domicile as well as a variety of publications and manuals
of the National Association of Insurance Commissioners. Permitted statutory
accounting practices encompass all accounting practices not so prescribed, but
allowed by the state of domicile.
64
<PAGE>
At Dec. 31, 1998 and 1997, permitted property-liability transactions related
to the disposal of certain real property acquired as security increased
statutory surplus by $12 million and $20 million, respectively, over what it
would have been had prescribed accounting practices been followed. At Dec. 31,
1998 and 1997, permitted property-liability transactions related to the
discounting of certain assumed reinsurance contracts increased statutory surplus
by $33.7 million and $37.6 million, respectively. At Dec. 31, 1998 and 1997,
permitted life insurance transactions related to the release of capital gains
related to a coinsurance contract and the related establishment of a voluntary
investment reserve increased statutory surplus by $18 million and $23 million,
respectively.
On a statutory accounting basis, our property-liability underwriting
operations reported net income of $196.4 million in 1998, $1.15 billion in 1997
and $759.2 million in 1996. Our life insurance operations reported statutory net
income of $24.1 million, $21.0 million and $28.8 million in 1998, 1997 and 1996,
respectively. Statutory surplus (shareholder's equity) of our property-liability
underwriting operations was $4.7 billion and $4.8 billion as of Dec. 31, 1998
and 1997, respectively. Statutory surplus of our life insurance operation was
$201 million and $195 million as of Dec. 31, 1998 and 1997, respectively.
17. SEGMENT INFORMATION
We have seven reportable segments in our insurance operations, consisting of
Commercial Lines, Specialty Commercial, Personal Insurance, International
Underwriting, Reinsurance, Property-liability Investment Operations, and Life
Insurance. The insurance operations are managed separately because each targets
different customers and requires different marketing strategies. We also have an
Asset Management segment, consisting of our majority ownership in The John
Nuveen Company.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. We evaluate performance based on
underwriting results for our property-liability insurance segments, investment
income and realized gains for our investment operations, and on pretax operating
results for the life insurance and asset management segments. Property-liability
underwriting assets are reviewed in total by management for purposes of decision
making. We do not allocate assets to these specific underwriting segments.
Assets are specifically identified for our life insurance and asset management
segments.
GEOGRAPHIC AREAS--The following summary presents financial data of our
continuing operations based on their location.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
U.S.................. $8,314,641 $8,820,153 $8,544,996
Non-U.S.............. 793,760 803,026 686,541
---------- ---------- ----------
Total revenues..... $9,108,401 $9,623,179 $9,231,537
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEGMENT INFORMATION--The summary on the next page presents revenues and
pretax income from continuing operations for our reportable segments. Amounts
for 1997 and 1996 were reclassified to be consistent with the 1998 presentation.
The revenues of our life insurance and asset management segments include their
respective investment income and realized investment gains. The table also
presents identifiable assets for our property-liability underwriting operation
in total, and our life insurance and asset management segments. Included in the
table are life insurance segment revenues of $47 million, $65 million and $76
million for the years ended Dec. 31, 1998, 1997 and 1996, respectively, related
to structured settlement annuities sold primarily to our Commercial Lines
segment.
65
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES FROM CONTINUING OPERATIONS
Property-liability insurance:
Commercial lines....................................................... $ 2,614,645 $ 2,912,393 $ 2,775,349
Specialty commercial................................................... 1,446,937 1,441,835 1,416,577
Personal insurance..................................................... 1,392,325 1,302,110 1,335,451
------------ ------------ ------------
Total U. S. underwriting............................................. 5,453,907 5,656,338 5,527,377
International.......................................................... 333,186 277,778 269,266
------------ ------------ ------------
Total primary underwriting........................................... 5,787,093 5,934,116 5,796,643
Reinsurance............................................................ 1,038,687 1,226,913 1,237,467
------------ ------------ ------------
Total underwriting................................................... 6,825,780 7,161,029 7,034,110
Investment operations:
Net investment income................................................ 1,306,828 1,323,967 1,236,013
Realized investment gains............................................ 187,871 412,332 271,483
------------ ------------ ------------
Total investment operations........................................ 1,494,699 1,736,299 1,507,496
Other.................................................................. 59,147 47,732 50,338
------------ ------------ ------------
Total property-liability insurance................................... 8,379,626 8,945,060 8,591,944
Life insurance........................................................... 393,084 403,821 356,887
Asset management......................................................... 307,535 268,927 232,347
------------ ------------ ------------
Total reportable segments............................................ 9,080,245 9,617,808 9,181,178
Parent company, other operations and consolidating eliminations.......... 28,156 5,371 50,359
------------ ------------ ------------
Total revenues....................................................... $ 9,108,401 $ 9,623,179 $ 9,231,537
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Property-liability insurance:
Commercial lines....................................................... $ (658,694) $ (90,615) $ (95,375)
Specialty commercial................................................... (146,872) 17,956 71,088
Personal insurance..................................................... (175,489) (111,364) (319,071)
------------ ------------ ------------
Total U. S. underwriting............................................. (981,055) (184,023) (343,358)
International.......................................................... (67,422) (52,788) (23,432)
------------ ------------ ------------
Total primary underwriting........................................... (1,048,477) (236,811) (366,790)
Reinsurance............................................................ 7,349 4,032 17,322
------------ ------------ ------------
Total GAAP underwriting result....................................... (1,041,128) (232,779) (349,468)
Investment operations:
Net investment income................................................ 1,306,828 1,323,967 1,236,013
Realized investment gains............................................ 187,871 412,332 271,483
------------ ------------ ------------
Total investment operations........................................ 1,494,699 1,736,299 1,507,496
Other.................................................................. (322,162) (112,935) (208,002)
------------ ------------ ------------
Total property-liability insurance................................... 131,409 1,390,585 950,026
Life insurance........................................................... 20,747 77,995 (8,250)
Asset management......................................................... 103,960 92,617 91,697
------------ ------------ ------------
Total reportable segments............................................ 256,116 1,561,197 1,033,473
Parent company, other operations and consolidating eliminations.......... (302,403) (225,489) (42,375)
------------ ------------ ------------
Total income (loss) from continuing operations before income taxes... $ (46,287) $ 1,335,708 $ 991,098
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Property-liability insurance........................................ $ 32,340,907 $ 31,688,474 30,005,932
Life insurance...................................................... 4,838,690 4,478,236 4,204,400
Asset management.................................................... 504,788 516,690 356,318
------------- ------------- -------------
Total reportable segments....................................... 37,684,385 36,683,400 34,566,650
Parent company, other operations, consolidating eliminations and
discontinued operations........................................... 638,323 675,428 579,586
------------- ------------- -------------
Total assets.................................................... $ 38,322,708 $ 37,358,828 $ 35,146,236
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The $291.6 million merger-related charge is recorded in the following
captions of the "Income (Loss) from Continuing Operations Before Income Taxes"
section of the foregoing segment table: $142.4 in property-liability
insurance-other; $14.1 million in property-liability insurance--realized gains;
$9.4 million in life insurance; and $125.7 million in parent company, other
operations and consolidating eliminations.
The $250 million provision to strengthen loss reserves is recorded as
follows: $196.7 million in commercial lines; $35.1 million in personal
insurance; and $18.2 million in specialty commercial.
Also included in the life insurance caption is a $41.0 million charge to
writedown the carrying value of deferred policy acquisition costs (DPAC). The
writedown relates to universal life-
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<PAGE>
type and investment-type contracts which are subject to the guidance in SFAS No.
97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments."
According to SFAS No. 97, amortization of DPAC is to be based on the present
value of estimated gross profits expected to be realized over the life of the
contract. Estimates of expected gross profits used as a basis for amortization
shall be evaluated regularly and the total amortization to date should be
adjusted if actual experience or other evidence suggests that earlier estimates
should be revised.
The $41.0 million DPAC charge had three components. First, the persistency
of certain in-force business, particularly universal life and flexible premium
annuities, sold through some USF&G distribution channels, had begun to
deteriorate after the USF&G merger announcement. To mitigate this, management
decided, in the second quarter, to increase credited rates on certain universal
life business. This change lowered the estimated future profits on this
business, which, as required under SFAS No. 97, triggered $19.1 million in
accelerated DPAC amortization. Second, the low interest rate environment during
the first half of 1998 led to assumption changes as to the future "spread" on
certain interest sensitive products, lowering gross profit expectations and
triggering a $15.6 million DPAC charge. The remaining $6.3 million charge
resulted from a change in annuitization assumptions for certain tax-sheltered
annuity products.
Late in the fourth quarter of 1998, we recorded a pretax restructuring
charge of $34.3 million ($22.3 million, or $0.09, net of tax benefit). The
majority of the charge, $26.5 million, related to the anticipated termination of
approximately 520 employees in the following operations: Claims, Commercial
Lines, Information Systems, Medical Services and Professional Markets. The
remaining charge of $7.9 million related to costs to be incurred to exit lease
contracts. As of Dec. 31, 1998, no employees had been terminated under the
restructuring plan. Actions to take place under this fourth quarter 1998 plan
are expected to be completed by the end of 1999. The charge is included in the
property-liability insurance-- other caption in the foregoing segment table.
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<PAGE>
18. COMPREHENSIVE INCOME
Comprehensive income is defined as any change in our equity from
transactions and other events originating from nonowner sources. In our case,
those changes are comprised of our reported net income, changes in unrealized
appreciation and changes in unrealized foreign currency translation adjustments
and minimum pension liability. The following summaries present the components of
our comprehensive income, other than net income, for the last three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------
INCOME
PRETAX TAX EFFECT AFTER-TAX
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Unrealized appreciation arising during period................................ $ 460,790 $ 163,507 $ 297,283
Less: reclassification adjustment for realized gains included in net
income..................................................................... 178,006 62,302 115,704
---------- ---------- ----------
Net change in unrealized appreciation...................................... 282,784 101,205 181,579
---------- ---------- ----------
Net change in unrealized loss on foreign currency translation................ 6,189 (2,667) 8,856
---------- ---------- ----------
Total other comprehensive income........................................... $ 288,973 $ 98,538 $ 190,435
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------
INCOME
PRETAX TAX EFFECT AFTER-TAX
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Unrealized appreciation arising during period................................ $ 624,125 $ 218,598 $ 405,527
Less: reclassification adjustment for realized gains included in net
income..................................................................... 367,842 128,745 239,097
---------- ---------- ----------
Net change in unrealized appreciation...................................... 256,283 89,853 166,430
---------- ---------- ----------
Net change in unrealized loss on foreign currency translation................ (3,284) (621) (2,663)
---------- ---------- ----------
Total other comprehensive income........................................... $ 252,999 $ 89,232 $ 163,767
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------
INCOME
PRETAX TAX EFFECT AFTER-TAX
----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Unrealized appreciation (depreciation) arising during period............... $ 92,089 $ 131,536 $ (39,447)
Less: reclassification adjustment for realized gains included in net
income................................................................... 277,371 97,080 180,291
----------- ---------- -----------
Net change in unrealized appreciation (depreciation)..................... (185,282) 34,456 (219,738)
----------- ---------- -----------
Unrealized gain (loss) on foreign currency translation..................... (5,030) 97 (5,127)
Less: reclassification adjustment for realized loss relating to
discontinued operations.................................................. (22,932) 2,662 (25,594)
----------- ---------- -----------
Net change in unrealized loss on foreign currency translations........... 17,902 (2,565) 20,467
----------- ---------- -----------
Minimum pension liability.................................................. 100,312 -- 100,312
----------- ---------- -----------
Total other comprehensive income (loss).................................. $ (67,068) $ 31,891 $ (98,959)
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
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<PAGE>
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited summary of our quarterly results for the last
three years.
<TABLE>
<CAPTION>
1998
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues...................................... $2,324,192 $2,379,681 $2,211,257 $2,193,271
Income (loss) from continuing operations...... 194,678 (273,803) 67,693 100,780
Net income (loss)............................. 194,678 (273,803) 67,693 100,780
Earnings per common share:
Basic:
Income (loss) from continuing
operations.............................. 0.82 (1.18) 0.27 0.41
Net income (loss)......................... 0.82 (1.18) 0.27 0.41
Diluted:
Income (loss) from continuing
operations.............................. 0.76 (1.18) 0.27 0.40
Net income (loss)......................... 0.76 (1.18) 0.27 0.40
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues...................................... $2,402,251 $2,493,102 $2,324,290 $2,403,536
Income from continuing operations............. 237,168 288,942 215,172 255,760
Net income.................................... 169,418 288,942 215,172 255,760
Earnings per common share:
Basic:
Income from continuing operations......... 1.02 1.25 0.92 1.09
Net income................................ 0.72 1.25 0.92 1.09
Diluted:
Income from continuing operations......... 0.94 1.15 0.86 1.01
Net income................................ 0.67 1.15 0.86 1.01
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues...................................... $2,197,076 $2,222,329 $2,347,496 $2,464,636
Income from continuing operations............. 206,633 207,417 155,369 271,042
Net income.................................... 191,043 202,175 169,480 170,004
Earnings per common share:
Basic:
Income from continuing operations......... 0.85 0.85 0.64 1.14
Net income................................ 0.78 0.83 0.70 0.70
Diluted:
Income from continuing operations......... 0.79 0.80 0.60 1.06
Net income................................ 0.73 0.78 0.66 0.66
</TABLE>
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<PAGE>
SHAREHOLDER INFORMATION
CORPORATE PROFILE
The St. Paul is a group of companies providing property-liability and life
insurance and reinsurance products and services worldwide.
YOUR DIVIDENDS
A quarterly dividend of $0.26 per share was declared on Feb. 2, 1999,
payable April 16, 1999, to shareholders of record as of March 31, 1999.
Dividends have been paid every year since 1872. During those 127 years of
uninterrupted dividend payments, total payments have been increased in 67 years.
The chart at the lower right contains dividend information for 1998 and 1997.
AUTOMATIC DIVIDEND REINVESTMENT PROGRAM
This program provides a convenient way for shareholders to increase their
holding of company stock. Approximately 48 percent of shareholders of record
participate.
An explanatory brochure and enrollment card may be obtained by calling our
stock transfer agent--Norwest Bank Minnesota, N.A. at 888-326-5102, or contact
them at the address below.
STOCK TRANSFER AGENT AND REGISTRAR
For address changes, dividend checks, direct deposits of dividends, account
consolidations, registration changes, lost stock certificates, stock holdings
and the Dividend Reinvestment Program, please contact:
Norwest Bank Minnesota, N.A.
Shareowner Services Department
P.O. Box 64854
Saint Paul, MN 55164-0854
Telephone: 888-326-5102
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 24,179 as of March 1, 1999.
Options on the company's stock trade on the Chicago Board Options Exchange
under the symbol SPQ.
ANNUAL SHAREHOLDERS' MEETING
The annual shareholders meeting will be at 2 p.m. Tuesday, May 4, 1999, at
the corporate headquarters, 385 Washington Street, Saint Paul, Minn. A proxy
statement will be sent around March 30 to each shareholder of record on March
11, 1999.
FORM 10-K AVAILABLE
The Form 10-K report filed with the Securities and Exchange Commission is
available without charge to shareholders upon request. Write to our corporate
secretary:
Sandra Ulsaker Wiese
The St. Paul Companies
385 Washington Street
Saint Paul, MN 55102
Also available from the corporate secretary is a comprehensive supplement to
the annual report.
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.
<TABLE>
<CAPTION>
CASH
DIVIDEND
HIGH LOW DECLARED
--------- --------- ---------
<S> <C> <C> <C>
1998
1st Quarter......... $47 3/16 39 5/16 $0.25
2nd Quarter......... 45 3/8 39 15/16 0.25
3rd Quarter......... 43 5/8 28 1/16 0.25
4th Quarter......... 37 1/2 29 9/16 0.25
Cash dividend paid in 1998 was $0.985.
</TABLE>
<TABLE>
<CAPTION>
CASH
DIVIDEND
HIGH LOW DECLARED
--------- --------- ---------
<S> <C> <C> <C>
1997
1st Quarter......... $35 13/16 28 15/16 $0.235
2nd Quarter......... 40 1/16 32 1/16 0.235
3rd Quarter......... 40 15/16 36 9/16 0.235
4th Quarter......... 42 5/8 39 9/16 0.235
Cash dividend paid in 1997 was $0.925.
</TABLE>
71
<PAGE>
BOARD OF DIRECTORS
H. Furlong Baldwin, 67
DIRECTOR SINCE MAY 1998. USF&G DIRECTOR 1968 TO 1998.
Chairman and CEO of Mercantile Bankshares Corporation, a general banking
business with offices in Maryland, Delaware and Virginia, and provider of
mortgage banking and trust services. Joined Mercantile-Safe Deposit & Trust
Company in 1956 and in 1970 was named president of Mercantile-Safe Deposit &
Trust and president of Mercantile Bankshares Corporation. Was elected to present
position in 1976.
Norman P. Blake, Jr., 57
DIRECTOR SINCE MAY 1998. USF&G DIRECTOR 1990 TO 1998.
Elected chairman, president and chief executive officer of Promus Hotel
Corporation in December 1998. Previously chairman, president and CEO of USF&G
Corporation, which merged with The St. Paul in April 1998. Joined USF&G as
chairman, president and chief executive officer in 1990. Previously served as
chairman and chief executive officer of Heller International and executive vice
president-financial operations for General Electric Credit Corporation.
Michael R. Bonsignore, 57
DIRECTOR SINCE 1991.
Chairman and CEO, Honeywell, Inc., a manufacturer of automation and control
systems for homes, buildings, industry and aerospace. Joined Honeywell in 1969
and held marketing and operations management positions until being named to
present position in 1993.
John H. Dasburg, 56
DIRECTOR SINCE 1994.
President and CEO, Northwest Airlines, Inc., since 1990. Joined Northwest as
executive vice president in 1989. Before joining the airline, employed by
Marriott Corp., where posts included president of the lodging group, chief
financial officer and chief real estate officer.
W. John Driscoll, 70
DIRECTOR SINCE 1970.
President and CEO (retired 1994), Rock Island Company, a private investment
company. Joined Rock Island in 1964 as general manager and named president and
CEO in 1973.
Kenneth M. Duberstein, 54
DIRECTOR SINCE MAY 1998. USF&G DIRECTOR 1996 TO 1998.
Chairman and CEO, The Duberstein Group, an independent strategic planning and
consulting company. Previously served as chief of staff to President Ronald
Reagan, 1988 to 1989; also served in the White House as deputy chief of staff in
1987, and assistant and deputy assistant to the president for legislative
affairs from 1981 to 1983.
Pierson M. Grieve, 71
DIRECTOR SINCE 1985.
Chairman and CEO (retired 1995), Ecolab, Inc., a worldwide developer and
marketer of cleaning and sanitizing products, systems and services. Joined
Ecolab in 1983 as chairman and CEO. Previously served in executive management
positions with several major U.S. businesses. Currently serves as a senior
operating executive of Palladium Equity Partners, LLC, a New York private
investment firm.
James E. Gustafson, 52
DIRECTOR SINCE JANUARY 1999.
President and Chief Operating Officer, The St. Paul Companies. Previously served
as president and chief operating officer of General Re Corporation, a Stamford,
Conn., international reinsurance company. Joined General Re in 1969 as an
underwriter. Was named executive vice president in 1991 and president and chief
operating officer in 1995.
72
<PAGE>
Thomas R. Hodgson, 57
DIRECTOR SINCE 1997.
Served as President and Chief Operating Officer, Abbott Laboratories, a global
diversified health care company devoted to the discovery, development and
manufacture and marketing of pharmaceutical, diagnostics, nutritional and
hospital products from 1990 to December 1998, when he retired. Joined Abbott in
1972 and served as president of Abbott International from 1983 to 1990. Served
on Abbott board for 13 years, until December 1998.
David G. John, 60
DIRECTOR SINCE 1996.
Chairman, The BOC Group, a U.K.-based manufacturer of industrial gases and
related products, and high vacuum technology. Joined BOC as non-executive
director in 1993; named chairman in 1996. Appointed non-executive director of
British Biotech plc and vice president and board member of The Prince of Wales
Business Leaders Forum in 1996. Has served as non-executive chairman of Premier
Oil since March 1998. Previously served 15 years in executive positions with
Inchcape plc.
William H. Kling, 56
DIRECTOR SINCE 1989.
President, Minnesota Public Radio. Founded Minnesota Public Radio in 1966 and
has served as president since then. Was founding president of American Public
Radio (now Public Radio International) in 1983 and served as vice chairman until
1993. Has served as president of Greenspring Company, a diversified media and
catalog marketing company, since 1987.
Douglas W. Leatherdale, 62
DIRECTOR SINCE 1981.
Chairman and CEO, The St. Paul Companies and Chairman, St. Paul Fire and Marine.
Joined the company's investments department in 1972. Named to present position
in 1990 after serving as vice president-investments, senior vice
president-finance, executive vice president and chief financial officer.
Bruce K. MacLaury, 67
DIRECTOR SINCE 1987.
President Emeritus (since 1995), The Brookings Institution, a Washington, D.C.,
public policy research and education institution. Prior to appointment as
president of Brookings in 1977, served with the Federal Reserve Bank of New York
and as president of the Minneapolis Federal Reserve Bank. Also served as a
deputy undersecretary of the U.S. Treasury.
Glen D. Nelson, M.D., 61
DIRECTOR SINCE 1992.
Vice Chairman, Medtronic, Inc., a world leading medical technology company.
Served Medtronic as an outside director from 1980, then joined the company in
1986 as executive vice president. Previously served as CEO of two health care
corporations and practiced as a surgeon in a multispecialty group for 17 years.
Serves as a clinical professor at the University of Minnesota.
Anita M. Pampusch, 60
DIRECTOR SINCE 1985.
President, The Bush Foundation, Saint Paul, Minn., since July 1997. Previously
served as president, The College of St. Catherine, from 1984 to 1997. Joined the
college as a philosophy instructor in 1970, became associate professor three
years later and was named vice president and academic dean in 1980. Served one
year as acting president of St. Catherine's before being named president.
Gordon M. Sprenger, 61
DIRECTOR SINCE 1995.
Executive Officer, Allina Health System, a not-for-profit integrated health care
system. Assumed current position in 1993 when HealthSpan Health Systems
Corporation, of which he was executive officer, merged with Medica. Previously
served in executive positions with Abbott-Northwestern Hospital and as president
and CEO of LifeSpan, Inc
73
<PAGE>
EXECUTIVE OFFICERS
Douglas W. Leatherdale, 62
CHAIRMAN AND CHIEF EXECUTIVE OFFICER SINCE 1990.
Joined the company's investments department in 1972. Served as vice
president-investments, senior vice president-finance, executive vice president
and chief financial officer, president and chief operating officer before being
named to current position. Fifteen years investment experience, including 11
years as an officer of Great West Life Assurance Company and five years as
associate executive secretary for the Lutheran Church in America's Board of
Pensions, prior to joining The St. Paul. Reporting to Leatherdale are U.S.
Underwriting, International Underwriting, St. Paul Re, Nuveen, Finance and
Investments, Legal Services, Human Resources and Corporate Affairs.
James E. Gustafson, 52
PRESIDENT AND CHIEF OPERATING OFFICER SINCE JANUARY 1999. BOARD MEMBER SINCE
JANUARY 1999.
Previously served as president and chief operating officer of General Re
Corporation. Joined General Re in 1969 and served in several underwriting
positions before being named vice president of the treaty underwriting division
in 1978. Named president and chief executive officer of the General Reinsurance
Services Corporation in 1987; senior vice president and chief underwriting
officer in 1982; executive vice president in 1991; and president and chief
operating officer in 1995. Reporting to Gustafson are the U.S. Underwriting
operations.
Paul J. Liska, 43
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER SINCE 1997.
Twenty years prior corporate executive and financial management experience
including five years with Kraft General Foods and most recently as president and
chief executive officer of Specialty Foods Corporation. Reporting to Liska are
Financial Controls, Investments, Corporate Audit, Corporate Treasury, Strategic
Planning and Development, Corporate Risk Management, Information Systems, Ceded
Reinsurance and F&G Life.
James F. Duffy, 55
PRESIDENT-ST. PAUL RE SINCE 1993.
Joined The St. Paul in 1980 as president of surplus lines and specialty
underwriting operations. Named senior vice president in 1984 and executive vice
president in 1988. Prior to joining company, 13 years insurance and reinsurance
experience, including eight with First State Insurance Company and New England
Reinsurance Corporation.
John A. MacColl, 50
EXECUTIVE VICE PRESIDENT-BALTIMORE OPERATIONS SINCE APRIL 1998.
Previously served as USF&G's executive vice president-human resources and
general counsel. Before joining USF&G in 1989, was a partner with the law firm
of Piper & Marbury in Baltimore and served as federal prosecutor in the U.S.
Attorney's Office in Maryland.
Mark L. Pabst, 52
PRESIDENT AND CHIEF OPERATING OFFICER-ST. PAUL INTERNATIONAL UNDERWRITING SINCE
1995. Joined The St. Paul as senior vice president-human resources in 1988.
Named executive vice president of Minet in 1992. Sixteen years prior experience
in human resources in banking, and five years as naval intelligence officer.
Michael J. Conroy, 57
EXECUTIVE VICE PRESIDENT AND CHIEF ADMINISTRATIVE OFFICER OF ST. PAUL FIRE AND
MARINE SINCE 1995.
Joined company in 1994 as senior vice president-claim. Twenty-nine years prior
insurance experience with the Chubb Corporation and with The Home Insurance
Company as executive vice president and chief administrative officer.
74
<PAGE>
Stephen W. Lilienthal, 49
EXECUTIVE VICE PRESIDENT OF ST. PAUL FIRE AND MARINE SINCE AUGUST 1998 AND OF
COMMERCIAL LINES GROUP SINCE NOVEMBER 1998.
Served as executive vice president and chief underwriting officer of USF&G, and
president of USF&G's Commercial Insurance Group. Joined USF&G in 1993 as senior
vice president and chief commercial lines underwriting officer. Twenty-one years
prior insurance experience at Travelers Insurance.
Joseph B. Nardi, 54
EXECUTIVE VICE PRESIDENT OF ST. PAUL FIRE AND MARINE AND PRESIDENT OF SPECIALTY
COMMERCIAL SINCE FEBRUARY 1998.
Joined company in 1970 and worked in underwriting, legal and marketing positions
before being named president of Medical Services in 1982. Also served as
president of business insurance operation from 1992 to 1993.
Bruce A. Backberg, 50
SENIOR VICE PRESIDENT AND CHIEF LEGAL COUNSEL SINCE 1997.
Started with company's legal services department in 1972. Named vice president
in 1992, and senior vice president and chief legal counsel in 1997.
James L Boudreau, 63
SENIOR VICE PRESIDENT SINCE MAY 1998 AND TREASURER SINCE 1979.
Joined company's investment area in 1973 and named senior planning officer in
1976. Twelve years prior experience in the financial services industry with The
National Shawmut Bank of Boston and Connecticut General Life Insurance Company.
Thomas A. Bradley, 41
SENIOR VICE PRESIDENT AND CORPORATE CONTROLLER SINCE APRIL 1998.
Previously served as USF&G's vice president-finance and corporate controller.
Before joining USF&G in 1993, was vice president and chief financial officer
with Maryland Casualty Company's Commercial Insurance Division.
Karen L. Himle, 43
SENIOR VICE PRESIDENT-CORPORATE AFFAIRS SINCE 1997.
Started with company's government affairs department in 1985. Named senior
government affairs officer in 1989 and vice president-corporate communications
in 1991. Six years prior government relations and legislative experience, most
recently with Peoples Natural Gas Company.
James Hom, 43
SENIOR VICE PRESIDENT-STRATEGIC PLANNING AND DEVELOPMENT SINCE JOINING COMPANY
IN 1994.
Twenty years prior insurance experience, including eight years in external
management consulting. Served in various corporate and line positions with The
Home Insurance Company and Hartford Insurance Group.
David R. Nachbar, 36
SENIOR VICE PRESIDENT-HUMAN RESOURCES SINCE AUGUST 1998.
Previously vice president-human resources and chief of staff-Asia for Citicorp.
Fifteen years prior human resources experience with the American Broadcasting
Companies, Time Warner, PepsiCo and Citibank.
Sandra Ulsaker Wiese, 39
SENIOR CORPORATE COUNSEL SINCE 1994 AND CORPORATE SECRETARY SINCE FEBRUARY 1998.
Joined the company's legal services department in 1991 and named officer in
1995. Served as chief of staff of the U.S. Small Business Administration in
Washington, D.C.
75
<PAGE>
Exhibit 21
<TABLE>
<CAPTION>
Subsidiaries of The St. Paul Companies, Inc. State or
- - ------------------------------------------- Other
Jurisdiction of
Name Incorporation
- - ---- ---------------
<S> <C>
(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 Fire and Casualty Insurance Co. Wisconsin
(vi) St. Paul Indemnity Insurance Co. Indiana
(vii) St. Paul Property and Casualty Insurance Co. Nebraska
(viii) St. Paul Lloyds Holdings, Inc. Texas
(ix) St. Paul Management Services, Inc. Minnesota
(x) Seaboard Surety Company New York
Subsidiary:
(a) Seaboard Surety Company of Canada Canada
(xi) St. Paul Insurance Co. of North Dakota North Dakota
(xii) St. Paul Specialty Underwriting, Inc. Delaware
Subsidiaries:
(a) St. Paul Surplus Lines Insurance Co. Delaware
(b) Athena Assurance Co. Minnesota
(c) St. Paul Medical Liability Insurance Co. Minnesota
(d) St. Paul Risk Services, Inc. Minnesota
(xiii) Economy Fire & Casualty Co. Illinois
(a) Economy Preferred Insurance Co. Illinois
(b) Economy Premier Assurance Co. Illinois
(xiv) Northbrook Holdings, Inc. Delaware
Subsidiaries:
(a) Northbrook Indemnity Co. Illinois
(b) Northbrook National Insurance Co. Illinois
(c) Northbrook Property and Casualty
Insurance Co. Illinois
(xv) St. Paul Venture Capital IV, L.L.C. Delaware
(xvi) St. Paul Properties, Inc. Delaware
Subsidiaries:
(a) 77 Water Street, Inc. Minnesota
(b) St. Paul Interchange, Inc. Minnesota
(c) 350 Market Street, Inc. Minnesota
(xvii) United States Fidelity and Guaranty Co. Maryland
Subsidiaries:
(a) Fidelity and Guaranty Insurance
Underwriters, Inc. Wisconsin
(b) Fidelity and Guaranty Insurance Co. Iowa
(c) USF&G Insurance Company of Mississippi Mississippi
(d) USF&G Insurance Company of Wisconsin Wisconsin
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
(e) USF&G Insurance Company of Illinois Illinois
(f) USF&G Specialty Insurance Co. Maryland
(g) USF&G Business Insurance Co. Maryland
(h) USF&G Family Insurance Co. Maryland
(i) GeoVera Insurance Co. Maryland
(j) F&G Re, Inc. Delaware
(k) Inner Harbor Reinsurance, Inc. Maryland
(l) The Del Mar Co. Delaware
(m) Northern Indemnity, Inc. Canada
(n) USF&G Small Business Insurance Co. Maryland
(o) USF&G Pacific Insurance Co. Maryland
(p) USF&G West Insurance Co. Maryland
(q) USF&G Founder's Insurance Co. Maryland
(r) Charter House Underwriters, Inc. Maryland
(s) Afianzadora Insurgentes, S.A. De C.V. Mexico
(t) F&G Specialty Insurance Services, Inc. California
(u) IMG Holding Company, Inc. Maryland
Subsidiary:
(i) USF&G Realty Advisors, Inc. Delaware
(v) Discover Re Managers, Inc. Delaware
Subsidiary:
(i) Discovery Reinsurance Co. Indiana
(w) St. Paul Syndicate Holdings, Ltd. United Kingdom
Subsidiary:
(i) F&G Overseas, Ltd. Cayman Islands
(x) THI Holdings (Delaware), Inc. Delaware
Subsidiaries:
(i) Titan Holdings Service Corp. Texas
(ii) Victoria Financial Corp. Delaware
(xviii) Fidelity and Guaranty Life Insurance Co. Maryland
Subsidiary:
(a) Thomas Jefferson Life Insurance Co. New York
(xix) USF&G Realty, Inc. Delaware
(2) The John Nuveen Company* Delaware
Subsidiaries:
(i) John Nuveen & Co. Incorporated Delaware
Subsidiaries:
(a) Nuveen Advisory Corp. Delaware
(b) Nuveen Institutional Advisory Corp. Delaware
(ii) Nuveen Asset Management, Inc. Delaware
(iii) Rittenhouse Financial Services, Inc. Delaware
(3) St. Paul Re, Inc. New York
(4) Camperdown Corporation Delaware
</TABLE>
41
<PAGE>
<TABLE>
<S> <C>
(5) St. Paul Capital L.L.C. Delaware
(6) St. Paul Venture Capital, Inc. Delaware
(7) St. Paul London Properties, Inc. Minnesota
(8) St. Paul London Investments, Inc. Minnesota
(9) St. Paul Multinational Holdings, Inc. Delaware
Subsidiaries:
(i) St. Paul Insurance Company (S.A) Limited South Africa
(ii) Seguros St. Paul de Mexico, S.A. de C.V. Mexico
(iii) Botswana Insurance Company Limited Botswana
(iv) St. Paul Argentina Compania De Seguros S.A. Argentina
(10) St. Paul Bermuda Holdings, Inc. Delaware
Subsidiaries:
(i) St. Paul (Bermuda), Ltd. Bermuda
(ii) St. Paul Re (Bermuda), Ltd. Bermuda
(11) St. Paul Holdings Limited United Kingdom
Subsidiaries:
(i) St. Paul Reinsurance Company
Limited United Kingdom
(ii) St. Paul International Insurance
Company Limited United Kingdom
(iii) St. Paul Insurance Espana Seguros
Y Reaseguros, S.A. Spain
(iv) Camperdown UK Limited United Kingdom
(v) New World Insurance Company Ltd. Guernsey
(vi) Lesotho National Insurance
Holdings Limited Lesotho
(12) USF&G Pegasus Realty, Inc. Maryland
(13) F&G International Insurance, Ltd. Bermuda
(14) Bosworth Insurance Co., Ltd. Bermuda
(15) St. George Reinsurance, Ltd. B.W. Indies
(16) Mountain Ridge Insurance Co. Vermont
</TABLE>
*The John Nuveen Company is a majority-owned subsidiary jointly owned by The St.
Paul, which holds a 65% interest, and Fire and Marine, which holds a 13%
interest. The remaining 22% is publicly held.
42
<PAGE>
EXHIBIT 23A
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. 33-15392, No. 33-23446, No. 33-23948, No. 33-24220,
No. 33-24575, No. 33-26923, No. 33-49273, No. 33-56987, No. 333-01065, No.
333-22329, No. 333-25203, No. 333-28915, No. 333-48121, No. 333-50935, No.
333-50937, No. 333-50941, No. 333-50943 and No. 333-67983), and Form S-3 (SEC
File No. 33-33931, No. 33-50115, No. 33-58491, No. 333-06465 and No.
333-67139) of The St. Paul Companies, Inc., of our reports dated March 2,
1999, relating to the consolidated balance sheets of The St. Paul Companies,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, comprehensive income
and cash flows for each of the years in the three-year period ended December
31, 1998, and related schedules I through V, which reports appear or are
incorporated by reference in the December 31, 1998 annual report on Form 10-K
of The St. Paul Companies, Inc. The consolidated financial statements and
financial statement schedules as of December 31, 1997 and for each of the
years in the two-year period then ended have been restated to reflect the
pooling of interests with USF&G Corporation. Our reports state the
consolidated financial statements and financial statement schedules of USF&G
Corporation which statements reflect total assets constituting 43 percent as
of December 31, 1997 and total revenues constituting 35 percent and 38
percent for the years ended December 31, 1997 and 1996, respectively, of the
related consolidated totals were audited by other auditors whose reports have
been furnished to us, and our opinions, insofar as they relate to the
amounts included for USF&G Corporation, as of December 31, 1997 and for each
of the years in the two-year period then ended, are based solely on the
reports of such other auditors.
Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP
March 31, 1999 -------------------------
KPMG Peat Marwick LLP
43
<PAGE>
EXHIBIT 23B
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 20, 1998, with respect to the
consolidated financial statements of USF&G Corporation for the year ended
December 31, 1997 (not included separately herein) included as Schedule VII in
The St. Paul Companies, Inc.'s Annual Report (Form 10-K) for the year ended
December 31, 1998, filed with the Securities and Exchange Commission.
Our audits also included the financial statement schedules of USF&G Corporation
listed in Item 14(a) of USF&G Corporation's Annual Report (Form 10-K) for the
year ended December 31, 1997 (not included separately herein). These schedules
are the responsibility of management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration Statements
on Form S-8 (SEC File No. 33-15392, No. 33-23446, No. 33-23948, No. 33-24220,
No. 33-24575, No. 33-26923, No. 33-49273, No. 33-56987, No. 333-01065, No.
333-22329, No. 333-25203, No. 333-28915, No. 333-48121, No. 333-50935, No.
333-50937, No. 333-50941, No. 333-50943 and No. 333-67983), and Form S-3 (SEC
File No. 33-33931, No. 33-50115, No. 33-58491, No. 333-06465 and No. 333-67139),
of The St. Paul Companies, Inc., of our report dated February 20, 1998, with
respect to the consolidated financial statements and schedules of USF&G
Corporation (these financial statements and schedules are not presented herein)
included as Schedule VII in The St. Paul Companies, Inc. Annual Report on Form
10-K filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
----------------------
Ernst & Young LLP
Baltimore, Maryland
March 31, 1999
<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 Sandra Ulsaker Wiese and Thomas A. Bradley, or either of
them, to be my attorney-in-fact, with full power and authority to sign on my
behalf a Form 10-K for the year ended December 31, 1998, to be filed by The St.
Paul with the Securities and Exchange Commission, and any amendments thereto,
and shall have the same force and effect as though I had manually signed the
Form 10-K or amendments.
Dated: February 2, 1999 Signature: /s/ H. Furlong Baldwin
----------------------
Name: H. Furlong Baldwin
Dated: February 2, 1999 Signature: /s/ Norman P. Blake
---------------------
Name: Norman P. Blake
Dated: February 2, 1999 Signature: /s/ Michael R. Bonsignore
-------------------------
Name: Michael R. Bonsignore
Dated: February 2, 1999 Signature: /s/ John H. Dasburg
-------------------
Name: John H. Dasburg
Dated: February 2, 1999 Signature: /s/ W. John Driscoll
--------------------
Name: W. John Driscoll
Dated: February 2, 1999 Signature: /s/ Kenneth M. Duberstein
-------------------------
Name: Kenneth M. Duberstein
Dated: February 2, 1999 Signature: /s/ Pierson M. Grieve
---------------------
Name: Pierson M. Grieve
Dated: February 2, 1999 Signature: /s/ Thomas R. Hodgson
---------------------
Name: Thomas R. Hodgson
45
<PAGE>
Dated: February 2, 1999 Signature: /s/ David G. John
-----------------
Name: David G. John
Dated: February 2, 1999 Signature: /s/ William H. Kling
--------------------
Name: William H. Kling
Dated: February 2, 1999 Signature: /s/ Bruce K. MacLaury
---------------------
Name: Bruce K. MacLaury
Dated: February 2, 1999 Signature: /s/ Glen D. Nelson
------------------
Name: Glen D. Nelson
Dated: February 2, 1999 Signature: /s/ Anita M. Pampusch
---------------------
Name: Anita M . Pampusch
Dated: February 2, 1999 Signature: /s/ Gordon M. Sprenger
----------------------
Name: Gordon M. Sprenger
46
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<DEBT-HELD-FOR-SALE> 21,056,259 20,945,219 20,107,863
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 1,258,509 1,052,370 823,628
<MORTGAGE> 629,450 640,734 406,377
<REAL-ESTATE> 877,998 985,317 1,247,673
<TOTAL-INVEST> 27,115,892 25,980,033 24,441,938
<CASH> 119,841 113,175 109,855
<RECOVER-REINSURE> 157,484 128,422 164,618
<DEFERRED-ACQUISITION> 878,172 872,460 857,560
<TOTAL-ASSETS> 38,322,708 37,358,828 35,146,236
<POLICY-LOSSES> 22,600,198 21,969,130 21,440,625
<UNEARNED-PREMIUMS> 3,265,762 3,528,234 3,679,752
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 1,260,392 1,304,008 1,170,676
502,700 502,700 307,000
15,576 16,725 16,063
<COMMON> 2,127,671 2,057,108 1,895,608
<OTHER-SE> 4,493,140 4,534,335 3,735,789
<TOTAL-LIABILITY-AND-EQUITY> 38,322,708 37,358,828 35,146,236
6,944,575 7,298,100 7,178,682
<INVESTMENT-INCOME> 1,584,982 1,577,805 1,512,575
<INVESTMENT-GAINS> 201,689 423,048 261,989
<OTHER-INCOME> 377,155 324,226 278,291
<BENEFITS> 5,876,317 5,370,369 5,466,302
<UNDERWRITING-AMORTIZATION> 1,653,613 1,709,039 1,682,788
<UNDERWRITING-OTHER> 1,624,758 1,208,063 1,091,349
<INCOME-PRETAX> (46,287) 1,335,708 991,098
<INCOME-TAX> (135,635) 338,666 150,637
<INCOME-CONTINUING> 89,348 997,042 840,461
<DISCONTINUED> 0 (67,750) (107,759)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 89,348 929,292 732,702
<EPS-PRIMARY> 0.33 3.97 3.01
<EPS-DILUTED> 0.32 3.69 2.84
<RESERVE-OPEN> 18,153,080 17,888,536 16,559,200
<PROVISION-CURRENT> 5,874,522 5,720,662 5,567,703
<PROVISION-PRIOR> (270,961) (627,141) (414,138)
<PAYMENTS-CURRENT> 1,840,328 1,709,512 1,864,832
<PAYMENTS-PRIOR> 3,653,865 3,453,073 3,029,833
<RESERVE-CLOSE> 18,457,921 18,153,080 17,888,536
<CUMULATIVE-DEFICIENCY> 191,000 0 0
</TABLE>
