-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NktbRs+7eeJWrACjJg0YEcYsETnlr6SX50jvCn0G+9zZj5X6azdehTVqR33K3WAK PXeOvJQrXdSlt0BMxk9Ogw== 0000086312-96-000015.txt : 19961118 0000086312-96-000015.hdr.sgml : 19961118 ACCESSION NUMBER: 0000086312-96-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ST PAUL COMPANIES INC /MN/ CENTRAL INDEX KEY: 0000086312 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 410518860 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10898 FILM NUMBER: 96663247 BUSINESS ADDRESS: STREET 1: 385 WASHINGTON ST CITY: SAINT PAUL STATE: MN ZIP: 55102 BUSINESS PHONE: 6122217911 FORMER COMPANY: FORMER CONFORMED NAME: SAINT PAUL COMPANIES INC DATE OF NAME CHANGE: 19900730 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) X OF THE SECURITIES EXCHANGE ACT OF 1934 ---- For the quarterly period ended September 30, 1996 ------------------ or TRANSITION REPORT PURSUANT TO SECTION 13 OR ---- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission File Number 0-3021 -------- THE ST. PAUL COMPANIES, INC. - ---------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 - ------------------------------------ ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 385 Washington St., Saint Paul, MN 55102 - ------------------------------------ ------------------------------ (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code (612) 310-7911 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- The number of shares of the Registrant's Common Stock, without par value, outstanding at November 8, 1996, was 82,980,241. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Consolidated Statements of Income (Unaudited), Three and Nine Months Ended September 30, 1996 and 1995 3 Consolidated Balance Sheets, September 30, 1996 (Unaudited) and December 31, 1995 4 Consolidated Statements of Shareholders' Equity, Nine Months Ended September 30, 1996 (Unaudited) and Twelve Months Ended December 31, 1995 6 Consolidated Statements of Cash Flows (Unaudited), Nine Months Ended September 30, 1996 and 1995 7 Notes to Consolidated Financial Statements (Unaudited) 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II. OTHER INFORMATION Item 1 through Item 6 22 Signatures 24 EXHIBIT INDEX 25 PART I FINANCIAL INFORMATION THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Income Unaudited (In thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Revenues: Premiums earned $1,168,908 993,317 3,254,868 2,931,214 Net investment income 211,672 193,922 616,223 570,487 Insurance brokerage fees and commissions 81,388 83,549 224,476 227,662 Investment banking-asset management 55,544 55,091 161,468 162,969 Realized investment gains 37,556 25,736 132,981 38,060 Other 10,571 13,251 35,435 32,661 --------- --------- --------- --------- Total revenues 1,565,639 1,364,866 4,425,451 3,963,053 --------- --------- --------- --------- Expenses: Insurance losses and loss adjustment expenses 905,943 714,302 2,440,204 2,118,131 Policy acquisition expenses 249,736 215,863 712,015 642,785 Provision for loss on disposal of insurance brokerage operations 250,000 - 250,000 - Operating and administrative 296,484 256,596 827,225 732,632 --------- --------- --------- --------- Total expenses 1,702,163 1,186,761 4,229,444 3,493,548 --------- --------- --------- --------- Income (loss) before income taxes (136,524) 178,105 196,007 469,505 Income tax expense (benefit): Federal current 14,288 53,825 86,855 145,085 Other (279,746) (18,119) (278,656) (41,542) --------- --------- --------- --------- Total income tax expense (benefit) (265,458) 35,706 (191,801) 103,543 --------- --------- --------- --------- Net income $128,934 142,399 387,808 365,962 ========= ========= ========= ========= Earnings per common share: Primary $1.50 1.64 4.50 4.21 ========= ========= ========= ========= Fully diluted $1.42 1.54 4.24 4.00 ========= ========= ========= ========= Dividends declared on common stock $0.44 0.40 1.32 1.20 ========= ========= ========= ========= See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) September 30, December 31, ASSETS 1996 1995 - ------ ---------- ---------- (Unaudited) Investments: Fixed maturities, at estimated market value $11,581,950 10,372,890 Equities, at estimated market value 840,369 711,471 Real estate, at cost less accumulated depreciation of $78,392 (1995; $68,795) 609,245 611,656 Venture capital, at estimated market value 514,366 388,599 Other investments 51,820 42,776 Short-term investments, at cost 522,201 939,528 ---------- ---------- Total investments 14,119,951 13,066,920 Cash 33,646 34,440 Investment banking inventory securities 95,709 249,662 Reinsurance recoverables: Unpaid losses 1,989,958 1,853,817 Paid losses 59,654 74,568 Receivables: Underwriting premiums 1,552,360 1,316,560 Insurance brokerage activities - 652,801 Interest and dividends 207,359 197,740 Other 95,819 81,885 Deferred policy acquisition expenses 406,254 372,174 Ceded unearned premiums 204,853 226,943 Deferred income taxes 966,364 528,805 Office properties and equipment, at cost less accumulated depreciation of $215,039 (1995; $277,759) 285,586 478,286 Goodwill 170,548 314,457 Other assets 263,802 207,444 ---------- ---------- Total assets $20,451,863 19,656,502 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In thousands) September 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995 - ------------------------------------ ------------ ----------- (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $11,735,119 10,247,070 Unearned premiums 2,578,197 2,361,028 ---------- ---------- Total insurance reserves 14,313,316 12,608,098 Debt 707,560 704,042 Payables: Insurance brokerage activities - 979,964 Income taxes 212,595 179,249 Reinsurance premiums 130,698 139,058 Accrued expenses and other 522,359 618,903 Other liabilities 484,703 490,067 ---------- ---------- Total liabilities 16,371,231 15,719,381 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. 207,000 207,000 ---------- ---------- Shareholders' equity: Preferred: Series B convertible preferred stock; 1,450 shares authorized; 989 shares outstanding (999 shares in 1995) 142,833 144,165 Guaranteed obligation - PSOP (126,068) (133,293) ---------- ---------- Total preferred shareholders' equity 16,765 10,872 ---------- ---------- Common: Common stock, 240,000 shares authorized; 83,160 shares outstanding (83,976 shares in 1995) 465,827 460,458 Retained earnings 2,922,092 2,704,075 Guaranteed obligation - ESOP (23,131) (32,294) Unrealized appreciation of investments 511,457 627,791 Unrealized loss on foreign currency translation (19,378) (40,781) ---------- ---------- Total common shareholders' equity 3,856,867 3,719,249 ---------- ---------- Total shareholders' equity 3,873,632 3,730,121 ---------- ---------- Total liabilities, redeemable preferred securities and shareholders' equity $20,451,863 19,656,502 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In thousands) Nine Twelve Months Ended Months Ended September 30, December 31, 1996 1995 ------------ ------------ (Unaudited) Preferred shareholders' equity: Series B convertible preferred stock: Beginning of period $144,165 146,102 Change during period (1,332) (1,937) ---------- ---------- End of period 142,833 144,165 ---------- ---------- Guaranteed obligation - PSOP: Beginning of period (133,293) (141,567) Principal payments 7,225 8,274 ---------- ---------- End of period (126,068) (133,293) ---------- ---------- Total preferred shareholders' equity 16,765 10,872 ---------- ---------- Common shareholders' equity: Common stock: Beginning of period 460,458 445,222 Stock issued under stock option and other incentive plans 11,716 19,481 Reacquired common shares (6,347) (4,245) ---------- ---------- End of period 465,827 460,458 ---------- ---------- Retained earnings: Beginning of period 2,704,075 2,362,286 Net income 387,808 521,209 Dividends declared on common stock (109,547) (133,956) Dividends declared on PSOP preferred stock, net of taxes (6,503) (8,582) Reacquired common shares (54,627) (38,291) Tax benefit on employee stock options and awards 886 1,409 ---------- ---------- End of period 2,922,092 2,704,075 ---------- ---------- Guaranteed obligation - ESOP: Beginning of period (32,294) (44,410) Principal payments 9,163 12,116 ---------- ---------- End of period (23,131) (32,294) ---------- ---------- Unrealized appreciation of investments, net of taxes: Beginning of period 627,791 13,948 Change during the period (116,334) 613,843 ---------- ---------- End of period 511,457 627,791 ---------- ---------- Unrealized loss on foreign currency translation, net of taxes: Beginning of period (40,781) (44,112) Currency translation adjustments (4,191) 3,331 Realized loss relating to disposal of brokerage operations 25,594 - ---------- ---------- End of period (19,378) (40,781) ---------- ---------- Total common shareholders' equity 3,856,867 3,719,249 ---------- ---------- Total shareholders' equity $3,873,632 3,730,121 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (In thousands) Nine Months Ended September 30 -------------------------- 1996 1995 ------ ------ OPERATING ACTIVITIES Underwriting: Net income $374,034 383,742 Adjustments: Change in net insurance reserves 362,377 625,146 Change in underwriting premiums receivable (51,027) (208,381) Provision for deferred taxes (27,823) (47,024) Realized investment gains (124,944) (32,355) Other 182,695 (96,758) ---------- ---------- Total underwriting 715,312 624,370 ---------- ---------- Insurance brokerage: Net loss (276,074) (22,172) Adjustments: Provision for estimated loss on disposal 250,000 - Change in premium balances (71,162) (28,041) Other 8,574 15,568 ---------- ---------- Total insurance brokerage (88,662) (34,645) ---------- ---------- Investment banking-asset management: Net income 41,100 37,997 Adjustments: Change in inventory securities 111,950 40,919 Change in short-term investments (58,457) (104,401) Change in short-term borrowings (25,000) - Change in open security transactions (1,502) (2,810) Other 16,319 52,353 ---------- ---------- Total investment banking-asset management 84,410 24,058 ---------- ---------- Parent company and consolidating eliminations: Net income (loss) 248,748 (33,605) Deferred tax benefit on provision for loss on disposal of insurance brokerage operations (266,000) - Realized investment gains (8,037) (5,705) Other adjustments (19,847) 42,016 ---------- ---------- Total parent company and consolidating eliminations (45,136) 2,706 ---------- ---------- Net cash provided by operating activities 665,924 616,489 ---------- ---------- INVESTING ACTIVITIES Purchase of investments (2,241,359) (2,015,989) Proceeds from sales and maturities of investments 1,823,783 1,336,941 Change in short-term investments 107,063 56,399 Purchase of Northbrook Holdings Inc., net of cash acquired (184,568) - Change in open security transactions 16,925 (28,876) Net purchases of office properties and equipment (32,892) (37,322) Other (22,566) (50,628) ---------- ---------- Net cash used in investing activities (533,614) (739,475) ---------- ---------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (115,808) (107,897) Proceeds from issuance of debt 44,238 192,900 Reacquired common shares (60,310) (497) Proceeds from issuance of company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. - 207,000 Repayment of debt - (185,844) Other (1,296) (818) ---------- ---------- Net cash provided by (used in) financing activities (133,176) 104,844 ---------- ---------- Effect of exchange rate changes on cash 72 140 ---------- ---------- Decrease in cash (794) (18,002) Cash at beginning of period 34,440 46,664 ---------- ---------- Cash at end of period 33,646 28,662 ========== ========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited September 30, 1996 Note 1 Basis of Presentation - ----------------------------- The consolidated financial statements include The St. Paul Companies, Inc. and subsidiaries, and have been prepared in conformity with generally accepted accounting principles. These financial statements rely, in part, on estimates. In the opinion of management, all necessary adjustments have been reflected for a fair presentation of the results of operations, financial position and cash flows in the accompanying unaudited consolidated financial statements. The results for the period are not necessarily indicative of the results to be expected for the entire year. Reference should be made to the "Notes to Consolidated Financial Statements" on pages 51 to 67 of the Registrant's annual report to shareholders for the year ended December 31, 1995. The amounts in those notes have not changed except as a result of transactions in the ordinary course of business or as otherwise disclosed in these notes. Some figures in the 1995 consolidated financial statements have been reclassified to conform with the 1996 presentation. These reclassifications had no effect on net income or common shareholders' equity, as previously reported. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 2 Earnings per Share - -------------------------- Earnings per common share (EPS) amounts were calculated by dividing net income, as adjusted, by the adjusted average common shares outstanding. Three Months Ended Nine Months Ended September 30 September 30 ---------------- ---------------- 1996 1995 1996 1995 ------ ------ ------ ------ (In thousands) PRIMARY Net income, as reported $128,934 142,399 387,808 365,962 PSOP preferred dividends declared (net of taxes) (2,179) (2,159) (6,503) (6,444) Premium on preferred shares redeemed (224) - (664) - -------- ------- ------- ------- Net income, as adjusted $126,531 140,240 380,641 359,518 ======== ======= ======= ======= FULLY DILUTED Net income, as reported $128,934 142,399 387,808 365,962 Dividends on monthly income preferred securities (net of taxes) 2,018 2,018 6,055 3,027 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (752) (867) (2,265) (2,612) Premium on preferred shares redeemed (224) - (664) - -------- ------- ------- ------- Net income, as adjusted $129,976 143,550 390,934 366,377 ======== ======= ======= ======= ADJUSTED AVERAGE COMMON SHARES OUTSTANDING Primary 84,254 85,566 84,644 85,373 ======== ======= ======= ======= Fully diluted 91,840 93,414 92,179 91,570 ======== ======= ======= ======= Adjusted average common shares outstanding include the common and common equivalent shares outstanding for the period and, for fully diluted EPS, common shares that would be issuable upon conversion of PSOP preferred stock and the company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. (monthly income preferred securities). THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 3 Investments - ------------------- Investment Activity. A summary of investment transactions is presented below. Nine Months Ended September 30 ------------------------------ 1996 1995 ------ ------ (In thousands) Purchases: Fixed maturities $1,418,142 1,206,888 Equities 700,308 648,154 Real estate 18,807 108,589 Venture capital 74,375 46,938 Other investments 29,727 5,420 --------- --------- Total purchases 2,241,359 2,015,989 --------- --------- Proceeds from sales and maturities: Fixed maturities: Sales 390,401 240,652 Maturities and redemptions 637,362 433,306 Equities 682,462 588,601 Venture capital 102,741 64,260 Real estate 8,577 7,520 Other investments 2,240 2,602 --------- --------- Total sales and maturities 1,823,783 1,336,941 --------- --------- Net purchases $417,576 679,048 ========= ========= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Change in Unrealized Appreciation. The increase (decrease) in unrealized appreciation of investments recorded in common shareholders' equity was as follows: Nine Months Ended Twelve Months Ended September 30, 1996 December 31, 1995 ------------------ ------------------- (In thousands) Fixed maturities $(307,394) 742,626 Equities 34,728 130,247 Venture capital 95,160 59,880 -------- ------- Total change in pretax unrealized appreciation (177,506) 932,753 Increase (decrease) in deferred tax asset due to change in unrealized appreciation 61,172 (318,910) -------- -------- Total change in unrealized appreciation, net of taxes $(116,334) 613,843 ======== ======== Note 4 Income Taxes - -------------------- The components of the income tax provision are as follows: Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1996 1995 1996 1995 ------ ------ ------ ------ (In thousands) Federal current tax expense $14,288 53,825 86,855 145,085 Federal deferred tax benefit on provision for loss on disposal of insurance brokerage operations (266,000) - (266,000) - Other federal deferred tax benefit (23,669) (19,190) (39,900) (50,207) ------- ------- ------- ------- Total federal income tax expense (benefit) (275,381) 34,635 (219,045) 94,878 Foreign income taxes 8,401 (260) 22,862 4,875 State income taxes 1,522 1,331 4,382 3,790 ------- ------- ------- ------- Total income tax expense (benefit) ($265,458) 35,706 (191,801) 103,543 ======= ======= ======= ======= See Note 9 on page 14 for further discussion of the $266 million deferred tax benefit on the provision for loss on disposal of insurance brokerage operations. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 5 Contingent Liabilities - ------------------------------ In the ordinary course of conducting business, the company and some of its subsidiaries have been named as defendants in various lawsuits. Some of these lawsuits attempt to establish liability under insurance contracts issued by those companies. Plaintiffs in these lawsuits are asking for money damages or to have the court direct the activities of our operations in certain ways. Although it is possible that the settlement of a contingency may be material to the company's results of operations and liquidity in the period in which the settlement occurs, the company believes that the total amounts that it or its subsidiaries will ultimately have to pay in all of these lawsuits will have no material effect on its overall financial position. In some cases, plaintiffs seek to establish coverage for their liability under environmental protection laws. See "Environmental and Asbestos Claims" in Management's Discussion and Analysis for information on these claims. Note 6 Debt - ------------ Debt consists of the following: September 30, December 31, 1996 1995 ------------------ ----------------- Book Fair Book Fair Value Value Value Value ----- ----- ----- ----- (In thousands) Medium-term notes $412,428 408,600 397,433 419,500 Commercial paper 178,473 178,473 149,629 149,629 9 3/8% notes 99,991 102,200 99,982 105,300 Guaranteed ESOP debt 16,668 17,100 25,001 26,200 Pound sterling loan notes - - 6,997 6,997 Short-term borrowings - - 25,000 25,000 ------- ------- ------- ------- Total debt $707,560 706,373 704,042 732,626 ======= ======= ======= ======= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 7 Reinsurance - ------------------- The company's consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the company's acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks the company has underwritten to other insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to protect the company from potential losses in excess of the amount it is prepared to accept. The company expects those with whom it has ceded reinsurance to honor their obligations. In the event these companies are unable to honor their obligations, the company will pay these amounts. The company has established allowances for possible nonpayment of amounts due to it. The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses and loss adjustment expenses is as follows: Three Months Ended Nine Months Ended September 30 September 30 -------------------- --------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (In thousands) Premiums written: Direct $1,120,234 1,076,797 2,813,855 2,828,803 Assumed 273,631 224,685 789,490 750,207 Ceded (146,895) (143,854) (343,838) (409,893) --------- --------- --------- --------- Net premiums written $1,246,970 1,157,628 3,259,507 3,169,117 ========= ========= ========= ========= Premiums earned: Direct $1,045,971 928,783 2,891,156 2,715,737 Assumed 270,119 222,705 749,765 656,450 Ceded (147,182) (158,171) (386,053) (440,973) --------- --------- --------- --------- Net premiums earned $1,168,908 993,317 3,254,868 2,931,214 ========= ========= ========= ========= Insurance losses and loss adjustment expenses: Direct $830,977 652,304 2,127,265 1,894,286 Assumed 151,748 181,845 531,170 557,391 Ceded (76,782) (119,847) (218,231) (333,546) --------- --------- --------- --------- Net insurance losses and loss adjustment expenses $905,943 714,302 2,440,204 2,118,131 ========= ========= ========= ========= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 8 Acquisition of Northbrook Holdings Inc. - ----------------------------------------------- On July 31, 1996, St. Paul Fire and Marine Insurance Company, a subsidiary of the company, completed its acquisition of Northbrook Holdings Inc. and its three insurance company subsidiaries from The Allstate Corporation. Northbrook and its subsidiaries, which had $587 million in net written premiums in 1995, underwrite various property-liability commercial insurance products throughout the United States. The company's total cost for the Northbrook acquisition was approximately $190 million (subject to post-closing adjustments), which was provided from internal funds. The company recorded goodwill of approximately $64 million as a result of this acquisition, which is being amortized over a 15-year period. The acquisition was accounted for as a purchase. As a result, Northbrook's results were included in the company's consolidated results from the date of purchase. Consolidated results would not have been materially different had this acquisition been completed at the beginning of 1995. Note 9 Provision for Loss on Disposal of Insurance Brokerage Operations - ------------------------------------------------------------------------ In September 1996, the company committed to a plan to dispose of a significant portion of its insurance brokerage operations. As a result, the company recorded a pretax loss of $250 million in the third quarter, representing the estimated difference between the fair value and the carrying value of these operations at the date of disposal. The third quarter loss provision encompasses estimated operating losses of the affected operations through the estimated disposal date, the realization of previously unrealized foreign exchange losses, pension and postretirement curtailment gains, and estimated selling costs. Any adjustments to the loss provision will be reflected in the results for the quarter during which the adjustments are made. The company recorded a $266 million deferred tax benefit in the third quarter associated with this loss on disposal. This net benefit consisted of a tax benefit on the provision for loss on disposal of $304 million, reduced by a valuation allowance of $38 million. The company's federal income tax carrying value of the affected operations was substantially higher than the carrying value for financial statement purposes, resulting in the tax benefit recognized in the third quarter being disproportionate to the related pretax loss. The brokerage operations' balance sheet was not included in the company's consolidated balance sheet at Sept. 30, 1996. Rather, the net assets of the brokerage operations were included on one line in the balance sheet. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations September 30, 1996 Consolidated Results - -------------------- The company incurred a pretax loss of $137 million in the third quarter, driven by a $250 million provision for the estimated loss on disposal of a significant portion of the company's insurance brokerage operations. The company also recorded a $266 million deferred tax benefit associated with this loss provision. Year-to-date pretax earnings of $196 million were $274 million below comparable 1995 earnings of $470 million, reflecting the impact of the brokerage loss provision and a significant increase in catastrophe losses in the company's underwriting operations. Consolidated revenues in the third quarter totaled $1.57 billion, over $200 million higher than 1995 third quarter revenues of $1.36 billion. Year-to-date revenues in 1996 were 12% higher than the same period of 1995. Growth in insurance premiums earned, investment income and realized investment gains accounted for the increased revenue in 1996. Results by Segment - ------------------ Pretax results by industry segment were as follows (in millions): Three Months Nine Months Ended Sept. 30 Ended Sept. 30 ------------- ------------- 1996 1995 1996 1995 ---- ---- ---- ---- Pretax income (loss): Insurance: Underwriting: GAAP underwriting results $(87) (25) (168) (66) Net investment income 202 184 585 543 Realized investment gains 36 23 125 32 Other (40) (11) (88) (33) ---- ---- ---- ---- Total underwriting 111 171 454 476 Brokerage (252) 5 (270) (14) ---- ---- ---- ---- Total insurance (141) 176 184 462 Investment banking-asset management 23 22 67 61 Parent and other (19) (20) (55) (53) ---- ---- ---- ---- Income (loss) before income taxes (137) 178 196 470 Income tax expense (benefit) (266) 36 (192) 104 ---- ---- ---- ---- Net income $129 142 388 366 ==== ==== ==== ==== Net income per common share $1.42 1.54 4.24 4.00 ==== ==== ==== ==== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Insurance Underwriting - ---------------------- The following summarizes key financial results by underwriting operation: % of Three Months Nine Months 1996 Ended Sept. 30 Ended Sept. 30 Written -------------- -------------- ($ in Millions) Premiums 1996 1995 1996 1995 - --------------- -------- ---- ---- ---- ---- Specialized Commercial: Written Premiums 29% $342 336 947 975 Underwriting Results $18 (26) 27 (73) Combined Ratio 93.3 107.4 97.3 106.6 Personal Insurance: Written Premiums 17% $193 178 546 508 Underwriting Results ($61) (8) (150) (18) Combined Ratio 133.3 104.1 128.0 103.1 Commercial: Written Premiums 16% $220 166 530 454 Underwriting Results ($35) (5) (46) (20) Combined Ratio 117.0 101.1 109.8 103.8 Medical Services: Written Premiums 12% $201 242 401 508 Underwriting Results $7 14 47 66 Combined Ratio 92.7 86.6 92.0 85.1 ---- ----- ----- ----- ----- Total St. Paul Fire & Marine: Written Premiums 74% $956 922 2,424 2,445 Underwriting Results ($71) (25) (122) (45) Combined Ratio 106.9 100.7 105.7 100.9 International: Written Premiums 7% $118 66 229 154 Underwriting Results ($4) (3) (16) (19) Combined Ratio 100.0 98.8 106.2 112.6 ---- ----- ----- ----- ----- Total Worldwide Insurance: Written Premiums 81% $1,074 988 2,653 2,599 Underwriting Results ($75) (28) (138) (64) Combined Ratio 106.2 100.6 105.8 101.7 Reinsurance: Written Premiums 19% $173 170 607 570 Underwriting Results ($12) 3 (30) (2) Combined Ratio 108.6 99.9 104.8 99.4 ---- ----- ----- ----- ----- Total: Written Premiums 100% $1,247 1,158 3,260 3,169 GAAP Underwriting Results ($87) (25) (168) (66) Statutory Combined Ratio: Loss and Loss Expense Ratio 77.5 71.9 75.0 72.3 Underwriting Expense Ratio 29.1 28.5 30.6 29.0 ----- ----- ----- ----- Combined Ratio 106.6 100.4 105.6 101.3 ===== ===== ===== ===== Combined Ratio Including Policyholders' Dividends 106.9 100.7 105.8 101.4 ===== ===== ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued In May 1996, the company formed a new worldwide insurance underwriting group, which includes St. Paul Fire and Marine, the company's flagship domestic underwriting operation, and St. Paul International Underwriting. This new structure is reflected in the table on the preceding page. Underwriting operations posted pretax earnings of $111 million in the third quarter, $60 million less than the same period of 1995. Catastrophe losses in the third quarter of 1996 totaled $66 million, half of which were the result of Hurricane Fran in August. Catastrophe losses in last year's third quarter were $28 million. An increase in other expenses, primarily resulting from the company's agreement to settle a lawsuit (see "Legal Matters" section on page 20), also contributed to the deterioration in underwriting earnings. Third quarter 1996 written premiums of $1.25 billion were 8% higher than premiums of $1.16 billion in the same 1995 quarter. The 1996 third quarter total includes $53 million of written premiums from the three commercial insurance underwriting subsidiaries of Northbrook Holdings Inc. acquired from The Allstate Corporation in July. Medical Services' premiums were down 17% compared with the same 1995 period, reflecting competitive conditions in that market sector. Personal Insurance premiums increased 8% over the third quarter of 1995, due to new business. International volume grew 77% over last year's third quarter, primarily the result of increased production at Camperdown Corporation, the company's vehicle for writing business through Lloyd's of London. Written premiums for the first nine months of 1996 totaled $3.26 billion, 3% higher than the same period of 1995. Medical Services' year-to-date premiums were down $107 million from 1995, reflecting the impact of competitive market conditions and the transition to annual policy terms in the second half of last year. This decline was offset by significant premium growth in Commercial (primarily the result of the Northbrook acquisition) and International (due to Camperdown). Personal Insurance and Reinsurance premiums also increased over 1995 levels. The third quarter 1996 GAAP underwriting loss was $87 million, compared with 1995's third quarter loss of $25 million. Key factors in the increase in third quarter underwriting losses compared to 1995 were as follows: - Specialized Commercial - $44 million better than 1995 - A significant decline in losses resulting from the company's withdrawal from various insurance pool arrangements drove the improvement over 1995. - Personal Insurance - $53 million worse than 1995 - The variance from 1995 resulted from a $22 million increase in catastrophe losses and a deterioration in other current year loss experience. - Commercial - $30 million worse than 1995 - The addition of Northbrook, which posted a $16 million underwriting loss in the quarter, and a $15 million increase in catastrophe losses were the primary factors contributing to the increase in underwriting losses. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued The nine-month GAAP underwriting loss of $168 million in 1996 was over $100 million worse than the comparable 1995 loss of $66 million. Catastrophe losses in the first nine months of 1996 totaled $181 million, compared with $99 million for the same period of 1995. This increase in catastrophe experience, coupled with an increase in noncatastrophe losses in Personal Insurance and Reinsurance, more than offset the $100 million improvement in Specialized Commercial results compared to the first nine months of 1995. The underwriting operations' third quarter pretax investment income of $202 million, which was 10% higher than the same period of 1995, included $10 million of investment income from Northbrook. Year-to-date investment income of $585 million was 8% ahead of last year. The increase over 1995 was primarily due to strong investment cash flows, which have fueled a $586 million net increase (excluding Northbrook) in fixed-maturity investments over the last twelve months. After a twelve-month period of almost exclusive tax-exempt security purchases, the company began purchasing taxable bonds in the third quarter due to a change in the company's consolidated tax position. The weighted average pretax yield on the underwriting operations' fixed maturities portfolio was 7.1% at Sept. 30, 1996. With the acquisition of Northbrook in the third quarter, the company added $1.2 billion of high-quality securities to its underwriting operations' investment portfolio. Approximately 95% of the fixed- maturity portfolio at Sept. 30, 1996 was rated at investment grade levels (BBB or better). Environmental and Asbestos Claims - --------------------------------- The company's underwriting operations continue to receive claims under policies written many years ago alleging injuries from environmental pollution or alleging covered property damages for the cost to clean up polluted sites. The company has also received asbestos claims arising out of product liability coverages under general liability policies. Significant legal issues, primarily pertaining to issues of coverage, exist with regard to the company's alleged liability for both environmental and asbestos claims. In the company's opinion, court decisions in certain jurisdictions have tended to expand insurance coverage beyond the intent of the original policies. The company's ultimate liability for environmental claims is difficult to estimate. Insured parties have submitted claims for losses not covered in the insurance policy, and the ultimate resolution of these claims may be subject to lengthy litigation, making it difficult to estimate the company's potential liability. In addition, variables, such as the length of time necessary to clean up a polluted site, and controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of an environmental claim. Estimating the ultimate liability for asbestos claims is equally difficult. The primary factors influencing the estimate of the total cost of these claims are case law and a history of prior claims, both of which are still developing. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued In 1994, the company specifically reallocated, for environmental and asbestos claims, a portion of previously established IBNR (incurred but not reported) reserves. Prior to that, the company made no specific allocation of its IBNR reserves for environmental or asbestos claims, but rather identified reserves only for reported claims (case reserves). In the fourth quarter of 1995, the company recorded additional gross reserves of $360 million and specifically reallocated $113 million of previously recorded net reserves for North American environmental and asbestos losses on policies written in the United Kingdom prior to 1980. The following table represents a reconciliation of total gross and net environmental reserve development for the nine months ended Sept. 30, 1996, and the years ended Dec. 31, 1995 and 1994. Amounts in the "net" column are reduced by reinsurance recoverable. 1996 1995 1994 Pollution (nine months) ----------- ----------- - ---------- ----------- (in millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Beginning reserves $528 319 275 200 105 73 Incurred losses 64 48 59 68 71 56 Reserve reallocation - - 233 79 132 95 Paid losses (23) (19) (39) (28) (33) (24) --- --- --- --- --- --- Ending reserves $569 348 528 319 275 200 === === === === === === Many significant environmental claims currently being brought against insurance companies arise out of contamination that occurred 20 to 30 years ago. Since 1970, the company's Commercial General Liability policy form has included a specific pollution exclusion, and, since 1986, an industry standard absolute pollution exclusion for policies underwritten in the United States. The following table represents a reconciliation of total gross and net reserve development for asbestos claims for the nine months ended Sept. 30, 1996, and the years ended Dec. 31, 1995 and 1994: 1996 1995 1994 Asbestos (nine months) ----------- ----------- -------- ----------- (in millions) Gross Net Gross Net Gross Net ----- ---- ----- --- ----- --- Beginning reserves $283 158 185 145 62 48 Incurred losses 10 15 (13) (9) 13 14 Reserve reallocation - - 127 34 127 95 Paid losses (19) (10) (16) (12) (17) (12) --- --- --- --- --- --- Ending reserves $274 163 283 158 185 145 === === === === === === THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Most of the asbestos claims the company has received pertain to policies written prior to 1986. Since 1986, for policies underwritten in the United States, the company's Commercial General Liability policy has included the industry standard absolute pollution exclusion, which the company believes applies to asbestos claims. The company believes its current reserves for environmental and asbestos losses represent the best estimate of its ultimate liability for such losses. Because of the difficulty inherent in estimating those losses, however, there is no assurance that the company's ultimate liability will, in fact, match current reserves. The company continues to evaluate new information and developing loss patterns, but it believes any additional loss provisions for environmental and asbestos claims will not materially impact its results of operations, liquidity or financial position. Total gross environmental and asbestos reserves at Sept. 30, 1996, of $843 million represented 7% of gross consolidated reserves of $11.7 billion. Legal Matters - ------------- In 1993, the Superior Court of California entered judgment in an action brought against St. Paul Fire and Marine Insurance Company in 1987 by Arntz Contracting Company and certain affiliates. The action alleged breach of contract and intentional interference with ability to conduct business. The judgment affirmed a jury's August 1993 award of approximately $16.5 million in compensatory damages and $100 million in punitive damages. In January 1994, the portion of the judgment granting punitive damages was vacated. In the third quarter of 1996, the company, as a result of its reaching an oral understanding with the plaintiff, recorded an expense of $22 million for the settlement of all claims associated with this lawsuit. Insurance Brokerage - ------------------- In the third quarter of 1996, the company committed to a plan to dispose of a significant portion of its insurance brokerage operations. The company recorded a pretax loss provision of $250 million in the third quarter, representing the estimated loss on disposal of these operations. The company also recorded a deferred tax benefit of $266 million relating to the plan for disposal. See Note 9 on page 14 for further discussion of the estimated loss on disposal of these operations. Investment Banking-Asset Management - ----------------------------------- The company's portion of The John Nuveen Company's third quarter pretax earnings was $23 million, compared with $22 million in 1995. For the first nine months of 1996, the company's portion was $67 million, compared with $61 million in 1995. The company currently owns 78% of Nuveen. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Asset management fees of $46 million for the quarter were level with the same period of 1995. Year-to-date management fees in 1996 were 2% ahead of last year. Assets under management totaled $31.7 billion at Sept. 30, down slightly from year-end 1995 due to a decline in the value of underlying fund investments. Nuveen's year-to-date Unit Investment Trust sales of $766 million were down 12% from the comparable 1995 total. Nuveen commenced a stock repurchase program in the third quarter, retiring 1.8 million of its common shares for a total cost of $46 million. The repurchases were proportioned between the company and minority shareholders to maintain the company's 78% interest in Nuveen. The company's proceeds from Nuveen's repurchases in the third quarter totaled $36 million. Capital Resources - ----------------- Common shareholders' equity grew to a new high of $3.86 billion at the end of the third quarter, driven by the company's record nine-month net income of $388 million. The after-tax appreciation of the company's fixed maturities investment portfolio has declined $201 million in 1996, reflecting the impact of confusing economic indicators on the bond markets. The company's equity and venture capital portfolios, however, experienced an $84 million increase in their after-tax appreciation in the first nine months of 1996. The company has repurchased and retired 1.14 million shares of its common stock for a total cost of $60 million in 1996. The company's acquisition of Northbrook Holdings Inc. from The Allstate Corporation on July 31, 1996 was financed internally. See Note 8 on page 14 for further details pertaining to this acquisition. Total debt outstanding at the end of the quarter was $708 million, virtually unchanged from $704 million at the end of 1995. Nearly 60% of the company's debt is composed of medium- term notes, which bear a weighted average interest rate of 7.1%. The ratio of debt to total capitalization at Sept. 30, 1996, was 15%. In June 1996, the company filed a shelf registration statement with the Securities and Exchange Commission, giving the company the capacity to issue $275 million of additional debt. The company issued $15 million of medium-term notes in the third quarter. The company's ratio of earnings to fixed charges was 4.68 for the first nine months of 1996, compared with 9.12 for the same period of 1995. The company's ratio of earnings to combined fixed charges and preferred stock dividends was 3.28 for the first nine months of 1996, compared with 6.93 for the same period of 1995. The decline in ratios from 1995 was primarily due to the third quarter 1996 pretax loss of $137 million, which reduced year-to- date pretax earnings to $196 million, compared with pretax earnings of $470 million for the same period of 1995. Fixed charges consist of interest expense before reduction for capitalized interest and one-third of rental expense, which is considered to be representative of an interest factor. Liquidity - --------- Liquidity refers to the company's ability to generate sufficient funds to meet the cash requirements of its business operations. Net cash provided by operations was $666 million in the first nine months of 1996, compared with $616 million in 1995. The company's liquidity position remains strong due to cash flows from underwriting operations. PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements and the "Legal Matters" section of Management's Discussion and Analysis included in Part I of this report is incorporated herein by reference. In 1993, the Superior Court of California entered judgment in an action brought against St. Paul Fire and Marine Insurance Company in 1987 by Arntz Contracting Company and certain affiliates. The action alleged breach of contract and intentional interference with ability to conduct business. The judgment affirmed a jury's August 1993 award of approximately $16.5 million in compensatory damages and $100 million in punitive damages. In January 1994, the portion of the judgment granting punitive damages was vacated. In the third quarter of 1996, the company, as a result of its reaching an oral understanding with the plaintiff, recorded an expense of $22 million for the settlement of all claims associated with this lawsuit. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. An Exhibit Index is set forth on page 25 of this report. (b) Reports on Form 8-K. The Registrant filed a Form 8-K Current Report dated July 29, 1996, pertaining to the Registrant's press release of second quarter 1996 financial results. The Registrant filed a Form 8-K Current Report dated August 7, 1996, pertaining to exhibits filed in connection with the Registration Statement on Form S-3 (File No. 333-06456) filed by the Registrant covering debt securities issuable under an indenture, dated as of March 31, 1990, between the Registrant and The Chase Manhattan Bank. The Registrant filed a Form 8-K Current Report dated August 27, 1996, announcing that the Registrant had retained Goldman Sachs International to assist in examining strategic alternatives with respect to the Minet Group, the registrant's insurance brokerage operation. The Registrant filed a Form 8-K Current Report dated October 1, 1996, announcing the anticipated impact of weather-related losses on the Registrant's third quarter operating results. The Registrant filed a Form 8-K Current Report dated October 29, 1996, pertaining to the Registrant's press release of third quarter 1996 financial results. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE ST. PAUL COMPANIES, INC. (Registrant) Date: November 12, 1996 By /s/ Bruce A. Backberg --------------------- Bruce A. Backberg Vice President and Corporate Secretary (Authorized Signatory) Date: November 12, 1996 By /s/ Howard E. Dalton -------------------- Howard E. Dalton Senior Vice President Chief Accounting Officer EXHIBIT INDEX ------------- Exhibit How - ------- Filed ----- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession*.............................. (4) Instruments defining the rights of security holders, including indentures** (10) Material contracts*........................................ (11) Statement re computation of per share earnings**........... (1) (12) Statement re computation of ratios**....................... (1) (15) Letter re unaudited interim financial information*......... (18) Letter re change in accounting principles*................. (19) Report furnished to security holders*...................... (22) Published report regarding matters submitted to vote of security holders*............................... (23) Consents of experts and counsel*........................... (24) Power of attorney*......................................... (27) Financial data schedule**.................................. (1) (99) Additional exhibits*....................................... * These items are not applicable. ** This exhibit is included only with the copies of this report that are filed with the Securities and Exchange Commission. However, a copy of the exhibit may be obtained from the Registrant for a reasonable fee by writing to Legal Services, The St. Paul Companies, 385 Washington Street, Saint Paul, MN 55102. (1) Filed electronically. EX-11 2 Exhibit 11 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings Per Share (In thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 1996 1995 1996 1995 ----- ----- ----- ----- EARNINGS: Primary: Net income, as reported $128,934 142,399 387,808 365,962 PSOP preferred dividends declared (net of taxes) (2,179) (2,159) (6,503) (6,444) Premium on preferred shares redeemed (224) - (664) - -------- -------- -------- -------- Net income, as adjusted $126,531 140,240 380,641 359,518 ======== ======== ======== ======== Fully diluted: Net income, as reported $128,934 142,399 387,808 365,962 Dividends on monthly income preferred securities (net of taxes) 2,018 2,018 6,055 3,027 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (752) (867) (2,265) (2,612) Premium on preferred shares redeemed (224) - (664) - -------- -------- -------- -------- Net income, as adjusted $129,976 143,550 390,934 366,377 ======== ======== ======== ======== SHARES: Primary: Weighted average number of common shares outstanding, per consolidated financial statements 83,286 84,559 83,594 84,413 Additional dilutive effect of assumed exercise of outstanding stock options (based on treasury stock method using average market price) 968 1,007 1,050 960 -------- -------- -------- -------- Weighted average, as adjusted 84,254 85,566 84,644 85,373 ======== ======== ======== ======== Fully diluted: Weighted average number of common shares outstanding, per consolidated financial statements 83,286 84,559 83,594 84,413 Additional dilutive effect of: Assumed conversion of PSOP preferred stock 3,963 4,022 3,977 4,034 Assumed conversion of monthly income preferred securities 3,509 3,509 3,509 1,774 Assumed exercise of outstanding stock options (based on treasury stock method using market price at end of period) 1,082 1,324 1,099 1,349 -------- -------- -------- -------- Weighted average, as adjusted 91,840 93,414 92,179 91,570 ======== ======== ======== ======== EARNINGS PER COMMON SHARE: Primary $1.50 1.64 4.50 4.21 Fully diluted $1.42 1.54 4.24 4.00 EX-12 3 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Exhibit 12 Computation of Ratios (In thousands, except ratios) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1996 1995 1996 1995 ----- ----- ----- ----- EARNINGS: Income (loss) before income taxes $(136,524) 178,105 196,007 469,505 Add: fixed charges 18,600 21,073 53,304 57,809 ------- ------- ------- ------- Income (loss), as adjusted $(117,924) 199,178 249,311 527,314 ======= ======= ======= ======= FIXED CHARGES: Interest costs $13,071 15,703 38,220 41,060 Rental expense (1) 5,529 5,370 15,084 16,749 ------- ------- ------- ------- Total fixed charges $18,600 21,073 53,304 57,809 ======= ======= ======= ======= FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Fixed charges $18,600 21,073 53,304 57,809 PSOP preferred stock dividends 4,458 4,523 13,422 13,615 Dividends on monthly income preferred securities 3,105 3,105 9,315 4,658 ------- ------- ------- ------- Total fixed charges and preferred stock dividends $26,163 28,701 76,041 76,082 ======= ======= ======= ======= Ratio of earnings to fixed charges (2) - 9.45 4.68 9.12 ======= ======= ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends (2) - 6.94 3.28 6.93 ======= ======= ======= ======= (1) Interest portion deemed implicit in total rent expense. (2) The 1996 third quarter loss was inadequate to cover "fixed charges" by $136.5 million and "combined fixed charges and preferred stock dividends" by $144.1 million. EX-27 4
7 1,000 9-MOS DEC-31-1996 SEP-30-1996 11,581,950 0 0 840,369 0 609,245 14,119,951 33,646 59,654 406,254 20,451,863 11,735,119 2,578,197 0 0 707,560 0 16,765 465,827 3,391,040 20,451,863 3,254,868 616,223 132,981 421,379 2,440,204 712,015 1,077,225 196,007 (191,801) 387,808 0 0 0 387,808 4.50 4.24 0 0 0 0 0 0 0
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