-----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, P6Of2qfnrhr7lflo2LDIV2OwSkDJBY9CYgmwU+NDGCXIGmaQm77hqapdBVgmF2Dn jydllfoK2PCU5JYuXerh1g== 0000086312-97-000019.txt : 19970520 0000086312-97-000019.hdr.sgml : 19970520 ACCESSION NUMBER: 0000086312-97-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 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: 97605905 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) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) ----- OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 -------------- 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 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 May 8, 1997, was 83,611,381. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION Consolidated Statements of Income, (Unaudited), Three Months Ended March 31, 1997 and 1996 3 Consolidated Balance Sheets, March 31, 1997 (Unaudited) and December 31, 1996 4 Consolidated Statements of Shareholders' Equity, Three Months Ended March 31, 1997 (Unaudited) and Twelve Months Ended December 31, 1996 6 Consolidated Statements of Cash Flows (Unaudited), Three Months Ended March 31, 1997 and 1996 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 23 EXHIBIT INDEX 24 PART I FINANCIAL INFORMATION THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Income Unaudited (In thousands) Three Months Ended March 31 ------------------------- 1997 1996 ------ ------ Revenues: Premiums earned $1,171,453 1,030,576 Net investment income 218,662 192,379 Realized investment gains 95,592 47,920 Investment banking-asset management 58,605 53,340 Other 12,891 5,676 ----------- ----------- Total revenues 1,557,203 1,329,891 ----------- ----------- Expenses: Insurance losses and loss adjustment expenses 868,878 755,460 Policy acquisition expenses 254,760 230,488 Operating and administrative 188,355 166,455 ----------- ----------- Total expenses 1,311,993 1,152,403 ----------- ----------- Income from continuing operations before income taxes 245,210 177,488 Income tax expense (benefit): Federal current 64,671 35,655 Other (11,760) (2,578) ----------- ----------- Total income tax expense 52,911 33,077 ----------- ----------- Income from continuing operations 192,299 144,411 Discontinued operations: Operating loss, net of taxes - (15,590) Loss on disposal, net of taxes (67,750) - ----------- ----------- Loss from discontinued operations (67,750) (15,590) ----------- ----------- Net income $124,549 128,821 =========== =========== Primary earnings per common share: Income from continuing operations $2.25 1.67 Loss from discontinued operations (0.81) (0.18) ----------- ----------- Net income $1.44 1.49 =========== =========== Fully diluted earnings per common share: Income from continuing operations $2.10 1.57 Loss from discontinued operations (0.73) (0.17) ----------- ----------- Net income $1.37 1.40 =========== =========== Dividends declared on common stock $0.47 0.44 =========== =========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands) March 31, December 31, ASSETS 1997 1996 - ---------- ------------- ------------- (Unaudited) Investments: Fixed maturities, at estimated market value $11,772,252 11,944,085 Equities, at estimated market value 850,997 808,295 Real estate, at cost less accumulated depreciation of $77,367 (1996; $81,764) 729,257 693,910 Venture capital, at estimated market value 533,665 586,222 Other investments 45,272 43,311 Short-term investments, at cost 203,403 289,793 ------------ ------------ Total investments 14,134,846 14,365,616 Cash 38,383 37,214 Investment banking inventory securities 141,688 143,594 Reinsurance recoverables: Unpaid losses 1,783,981 1,890,105 Paid losses 84,258 68,692 Receivables: Underwriting premiums 1,462,116 1,558,967 Interest and dividends 218,551 213,883 Other 118,942 104,865 Deferred policy acquisition expenses 393,424 401,768 Ceded unearned premiums 208,460 243,663 Deferred income taxes 1,033,851 908,220 Office properties and equipment, at cost less accumulated depreciation of $237,062 (1996; $217,454) 285,832 281,093 Goodwill 239,024 167,338 Other assets 246,396 295,958 ------------ ------------ Total assets $20,389,752 20,680,976 ============ ============ See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (In thousands) March 31, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996 - ------------------------------------ ------------- ------------ (Unaudited) Liabilities: Insurance reserves: Losses and loss adjustment expenses $11,679,590 11,673,148 Unearned premiums 2,397,437 2,566,551 ------------ ------------ Total insurance reserves 14,077,027 14,239,699 Debt 707,588 689,141 Payables: Income taxes 260,522 219,081 Reinsurance premiums 157,561 181,524 Accrued expenses and other 428,604 484,062 Other liabilities 647,887 656,649 ------------ ------------ Total liabilities 16,279,189 16,470,156 ------------ ------------ 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; 981 shares outstanding (985 shares in 1996) 141,732 142,131 Guaranteed obligation - PSOP (123,000) (126,068) ------------ ------------ Total preferred shareholders' equity 18,732 16,063 ------------ ------------ Common: Common stock, 240,000 shares authorized; 83,525 shares outstanding (83,198 shares in 1996) 487,557 475,710 Retained earnings 3,020,490 2,935,928 Guaranteed obligation - ESOP (16,786) (20,353) Unrealized appreciation of investments 407,730 616,968 Unrealized loss on foreign currency translation (14,160) (20,496) ------------ ------------ Total common shareholders' equity 3,884,831 3,987,757 ------------ ------------ Total shareholders' equity 3,903,563 4,003,820 ------------ ------------ Total liabilities, redeemable preferred securities and shareholders' equity $20,389,752 20,680,976 ============ ============ See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (In thousands) Three Twelve Months Ended Months Ended March 31 December 31 ------------- ----------- 1997 1996 ------- ------- (Unaudited) Preferred shareholders' equity: Series B convertible preferred stock: Beginning of period $142,131 144,165 Change during period (399) (2,034) ------------ ------------ End of period 141,732 142,131 ------------ ------------ Guaranteed obligation - PSOP: Beginning of period (126,068) (133,293) Principal payments 3,068 7,225 ------------ ------------ End of period (123,000) (126,068) ------------ ------------ Total preferred shareholders' equity 18,732 16,063 ------------ ------------ Common shareholders' equity: Common stock: Beginning of period 475,710 460,458 Stock issued under stock option and other incentive plans 11,853 23,057 Reacquired common shares (6) (7,805) ------------ ------------ End of period 487,557 475,710 ------------ ------------ Retained earnings: Beginning of period 2,935,928 2,704,075 Net income 124,549 450,099 Dividends declared on common stock (39,122) (145,956) Dividends declared on preferred stock, net of taxes (2,185) (8,664) Reacquired common shares (61) (67,445) Tax benefit on employee stock options and awards 1,381 3,819 ------------ ------------ End of period 3,020,490 2,935,928 ------------ ------------ Guaranteed obligation - ESOP: Beginning of period (20,353) (32,294) Principal payments 3,567 11,941 ------------ ------------ End of period (16,786) (20,353) ------------ ------------ Unrealized appreciation of investments, net of taxes: Beginning of period 616,968 627,791 Change during the period (209,238) (10,823) ------------ ------------ End of period 407,730 616,968 ------------ ------------ Unrealized loss on foreign currency translation, net of taxes: Beginning of period (20,496) (40,781) Change during the period 6,336 20,285 ------------ ------------ End of period (14,160) (20,496) ------------ ------------ Total common shareholders' equity 3,884,831 3,987,757 ------------ ------------ Total shareholders' equity $3,903,563 4,003,820 ============ ============ See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (In thousands) Three Months Ended March 31 ------------------------- 1997 1996 -------- ------- OPERATING ACTIVITIES Underwriting: Net income $181,410 137,466 Adjustments: Change in net insurance reserves (98,727) (11,594) Change in underwriting premiums receivable 119,656 92,293 Provision for deferred taxes (4,270) (7,226) Realized investment gains (92,713) (42,298) Other (41,341) 43,355 ----------- ----------- Total underwriting 64,015 211,996 ----------- ----------- Investment banking-asset management: Net income 13,845 13,288 Adjustments: Change in inventory securities 1,906 180,066 Change in short-term investments 40,674 (180,973) Change in short-term borrowings - (25,000) Change in open security transactions (3,589) 1,784 Other (12,487) 26,627 ----------- ----------- Total investment banking-asset management 40,349 15,792 ----------- ----------- Parent company, consolidating eliminations and discontinued operations: Net loss (70,706) (21,933) Adjustments: Provision for loss on disposal, net of taxes 67,750 - Realized investment gains (2,879) (5,622) Other adjustments (34,241) 11,644 ----------- ----------- Total parent company, consolidating eliminations and discontinued operations (40,076) (15,911) ----------- ----------- Net cash provided by operating activities 64,288 211,877 ----------- ----------- INVESTING ACTIVITIES Purchases of investments (790,346) (732,306) Proceeds from sales and maturities of investments 721,727 528,421 Change in short-term investments 51,489 84,531 Change in open security transactions (9,659) (32,926) Net purchases of office properties and equipment (15,791) (6,097) Other (11,529) 9,130 ----------- ----------- Net cash used in investing activities (54,109) (149,247) ----------- ----------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (39,453) (36,487) Proceeds from issuance of debt 30,000 - Repayment of debt (8,662) (3,819) Reacquired common shares (67) (20,206) Other 9,103 1,616 ----------- ----------- Net cash used in financing activities (9,079) (58,896) ----------- ----------- Effect of exchange rate changes on cash 69 (77) ----------- ----------- Increase in cash 1,169 3,657 Cash at beginning of period 37,214 25,475 ----------- ----------- Cash at end of period $38,383 29,132 =========== =========== See notes to consolidated financial statements. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Unaudited March 31, 1997 Note 1 Basis of Presentation - ----------------------------- The financial statements include The St. Paul Companies, Inc. and subsidiaries, and have been prepared in conformity with generally accepted accounting principles. These consolidated 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 53 to 69 of the Registrant's annual report to shareholders for the year ended December 31, 1996. 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 1996 consolidated financial statements have been reclassified to conform with the 1997 presentation. These reclassifications had no effect on net income or shareholders' equity, as previously reported. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 2 Earnings Pper Share - --------------------------- Earnings per common share (EPS) amounts were calculated by dividing operating earningsnet income, as adjusted, by the adjusted average common shares outstanding. Three Months Ended March 31 ------------------------- 1997 1996 ------ ------ (In thousands) PRIMARY Net income, as reported $124,549 128,821 PSOP preferred dividends declared (net of taxes) (2,185) (2,165) Premium on preferred shares redeemed (260) (208) ---------- ---------- Net income, as adjusted $122,104 126,448 ========== ========== FULLY DILUTED Net income, as reported $124,549 128,821 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (670) (758) Dividends on monthly income preferred securities (net of taxes) 2,018 2,018 Premium on preferred shares redeemed (260) (208) ---------- ---------- Net income, as adjusted $125,637 129,873 ========== ========== ADJUSTED AVERAGE COMMON SHARES OUTSTANDING Primary 84,505 85,150 ======= ======= Fully diluted 91,948 92,596 ======= ======= 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. Three Months Ended March 31 ------------------------------ 1997 1996 ------ ------ (In thousands) Purchases: Fixed maturities $344,439 490,613 Equities 347,817 207,698 Real estate 56,395 3,488 Venture capital 23,134 25,992 Other investments 18,561 4,515 ----------- ---------- Total purchases 790,346 732,306 ----------- ---------- Proceeds from sales and maturities: Fixed maturities: Sales 245,599 63,830 Maturities and redemptions 100,156 209,549 Equities 318,856 211,586 Real estate 16,028 1,466 Venture capital 37,567 41,428 Other investments 3,521 562 ----------- ----------- Total sales and maturities 721,727 528,421 ----------- ----------- Net purchases $ 68,619 203,885 =========== =========== Change in Unrealized Appreciation. The increase (decrease) in unrealized appreciation of investments recorded in common shareholders' equity was as follows: Three Months Ended Twelve Months Ended March 31, 1997 December 31, 1996 ------------------ ----------------- (In thousands) Fixed maturities $(213,147) (198,855) Equities (41,064) 25,975 Venture capital (66,291) 163,110 ----------- ---------- Total change in pretax unrealized appreciation (320,502) (9,770) Increase (decrease) in deferred tax asset 111,264 (1,053) ----------- ---------- Total change in unrealized appreciation, net of taxes $(209,238) (10,823) =========== ========== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 4 Income Taxes - -------------------- The components of income tax expense on continuing operations are as follows: Three Months Ended March 31 ----------------------- 1997 1996 ------ ------ (In thousands) Federal current tax expense $64,671 35,655 Federal deferred tax benefit (17,889) (7,875) -------- -------- Total federal income tax expense 46,782 27,780 Foreign income taxes 4,606 3,881 State income taxes 1,523 1,416 -------- -------- Total income tax expense on continuing operations $52,911 33,077 ======== ======== 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. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 6 Debt - ------------ Debt consists of the following: March 31, December 31, 1997 1996 ---------------- ----------------- Book Fair Book Fair Value Value Value Value ------ ------ ------ ------ (In thousands) Medium-term notes $460,425 454,000 430,427 435,500 Commercial paper 122,833 122,833 131,610 131,610 9 3/8% notes 99,997 100,700 99,994 101,500 Guaranteed ESOP debt 11,113 11,200 13,890 14,000 Real estate mortgage 13,220 13,000 13,220 13,220 --------- -------- -------- -------- Total debt $707,588 701,733 689,141 695,830 ========= ======== ======== ======== 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 ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 March 31 ------------------------- 1997 1996 ------- -------- (In thousands) Premiums written: Direct $875,539 782,710 Assumed 218,133 223,610 Ceded (64,452) (71,709) ----------- ---------- Net premiums written $1,029,220 934,611 =========== ========== Premiums earned: Direct $1,023,494 918,121 Assumed 250,303 229,759 Ceded (102,344) (117,304) ----------- ---------- Net premiums earned $1,171,453 1,030,576 =========== ========== Insurance losses and loss adjustment expenses: Direct $724,755 623,489 Assumed 161,230 189,399 Ceded (17,107) (57,428) ----------- ---------- Net insurance losses and loss adjustment expenses $868,878 755,460 =========== ========== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Note 8 Discontinued Operations - ------------------------------- In early April, The St. Paul reached agreement with Aon Corporation to sell its insurance brokerage operation, Minet, to Aon. The sale is scheduled to close on or before May 26, 1997. The St. Paul's gross proceeds from the sale are expected to be approximately equal to its remaining carrying value of Minet. The St. Paul agreed to indemnify Aon against most preclosing liabilities of the Minet businesses in connection with the transaction. The company recorded a net after-tax loss on disposal of $67.8 million in the first quarter of 1997, which resulted primarily from The St. Paul's agreement to be responsible for certain severance, employee benefits, future lease commitments and other costs relating to Minet. The following summarizes discontinued operations for the first quarter of 1997 and 1996: Three Months Ended March 31 ------------------------ 1997 1996 -------- -------- (In thousands) Operating loss, before income taxes $ - (13,408) Income tax expense - 2,182 -------- --------- Operating loss, net of taxes - (15,590) -------- --------- Loss on disposal, before income taxes (103,280) - Income tax benefit 35,530 - -------- --------- Loss on disposal, net of taxes (67,750) - -------- --------- Loss from discontinued operations $(67,750) (15,590) ======== ========= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations March 31, 1997 Consolidated Results -------------------- The St. Paul's pretax income from continuing operations totaled $245 million in the first quarter of 1997, 38% higher than income of $177 million in the same 1996 period. The improvement over 1996 was centered in the underwriting segment, driven by an increase in realized gains from investment sales and growth in investment income. The St. Paul recorded an after-tax loss from discontinued operations of $67.8 million in the first quarter of 1997, relating to the sale of its brokerage operation, Minet. Refer to Note 8 on page 14 of this report for further information regarding The St. Paul's discontinued operations. Consolidated revenues of $1.56 billion in the first quarter increased by almost $230 million, or 17%, from the equivalent 1996 total of $1.33 billion. Growth in insurance premiums earned, investment income and realized investment gains accounted for the revenue growth in 1997. The following table summarizes The St. Paul's results for the first quarters of 1997 and 1996. Three Months Ended March 31 ------------------ 1997 1996 Pretax income (loss): ---- ---- Underwriting: GAAP underwriting result $(51) (42) Net investment income 218 189 Realized investment gains 93 42 Other (19) (16) ---- ---- Total underwriting 241 173 Investment banking-asset management 23 22 Parent and other (19) (18) ---- ---- Income from continuing operations before income taxes 245 177 Income tax expense 53 33 ---- ---- Income from continuing operations 192 144 Loss from discontinued operations, net of taxes (67) (15) ---- ---- Net income $125 129 ==== ==== Fully diluted net income per common share $1.37 1.40 ==== ==== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Underwriting ------------ The following summarizes key financial results by underwriting operation: Three Months % of 1997 Ended March 31 Written -------------- ($ in Millions) Premiums 1997 1996 -------- ---- ---- Specialized Commercial: Written Premiums 29% $300 264 Underwriting Result $(3) (10) Combined Ratio 101.5 105.5 Commercial: Written Premiums 24% $241 155 Underwriting Result $(16) (9) Combined Ratio 112.6 106.3 Personal Insurance: Written Premiums 17% $175 164 Underwriting Result $(23) (28) Combined Ratio 112.9 116.9 Medical Services: Written Premiums 9% $95 102 Underwriting Result $4 20 Combined Ratio 105.6 94.4 ---- ----- ----- Total St. Paul Fire and Marine: Written Premiums 79% $811 685 Underwriting Result $(38) (27) Combined Ratio 107.7 106.1 St. Paul International Underwriting: Written Premiums 5% $53 56 Underwriting Result $(7) (6) Combined Ratio 113.9 112.2 ---- ----- ----- Total Worldwide Insurance Operations: Written Premiums 84% $864 741 Underwriting Result $(45) (33) Combined Ratio 108.1 106.6 St. Paul Re: Written Premiums 16% $165 194 Underwriting Result $(6) (9) Combined Ratio 104.2 104.7 ---- ----- ----- Total Underwriting: Written Premiums 100% $1,029 935 GAAP Underwriting Result $(51) (42) Statutory Combined Ratio: Loss and Loss Expense Ratio 74.2 73.3 Underwriting Expense Ratio 33.3 32.8 ----- ----- Combined Ratio 107.5 106.1 ===== ===== Combined Ratio Incl. Policyholders' Dividends 107.8 106.3 ===== ===== THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Written Premiums - ---------------- First quarter written premiums of $1.03 billion were 10% higher than the comparable 1996 total of $935 million. Premium volume in The St. Paul's Commercial operation increased $86 million over the first quarter of 1996, reflecting the impact of The St. Paul's acquisition of Northbrook Holdings, Inc. and its three commercial underwriting companies (Northbrook) in the third quarter of 1996. Specialized Commercial written premiums of $300 million grew 14% over the same period of 1996. Several business centers within Specialized Commercial, including Construction, Financial and Professional Services, and Public Sector Services, experienced premium growth over 1996. Specialized Commercial premium volume in last year's first quarter was reduced by $20 million for returned premiums associated with The St. Paul's withdrawal from an insurance pool arrangement. Personal Insurance premiums grew 7%, to $175 million, compared with the first quarter of 1996, primarily the result of price increases on existing business. Medical Services' written premiums in 1997's first quarter were down 8% from 1996, reflecting the competitive market conditions that persist in the medical liability marketplace. The decline in Medical Services' written premiums resulted principally from pricing reductions. Reinsurance premiums were down $29 million, or 15%, from the same period of 1996. Worldwide reinsurance markets are characterized by excess capacity and competitive market conditions, causing downward pressure on premium rates. Underwriting Results - -------------------- The first quarter GAAP underwriting loss was $51 million, compared with a loss of $42 million in the first quarter of 1996. Improvements in Specialized Commercial and Personal Insurance results were more than offset by a decline in Medical Services' profitability and an increase in Commercial losses. Pretax catastrophe losses in the 1997 period totaled just $5 million, compared with last year's first quarter total of $62 million. An East Coast blizzard and numerous other winter storms were the source of 1996's sizable first quarter catastrophe activity. The company-wide expense ratio of 33.3 was one-half point worse than last year, primarily due to an increase in expenses associated with ongoing efforts to integrate Northbrook into The St. Paul's existing Commercial operations. The Personal Insurance expense ratio of 29.0 was over three points better than last year, reflecting the impact of several corrective measures implemented in 1997 aimed at improving this operation's results. Key factors in the change in underwriting results from 1996 were as follows: - Specialized Commercial - $7 million better than 1996 - Improved Surety results and a decline in losses from insurance pools were the primary factors driving the improvement over 1996. - Personal Insurance - $5 million better than 1996 - A decline in expenses and an improvement in prior year loss development accounted for the favorable variance over 1996. - Medical Services - $16 million worse than 1996 - Loss costs continued to rise in a market suffering through a sustained period of aggressive competition. Despite the unfavorable variance from 1996, Medical Services was still profitable for the quarter. - Commercial - $7 million worse than 1996 - An increase in expenses, primarily relating to Northbrook integration initiatives, along with less favorable prior year loss development more than offset a decline in catastrophe losses. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Investments - ----------- First quarter pretax investment income in the underwriting segment was $218 million, 15% higher than first quarter 1996 income of $189 million. Approximately half of the increase was attributable to income derived from investments acquired in the Northbrook purchase last year. The remainder of the increase resulted from underlying growth in the underwriting operations' investment portfolio, fueled by steady investment cash flows over the last twelve months. Fixed maturities purchased in the first quarter of 1997 were predominantly taxable securities, due to The St. Paul's consolidated tax position. The new money rate on taxable fixed maturities in the first quarter of 1997 was 7.0%, compared with 5.8% on tax- exempt securities. The weighted average pretax yield on the fixed maturities portfolio at March 31, 1997 was 7.1%, and the portfolio had an average life of 9.0 years. Approximately 96% of that portfolio is rated at investment grade levels (BBB or better). Sales of equity and venture capital investments in the first quarter of 1997 generated pretax realized gains of $54 million and $40 million, respectively. Environmental and Asbestos Claims --------------------------------- The St. Paul'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. These operations also receive asbestos claims arising out of product liability coverages under general liability policies. Significant legal issues, primarily pertaining to issues of coverage, exist with regard to 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 underwriting operations' ultimate liability for environmental claims is difficult to estimate. Insured parties have submitted claims for losses not covered in the insurance policy, and the ultimate resolution of these claims may be subject to lengthy litigation. In addition, variables, such as the length of time necessary to clean up a polluted site, controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of an environmental claim. Estimating 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 experience, both of which are still developing. In 1995, The St. Paul's underwriting operations 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 table on the next page represents a reconciliation of total gross and net environmental reserve development for the three months ended March 31, 1997, and the years ended Dec. 31, 1996 and 1995. Amounts in the "net" column are reduced by reinsurance recoverable. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued 1997 1996 1995 Environmental (three months) ---- ---- - ------------- ------------ (in millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Beginning reserves $581 368 528 319 275 200 Reserves acquired - - 18 7 - - Incurred losses 3 - 67 72 59 68 Reserve reallocation - - - - 233 79 Paid losses (5) (1) (32) (30) (39) (28) ---- ---- ---- ---- ---- ---- Ending reserves $579 367 581 368 528 319 ==== ==== ==== ==== ==== ==== Many significant environmental claims currently being brought against insurance companies arise out of contamination that occurred 20 to 30 years ago. Since 1970, the underwriting operations' 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 three months ended March 31, 1997, and the years ended Dec. 31, 1996 and 1995. 1997 1996 1995 Asbestos (three months) ---- ---- - -------- ------------ (in millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Beginning reserves $278 169 283 158 185 145 Reserves acquired - - 6 6 - - Incurred losses (12) (6) 12 18 (13) (9) Reserve reallocation - - - - 127 34 Paid losses (8) (6) (23) (13) (16) (12) ---- ---- ---- ---- ---- ---- Ending reserves $258 157 278 169 283 158 ==== ==== ==== ==== ==== ==== 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 underwriting operations' Commercial General Liability policy has included the industry standard absolute pollution exclusion, which the company believes applies to asbestos claims. Based on all information currently available, The St. Paul's reserves for environmental and asbestos losses represent its best estimate of its ultimate liability for such losses. Because of the difficulty inherent in estimating such losses, however, the company cannot give assurances that its ultimate liability for environmental and asbestos losses will, in fact, match current reserves. The company continues to evaluate new information and developing loss patterns, but it believes any future additional loss provisions for environmental and asbestos claims will not materially impact the results of operations, liquidity or financial position. Total gross environmental and asbestos reserves at March 31, 1997, of $837 million represented approximately 7% of gross consolidated reserves of $11.68 billion. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Investment Banking-Asset Management ----------------------------------- The company's portion of pretax earnings from The John Nuveen Company (Nuveen) was $23 million in the first quarter of 1997, compared with $22 million in 1996's first quarter. The company holds a 78% interest in Nuveen. Fees earned from investment advisory services provided on assets under Nuveen's management grew $4 million, or 8%, over the first quarter of 1996. Total assets under management at March 31, 1997 of $36.8 billion were up $4.4 billion from year- end 1996. In January 1997, Nuveen completed its acquisition of Flagship Resources Inc., a tax-exempt mutual fund and money management firm. The increases in assets under management and related fee income reflect the addition of Flagship to Nuveen's operations. The total cost of the acquisition was $63 million (substantially all of which represented goodwill), plus as much as an additional $20 million, contingent upon meeting future growth targets. Contributing to the increase in assets under management were gross product sales of $493 million, consisting of $208 million in unit investment trusts, $208 million in mutual funds, and $77 million in managed accounts. Gross product sales in the same 1996 period were $289 million. Capital Resources ----------------- Common shareholders' equity of $3.9 billion at March 31, 1997 was down $103 million from year-end 1996 common equity of $4.0 billion. First quarter net income was offset by a $140 million decline (net of taxes) in the unrealized appreciation of the company's fixed maturities portfolio. An increase in market interest rates negatively impacted bond values in the first quarter. The after-tax unrealized appreciation on The St. Paul's equity and venture capital portfolios declined by $70 million since the end of 1996, primarily due to the sale of investments which generated realized gains during the quarter. Total debt outstanding at quarter-end of $708 million was up 3% from year-end 1996, due to the issuance of $30 million of medium-term notes during the quarter. The ratio of total debt to total capitalization of 15% increased slightly over the year-end 1996 ratio of 14%. The company anticipates that any major capital expenditures during the remainder of 1997 would involve acquisitions of existing businesses or stock repurchases; there are no major capital improvements planned for 1997. The company's ratio of earnings to fixed charges was 13.59 for the first three months of 1997, compared with 11.70 for the same period of 1996. The company's ratio of earnings to combined fixed charges and preferred stock dividends was 9.80 for the first three months of 1997, compared with 8.03 for the same period of 1996. Fixed charges consist of interest expense 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 short- and long-term cash requirements of its business segments. Net cash provided by operations was $64 million in the first three months of 1997, compared to $212 million in 1996. The decrease from 1996 was primarily due to a decline in cash flows in the underwriting segment resulting from an increase in loss payments. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Management's Discussion, Continued Impact of Accounting Pronouncement to be Adopted in the Future - -------------------------------------------------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which revises the calculation and presentation provisions of Accounting Principles Board Opinion No. 15 and its related interpretations. SFAS No. 128 is effective for fiscal years and interim periods ending after December 15, 1997. It replaces the presentation of primary earnings per share with "basic earnings per share," and fully diluted earnings per share with "diluted earnings per share." If the provisions of SFAS No. 128 had been applied for the periods ended March 31, 1997 and 1996, basic earnings per share would have been $2.28 and $1.69, respectively, for income from continuing operations, and $1.47 and $1.51, respectively, for net income. Diluted earnings per share would have been the same as fully diluted earnings per share for both periods. PART II OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note 5 to the consolidated financial statements is incorporated herein by reference. 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. The St. Paul's annual shareholders' meeting was held on May 6, 1997. (1) All thirteen persons nominated for directors by management were named in proxies for the meeting which were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees as listed in the proxy statements. All thirteen nominees were elected by the following votes: In favor Withheld ---------- -------- Michael R. Bonsignore 74,878,751 464,136 John H. Dasburg 74,764,469 578,418 W. John Driscoll 74,859,353 483,534 Pierson M. Grieve 74,822,094 520,793 Ronald James 74,834,125 508,762 David G. John 74,837,058 505,829 William H. Kling 74,831,967 510,920 Douglas W. Leatherdale 74,801,535 541,352 Bruce K. MacLaury 74,840,116 502,771 Glen D. Nelson 74,850,513 492,374 Anita M. Pampusch 74,846,415 496,472 Gordon M. Sprenger 74,851,560 491,327 Patrick A. Thiele 74,837,295 505,592 (2) By a vote of 64,562,572 in favor, 3,898,309 against and 776,901 abstaining, the shareholders approved the Company's Special Leveraged Stock Purchase Program. (3) By a vote of 74,678,848 in favor, 282,885 against and 381,154 abstaining, the shareholders ratified the selection of KPMG Peat Marwick LLP as the independent auditors for The St. Paul. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. An Exhibit Index is set forth as the last page in this document. (b) Reports on Form 8-K. 1) The St. Paul filed a Form 8-K Current Report dated January 27, 1997, announcing its financial results for the year ended December 31, 1996. 2) The St. Paul filed a Form 8-K Current Report dated February 7, 1997, announcing share repurchase and stock ownership plans. 3) The St. Paul filed a Form 8-K Current Report dated April 28, 1997, announcing its financial results for the quarter ended March 31, 1997, and the anticipated impact of flooding in the Red River Valley on its second quarter 1997 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: May 13, 1997 By /s/ Bruce A. Backberg ------------------------ Bruce A. Backberg Vice President and Corporate Secretary (Authorized Signatory) Date: May 13, 1997 By /s/ Howard E. Dalton ---------------------- Howard E. Dalton Senior Vice President Chief Accounting Officer EXHIBIT INDEX ----------------------- Method of Exhibit Filing - -------- ------------ (2) Plan of acquisition, reorganization, arrangement, liquidation or succession*.............................. (3) Articles of incorporation and by-laws*...................... (4) Instruments defining the rights of security holders, including indentures*................................... (10) Material contracts a) Letter Agreement dated May 8, 1997 between the Company and Mr. Paul J. Liska related to the terms of his employment**..............................(1) b) Letter Agreement, agreed to January 20, 1997 between the Company and Mr. Paul J. Liska related to severanc benefits**.................................(1) c) The Special Leveraged Stock Purchase Plan**..............(1) d) Amendment to Deferred Stock Agreement with Mr. Mark L.Pabst**.....................................(1) (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 The St. Paul Companies, 385 Washington Street, Saint Paul, MN 55102, Attention: Corporate Secretary. (1) Filed electronically. EX-10 2 Exhibit 10A ----------- May 8, 1997 Mr. Paul Liska 1048 Ashland Avenue River Forest, IL 60305 Dear Paul: The purpose of this letter is outline your compensation package for your employment in the position of Executive Vice President, Chief Financial Officer for The St. Paul Companies, Inc., reporting to Doug Leatherdale, Chairman, CEO and President, effective beginning employment with the Company. The following sets forth the terms originally set forth in the letter of December 26, 1996 as subsequently modified: Up Front Bonus A one time payment -------------- of $400,000, minus applicable taxes to be paid upon starting employment with The St. Paul. Special Stock Option Grant You will participate in a -------------------------- special one time stock option grant of 120,000 options with strike prices of $58.75 which expire December 2, 2001. These options have time and performance conditions. In order for these to vest, you must be here until December 2, 2000. In addition the 20 day average of our stock price must reach $100 per share in order for 50% of the grant to vest. If the 20 day average of our stock price reaches $110 an additional 50% will vest. At a stock price of $110, this grant when vested would be worth $6.2M. Salary $600,000 per annum, ------ to be reviewed in 1998 and annually thereafter. Annual salary change date is March for all officers. Annual Award Incentive The annual target award ---------------------- opportunity for this position is 60% of base salary. Awards are based solely on corporate earnings for our top executives. Upon annual Board approval, an over-performance incentive may be granted, thereby increasing the maximum award potential to 90% of base salary. We will guarantee your first annual award payment of $300,000 to be paid, minus applicable federal and state income taxes, in February 1997. Stock Options You will ------------- participate in the annual program starting in 1997. Upon Board approval, you will be awarded 40,000 options in February 1997. Based on our average stock growth of 10.79 since 1986, and assuming 40,000 annual stock options through the year 2005, the future value for the program is approximately $60M. This is estimated and is only intended to illustrate the financial value of this component of our Executive Compensation Package. Restricted Stock Your ---------------- award, upon board approval, at no cost to you except applicable taxes, is 15,000 shares of The St. Paul Companies stock. Vesting is over four years at 3,750 shares per year on the anniversary of your employment date. You will also participate in our executive stock purchase program which provides, at no cost to you except taxes, a 15% stock tip upon purchase of company stock. You become eligible for this program upon achieving 3X your annual salary in direct St. Paul Companies stock ownership. Tax/Financial Counseling You ------------------------ are eligible for executive tax/financial counseling service, which is worth $15,000 for the first year and $12,500 per year thereafter. Physical Exam You are ------------- eligible for an annual executive physical exam to be administered, at your choice, by Mayo Clinic, Rochester, MN or Park Nicollet Clinic, Minneapolis, MN. Executive Benefits You are ------------------ eligible for executive benefits that supplement our qualified benefit plans such as the retirement plan and the 401(K). This involves a Benefit Equalization Plan for highly compensated employees which contains an Executive Retirement Plan and an Executive Savings Plan. Details will be provided to you upon starting with the company. Other Considerations Within the next three years, -------------------- if you are terminated from The St. Paul Companies, for any reason other than malfeasance, you will be paid three times your normal annual cash compensation. This compensation is consistent with the current St. Paul Companies change of control protection. Long Term Cash Incentive In ------------------------ addition you will be paid: i) $255,000, if you are employed by the company after December 2, 2000 and after the 20-day average price of a share of stock exceeds $100 per share (if the price target is met before December 3, 2001); and ii) an additional $255,000, if you are employed by the company after December 2, 2000 and after the 20-day average price of a share of stock exceeds $110 per share (if the price target is met before December 3, 2001). These amounts will automatically be paid to you as soon as administratively possible after the vesting conditions are met. If you are in agreement that the terms of this letter reflect the terms of your employment with the company as ultimately agreed to, please indicate your acceptance by signing below. Sincerely yours, /s/ Greg A. Lee - ------------------ Greg A. Lee Sr. Vice President Human Resources Accepted /s/ Paul J. Liska - ------------------ GAL/ala Attachments cc: Doug Leatherdale EX-10 3 December 19, 1996 Mr. Paul Liska 1048 Ashland Avenue River Forest, Illinois 60305 Dear Paul, The purpose of this letter is to outline the compensation and benefits you will receive if your employment with The St. Paul Companies, Inc. ("Company") is terminated by the Company, or by you for "Good Reason" as defined in Section II below. This letter will also outline the Company's expectations relative to any eventual subsequent employment with a competitor. Referring to my letter to you of December 5, 1996, to the extent that the content of this letter conflicts in any way with any previous written or oral communication between you, me or any other representative of the Company, the content of this letter will control and take precedence over such previous communication. The terms of this letter agreement can be amended in the future only by express mutual written agreement between Doug Leatherdale, me or our successors (representing the Company) and you. I. The benefits provided to you in a termination situation initiated by the Company, will depend on whether or not such termination is "For Cause". If your termination is "For Cause", you will be ineligible for any benefits not required by law. For purposes of this agreement, "For Cause" shall mean your conviction of any felony involving intentional conduct, your conviction of any lesser crime or offense involving the illegal use or conversion of Company property, your willful misconduct in connection with the performance of your duties with the Company (which shall not be deemed to include any action taken by you in good faith in the interest of the Company), or your taking illegal actions in your business or personal life which materially and demonstrably harm the reputation or damage the good name of the Company. If the cause of the termination is a Change in Control of the Company, the Company's Special Severance Policy ("Policy") as in force as of the date of a Change of Control, as defined below, will determine the level of benefits to which you will be entitled. For purposes of this Policy, as it currently is drafted, "Change in Control" means a change in control that would cause the Company to file a Form 8-K with the SEC; the Company's incumbent board of directors ceases to be a majority; or fifty (50) per cent of the Company's common stock is acquired by a "person" within the meaning of Section 14 (d) of the Securities Exchange Act of 1934. Under the Policy, you are eligible for these benefits once you've been employed for three months with the Company and your employment is terminated by the Company within two years after a Change in Control for reasons other than "Cause" or you terminate voluntarily for "Good Reason". While the "Policy" cannot be amended to waive the three month requirement detailed above, if you were to be terminated for reasons covered by the Policy in that time frame, the Company will pay you the cash equivalency of the benefits and compensation you would have received under the Policy as if you had met the three month eligibility requirements. For senior executives, under the Policy and for purposes of this Section I of this letter agreement, "Good Reason" includes such situations as an adverse change in status or position as a result of a material diminution in duties or responsibilities, the refusal to allow you to engage in activities that were not prohibited before the Change in Control, a reduction in your salary, job relocation of a certain type and failure to maintain benefits that are substantially the same as are in effect when the Change in Control occurs. If you are eventually eligible for severance payments under this Policy, you will be entitled to receive: A lump sum severance payment equal to 299 per cent (299%) of your "annualized includible compensation for the base period" (as determined under Section 280 G of the Internal Revenue Code). All payments are subject to reduction so that no amount will be subject to federal excise tax on "excess parachute payments" imposed under Section 4999 of the Internal Revenue Code. Continued participation for three years in Company medical, dental, disability and life insurance programs in which you participated on the date such employment is terminated. Outplacement assistance. Please note that the Board may amend, modify or revoke the Special Severance Policy as it applies to senior executives of the Company as a group, at any time prior to a Change in Control without employees' consent. (There are restrictions on amendments to, and the termination of, the policy after a Change in Control has occurred.) While the Policy addresses only the benefits as outlined above, various Company benefit plans also have Change in Control provisions. While these plans are amended from time to time and the benefits you would be entitled to receive in the future will be affected by such amendments, currently such provisions provide the following benefits to individuals at your level in case of a Change in Control. (What is provided below is a very brief summary. If you would like more detail, I can provide you with a complete copy of such plans for your review): If vested in the Company's qualified pension plan, upon a Change in Control, the accrued benefits of all participants is increased on a nondiscriminating basis to apply any overfunded balance. You will also be credited with three additional years of service as described below, provided you are vested in the plan and meet any other eligibility criteria. Under the Company's 401 (k) plan, all Company matching contributions become 100 percent (100%) vested for terminated participants. All stock options and shares of restricted stock vest immediately upon a Change in Control and are fully exercisable. The Company provides non-qualified benefit equivalization plans through a Rabbi Trust for executives eligible to receive 401 (k) or pension benefits in excess of the statutory limit. If there is a Change in Control, the Rabbi Trust will be funded and any benefits to which you may be entitled will be paid to you by the trustee in accordance with the terms of the Trust and the underlying plans. II. If the termination is as a result of any reason other than a (i) Change in Control or (ii) for Cause, or if you terminate the agreement for Good Reason (as defined in this Section), you will receive the following benefits: Severance pay. If the termination takes place before your third anniversary of employment with the Company, you will receive a severance payment equal to three hundred percent (300%) of your then current annual salary, plus three hundred percent (300%) of the average annual incentive award you earned since joining the Company, provided that you sign the standard Company severance agreement for senior executives releasing the Company from legal liability for your termination. If the termination takes place after your third anniversary, you will receive a severance payment equal to one hundred fifty percent (150%) of your then current annual salary, plus one hundred fifty percent (150%) of your average annual incentive award in the previous three years, again, provided you sign the release described above. Pension Benefits. You will be provided with three additional years of credited service, which will have the affect of increasing your net pension benefit at the time of your termination of employment from the Company. You must be vested in the Employees' Retirement Plan at the time of termination in order to receive this additional service. What follows is an example of the value of this benefit. When you review this chart, please note that this is a good faith estimate and does not reflect any future changes in the Employees' Retirement Plan, Executive Retirement Plan (ERP) or future interest rates, and thus is for illustrative purposes only: Actual Service +3 Years Credited Service --------------- ------------------------- Annual Lump Annual Lump Age Annuity Sum Annuity Sum ---- ------- ---------- --------- ---------- 55 $183,144 $1,980,000 $228,924 $2,475,000 62 $545,388 $5,320,000 $663,888 $6,475,000 65 $830,256 $7,630,000 $943,476 $8,675,000 In preparing this estimate, we relied on the following assumptions: 1997 Annual Salary: $600,000, with 4% per year increases 1997 Annual $360,000, with 4% per year Incentive: increases Date of Birth: 1/1/55 Date of Hire: 1/1/97 Lump Sum Interest 30 - Year U. S. Treasury Rate: rate of 8% This estimate is based on the following current defined benefit formula: Multiply your monthly covered compensation amount by 45% (Your covered compensation amount is based on the average of social security wage bases and your age, thus it changes each year). Multiply the amount of your five-year average monthly salary, which is greater than your covered compensation amount, by 54%. Add the results of the first two bullets and multiply the amount times your total years of credited service (this is where the three additional years of service will increase your benefit) and divide the result by 30. This will be your normal monthly retirement benefit under the current formula. Note that all pension benefit attributable to the additional three years of credited service will be payable from the ERP (the Company's non-qualified pension plan). As you are aware, the government restricts the amount of pension benefits which may be paid through tax qualified plans. The portion of your pension not attributable to this additional three years of credited service will be, to the greatest extent possible, paid out of the qualified plan. The remainder of the latter commitment will be paid out of the ERP. Savings and other Pension Benefits. As with our defined pension plan, each of our savings and benefit equalization plans is governed by a plan document that may be amended from time to time. Your treatment will be governed by the wording of those plans at the time of termination. Currently these would include: Executive Savings Plan (ESP) - - your vested account balance. Deferred Incentive Bonuses - - your vested deferred bonus. 401(k) Plan - - all your contributions, plus vested Company contributions. Employee Stock Ownership Plan (ESOP) - - all vested Company contributions. In addition, in the event you terminate within six years of your commencement of employment with the Company, the Company will pay you a lump sum amount equal to the unvested balance of your 401(k) (Savings Plus), ESP and ESOP accounts, as soon as administratively possible. Welfare Benefits. While we will be unable to cover you under the Company's broad-based welfare plans after termination, we will either reimburse your out of pocket cost, grossed up for income tax purposes, to replace these coverages in essentially the same form as under our plan, or arrange for equivalent policies to be purchased for you at Company expense. For purposes of Section II of this agreement only, "Good Reason" shall mean the continuation of any of the following after written notice from you and a failure of the Company to remedy such event within thirty (30) days after the receipt of such notice: (i) a reduction in your base salary as in effect from time to time; (ii) a failure of the Company to provide you with any benefit or compensation plan (including any pension, profit sharing, life insurance, health, accidental death or disability plan) which has been made available to other comparable executives on terms and conditions no less favorable to you than those offered to such other executives [For purposes of this subsection (ii), Pat Thiele, or a successor executive performing essentially the same duties currently being performed by Mr. Thiele will not be considered a "comparable" executive.]; (iii) your receipt of any annual incentive payout based on financial measures which are shared with either senior executives that is not consistent with the payout criteria of other senior executives (all payouts are subject to Board approval); (iv) the assignment to you of duties materially inconsistent with your position as Executive Vice President and Chief Financial Officer of the Company; (v) a material adverse change in your title or the line of authority through which you are required to report; or (vi) a relocation of the corporate headquarters of the Company to a location outside of the greater Minneapolis/St. Paul metropolitan area. III. Upon termination, in exchange for all of the benefits provided above, you agree, for a period of two (2) years, to not engage directly or indirectly in any business (as a shareholder, employee, director, officer, partner, owner or in any capacity calling for the performance of acts of management, operation or control) which competes with the Company. This non-compete prohibition applies to any business engaging in the underwriting of property and casualty insurance, or any other business which the Company may enter between now and the date of termination. You also agree, for this two (2) year period, to not hire or cause to be hired, without the express written consent of the Company, any employee of the Company by a successor entity or employer with whom you may ultimately become associated. You also agree, for an indefinite period, to not divulge to any person or entities, without the express written consent of the Company, confidential information relating to the Company's business, including, but not limited to, investment strategies, business methods, rating methodologies and strategies, actuarial methodologies and reserving strategies, customer and agent lists, trade secrets and the like. If you are in agreement with the terms of this letter, please indicate that acceptance by signing below. Keep one original for your files and return the other to me. As I noted above, to the extent that the content of this letter conflicts in any way with previous written or oral communication between you, me or any other representatives of the Company, the content of this letter will control and take precedence over such previous communication. Agreed to and Accepted: PAUL LISKA THE ST. PAUL COMPANIES, INC. /s/ Paul J. Liska - ---------------------- Paul J. Liska Date: January 20, 1997 By: /s/ Greg A.Lee - -------------------------- ------------------------ Greg A. Lee Its: Senior Vice President- Human Resources --------------------------- Date: December 26, 1996 --------------------------- EX-10 4 THE ST. PAUL COMPANIES, INC. SPECIAL LEVERAGED STOCK PURCHASE PLAN 1. Purpose and Term. The purpose of The St. Paul Companies, Inc. Special Leveraged Stock Purchase Plan (the "Plan") is to increase senior officers' ownership of Company common stock and to provide those officers with a stronger, more immediate focus on shareholder value creation. The Plan shall become effective upon the approval of the shareholders of the Company and will terminate May 7, 2003. 2. Definitions. Wherever used herein, the following terms shall have the respective meanings set forth below: "Board" means the Board of Directors of the Company. "Committee" means the Personnel and Compensation Committee of the Board, or, if no longer established, the Board. "Common Stock" means the common stock of the Company. "Company" means The St. Paul Companies, Inc. "Drawdown" means any advance of funds under a Note. "Notes" or "Note" means the Secured Promissory Notes in form of the attached Exhibit A entered into by each Participant with the Company. "Participant" means an employee of the Company or its subsidiaries who is selected by the Committee to participate in the Plan. "Pledge Agreement" means the Pledge and Custody Agreement entered into by each Participant and the Company in the form of the attached Exhibit B "Purchase Loan" means loans made pursuant to this Plan. "Purchased Stock" means the shares of Company Common Stock purchased with the loan proceeds. "Retirement" means termination of employment which entitles the Participant to an immediate pension under the terms of The St. Paul Companies, Inc. Employees Retirement Plan. 3. Eligibility. The Committee shall select from time to time as Participants in the Plan such senior executives of the Company or its subsidiaries who are expected to contribute to the successful performance of the Company. No employee shall have at any time the right (i) to be selected as a Participant, (ii) to be entitled to a Purchase Loan, or (iii) having been selected for a Purchase Loan, to receive any further Purchase Loans. Selected Participants will be eligible for loans if they have previously met their stock ownership targets established by the Committee. Generally stock ownership targets are to range from 200 percent of salary to 500 percent of salary and will be similar to the Participants' stock ownership target for the Company's Executive Stock Ownership Program. Participants who do not initially meet their stock ownership targets could receive Purchase Loans when they meet their stock ownership targets if they do so by May 6, 1999. 4. Administration. The Plan shall be administered by the Committee. A majority of the Committee shall constitute a quorum, and the acts of a majority shall be the acts of the Committee. Subject to the provisions of the Plan, the Committee shall (i) select the Participants, determine the amount of the loans to be made to Participants and the Participants' stock ownership targets, and (ii) have the authority to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the administration of the Plan, to determine the terms and provisions of any agreements entered into hereunder, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Purchase Loan in the manner and to the extent it shall deem desirable to carry it into effect. The determinations of the Committee in the administration of the Plan, as described herein, shall be final and conclusive. 5. Loans. Company shall provide each Participant with a full- recourse interest bearing Purchase Loan, the proceeds of which shall be used by the Participant to purchase additional Common Stock on the open market within the next available window period. Funds shall be advanced upon the Participant providing the Company with evidence that additional shares have been purchased. The total amount that each Participant shall be allowed to borrow under this Plan shall be as determined by the Committee. Each Drawdown and the total amount of all Drawdowns under each Note shall in no event be greater than the cost of the Purchased Stock, including commissions. Each Drawdown shall be at least $100,000.00 and as a condition precedent to any additional Drawdown the market value of the Pledged Securities shall at least be equal to the amount outstanding under the Note Purchase Loans will accrue interest at the "applicable federal rate" (as determined by Section 1274(d) of the Internal Revenue Code) as of the date the advances were made for loans of such maturity, compounded annually. While interest on the Purchase Loans will accrue at the applicable federal rate, interest will not be payable until the loan terminates. Accrued but unpaid interest on the Purchase Loans will be added to the principal balance of the Purchase Loan. Fifty percent of the total principal amounts of all advances under the Purchase Loan will be payable by May 7, 2002. All remaining principal and interest under the Purchase Loans will be due and payable May 7, 2003. The Participant may prepay at any time. The payment of the Purchase Loans will be accelerated if a Participant's service is terminated because of resignation or involuntary termination. In those instances, the Purchase Loan must be paid within 30 days following such event. If a Participant's termination of service is due to Retirement, death, disability or following a Change of Control (as defined below), the Purchase Loan must be repaid over a two-year period following such event, but no later than May 7, 2003. The Purchase Loan may also be prepaid at any time at the Participant's option. Purchase Loans shall be evidenced by the Participant's execution of a Secured Promissory note in the form of the attached Exhibit A. "Change of Control" means a change of 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 6, 1997, 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, or fifty percent (50%) or more of the Common Stock; or (b) individuals who constitute the Board on May 6, 1997, cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to May 6, 1997, 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 6, 1997 (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 6, 1997. 6. Pledged Securities. The Participant shall pledge the Purchased Stock and such additional securities as may be necessary, to secure the Purchase Loan by executing a Pledge Agreement in the form of the attached Exhibit B. Participants will be permitted at any time to sell the Purchased Stock so pledged, provided that the proceeds from such sale must be applied against the outstanding balance of the Purchase Loan. Participants would be entitled to any shareholder dividends, and to vote any pledged securities, including the Purchased Stock. 7. Nontransferability. No amount payable or other right under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind nor in any manner be subject to the debts or liabilities of any person, except by will or the laws of descent and distribution, and any attempt to so alienate or subject any such amount, whether presently or thereafter payable, or any such right shall be void. 8. No Right to Employment. No person shall have any claim or right to be granted a Purchase Loan, and the grant of a Purchase Loan shall not be construed as giving a Participant the right to continue in the employ of the Company or its subsidiaries. Further, the Company and its subsidiaries expressly reserve the right at any time to dismiss a Participant without any liability, or any claim under the Plan, except as provided herein or in any agreement entered into hereunder. 9. Amendment. The Board of Directors upon the recommendation of the Committee may amend, suspend, or terminate the Plan at any time provided no amendment, suspension or termination of the Plan may cause the Plan to fail to meet the requirements of Rule 16b-3, or such successor rule as may hereinafter be in effect, or Section 162(m) of the Internal Revenue Code or may, without the consent of the Participant, adversely affect such Participant's rights under the Plan in any material aspect. No such amendment shall be made without the approval of the Company's shareholders to the extent such approval is required by law or agreement. 10. Governing Law. The Plan shall be construed and its provisions enforced and administered in accordance with the laws of the State of Minnesota. Exhibit A SECURED PROMISSORY NOTE May 7, 1997 This Note is issued under and subject to the terms of The St. Paul Companies, Inc. Special Leveraged Stock Purchase Plan ("Plan"). All capitalized terms used herein without definition have the meaning ascribed to them in the Plan. For value received, the undersigned (hereinafter referred to as the "Borrower") promises to pay to the order of The St. Paul Companies, Inc., a Minnesota corporation (the "Holder"), the principal amount that the Borrower is advanced under the terms of the Plan. The Borrower further promises to pay at the maturity of this Note to the order of the Holder interest on the amount of each advance of principal outstanding from time to time at the mid-term federal rate (with annual compounding) that would avoid imputed interest as determined under section 1274 (c) of the Internal Revenue Code of 1986, as amended as of the date on which the advance was made, compounded annually (the "Interest Rate"). Fifty percent of the total principal advances shall, to the extent not prepaid, be payable May 7, 2002. All principal and all interest outstanding on this Note from time to time shall be payable at a date no later than the earlier of (a) May 7, 2003, or (b) the date thirty (30) days after the Borrower ceases to be an employee of the Company or one of its subsidiaries; provided that if the Borrower's employment is terminated due to Retirement, death, disability or following a Change in Control, the outstanding principal and interest shall be repaid in eight (8) (or a lesser number if after May 7, 2001) equal quarterly installments. Principal and interest shall be payable to the Holder at 385 Washington Street, MC 516A, St. Paul, Minnesota, 55102 or at such other location as the Holder may designate in writing. The Holder, or authorized agent of the Holder, shall record all advances of principal under this Note (each a "Drawdown"), the Interest Rate to be paid on each Drawdown and all payments of principal and interest hereunder and shall endorse such Drawdowns and payments on the grid which is attached to and made a part of this Note (the "Grid"). The entries on the Grid shall be prima facie evidence of amounts outstanding hereunder. Each advance or Drawdown shall be at least $100,000.00. The Borrower may prepay any amount of principal outstanding and any accrued but unpaid interest in whole or in part without penalty or premium. The Holder shall apply each payment on this Note to the Drawdown bearing the highest Interest Rate and then to additional Drawdowns in descending order of the Interest Rate applicable to each Drawdown, in each case first to the accrued but unpaid interest and second to the principal outstanding on such Drawdown, unless the Borrower shall request otherwise. The Borrower hereby waives demand, notice, presentment, protest and notice of dishonor. The Borrower hereby consents to any delays, extensions of time, renewals, waivers or modifications that may be granted or consented to by the Holder with respect to the time of payment or any other provision hereof. No waiver of any obligation of the Borrower under this Note shall be effective unless it is in writing signed by the Holder. No waiver by the Holder of any right or remedy under this Note shall constitute a bar to exercise of the same right or remedy on any subsequent occasion or of any other right or remedy at any time. Upon the occurrence of an Event of Default (as defined in that certain Pledge Agreement between the Borrower and the Holder, dated as of the date hereof (the "Pledge Agreement")), the Holder may exercise in full its rights to foreclose on the collateral pledged by the Borrower under the Pledge Agreement. In addition, the Borrower agrees to pay the Holder's reasonable costs in collecting this Note, including reasonable attorneys' fees. The interpretation of this Note and the rights and remedies of the parties hereto shall be governed by the laws of the State of Minnesota. If one or more of the provisions of the Note is held invalid, illegal or unenforceable, in whole or in part, or if any one or more of the provisions of this Note operate or would operate to invalidate this Note, then only such provision(s) shall be deemed null and void and shall not affect any other provision of this Note, which shall remain in full force and effect. IN WITNESS WHEREOF the Borrower has executed this Note on the date first above written. ------------------------------------ Amount of Amount of Outstanding Date of Date of Amount of Interest Principal Interest Principle Notation Transaction Drawdown Drawdown Rate Paid Paid Balance Made By - ----------- -------- -------- -------- --------- --------- --------- ------- Exhibit B PLEDGE AND CUSTODY AGREEMENT PLEDGE AGREEMENT, dated as of May 7, 1997, made by the undersigned (the "Borrower") in favor of The St. Paul Companies, Inc., a Minnesota corporation (the "Lender"). WHEREAS, under the terms of The St. Paul Companies Special Leveraged Stock Purchase Plan ("Plan"), the Lender has agreed to make loans to the Borrower upon the terms and subject to the conditions set forth in the Plan, to be evidenced by a promissory notes (the "Note") of the Borrower thereunder; and WHEREAS, it is a condition precedent of the Borrower under the Plan that the Borrower shall execute and deliver this Pledge Agreement to the Lender; NOW, THEREFORE, in consideration of the premises set forth, the Borrower hereby covenants and agrees with the Lender as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Plan or Note and used herein are used as so defined, and the following terms shall have the following meanings: "Additional Pledged Securities" means shares of Common Stock or cash above and beyond the Purchased Stock and the Tipped Common Stock which the Borrower may be required to pledge. "Collateral" means the Pledged Securities and all Proceeds. "Common Stock" means the common stock of The St. Paul Companies, Inc.. "Event of Default" means any failure to pay any or all Obligations, or any portion thereof, when due or any breach or violation of this Pledge Agreement or the Notes, which breach or violation has not been cured within 10 days following written notice thereof by the Lender to the Borrower. "Obligations" means the unpaid principal of and interest on any or all Notes. "Pledge Agreement" means this Pledge and Custody Agreement, as amended, supplemented or otherwise modified from time to time. "Pledged Securities" means the Purchased Stock , the Tipped Company Stock, and the Additional Pledged Securities. and all additional securities pledged by the Borrower as required hereunder. "Proceeds" means all "proceeds" as such term is defined in the Uniform Commercial Code and, in any event, shall include, without limitation, all dividends or other income from or distributions with respect to the Pledged Securities or proceeds from the sale, disposition or other liquidation thereof. "Purchased Stock" means the shares of The St. Paul Companies, Inc. Common Stock purchased by the Borrower with the Note proceeds. "Tipped Common Stock" means the shares of Common Stock awarded to the Borrower pursuant to the St. Paul Companies, Inc. executive stock ownership plan as a result of the acquisition of the Purchased Stock. 2. Pledge; Grant of Security Interest. The Borrower grants to the Lender a first priority security interest in the Collateral, as collateral security for the prompt and complete payment and performance when due of the Obligations. 3. Custody. Promptly after the issuance of the loan amount, the Borrower shall deliver to the Company the stock certificates representing the Purchased Stock and stock transfer powers granting the Company the power to endorse and transfer the Purchased Stock. 4. Covenants. The Borrower covenants and agrees with the Lender that, from and after the date of this Pledge Agreement until the Obligations are paid in full: (a) Without the prior written consent of the Lender, the Borrower will not (i) sell, assign, transfer, exchange or otherwise dispose of, or grant any option with respect to, the Collateral, or (ii) create, incur or permit to exist any lien or option in favor of, or any claim of any person or entity with respect to, any of the Collateral, or any interest therein. (b) At any time and from time to time, upon the written request of the Lender, and at the sole expense of the Borrower, the Borrower will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Lender may reasonably request for the purposes of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted. 5. Adjustments to Pledged Securities. In the event that Borrower desires to make a further Drawdown and the market value of the currently Pledged Securities is less than the Borrower's Obligations, the Borrower, as a condition precedent to a further Drawdown, shall deposit with the Lender additional shares of Company Common Stock or cash which, together with the Pledged Securities then on deposit, will equal the Borrower's Obligations. In the event that the aggregate market value of the Pledged Securities increases, due to market appreciation, to more than 115% of the Borrower's Obligations, Borrower, by notice to Lender, may demand that the Lender release to Borrower the excess of Additional Pledged Securities, if any, and any Tipped Common Stock (if the restrictions have lapsed). In addition if the Borrower prepays any principal amount outstanding under the Note, then Lender may release Purchased Stock such that the aggregate market value of the remaining Purchased Stock pledged hereunder is not more than 115% of the Borrower's Obligations. 6. Rights of the Lender. (a) If an Event of Default shall occur and be continuing: (i) the Lender shall have the right to receive any and all Proceeds paid in respect of the Pledged Securities and make application thereof to the Obligations in such order as it may determine in its sole discretion, and (ii) the Lender shall have no duty to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (b) The rights of the Lender hereunder shall not be conditioned or contingent upon the pursuit by the Lender of any right or remedy against the Borrower or against any other person or entity which may be or become liable in respect of all or any part of the Obligations or against any other collateral security therefor, guarantee thereof or right of offset with respect thereto. The Lender shall not be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so, nor shall it be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Borrower or any other person or entity or to take any other action whatsoever with regard to the Collateral or any part thereof. 7. Remedies. If an Event of Default shall occur and be continuing, the Lender may exercise, in addition to all other rights and remedies granted in this Pledge Agreement, the Plan or in any Note, all rights and remedies of a secured party under the Minnesota Uniform Commercial Code. Without limiting the generality of the foregoing, the Lender, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Borrower (all and each of which demands, defenses, advertisements and notices are hereby expressly waived), may in such circumstances, forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give options or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing) at public or private sale, upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Lender shall have the right upon any such public sale, and, to the extent permitted by law, upon any such private sale, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Borrower, which right or equity is hereby expressly waived and released. The Lender shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations. 8. Limitation on Duties Regarding Collateral. The Lender's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession shall be to deal with it in the same manner as the Lender deals with similar securities, instruments and property for its own account. Neither the Lender nor any of its affiliates, directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any of the Collateral upon the request of the Borrower or otherwise. 9. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral or any part thereof are irrevocable and powers coupled with an interest. 10. Severability. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11. No Waiver; Cumulative Remedies. The Lender shall not by any act (except by a written instrument pursuant to paragraph 12 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 12. Waivers and Amendments; Successors and Assigns; Governing Law. None of the terms or provisions of this Pledge Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Borrower and the Lender, provided that any provision of this Pledge Agreement may be waived in writing by the Lender. This Pledge Agreement shall be binding upon the successors and assigns of the Borrower and shall inure to the benefit of the Lender and its successors and assigns. This Pledge Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Minnesota. 13. Counterparts. This Pledge Agreement may be executed in several counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one agreement. IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to be duly executed and delivered as of the date first above. BORROWER: ------------------------------------ LENDER: THE ST. PAUL COMPANIES, INC. By: ------------------------------- Title: -------------------------- EX-10 5 AMENDMENT NO. 2 TO THE ST. PAUL COMPANIES, INC. DEFERRED STOCK GRANT AGREEMENT WITH MARK PABST WHEREAS, The St. Paul Companies, Inc. (the "Company") and Mark Pabst (the "Employee") entered into a Deferred Stock Grant Agreement dated November 2, 1993 (the "Agreement"); and WHEREAS, the Agreement, as heretofore amended, provides that the Employee will be entitled to receive the Deferred Shares no later than March 14, 1997 unless the Employee has a termination of employment prior to March 14, 1997 for any reason other than death, disability or involuntary termination without cause; and WHEREAS, the Company has determined that it is not in the Company's interest to issue the Deferred Shares to the Employee on or before March 14, 1997; and WHEREAS, Company has requested that Employee agree to the deferral of the Company's delivery of the Deferred Shares to the Employee, and WHEREAS, the Employee has indicated that he is willing to accept the deferral of the Company's delivery of the Deferred Shares on the condition that the Employee not forfeit his right to receive the Deferred Shares if he voluntarily terminates his employment with the Company and all of its subsidiaries prior to delivery of the Deferred Shares. NOW THEREFORE, the Company and the Employee hereby agree to amend Sections 3 and 4 of the Agreement as follows: 3. Issuance of Deferred Shares. The Company shall cause the issuance, fully paid and nonassessable, and delivery to the Employee of four thousand Deferred Shares duly registered in the Employee's name upon the earliest to occur of the Employee's - (1) return to the United States from expatriate assignment, (2) involuntary termination of employment with the Company (and all of its subsidiaries) for any reason, (3) voluntary termination of employment with the Company (and all of its subsidiaries), or (4) death or disability. The Employee shall be considered to be disabled if he becomes physically or mentally disabled, whether totally or partially, so that he is prevented from satisfactorily performing his duties as an employee for a period of six consecutive months or for shorter periods aggregating six months in any period of twelve consecutive months. In the event that the Employee is not an employee of the Company or one of its subsidiaries on the date he becomes entitled to have his Deferred Shares issued to him pursuant hereto, the Company may, in lieu of issuing Deferred Shares, elect to pay to him (or his surviving spouse or representative of his estate, as the case may be) an amount equal to the market value on the date that the Deferred Shares would have otherwise been issuable to him. The "market value" of such Deferred Shares shall be the closing price in the principal United States market for common shares of the Company on that day, or if the market is closed on that day, on the next preceding day on which the market was open. 4. RESERVED The capitalized terms used above shall have the same meaning as defined in the Agreement. In witness whereof, the Company and the Employee have executed this Amendment No. 2 to the Agreement as of the 13th day of March, 1997 and such Amendment shall be effective as of that date. THE ST. PAUL COMPANIES, INC. By: /s/ Greg A. Lee /s/ Mark Pabst -------------------------- ---------- Greg A. Lee Mark Pabst Senior Vice President EX-11 6 Exhibit 11 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings Per Share (In thousands) Three Months Ended March 31 ------------------ 1997 1996 EARNINGS: ------ ------ Primary: Net income, as reported $124,549 128,821 PSOP preferred dividends declared (net of taxes) (2,185) (2,165) Premium on preferred shares redeemed (260) (208) ------- ------- Net income, as adjusted $122,104 126,448 ======= ======= Fully diluted: Net income, as reported $124,549 128,821 Dividends on monthly income preferred securities (net of taxes) 2,018 2,018 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (670) (758) Premium on preferred shares redeemed (260) (208) ------- ------- Net income, as adjusted $125,637 129,873 ======= ======= SHARES: Primary: Weighted average number of common shares outstanding, per consolidated financial statements 83,369 83,977 Additional dilutive effect of outstanding stock options (based on treasury stock method using average market price) 1,136 1,173 ------- ------- Weighted average, as adjusted 84,505 85,150 ======= ======= Fully diluted: Weighted average number of common shares outstanding, per consolidated financial statements 83,369 83,977 Additional dilutive effect of: Assumed conversion of PSOP preferred stock 3,934 3,990 Assumed conversion of monthly income preferred securities 3,509 3,509 Outstanding stock options (based on treasury stock method using market price at end of period) 1,136 1,120 ------- ------- Weighted average, as adjusted 91,948 92,596 ======= ======= EARNINGS PER COMMON SHARE: Primary $1.44 1.49 Fully diluted $1.37 1.40 EX-12 7 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Exhibit 12 Computation of Ratios (In thousands, except ratios) Three Months Ended March 31 -------------------- 1997 1996 ------ ------ EARNINGS: Income before income taxes $245,210 177,488 Add: fixed charges 19,477 16,585 ------- ------- Income, as adjusted $264,687 194,073 ======= ======= FIXED CHARGES: Interest costs $12,901 12,424 Rental expense (1) 6,576 4,161 ------- ------- Total fixed charges $19,477 16,585 ======= ======= FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Fixed charges $19,477 16,585 PSOP preferred stock dividends 4,425 4,489 Dividends on monthly income preferred securities 3,105 3,105 ------- ------- Total fixed charges and preferred stock dividends $27,007 24,179 ======= ======= Ratio of earnings to fixed charges 13.59 11.70 ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends 9.80 8.03 ======= ======= (1) Interest portion deemed implicit in total rent expense. EX-27 8
7 1,000 3-MOS 3-MOS 3-MOS DEC-31-1997 DEC-31-1996 DEC-31-1995 MAR-31-1997 MAR-31-1996 MAR-31-1995 11,772,252 10,335,291 9,066,702 0 0 0 0 0 0 850,997 746,635 588,355 0 0 0 729,257 607,987 613,867 14,134,846 12,674,332 11,244,812 38,383 29,134 13,264 84,258 94,851 106,650 393,424 361,063 320,388 20,389,752 18,339,862 16,532,716 11,679,590 10,276,100 9,555,780 2,397,437 2,217,602 2,071,324 0 0 0 0 0 0 707,588 664,975 621,861 207,000 207,000 0 18,732 13,265 8,120 487,557 462,893 449,863 3,397,274 3,216,151 2,558,938 20,389,752 18,339,862 16,532,716 1,171,453 1,030,576 946,070 218,662 192,379 179,409 95,592 47,920 2,977 71,496 59,016 64,299 868,878 755,460 680,439 254,760 230,488 207,694 188,355 166,455 141,845 245,210 177,488 162,777 52,911 33,077 35,393 192,299 144,411 127,384 (67,750) (15,590) (16,788) 0 0 0 0 0 0 124,549 128,821 110,596 1.44 1.49 1.27 1.37 1.40 1.23 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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