-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, O+DwL/WoDGv0ehyWOAnBKan/o7y3IJrmy1CDiiURdQGy9Uw/d17ysYhSyU+8FiEg 1CN6zVXc8MN8rol6mdTNdg== 0000086312-95-000003.txt : 199507120000086312-95-000003.hdr.sgml : 19950711 ACCESSION NUMBER: 0000086312-95-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950328 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10898 FILM NUMBER: 95523899 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-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - -- EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1994 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) -- OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to ----------- ---------- Commission file number 0-3021 THE ST. PAUL COMPANIES, INC. (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 ---------- ----------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 385 Washington Street, Saint Paul, MN 55102 -------------------------------------- ------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 612-221-7911 ------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock (without par value) New York Stock Exchange London Stock Exchange Stock Purchase Rights New York Stock Exchange --------------------- ------------------------ (Title of class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of the outstanding Common Stock held by nonaffiliates of the Registrant on March 24, 1995, was $4,242,382,341. The number of shares of the Registrant's Common Stock, without par value, outstanding at March 24, 1995, was 84,334,840. An Exhibit Index is set forth at page 31 of this report. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the Registrant's 1994 Annual Report to Shareholders are incorporated by reference into Parts I, II and IV of this report. Portions of the Registrant's Proxy Statement relating to the annual meeting of shareholders to be held May 2, 1995, are incorporated by reference into Parts III and IV of this report. PART I ------ Item 1. Business. - ------ -------- General Description The St. Paul Companies, Inc. ("The St. Paul") is incorporated as a general business corporation under the laws of the State of Minnesota. The St. Paul and its subsidiaries comprise one of the oldest insurance organizations in the United States, dating back to 1853. The St. Paul is a management company principally engaged, through its subsidiaries, in three industry segments: property-liability insurance underwriting, insurance brokerage and investment banking-asset management. As a management company, The St. Paul oversees the operations of its subsidiaries and provides them with capital, management and administrative services. According to "Fortune" magazine's most recent rankings, in terms of total assets, The St. Paul was the 25th largest diversified financial company in the United States at Dec. 31, 1993. At March 23, 1995, The St. Paul and its subsidiaries employed approximately 12,900 persons. The St. Paul's primary business is insurance underwriting, which accounted for 88% of consolidated revenues in 1994. Insurance brokerage and investment banking-asset management operations accounted for 7% and 5% of consolidated revenues, respectively, in 1994. Note 16 on pages 58 and 59 of The St. Paul's 1994 Annual Report to Shareholders, which discloses revenues, income (loss) before income taxes and identifiable assets for The St. Paul's industry segments and by geographic areas for the last three years, is incorporated herein by reference. The following table lists the sources of The St. Paul's consolidated revenues for each of the last three years: Percentage of Consolidated Revenues 1994 1993 1992 ---- ---- ---- Insurance Underwriting: Fire and Marine: Specialized Commercial 21.6% 22.7% 23.4% Personal & Business 15.7 10.9 7.6 Medical Services 13.6 15.4 16.0 Commercial 8.1 9.4 12.0 ----- ----- ----- Total Fire and Marine 59.0 58.4 59.0 Reinsurance 10.3 8.9 8.0 International 3.3 4.0 2.9 Net Investment Income 14.4 14.5 14.3 Realized Investment Gains 0.7 1.1 1.3 Other 0.6 0.7 0.5 ----- ----- ----- Total Insurance Underwriting 88.3 87.6 86.0 Insurance Brokerage 7.4 7.2 7.3 Investment Banking-Asset Management 4.7 5.5 4.9 Parent Company and Eliminations (0.4) (0.3) 1.8 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== UNDERWRITING OPERATIONS Overview. The St. Paul's insurance underwriting business is conducted through three principal operations. St. Paul Fire and Marine ("Fire and Marine") is The St. Paul's U.S. insurance underwriting operation. Fire and Marine underwrites property and liability insurance and provides insurance- related products and services to commercial, professional and individual customers throughout the United States. The St. Paul's reinsurance business operates under the name St. Paul Re, which underwrites reinsurance for leading North American and international insurance companies. International Underwriting offers primary property-liability insurance coverages in the United Kingdom and in other selected international markets, primarily Canada and Western Europe. The primary sources of the underwriting operations' revenues are premiums earned from insurance and reinsurance policies, and income earned from the investment portfolio. According to the most recent industry statistics published in "Best's Review" with respect to property-liability insurers doing business in the United States, The St. Paul's underwriting operations ranked 15th on the basis of 1993 written premiums. Principal Departments and Products The "Underwriting Results by Operation" table on page 23 of The St. Paul's 1994 Annual Report to Shareholders, which summarizes written premiums, underwriting results and combined ratios for each of its underwriting operations for the last three years, is incorporated herein by reference. The following discussion summarizes the business structure of The St. Paul's underwriting operations. Fire and Marine Fire and Marine underwrites insurance through the following business units: Specialized Commercial. This is the largest of Fire and Marine's operations, based on written premiums, and includes a number of individual underwriting operations organized according to market segments or along product lines. Specialized Commercial, in general, provides coverage for damage to the customer's property (fire, inland marine and auto), liability for bodily injury or damage to the property of others (general liability, auto liability and excess), workers' compensation insurance, and various professional liability coverages. Operations serving particular market segments consist of the following: Construction provides insurance to medium- and large-size general building contractors, highway contractors and specialty contractors. Large construction projects are insured during the life of the project. Technology underwrites a range of specialized coverages for information technology firms, as well as manufacturers of electronics, synthetics, industrial machinery and medical equipment. Financial Services provides fidelity coverages for depository institutions, in addition to directors and officers liability and all other property and liability coverages for this industry. National Accounts underwrites large commercial risks for a broad spectrum of large businesses, including multistate operations. Public Sector Services markets insurance products and services to all levels of government entities. The following operations are organized along specific product lines: Surety underwrites surety bonds, primarily for construction contractors, which guarantee that third parties will be indemnified against the nonperformance of contractual obligations. Based on estimated 1994 premium data, Fire and Marine's surety operation is the second-largest underwriter of surety bonds in the United States. Ocean Marine provides a variety of property and liability insurance related to ocean and inland waterways traffic, including cargo and hull property protection. Professional Liability markets errors and omissions coverage for lawyers, insurance agents and other nonmedical professionals, including directors and officers. Surplus Lines underwrites products liability insurance, umbrella and excess liability coverages, property insurance for high-risk classes of business, and coverages for unique, sometimes one-of-a-kind risks. Special Property provides property insurance programs for large commercial accounts. Specialized Commercial also includes the results of Fire and Marine's participation in insurance pools and associations, which provide specialized underwriting skills and risk management services for the classes of business that they write. These pools and associations serve to increase the underwriting capacity of the participating companies for insurance policies where the concentration of risk is so high or the amount so large that a single company could not prudently accept the entire risk. Personal & Business Insurance. This operation provides property and liability insurance coverages for individuals and small-business owners. For individuals, a variety of monoline and package policies are offered to protect personal property such as homes, automobiles and boats, as well as to provide coverage for personal liability. Economy Fire & Casualty Company, a personal insurance underwriter acquired in August 1993, is included in this operation and is in the process of being fully integrated into Fire and Marine's existing personal insurance operations. For small-business owners, Personal & Business Insurance markets Package Accounts for Commercial Enterprises (PACE) policies, which offer general commercial property and liability coverages for offices, retailers and family restaurants. Medical Services. Medical Services underwrites professional liability, property and general liability insurance for the health care delivery system. Products include coverages for health care professionals such as physicians and surgeons, dental professionals and nurses. Products for individual health care facilities and entire systems, such as hospital networks and managed care systems, are also marketed. Specialized claim and loss control services are integral components of Medical Services' insurance products. Fire and Marine is the largest medical liability insurer in the United States, with premium volume representing approximately 12% of the United States market in 1993 based on premium data published in "Best's Review." Commercial. Fire and Marine's Commercial underwriting operation offers property and liability insurance to midsize commercial enterprises. Coverages marketed include package, general liability, umbrella and excess liability, commercial auto and fire, inland marine and workers' compensation. Insurance products are designed for midsize manufacturers, retailers and service businesses, as well as specific customer groups such as museums, country clubs, hotels and schools. Reinsurance St. Paul Re underwrites reinsurance in both domestic and international insurance markets (referred to as "assumed reinsurance"). Reinsurance is an agreement between insurance companies to transfer risks. A large portion of reinsurance is effected automatically under general reinsurance contracts known as treaties. In some instances, reinsurance is effected by negotiation on individual risks, which is referred to as facultative reinsurance. St. Paul Re obtains business primarily through the broker or intermediary market, writing both treaty and facultative reinsurance for property, liability, ocean marine, surety and specialty coverages. According to data published by the Reinsurance Association of America, St. Paul Re ranked as the eighth largest U.S. reinsurance underwriter based on written premium volume for the first nine months of 1994. In late 1994, St. Paul Re purchased from the CIGNA Corporation the right to renew most of the international business underwritten by CIGNA Reinsurance- Property & Casualty. This purchase is expected to enable St. Paul Re to expand and diversify its global reinsurance capabilities. International Underwriting The International Underwriting operation includes primary insurance written outside the United States, mainly the United Kingdom, Canada, Spain and the Republic of Ireland. It also includes insurance written for foreign operations of multinational corporations based in the United States, and insurance written to cover exposures in the United States for foreign-based companies. This operation offers a range of commercial and personal lines products and services tailored to meet the unique needs of customers located outside the United States. Principal Markets and Methods of Distribution St. Paul Fire and Marine Insurance Company and its subsidiaries are licensed and transact business in all 50 states, the District of Columbia, Puerto Rico and the Virgin Islands. Fire and Marine's business is broadly distributed throughout the United States, with a particularly strong market presence in the Midwestern region. Five percent or more of Fire and Marine's 1994 property-liability written premiums were produced in each of Illinois, Minnesota and New York. Fire and Marine's business is produced primarily through approximately 6,300 independent insurance agencies and national insurance brokers. Fire and Marine maintains 12 regional offices in major cities throughout the United States and 90 additional service offices in the United States to respond to the needs of agents, brokers and policyholders. Approximately 81% of Fire and Marine's total premium volume in 1994 originated in the regional and service offices, with the balance of business produced by various insurance pools and by the home office. In 1994, St. Paul Re produced business from its New York and London offices, and approximately 30% of its business originated from outside the United States. As a result of the acquisition from the CIGNA Corporation in late 1994, St. Paul Re now also operates out of offices in Brussels, Singapore and Miami. Reserves for Losses and Loss Adjustment Expenses (LAE) General Information. When claims are made by or against policyholders, any amounts that The St. Paul's underwriting operations pay or expect to pay to the claimant are referred to as losses. The costs of investigating, resolving and processing these claims are referred to as loss adjustment expenses (LAE). Reserves are established that reflect the estimated unpaid total cost of these two items. The reserves for unpaid losses and LAE cover claims that were incurred not only in 1994 but also in prior years. These reserves include estimates of the total cost of claims that have already been reported but not yet settled, and those that have been incurred but not yet reported. Loss reserves are established on an undiscounted basis, and are reduced for deductibles recoverable from customers and estimates of salvage and subrogation. Management continually reviews loss reserves, using a variety of statistical and actuarial techniques to analyze claim costs, frequency and severity data, and social and economic factors. Management believes that the reserves currently established for losses and LAE are adequate to cover their eventual costs. However, final claim payments may differ from these reserves, particularly when these payments may not take place for several years. Adjustments to previously estimated reserves are reflected in results in the year in which they are made. Ten-year Development. The table on page 7 presents a development of net loss and LAE reserve liabilities and payments for the years 1984 through 1994. The top line on the table shows the estimated liability for unpaid losses and LAE, net of reinsurance recoverable, recorded at the balance sheet date for each of the years indicated. Loss development data for The St. Paul's U.K.- based underwriting subsidiary, St. Paul UK, is included for all years in the table since 1988. The upper portion of the table, which shows the re-estimated amount relating to the previously recorded liability, is based upon experience as of the end of each succeeding year. This estimate is either increased or decreased as further information becomes known about individual claims and as changes in the trend of claim frequency and severity become apparent. The "Cumulative Redundancy (Deficiency)" line on the table for any given year represents the aggregate change in the estimates for all years subsequent to the year the reserves were initially established. For example, the 1984 reserve of $2,917 million developed up to $2,993 million, or a $76 million deficiency, by the end of 1985. By the end of 1994, the 1984 reserve had developed a deficiency of $488 million. The changes in the estimate of 1984 loss reserves were reflected in operations during the past ten years. In 1993, The St. Paul adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." This statement required, among other things, that reinsurance recoverables on unpaid losses and LAE be shown as an asset, instead of the prior practice of netting this amount against insurance reserves for balance sheet reporting purposes. The middle portion of the table, which includes data for only those periods impacted since the adoption of SFAS No. 113 (the years 1992 through 1994), represents a reconciliation between the net reserve liability as shown on the top line of the table and the gross reserve liability as shown on The St. Paul's balance sheet. This portion of the table also presents the gross re- estimated reserve liability as of the end of the latest re-estimation period (Dec. 31, 1994) and the related re-estimated reinsurance recoverable. The St. Paul did not restate data for years prior to 1992 in this table for presentation on a gross basis due to the impracticality of determining such gross data on a reliable basis for its foreign underwriting operations. The lower portion of the table presents the cumulative amounts paid with respect to the previously recorded liability as of the end of each succeeding year. For example, as of Dec. 31, 1994, $3,078 million of the currently estimated $3,405 million of losses and LAE that have been incurred for the years up to and including 1984 have been paid. Thus, as of Dec. 31, 1994, it is estimated that $327 million of incurred losses and LAE are unpaid for the years up to and including 1984. Caution should be exercised in evaluating the information shown on this table. It should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the portion of the development shown for year-end 1993 reserves that relates to 1984 losses is included in the cumulative redundancy or deficiency amount for the years 1984 through 1993. This table presents calendar year data. It does not present accident or policy year development data, which some readers may be more accustomed to analyzing. The social and economic conditions and other trends which had an impact on the changes in the estimated liability in the past are not necessarily indicative of the future. Accordingly, readers are cautioned against extrapolating any conclusions about future results from the information presented in this table. Analysis of Loss and Loss Adjustment Expense (LAE) Development (in millions)
Year ended December 31 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 - ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Net liability for unpaid losses and LAE $2,917 3,364 4,043 4,745 5,502 5,907 6,279 6,688 7,207 7,640 7,890 ====== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== Liability re-estimated as of: One year later 2,993 3,477 4,087 4,727 5,313 5,656 6,037 6,436 6,984 7,312 Two years later 3,104 3,625 4,078 4,489 4,914 5,338 5,787 6,260 6,703 Three years later 3,203 3,652 3,955 4,268 4,789 5,135 5,628 6,066 Four years later 3,222 3,597 3,874 4,226 4,731 5,027 5,490 Five years later 3,202 3,572 3,874 4,178 4,707 4,975 Six years later 3,227 3,624 3,885 4,180 4,682 Seven years later 3,280 3,652 3,914 4,169 Eight years later 3,308 3,688 3,951 Nine years later 3,361 3,742 Ten years later 3,405 Cumulative redundancy (deficiency) $ (488) (378) 92 576 820 932 789 622 504 328 ======= ===== ===== ===== ===== ===== ===== ===== ===== ===== Cumulative redundancy (deficiency) excluding foreign exchange (1) $ (488) (378) 92 576 831 914 791 633 501 326 ======= ===== ===== ===== ===== ===== ===== ===== ===== ===== Net liability for unpaid losses and LAE 7,207 7,640 7,890 Reinsurance recoverable on unpaid losses 1,606 1,545 1,533 ------ ----- ----- Gross liability 8,813 9,185 9,423 ====== ===== ===== Gross re-estimated liability: One year later 8,692 8,842 Two years later 8,389 Gross cumulative redundancy 424 343 === === Gross cumulative redundancy excluding foreign exchange (1) 421 355 === === Cumulative amount of net liability paid through: One year later $ 941 976 1,008 1,101 1,196 1,318 1,450 1,452 1,547 1,566 Two years later 1,539 1,666 1,787 1,884 2,044 2,209 2,361 2,493 2,576 Three years later 1,983 2,185 2,332 2,466 2,646 2,797 3,015 3,155 Four years later 2,304 2,548 2,732 2,869 3,043 3,216 3,442 Five years later 2,533 2,812 3,012 3,132 3,348 3,496 Six years later 2,703 3,008 3,205 3,322 3,554 Seven years later 2,833 3,157 3,343 3,453 Eight years later 2,935 3,258 3,447 Nine years later 3,010 3,343 Ten years later 3,078 Cumulative amount of gross liability paid through: One year later 1,935 1,872 Two years later 3,199 (1) The results of St. Paul UK translated from original currencies into U.S. dollars are included with The St. Paul's U.S. underwriting operations in this table since 1988. The foreign currency translation impact on the cumulative redundancy (deficiency) arises from the difference between reserve developments translated at the exchange rates at the end of the year in which the liabilities were originally estimated, and the exchange rates at the end of the year in which the liabilities were re-estimated.
For further information on The St. Paul's loss reserves, including a reconciliation of beginning and ending loss reserve liabilities for each of the last three years, refer to the "Reserves for Losses and Loss Adjustment Expenses" section on pages 28 and 29, and the "Environmental Pollution and Asbestos Claims" section on pages 29 and 30, of the 1994 Annual Report to Shareholders, which are incorporated herein by reference. Ceded Reinsurance Through ceded reinsurance, other insurers and reinsurers agree to share certain risks that The St. Paul's subsidiaries have underwritten. The purpose of reinsurance is to limit a ceding insurer's maximum net loss arising from large risks or catastrophes. Reinsurance also serves to increase the direct writing capacity of the ceding insurer. Amounts recoverable on ceded losses are recorded as an asset. The St. Paul strives to achieve the following objectives with respect to ceded reinsurance: 1) Protect its assets from large individual risk and occurrence losses by purchasing reinsurance from financially secure reinsurance companies at a reasonable cost. 2) Provide its respective underwriting operations with the capacity necessary to write large limits on accounts by purchasing reinsurance from financially secure reinsurance companies at a reasonable cost. The collectibility of reinsurance is subject to the solvency of reinsurers. The placement of ceded reinsurance is guided by The St. Paul's Reinsurance Security Committee, which has established financial standards to determine qualified reinsurers. Uncollectible reinsurance recoverables have not had a material adverse impact on The St. Paul's results of operations, liquidity or financial position. Note 14 on pages 57 and 58 of the 1994 Annual Report to Shareholders, which provides a schedule of ceded reinsurance information, is incorporated herein by reference. INSURANCE BROKERAGE OPERATIONS The St. Paul's insurance brokerage segment, Minet, provides insurance and reinsurance broking and risk advisory services for major corporations and large professional organizations worldwide. According to the most recent rankings in terms of total 1993 revenues by "Business Insurance," Minet is the tenth largest international insurance brokerage organization in the world. Based in London, Minet has 131 offices throughout North America, Europe, Africa, Asia and Australia. Minet operates through six business units, each focusing on distinct client groups. Global Professional Services provides insurance brokerage services to the world's largest accounting firms, as well as law firms, law societies and insurance companies. International Retail serves clients in Asia, Africa, Australia and Europe. Retail brokers act on behalf of organizations such as corporations and partnerships by providing risk management services and procuring insurance coverages. International Broking, through its wholesale broking operations, provides access to Lloyd's of London and other markets for the purpose of assembling underwriting capacity for specialized insurance programs for clients throughout the world. Wholesale brokers act on behalf of retail brokers by procuring specialty insurance coverages. Minet's North American operations include retail brokerage and advisory services for professional clients and major industrial and service corporations. This business unit includes Minet's U.S. wholesale brokerage network, Swett & Crawford, which, according to the most recent rankings in terms of total 1993 revenues by "Business Insurance," is the largest wholesale insurance broker in the United States. Reinsurance provides facultative and treaty intermediary services to insurance companies throughout the world. Minet Risk Services provides consulting and actuarial services to clients worldwide, and also provides management services to captive insurance companies. Minet in recent years has expanded the scope of its specialty brokerage operations by acquiring several small, specialized brokers throughout the world to complement its existing worldwide client base and market network. In 1992, The St. Paul significantly reduced the carrying value of its investment in Minet through a $365 million write-down of goodwill. The "Insurance Brokerage" section of "Management's Discussion and Analysis" on pages 33 and 34 of the 1994 Annual Report to Shareholders, which discusses the goodwill write-down and other matters, is incorporated herein by reference. INVESTMENT BANKING-ASSET MANAGEMENT OPERATIONS The John Nuveen Company ("Nuveen") is the St. Paul's investment banking-asset management subsidiary. The St. Paul and Fire and Marine currently hold a combined 77% interest in Nuveen after selling a minority interest by means of an initial public offering in 1992. Note 13 on page 57 of The St. Paul's 1994 Annual Report to Shareholders, which provides further information on the sale of a minority interest in Nuveen, is incorporated herein by reference. Through John Nuveen & Co. Incorporated, a wholly-owned subsidiary, Nuveen markets tax-exempt, open-end and closed-end (exchange-traded) managed funds. Nuveen also underwrites and trades municipal bonds and tax-exempt unit investment trusts (UITs). Nuveen markets its funds and UITs to individuals through registered representatives associated with unaffiliated national and regional broker-dealers and other financial organizations. Through its Municipal Finance Department, the firm also serves state and local governments and their authorities by financing community projects through both negotiated and competitive financings. Nuveen Advisory Corp., a wholly-owned subsidiary of John Nuveen & Co. Incorporated, is investment adviser to the Nuveen-sponsored open-end mutual funds and exchange-traded funds. Nuveen Institutional Advisory Corp., also a wholly-owned subsidiary, is investment adviser to other Nuveen-sponsored exchange-traded funds and also provides investment management services to trust funds established by public utilities for the decommissioning of nuclear power plants. As the leading sponsor of tax-free UITs, Nuveen currently sponsors trusts with assets of $16.8 billion in 50 different national, state and insured portfolios. Nuveen also manages 21 tax-free, open-end mutual funds and money market funds with net assets of approximately $6 billion in national, state, insured and money market portfolios. In addition, Nuveen manages 70 exchange-traded funds with approximately $24 billion in net assets, which are traded on national stock exchanges. Nuveen has its principal office in Chicago and maintains regional sales offices in other cities across the United States. INVESTMENTS Objectives. The St. Paul's board of directors approves the annual investment plans of the underwriting subsidiaries. The primary objectives of those plans are as follows: 1) to maintain a widely diversified fixed maturities portfolio structured to maximize investment income while minimizing credit risk through investments in high-quality instruments; 2) to provide for long-term growth in the market value of the investment portfolio through investments in certain other investment classes, such as equity securities, real estate and venture capital; 3) to manage the mix of portfolio maturities to complement anticipated insurance loss pay-out patterns. The St. Paul has limited involvement with derivative financial instruments to hedge against fluctuations in interest rates, equity security values and foreign currency values, and to generate income. The St. Paul does not participate in the derivatives market for trading or speculative purposes. Fixed Maturities. Fixed maturities constituted 79% of The St. Paul's investment portfolio at Dec. 31, 1994. The following table presents information about the fixed maturities portfolio for the last five years (dollars in millions). Weighted Weighted Amortized Market Pretax Net Average Average Cost at Year Value at Investment Pretax After-tax Year Year-end Year-end Income Yield Yield ---- --------- ------------ ---------- -------- -------- 1994 $8,913.4 $8,828.7 $626.3 7.4% 5.7% 1993 8,385.1 9,148.0 607.1 7.4% 5.9% 1992 7,731.2 8,236.3 605.2 8.0% 6.5% 1991 7,230.3 7,722.1 589.0 8.4% 6.8% 1990 6,538.1 6,714.5 561.4 9.0% 6.9% The St. Paul determines the mix of its investment in taxable and tax-exempt securities based on its current and projected tax position and the relationship between taxable and tax-exempt investment yields. Fixed maturity purchases in 1994 were predominantly intermediate-term, investment- grade taxable securities. Beginning Dec. 31, 1993, the fixed maturities portfolio was carried on The St. Paul's balance sheet at estimated market value, with unrealized appreciation and depreciation (net of taxes) recorded in common shareholders' equity. At Dec. 31, 1994, the pretax unrealized depreciation on the portfolio totaled $85 million. The fixed maturities portfolio is managed conservatively to provide reasonable return while limiting exposure to risks. Approximately 95% of the fixed maturities portfolio is rated at investment grade levels (BBB or better). Nonrated securities comprise the remainder of the portfolio. Most of these are nonrated municipal bonds which, in management's view, would be considered of investment-grade quality if rated. Equities. Equity holdings comprised 5% of The St. Paul's investments at Dec. 31, 1994, and consist of a diversified portfolio of common stocks, which are held with the primary objective of achieving capital appreciation. This portfolio provided $21 million of realized investment gains and $13 million of dividend income in 1994, and its carrying value at year-end included $30 million of unrealized appreciation. Real Estate. The St. Paul's real estate holdings, which comprised 5% of total investments at Dec. 31, 1994, consist primarily of a diversified portfolio of commercial office and warehouse buildings geographically distributed throughout the United States. This portfolio produced $28 million of pretax investment income in 1994. The St. Paul does not invest in real estate mortgages. Venture Capital. Securities of small- to medium-size companies spanning a variety of industries comprised The St. Paul's investments in venture capital, which accounted for 3% of total investments at Dec. 31, 1994. These investments are in the form of limited partnership interests or direct equity investments, and their carrying value at year-end included $69 million of unrealized appreciation. Other Investments. The St. Paul's portfolio also includes short-term securities and other miscellaneous investments, which in the aggregate comprised 8% of total investments at Dec. 31, 1994. Notes 3, 4 and 5 on pages 48 through 50 of the 1994 Annual Report to Shareholders, and the "Investments" section of "Management's Discussion and Analysis" on pages 31 through 33 of said Annual Report, which provide additional information about The St. Paul's investment portfolio, are incorporated herein by reference. COMPETITION AND REGULATION The businesses in which The St. Paul's subsidiaries are engaged are all highly competitive. Underwriting. The St. Paul's underwriting subsidiaries compete with a large number of other insurers. These subsidiaries compete principally by attempting to offer a combination of superior products, underwriting expertise and services at a competitive price. The combination of products, services, pricing and other methods of competition varies by line of insurance and by coverage within each line of insurance. The St. Paul and its underwriting subsidiaries are subject to regulation by certain states as an insurance holding company system. Such regulation generally provides that transactions between companies within the holding company system must be fair and equitable. In addition, transfers of assets among such affiliated companies, certain dividend payments from underwriting subsidiaries and certain material transactions between companies within the system may be subject to prior notice to or approval of state regulatory authorities. During 1994, The St. Paul received $201.0 million in cash dividends from Fire and Marine and a $157.1 million noncash dividend of the capital stock of Fire and Marine's U.K.-based underwriting operation. In 1995, up to $311.6 million in cash dividends can be paid by Fire and Marine to The St. Paul without regulatory approval. Any change of control (generally presumed by the holding company laws to occur with the acquisition of 10% or more of an insurance holding company's voting securities) of The St. Paul and its underwriting subsidiaries is also subject to such prior approval. The underwriting subsidiaries are subject to licensing and supervision by government regulatory agencies in the jurisdictions in which they do business. The nature and extent of such regulation vary but generally have their source in statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. Such regulation, supervision and administration of the underwriting subsidiaries may relate, among other things, to the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; restrictions on the size of risk which may be insured under a single policy; deposits of securities for the benefit of policyholders; regulation of policy forms and premium rates; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; requirements regarding reserves for unearned premiums, losses and other matters; the nature of and limitations on dividends to policyholders and shareholders; the nature and extent of required participation in insurance guaranty funds; and the involuntary assumption of hard-to-place or high-risk insurance business, primarily in the personal auto and workers' compensation insurance lines. Loss ratio trends in property-liability insurance underwriting experience may be improved by, among other things, changing the kinds of coverages provided by policies, providing loss prevention services, increasing premium rates or by a combination of these. The freedom of The St. Paul's insurance underwriting subsidiaries to meet emerging adverse underwriting trends may be slowed, from time to time, by the effects of those state laws which require prior approval by insurance regulatory authorities of changes in policy forms and premium rates. Fire and Marine does business in all 50 states and the District of Columbia, Puerto Rico and the Virgin Islands. Many of these jurisdictions require prior approval of most or all premium rates. The St. Paul's insurance underwriting business in the United Kingdom is regulated by the Department of Trade and Industry (DTI). The DTI's principal objectives are to ensure that insurance companies are responsibly managed, that they have adequate funds to meet liabilities to policyholders and that they maintain required levels of solvency. In Canada, the conduct of insurance business is regulated under provisions of the Insurance Companies Act of 1992, which requires insurance companies to maintain certain levels of capital depending on the type and amount of insurance policies in force. The St. Paul is also subject to regulations in the other countries and jurisdictions in which it writes insurance business. Insurance Brokerage. The St. Paul's insurance brokerage segment, Minet, is subject to licensing requirements and other regulations under the laws of the countries in which it operates. In addition, rules of the Lloyd's insurance market in London and other regulatory organizations govern certain business activities of the brokerage operations. The regulation, supervision and administration of the brokerage operations are extensive, but in general relate to licensing standards and procedures applicable to brokers; limitations on the handling and investment of premium trust funds; business reporting and premium tax collection requirements; procedures for issuing policies; and restrictions on the eligibility of insurers with whom insurance coverage may be placed. Investment Banking-Asset Management. Nuveen is a publicly-traded company registered under the Securities Exchange Act of 1934 and listed on the New York Stock Exchange. One of its subsidiaries is a registered broker and dealer under the Securities Exchange Act of 1934, and is subject to regulation by The Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and other federal and state agencies. Nuveen's other two subsidiaries are registered investment advisers under the Investment Advisers Act of 1940. As such, they are subject to regulation by the Securities and Exchange Commission. Item 2. Properties. - ------ ---------- Fire and Marine owns its corporate headquarters buildings, located at 385 Washington Street and 130 West Sixth Street, Saint Paul, Minnesota. These buildings, which are adjacent to one another and connected by skyway, are also occupied by The St. Paul. These buildings consist of approximately 1.1 million square feet of gross floor space. Minet, St. Paul International Insurance Company Ltd. and Economy also own buildings which house their respective operations. Fire and Marine and its subsidiary, St. Paul Properties, Inc., own a portfolio of income-producing properties in various locations across the United States that they have purchased for investment. The St. Paul's operating subsidiaries rent or lease office space in many cities in which they operate. Management considers the currently owned and leased office facilities of The St. Paul and its subsidiaries adequate for the current and anticipated future level of operations. Item 3. Legal Proceedings. - ------ ----------------- The information set forth in the "Legal Matters" section of Note 11 on page 57 of the 1994 Annual Report to Shareholders, the "Legal Matters" section of "Management's Discussion and Analysis" on page 30 of said Annual Report, and the "Environmental Pollution and Asbestos Claims" section of "Management's Discussion and Analysis" on pages 29 and 30 of said Annual Report are incorporated herein by reference. In 1990, at the direction of the UK Department of Trade and Industry (DTI), five insurance underwriting subsidiaries of London United Investments PLC (LUI) suspended underwriting new insurance business. At the same time, four of those subsidiaries, being insolvent, suspended payment of claims and have since been placed in provisional liquidation. The fifth subsidiary, Walbrook Insurance Company, continued paying claims until May 1992 but has now also been placed in provisional insolvent liquidation. Weavers Underwriting Agency (Weavers), an LUI subsidiary, managed these insurers. The St. Paul's insurance brokerage operation, Minet, had brokered business to and from Weavers for many years. From 1973 through 1980, The St. Paul's UK-based underwriting operations had accepted business from Weavers. St. Paul International Insurance Company Limited (SPI) is a defendant in proceedings brought in the English courts in 1987 by Milano Assicurazioni SPA to challenge the validity of certain reinsurance contracts relating to the Weavers pool, of which SPI was a member. The trial is due to commence in April 1995. SPI is aware that there are other reinsurers seeking to avoid liability on certain of the reinsurance contracts relating to the Weavers pool. SPI and other members of the Weavers pool are seeking enforcement of the reinsurance contracts. Minet may also become the subject of legal proceedings arising from its role as one of the major brokers for Weavers. The proceedings are being vigorously contested by The St. Paul and it recognizes that the final outcome of these proceedings, if adverse to The St. Paul, may materially impact the results of operations in the period in which that outcome occurs, but believes it will not have a materially adverse effect on its liquidity or overall financial position. The St. Paul reported in its 1993 Form 10-K on a declaratory judgment action in the Circuit Court of Missouri involving Economy's potential liability under a homeowner's policy for a wrongful death that occurred in the home of its insured, Robert A. Berdella, Jr. That action was settled in December 1994 at no cost to either The St. Paul or Economy. The St. Paul previously reported that the Superior Court of California had entered judgment against Fire and Marine and in favor of Arntz Contracting Company and certain of its affiliates in the amount of $16.5 million in compensatory damages and $100 million in punitive damages. In January 1994, the portion of the judgment granting punitive damages was vacated. Both parties have appealed the court's ruling. Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- No matter was submitted to a vote of security holders during the quarter ended Dec. 31, 1994. Executive Officers of the Registrant. - ------------------------------------ All of the following persons are regarded as executive officers of The St. Paul Companies, Inc. because of their responsibilities and duties as elected officers of The St. Paul, Fire and Marine or St. Paul Re. There are no family relationships between any of The St. Paul's executive officers and directors, and there are no arrangements or understandings between any of these officers and any other person pursuant to which the officer was selected as an officer. All of the following officers except Nicholas M. Brown Jr., Andrew I. Douglass, Greg A. Lee and James Hom have held executive positions with The St. Paul or one or more of its subsidiaries for more than five years, and have been employees of The St. Paul or a subsidiary for more than five years. Nicholas M. Brown Jr. joined The St. Paul in September 1993. For more than five years prior to that date, Mr. Brown held various management positions with Aetna Life and Casualty. Mr. Douglass joined The St. Paul in August 1993. For more than five years prior to 1993, Mr. Douglass had been Executive Vice President and General Counsel of Heller International Corporation. Greg A. Lee joined The St. Paul in January 1993. For more than five years prior to that date, Mr. Lee held various human resources management positions with PepsiCo, Inc. and its subsidiaries. James Hom joined The St. Paul in October 1994. For two years prior to that date, Mr. Hom served as vice president-corporate claims and project management for The Home Insurance Company. Prior to that, Mr. Hom spent seven years managing insurance consulting groups for two large public accounting firms. Positions Term of Office Presently and Period of Name Age Held Service - ---- --- ---------- -------------- Douglas W. 58 Chairman, President Serving at the Leatherdale and Chief Executive pleasure of the Officer Board from 5-90 Patrick A. Thiele 44 Executive Vice Serving at the President and pleasure of the Chief Financial Board from 12-91 Officer Nicholas M. 40 Executive Vice Serving at the Brown Jr. President and pleasure of the Chief Operating Board from 5-94 Officer- Fire and Marine James F. Duffy 51 President and Serving at the Chief Executive pleasure of the Officer- Board from 9-93 St. Paul Re Susan J. Albrecht 48 President- Serving at the Major Markets- pleasure of the Fire and Marine Board from 12-94 Gary P. Hanson 51 President- Serving at the Personal & pleasure of the Business Board from 9-93 Insurance- Fire and Marine Joseph B. Nardi 50 President- Serving at the Medical Services- pleasure of the Fire and Marine Board from 8-82 Janet R. Nelson 45 President- Serving at the Custom Markets- pleasure of the Fire and Marine Board from 5-94 James A. Schulte 45 President- Serving at the Commercial- pleasure of the Fire and Marine Board from 10-93 Mark L. Pabst 48 Senior Vice Serving at the President-Fire and pleasure of the Marine and President Board from 2-95 and Chief Executive Officer-International Underwriting Howard E. Dalton 57 Senior Vice Serving at the President and pleasure of the Chief Accounting Board from 9-87 Officer Andrew I. Douglass 51 Senior Vice Serving at the President and pleasure of the General Counsel Board from 8-93 James Hom 39 Senior Vice Serving at the President- pleasure of the Corporate Planning Board from 10-94 Greg A. Lee 45 Senior Vice Serving at the President- pleasure of the Human Resources Board from 1-93 Bruce A. Backberg 46 Vice President Serving at the and Corporate pleasure of the Secretary Board from 5-92 James L. Boudreau 59 Vice President Serving at the and Treasurer pleasure of the Board from 11-90 Part II ------- Item 5. Market for the Registrant's Common Equity and - ------ Related Stockholder Matters. --------------------------------------------- The "Stock Trading" and "Stock Price and Dividend Rate" portions of the "Shareholder Information" section on page 66 of The St. Paul's 1994 Annual Report to Shareholders are incorporated herein by reference. Item 6. Selected Financial Data. - ------ ----------------------- The "Eleven-year Summary of Selected Financial Data" section on pages 38 and 39 of the 1994 Annual Report to Shareholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial - ------ Condition and Results of Operations. ------------------------------------------------- The "Management's Discussion and Analysis" section on pages 20 to 37 of the 1994 Annual Report to Shareholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. - ------ ------------------------------------------- The financial statements and supplementary data on pages 38 to 60 of the 1994 Annual Report to Shareholders are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on - ------ Accounting and Financial Disclosure. ------------------------------------------------ None. Part III -------- Item 10. Directors and Executive Officers of the Registrant. - ------- -------------------------------------------------- The "Nominees for Directors" section, which provides information regarding The St. Paul's directors, on pages 4 to 6 of The St. Paul's Proxy Statement relating to the annual meeting of shareholders to be held May 2, 1995, is incorporated herein by reference. Information regarding The St. Paul's executive officers is included in Part I of this report. Item 11. Executive Compensation. - ------- ---------------------- The "Executive Compensation" section on pages 11 to 19 and the "Board of Directors Compensation" section on pages 6 to 8 of the Proxy Statement relating to the annual meeting of shareholders to be held May 2, 1995, are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial - ------- Owners and Management. ---------------------------------------- The "Security Ownership of Certain Beneficial Owners and Management" section on pages 20 to 23 of the Proxy Statement relating to the annual meeting of shareholders to be held May 2, 1995, are incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- None. Part IV ------- Item 14. Exhibits, Financial Statements, Financial Statement - ------- Schedules and Reports on Form 8-K. --------------------------------------------------- (a) Filed documents. The following documents are filed as part of this report: 1. Financial Statements. Incorporated by reference into Part II of this report: The St. Paul Companies, Inc. and Subsidiaries: Consolidated Statements of Operations - Years Ended December 31, 1994, 1993 and 1992 Consolidated Balance Sheets - December 31, 1994 and 1993 Consolidated Statements of Common Shareholders' Equity - Years Ended December 31, 1994, 1993 and 1992 Consolidated Statements of Cash Flows - Years Ended December 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements 2. Financial Statement Schedules. The St. Paul Companies, Inc. and Subsidiaries: Independent Auditors' Report on Financial Statement Schedules I. Summary of Investments - Other than Investments in Related Parties II. Condensed Financial Information of Registrant III. Supplementary Insurance Information IV. Reinsurance V. Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable, not required, or the information is included elsewhere in the Consolidated Financial Statements or Notes thereto. 3. Exhibits. An Exhibit Index is set forth at page 31 of this report. (3) The current articles of incorporation and the current bylaws of The St. Paul are incorporated herein by reference to Form 10-Q for the quarter ended March 31, 1994. (4) A specimen certificate of The St. Paul's common stock is incorporated herein by reference to the Form 10-K for the year ended December 31, 1992. The Shareholder Protection Rights Agreement and the amendment thereof are incorporated herein by reference to the Form 8-K Current Reports dated December 4, 1989, and March 9, 1990. There are no long-term debt instruments in which the total amount of securities authorized exceeds 10% of the total assets of The St. Paul and its subsidiaries on a consolidated basis. The St. Paul agrees to furnish a copy of any of its long-term debt instruments to the Securities and Exchange Commission upon request. (10) The Directors' Charitable Award Program. Compensation Arrangement with Mr. Nicholas M. Brown Jr. Relocation Loan Payback Agreement with Mr. James F. Duffy. Pension Service Agreement with Mr. Andrew I. Douglass. The 1994 Stock Incentive Plan is incorporated by reference to Form 10-Q for the quarter ended March 31, 1994. The 1994 Annual Incentive Plan is incorporated by reference to Form 10-Q for the quarter ended March 31, 1994. The Long-Term Incentive Plan is incorporated by reference to Form 10-Q for the quarter ended March 31, 1994. The Non-Employee Director Stock Retainer Plan is incorporated by reference to Form 10-K for the year ended December 31, 1991. The summary description of the Outside Directors' Retirement Plan is incorporated by reference to the Proxy Statement relating to the annual meeting of shareholders to be held May 2, 1995. The 1988 Stock Option Plan as in effect for options granted prior to June 1994, as amended, is incorporated by reference to Form 10-K for the year ended December 31, 1990. The Restricted Stock Award Plan, as amended, is incorporated by reference to Form 10-K for the year ended December 31, 1989. The Benefit Equalization Plan and Special Severance Policy are incorporated by reference to Form 10-K for the year ended December 31, 1987. The Deferred Management Incentive Awards Agreement - Prime Rate, the Deferred Management Incentive Awards Agreement - Phantom Stock, the Directors' Deferred Compensation Agreement - Prime Rate and the Directors' Deferred Compensation Agreement - Phantom Stock are incorporated by reference to Form 10-K for the year ended December 31, 1982. The Alternate Long-Term Incentive Plan is incorporated by reference to Form 10-Q for the quarter ended March 31, 1983. The summary descriptions of the Annual Incentive Plan (as in effect prior to 1994), Executive Post-Retirement Life Insurance Plan and Executive Excess Long-Term Disability Plan are incorporated by reference to the Proxy Statement relating to the annual meeting of shareholders which was held on May 5, 1992. (11) A statement regarding the computation of per share earnings. (12) A statement regarding the computation of the ratio of earnings to combined fixed charges and preferred stock dividends. (13) The 1994 Annual Report to Shareholders. The following portions of such annual report, representing those portions expressly incorporated by reference in this report on Form 10-K, are filed as an exhibit to this report: Portions of Annual Report for the year ended Items in December 31, 1994 this report ---------------------------- ----------- Consolidated Financial Statements Item 8 Notes to Consolidated Financial Statements Item 1, 8 Independent Auditors' Report Item 8 Management's Discussion and Analysis Item 1, 3, 7 "Stock Trading" and "Stock Price and Dividend Rate" portions of "Shareholder Information" Item 5 Eleven-year Summary of Selected Financial Data Item 6 The complete 1994 Annual Report to Shareholders is furnished to the Commission in a paper format pursuant to Rule 14a-3(c). (21) List of subsidiaries of The St. Paul Companies, Inc. (23) Consent of independent auditors to incorporation by reference of certain reports into Registration Statements on Form S-8 (SEC File No. 2-69894, No. 33-15392, No. 33-20516, No. 33- 23446, No. 33-23948, No. 33-24220, No. 33-24575, No. 33-26923, No. 33-49273 and No. 33-56987) and Form S-3 (SEC File No. 33- 33931 and No. 33-50115). (24) Power of attorney. (27) Financial data schedule. (28) Information from reports furnished to state insurance regulatory authorities. (b) Reports on Form 8-K. A Form 8-K Current Report dated January 26, 1995, was filed relating to the announcement of The St. Paul's financial results for the year ended December 31, 1994. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The St. Paul Companies, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE ST. PAUL COMPANIES, INC. ---------------------------- (Registrant) Date March 27, 1995 By /s/ Bruce A. Backberg -------------- --------------------- Bruce A. Backberg Vice President and Corporate Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The St. Paul Companies, Inc. and in the capacities and on the dates indicated. Date March 27, 1995 By /s/ Douglas W. Leatherdale -------------- -------------------------- Douglas W. Leatherdale, Director, Chairman of the Board, President and Chief Executive Officer Date March 27, 1995 By /s/ Patrick A. Thiele -------------- --------------------- Patrick A. Thiele, Director, Executive Vice President and Chief Financial Officer Date March 27, 1995 By /s/ Howard E. Dalton -------------- -------------------- Howard E. Dalton, Senior Vice President and Chief Accounting Officer Date March 27, 1995 By /s/ Michael R. Bonsignore -------------- ------------------------- Michael R. Bonsignore*, Director Date March 27, 1995 By /s/ John H. Dasburg -------------- ------------------- John H. Dasburg*, Director Date March 27, 1995 By /s/ W. John Driscoll -------------- -------------------- W. John Driscoll*, Director Date March 27, 1995 By /s/ Pierson M. Grieve -------------- --------------------- Pierson M. Grieve*, Director Date March 27, 1995 By /s/ Ronald James -------------- ---------------- Ronald James*, Director Date March 27, 1995 By /s/ William H. Kling -------------- -------------------- William H. Kling*, Director Date March 27, 1995 By /s/ Bruce K. MacLaury -------------- --------------------- Bruce K. MacLaury*, Director Date March 27, 1995 By /s/ Ian A. Martin -------------- ----------------- Ian A. Martin*, Director Date March 27, 1995 By /s/ Glen D. Nelson -------------- ------------------ Glen D. Nelson*, Director Date March 27, 1995 By /s/ Anita M. Pampusch -------------- --------------------- Anita M. Pampusch*, Director Date March 27, 1995 *By /s/ Bruce A. Backberg -------------- --------------------- Bruce A. Backberg, Attorney-in-fact INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES The Board of Directors and Shareholders The St. Paul Companies, Inc.: Under date of January 26, 1995, we reported on the consolidated balance sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, common shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994, as contained in the 1994 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1994. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules listed in the index in Item 14(a) 2. of said Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Notes 1 and 14 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," in 1993. Also, as discussed in Notes 6 and 8 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and No. 106, "Accounting for Postretirement Benefits Other Than Pensions," in 1992. Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP January 26, 1995 ------------------------- KPMG Peat Marwick LLP THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1994 (In thousands) 1994 ---------------------------------- Amount at which shown in the Cost* Value* balance sheet -------- -------- ------------- Type of investment: Fixed maturities: United States Government and government agencies and authorities $ 2,202,765 $2,066,758 $ 2,066,758 States, municipalities and political subdivisions 4,016,100 4,164,739 4,164,739 Foreign governments 697,083 682,709 682,709 Corporate securities 1,156,422 1,080,681 1,080,681 Mortgage-backed securities 841,003 833,797 833,797 ---------- --------- ---------- Total fixed maturities 8,913,373 8,828,684 8,828,684 ---------- ========= ---------- Equity securities: Common stocks: Public utilities 49,130 50,727 50,727 Banks, trusts and insurance companies 26,894 26,825 26,825 Industrial, miscellaneous and all other 424,825 453,490 453,490 ---------- --------- ---------- Total equity securities 500,849 531,042 531,042 ---------- ========= ---------- Venture capital 260,637 $ 330,032 330,032 ---------- ========= ---------- Real estate 548,144** 528,144 Other investments 46,539 46,539 Short-term investments 898,081 898,081 ---------- ---------- Total investments $11,167,623 $11,162,522 ========== ========== *See Notes 1, 3, 4 and 5 to the consolidated financial statements included in The St. Paul's 1994 Annual Report to Shareholders. ** The cost of real estate represents the cost of the properties before valuation provisions. (See Schedule V on page 30). THE ST. PAUL COMPANIES, INC. (Parent Only) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET INFORMATION December 31, 1994 and 1993 (In thousands) Assets - ------ 1994 1993 -------- -------- Investment in subsidiaries $3,308,561 $3,555,191 Investments: Fixed maturities 42,385 49,134 Equity securities 41,288 32,959 Short-term investments 5,040 2,478 Deferred income taxes 139,396 113,765 Notes and other receivables from subsidiaries 350 1,205 Other assets 46,579 31,920 --------- --------- Total assets $3,583,599 $3,786,652 ========= ========= Liabilities - ----------- Debt $ 766,016 $ 717,056 Dividends payable to shareholders 31,549 29,634 Other liabilities 48,565 36,155 --------- --------- Total liabilities 846,130 782,845 --------- --------- Convertible preferred stock 146,102 147,608 Guaranteed obligation - PSOP (141,567) (148,929) --------- --------- Net convertible preferred stock 4,535 (1,321) --------- --------- Common Shareholders' Equity - --------------------------- Common stock, authorized 240,000 shares; issued 84,202 shares (84,715 in 1993) 445,222 438,559 Retained earnings 2,362,286 2,082,832 Guaranteed obligation - ESOP (44,410) (56,005) Unrealized appreciation of investments 13,948 588,844 Unrealized loss on foreign currency translation (44,112) (49,102) --------- --------- Total common shareholders' equity 2,732,934 3,005,128 --------- --------- Total liabilities, preferred stock and common shareholders' equity $3,583,599 $3,786,652 ========= ========= See accompanying notes to condensed financial information. THE ST. PAUL COMPANIES, INC. (Parent Only) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENT OF INCOME INFORMATION Years Ended December 31, 1994, 1993 and 1992 (In thousands) 1994 1993 1992 ------- ------- ------- Revenues: Net investment income $ 4,470 $ 4,647 $ 7,174 Realized investment gains (losses) 4,240 5,551 (7,022) Realized gain on sale of minority interest in Nuveen - - 98,284 ------- ------- ------- Total revenues 8,710 10,198 98,436 ------- ------- ------- Expenses: Interest expense 48,457 43,349 36,933 Administrative and other 21,312 25,403 22,575 ------- ------- ------- Total expenses 69,769 68,752 59,508 ------- ------- ------- Income (loss) before income taxes (61,059) (58,554) 38,928 Income tax benefit (22,608) (24,977) (119,574) ------- ------- ------- Income (loss) before cumulative effects of accounting changes (38,451) (33,577) 158,502 Cumulative effects of accounting changes: Income taxes - - (23,264) Postretirement benefits - - (2,934) ------- ------- ------- Net income (loss) - Parent only (38,451) (33,577) 132,304 Equity in net income (loss) of subsidiaries 481,279 461,186 (288,342) ------- ------- ------- Consolidated net income (loss) $442,828 $427,609 $(156,038) ======= ======= ======= See accompanying notes to condensed financial information. THE ST. PAUL COMPANIES, INC. (Parent Only) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENT OF CASH FLOWS INFORMATION Years Ended December 31, 1994, 1993 and 1992 (In thousands) 1994 1993 1992 ------ ------ ------ Operating Activities: Net income (loss) $ (38,451) $ (33,577) $ 132,304 Cash dividends from subsidiaries 210,523 208,333 109,788 Tax payments from subsidiaries 104,509 99,751 106,078 State and federal income tax payments (84,910) (83,200) (107,100) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred tax benefit (19,660) (7,609) (109,994) Realized gains (4,240) (5,551) (91,262) Other 1,897 (14,205) 2,951 -------- -------- -------- Cash provided by operating activities 169,668 163,942 42,765 -------- -------- -------- Investing Activities: Proceeds from sales and maturities of investments 84,337 62,656 145,083 Purchases of investments (93,601) (61,614) (193,626) Capital contributions to subsidiaries (53,466) (75,136) (50,311) Acquisitions (10,643) - - Proceeds from sale of Nuveen shares - - 137,052 Other 14 1,356 (5,734) -------- -------- -------- Cash provided by (used in) investing activities (73,359) (72,738) 32,464 -------- -------- -------- Financing Activities: Dividends paid to shareholders (136,062) (129,218) (126,067) Issuance of debt 87,721 77,243 102,646 Repayment of debt (20,350) (51,735) (8,504) Reacquired common shares (34,150) (207) (57,722) Stock options exercised and other 6,532 12,713 14,418 -------- -------- -------- Cash used in financing activities (96,309) (91,204) (75,229) -------- -------- -------- Change in cash - - - Cash at beginning of year - - - -------- -------- -------- Cash at end of year $ - $ - $ - ======== ======== ======== See accompanying notes to condensed financial information. THE ST. PAUL COMPANIES, INC. (Parent Only) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL INFORMATION 1. The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes included in The St. Paul's 1994 Annual Report to Shareholders. 2. Debt consists of the following (in thousands): December 31, ------------------- 1994 1993 ------ ------ Commercial paper $275,635 $201,384 Medium-term notes 204,433 210,780 Guaranteed PSOP debt (1) 141,567 148,929 9-3/8% notes 99,971 99,959 Guaranteed ESOP debt 36,112 47,223 Guaranteed ESOP debt (1) 8,298 8,781 ------- ------- Total debt $766,016 $717,056 ======= ======= (1) Eliminated in consolidation. See Note 7 to the consolidated financial statements included in the 1994 Annual Report to Shareholders for further information on the debt outstanding at Dec. 31, 1994. The amount of debt, other than debt eliminated in consolidation, that becomes due during each of the next five years is as follows: 1995 and 1996, $11.1 million; 1997, $386.7 million; 1998, $27.8 million; and 1999, $20.0 million. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (In thousands) At December 31, ---------------------------------------------- Deferred Gross loss Other policy policy and loss Gross claims and acquisition adjustment unearned benefits expenses expense reserves premiums payable ---------- --------------- -------- -------- 1994 - ---- Property-Liability Insurance Underwriting: Fire and Marine: Specialized Commercial $110,792 $3,209,219 $ 688,662 - Personal & Business Insurance 66,248 635,538 322,199 - Medical Services 48,131 2,179,849 592,627 - Commercial 46,658 1,232,685 211,771 - ------- --------- --------- ------- Total Fire and Marine 271,829 7,257,291 1,815,259 - Reinsurance 40,318 1,912,028 192,861 - International 12,211 254,110 101,050 - ------- --------- --------- ------- Total $324,358 $9,423,429 $2,109,170 - ======= ========= ========= ======= 1993 - ---- Property-Liability Insurance Underwriting: Fire and Marine: Specialized Commercial $106,584 $3,014,729 $ 595,960 - Personal & Business Insurance 66,048 648,343 312,128 - Medical Services 44,951 2,229,728 552,165 - Commercial 38,738 1,295,976 171,899 - ------- --------- --------- ------- Total Fire and Marine 256,321 7,188,776 1,632,152 - Reinsurance 29,177 1,812,517 161,178 - International 9,362 183,898 82,305 - ------- --------- --------- ------- Total $294,860 $9,185,191 $1,875,635 - ======= ========= ========= ======= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE III- - SUPPLEMENTARY INSURANCE INFORMATION (In thousands)
Insurance losses Amortization Net and loss of policy Other Premiums investment adjustment acquisition operating Premiums 1994 earned income expenses expenses expenses written - ---- -------- --------- --------- ---------- -------- ------- Property-Liability Underwriting: Fire and Marine: Specialized Commercial $1,015,397 - $ 764,760 $252,577 $ 89,477 $1,085,514 Personal & Business Insurance 737,601 - 542,970 163,517 67,774 746,756 Medical Services 638,413 - 369,571 109,517 38,848 689,716 Commercial 380,356 - 278,464 112,656 43,666 418,542 --------- ------- -------- ------- ------- -------- Total Fire and Marine 2,771,767 - 1,955,765 638,267 239,765 2,940,528 Reinsurance 483,368 - 372,013 90,281 42,877 513,322 International 156,946 - 133,920 25,398 28,797 169,176 Net investment income - $674,818 - - - - Other - - - - 64,127 - --------- ------- --------- ------- ------- --------- Total $3,412,081 $674,818 $2,461,698 $753,946 $375,566 $3,623,026 ========= ======= ========= ======= ======= ========= 1993 - ---- Property-Liability Insurance Underwriting: Fire and Marine: Specialized Commercial $1,011,439 - $ 751,406 $263,138 $ 91,570 $1,000,255 Personal & Business Insurance 485,564 - 344,398 95,770 81,357 485,552 Medical Services 688,980 - 389,483 122,323 48,777 710,281 Commercial 418,635 - 311,688 144,606 19,721 379,827 --------- -------- --------- -------- ------- -------- Total Fire and Marine 2,604,618 - 1,796,975 625,837 241,425 2,575,915 Reinsurance 395,008 - 327,696 74,026 38,152 431,242 International 178,712 - 179,067 32,274 30,042 171,388 Net investment income - $646,396 - - - - Other - - - - 53,211 - --------- ------- --------- ------- ------- --------- Total $3,178,338 $646,396 $2,303,738 $732,137 $362,830 $3,178,545 ========= ======= ========= ======= ======= ========= 1992 - ---- Property-Liability Insurance Underwriting: Fire and Marine: Specialized Commercial $1,050,936 - $ 868,570 $282,938 $ 77,583 $1,058,127 Personal & Business Insurance 341,902 - 271,050 96,141 38,013 350,236 Medical Services 722,172 - 403,990 134,442 40,471 712,021 Commercial 541,109 - 457,756 173,497 34,455 499,172 --------- ------- --------- ------- ------- --------- Total Fire and Marine 2,656,119 - 2,001,366 687,018 190,522 2,619,556 Reinsurance 361,093 - 558,305 79,950 37,194 343,045 International 126,034 - 130,375 22,337 21,159 179,818 Net investment income - $642,301 - - - - Other - - - 61,525 - --------- ------- --------- ------- ------- --------- Total $3,143,246 $642,301 $2,690,046 $789,305 $310,400 $3,142,419 ========= ======= ========= ======= ======= =========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE IV - REINSURANCE Years Ended December 31, 1994, 1993 and 1992 (In thousands) Percentage Property-liability Ceded to Assumed of amount insurance Gross other from other Net assumed to premiums earned: amount companies companies amount net - ----------------- ------ --------- --------- ------ ---------- 1994 $3,296,215 594,121 709,987 3,412,081 20.8% ========= ======= ======= ========= 1993 $3,021,203 523,491 680,626 3,178,338 21.4% ========= ======= ======= ========= 1992 $3,027,243 545,502 661,505 3,143,246 21.0% ========= ======= ======= ========= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1994, 1993 and 1992 (In thousands) Additions -------------------- Balance at Charged to Charged to Balance beginning costs and other at end Description of year expenses accounts Deductions(1) of year - ----------- --------- -------- -------- ----------- ------ 1994 - ---- Real estate valuation adjustment $10,000 10,000 - - 20,000 ======= ====== ===== ====== ====== Allowance for uncollectible: Agency loans $ 4,750 - - 3,086 1,664 ======= ====== ===== ====== ====== Premiums receivable from: Underwriting activities $22,218 2,373 - 3,653 20,938 ======= ====== ===== ====== ====== Brokerage activities $19,069 820 - 360 19,529 ======= ====== ===== ====== ====== Reinsurance $26,202 492 - 871 25,823 ======= ====== ===== ====== ====== 1993 - ---- Real estate valuation adjustment $ - 10,000 - - 10,000 ======= ====== ===== ====== ====== Allowance for uncollectible: Agency loans $ 5,000 3,000 - 3,250 4,750 ======= ====== ===== ====== ====== Premiums receivable from: Underwriting activities $ 7,314 15,972 - 1,068 22,218 ======= ====== ===== ====== ====== Brokerage activities $18,771 1,637 - 1,339 19,069 ======= ====== ===== ====== ====== Reinsurance $32,768 2,947 - 9,513 26,202 ======= ====== ===== ====== ====== 1992 - ---- Oil and gas valuation adjustment for ceiling test write-down $65,636 - - 65,636 - ======= ====== ===== ====== ======= Allowance for uncollectible: Agency loans $ 5,000 - - - 5,000 ======= ====== ===== ====== ======= Premiums receivable from: Underwriting activities $12,344 2,496 - 7,526 7,314 ======= ====== ===== ====== ======= Brokerage activities $20,843 1,992 - 4,064 18,771 ======= ====== ===== ====== ======= Reinsurance $13,708 21,508 - 2,448 32,768 ======= ====== ===== ====== ======= (1)Deductions include write-offs of amounts determined to be uncollectible and unrealized foreign exchange gains and losses. EXHIBIT INDEX* -------------- How Exhibit Filed - ------- ----- (2) Plan of acquisition, reorganization, arrangement, liquidation, or succession**.................................. (3) Articles of incorporation and by-laws***...................... (4) Instruments defining the rights of security holders, including indentures (a) Specimen Common Stock Certificate***...................... (b) Shareholder Protection Rights Agreement***................ (9) Voting trust agreements**..................................... (10) Material contracts (a) The Directors' Charitable Award Program...................(1) (b) Compensation Arrangement with Mr. Nicholas M. Brown Jr...(1) (c) Relocation Loan Payback Agreement with Mr. James F. Duffy.(1) (d) Pension Service Agreement with Mr. Andrew I. Douglass.....(1) (e) 1994 Stock Incentive Plan***.............................. (f) 1994 Annual Incentive Plan***............................. (g) Long-Term Incentive Plan***............................... (h) Non-Employee Director Stock Retainer Plan***.............. (i) Outside Directors' Retirement Plan***..................... (j) Amended 1988 Stock Option Plan***......................... (k) Restricted Stock Award Plan***............................ (l) Benefit Equalization Plan***.............................. (m) Special Severance Policy***............................... (n) Deferred Management Incentive Awards Agreement - Prime Rate*** ............................................. (o) Deferred Management Incentive Awards Agreement - Phantom Stock***. ......................................... (p) Directors' Deferred Compensation Agreement - Prime Rate*** ............................................. (q) Directors' Deferred Compensation Agreement - Phantom Stock***. ......................................... (r) Alternative Long-Term Incentive Plan***................... (s) Annual Incentive Plan***.................................. (t) Executive Post-Retirement Life Insurance Plan***.......... (u) Executive Excess Long-Term Disability Plan***............. (11) Statement re computation of per share earnings..............(1) (12) Statement re computation of ratios..........................(1) (13) Annual report to security holders...........................(1) (16) Letter re change in certifying accountant**................. (18) Letter re change in accounting principles**................. (21) Subsidiaries of the Registrant..............................(1) (22) Published report regarding matters submitted to vote of security holders**......................................... (23) Consents of experts and counsel.............................(1) (24) Power of attorney ..........................................(1) (27) Financial data schedule ....................................(1) (28) Information from reports furnished to state insurance regulatory authorities........................................ P (99) Additional exhibits**....................................... * The exhibits are included only w ith the copies of this report that are filed with the Securities and Exchange Commission. However, copies of the exhibits may be obtained from The St. Paul for a reasonable fee by writing to the Corporate Secretary, The St. Paul Companies, Inc., 385 Washington Street, St. Paul, Minnesota 55102. ** These items are not applicable. ***These items are incorporated by reference as described in Item 14(a)(3) of this report. (1) Filed electronically. P Filed on paper under cover of Form SE pursuant to Rule 311(c) of Regulation S-T. EX-10 2 EXHIBIT 10(a) THE ST. PAUL COMPANIES, INC. DIRECTORS CHARITABLE AWARD PROGRAM 1. PURPOSE OF THE PROGRAM The St. Paul Companies, Inc. Directors Charitable Award Program (the "Program") allows each eligible Director of The St. Paul Companies, Inc. (the "Company") to recommend that the Company make a donation of up to $1,000,000 to the eligible tax-exempt organization(s) (the "Donee(s)") selected by the Director, with the donation to be made, in the Director's name, in ten equal annual installments, with the first installment to be made as soon as is practicable after the Director's death. The purpose of the Program is to recognize the interest of the Company and its Directors in supporting worthy educational institutions and other charitable organizations. 2. ELIGIBILITY All persons serving as Directors of the Company as of February 7, 1995, shall be eligible to participate in the Program upon their completion of enrollment in the Program. All Directors who join the Company's Board of Directors after that date shall be immediately eligible to participate in the Program upon election to the Board and completion of enrollment in the Program. 3. RECOMMENDATION OF DONATION When a Director becomes eligible to participate in the Program, he or she shall make a written recommendation to the Company, on a form approved by the Company for this purpose, designating the Donee(s) which he or she intends to be the recipient(s) of the Company donation to be made on his or her behalf. A Director may revise or revoke any such recommendation prior to his or her death by signing a new recommendation form and submitting it to the Company. 4. AMOUNT AND TIMING OF DONATION Each eligible Director may choose one organization to receive a Company donation of up to $1,000,000, or up to four organizations to receive donations aggregating up to $1,000,000. Each recommended organization must be recommended to receive a donation of at least $100,000. The donation will be made by the Company in ten equal annual installments, with the first installment to be made as soon as is practicable after the Director's death. If a Director recommends more than one organization to receive a donation, each will receive a prorated portion of each annual installment. Each annual installment payment will be divided among the recommended organizations in the same proportions as the total donation amount has been allocated among the organizations by the Director. 5. DONEES In order to be eligible to receive a donation, a recommended organization must initially, and at the time a donation is to be made, qualify to receive tax- deductible donations under the Internal Revenue Code, and be reviewed and approved by the Board Governance Committee. A recommendation will be approved unless it is determined, in the exercise of good faith judgment, that a donation to the organization would be detrimental to the best interests of the Company. A Director's private foundation is not eligible to receive donations under the Program. If an organization recommended by a Director ceases to qualify as a Donee, and if the Director does not submit a form to change the recommendation before his or her death, the amount recommended to be donated to the organization will instead be donated to the Director's remaining recommended qualified Donee(s) on a prorated basis. If none of the recommended organizations qualify, the donation will be made to the organization(s) selected by the Company. 6. VESTING The amount of the donation made on a Director's behalf will be determined based on the Director's months of Board service, in accordance with the following vesting schedule: VESTING DATE DONATION AMOUNT ------------ --------------- Upon third anniversary of $200,000 date first elected a director by shareholders (Election Date) Upon fourth anniversary $400,000 of Election Date VESTING DATE DONATION AMOUNT ------------ --------------- Upon fifth anniversary of $600,000 Election Date Upon sixth anniversary of $800,000 Election Date Upon seventh anniversary Up to of Election Date $1,000,000 Notwithstanding this vesting schedule, a Director will be entitled to a donation amount of up to $1,000,000 in the event (a) he or she dies or becomes disabled while serving as a Director, (b) if not an employee of the Company, he or she retires at the mandatory retirement age for non-employee directors, or (c) if an employee of the Company, he or she retires on or after his or her normal retirement date. For persons serving as Directors on February 7, 1995, Board service prior to that date will count as vesting service. If a Director recommends more than one organization to receive aggregate donations of up to $1,000,000, and if the applicable vested donation amount is less than $1,000,000, the actual donation amount will be divided among those organizations in the same proportions as the total donation amount has been allocated among the organizations by the Director. 7. FUNDING AND PROGRAM ASSETS The Company may fund the Program or it may choose not to fund the Program. If the Company elects to fund the Program in any manner, neither the Directors nor their recommended Donee(s) shall have any rights or interests in any assets of the Company identified for such purpose. Nothing contained in the Program shall create, or be deemed to create, a trust, actual or constructive, for the benefit of a Director or any Donee recommended by a Director to receive a donation, or shall give, or be deemed to give, any Director or recommended Donee any interest in any assets of the Program or the Company. If the Company elects to fund the Program through life insurance policies, a participating Director agrees to cooperate and fulfill the enrollment requirements necessary to obtain insurance on his or her life. 8. AMENDMENT OR TERMINATION The Board of Directors of the Company may, at any time, without the consent of the Directors participating in the Program, amend, suspend, or terminate the Program. 9. ADMINISTRATION The Program shall be administered by the Board Governance Committee. The Committee shall have authority, in its discretion, but subject to the provisions of the Program, to prescribe, amend, and rescind rules, regulations and procedures relating to the Program. The determinations of the Committee on the foregoing matters shall be conclusive and binding on all interested parties. 10. GOVERNING LAW The Program shall be construed and enforced according to the laws of the State of Minnesota and all provisions thereof shall be administered according to the laws of said state. 11. EFFECTIVE DATE The Program shall become effective when all Directors, as of February 7, 1995, have completed the Program enrollment requirements. EX-10 3 EXHIBIT 10(b) Compensation Arrangement with Mr. Nicholas M. Brown Jr. ------------------------------------------------------- March 28, 1995 Mr. Nicholas M. Brown Jr. 5600 Bristol Lane Minnetonka, MN 55343 Dear Nick, This is to confirm the special arrangements, outside the normal St. Paul benefit and executive compensation programs, that we agreed to upon your joining The St. Paul in August of 1993. From this point forward, the only such special benefits to which you are entitled are as follows: 1. We will ensure that the amount of pension benefit you receive from The St. Paul, when added to the pension benefit you will receive from the Aetna, will be no less than the pension benefit you would have received from the Aetna had you remained employed at Aetna through the date of the termination of your employment from St. Paul. We will calculate this in the following manner: a. First we will add together the pension benefits you will be paid under the Aetna pension program with the pension benefit you will receive through the St. Paul pension program. b. We will then calculate the amount that your pension would have been from the Aetna, assuming a 7% annual salary increase from the year you joined St. Paul through the year of the termination of your employment with St. Paul. c. If a. is equal to or greater than b., we will not pay you any additional pension benefit. However, if b. is greater than a., we will pay you the difference. 2. If, at any time between now and August 2, 1996, there is any change in your reporting relationship to the CEO or any change of your management responsibilities which is unsatisfactory to you, and for that reason you decide to terminate employment with The St. Paul Companies, or The St. Paul terminates the relationship for any reason other than malfeasance, you will be paid three times your normal annual cash compensation. You will, of course, continue in the benefit and compensation arrangements that have been previously been established for you. Going forward, you will participate in all benefit and compensation programs available to an executive in your office in accordance with the terms of those programs. This supersedes any previous arrangements and understandings we may have had with respect to such special benefit and compensation programs. If you approve of this agreement, please sign below. If you have any questions, please give me a call. Sincerely yours, Agreed to this 28th St. Paul Fire and Marine day of March, 1995. Insurance Company By: /s/ Greg A. Lee /s/ Nicholas M. Brown Jr. ---------------- -------------------- Greg A. Lee Nicholas M. Brown Jr. Senior Vice President Executive Vice President Human Resources and Chief Operating Officer EX-10 4 EXHIBIT 10(c) Relocation Loan Payback Agreement with Mr. James F. Duffy --------------------------------------------------------- This agreement, dated May 23, 1994 is between St. Paul Fire and Marine Insurance Company (the "Company") and James F. Duffy (the "Employee"). Whereas, the Employee has accepted a job transfer from St. Paul, Minnesota to New York, New York which has a higher cost of living; and Whereas the Company desires to assist the Employee in his transition to New York, New York by providing the Employee with an interest free relocation loan. Now therefore, the parties hereto agree to the terms and conditions as follows: 1. The company shall provide a relocation loan, without interest, to the Employee in the amount of $325,000 and 00/100 Dollars ($325,000) (the "Loan Amount"). 2.The Employee agrees to repay the loan in seven (7) equal installments according to the following schedule: February 1, 1995 Fifteen percent (15%) of the Loan Amount February 1, 1996 Fifteen percent (15%) of the Loan Amount February 1, 1997 Fifteen percent (15%) of the Loan Amount February 1, 1998 Fifteen percent (15%) of the Loan Amount February 1, 1999 Fifteen percent (15%) of the Loan Amount February 1, 2000 Fifteen percent (15%) of the Loan Amount February 1, 2001 Remainder of the outstanding balance 3.In the event of the nonpayment when due of any payment due under this Agreement and if such default continues for a period of thirty (30) days, then, at the option of the Company, any or all of the outstanding Loan Amount shall immediately become due and payable. The failure to assert this right shall not be deemed a waiver. 4.In the event the Employee voluntarily terminates his employment with the Company and its affiliated companies prior to the payment in full of the loan, then, at the option of the Company, the outstanding Loan Amount shall immediately become due and payable. The failure to assert this right shall not be deemed a waiver. 5.In the event of the Employee's involuntary termination from the Company or an affiliated company, then, at the option of the Company, the outstanding Loan Amount shall immediately become due and payable. The failure to assert this right shall not be deemed a waiver. 6.This agreement shall be governed by and construed in accordance with the laws of the State of Minnesota. /s/ James F. Duffy July 11, 1994 ------------------ ------------- James F. Duffy Accepted by: St. Paul Fire and Marine Insurance Company /s/ Greg Lee May 23, 1994 ------------ ------------ Greg Lee Senior Vice President-Human Resources EX-10 5 EXHIBIT 10(d) Pension Service Agreement with Mr. Andrew I. Douglass ----------------------------------------------------- March 28, 1995 Mr. Andrew I. Douglass 810 Oakgreen Avenue North Stillwater, MN 55082 Dear Andy: This is to confirm the special arrangement, outside the normal St. Paul benefit and executive compensation programs, that we agreed to when you joined The St. Paul in August 1993. Pursuant to that arrangement, you will be given credit under The St. Paul pension plan for your eight years of service with Heller International Corporation. Although we will not be able to credit that service under our qualified plan, we will make the necessary arrangements on a nonqualified basis. To review a number of the compensation arrangements that have already been put in place, you were paid an up-front bonus upon joining the Company, your annual salary has been set at a mutually satisfactory level and will be reviewed every March 1 as is the case for all officers, you were granted options on 5,000 (post-split) shares in February of 1994, and you were awarded 4,000 (post-split) restricted shares shortly after joining the Company. We have also established that, on an ongoing basis, among other things, you will participate in the Annual Incentive Award Plan with a maximum annual opportunity of 50% of base salary, you will participate in the Long-Term Incentive Plan for senior management, you will continue to receive a benefit for executive tax/financial counseling service worth $3,500 to $5,000 per year, and you are eligible for an annual Company- paid physical exam by your personal physician. You will, of course, continue in the benefit and compensation arrangements that have previously been established for you. Going forward, you will participate in all benefit and compensation programs available to an executive in your office in accordance with the terms of those programs. This supersedes any previous arrangements and understandings we may have had with respect to such special benefit and compensation programs. If you approve of this agreement, please sign below. If you have any questions, please give me a call. Sincerely yours, Agreed to this 28th The St. Paul Companies, Inc. day of March, 1995. By: /s/ Greg A. Lee /s/ Andrew I. Douglass ---------------- --------------------- Greg A. Lee Andrew I. Douglass Senior Vice President Senior Vice President Human Resources and General Counsel EX-11 6 EXHIBIT 11 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings (Loss) Per Common Share (In thousands, except per share amounts) Twelve Months Ended December 31, ------------------------------ 1994 1993 1992 ----- ----- ----- PRIMARY Earnings (loss): Net income (loss), as reported $442,828 $427,609 $(156,038) Preferred dividends declared (net of taxes) (8,448) (8,395) (8,349) ------- ------- ------- Net income (loss), as adjusted $434,380 $419,214 $(164,387) ======= ======= ======= Shares: Weighted average number of common shares outstanding 84,183 84,417 84,721 Additional dilutive effect of: Outstanding stock options (based on treasury stock method using average market price) 633 799 - ------- ------- ------- Weighted average, as adjusted 84,816 85,216 84,721 ======= ======= ======= FULLY DILUTED Earnings (loss): Net income (loss), as reported $442,828 $427,609 $(156,038) Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (3,782) (4,080) - Preferred dividends declared (net of taxes) - - (8,349) ------- ------- ------- Net income (loss), as adjusted $439,046 $423,529 $(164,387) ======= ======= ======= Shares: Weighted average number of common shares outstanding 84,183 84,417 84,721 Additional dilutive effect of: Convertible preferred stock 4,073 4,106 - Outstanding stock options (based on treasury stock method using market price at end of period) 811 946 - ------- ------- ------- Weighted average, as adjusted 89,067 89,469 84,721 ======= ======= ======= EARNINGS (LOSS) PER COMMON SHARE: Primary $5.12 $4.92 $(1.94) ======= ======= ======= Fully diluted $4.93 $4.73 $(1.94) ======= ======= ======= EX-12 7 EXHIBIT 12 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Ratios (In thousands, except ratios) Twelve Months Ended December 31, --------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- EARNINGS (LOSS): Income (loss) before income taxes $563,578 $522,606 $(225,063) $528,061 $503,905 Add: fixed charges 62,718 65,633 70,897 65,045 60,148 Less: capitalized interest - - 4,580 3,571 6,935 ------- ------- ------- ------- ------- Income (loss), as adjusted $626,296 $588,239 $(158,746) $589,535 $557,118 ======= ======= ======= ======= ======= FIXED CHARGES AND PREFERRED STOCK DIVIDENDS: Fixed charges: Interest costs $ 39,736 $ 40,921 $ 40,288 $ 39,275 $ 36,490 Rental expense (1) 22,982 24,712 30,609 25,770 23,658 ------- ------- ------- ------- ------- Total fixed charges 62,718 65,633 70,897 65,045 60,148 Preferred stock dividends 18,337 18,488 18,395 18,451 17,285 ------- ------- ------- ------- ------- Total fixed charges and preferred stock dividends $ 81,055 $ 84,121 $ 89,292 $ 83,496 $ 77,433 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges (2) 9.99 8.96 - 9.06 9.26 ======= ======= ======= ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends (2) 7.73 6.99 - 7.06 7.19 ======= ======= ======= ======= ======= 1) Interest portion deemed implicit in total rent expense. 2) The 1992 loss was inadequate to cover "fixed charges" by $229.6 million, and "combined fixed charges and preferred dividends" by $248.0 million. EX-13 8 PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS INCORPORATED BY REFERENCE TO FORM 10-K ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis THE ST. PAUL REPORTS RECORD EARNINGS IN 1994 In a year marked by highly competitive market conditions in the property-liability insurance industry, we achieved our best underwriting result since 1988 and recorded our second consecutive year of record earnings. Pretax earnings in 1994 were driven by our underwriting segment, where fundamental improvements overcame catastrophe losses that were the third- worst in our history. Our insurance brokerage operation, Minet, continued to make progress in realigning its business structure. And our investment in The John Nuveen Company was once again profitable. However, functioning in a difficult market environment in 1994, Nuveen experienced a decline in earnings after its record results last year. In 1993, we experienced a dramatic improvement in our underwriting and insurance brokerage segments as we rebounded from 1992's unprecedented catastrophe losses and a $365 million write-down in Minet goodwill. The following table provides a consolidated overview of our results for the last three years: Year Ended December 31 (In millions) 1994 1993 1992 ---- ---- ---- Pretax earnings (loss): Underwriting .......................... $561 $507 $81 Insurance brokerage ................... (10) (13) (433) Investment banking-asset management ... 72 83 82 Parent company and consolidating eliminations ........... (59) (54) 45 ---- ---- ---- Pretax income (loss) ................. 564 523 (225) Income tax expense ..................... 121 95 7 ---- ---- ---- Net income (loss) before accounting changes................... 443 428 (232) Cumulative effects of accounting changes .................... - - 76 ---- ---- ---- Net income (loss) .................... $443 $428 $(156) ==== ==== ==== Per share* ........................... $4.93 $4.73 $(1.94) ==== ==== ==== *All per share amounts reflect the 2-for-1 stock split in 1994. Net income of $443 million in 1994 was the highest annual total in the company's history, surpassing last year's previous record of $428 million. Net income in 1993 included an income tax benefit of $15 million, or $0.17 per share, resulting from the impact of an increase in the (GRAPHIC IMAGE NO. 1- SEE APPENDIX) statutory federal tax rate on our deferred tax asset. In 1992, our net loss was reduced by an after-tax gain of $65 million from our sale of a minority interest in The John Nuveen Company. Also in 1992, we implemented two new Statements of Financial Accounting Standards (SFAS) relating to income taxes and postretirement benefits, which in total reduced our net loss by $76 million. Our operating earnings, which exclude after-tax realized investment gains, were $414 million in 1994, compared with earnings of $387 million in 1993 and a loss of $334 million in 1992. Consolidated revenues increased 5% in 1994 to $4.7 billion, reflecting the incremental impact of including the results of Economy Fire & Casualty Company (Economy), acquired in August 1993, for a full year. In 1993, consolidated revenues were level with 1992, as increases in earned premiums and investment banking-asset management revenues were offset by a sharp decline in realized gains. The St. Paul's consolidated assets stood at $17.5 billion at the end of 1994, compared with total assets of $17.1 billion at year-end 1993. An $848 million decline in the carrying value of our fixed maturity investment portfolio masked underlying asset growth in 1994. We adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as of Dec. 31, 1993, and began recording our fixed maturity portfolio at estimated market value on our balance sheet, with the corresponding unrealized appreciation, net of taxes, recorded in common shareholders' equity. Fixed maturity investments at the end of 1994 included $85 million of unrealized depreciation. Our adoption of SFAS No. 115 had no effect on net income or loss. OPERATIONAL REVIEW We operate in three industry segments - underwriting, insurance brokerage and investment banking-asset management. Our underwriting operation conducts business primarily under the name St. Paul Fire and Marine (Fire and Marine), which is our largest operation. Our two other underwriting operations are Reinsurance (St. Paul Re) and International. Minet, based in London, comprises our insurance brokerage segment. The John Nuveen Company, of which we own 77%, is an investment banking- asset management firm based in Chicago. On the pages that follow, we will analyze the pretax results of these segments for the last three years. (GRAPHIC IMAGE NO. 2- SEE APPENDIX) (GRAPHIC IMAGE NO. 3- SEE APPENDIX) UNDERWRITING RESULTS IMPROVE DESPITE COMPETITIVE MARKET Consolidated written premiums of $3.6 billion in 1994 grew 14% over 1993 premiums of $3.2 billion. Premium growth was centered in Personal & Business Insurance, which included the results for Economy for a full 12 months, and in Reinsurance, due to price increases, higher retentions and new business. In 1993, premiums were level with 1992, as increases in Personal & Business Insurance and Reinsurance were offset by a decline in Commercial volume. The following table provides a look at our consolidated GAAP underwriting results and combined ratios for the last three years and illustrates the fundamental improvement in underwriting performance after factoring out the impact of catastrophes in each year. Year ended December 31 (Dollars in millions) 1994 1993 1992 ---- ---- ---- Actual: GAAP underwriting loss ................ $(113) $(150) $(567) Combined ratio ........................ 102.3 104.5 117.8 Adjustment: Catastrophe losses .................... $(105) $(62) $(305) Impact on combined ratio .............. 3.1 1.9 9.7 ---- ---- ---- Excluding catastrophe losses: GAAP underwriting loss ................ $(8) $(88) $(262) Combined ratio ........................ 99.2 102.6 108.1 ---- ---- ---- In 1994, the California earthquake, winter ice storms and summer hail storms ended the respite we enjoyed in 1993 from major catastrophes. Hurricane Andrew was the most significant catastrophe in 1992, severely impacting results in the underwriting segment. Reinsurance and Specialized Commercial were primary contributors to the improvement in noncatastrophe underwriting experience since 1992. In both operations, we have undertaken a variety of pricing and underwriting actions designed to reduce the volatility of underwriting results and ultimately provide for a higher quality book of business. Our successful efforts to restrain expense growth throughout the underwriting segment have also played a major role in improved underwriting results. Our underwriting expense ratio improved by 1.8 points from 1993, due to improved organizational efficiency and the acquisition of Economy. We continued to restructure Fire and Marine in 1994, an effort that began in 1993 with the goal of creating a more efficient and customer-focused organization by streamlining the processes by which we acquire business and provide service to our customers. In 1993, we recorded restructuring charges of $21 million, primarily consisting of severance and relocation expenses. We incurred no additional restructuring charges in 1994. Pretax earnings in the underwriting segment of $561 million increased 11% over 1993 income of $507 million, reflecting improved underwriting results and increased investment income. Pretax investment income totaled $675 million in 1994, compared with $646 million and $642 million in 1993 and 1992, respectively. The increase in 1994 reflected the inclusion of Economy for a full year. For several years prior to 1994, investment income levels were stagnant due to a sustained period of falling interest rates. UNDERWRITING RESULTS BY OPERATION - The following table summarizes written premiums, underwriting results and combined ratios for each of our underwriting operations for the last three years. We made several reclassifications to 1993 and 1992 information to conform to our 1994 presentation. After the table, we take a closer look at 1994 results and a look ahead to 1995 for each operation. % of 1994 Year Ended December 31 (Dollars in millions) Written Premiums 1994 1993 1992 ---------------- ---- ---- ---- SPECIALIZED COMMERCIAL Written premiums ............. 30% $1,086 $1,000 $1,058 Underwriting result .......... $(89) $(116) $(244) Combined ratio ............... 107.1 111.9 123.2 PERSONAL & BUSINESS INSURANCE Written premiums ............. 21% $747 $486 $350 Underwriting result .......... $(35) $(29) $(63) Combined ratio ............... 104.6 105.8 117.7 MEDICAL SERVICES Written premiums ............. 19% $690 $710 $712 Underwriting result .......... $118 $133 $152 Combined ratio ............... 80.3 80.0 78.6 COMMERCIAL Written premiums ............. 11% $418 $380 $499 Underwriting result .......... $(54) $(58) $(123) Combined ratio ............... 112.6 115.4 123.9 TOTAL ST. PAUL FIRE AND MARINE Written premiums ........... 81% $2,941 $2,576 $2,619 Underwriting result ........ $(60) $(70) $(278) Combined ratio ............. 101.0 102.6 110.5 REINSURANCE Written premiums ............. 14% $513 $431 $343 Underwriting result .......... $(22) $(18) $(241) Combined ratio ............... 105.1 103.1 166.3 INTERNATIONAL Written premiums ............. 5% $169 $172 $180 Underwriting result .......... $(31) $(62) $(48) Combined ratio ............... 117.6 135.9 132.1 TOTAL Written premiums ........... 100% $3,623 $3,179 $3,142 Underwriting result ........ $(113) $(150) $(567) Combined ratio: Loss and loss expense ratio 72.1 72.5 85.6 Underwriting expense ratio. 30.2 32.0 32.2 ----- ----- ----- Combined ratio............. 102.3 104.5 117.8 ===== ===== ===== Combined ratio including policyholders' dividends... 102.3 104.7 118.2 ===== ===== ===== Figures are on a GAAP basis, except for combined ratios, which are not derived from the GAAP financial statements. SPECIALIZED COMMERCIAL Specialized Commercial includes a number of our businesses that are organized according to market segments or along product lines. Market segments served include Construction, Technology, Financial Services, National Accounts and Public Sector Services. Product lines include Surety, Ocean Marine, Professional Liability, Surplus Lines and Special Property. Specialized Commercial also includes the results of our participation in insurance Pools. WRITTEN PREMIUMS - Specialized Commercial written premiums increased 9% in 1994 to $1.1 billion. Premium growth in 1994 was centered in Ocean Marine, Surplus Lines, Public Sector Services and Special Property. In all of these sectors, new business opportunities were available due to a decline in the number of insurers writing these types of coverages. Ocean Marine premiums of $94 million in 1994 increased $19 million over 1993, and premium volume in Surplus Lines grew 45% in 1994 to $76 million. Public Sector Services experienced a $10 million increase in written premiums in 1994. In addition, our increased participation in an industrial risk insurance pool contributed to premium growth in Pools. In market sectors characterized by high levels of competition, we experienced little or no premium growth. Construction, the largest sector of Specialized Commercial, posted 1994 written premiums of $210 million, up slightly over 1993. National Accounts volume declined 19% in 1994, and Technology written premiums were down 6% from 1993. In 1993, Specialized Commercial premiums were down 5% from 1992, primarily due to the conversion of workers' compensation business to high deductible programs. UNDERWRITING RESULT - Specialized Commercial's underwriting loss of $89 million in 1994 was $27 million less than 1993's loss of $116 million. The improvement in underwriting results was centered in those business sectors where we experienced premium growth. Ocean Marine posted an underwriting profit of $8 million due to the effect of favorable development on prior-year losses and new business. Special Property's underwriting result improved $10 million compared with 1993, as a result of improved current-year loss experience. In those sectors where premium volume declined or was flat with 1993, we experienced little or no improvement in bottom line results. Construction's underwriting loss increased to $29 million in 1994, up from $21 million in 1993 as a result of deterioration in loss experience. Technology's underwriting result improved by $3 million over 1993. In 1993, Specialized Commercial's underwriting result was $128 million better than 1992, primarily due to reduced losses on workers' compensation coverages and improved loss experience in most business sectors. Catastrophe losses did not have a major impact on Specialized Commercial results in 1994, 1993 or 1992. OUTLOOK FOR 1995 - We believe there is reasonable opportunity for profitable growth in Specialized Commercial. We anticipate that our Ocean Marine, Surplus Lines, Public Sector Services and Special Property units will continue to experience growth in 1995, assuming market conditions remain favorable. In Construction, Technology, National Accounts, Financial Services and Professional Liability, growth will be a challenge, as we expect no improvement in the marketplace. Our efforts in all of Specialized Commercial's businesses will focus on new product development with the purpose of acquiring new business by offering innovative coverages and superior service to individual market sectors. PERSONAL & BUSINESS INSURANCE Personal & Business Insurance provides property-liability insurance products for individuals and small-business owners. For individuals, we offer a variety of monoline and package coverages for personal property, such as homes and autos, and personal liability. For small-business owners, we market Package Accounts for Commercial Enterprises (PACE) policies for offices, retailers and family restaurants. WRITTEN PREMIUMS - Premiums written in Personal & Business Insurance increased 54% over 1993. Volume in 1994 reflects a full year of premiums produced by Economy, whereas 1993 included only four months of Economy premiums. Excluding the impact of Economy in both years, premium volume in this operation was down slightly from 1993. Premiums generated by our primary package policy, PAK II, increased 12% in 1994 as a result of growth in the number of accounts. However, PACE premium volume in 1994 declined 20% from 1993, reflecting the intensely competitive market environment that persists for small commercial accounts. UNDERWRITING RESULT - The underwriting loss deteriorated to $35 million in 1994, $6 million worse than 1993. Catastrophe losses in 1994 masked underlying improvement in this operation. Factoring out the impact of catastrophes, this operation posted underwriting losses of $6 million, $20 million and $32 million in 1994, 1993 and 1992, respectively. Our personal package and PACE sectors, largely unaffected by catastrophes, experienced a combined $18 million improvement in underwriting results in 1994. The underwriting expense ratio for Personal & Business Insurance improved by 3.9 points in 1994, reflecting the addition of Economy and the results of our expense management and efficiency efforts. Underwriting results in 1993 improved markedly over 1992 as a result of a decline in catastrophe losses and Economy's underwriting profit. Results in 1992 were severely impacted by catastrophe losses associated with Hurricane Andrew. OUTLOOK FOR 1995 - We expect the personal and small commercial market environment to become increasingly competitive; consequently, we will continue our aggressive efforts to increase efficiency and reduce costs in Personal & Business Insurance. Continuing the integration of Economy into our existing business structure will remain a priority in 1995. (GRAPHIC IMAGE NO. 4- SEE APPENDIX) MEDICAL SERVICES Medical Services offers medical professional liability, property and general liability insurance to the health care delivery system. Products include coverages for health care professionals (physicians and surgeons, dental professionals and nurses), individual health care facilities and entire systems, such as hospital networks and managed care systems. Specialized claim and loss control services are also integral components of Medical Services' insurance products. Medical Services operates through four major market sectors - Physicians and Surgeons, Health Care Facilities, Major Accounts and Other Professionals. Medical Services is the largest medical liability insurer in the United States, based on written premium volume. WRITTEN PREMIUMS - Medical Services' premium volume declined 3% in 1994 to $690 million. However, the number of Medical Services' physician and surgeon policyholders increased 2%, and the number of insured hospital beds increased 6%. The decrease in premium volume in the face of those increases is primarily due to an ongoing shift in our mix of business toward our Major Accounts sector, where higher self-insured retentions generate less written premiums. In 1993, written premiums were level with 1992, as an increase in Major Accounts volume was offset by declines in the Physicians and Surgeons and Other Professional sectors. UNDERWRITING RESULT - Medical Services' 1994 underwriting profit of $118 million represented the fifth consecutive year with a profit in excess of $100 million. The underwriting profits in 1993 and 1992 were $133 million and $152 million, respectively. Favorable prior-year loss experience was the dominant factor in underwriting profits for all three years. OUTLOOK FOR 1995 - New business initiatives and continued profitability mark the outlook for Medical Services. Our new business efforts will focus on building physicians and surgeons professional liability market share in states in which we either have not offered this coverage or have not focused on developing significant market share. We expect to continue our recent growth in coverages for the long-term care industry, and we plan to capitalize on opportunities arising from the consolidations, mergers and acquisitions that mark the current evolving health care delivery system. COMMERCIAL Commercial offers property and liability insurance to midsize commercial enterprises. This includes coverages for specific customer groups, such as museums and country clubs, as well as coverages designed for specific regional needs. Business coverages marketed include package, general liability, umbrella liability, commercial auto and fire, inland marine and workers' compensation. WRITTEN PREMIUMS - All sectors in Commercial contributed to this operation's 10% growth in 1994 premium volume. In the three years prior to 1994, our Commercial premiums declined sharply as a result of our efforts to reduce our exposures in certain lines of business where loss experience had been unacceptable, particularly workers' compensation coverages. Having substantially changed the mix of our book of business in 1993, we turned our attention in 1994 to acquiring new business and completing the restructuring of our Commercial operations. The ``middle market'' served by Commercial remains intensely competitive, and as a result, premium growth in 1994 is more a reflection of new business than price increases. In 1993, premiums declined by 24% from 1992 due to reduced workers' compensation business. UNDERWRITING RESULT - Commercial's underwriting loss declined slightly in 1994, to $54 million from $58 million in 1993. Deterioration in loss experience for general liability coverages was offset by improved results in workers' compensation and inland marine and a decline in involuntary costs. Catastrophe losses were not significant in 1994 or 1993. The underwriting expense ratio in Commercial was slightly below 1993, an encouraging indication that our efforts to streamline this operation are paying off with bottom line results. The $58 million underwriting loss in 1993 was less than half the 1992 loss, primarily due to a decline in catastrophe losses that severely impacted results in 1992. OUTLOOK FOR 1995 - We will continue to pursue new business opportunities in Commercial. Our challenge in growing this business will be to maintain underwriting discipline in evaluating new business. We believe the new structure of this operation will allow us to maintain our favorable loss ratio while we strive to reduce our expense ratio. REINSURANCE Our Reinsurance business operates under the name St. Paul Re, which underwrites reinsurance from its New York and London offices for North American and international property- liability insurance companies. St. Paul Re obtains business primarily through the broker or intermediary market, writing both treaty and facultative reinsurance for property, liability, ocean marine and certain specialty classes. WRITTEN PREMIUMS - Reinsurance premiums increased 19% in 1994, primarily due to the combined impact of price increases, higher retentions and new business. Premium growth was particularly strong for nonmarine treaty business written in London, due to a favorable rate environment, which made new business opportunities more attractive. Written premiums in 1993 increased 26% over 1992, primarily due to price increases on most property reinsurance coverages. Severe worldwide catastrophe losses in the early 1990s heightened the demand for and led to increased rates on catastrophe reinsurance, which contributed to our premium growth in both 1994 and 1993. UNDERWRITING RESULT - The 1994 underwriting loss of $22 million was only slightly worse than the 1993 loss of $18 million, in spite of an $18 million increase in catastrophe losses in 1994. Reinsurance experienced a $47 million loss associated with the California earthquake in January 1994. Excluding the impact of catastrophes in both years, Reinsurance posted a profit of $21 million in 1994, compared with a profit of $6 million in 1993. A favorable pricing environment for most property reinsurance products over the last two years, coupled with improving loss experience, has resulted in a reduction in noncatastrophe underwriting losses. Ocean Marine reinsurance results also contributed to the improvement over 1993. In 1993, a significant decline in catastrophe losses accounted for the marked turnaround in underwriting results compared with 1992, when Hurricane Andrew and a host of other weather-related disasters had a severe impact on reinsurance results. OUTLOOK FOR 1995 - We anticipate additional premium growth as a result of our agreement in late 1994 to purchase the book of international property-liability reinsurance from a reinsurance underwriting subsidiary of the CIGNA Corporation. We believe the opportunity for new and renewal accounts offered by this book of business fits well with St. Paul Re's efforts to expand the scope of its international operations. The incremental impact of this purchase on 1995 written premiums will depend on the extent to which existing business is renewed and new business is developed. Our challenge in 1995 will be to maintain adequate pricing levels to avoid the severe cyclical swings that have marked the reinsurance market in recent years. INTERNATIONAL International includes primary insurance written outside the United States, mainly in the United Kingdom, Canada, Spain and the Republic of Ireland, and multinational accounts. International offers a range of commercial and personal lines products and services tailored to meet the unique needs of customers located outside the United States. WRITTEN PREMIUMS - International written premiums of $169 million in 1994 declined slightly from 1993. We undertook steps in 1994 to improve the quality of our book of international business, including changing the mix of our business to focus more on commercial accounts and less on personal coverages. Premium volume for commercial coverages underwritten in the United Kingdom increased 31% in 1994, while U.K. personal insurance premium volume declined 28% from 1993 levels, as we reduced the number of policies written on high-risk motorists. Premiums written in Canada were level with 1993. In 1993, premiums declined 5% from 1992, primarily as a result of a decline in personal insurance volume in the United Kingdom. UNDERWRITING RESULT - The underwriting loss of $31 million in 1994 was half the 1993 loss, and the improvement spanned virtually all major sectors of International. Underwriting results in Canada were $13 million better than 1993, led by improved current-year loss experience in general commercial business. In the United Kingdom, both the commercial and personal sectors made progress, posting a combined $14 million improvement in underwriting results. In 1993, the underwriting loss deteriorated to $62 million, from $48 million in 1992, due to adverse loss development on commercial business written in both Canada and the United Kingdom. OUTLOOK FOR 1995 - Our plans include expanding both our product lines and geographic coverage. In Canada, we will pursue market share in several specialty niche markets, and in the United Kingdom, new business initiatives will focus on specific customer groups in both commercial and personal market sectors. We plan to expand our international business in Europe. Reducing underwriting losses in our existing operations will be a priority in 1995. (GRAPHIC IMAGE NO. 5- SEE APPENDIX) (GRAPHIC IMAGE NO. 6- SEE APPENDIX) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Loss reserves constitute 64% of our consolidated liabilities. We establish reserves that reflect our estimates of the total losses and loss adjustment expenses we will ultimately have to pay under insurance and reinsurance policies. These include losses that have been reported but not settled and losses that have been incurred but not yet reported to us (IBNR). Loss reserves are established on an undiscounted basis after reductions for deductibles and estimates of salvage and subrogation. These reductions totaled $669 million, and $611 million at the end of 1994 and 1993, respectively. For reported losses, we establish reserves on a "case" basis within the parameters of coverage provided in the related policy. For IBNR losses, we estimate reserves using established actuarial methods. Our case and IBNR loss reserve estimates reflect such variables as past loss experience, social trends in damage awards, changes in judicial interpretation of legal liability and policy coverages, and inflation. We take into account not only monetary increases in the cost of what we insure, but also changes in societal factors that influence jury verdicts and case law and, in turn, claim costs. Due to the nature of many of the coverages we offer, which involve claims that may not be settled for many years after they are incurred, subjective judgments as to our ultimate exposure to losses are an integral and necessary component of our loss reserving process. We continually review our reserves, using a variety of statistical and actuarial techniques to analyze current claim costs, frequency and severity data, and prevailing economic, social and legal factors. We adjust reserves established in prior years as loss experience develops and new information becomes available. Adjustments to previously estimated reserves are reflected in our financial results in the periods in which they are made. RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) - The accompanying table presents a reconciliation of beginning and ending consolidated loss reserves for the last three years. Year Ended December 31 (In millions) 1994 1993 1992 ---- ---- ---- Loss and LAE reserves at beginning of year, as reported .................. $9,185 $8,813 $8,246 Less reinsurance recoverables on unpaid losses at beginning of year .... (1,545) (1,606) (1,558) ----- ----- ----- Net loss and LAE reserves at beginning of year................. 7,640 7,207 6,688 Economy reserves at acquisition ........ - 280 - Provision for losses and LAE for claims incurred: Current year ......................... 2,790 2,527 2,941 Prior years .......................... (328) (223) (251) ----- ----- ----- Total incurred....................... 2,462 2,304 2,690 Losses and LAE payments for claims incurred: Current year ......................... (667) (580) (708) Prior years .......................... (1,566) (1,547) (1,452) ----- ----- ----- Total paid........................... (2,233) (2,127) (2,160) Unrealized foreign exchange loss (gain) 21 (24) (11) ----- ----- ----- Net loss and LAE reserves at end of year ...................... 7,890 7,640 7,207 Plus reinsurance recoverables on unpaid losses at end of year ......... 1,533 1,545 1,606 ----- ----- ----- Loss and LAE reserves at end of year, as reported ........... $9,423 $9,185 $8,813 ===== ===== ===== In each of the years shown in the table, we have recorded reductions in the loss provision for claims incurred in prior years. This recurring favorable development on prior-year losses runs contrary to the experiences of many of our peers in the property-liability insurance industry. Prior-year reserve strengthening has essentially become the industry norm over the last several years, as changes in social, economic and judicial factors and the emergence of pollution and asbestos claims have increased the estimated costs of settling insurance claims. A number of factors have contributed to our divergence from industry norms. First, we write more medical liability coverages than any of our peers, and that market has experienced a relatively favorable claims environment for the last seven years. Second, we have experienced a comparatively lower amount of adverse development on pollution and asbestos claim losses relative to our peers on commercial policies written prior to 1985. Third, we believe that generally, our reserving philosophy is more conservative than others in the industry. In all three years in the table, our Medical Services operation accounted for a significant amount of the favorable prior-year loss development. Our conservative reserving philosophy in this operation has evolved over time and is the product of many years of experience underwriting coverages in this unique and often volatile market. The nature of medical liability claims is such that changes in the frequency and severity of claims can occur suddenly, but it can be several years before we know how these changes will ultimately impact us. Since 1987, the medical liability claims environment has been favorable, but our response in terms of pricing and (GRAPHIC IMAGE NO. 7- SEE APPENDIX) reserving has been cautious and gradual, since prior experience in this line of business has shown that reserves previously believed to be adequate can revert to deficiency in a short period of time due to shifting trends in social, legal and regulatory factors. In 1994, we also experienced favorable prior-year loss development in several of our Specialized Commercial business sectors, particularly general liability and workers' compensation coverages. Improvement in claim experience and changes in economic, social and legal trends since reserves were established caused us to reduce our estimate of the ultimate cost of losses incurred in these sectors. ENVIRONMENTAL POLLUTION AND ASBESTOS CLAIMS Our underwriting operations continue to receive claims under policies written many years ago alleging injuries from environmental pollution or alleging covered property damages for the cost to clean up polluted sites. We have also received asbestos claims arising out of product liability coverages under general liability policies. Significant legal issues, primarily pertaining to issues of coverage, exist with regard to our alleged liability for both pollution and asbestos claims. In our opinion, court decisions in certain jurisdictions have tended to expand insurance coverage beyond the intent of the original policies. Our ultimate liability for pollution claims is extremely difficult to estimate. Insured parties have submitted claims for losses not covered in the insurance policy, and the ultimate resolution of these claims may be subject to lengthy litigation, making it difficult to estimate our potential liability. In addition, variables, such as the length of time necessary to clean up a polluted site and controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of a pollution claim. Estimating our ultimate liability for asbestos claims is equally difficult. The primary factors influencing our estimate of the total cost of these claims are case law and a history of prior claim development, both of which are still developing. Because of the significant uncertainties associated with pollution and asbestos claims and the likelihood that they will not be resolved in the near future, we are unable to estimate our ultimate exposure to these claims and cannot quantify a range of reasonably possible losses in addition to recorded reserves. Consequently, our results of operations in future periods may be materially impacted by these claims. However, we believe it is unlikely that such claims will materially impact our financial position or liquidity. Prior to 1994, we made no specific allocation for pollution or asbestos claims of our IBNR (incurred but not reported) reserves, but rather identified reserves only for reported claims (case reserves). In the third quarter of 1994, we specifically allocated for pollution and asbestos claims a portion of previously established IBNR reserves. The following table represents a reconciliation of total gross and net pollution reserve development for each of the years in the three-year period ended Dec. 31, 1994. Amounts in the ``net'' column are reduced by reinsurance. 1994 1993 1992 ---- ---- ---- (In millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Pollution Beginning reserves ...... $105 $73 $88 $62 $76 $55 Incurred losses ......... 71 56 32 22 30 20 IBNR allocation ......... 132 95 - - - - Paid losses ............. (33) (24) (15) (11) (18) (13) --- --- --- --- --- --- Ending reserves ......... $275 $200 $105 $73 $88 $62 === === === === === === At Dec. 31, 1994, approximately 70% of our total gross pollution reserves represented reserves for claims on direct business written in the United States by Fire and Marine. The balance of our pollution reserves consisted of estimated losses on reinsurance we have assumed. Many significant pollution claims currently being brought against insurance companies arise out of contamination that occurred 20 to 30 years ago, a time frame during which Fire and Marine's commercial book of business was largely composed of small- to medium-size businesses without significant exposure to pollution liability. In addition, we believe that our current mix of domestic commercial business carries a relatively low risk of significant pollution liability. Finally, since 1970, our Commercial General Liability policy form has included a specific pollution exclusion and, since 1986, the industry standard absolute pollution exclusion. The following table represents a reconciliation of total gross and net reserve development for asbestos claims for each of the years in the three-year period ended Dec. 31, 1994: 1994 1993 1992 ---- ---- ---- (In millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Asbestos Beginning reserves ...... $62 $48 $70 $54 $65 $54 Incurred losses ......... 13 14 17 15 25 17 IBNR allocation ......... 127 95 - - - - Paid losses ............. (17) (12) (25) (21) (20) (17) --- --- --- --- --- --- Ending reserves ......... $185 $145 $62 $48 $70 $54 === === === === === === Most of the asbestos claims we have received pertain to policies written prior to 1986. Since 1986, our Commercial General Liability policy has used the industry standard absolute pollution exclusion, which we believe applies to asbestos claims. Total gross pollution and asbestos reserves at Dec. 31, 1994, of $460 million represented approximately 5% of gross consolidated reserves of $9.4 billion. LEGAL MATTERS In 1994, Fire and Marine was added as a defendant to Weatherford Roofing Company, et al. vs. Employers National Insurance Company, et al., a purported class action. The plaintiffs claim (among other things) that approximately 300 insurance companies have overcharged customers for retrospectively rated workers' compensation insurance in Texas between 1987 and 1992. In the course of responding to the complaint, we determined that in certain instances we made charges in excess of the filed and approved regulated rates for retrospectively rated workers' compensation insurance, both in Texas and other states. We are in the process of making refunds with interest in all affected states, and the judge has approved the settlement of the Texas case. Our results in 1994 include an accrual of approximately $45 million to cover substantially all of the costs of all such premium refunds, interest and related expenses. The majority of this accrual was recorded in our Specialized Commercial operation. (GRAPHIC IMAGE NO. 8- SEE APPENDIX) INVESTMENTS Our investment strategy mirrors our corporate philosophy - maximizing shareholder return while maintaining financial integrity. Our underwriting operations' investment portfolio is dominated by fixed maturities. Our primary objective is to maintain a widely diversified, high-quality portfolio structured to maximize investment income while minimizing credit risk. We manage the mix of portfolio maturities to complement anticipated insurance loss pay-out patterns. We also invest in other investment classes such as equity securities, real estate and venture capital, which have the potential for higher returns but also involve a greater degree of risk, including uncertain rates of return and less liquidity. Funds to build our investment portfolio originate from underwriting cash flows, which consist of the excess of premiums collected over losses and expenses paid, and investment cash flows, which consist of income on existing investments and proceeds from sales and maturities of investments. Our underwriting and investment cash flows have been strong for the last several years, and, consequently, our investment portfolio has continued to grow. However, a sustained period of declining interest rates prior to 1994 has resulted in stagnant investment income levels. Our underwriting segment's pretax investment income in 1994 was $675 million, compared with $646 million and $642 million in 1993 and 1992, respectively. The increase in 1994 was primarily due to Economy (acquired in August 1993) being included in our results for a full 12-month period. We have limited involvement with derivative financial instruments to hedge against fluctuations in interest rates, equity security values and foreign currency values, and to generate income. We do not participate in the derivatives market for trading or speculative purposes. (GRAPHIC IMAGE NO. 9- SEE APPENDIX) The following table provides a look at the composition and carrying value of our underwriting segment's investment portfolio for the last three years, followed by more information about each of the major investment classes. December 31 (In millions) 1994 1993 1992 ---- ---- ---- Fixed maturities ....................... $8,938 $9,249 $7,826 Equities ............................... 490 516 471 Real estate ............................ 528 489 435 Venture capital ........................ 330 298 231 Short-term investments ................. 342 269 213 Other investments ...................... 47 47 56 ------ ------ ----- Total investments .................... $10,675 $10,868 $9,232 ====== ====== ===== FIXED MATURITIES - This is the largest of our asset classes, comprising 84% of total underwriting investments at the end of 1994. This portfolio primarily consists of high-quality, intermediate-term taxable U.S. government, agency and corporate bonds and tax-exempt U.S. municipal bonds. Taxable bonds account for 54% of total fixed maturities, up from 50% in 1993. Approximately 95% of our fixed maturities are rated at investment-grade levels (BBB or better). The remainder of the portfolio consists of nonrated securities, most of which, in our opinion, would be considered investment-grade quality if rated. The carrying values for 1994 and 1993 in the foregoing table represent market value, while 1992 is stated at amortized cost. At the end of 1993, we classified our entire portfolio as "available for sale" and marked it to market in accordance with SFAS No. 115. At that time, with interest rates at a 20- year low, the market value of our portfolio was $758 million higher than its amortized cost. In 1994, as interest rates took a sharp upward turn, this unrealized appreciation was completely eroded, and the year-end 1994 carrying value is $78 million below amortized cost. A clearer picture of the real growth in this investment class emerges when comparing the amortized cost of these securities at the end of the last three years: $9.0 billion in 1994, $8.5 billion in 1993 and $7.8 billion in 1992. This represents a compound annual growth rate of 7% over the last two years. Despite these increases, fixed maturity investment income for these years - $637 million in 1994, $618 million in 1993, and $614 million in 1992 - has not grown at the same rate. (The 1994 total includes the incremental impact of Economy.) Declining yields available on new fixed maturity investments relative to higher yields on maturing investments over the last several years have prevented any meaningful investment income growth. The upward turn in interest rates in 1994 affected only new investments and did not appreciably impact investment income for the year. EQUITIES - Our equity holdings account for 5% of the underwriting segment's total investments and consist of a diversified portfolio of common stocks. In 1994, we recorded dividend income of $13 million on this portfolio, compared with $12 million in both 1993 and 1992. Realized gains from sales of equity securities totaled $20 million in 1994. Comparable gains in 1993 and 1992 were $43 million and $62 million, respectively. This portfolio's carrying value at the end of 1994 included $29 million of unrealized appreciation. (GRAPHIC IMAGE NO. 10- SEE APPENDIX) (GRAPHIC IMAGE NO. 11- SEE APPENDIX) REAL ESTATE - Our real estate holdings consist of direct and joint venture equity investments, primarily in commercial office and warehouse properties geographically distributed around the United States. We do not have a portfolio of real estate mortgage loans. In 1994, we recorded pretax investment income of $28 million and experienced strong operational cash flows from these properties. VENTURE CAPITAL - This investment class consists of private investments spanning a variety of industries, with a particular concentration on information technology, health care and retail firms. The carrying value of this portfolio at year-end 1994 included $69 million of unrealized appreciation. We recorded $18 million of realized gains from sales of venture capital investments in 1994, compared with $24 million in 1993. In 1992, we incurred a minimal realized loss on venture capital sales. OUTLOOK FOR 1995 - We expect the sharp upward move in interest rates that occurred in 1994 will contribute to investment income growth, as we make new investments at these higher rates. There will be no major changes in our investment strategy - taxable, investment-grade, intermediate-term securities will still be our focus for new fixed maturity purchases. We will begin investing directly in equity securities issued by foreign corporations on a limited basis in 1995. INSURANCE BROKERAGE SHOWS MODEST IMPROVEMENT Our insurance brokerage segment, Minet, provides insurance and reinsurance broking and risk advisory services for major corporations and large professional organizations worldwide. In recent years, Minet's operating results have been negatively impacted by excess capacity in worldwide insurance markets and the increasing trend away from commissions and toward fees as a basis of determining prices for services performed. Minet's pretax loss of $10 million in 1994 represented a slight improvement over 1993's loss of $13 million. In 1992, Minet's pretax loss of $433 million was driven by a $365 million goodwill write-down and a $39 million provision for reorganization costs and other nonrecurring charges. Minet is engaged in retail, wholesale and reinsurance broking on a worldwide basis. Retail brokers act on behalf of organizations such as corporations and partnerships by providing risk management advisory services and securing insurance coverages. Wholesale brokers act on behalf of retail brokers by procuring specialty insurance coverages. Reinsurance brokers act as intermediaries to service the reinsurance needs of insurers. Minet is a broker of specialized coverages, such as professional indemnity, directors and officers, financial institutions, energy, technology and construction. Minet has focused its business on specialty products and industries that have been successful in the past or that have significant potential for success in the future. Brokerage fees and commissions increased 7% to $316 million in 1994, reflecting growth in Minet's reinsurance and wholesale brokerage operations and additional revenues contributed by several newly acquired specialty brokerage firms. Expenses increased in 1994 as a result of the expansion of retail specialty broking teams. In 1993, Minet's operating expenses declined due to aggressive expense control measures and integration efforts. During the past three years, we have made $142 million in capital contributions to Minet to enhance liquidity and facilitate the acquisition of several specialty brokers. Minet's reinsurance brokerage operation recorded an increase in pretax earnings in 1994, driven by growth in brokerage fees and commissions and investment income. Tightened capacity in the worldwide reinsurance market, due to severe catastrophes in the early 1990s, has resulted in increased demand for Minet's reinsurance brokerage services. Retail and wholesale brokerage operations also posted modestly improved results in 1994. However, Minet experienced a decline in earnings from its Global Professional Services unit, which provides brokerage and advisory services to the world's largest accounting firms. In 1993, Minet experienced a slight improvement over 1992 results, adjusted to remove the impact of one-time charges. The goodwill write-down in 1992 occurred after we analyzed our estimates of Minet's discounted future earnings and concluded that our carrying value was significantly higher than its estimated value. The write-down was a noncash charge with no related tax benefit. OUTLOOK FOR 1995 - We do not anticipate a favorable turn in market conditions, and, as a result, our focus will remain on developing new business opportunities in specialty market niches where we have the expertise to offer value-added services. We will pursue acquisitions that complement our existing operations and continue to grow internally through the addition of new specialty broker teams. In an environment where revenue growth is a difficult challenge, expense containment initiatives will remain a vital component of our efforts to improve profitability. (GRAPHIC IMAGE NO. 12- SEE APPENDIX) INVESTMENT BANKING-ASSET MANAGEMENT PERFORMS WELL IN DIFFICULT MARKET The John Nuveen Company, in which we held a 77% interest at year-end 1994, comprises our investment banking-asset management segment. Nuveen markets tax-exempt open-end and closed-end (exchange-traded) managed fund shares and provides investment advice to and administers the business affairs of its family of managed funds. Nuveen also underwrites and trades municipal bonds and tax-exempt unit investment trusts (UITs), and provides pricing and surveillance services to its UITs. We sold a portion of our interest in Nuveen in May 1992. Our consolidated results include Nuveen's earnings to the extent of our ownership percentage. We realized a pretax gain of $98 million and proceeds of $137 million on the minority interest sale in 1992. Rapidly rising interest rates, declining municipal new issue volume and increased investor uncertainty resulting from the increase in interest rates all combined to make 1994 one of the most difficult markets since World War II for participants in the municipal bond business. Nuveen's total revenues declined 10% in 1994 to $220 million from $246 million in 1993. Revenues in 1992 were $221 million. Investment advisory fees earned on managed assets increased slightly over 1993. Distribution revenues fell by $23 million, or 70%, from 1993 due to the decline in the value of municipal bonds and UITs held for future sale and the decline in new investment product sales in 1994. The increase in 1993 revenues was driven by growth in asset management fees. Nuveen's sales of tax-exempt, exchange-traded funds in 1994 were $470 million, a significant decline from 1993 sales of $4.0 billion and 1992 sales of $4.2 billion. In addition, UIT sales declined, as did the underwriting and sales of municipal securities as a result of the 44% decline during the year in municipal new issue and refunding volume. In this difficult and challenging environment, Nuveen's pretax earnings in 1994 of $95 million were the third-best in its history. Earnings in 1993 and 1992 were $112 million and $98 million, respectively. Our portion of Nuveen's earnings in each of those years was $72 million, $83 million and $82 million, respectively. Total assets under Nuveen's management fell to $29.7 billion at the end of 1994, compared with $32.7 billion at the end of 1993. The comparable 1992 total was $27.3 billion. The decline in 1994 was primarily due to the reduction in the underlying value of fund portfolio investments resulting from the rising interest rate environment; sales of shares in all funds were offset by redemptions of shares in mutual funds. In 1993, growth in managed assets was largely the result of sponsoring new tax-free investment products, and an increase in the value of underlying municipal bond investments held by the various funds. CAPITAL RESOURCES Our capital resources represent funds deployed or available to be deployed to support our business operations and consist of common shareholders' equity and debt outstanding. The following table summarizes our capitalization at the end of the last three years: December 31 (In millions) 1994 1993 1992 ---- ---- ---- Common shareholders' equity: Common stock and retained earnings .... $2,808 $2,521 $2,203 Guaranteed obligation - ESOP .......... (45) (56) (68) Unrealized appreciation of investments 14 589 64 Unrealized foreign exchange gain (loss) ................. (44) (49) 3 ----- ----- ----- Total common shareholders' equity .... 2,733 3,005 2,202 Debt ................................... 623 640 567 ----- ----- ----- Total capitalization ................. $3,356 $3,645 $2,769 ===== ===== ===== Ratio of debt to total capitalization ................. 19% 18% 20% ===== ===== ===== (GRAPHIC IMAGE NO. 13- SEE APPENDIX) Our total capitalization declined by nearly $300 million in 1994 despite our record earnings, primarily due to the decrease in the carrying value of our fixed maturity holdings. Rising interest rates in 1994 eroded our bond values, to the extent that the unrealized appreciation on that portfolio decreased $552 million (net of taxes) by the end of 1994. In 1993, total capitalization increased by over $800 million from year-end 1992 as a result of strong earnings and the impact of recording fixed maturities at market value. Debt outstanding in 1994 declined slightly from 1993. A $74 million increase in commercial paper outstanding was more than offset by a decline in short-term borrowings at Nuveen. We issued $14 million of medium-term notes in 1994. We also funded note maturities totaling $20 million. In 1993, debt outstanding increased due to short-term borrowings by Nuveen. In 1992, debt outstanding increased $80 million, primarily due to the issuance of medium-term notes. We may issue additional medium-term notes in 1995. At year- end, we had the capacity to issue an additional $274 million of debt under a $300 million shelf registration with the Securities and Exchange Commission. We repurchased and retired 860,000 of our outstanding common shares in 1994 for a total cost of $34 million, which was funded internally. We may engage in further stock repurchases if we believe our stock is undervalued to the point that repurchasing it will be consistent with our goal of enhancing shareholder value. In 1993, our major capital transaction consisted of the purchase of Economy from Kemper Corporation for $395 million. We paid $295 million in cash and contributed $100 million of securities to the capital of Economy. This acquisition was financed with internal funds. In 1992, we repurchased and retired 1,585,000 shares of our common stock (as adjusted for the 1994 stock split) for a total cost of $58 million. We also completed construction of Minet's office building in London and renovation of our existing headquarters building in Saint Paul, Minn. The total cost of these projects in 1992 was $43 million, which was funded internally. We anticipate that any major capital expenditures in 1995 would involve acquisitions of existing businesses; we have no major capital improvements planned for 1995. (GRAPHIC IMAGE NO. 14- SEE APPENDIX) (GRAPHIC IMAGE NO. 15- SEE APPENDIX) LIQUIDITY Liquidity refers to our ability to generate sufficient cash flows to meet the short- and long-term cash requirements of our business segments. The underwriting segment's short-term cash needs primarily consist of funding insurance loss and loss adjustment expense payments and day-to-day operating expenses. Those needs are met through cash receipts from operations, which consist primarily of insurance premiums collected and investment income. Our investment portfolio is also a source of liquidity, in the form of readily marketable fixed maturities, common stocks and short-term investments. Underwriting's net positive cash flows from operations are used to build the investment portfolio and thereby increase future investment income. Minet's primary source of operational cash flows is insurance brokerage fees and commissions, and Nuveen's operational cash flows originate predominantly from asset management fees and product distribution revenues. Because of the nature of our underwriting operations, where premiums are generally collected and invested before related losses are paid, we believe our liquidity requirements beyond 1994 will be adequately funded by operational cash flows. However, our financial strength and relatively conservative level of debt provide us with the flexibility and capacity to obtain funds externally through debt or equity financings. Cash flows from operations totaled $899 million in 1994, compared with $754 million in 1993 and $610 million in 1992. Operating cash flows in each of our business segments improved over 1993. In our underwriting segment, a decline in underwriting losses and growth in investment income drove operating cash flows to $884 million, an increase of $71 million over 1993. In 1993, cash flows from operations grew over 1992 primarily due to a decline in paid losses associated with catastrophes and reinsurance recoveries on catastrophe losses incurred in 1992. Operational cash flows on a consolidated basis in each of the last three years have been more than adequate to meet the liquidity requirements for each of our business segments. We are not aware of any current recommendations by regulatory authorities that, if implemented, might have a material impact on our liquidity, capital resources or operations. (GRAPHIC IMAGE NO. 16- SEE APPENDIX) APPENDIX TO ITEM 7-NARRATIVE DESCRIPTION OF GRAPHIC IMAGES CONTAINED IN PAPER FORMAT VERSION OF MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ------------------------------------------------- GRAPHIC IMAGE NO. 1-Bar graph depicting Operating Earnings (Loss) per Common Share for the years 1990 through 1994. 1990: $4.09 1991: $4.23 1992: ($4.04) 1993: $4.28 1994: $4.60 CAPTION: "The St. Paul generated record operating earnings in 1994 for the second consecutive year. In 1992, our operating loss was driven by record catastrophe losses (including Hurricane Andrew) and a write-down in the value of a subsidiary." GRAPHIC IMAGE NO. 2-Bar graph depicting Return on Beginning Equity for the years 1990 through 1994. 1990: 16.1% 1991: 17.0% 1992: -- 1993: 17.2% 1994: 13.5% CAPTION: "ROE is calculated by dividing operating earnings (less preferred dividends) by common shareholders' equity at the beginning of the year. Even though operating earnings increased in 1994, ROE went down because 1994 beginning equity was higher due to the addition of unrealized appreciation on our bond portfolio." GRAPHIC IMAGE NO. 3-Photo depicting construction worker on girders in building under construction. CAPTION: "The St. Paul is a leading provider of insurance for the construction industry. Through St. Paul Construction, we underwrite property-liability coverages for contractors throughout the United States. St. Paul Surety is the second-largest U.S. underwriter of contract surety bonds for contractors." GRAPHIC IMAGE NO. 4-Bar graph depicting Underwriting Operations Written Premiums for the years 1990 through 1994. (In Billions) 1990: $3.1 1991: $3.2 1992: $3.1 1993: $3.2 1994: $3.6 CAPTION: "Our acquisition of Economy Fire & Casualty Company in late 1993, along with growth in our Specialized Commercial, Commercial and Reinsurance operations, were the chief factors behind a 14% increase in premium volume over 1993." GRAPHIC IMAGE NO. 5-Photo depicting golf course. CAPTION: "St. Paul Commercial's Eagle 3 policy is tailor-made to meet the unique insurance needs of country clubs - one of the targeted markets for Commercial." GRAPHIC IMAGE NO. 6-Pie chart depicting Underwriting Operations Premium Distribution in 1994. Specialized Commercial 30% Personal & Business Insurance 21% Medical Services 19% Commercial 11% Reinsurance 14% International 5% CAPTION: "Our underwriting operations, which produced $3.6 billion in written premiums in 1994, offer a wide range of insurance products and services." GRAPHIC IMAGE NO. 7-Bar graph depicting Underwriting Operations Combined Ratio for the years 1990 through 1994. 1990 1991 1992 1993 1994 ----- ----- ----- ----- ----- Loss Ratio 73.2 75.2 85.6 72.5 72.1 Expense Ratio 30.0 29.4 32.2 32.0 30.2 ----- ----- ----- ----- ----- Combined Ratio 103.2 104.6 117.8 104.5 102.3 ===== ===== ===== ===== ===== CAPTION: "Our underwriting combined ratio improved by 2.2 points in 1994. The combined ratio measures underwriting profit or loss. The lower the combined ratio, the better the result." GRAPHIC IMAGE NO. 8-Photo depicting manufacturing professional. CAPTION: "St. Paul Technology provides property-liability insurance for electronics manufacturing, medical technology, industrial electronics machinery, synthetics manufacturing and information technology firms." GRAPHIC IMAGE NO. 9-Bar graph depicting Underwriting Operations Net Investment Income for the years 1990 through 1994. (In Millions) 1990: $629 1991: $641 1992: $642 1993: $646 1994: $675 CAPTION: "Investment income is a steady, reliable component of total earnings." GRAPHIC IMAGE NO. 10-Pie chart depicting composition of Underwriting Operations Investment Portfolio. Fixed Maturities 84% Equities 5% Real Estate 5% Venture Capital 3% Short-term and Other Investments 3% CAPTION: "The obligation to pay claims when they come due drives the portfolio mix, which is heavily weighted toward high-quality bonds. At year-end 1994, the carrying value of our portfolio was $10.7 billion." GRAPHIC IMAGE NO. 11-Table depicting Bond Portfolio Ratings. Rating Percent ------ ------- AAA 54% AA 24% A 14% BBB 3% Nonrated 5% CAPTION: "Long-term fixed maturities comprised 84% of our underwriting investments at year-end; 95% were rated at investment- grade levels." GRAPHIC IMAGE NO. 12-Photo depicting New York Stock Exchange. CAPTION: "When the closing bell rings and the clamor on the floor of the New York Stock Exchange subsides, St. Paul employees have more than a passing interest in how "SPC" stock performed that day. St. Paul employees now own 11 percent of our stock - providing a link between investor and employee interests." GRAPHIC IMAGE NO. 13-Bar graph depicting Total Capitalization for the years 1990 through 1994. (In billions) 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- Common Share- holders' Equity $2.2 $2.5 $2.2 $3.0 $2.7 Debt 0.5 0.5 0.6 0.6 0.6 ---- ---- ---- ---- ---- Total Capitalization $2.7 $3.0 $2.8 $3.6 $3.3 ==== ==== ==== ==== ==== CAPTION: "Debt remains a relatively small percentage - at 19% - of our total capitalization at year-end 1994. Capitalization declined in 1994 due to the decrease in the value of our bond portfolio." GRAPHIC IMAGE NO. 14-Bar graph depicting Book Value per Common Share for the years 1990 through 1994. 1990: $26.00 1991: $29.78 1992: $26.18 1993: $35.47 1994: $32.46 CAPTION: "Rising interest rates in 1994 eroded the appreciation on our bond portfolio, which decreased common shareholders' equity from $3.0 billion in 1993 to $2.7 billion, or $32.46 per share, in 1994." GRAPHIC IMAGE NO. 15-Table depicting Claims-paying Ratings as of December 31, 1994. Organization Rating ------------ ------ A.M. Best A+ Moody's Aa1 Standard & Poor's AAA CAPTION: "The St. Paul's flagship company, St. Paul Fire and Marine, has a long history of high ratings for claims-paying ability." GRAPHIC IMAGE NO. 16-Bar graph depicting Dividends Paid per Common Share for the years 1990 through 1994. 1990: $1.18 1991: $1.28 1992: $1.35 1993: $1.39 1994: $1.48 CAPTION: "Dividends are an important aspect of our total return to investors. Our objective is to increase dividends on a regular basis. We have paid a common share dividend for 123 consecutive years and increased dividends in 63 of those years." Item 6. SELECTED FINANCIAL DATA. -----------------------
The St. Paul Companies ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA CONSOLIDATED For the year ended December 31 (Dollars in thousands) 1994 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- ---- FROM CONTINUING OPERATIONS Revenues .............................. $4,701,285 $4,460,172 $4,498,692 $4,351,700 $4,005,237 $3,788,648 Operating earnings (loss) ............. 413,866 386,628 (333,791) 380,804 385,458 338,267 Income (loss) before cumulative effects and extraordinary credit ..... 442,828 427,609 (232,521) 405,062 391,270 398,158 INVESTMENT ACTIVITY Net investment income ................. 694,594 661,106 666,374 675,604 669,989 662,211 Realized investment gains (losses), net of taxes ......................... 28,962 40,981 36,437 24,258 5,812 59,891 Change in unrealized appreciation of investments, net of taxes* ........ (574,896) 525,175 (23,815) 55,093 (67,558) 60,045 OTHER SELECTED FINANCIAL DATA (AS OF DECEMBER 31) Total assets .......................... 17,495,820 17,149,196 15,392,054 14,744,717 13,907,293 12,734,411 Debt .................................. 622,624 639,729 566,717 486,779 473,829 293,802 Common shareholders' equity ........... 2,732,934 3,005,128 2,202,499 2,532,841 2,196,371 2,349,254 Common shares outstanding** ........... 84,202,417 84,714,676 84,118,554 85,042,484 84,468,058 98,607,762 PER COMMON SHARE DATA Operating earnings (loss) ............. 4.60 4.28 (4.04) 4.23 4.09 3.45 Income (loss) before cumulative effects and extraordinary credit ..... 4.93 4.73 (2.84) 4.50 4.16 4.06 Book value ............................ 32.46 35.47 26.18 29.78 26.00 23.82 Year-end market price ................. 44.75 44.94 38.50 36.44 31.38 29.57 Cash dividends declared ............... 1.50 1.40 1.36 1.30 1.20 1.10 OPERATING EARNINGS RETURN ON BEGINNING EQUITY .................. 13.5% 17.2% - 17.0% 16.1% 16.8% UNDERWRITING For the year ended December 31 (Dollars in thousands) 1994 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- ---- Written premiums ...................... $3,623,026 $3,178,545 $3,142,419 $3,233,729 $3,052,032 $2,807,223 Statutory underwriting result ......... (143,317) (143,599) (557,463) (170,894) (141,751) (207,977) GAAP underwriting result .............. (113,008) (150,255) (566,886) (163,782) (120,730) (196,378) Net investment income ................. 674,818 646,396 642,301 640,856 629,242 614,119 Pretax operating earnings (loss) ...... 524,742 457,752 20,781 451,184 457,161 364,352 Pretax income (loss) .................. 560,709 507,181 81,132 486,063 466,731 456,167 Statutory combined ratio: Loss and loss expense ratio .......... 72.1 72.5 85.6 75.2 73.2 75.7 Underwriting expense ratio ........... 30.2 32.0 32.2 29.4 30.0 30.5 ----- ----- ----- ----- ----- ----- Combined ratio ....................... 102.3 104.5 117.8 104.6 103.2 106.2 Combined ratio including policyholders' dividends ............. 102.3 104.7 118.2 105.0 104.2 106.6 *The change for 1993 includes the impact of adopting SFAS No. 115. **All years presented reflect the effect of the 2-for-1 stock split executed June 6, 1994.
The St. Paul Companies ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA CONSOLIDATED For the year ended December 31 (Dollars in thousands) 1988 1987 1986 1985 1984 ---- ---- ---- ---- ---- FROM CONTINUING OPERATIONS Revenues .............................. $3,634,953 $3,358,918 $3,190,754 $2,762,126 $2,366,528 Operating earnings (loss) ............. 349,261 324,315 153,882 42,061 (196,794) Income (loss) before cumulative effects and extraordinary credit ..... 352,615 318,826 159,585 90,899 (192,850) INVESTMENT ACTIVITY Net investment income ................. 592,032 534,767 458,710 381,280 327,608 Realized investment gains (losses), net of taxes ......................... 3,354 (5,489) 5,703 48,838 3,944 Change in unrealized appreciation of investments, net of taxes* ........ 20,428 (19,959) (13,396) 3,317 (32,744) OTHER SELECTED FINANCIAL DATA (AS OF DECEMBER 31) Total assets .......................... 11,997,989 9,712,307 8,669,598 7,861,877 6,176,745 Debt .................................. 417,140 96,576 344,299 750,876 126,932 Common shareholders' equity ........... 2,015,219 1,711,362 1,440,565 1,012,245 968,692 Common shares outstanding** ........... 92,728,168 92,603,714 92,495,700 80,200,900 80,179,892 PER COMMON SHARE DATA Operating earnings (loss) ............. 3.63 3.38 1.67 .52 (2.45) Income (loss) before cumulative effects and extraordinary credit ..... 3.66 3.34 1.77 1.17 (2.63) Book value ............................ 21.73 18.48 15.57 12.62 12.08 Year-end market price ................. 21.75 23.00 20.13 19.97 13.41 Cash dividends declared ............... 1.00 .88 .75 .75 .75 OPERATING EARNINGS RETURN ON BEGINNING EQUITY .................. 20.4% 22.5% 15.2% 4.3% - UNDERWRITING For the year ended December 31 (Dollars in thousands) 1988 1987 1986 1985 1984 Written premiums ...................... $2,690,536 $2,704,165 $2,556,425 $2,234,910 $1,894,355 Statutory underwriting result ......... (92,741) (145,061) (265,105) (460,306) (574,447) GAAP underwriting result .............. (90,209) (127,066) (275,184) (408,755) (572,542) Net investment income ................. 548,766 498,251 431,594 366,687 313,395 Pretax operating earnings (loss) ...... 420,339 358,493 142,532 (58,387) (261,134) Pretax income (loss) .................. 424,187 351,358 151,552 31,674 (254,332) Statutory combined ratio: Loss and loss expense ratio .......... 73.6 76.2 82.0 91.3 99.4 Underwriting expense ratio ........... 30.0 28.9 27.9 28.5 30.9 ----- ----- ----- ----- ----- Combined ratio ....................... 103.6 105.1 109.9 119.8 130.3 Combined ratio including policyholders' dividends ............. 104.0 105.3 110.5 120.8 131.0 *The change for 1993 includes the impact of adopting SFAS No. 115. **All years presented reflect the effect of the 2-for-1 stock split executed June 6, 1994.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS SCOPE OF RESPONSIBILITY - Management prepares the accompanying financial statements and related information and is responsible for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles. These financial statements include amounts that are based on management's estimates and judgments, particularly our reserves for losses and loss adjustment expenses. We believe that these statements present fairly the company's financial position and results of operations and that the other information contained in the annual report is consistent with the financial statements. INTERNAL CONTROLS - We maintain and rely on a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized and recorded. We continually monitor these internal accounting controls, modifying and improving them as business conditions and operations change. Our internal audit department also independently reviews and evaluates these controls. We recognize the inherent limitations in all control systems and believe that our systems provide an appropriate balance between the costs and benefits desired. We believe our systems of internal accounting controls provide reasonable assurance that errors or irregularities that would be material to the financial statements are prevented or detected in the normal course of business. INDEPENDENT AUDITORS - Our independent auditors, KPMG Peat Marwick LLP, have audited the consolidated financial statements. Their audit was conducted in accordance with generally accepted auditing standards, which includes the consideration of our internal controls to the extent necessary to form an independent opinion on the consolidated financial statements prepared by management. AUDIT COMMITTEE - The audit committee of the board of directors, composed solely of outside directors, oversees management's discharge of its financial reporting responsibilities. The committee meets periodically with management, our internal auditors and representatives of KPMG Peat Marwick LLP to discuss auditing, financial reporting and internal control matters. Both internal audit and KPMG Peat Marwick LLP have access to the audit committee without management's presence. CODE OF CONDUCT - We recognize our responsibility for maintaining a strong ethical climate. This responsibility is addressed in the company's written code of conduct. /s/ Douglas W. Leatherdale /s/ Howard E. Dalton -------------------------- -------------------- Douglas W. Leatherdale Howard E. Dalton Chairman, President and Senior Vice President Chief Executive Officer Chief Accounting Officer INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND SHAREHOLDERS THE ST. PAUL COMPANIES, INC.: We have audited the accompanying consolidated balance sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, common shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The St. Paul Companies, Inc. and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 14 to the consolidated financial statements, the company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," in 1993. Also, as discussed in Notes 6 and 8 to the consolidated financial statements, the company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and No. 106, "Accounting for Postretirement Benefits Other Than Pensions," in 1992. /s/ KPMG Peat Marwick LLP ------------------------- KPMG Peat Marwick LLP Minneapolis, Minnesota January 26, 1995 The St. Paul Companies CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- REVENUES Premiums earned ........................$3,412,081 $3,178,338 $3,143,246 Net investment income .................. 694,594 661,106 666,374 Insurance brokerage fees and commissions ...................... 303,152 283,680 280,836 Investment banking-asset management .... 211,789 241,730 218,825 Realized investment gains .............. 41,974 58,254 57,451 Realized gain on sale of minority interest in Nuveen ................... - - 98,284 Other .................................. 37,695 37,064 33,676 --------- --------- --------- Total revenues .................... 4,701,285 4,460,172 4,498,692 --------- --------- --------- EXPENSES Insurance losses and loss adjustment expenses .................. 2,461,698 2,303,738 2,690,046 Policy acquisition expenses ............ 753,946 732,137 789,305 Operating and administrative ........... 922,063 901,691 879,404 Write-down of goodwill ................. - - 365,000 --------- --------- --------- Total expenses .................... 4,137,707 3,937,566 4,723,755 --------- --------- --------- Income (loss) before income taxes . 563,578 522,606 (225,063) Income tax expense (benefit): Federal current ...................... 151,347 148,508 109,740 Other ................................ (30,597) (53,511) (102,282) --------- --------- --------- Total income tax expense .......... 120,750 94,997 7,458 --------- --------- --------- Income (loss) before cumulative effects of accounting changes .... 442,828 427,609 (232,521) Cumulative effects of accounting changes: Income taxes ........................ - - 126,047 Postretirement benefits ............. - - (49,564) --------- --------- --------- Net Income (Loss) ................. $442,828 $427,609 $(156,038) ========= ========= ========= PRIMARY EARNINGS (LOSS) PER COMMON SHARE Income (loss) before cumulative effects of accounting changes ........ $5.12 $4.92 $(2.84) Cumulative effects of accounting changes: Income taxes ........................ - - 1.49 Postretirement benefits ............. - - (0.59) --------- --------- --------- Net Income (Loss) ................. $5.12 $4.92 $(1.94) ========= ========= ========= FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE Income (loss) before cumulative effects of accounting changes ........ $4.93 $4.73 $(2.84) Cumulative effects of accounting changes: Income taxes ........................ - - 1.49 Postretirement benefits ............. - - (0.59) --------- --------- --------- Net Income (Loss) ................. $4.93 $4.73 $(1.94) ========= ========= ========= See notes to consolidated financial statements. The St. Paul Companies CONSOLIDATED BALANCE SHEETS December 31 (In thousands) 1994 1993 ---- ---- ASSETS Investments: Fixed maturities ............................... $8,828,684 $9,147,964 Equities ....................................... 531,042 548,682 Real estate .................................... 528,144 488,691 Venture capital ................................ 330,032 297,982 Other investments .............................. 46,539 47,834 Short-term investments ......................... 898,081 725,261 ---------- ---------- Total investments ............................. 11,162,522 11,256,414 Cash ............................................. 46,664 25,420 Investment banking inventory securities .......... 148,031 305,804 Reinsurance recoverables: Unpaid losses .................................. 1,533,250 1,545,026 Paid losses .................................... 88,900 94,437 Receivables: Underwriting premiums .......................... 1,107,788 1,008,034 Insurance brokerage activities ................. 891,823 805,209 Interest and dividends ......................... 182,938 174,852 Other .......................................... 88,657 105,513 Deferred policy acquisition expenses ............. 324,358 294,860 Ceded unearned premiums .......................... 255,687 238,633 Deferred income taxes ............................ 790,508 425,012 Office properties and equipment .................. 477,570 455,861 Goodwill ......................................... 279,308 284,276 Other assets ..................................... 117,816 129,845 ---------- ---------- Total Assets .................................. $17,495,820 $17,149,196 ========== ========== LIABILITIES Insurance reserves: Losses and loss adjustment expenses ............ $9,423,429 $9,185,191 Unearned premiums .............................. 2,109,170 1,875,635 ---------- ---------- Total insurance reserves ...................... 11,532,599 11,060,826 Debt ............................................. 622,624 639,729 Payables: Insurance brokerage activities ................. 1,191,089 1,083,845 Reinsurance premiums ........................... 155,833 138,150 Income taxes ................................... 183,659 162,645 Accrued expenses and other ..................... 600,211 593,205 Other liabilities ................................ 472,336 466,989 ---------- ---------- Total Liabilities ............................. 14,758,351 14,145,389 ---------- ---------- Convertible preferred stock ...................... 146,102 147,608 Guaranteed obligation - PSOP ..................... (141,567) (148,929) ---------- ---------- Net Convertible Preferred Stock ............... 4,535 (1,321) ---------- ---------- COMMON SHAREHOLDERS' EQUITY Common stock ..................................... 445,222 438,559 Retained earnings ................................ 2,362,286 2,082,832 Guaranteed obligation - ESOP ..................... (44,410) (56,005) Unrealized appreciation of investments ........... 13,948 588,844 Unrealized loss on foreign currency translation .. (44,112) (49,102) ---------- ---------- Total Common Shareholders' Equity ............. 2,732,934 3,005,128 ---------- ---------- Total Liabilities, Preferred Stock and Common Shareholders' Equity ............. $17,495,820 $17,149,196 ========== ========== See notes to consolidated financial statements. The St. Paul Companies CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- COMMON SHAREHOLDERS' EQUITY Common stock: Beginning of year .................... $438,559 $422,249 $414,257 Stock issued under stock option and other incentive plans ........... 11,130 16,334 15,862 Reacquired common shares ............. (4,467) (24) (7,870) --------- --------- --------- End of year ....................... 445,222 438,559 422,249 --------- --------- --------- Retained earnings: Beginning of year .................... 2,082,832 1,781,113 2,108,923 Net income (loss) .................... 442,828 427,609 (156,038) Dividends declared on common stock, $1.50 per share in 1994 ($1.40 in 1993 and $1.36 in 1992) ............. (124,921) (116,962) (113,478) Dividends declared on preferred stock, net of taxes ................. (8,448) (8,395) (8,349) Reacquired common shares ............. (30,005) (533) (49,945) --------- --------- --------- End of year ....................... 2,362,286 2,082,832 1,781,113 --------- --------- --------- Guaranteed obligation - ESOP: Beginning of year .................... (56,005) (67,452) (78,564) Principal payments ................... 11,595 11,447 11,112 --------- --------- --------- End of year ....................... (44,410) (56,005) (67,452) --------- --------- --------- Unrealized appreciation of investments, net of taxes: Beginning of year .................... 588,844 63,669 87,484 Change for the year .................. (574,896) 23,193 (23,815) Change due to adoption of SFAS No. 115 - 501,982 - --------- --------- --------- End of year ....................... 13,948 588,844 63,669 --------- --------- --------- Unrealized gain (loss) on foreign currency translation, net of taxes: Beginning of year .................... (49,102) 2,920 741 Change for the year .................. 4,990 (52,022) 2,179 --------- --------- --------- End of year ....................... (44,112) (49,102) 2,920 --------- --------- --------- Total Common Shareholders' Equity .$2,732,934 $3,005,128 $2,202,499 ========= ========= ========= See notes to consolidated financial statements. The St. Paul Companies CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- OPERATING ACTIVITIES Underwriting: Net income ........................... $452,756 $423,109 $218,261 Adjustments: Change in net insurance reserves .... 445,791 204,423 515,202 Change in underwriting premiums receivable ............... (89,147) 89,441 64,336 Deferred tax benefit ................ (36,085) (48,976) (113,435) Cumulative effects of accounting changes ................ - - (99,092) Realized gains ...................... (35,967) (49,429) (60,351) Other ............................... 146,886 194,990 108,611 ------- ------- ------- Total underwriting ................ 884,234 813,558 633,532 ------- ------- ------- Insurance brokerage: Net loss ............................. (19,571) (24,710) (442,830) Adjustments: Change in premium balances .......... 4,303 (20,718) 3,768 Change in accounts payable and accrued expenses .............. (19,334) (8,985) 9,732 Depreciation and goodwill amortization ...................... 23,948 20,233 33,717 Write-down of goodwill .............. - - 365,000 Other ............................... 9,749 (2,833) (8,308) ------- ------- ------- Total insurance brokerage ......... (905) (37,013) (38,921) ------- ------- ------- Investment banking-asset management: Net income ........................... 44,196 52,103 49,653 Adjustments: Change in inventory securities ...... 156,823 (79,472) 5,150 Change in short-term borrowings ..... (80,383) 60,383 (2,000) Change in short-term investments .... (94,968) (17,048) 5,928 Change in open security transactions 10,879 (3,143) (4,562) Other ............................... 21,051 8,872 18,960 ------- ------- ------- Total investment banking- asset management ................. 57,598 21,695 73,129 ------- ------- ------- Parent company and consolidating eliminations: Net income (loss) .................... (34,553) (22,893) 18,878 Realized gains ....................... (4,240) (8,825) (95,384) Other adjustments .................... (2,919) (12,672) 18,316 ------- ------- ------- Total parent company and consolidating eliminations ....... (41,712) (44,390) (58,190) ------- ------- ------- Net Cash Provided by Operating Activities ............. 899,215 753,850 609,550 ------- ------- ------- INVESTING ACTIVITIES Purchases of investments ...............(2,087,104) (2,484,731) (2,315,872) Proceeds from sales and maturities of investments ............ 1,465,668 1,954,206 1,721,498 Change in short-term investments ....... (40,922) 151,213 14,769 Change in open security transactions ... (6,156) 56,463 (15,443) Net purchases of office properties and equipment ............. (66,564) (47,210) (100,695) Purchase of Economy Fire & Casualty, net of cash acquired ................. - (274,561) - Proceeds from sale of Nuveen shares .... - - 137,052 Other .................................. (20,530) (28,866) 8,540 ------- ------- ------- Net Cash Used in Investing Activities ............. (755,608) (673,486) (550,151) ------- ------- ------- FINANCING ACTIVITIES Dividends paid on common and preferred stock .................. (136,062) (129,218) (126,067) Proceeds from issuance of debt ......... 94,194 77,243 102,646 Repayment of debt ..................... (20,350) (51,735) (8,504) Repurchase of common shares ............ (34,150) (207) (57,722) Other .................................. (26,855) 23,929 32,784 ------- ------- ------- Net Cash Used in Financing Activities ............. (123,223) (79,988) (56,863) ------- ------- ------- Effect of exchange rate changes on cash 860 (1,604) (55) Increase (Decrease) in Cash ....... 21,244 (1,228) 2,481 ------- ------- ------- Cash at beginning of year .............. 25,420 26,648 24,167 ------- ------- ------- Cash at End of Year ............... $46,664 $25,420 $26,648 ======= ======= ======= See notes to consolidated financial statements. The St. Paul Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES HOW WE PREPARE OUR FINANCIAL STATEMENTS The following summary explains the accounting policies we use to arrive at some of the more significant amounts in our financial statements. GAAP - We prepare our financial statements in accordance with generally accepted accounting principles (GAAP). We follow the accounting standards established by the Financial Accounting Standards Board and the American Institute of Certified Public Accountants. CONSOLIDATION - We combine our financial statements with those of our subsidiaries and present them on a consolidated basis. The consolidated financial statements do not include the results of material transactions between us and our subsidiaries or among our subsidiaries. We record the results of our insurance brokerage and foreign underwriting operations on a one-quarter lag. RECLASSIFICATIONS - We reclassified some figures in our 1993 and 1992 financial statements and notes to conform with the 1994 presentation. These reclassifications had no effect on net income or loss, or common shareholders' equity, as previously reported for those years. STOCK SPLIT - In June 1994, we executed a 2-for-1 stock split. All references in these financial statements and related notes to per- share amounts and to the number of shares of common stock reflect the effect of this stock split on all periods presented. INFORMATION ABOUT OUR INVESTMENTS METHOD FOR VALUING INVESTMENTS - We implemented Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" as of Dec. 31, 1993. We classified our entire fixed maturity and equity investment portfolios as "available-for-sale." Accordingly, these investments are reported at estimated market value at Dec.31, 1994 and 1993. Classifying these portfolios as "available-for-sale" did not impact net income. FIXED MATURITIES - We carry our fixed maturities at estimated market value as of Dec. 31, 1994 and 1993. Prior to our adoption of SFAS No. 115, we carried fixed maturities at amortized cost. EQUITIES - We carry our equity securities at estimated market value. REAL ESTATE - Our real estate investments primarily consist of commercial buildings. Some of these properties we own directly and others we hold in joint ventures. For direct investments, we carry land at cost and buildings at cost less accumulated depreciation and valuation adjustments. We depreciate real estate assets on a straight-line basis over 40 years. Tenant improvements are amortized over the term of the lease. The accumulated depreciation of these assets was $60.2 million and $48.8 million at Dec. 31, 1994 and 1993, respectively. We account for our joint ventures using the equity method, which means we carry these investments at cost, adjusted for our share of earnings or losses from these joint ventures, and reduced by any cash distributions the joint ventures make to us and valuation adjustments. VENTURE CAPITAL - We invest in securities of small- to medium-sized companies. These investments are in the form of limited partnerships or direct ownership. The limited partnerships are carried at our equity in the estimated market value of the investments held by these limited partnerships. The securities we own directly are carried at estimated market value. REALIZED INVESTMENT GAINS AND LOSSES - We record the cost of each individual investment security so that when we sell, we are able to identify and record the gain or loss on that transaction. We continually monitor the difference between the cost and estimated market value of our investments. If any of our investments experience a decline in value that is other than temporary, we establish a valuation allowance for the decline and record a realized loss on the statement of operations. UNREALIZED APPRECIATION AND DEPRECIATION OF INVESTMENTS - For investments we carry at estimated market value, we record the difference between cost and market, net of deferred taxes, as a part of common shareholders' equity. This difference is referred to as unrealized appreciation or depreciation of investments. ACCOUNTING FOR OUR UNDERWRITING OPERATIONS PREMIUMS EARNED - Our largest source of revenues is from premiums on policies written by our insurance underwriters. We reflect the premiums as revenues evenly over the policy terms. The premiums that we have not yet recognized as revenues are recorded as unearned premiums. INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES - Losses refer to the amounts we paid or expect to pay to claimants for events that have occurred. The costs of investigating, resolving and processing these claims are referred to as loss adjustment expenses. We record these items on our statement of operations net of reinsurance, which means that we reduce our gross losses and loss expenses incurred by the amounts we will recover under reinsurance contracts. We establish reserves for the estimated total unpaid cost of losses and loss expenses, which cover events that occurred in 1994 and prior years. These reserves reflect our estimates of the total cost of claims that were reported to us, but not yet paid, and the cost of claims not yet reported to us. We base our estimates on past loss experience and consider current claim trends as well as prevailing social, economic and legal conditions. We reduce our loss reserves for estimated amounts of salvage and subrogation and deductibles recoverable from our customers. Estimated amounts recoverable from reinsurers on unpaid losses and loss expenses are reflected as assets. We believe that the reserves we have established are adequate to cover the ultimate costs of losses and loss adjustment expenses. Final claim payments, however, may differ from the established reserves, particularly when these payments may not occur for several years. Any adjustments we make to reserves are reflected in the results for the year during which the adjustments are made. The "Reserves for Losses and Loss Adjustment Expenses" section on pages 28 and 29 of Management's Discussion and Analysis includes a table depicting the development of our loss reserve liabilities for the last three years, and further discussion relating to our loss reserve development. The "Environmental Pollution and Asbestos Claims" section on pages 29 and 30 of Management's Discussion and Analysis includes tables depicting the development of our pollution and asbestos loss reserve liabilities for the last three years, and further discussion relating to the development of those reserves. POLICY ACQUISITION EXPENSES - The costs directly related to writing an insurance policy are referred to as policy acquisition expenses and consist of commissions, state premium taxes and other direct underwriting expenses. Although these expenses arise when we issue a policy, we defer and amortize them over the same period as the premiums are recorded as revenues. If deferred policy acquisition expenses were to exceed the sum of unearned premiums and related anticipated investment income less expected losses and loss adjustment expenses, the excess costs would be expensed immediately. ACCOUNTING FOR OUR INSURANCE BROKERAGE OPERATIONS Our insurance brokerage segment consists of the Minet group of companies. Our insurance brokers and advisers help customers obtain or place insurance policies or reinsurance contracts and provide insurance advisory and consulting services. We earn fees and commissions for providing these services. These revenues are recorded on the date billed or the effective date of the policy, whichever is later. Servicing costs are expensed as incurred. We record premiums receivable from customers as assets with corresponding liabilities, net of commissions, payable to the insurance carriers with whom the business was placed. Premiums collected, but not yet remitted to insurance carriers, are restricted as to use by business practices. These amounts are included in short-term investments and totaled $385.0 million and $393.2 million at the end of 1994 and 1993, respectively. ACCOUNTING FOR OUR INVESTMENT BANKING-ASSET MANAGEMENT OPERATIONS Our investment banking-asset management segment consists of The John Nuveen Company. Nuveen markets tax-exempt open-end and closed-end (exchange-traded) managed fund shares and provides investment advice to and manages the business affairs of the Nuveen family of managed funds. They also underwrite and trade municipal bonds and tax-exempt unit investment trusts (UITs). They hold in inventory municipal bonds and UITs that will be sold to individuals or security dealers; such inventory securities are carried at market value. Revenues include investment advisory fees, revenues from the distribution of Nuveen UITs and managed fund investment products, gains and losses from the sale of inventory securities, and unrealized gains and losses on inventory securities held. GOODWILL Goodwill is the excess of the amount paid to acquire a company over the fair value of its net assets, reduced by amortization and any subsequent valuation adjustments. We amortize goodwill over periods of up to 15 years. In 1992 and prior years, we amortized this asset on a straight-line basis over periods of up to 40 years. The accumulated amortization of goodwill was $102.9 million and $70.1 million at Dec. 31, 1994 and 1993, respectively. We continually monitor the value of our goodwill based on our estimates of discounted future earnings. If we determine that our goodwill has been impaired, we reduce its carrying value with a corresponding charge to expenses. At the end of 1992, we wrote down $365 million of the goodwill associated with our investment in Minet and reduced the amortization period for substantially all of the remaining goodwill to 15 years. OFFICE PROPERTIES AND EQUIPMENT We carry office properties and equipment at depreciated cost. We depreciate these assets on a straight-line basis over the estimated useful lives of the assets. The accumulated depreciation for office properties and equipment was $243.9 million and $215.4 million at the end of 1994 and 1993, respectively. FOREIGN CURRENCY TRANSLATION We assign functional currencies to our foreign operations. These are generally the currencies of the local operating environment. Foreign currency amounts are converted to the functional currency, and the resulting foreign exchange gains or losses are reflected in the statement of operations. Functional currency amounts are then translated into U.S. dollars. The unrealized gain or loss from this translation is recorded as a part of common shareholders' equity. Both the conversion and translation are calculated using current exchange rates for the balance sheets and average exchange rates for the statements of operations. SUPPLEMENTAL CASH FLOW INFORMATION INTEREST AND INCOME TAXES PAID - We paid interest of $40.0 million in 1994, $41.2 million in 1993 and $35.1 million in 1992. Interest payments in 1992 were net of capitalized interest of $4.6 million. We paid federal income taxes of $122.7 million in 1994, $121.8 million in 1993 and $107.1 million in 1992. NONCASH INVESTING ACTIVITIES - In connection with our acquisition of Economy Fire & Casualty Company (Economy) from Kemper Corporation in 1993, we contributed securities with a book value of approximately $100 million to the capital of Economy. Note 2 EARNINGS PER COMMON SHARE Earnings (loss) per common share (EPS) amounts were calculated by dividing net income (loss), as adjusted, by the average common shares outstanding. Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- PRIMARY Net income (loss), as reported .........$442,828 $427,609 $(156,038) Preferred dividends declared (net of taxes) ........................ (8,448) (8,395) (8,349) ------- ------- ------- Net income (loss), as adjusted .......$434,380 $419,214 $(164,387) ======= ======= ======= FULLY DILUTED Net income (loss), as reported .........$442,828 $427,609 $(156,038) Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock ......... (3,782) (4,080) - Preferred dividends declared (net of taxes) ........................ - - (8,349) ------- ------- ------- Net income (loss), as adjusted .......$439,046 $423,529 $(164,387) ======= ======= ======= AVERAGE SHARES OUTSTANDING Primary ................................ 84,816 85,216 84,721 Fully diluted .......................... 89,067 89,469 84,721 Average shares outstanding include, if dilutive, the common and common equivalent shares outstanding for the year and, for fully diluted EPS, common shares that would be issuable upon conversion of preferred stock. Note 3 INVESTMENTS VALUATION OF INVESTMENTS - The following presents the cost, gross unrealized appreciation and depreciation, and estimated market value of our investments in fixed maturities, equities and venture capital. December 31, 1994 Gross Gross Estimated Unrealized Unrealized Market (In thousands) Cost Appreciation Depreciation Value ---- ----------- ----------- -------- Fixed maturities: U.S. government ...........$2,202,765 $6,796 $(142,803) $2,066,758 States and political subdivisions ............. 4,016,100 170,738 (22,099) 4,164,739 Foreign governments ....... 697,083 7,833 (22,207) 682,709 Corporate securities ...... 1,156,422 2,011 (77,752) 1,080,681 Mortgage-backed securities 841,003 20,909 (28,115) 833,797 --------- ------- -------- --------- Total fixed maturities 8,913,373 208,287 (292,976) 8,828,684 Equities ................... 500,849 50,305 (20,112) 531,042 Venture capital ............ 260,637 88,437 (19,042) 330,032 --------- ------- -------- --------- Total ....................$9,674,859 $347,029 $(332,130) $9,689,758 ========= ======= ======== ========= December 31, 1993 Gross Gross Estimated Unrealized Unrealized Market (In thousands) Cost Appreciation Depreciation Value ---- ----------- ----------- -------- Fixed maturities: U.S. government ...........$1,854,287 $89,183 $(4,478) $1,938,992 States and political subdivisions ............. 4,108,680 502,819 (581) 4,610,918 Foreign governments ....... 520,254 47,515 (3,070) 564,699 Corporate securities ...... 957,526 66,917 (8,369) 1,016,074 Mortgage-backed securities 944,352 74,361 (1,432) 1,017,281 --------- ------- -------- --------- Total fixed maturities ... 8,385,099 780,795 (17,930) 9,147,964 Equities ................... 488,383 80,398 (20,099) 548,682 Venture capital ............ 224,523 89,100 (15,641) 297,982 --------- ------- -------- --------- Total ....................$9,098,005 $950,293 $(53,670) $9,994,628 ========= ======= ======== ========= STATUTORY DEPOSITS - At Dec. 31, 1994, our underwriting operations had investments in fixed maturities with an estimated market value of $378.8 million on deposit with regulatory authorities, as required by law. FIXED MATURITIES BY MATURITY DATE - The following table presents the breakdown of our fixed maturities by years to maturity. Actual maturities may differ from those stated as a result of calls and prepayments. December 31, 1994 Amortized Estimated (In thousands) Cost Market Value --------- --------- One year or less .......................... $ 201,801 $ 203,790 Over one year through five years .......... 1,010,042 998,895 Over five years through ten years ......... 3,139,067 3,032,260 Over 10 years ............................. 3,721,460 3,759,942 Mortgage-backed securities with various maturities ....................... 841,003 833,797 --------- --------- Total ................................... $8,913,373 $8,828,684 ========= ========= Note 4 INVESTMENT TRANSACTIONS INVESTMENT ACTIVITY - Here is a summary of our investment purchases, sales and maturities. Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- PURCHASES Fixed maturities ................ $1,235,653 $1,816,965 $1,778,736 Equities ........................ 700,568 465,056 401,374 Real estate ..................... 74,420 110,371 64,658 Venture capital ................. 66,622 79,410 55,928 Other investments ............... 9,841 12,929 15,176 --------- --------- --------- Total purchases ............... 2,087,104 2,484,731 2,315,872 --------- --------- --------- PROCEEDS FROM SALES AND MATURITIES Fixed maturities: Sales .......................... 181,126 169,330 295,648 Maturities and redemptions ..... 533,292 1,236,912 976,712 Equities ........................ 707,608 437,610 431,225 Real estate ..................... 6,718 40,764 - Venture capital ................. 28,817 59,124 2,803 Other investments ............... 8,107 10,466 15,110 --------- --------- --------- Total sales and maturities .... 1,465,668 1,954,206 1,721,498 --------- --------- --------- Net purchases ................. $ 621,436 $ 530,525 $ 594,374 ========= ========= ========= NET INVESTMENT INCOME - Here is a summary of our net investment income. Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- Fixed maturities ............... $626,263 $607,067 $605,217 Equities ....................... 12,984 12,035 11,629 Real estate .................... 28,049 19,288 19,022 Venture capital ................ (1,849) (2,012) (1,966) Other investments .............. 346 698 569 Short-term investments ......... 45,893 37,952 46,018 ------- ------- ------- Total........................ 711,686 675,028 680,489 Investment expenses ............ (17,092) (13,922) (14,115) ------- ------- ------- Net investment income........ $694,594 $661,106 $666,374 ======= ======= ======= REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) - The following summarizes our pretax realized investment gains and losses and change in unrealized appreciation of investments recorded in common shareholders' equity. Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- PRETAX REALIZED INVESTMENT GAINS (LOSSES) Fixed maturities: Gross realized gains ......... $5,232 $8,916 $12,702 Gross realized losses ........ (1,849) (3,585) (1,391) ------ ------ ------ Total fixed maturities....... 3,383 5,331 11,311 ------ ------ ------ Equities: Gross realized gains ......... 59,548 62,310 81,841 Gross realized losses ........ (38,626) (18,782) (16,066) ------ ------ ------ Total equities............... 20,922 43,528 65,775 ------ ------ ------ Real estate .................... (10,458) (10,188) (7,519) Venture capital ................ 17,616 24,046 (180) Other .......................... 10,511 (4,463) (11,936) ------ ------ ------ Total pretax realized investment gains ............ $41,974 $58,254 $57,451 ====== ====== ====== CHANGE IN UNREALIZED APPRECIATION Fixed maturities ............... $(847,554) $771,598 $ - Equities ....................... (30,106) (23,993) (34,038) Venture capital ................ (4,064) 52,550 6,687 Other .......................... - - (8,732) ------- ------- ------ Total change in pretax unrealized appreciation ..... (881,724) 800,155 (36,083) Increase (decrease) in deferred tax asset ........... 306,828 (274,980) 12,268 ------- ------- ------ Total change in unrealized appreciation, net of taxes .. $(574,896) $525,175 $(23,815) ======= ======= ====== Prior to our adoption of SFAS No. 115 on Dec. 31, 1993, we did not record unrealized appreciation or depreciation of fixed maturities on the consolidated balance sheet. Consequently, the change in unrealized appreciation of fixed maturities for 1993 represents the cumulative unrealized appreciation recorded upon our adoption of SFAS No. 115. The actual increase in pretax unrealized appreciation of fixed maturities for the years ended Dec. 31, 1993 and 1992, respectively, was $257.8 million and $13.3 million. Note 5 DERIVATIVE FINANCIAL INSTRUMENTS In October 1994, the Financial Accounting Standards Board issued SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." Derivative financial instruments are defined as futures, forward, swap or option contracts and other financial instruments with similar characteristics. We are not involved in derivatives for trading purposes, but have limited involvement with these instruments for purposes of hedging and income generation. All investments, including derivative instruments, have some degree of market and credit risk associated with them. However, the market risk on our derivatives substantially offsets the market risk associated with fluctuations in interest rates, and the value of certain investments. We minimize our credit risk by conducting derivative transactions only with reputable, investment-grade counter parties. We use the following types of derivative instruments: INTEREST RATE SWAP AGREEMENTS - We enter into interest rate swap agreements for the purpose of minimizing the effect of interest rate fluctuations on some of our investments and debt. At Dec. 31, 1994 and 1993, we had investments in perpetual floating rate notes totaling $45 million and $55 million, respectively, and we were party to interest rate swap agreements for notional amounts equaling these totals at those dates. We record the market value of these agreements on our balance sheet. The market value represents the asset that would be realized, or the liability that would be incurred, had they been terminated at the balance sheet date. At Dec. 31, 1994 and 1993, we recorded a liability of $1.7 million and an asset of $4.1 million, respectively, associated with these agreements. In 1993, we entered into an interest rate swap agreement that requires us to pay a fixed rate of 5.6% on $50 million of our outstanding floating rate commercial paper through the year 2000. At Dec. 31, 1994 and 1993, the estimated market value of this swap agreement was an asset of $5.8 million and $400,000, respectively. OPTION CONTRACTS - At the end of 1994 we had written exchange-traded options on $48.2 million of our equity security investments for the purpose of income generation. The comparable amount at the end of 1993 was $41.1 million. We recorded the market value of these options on our balance sheet. At Dec. 31, 1994 and 1993, we recorded an unrealized loss of $276,000 and $52,000, respectively, associated with these options. FOREIGN EXCHANGE FORWARD CONTRACTS - Our U.K.-based insurance brokerage operation purchases these contracts to minimize the impact of fluctuating foreign currencies on its results of operations. At Dec. 31, 1994 and 1993, our open position on foreign exchange forward contracts totaled $26.4 million and $33.9 million, respectively. The unrealized loss on these contracts was $412,000 and $199,000 at the end of 1994 and 1993, respectively. Note 6 INCOME TAXES METHOD FOR COMPUTING INCOME TAX EXPENSE - Since 1992, we have computed our tax expense in accordance with SFAS No. 109, "Accounting for Income Taxes." The primary objective of our tax computation is to ensure that the deferred tax asset or liability on the balance sheet properly reflects the amount due from or to the government in the future. As a consequence, the portion of the tax expense that is a result of the change in the deferred tax asset or liability may not always be consistent with the income reported in the statements of operations. Some items of revenue and expense included in the statements of operations may not be currently taxable or deductible on our income tax returns. Therefore, our income tax assets and liabilities are divided into a current portion, which is the amount attributable to our current year's tax return, and a deferred portion, which is the amount attributable to another year's tax return. The revenue and expense items not currently taxable or deductible are called temporary differences. INCOME TAX EXPENSE (BENEFIT) - Income tax expense or benefits are recorded in various places in our financial statements. A summary of the amounts and places follows: Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- STATEMENTS OF OPERATIONS Expense related to income or loss before cumulative effects of accounting changes ........ $120,750 $94,997 $ 7,458 Benefit from the adoption of: SFAS No. 109 ................. - - (126,047) SFAS No. 106 ................. - - (25,777) ------- ------- ------- Total income tax expense (benefit) included in net income or loss .............. 120,750 94,997 (144,366) ------- ------- ------- COMMON SHAREHOLDERS' EQUITY Benefit for deductions relating to dividends on unallocated ESOP and PSOP shares ......... (4,578) (4,873) (5,226) Deferred expense (benefit) for the change in unrealized appreciation of investments and unrealized foreign exchange ..................... (308,073) 274,126 (15,675) ------- ------- ------- Total income tax expense (benefit) included in common shareholders' equity ........ (312,651) 269,253 (20,901) ------- ------- ------- Total income tax expense (benefit) included in financial statements ........ $(191,901) $364,250 $(165,267) ======= ======= ======= COMPONENTS OF INCOME TAX EXPENSE - The components of income tax expense related to the income or loss before cumulative effects of accounting changes are as follows: Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- Federal current tax expense .... $151,347 $148,508 $109,740 Federal deferred tax benefit ... (47,933) (54,935) (114,832) Impact of tax rate change ...... - (15,383) - ------- ------- ------- Total federal income tax expense (benefit) ........... 103,414 78,190 (5,092) Foreign income taxes ........... 11,788 9,692 6,776 State income taxes ............. 5,548 7,115 5,774 ------- ------- ------- Total income tax expense..... $120,750 $ 94,997 $ 7,458 ======= ======= ======= OUR TAX RATE IS DIFFERENT FROM THE STATUTORY RATE - Our total federal income tax expense (benefit) differs from the statutory rate of 35% (34% in 1992) of pretax income or loss as shown in the following table: Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- Federal income tax expense (benefit) at statutory rates . $197,252 $182,912 $(76,521) Increase (decrease) attributable to: Nontaxable investment income . (87,630) (90,502) (91,780) Foreign operations ........... (9,335) 9,869 48,894 Impact of tax rate change .... - (15,383) - Write-down of goodwill ....... - - 124,100 Other ........................ 3,127 (8,706) (9,785) ------- ------- ------- Federal income tax expense (benefit) .......... $103,414 $78,190 $(5,092) ======= ======= ======= MAJOR COMPONENTS OF DEFERRED INCOME TAXES ON OUR BALANCE SHEET - The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are presented in the following table: December 31 (In thousands) 1994 1993 ---- ---- DEFERRED TAX ASSETS Loss reserves ............................. $ 642,368 $ 593,938 Unearned premium reserves ................. 119,363 107,142 Deferred compensation ..................... 82,456 82,501 Foreign loss carryforwards ................ 43,263 51,479 Alternative minimum tax credit carryforwards ..................... 41,096 30,107 Other ..................................... 125,001 110,237 --------- -------- Total gross deferred tax assets ......... 1,053,547 975,404 Less valuation allowance .................. (50,359) (58,931) --------- -------- Net deferred tax assets ................. 1,003,188 916,473 --------- -------- DEFERRED TAX LIABILITIES Unrealized appreciation of investments .... 1,889 308,718 Deferred acquisition costs ................ 105,428 97,958 Real estate ............................... 43,994 44,062 Other ..................................... 61,369 40,723 --------- -------- Total gross deferred tax liabilities .... 212,680 491,461 --------- -------- Deferred income taxes ................... $790,508 $425,012 ========= ======== If we believe that all of our deferred tax assets will not result in future tax benefits, we must establish a "valuation allowance" for the portion of these assets that we think will not be realized. The valuation allowance for deferred tax assets as of Jan. 1, 1992, was $35.0 million. The net change in the total valuation allowance was a decrease of $8.6 million in 1994, and increases of $4.7 million and $19.2 million, respectively, in 1993 and 1992, relating entirely to our foreign operations. Based upon a review of our refundable taxes, anticipated future earnings, and all other available evidence, both positive and negative, we have concluded it is "more likely than not" that our net deferred tax assets will be realized. UNDISTRIBUTED EARNINGS OF SUBSIDIARIES - U.S. income taxes have not been provided on $29.1 million of our foreign operations' undistributed earnings as of Dec. 31, 1994, as such earnings are intended to be permanently reinvested in those operations. Furthermore, any taxes paid to foreign governments on these earnings may be partially used as credits against the U.S. tax on any dividend distributions from such earnings. We have not provided taxes on approximately $83.4 million of undistributed earnings related to our majority ownership of The John Nuveen Company that arose in 1994, 1993 and 1992 because we currently do not expect those earnings to become taxable to us. IRS EXAMINATIONS - The Internal Revenue Service has examined our consolidated returns through 1990 and is currently examining the years 1991 and 1992. Although it is possible that any additional taxes assessed as a result of these examinations may be material to liquidity in the period in which the assessment occurs, we believe such an assessment would not materially affect our overall financial position or results of operations. Note 7 DEBT AND CREDIT ARRANGEMENTS Debt consists of the following: December 31 1994 1993 Book Fair Book Fair (In thousands) Value Value Value Value ----- ----- ----- ----- Commercial paper ........... $275,635 $275,635 $201,384 $201,384 Medium-term notes .......... 204,433 189,400 210,780 221,100 9-3/8% notes ............... 99,971 102,800 99,959 113,400 Guaranteed ESOP debt ....... 36,112 37,200 47,223 52,200 Pound sterling loan notes .. 6,473 6,473 - - Short-term borrowings ...... - - 80,383 80,383 ------- ------- ------- ------- Total debt ............... $622,624 $611,508 $639,729 $668,467 ======= ======= ======= ======= FAIR VALUE - The fair value of our commercial paper and short-term borrowings approximates their book value because they are short-term in nature. For our other debt, which has longer terms and fixed interest rates, our fair value estimate is based on current interest rates available on debt securities in the market that have terms similar to ours. COMMERCIAL PAPER - Our commercial paper is supported by a $400 million credit agreement that expires in 1997. The credit agreement requires us to stay below a certain ratio of debt to equity, maintain a stated amount of common shareholders' equity and meet certain other requirements. As of year-end 1994, we had not borrowed any funds under the agreement, and we were in compliance with all provisions. Interest rates on commercial paper issued in 1994 ranged from 3.1% to 6.1%; in 1993 the range was 3.0% to 3.6%; and in 1992 the range was 3.0% to 4.7%. MEDIUM-TERM NOTES - The medium-term notes bear interest rates ranging from 5.9% to 8.4%. Maturities range from seven to 12 years after the issuance date. 9-3/8% NOTES - The 9-3/8% notes mature on June 15, 1997. GUARANTEED ESOP DEBT - The guaranteed ESOP debt bears an interest rate of 7.95% and is due March 1, 1998. The ESOP's principal payments and related interest are funded quarterly through a combination of our contributions and dividends on shares held by the ESOP. We show this debt as our liability, because we guaranteed the debt. POUND STERLING LOAN NOTES - The pound sterling loan notes were issued in 1994 in connection with our acquisition of a brokerage company. The notes mature on July 15, 2004, and bear an interest rate of 4.9% at Dec. 31, 1994. SHORT-TERM BORROWINGS - Short-term borrowings in 1993 were obligations of our investment banking-asset management operation that were collateralized by some of its inventory securities. These borrowings consisted of securities sold under an agreement to repurchase. INTEREST EXPENSE - Our interest expense was $39.6 million in 1994, $40.8 million in 1993 and $35.6 million in 1992. MATURITIES - The amount of debt that becomes due in each of the next five years is as follows: 1995 and 1996, $11.1 million; 1997, $386.7 million; 1998, $27.8 million; and 1999, $20.0 million. Note 8 RETIREMENT PLANS PENSION PLANS - We maintain funded defined benefit pension plans for most of our U.S. and non-U.S. employees. Benefits are based on years of service and the employee's compensation while employed by the company. U.S. pension benefits generally vest after five years of service. Non-U.S. pension benefits generally vest after two years of service. Our U.S. pension plans are noncontributory. This means that employees do not pay anything into the plans. Our funding policy is to contribute amounts sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act and any additional amounts that may be necessary. This may result in no contribution being made in a particular year. We contribute to our non-U.S. pension plans based on a percentage of salaries. Certain of these plans are contributory, which means that employees also contribute a percentage of their salary to the plan. The following table details the components of our net periodic pension cost for our U.S. and non-U.S. funded pension plans. Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- Service cost - benefits earned during the year ....... $37,611 $29,515 $32,912 Interest cost on projected benefits obligation .......... 40,606 36,670 39,449 Actual return on plan assets ... (6,928) (66,449) (25,333) Net amortization and deferral .. (35,243) 28,270 (20,352) ------ ------ ------ Net periodic pension cost.... $36,046 $28,006 $26,676 ====== ====== ====== The following table summarizes the funded status of our plans. December 31 1994 1993 (In thousands) U.S. Non-U.S. U.S. Non-U.S. ----- -------- ----- -------- Accumulated benefits obligation: Vested .................... $180,793 $186,317 $233,565 $194,403 Nonvested ................. 23,072 424 30,746 119 ------- ------- ------- ------- Subtotal ................. 203,865 186,741 264,311 194,522 Effect of projected salary increases .......... 86,557 45,588 94,340 42,753 ------- ------- ------- ------- Projected benefits obligation............... 290,422 232,329 358,651 237,275 Plan assets at fair value .. 245,852 239,025 228,322 215,843 ------- ------- ------- ------- Assets (greater) less than projected benefits obligation...... 44,570 (6,696) 130,329 21,432 Unrecognized net gain (loss) 9,071 (18,022) (54,233) (52,386) Unrecognized net asset at transition ....... 11,273 15,684 12,973 16,797 Unrecognized prior service cost .............. 420 (2,844) 109 (2,991) ------- ------- ------- ------- Accrued (prepaid) pension cost recorded on the balance sheet............ $ 65,334 $(11,878) $ 89,178 $(17,148) ======= ======= ======= ======= We use the services of an independent actuary to assist us in the determination of our pension cost and obligation. Pension cost is determined using assumptions at the beginning of the year. The funded status is determined using assumptions at the end of the year. Assumptions as of Dec. 31 used to determine the projected benefits obligation and pension cost are as follows: 1994 1993 1992 1991 ---- ---- ---- ---- U.S. PLANS Discount rate ................. 8.00% 6.25% 7.25% 7.75% Rate of increase in compensation ................. 5.00 4.25 5.50 6.00 Expected rate of return on plan assets ............... 9.00 9.00 9.00 9.50 NON-U.S. PLANS Discount rate ................. 8.50 7.50 9.50 9.50 Rate of increase in compensation ................. 6.00 5.50 7.50 7.50 Expected rate of return on plan assets ............... 10.00 9.50 10.50 10.50 Plan assets are invested primarily in equities and fixed maturities and included 380,172 shares of our common stock with a market value of $17.0 million and $17.1 million at Dec. 31, 1994 and 1993, respectively. We also maintain a noncontributory, unfunded pension plan to provide certain employees with pension benefits in excess of limits imposed by federal tax law and a noncontributory, unfunded pension plan for our outside directors. At the end of 1994 and 1993, we had a liability of $17.5 million and $13.9 million, respectively, recorded for these plans. During 1992, we offered a voluntary early retirement incentive, enabling certain eligible employees to elect early retirement. Early retirement was elected by 292 employees, which resulted in a pretax cost of $31.0 million in 1992. EMPLOYEE STOCK OWNERSHIP PLAN - We maintain an ESOP for qualified employees of our U.S.-based corporate, underwriting and insurance brokerage operations. An ESOP trust was formed that borrowed funds to purchase shares of our stock for future allocation to qualified employees. As the principal of the ESOP trust loan is paid, a pro rata amount of our common stock is released for allocation to eligible participants. Dividends we pay on all shares held by the trust are used to pay the ESOP's obligations. In addition, we make contributions as needed to meet the ESOP's obligations. All shares held by the ESOP are considered outstanding for EPS computations, and dividends paid on all ESOP shares are charged to retained earnings. Our ESOP expense was reduced by the dividends we paid to the ESOP trust. The following table summarizes our ESOP expense for each of the last three years: Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- Compensation expense ........... $12,330 $12,037 $11,776 Interest expense ............... 4,108 5,032 5,982 Dividends paid to ESOP trust ... (6,325) (6,181) (6,337) Proceeds from sales of forfeited shares, and interest income .. (273) (221) (377) ------ ------ ------ Net pretax ESOP expense...... $9,840 $10,667 $11,044 ===== ====== ====== Cash contributions to trust .... $9,171 $10,091 $10,496 ===== ====== ====== The following table details the shares held in the ESOP: December 31 (Shares) 1994 1993 ---- ---- Allocated ................................. 2,630,265 2,295,799 Committed to be released .................. 142,467 131,323 Unallocated ............................... 1,603,176 2,108,952 --------- --------- Total .................................... 4,375,908 4,536,074 ========= ========= The ESOP allocated 505,776 shares in 1994, 499,256 shares in 1993 and 492,418 shares in 1992. The remaining unallocated shares at Dec. 31, 1994, will be released for allocation annually through March 1, 1998. PREFERRED STOCK OWNERSHIP PLAN - Our Savings Plus Preferred Stock Ownership Plan (PSOP) allocates preferred shares semiannually to those employees participating in our Savings Plus Plan. The allocation is equivalent to 60% of employees' contributions up to a maximum of 6% of their salary plus shares equal to the value of dividends on previously allocated shares. To finance the stock purchase for future allocation to qualified employees, the PSOP borrowed $150 million at 9.4% from our U.S. underwriting subsidiary. As the principal and interest of the trust's loan is paid, a pro rata amount of our preferred stock is released for allocation to participating employees. Each share pays a dividend of $11.724 annually and is currently convertible into four shares of common stock (two shares prior to the stock split). Dividends on all shares held by the trust are used to pay the PSOP obligation. In addition to dividends paid to the trust, we make additional cash contributions to the PSOP as necessary in order to meet the PSOP's debt obligation. If dilutive, the common stock equivalent of all shares held by the PSOP is considered outstanding for fully diluted EPS computations, and dividends paid on all PSOP shares are charged to retained earnings. Our PSOP expense was reduced by the dividends we paid to the PSOP trust. The following table summarizes our PSOP expense for each of the last three years: Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- Compensation expense ........... $10,409 $7,268 $7,854 Interest expense ............... 13,602 14,044 14,075 Dividends paid to PSOP trust ... (11,993) (12,022) (12,141) ------ ------ ------ Net pretax PSOP expense ...... $12,018 $9,290 $9,788 ====== ====== ====== Cash contributions to trust .... $9,205 $2,728 $1,811 ====== ====== ====== The following table details the shares held in the PSOP: December 31 (Shares) 1994 1993 ---- ---- Allocated .............................. 187,194 135,741 Committed to be released ............... 31,601 26,887 Unallocated ............................ 793,691 860,300 --------- --------- Total ................................. 1,012,486 1,022,928 ========= ========= The PSOP allocated 66,609 shares in 1994, 53,342 shares in 1993 and 51,057 shares in 1992. The remaining unallocated shares at Dec. 31, 1994, will be released for allocation annually through Jan. 31, 2005. POSTRETIREMENT BENEFITS OTHER THAN PENSION - We provide certain health care and life insurance benefits for retired U.S. employees and their eligible dependents. We currently anticipate that most of our employees will become eligible for these benefits if they retire while working for us. The cost of these benefits is shared with the retiree. The benefits are generally provided through our employee benefits trust, to which periodic contributions are made to cover benefits paid during the year. Effective Jan. 1, 1992, we implemented SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This statement changed our method of accounting for postretirement benefits from the cash basis to the accrual basis. Now, we accrue postretirement benefits expense during the period that the employee renders the service to earn the benefit. We recorded a transition obligation of $75.3 million, representing the cumulative Jan. 1, 1992, liability for postretirement benefits, in the first quarter of 1992. This cumulative effect, net of taxes, was a charge to earnings of $49.6 million, or $0.59 per share. The following table details the components of the net periodic postretirement benefits cost: Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- Service cost - benefits attributed to service during the year ...... $ 5,089 $ 4,227 $ 4,159 Interest cost on accumulated postretirement benefits obligation ...................... 9,645 8,699 7,117 Actual return on plan assets ...... 320 (686) (891) Net amortization and deferral ..... (1,448) (590) (17) ------ ------ ------ Net periodic postretire- ment benefits cost ............. $13,606 $11,650 $10,368 ====== ====== ====== The following table summarizes the funded status of the plan. December 31 (In thousands) 1994 1993 ---- ---- Accumulated postretirement benefits obligation: Retirees ................................ $66,350 $74,541 Fully eligible active plan participants . 7,174 8,720 Other active plan participants .......... 33,822 47,797 ------- ------- Subtotal................................ 107,346 131,058 Plan assets at fair value ................. 13,753 13,693 ------- ------- Assets less than accumulated postretirement benefits obligation ..... 93,593 117,365 Unrecognized net gain (loss) .............. 16,398 (14,374) Unrecognized prior service cost ........... 5,017 5,370 ------- ------- Accrued postretirement benefits cost recorded on the balance sheet ..... $115,008 $108,361 ======= ======= We use the services of an independent actuary to assist in the determination of the benefits cost and obligation. Postretirement benefits cost is determined using assumptions at the beginning of the year. The funded status is determined using the assumptions at the end of the year. Assumptions as of Dec. 31 used to determine the postretirement benefits cost and accumulated postretirement benefits obligation are as follows: 1994 1993 1992 1991 Discount rate ................. 8.50% 7.00% 7.75% 8.00% Rate of increase in compensation .............. 5.00 4.25 5.50 6.00 Expected rate of return on plan assets ............... 8.00 7.50 7.50 7.50 A health care inflation rate of 14% was assumed to change to 8% in 1995, decrease annually to 6% in 2002 and then remain at that level. This inflation rate assumption has a significant impact on the health care portion of the postretirement benefits. For example, a 1% increase in this rate would have increased the accumulated postretirement benefits obligation at Dec. 31, 1994, by $16.4 million and the 1994 periodic benefits cost by $3.0 million. Note 9 STOCK OPTION AND OTHER INCENTIVE PLANS Our option plans for certain U.S.-based company officers and outside directors give these individuals the right to buy our stock at the market price on the day the options were granted. In May 1994, our shareholders adopted a new stock incentive plan, making available for future grant up to four million option shares. Stock options granted under the 1994 plan may be exercised between one and 10 years subsequent to the date of grant. Options granted under our option plan in effect prior to May 1994 may be exercised at any time up to 10 years after the grant date. Up to 800,000 of the four million shares available under the 1994 plan may be granted as restricted stock awards. The stock is restricted because recipients receive the stock only upon completing a specified objective or period of employment, generally one to five years. The shares are considered issued when awarded, but the recipient does not own and cannot sell the shares during the restriction period. Approximately 3,980,000 shares remained at year-end for grant under the 1994 plan, of which approximately 793,000 may be granted as restricted shares. We also have separate stock option plans for certain employees of our non-U.S. operations. Most of the options granted under these plans were priced at the market price of our common stock on the grant date. Generally, they can be exercised from three to 10 years after the grant date. Approximately 300,000 option shares remained available at year-end for future grants under our non-U.S. plans. Information concerning our U.S. and non-U.S. stock option plans is in the following table: Number of Option Price Option (Shares) Per Share Shares Outstanding Jan. 1, 1992 .......... $7.21 - 36.25 3,378,176 Granted ........................... 35.00 - 38.50 467,014 Canceled .......................... 10.10 - 34.25 (22,272) Exercised ......................... 7.21 - 36.25 (645,300) ------------- --------- Outstanding Dec. 31, 1992 ......... 9.95 - 38.50 3,177,618 Granted ........................... 38.25 - 47.88 378,908 Canceled .......................... 12.98 - 37.07 (42,594) Exercised ......................... 9.95 - 40.07 (566,224) ------------- --------- Outstanding Dec. 31, 1993 ......... 9.95 - 47.88 2,947,708 Granted ........................... 31.55 - 47.88 661,783 Canceled .......................... 21.75 - 47.88 (41,953) Exercised ......................... 9.95 - 47.88 (297,293) ------------- --------- Outstanding Dec. 31, 1994 ......... $21.25 - 47.88 3,270,245 ============= ========= Exercisable Dec. 31, 1994 ......... $21.25 - 46.63 2,400,710 ============= ========= Note 10 SHAREHOLDERS' EQUITY COMMON STOCK AND REACQUIRED SHARES - We are governed by the Minnesota Business Corporation Act. All authorized shares of voting common stock have no par value. Shares of common stock reacquired are considered unissued shares. On May 3, 1994, our shareholders voted to amend the company's Restated Articles of Incorporation to increase the number of authorized shares of voting common stock from 120 million to 240 million. Subsequent to this action, the board of directors approved a 2-for-1 stock split, issuing one additional voting common share on June 6, 1994, for each outstanding share to shareholders of record on May 17, 1994. In 1994, we reacquired 860,000 of our common shares for a total cost of $34.2 million. During 1992, we reacquired 1,585,000 of our common shares for a total cost of $57.7 million. We reduced our capital stock account for the cost of these repurchases in proportion to the percentage of shares reacquired, with the remainder of the cost charged to retained earnings. A summary of our common stock activity for the last three years is as follows: Year ended December 31 (Shares) 1994 1993 1992 ---- ---- ---- Outstanding at beginning of year ....................... 84,714,676 84,118,554 85,042,484 Issued under stock option and other incentive plans ..... 344,756 595,814 659,198 Issued upon conversion of preferred stock ............ 3,125 5,132 2,128 Reacquired ...................... (860,140) (4,824) (1,585,256) ---------- ---------- ---------- Outstanding at end of year ...... 84,202,417 84,714,676 84,118,554 ========== ========== ========== UNDESIGNATED SHARES - Our articles of incorporation allow us to issue five million undesignated shares. The board of directors may designate the type of shares and set the terms thereof. The board designated 1,450,000 of these shares as Series B Convertible Preferred Stock in connection with the formation of our Preferred Stock Ownership Plan (PSOP). The board designated 50,000 shares as Series A Junior Participating Preferred Stock in connection with the establishment of our Shareholder Protection Rights Plan. SHAREHOLDER PROTECTION RIGHTS PLAN - Our Shareholder Protection Rights Plan is designed to protect the interests of our shareholders in the event of unsolicited and unfair or coercive attempts to acquire control of the company. Our shareholders own one right for each common share owned, which would enable them to initiate specified actions to protect their interests. We may redeem this right under circumstances specified in the plan. DIVIDEND RESTRICTIONS - We primarily depend on dividends from our subsidiaries to pay dividends to our shareholders, service our debt and pay expenses. Various state laws and regulations limit the amount of dividends we may receive from our U.S. underwriting subsidiary. In 1995, $311.6 million will be available for dividends free from such restrictions. During 1994, we received cash dividends of $201.0 million from our U.S. underwriting subsidiary and a $157.1 million noncash dividend of the capital stock of its U.K.-based underwriting operation. Note 11 COMMITMENTS AND CONTINGENCIES INVESTMENT COMMITMENTS - We have long-term commitments to fund venture capital and real estate investments totaling $150.3 million as of Dec. 31, 1994. We estimate these commitments will be paid as follows: $99.9 million in 1995; $21.9 million in 1996; $15.6 million in 1997; $7.9 million in 1998; and $5.0 million in 1999. LEASE COMMITMENTS - A portion of our business activities is carried on in rented premises. We also enter into leases for equipment, such as office machines and computers. Our total rental expense was $69.6 million in 1994, $74.9 million in 1993 and $92.8 million in 1992. Certain leases are noncancelable, and we would remain responsible for payment even if we stopped using the space or equipment. On Dec. 31, 1994, the minimum annual rents for which we would be liable under these types of leases are as follows: $59.2 million in 1995, $49.4 million in 1996, $42.1 million in 1997, $36.7 million in 1998, $31.7 million in 1999 and $106.7 million thereafter. LEGAL MATTERS - In the ordinary course of conducting business, our operations have been named as defendants in various lawsuits. Some of these lawsuits attempt to establish liability under insurance contracts issued by our underwriting operations. Plaintiffs in these lawsuits are asking for money damages or to have the court direct the activities of our operations in certain ways. Although it is possible that the settlement of a contingency may be material to our results of operations and liquidity in the period in which the settlement occurs, we believe that the total amounts that we and our subsidiaries will ultimately have to pay in all of these lawsuits will have no material effect on our overall financial position. Note 12 ACQUISITION OF ECONOMY On Aug. 31, 1993, we acquired Economy Fire & Casualty Company, a personal insurance underwriting company, from Kemper Corporation. Our investment in Economy totaled approximately $395 million. This included a $100 million contribution of securities to the capital of Economy, with the remainder paid in cash to Kemper Corporation. We recorded goodwill of approximately $142 million that we are amortizing over 15 years. We accounted for the Economy acquisition as a purchase. As a result, Economy's results were included in our consolidated results from the date of purchase. Consolidated results would not have been materially different had this acquisition been completed at the beginning of 1992. Note 13 SALE OF MINORITY INTEREST IN NUVEEN In May 1992, we sold a minority interest in our investment banking- asset management subsidiary, The John Nuveen Company. The sale generated pretax proceeds of $137.1 million and resulted in a pretax gain of $98.3 million. We retained approximately 74% ownership in Nuveen at the time of the sale. We now own approximately 77% of Nuveen due to Nuveen's repurchase of some of its outstanding shares. We continue to consolidate 100% of Nuveen's assets, liabilities, revenues and expenses, with reductions on the balance sheet and statement of operations for the minority interest sold. The minority interest represents the minority shareholders' proportionate interest in Nuveen's equity and earnings. Minority interest of $66.5 million and $71.9 million was recorded in other liabilities at the end of 1994 and 1993, respectively. Note 14 REINSURANCE Our financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to our acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance means other insurance companies agree to share certain risks with us. The primary purpose of ceded reinsurance is to protect us from potential losses in excess of what we are prepared to accept. Effective Jan. 1, 1993, we implemented SFAS No. 113, "Accounting and Reporting for Reinsurance of Short- Duration and Long-Duration Contracts." This statement requires us to report balances pertaining to reinsurance transactions "gross" on the balance sheet. We now record reinsurance recoverables on unpaid losses and ceded unearned premiums as assets, in contrast to our prior practice of netting these amounts against the corresponding insurance reserves. Adoption of SFAS No. 113 had no impact on net income or common shareholders' equity. The largest portion (approximately 17%) of our total reinsurance recoverables and ceded unearned premiums was with General Reinsurance Corporation. That company is rated "A++" by A.M. Best, "Aaa" by Moody's and "AAA" by Standard & Poor's for its property-liability insurance claims-paying ability. We expect the companies to which we have ceded reinsurance to honor their obligations. In the event these companies are unable to honor their obligations to us, we will pay these amounts. We have established allowances for possible nonpayment of amounts due to us. The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses and loss adjustment expenses is as follows: Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- PREMIUMS WRITTEN Direct ....................... $3,491,466 $3,053,532 $3,011,879 Assumed ...................... 745,810 686,557 636,587 Ceded ........................ (614,250) (561,544) (506,047) --------- --------- --------- Net premiums written ....... $3,623,026 $3,178,545 $3,142,419 ========= ========= ========= PREMIUMS EARNED Direct ....................... $3,296,215 $3,021,203 $3,027,243 Assumed ...................... 709,987 680,626 661,505 Ceded ........................ (594,121) (523,491) (545,502) --------- --------- --------- Net premiums earned ........ $3,412,081 $3,178,338 $3,143,246 ========= ========= ========= INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES Direct ....................... $2,245,796 $1,968,839 $2,304,848 Assumed ...................... 595,492 721,141 1,034,594 Ceded ........................ (379,590) (386,242) (649,396) --------- --------- --------- Net insurance losses and loss adjustment expenses... $2,461,698 $2,303,738 $2,690,046 ========= ========= ========= Note 15 STATUTORY ACCOUNTING PRACTICES Our underwriting operations are required to file financial statements with state and foreign regulatory authorities. The accounting principles used to prepare these statutory financial statements follow prescribed accounting principles, which differ from GAAP. On a statutory accounting basis, our underwriting operations reported net income of $285.3 million in 1994, $441.1 million in 1993, and $185.0 million in 1992. Statutory surplus (shareholder's equity) of these operations was $1.9 billion and $1.8 billion as of Dec. 31, 1994 and 1993, respectively. Note 16 SEGMENT INFORMATION GEOGRAPHIC AREAS - We provide international broking services and property-liability insurance coverages. The following summary presents financial data based on the location of our operations: Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- REVENUES U.S. ......................... $4,071,932 $3,875,545 $3,963,203 Non-U.S. ..................... 629,353 584,627 535,489 --------- --------- --------- Total revenues ............. $4,701,285 $4,460,172 $4,498,692 ========= ========= ========= INCOME (LOSS) BEFORE INCOME TAXES U.S. ......................... $520,983 $559,512 $145,477 Non-U.S. ..................... 42,595 (36,906) (370,540) --------- --------- --------- Total income (loss) before income taxes........ $563,578 $522,606 $(225,063) ========= ========= ========= December 31 (In thousands) 1994 1993 1992 ---- ---- ---- IDENTIFIABLE ASSETS U.S. ......................... $14,716,603 $14,703,637 $13,166,460 Non-U.S. ..................... 2,779,217 2,445,559 2,225,594 ---------- ---------- ---------- Total assets ............... $17,495,820 $17,149,196 $15,392,054 ========== ========== ========== INDUSTRY - Our industry segments consist of underwriting, insurance brokerage and investment banking-asset management. The following summary presents revenues, income (loss) before income taxes and identifiable assets for each industry segment. Each segment's revenues and pretax income (loss) include investment income. The insurance brokerage segment's fees and commissions include intercompany commissions that are eliminated when we consolidate our operations. Year ended December 31 (In thousands) 1994 1993 1992 ---- ---- ---- REVENUES Underwriting: St. Paul Fire and Marine: Specialized commercial....... $1,015,397 $1,011,439 $1,050,936 Personal & business insurance 737,601 485,564 341,902 Medical services............. 638,413 688,980 722,172 Commercial................... 380,356 418,635 541,109 --------- --------- --------- Total St. Paul Fire and Marine ................. 2,771,767 2,604,618 2,656,119 Reinsurance .................. 483,368 395,008 361,093 International ................ 156,946 178,712 126,034 --------- --------- --------- Total premiums earned ....... 3,412,081 3,178,338 3,143,246 Net investment income ........ 674,818 646,396 642,301 Realized investment gains .... 35,967 49,429 60,351 Other ........................ 29,053 31,723 24,985 --------- --------- --------- Total underwriting .......... 4,151,919 3,905,886 3,870,883 --------- --------- --------- Insurance brokerage: Fees and commissions ......... 315,977 294,579 290,081 Net investment income ........ 21,322 21,213 29,444 Other ........................ 8,377 4,725 8,267 --------- --------- --------- Total insurance brokerage ... 345,676 320,517 327,792 --------- --------- --------- Investment banking- asset management ............. 220,303 245,732 221,182 --------- --------- --------- Total industry segments ..... 4,717,898 4,472,135 4,419,857 Parent company and consolidating eliminations ................. (16,613) (11,963) 78,835 --------- --------- --------- Total revenues .............. $4,701,285 $4,460,172 $4,498,692 ========= ========= ========= INCOME (LOSS) BEFORE INCOME TAXES Underwriting: St. Paul Fire and Marine: Specialized commercial....... $(89,116) $(116,126) $(244,190) Personal & business insurance (35,258) (28,835) (62,606) Medical services............. 118,379 132,922 151,906 Commercial................... (54,045) (57,315) (123,230) --------- --------- --------- Total St. Paul Fire and Marine ................. (60,040) (69,354) (278,120) Reinsurance .................. (21,802) (18,230) (240,930) International ................ (31,166) (62,671) (47,836) --------- --------- --------- Total GAAP underwriting result (113,008) (150,255) (566,886) Net investment income ........ 674,818 646,396 642,301 Realized investment gains .... 35,967 49,429 60,351 Other ........................ (37,068) (38,389) (54,634) --------- --------- --------- Total underwriting .......... 560,709 507,181 81,132 --------- --------- --------- Insurance brokerage ............ (9,947) (12,629) (432,527) --------- --------- --------- Investment banking-asset management: Pretax income before minority interest............ 94,635 111,663 97,866 Minority interest ............ (22,777) (29,076) (15,405) --------- --------- --------- Total investment banking- asset management ........... 71,858 82,587 82,461 --------- --------- --------- Total industry segments ..... 622,620 577,139 (268,934) Parent company and consolidating eliminations ................. (59,042) (54,533) 43,871 --------- --------- --------- Total income (loss) before income taxes ............... $563,578 $522,606 $(225,063) ========= ========= ========= December 31 (In thousands) 1994 1993 1992 ---- ---- ---- IDENTIFIABLE ASSETS Underwriting ................... $15,397,173 $15,144,260 $13,682,466 Insurance brokerage ............ 1,738,060 1,616,574 1,463,647 Investment banking- asset management ............. 348,847 410,764 294,235 ---------- ---------- ---------- Total industry segments ..... 17,484,080 17,171,598 15,440,348 Parent company and consolidating eliminations ... 11,740 (22,402) (48,294) ---------- ---------- ---------- Total assets ................ $17,495,820 $17,149,196 $15,392,054 ========== ========== ========== Note 17 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is an unaudited summary of our quarterly performance: 1994 First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenues ................ $1,163,775 $1,165,149 $1,199,068 $1,173,293 Net income .............. 64,437 127,762 129,808 120,821 Net income per common share: Primary ................ 0.73 1.49 1.51 1.40 Fully diluted .......... 0.71 1.43 1.45 1.35 1993 First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenues ................ $1,114,028 $1,069,338 $1,104,975 $1,171,831 Net income .............. 88,031 108,497 141,388 89,693 Net income per common share: Primary ................ 1.01 1.25 1.63 1.02 Fully diluted .......... 0.98 1.21 1.57 0.99 1992 First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenues ................ $1,099,209 $1,172,957 $1,125,114 $1,101,412 Income (loss) before cumulative effects of accounting changes ..... 105,788 143,122 (63,886) (417,545) Net income (loss) ....... 182,271 143,122 (63,886) (417,545) Earnings (loss) per common share: Primary: Income (loss) before cumulative effects of accounting changes .... 1.21 1.64 (0.78) (4.99) Net income (loss) ...... 2.10 1.64 (0.78) (4.99) Fully diluted: Income (loss) before cumulative effects of accounting changes .... 1.16 1.57 (0.78) (4.99) Net income (loss) ...... 2.01 1.57 (0.78) (4.99) Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. ----------------------------------------- Shareholder Information Stock Trading The company's stock is traded nationally on the New York Stock Exchange, where it is assigned the symbol SPC. As of Feb. 23, 1995, the stock is also listed on the London Stock Exchange under the symbol SPC. The number of holders of record, including individual owners, of our common stock was 7,789 as of Feb. 27, 1995. Options on the company's stock trade on the Chicago Board Options Exchange, under the symbol SPQ. Stock Price and Dividend Rate The table below sets forth the amount of cash dividends declared per share and the high and low closing sales prices of company stock for each quarter during the past two years. All amounts presented reflect the effect of a two-for-one stock split in 1994. Cash Dividend 1994 High Low Declared ---- ---- --- -------- 1st Quarter $ 44 3/8 $38 13/16 $.375 2nd Quarter 41 11/16 37 7/8 .375 3rd Quarter 44 1/2 39 1/2 .375 4th Quarter 45 1/8 40 .375 Cash dividend paid in 1994 was $1.48. Cash Dividend 1993 High Low Declared ---- ---- --- -------- 1st Quarter $ 41 5/8 $ 37 3/4 $.35 2nd Quarter 41 7/16 39 1/4 .35 3rd Quarter 46 11/16 40 5/16 .35 4th Quarter 48 1/2 43 1/4 .35 Cash dividend paid in 1993 was $1.39. EX-21 9 EXHIBIT 21 Subsidiaries of the Registrant State or - ------------------------------ Other Jurisdiction of Name Incorporation - ----- ----------- (1) St. Paul Fire and Marine Insurance Company Minnesota Subsidiaries: (i) St. Paul Mercury Insurance Co. Minnesota (ii) St. Paul Guardian Insurance Co. Minnesota (iii) The St. Paul Insurance Co. Texas (iv) The St. Paul Insurance Co. of Illinois Illinois (v) St. Paul Specialty Underwriting, Inc. Delaware Subsidiaries: (a) St. Paul Surplus Lines Insurance Co. Delaware (b) St. Paul Risk Services, Inc. Minnesota (c) Ramsey Insurance Co. Minnesota (d) Athena Assurance Co. Minnesota (vi) St. Paul Property and Casualty Insurance Co. Nebraska (vii) St. Paul Insurance Co. of North Dakota North Dakota (viii) St. Paul Fire and Casualty Insurance Co. Wisconsin (ix) Economy Fire & Casualty Co. Illinois (a) Economy Preferred Insurance Co. Illinois (b) Economy Premier Assurance Co. Illinois (c) Premier Assurance Center, Inc. Illinois (x) St. Paul Indemnity Insurance Co. Indiana (xi) St. Paul Properties, Inc. Delaware Subsidiaries: (a) 77 Water Street, Inc. Minnesota (b) St. Paul Interchange, Inc. Minnesota (c) St. Paul 345, Inc. Minnesota (d) 350 Market Street Minnesota (e) St. Paul Cambridge, Inc. Minnesota (xii) Seaboard Surety Company New York Subsidiary: (a) Seaboard Surety Company of Canada Canada (xiii) St. Paul Media,Inc. Minnesota (xiv) St. Paul Private RE, Inc. Minnesota (xv) St. Paul Venture Capital, Inc. Minnesota (xvi) St. Paul Land Resources, Inc. Minnesota (xvii) St. Paul Lloyds Holdings, Inc. Texas (xviii) St. Paul Management Services, Inc. Minnesota (2) Minet Holdings, Inc. New York Subsidiaries: (i) The Swett & Crawford Group, Inc. California Subsidiaries: (a) Swett Insurance Managers of Nevada, Inc. Nevada (b) Swett Insurance Managers of Idaho, Inc. Idaho (c) Durin Financial Corporation Wisconsin (d) Swett Insurance Managers of California, Inc. California (e) Swett Insurance Managers of Pennsylvania, Inc. Pennsylvania (f) Montgomery General Agency of New Jersey, Inc. New Jersey (g) Swett & Crawford California Subsidiaries: (1) Swett & Crawford of Texas, Inc. Texas (2) Swett & Crawford of Hawaii, Inc. Hawaii (3) Swett Insurance Managers, Inc. Colorado (h) Swett & Crawford of Connecticut, Inc. Connecticut (i) Swett Insurance Managers of Maine, Inc. Maine (j) Swett & Crawford Insurance Agency of Massachusetts Massachusetts (ii) Minet Re North America, Inc. Georgia Subsidiaries: (a) RFC Intermediaries, Inc. California (b) Tailored Awards, Inc. Minnesota (c) RFC Management Corporation Minnesota (d) Intere Intermediaries, Inc. New York Subsidiaries: (1) Intere Bermuda Bermuda (2) Intere Far East, Ltd. Hong Kong (3) Port Cove Associates New York (e) IOC Reinsurance Brokers, Ltd. Canada (iii) Continental Underwriters, Ltd. Louisiana (iv) Minet, Inc. New Jersey Subsidiary: (a) Minet Insurance Services, Inc. California (b) Minet Insurance Services of Texas, Inc. Texas (v) Minet Limited - Bermuda Bermuda (3) St. Paul (UK) Ltd. United Kingdom Subsidiaries: (i) St. Paul Reinsurance Company Limited United Kingdom (ii) St. Paul Management Limited United Kingdom (iii) Selsdon Insurance Management Limited United Kingdom (iv) St. Paul International Insurance Company Limited United Kingdom (v) St. Paul Insurance Espana Seguros Y Reaseguros, S.A. Spain (vi) Minet Group* United Kingdom Subsidiaries: (a) Associated Insurance Brokers of Botswana (Pty) Limited Botswana (b) JH Minet Reinsurance Brokers Limited United Kingdom (c) Minet Australia Limited Australia (d) Minet Burn & Roche Pty Limited Australia (e) Minet Consultancy Services Limited United Kingdom (f) Minet Hong Kong Limited Hong Kong (g) Minet Inc. Canada (h) Minet Limited United Kingdom (i) Minet Zimbabwe (Pvt) Limited Zimbabwe (j) Minet ICDC Insurance Brokers Ltd. Kenya (4) St. Paul Reinsurance Management Corporation New York Subsidiary: (i) Excess & Treaty Management Corporation New York (5) The John Nuveen Company** Delaware Subsidiaries: (i) John Nuveen & Co. Incorporated Delaware (ii) Nuveen Advisory Corp. Delaware (iii) Nuveen Institutional Advisory Corp. Delaware (6) St. Paul Investments Limited United Kingdom (7) Camperdown Corporation Delaware *Minet Group and its listed subsidiaries also conduct insurance brokerage business through a number of wholly-owned subsidiaries. A total of eight such subsidiaries operate in the United States and 61 operate in foreign countries. These 69 subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of Dec. 31, 1994. **The John Nuveen Company is a majority-owned subsidiary jointly owned by The St. Paul, which holds a 40% interest, and Fire and Marine, which holds a 37% interest. EX-23 10 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors The St. Paul Companies, Inc.: We consent to incorporation by reference in the Registration Statements on Form S-8 (SEC File No. 2-69894, No. 33-15392, No. 33- 20516, No. 33-23446, No. 33-23948, No. 33-24220, No. 33-24575, No. 33-26923, No. 33-49273 and No. 33-56987) and Form S-3 (SEC File No. 33-33931 and No. 33-50115) of The St. Paul Companies, Inc., of our report dated January 26, 1995, relating to the consolidated balance sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, common shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994, and all related schedules, which report appears in the December 31, 1994 annual report on Form 10-K of The St. Paul Companies, Inc. Our report refers to changes in the method of accounting for certain investments, reinsurance, income taxes and postretirement benefits. Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP March 27, 1995 ------------------------- KPMG Peat Marwick LLP EX-24 11 EXHIBIT 24 Power of Attorney ------------------ KNOW ALL MEN BY THESE PRESENTS, That I, the undersigned, a director of The St. Paul Companies, Inc., a Minnesota corporation ("The St. Paul"), do hereby make, nominate and appoint Bruce A. Backberg and Howard E. Dalton, or either of them, to be my attorney-in-fact, with full power and authority to include my conformed signature on the electronic filing of a Form 10-K for the year ended December 31, 1994, to be filed by The St. Paul with the Securities and Exchange Commission, and any amendment thereto, and shall have the same force and effect as though I had manually signed the Form 10-K or amendment. Dated: February 7, 1995 Signature: /s/ Michael R. Bonsignore ------------------------- Name: Michael R. Bonsignore Dated: February 27, 1995 Signature: /s/ John H. Dasburg ------------------------- Name: John H. Dasburg Dated: February 7, 1995 Signature: /s/ W. John Driscoll ------------------------- Name: W. John Driscoll Dated: February 7, 1995 Signature: /s/ Pierson M. Grieve ------------------------- Name: Pierson M. Grieve Dated: February 7, 1995 Signature: /s/ Ronald James ------------------------- Name: Ronald James Dated: February 7, 1995 Signature: /s/ William H. Kling ------------------------- Name: William H. Kling Dated: February 7, 1995 Signature: /s/ Bruce K. MacLaury ------------------------- Name: Bruce K. MacLaury Dated: February 7, 1995 Signature: /s/ Ian A. Martin ----------------- Name: Ian A. Martin Dated: February 7, 1995 Signature: /s/ Glen D. Nelson ------------------ Name: Glen D. Nelson Dated: February 7, 1995 Signature: /s/ Anita M. Pampusch --------------------- Name: Anita M. Pampusch EX-27 12
7 1,000 YEAR DEC-31-1994 DEC-31-1994 8,828,684 0 0 531,042 0 528,144 11,162,522 46,664 88,900 324,358 17,495,820 9,423,429 2,109,170 0 0 622,624 445,222 0 4,535 2,287,712 17,495,820 3,412,081 694,594 41,974 552,636 2,461,698 753,946 922,063 563,578 120,750 442,828 0 0 0 442,828 5.12 4.93 9,185,191 2,790,165 (328,466) 667,255 1,566,082 9,423,429 343,000
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