-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IY7vZP46pElje3E7BbvVP9jbIp1PA3KWQRZrj7q/E/IzjiZGx1/FxfBseYNv7SzD jaqgxarWTWeH1J2zGwy/GQ== 0000086312-96-000005.txt : 19960325 0000086312-96-000005.hdr.sgml : 19960325 ACCESSION NUMBER: 0000086312-96-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 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: 96537459 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, 1995 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 612-310-7911 ------------ Securities registered pursuant to Section 12(b) of the Act: Common Stock (without par value) New York Stock Exchange London Stock Exchange Stock Purchase Rights New York Stock Exchange --------------------- ----------------------------- (Title of class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The aggregate market value of the outstanding Common Stock held by nonaffiliates of the Registrant on March 18, 1996, was $4,668,977,742. The number of shares of the Registrant's Common Stock, without par value, outstanding at March 18, 1996, was 83,754,512. An Exhibit Index is set forth at page 31 of this report. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the Registrant's 1995 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 7, 1996, are incorporated by reference into Parts III and IV of this report. Page 1 of 31 pages 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 and reinsurance 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, The St. Paul was the 243rd largest U. S. corporation, based on total 1994 revenues. At March 18, 1996, The St. Paul and its subsidiaries employed approximately 12,300 persons. The St. Paul's underwriting segment accounted for 89% of consolidated revenues in 1995. The brokerage and investment banking-asset management segments accounted for 7% and 4% of consolidated revenues, respectively, in 1995. Note 15 on pages 65 and 66 of The St. Paul's 1995 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 1995 1994 1993 ---- ---- ---- Insurance Underwriting: St. Paul Fire and Marine: Specialized Commercial 22.8% 21.6% 22.7% Personal Insurance 12.1 13.2 8.1 Medical Services 11.2 13.6 15.4 Commercial 10.8 10.6 12.2 ---- ---- ---- Total Fire and Marine 56.9 59.0 58.4 St. Paul Re 12.1 10.3 8.9 St. Paul International Underwriting 4.4 3.3 4.0 Net investment income 13.5 14.4 14.5 Realized investment gains 1.4 0.7 1.1 Other 0.7 0.6 0.7 ---- ---- ---- Total underwriting 89.0 88.3 87.6 Insurance brokerage 6.8 7.4 7.2 Investment banking- asset management 4.4 4.7 5.5 Parent company and eliminations (0.2) (0.4) (0.3) ---- ---- ---- Total 100.0% 100.0% 100.0% ===== ===== ===== UNDERWRITING Overview. The St. Paul's 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 property-liability insurance companies worldwide. St. Paul International Underwriting provides primary property-liability insurance coverages outside the United States, and insurance on U.S. risks of foreign policyholders. 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 16th on the basis of 1994 written premiums. Principal Departments and Products The "Underwriting Results by Operation" table on page 19 of The St. Paul's 1995 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. St. Paul Fire and Marine Fire and Marine underwrites insurance through the following business units: Specialized Commercial. Based on written premiums, this is the largest of Fire and Marine's operations. Specialized Commercial includes a number of individual underwriting operations 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 1994 written premiums, Fire and Marine's surety operation ranked as the fourth-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. Effective Jan. 1, 1996, Specialized Commercial was restructured to more closely align its operations with the industry groups they serve. Three new business centers were formed - Manufacturing, Services Industry and Transportation/Programs. The National Accounts operation was eliminated. The large commercial risks previously underwritten in that operation are now underwritten in the respective individual Specialized Commercial operations. Personal Insurance. This operation provides property and liability insurance coverages for individuals. Through a variety of monoline and package policies, individuals can acquire coverages to protect personal property such as homes, automobiles and boats, as well as to provide coverage for personal liability. Medical Services. Medical Services underwrites professional liability, property and general liability insurance for the health care delivery system. Products include coverages for health care professionals (physicians and surgeons, dental professionals and nurses); individual health care facilities (including hospitals, long-term care facilities and other facilities such as laboratories); and entire systems (hospital networks and managed care systems). Specialized claim and loss control services are vital components of Medical Services' insurance products and services. Fire and Marine is the largest medical liability insurer in the United States, with premium volume representing approximately 10% of the U.S. market in 1994 based on premium data published in "Best's Review." Commercial. Fire and Marine's Commercial underwriting operation offers property and liability insurance to a broad range of small to midsize commercial enterprises. Business coverages marketed include package, general liability, umbrella and excess liability, commercial auto and fire, inland marine and workers' compensation. Commercial offers tailored coverages and insurance products for specific customer groups such as golf courses, museums, colleges and schools, amusement and recreation organizations, manufacturers, wholesalers and processors. Coverages marketed to the small commercial customer include the Package Accounts for Commercial Enterprises (PACE) policies for offices, retailers and family restaurants. St. Paul Re St. Paul Re underwrites reinsurance in both domestic and international insurance markets (referred to as "assumed reinsurance"). Reinsurance is an agreement through which one insurance company will transfer some of the risk it has underwritten to another insurer and will pay a premium in order to do so. A large portion of reinsurance is effected automatically under general reinsurance contracts known as treaties. In some instances, reinsurance is effected by negotiation on individual risks, which is referred to as facultative reinsurance. St. Paul Re underwrites both treaty and facultative reinsurance for property, liability, ocean marine, surety and specialty coverages. According to data published by the Reinsurance Association of America, St. Paul Re ranked as the seventh largest U.S. reinsurance underwriter based on written premium volume for the first nine months of 1995. In late 1994, St. Paul Re purchased from CIGNA Corporation the opportunity to renew most of the international business underwritten by CIGNA Reinsurance-Property & Casualty. In 1995, the renewal of CIGNA business accounted for $119 million of St. Paul Re's written premiums for the year. St. Paul International Underwriting St. Paul International Underwriting includes primary insurance written outside the United States. 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 broad range of commercial and personal lines products and services tailored to meet the unique needs of customers in each of the indigenous markets which it serves. 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 1995 property-liability written premiums were produced in each of Illinois, Minnesota, California and Texas. Fire and Marine's business is produced primarily through approximately 6,400 independent insurance agencies and national insurance brokers. Fire and Marine maintains 12 regional offices in major cities throughout the United States and 90 additional service offices in the United States to respond to the needs of agents, brokers and policyholders. St. Paul Re produces business from its New York and London headquarters, as well as from its offices in Miami, Brussels, Singapore and Tokyo. St. Paul Re obtains business primarily through the broker or intermediary market. Approximately 50% of St. Paul Re's business in 1995 originated from outside the United States. St. Paul International Underwriting is headquartered in London and underwrites insurance through indigenous operations in several markets outside the United States, including Africa, Canada, the Netherlands, the Republic of Ireland, Spain and the United Kingdom. Reserves for Losses and Loss Adjustment Expenses General Information. When claims are made by or against policyholders, any amounts that The St. Paul's underwriting operations pay or expect to pay to the claimant are referred to as losses. The costs of investigating, resolving and processing these claims are referred to as loss adjustment expenses (LAE). 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 1995 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 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 1985 through 1995. The top line on the table shows the estimated liability for unpaid losses and LAE, net of reinsurance recoverable, recorded at the balance sheet date for each of the years indicated. Loss development data for The St. Paul's U.K.-based reinsurance and international underwriting operations are included in the table from 1988 to 1995. 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 1985 reserve of $3,364 million developed up to $3,477 million, or a $113 million deficiency, by the end of 1986. By the end of 1995, the 1985 reserve had developed a deficiency of $419 million. The changes in the estimate of 1985 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 1995), 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, 1995) 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, 1995, $3,431 million of the currently estimated $3,783 million of losses and LAE that have been incurred for the years up to and including 1985 have been paid. Thus, as of Dec. 31, 1995, it is estimated that $352 million of incurred losses and LAE are unpaid for the years up to and including 1985. 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 1994 reserves that relates to 1985 losses is included in the cumulative redundancy or deficiency amount for the years 1985 through 1994. 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 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 - ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Net liability for unpaid losses and LAE $3,364 4,043 4,745 5,502 5,907 6,279 6,688 7,207 7,640 7,890 8,393 ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== Liability re-estimated as of: One year later 3,477 4,087 4,727 5,313 5,656 6,037 6,436 6,984 7,312 7,642 Two years later 3,625 4,078 4,489 4,914 5,338 5,787 6,260 6,703 7,027 Three years later 3,652 3,955 4,268 4,789 5,135 5,628 6,066 6,563 Four years later 3,597 3,874 4,226 4,731 5,027 5,490 6,063 Five years later 3,572 3,874 4,178 4,707 4,975 5,521 Six years later 3,624 3,885 4,180 4,682 5,058 Seven years later 3,652 3,914 4,169 4,796 Eight years later 3,688 3,951 4,163 Nine years later 3,742 3,983 Ten years later 3,783 Cumulative redundancy (deficiency) $ (419) 60 582 706 849 758 625 644 613 248 ===== ==== ===== ===== ===== ===== ===== ===== ===== ===== Cumulative redundancy (deficiency) excluding foreign exchange (1) $ (419) 60 582 720 834 764 641 647 617 256 ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== Net liability for unpaid losses and LAE 7,207 7,640 7,890 8,393 Reinsurance recoverable on unpaid losses 1,606 1,545 1,533 1,854 ----- ----- ----- ------ Gross liability 8,813 9,185 9,423 10,247 ===== ===== ===== ====== Gross re-estimated liability: One year later 8,692 8,842 9,599 Two years later 8,389 8,934 Three years later 8,622 Gross cumulative redundancy (deficiency) 191 251 (176) === === === Gross cumulative redundancy (deficiency) excluding foreign exchange (1) 166 241 (199) === === === Cumulative amount of net liability paid through: One year later 976 1,008 1,101 1,196 1,318 1,450 1,452 1,547 1,566 1,591 Two years later 1,666 1,787 1,884 2,044 2,209 2,361 2,493 2,576 2,608 Three years later 2,185 2,332 2,466 2,646 2,797 3,015 3,155 3,245 Four years later 2,548 2,732 2,869 3,043 3,216 3,442 3,584 Five years later 2,812 3,012 3,132 3,348 3,496 3,713 Six years later 3,008 3,205 3,322 3,554 3,674 Seven years later 3,157 3,343 3,453 3,691 Eight years later 3,258 3,447 3,573 Nine years later 3,343 3,551 Ten years later 3,431 Cumulative amount of gross liability paid through: One year later 1,935 1,872 1,958 Two years later 3,199 3,136 Three years later 4,047 (1) The results of The St. Paul's U.K.-based operations translated from original currencies into U.S. dollars are included with The St. Paul's U.S. underwriting operations in this table from 1988 to 1995. 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.
Note 6 on pages 56 and 57 of the 1995 Annual Report to Shareholders, which includes a reconciliation of beginning and ending loss reserve liabilities for each of the last three years, is incorporated herein by reference. Additional information about The St. Paul's reserves is contained in the "Insurance Reserves" and "Environmental and Asbestos Claims" sections of "Management's Discussion and Analysis" on pages 30 through 34 of the 1995 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. 2) Provide its respective underwriting operations with the capacity necessary to write large limits on accounts. The collectibility of reinsurance is subject to the solvency of reinsurers. The St. Paul's Reinsurance Security Committee, which has established financial standards to determine qualified, financially secure reinsurers, guides the placement of ceded reinsurance. Uncollectible reinsurance recoverables have not had a material adverse impact on The St. Paul's results of operations, liquidity or financial position. Note 13 on pages 64 and 65 of the 1995 Annual Report to Shareholders, which provides a schedule of ceded reinsurance information, is incorporated herein by reference. INSURANCE BROKERAGE 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 by "Business Insurance," Minet is the tenth largest international insurance brokerage organization in the world, based on total 1994 revenues. Minet is based in London and has 125 offices in 32 countries throughout North America, Europe, Africa, Asia and Australia. Minet operates through six business units, each focusing on distinct client groups. 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 1994 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. Global Professional Services provides insurance brokerage services to the world's largest accounting firms, as well as law firms, law societies and 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. INVESTMENT BANKING-ASSET MANAGEMENT The John Nuveen Company (Nuveen) is the St. Paul's investment banking-asset management subsidiary. The St. Paul and Fire and Marine currently hold a combined 78% interest in Nuveen. Through John Nuveen & Co. Incorporated, a wholly-owned subsidiary, Nuveen markets tax-free, open-end and closed-end (exchange-traded) managed funds. Nuveen also underwrites and trades municipal bonds and tax-free unit investment trusts (UITs). Nuveen markets its funds and UITs to individuals through registered representatives associated with unaffiliated national and regional broker-dealers and other financial organizations. Through its Municipal Finance Department, 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 $15.5 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 $7 billion in national, state, insured and money market portfolios. In addition, Nuveen manages 60 exchange-traded funds with approximately $26 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. The St. Paul has had limited involvement with derivative financial instruments, primarily to hedge against fluctuations in interest rates, equity security values and foreign currency values. The St. Paul has not participated 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, 1995. The following table presents information about the fixed maturities portfolio for the last five years (dollars in millions). Weighted Weighted Amortized Market Pretax Net Average Average Cost at Value at Investment Pretax After-tax Year Year-end Year-end Income Yield Yield - ---- -------- -------- ------ ------ -------- 1995 $9,715.0 $10,372.9 $665.4 7.2% 5.6% 1994 8,913.4 8,828.7 626.3 7.4% 5.7% 1993 8,385.1 9,148.0 607.1 7.4% 5.9% 1992 7,731.2 8,236.3 605.2 8.0% 6.5% 1991 7,230.3 7,722.1 589.0 8.4% 6.8% The St. Paul determines the mix of its investments in taxable and tax- exempt securities based on its current and projected tax position and the relationship between taxable and tax-exempt investment yields. Fixed maturity purchases in 1995 were comprised of intermediate-term, investment- grade taxable and tax-exempt securities. The fixed maturities portfolio is carried on The St. Paul's balance sheet at estimated market value, with unrealized appreciation and depreciation (net of taxes) recorded in common shareholders' equity. At Dec. 31, 1995, pretax unrealized appreciation totaled $658 million. The fixed maturities portfolio is managed conservatively to provide reasonable return while limiting exposure to risks. Approximately 96% of the fixed maturities portfolio is rated at investment grade levels (BBB or better). Nonrated securities comprise the remainder of the portfolio. Most of these are nonrated municipal bonds which, in management's view, would be considered of investment-grade quality if rated. Equities. Equity holdings comprised 5% of The St. Paul's investments at Dec. 31, 1995, and consist of a diversified portfolio of common stocks, which are held with the primary objective of achieving capital appreciation. This portfolio provided $49 million of realized investment gains and $15 million of dividend income in 1995, and its carrying value at year-end included $160 million of unrealized appreciation. Real Estate. The St. Paul's real estate holdings, which comprised 5% of total investments at Dec. 31, 1995, consist primarily of a diversified portfolio of commercial office and warehouse buildings geographically distributed throughout the United States. This portfolio produced $33 million of pretax investment income in 1995. 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, 1995. These investments are in the form of limited partnership interests or direct equity investments, and their carrying value at year-end included $129 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, 1995. Notes 3, 4 and 5 on pages 54 through 56 of the 1995 Annual Report to Shareholders, and the "Investments" section of "Management's Discussion and Analysis" on pages 35 through 37 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 domestic and international underwriting subsidiaries compete with a large number of other insurers. In addition, many large commercial customers self-insure their risks or utilize large deductibles on purchased insurance. The St. Paul's subsidiaries compete principally by attempting to offer a combination of superior products, underwriting expertise and services at a competitive price. The combination of products, services, pricing and other methods of competition varies by line of insurance and by coverage within each line of insurance. The St. Paul and its underwriting subsidiaries are subject to regulation by certain states as an insurance holding company system. Such regulation generally provides that transactions between companies within the holding company system must be fair and equitable. 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 1995, The St. Paul received $196.0 million in cash dividends from Fire and Marine. In 1996, up to $331.6 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, competes with a large number of other insurance brokers and risk consultants in the countries where it does business, and worldwide. 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. - ------ ---------- St. Paul Fire and Marine Insurance Company owns its corporate headquarters buildings, located at 385 Washington Street and 130 West Sixth Street, Saint Paul, Minnesota. These buildings, which are adjacent to one another and connected by skyway, are also occupied by The St. Paul. These buildings consist of approximately 1.1 million square feet of gross floor space. Economy Fire & Casualty Company, a subsidiary of St. Paul Fire and Marine Insurance Company, owns a building in Freeport, Illinois that houses a portion of Fire and Marine's personal insurance operations. Minet and St. Paul International Insurance Company Ltd. also own buildings in the United Kingdom which house their respective operations. St. Paul Fire and Marine Insurance Company and its subsidiary, St. Paul Properties, Inc., own a portfolio of income-producing properties in various locations across the United States that they have purchased for investment. The St. Paul's operating subsidiaries rent or lease office space in 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 64 of the 1995 Annual Report to Shareholders, the "Legal Matters" section of "Management's Discussion and Analysis" on page 34 of said Annual Report, and the "Environmental and Asbestos Claims" section of "Management's Discussion and Analysis" on pages 31 through 34 of said Annual Report are incorporated herein by reference. In 1990, at the direction of the UK Department of Trade and Industry (DTI), five insurance underwriting subsidiaries of London United Investments PLC (LUI) suspended underwriting new insurance business. At the same time, four of those subsidiaries, being insolvent, suspended payment of claims and have since been placed in provisional liquidation. The fifth subsidiary, Walbrook Insurance Company, continued paying claims until May 1992 but has now also been placed in provisional insolvent liquidation. Weavers Underwriting Agency (Weavers), an LUI subsidiary, managed these insurers. The St. Paul's insurance brokerage operation, Minet, had brokered business to and from Weavers for many years. From 1973 through 1980, The St. Paul's UK-based underwriting operations, now called St. Paul International Insurance Company Limited (SPI), had accepted business from Weavers. A portion of that business was ceded by SPI to reinsurers. Certain of those reinsurers have challenged the validity of certain reinsurance contracts relating to the Weavers pool, of which SPI was a member, in an attempt to avoid liability under those contracts. SPI and other members of the Weavers pool are seeking enforcement of the reinsurance contracts. Minet may also become the subject of legal proceedings arising from its role as one of the major brokers for Weavers. The proceedings are being vigorously contested by The St. Paul and it recognizes that the final outcome of these proceedings, if adverse to The St. Paul, may materially impact the results of operations in the period in which that outcome occurs, but believes it will not have a materially adverse effect on its liquidity or overall financial position. In late 1993, the Superior Court of California entered judgment in an action brought against Fire and Marine in 1987 by Arntz Contracting Company and certain affiliates alleging breach of contract and intentional interference with ability to conduct business. The judgment affirmed a jury's August 1993 award of approximately $16.5 million in compensatory damages and $100 million in punitive damages. In January 1994, the portion of the judgment granting punitive damages was vacated. Both parties have appealed the court's ruling. The St. Paul recognizes that the final outcome of this case, if adverse to Fire and Marine, may materially impact the results of operations in the period in which that outcome occurs, but believes it will not have a materially adverse effect on its liquidity or overall financial position. Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- No matter was submitted to a vote of security holders during the quarter ended Dec. 31, 1995. Executive Officers of the Registrant. - ------------------------------------ All of the following persons are regarded as executive officers of The St. Paul Companies, Inc. because of their responsibilities and duties as elected officers of The St. Paul, Fire and Marine, St. Paul Re or St. Paul International Underwriting. 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 Michael J. Conroy, 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. Michael J. Conroy joined The St. Paul in August 1994. For three years prior to that date, Mr. Conroy served as executive vice president and chief administrative officer of The Home Insurance Company. For two years prior to that, Mr. Conroy held various other management positions with The Home Insurance Company. 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. Andrew I. Douglass joined The St. Paul in August 1993. For more than five years prior to 1993, Mr. Douglass had been Executive Vice President and General Counsel of Heller International Corporation. Greg A. Lee joined The St. Paul in January 1993. For more than five years prior to that date, Mr. Lee held various human resources management positions with PepsiCo, Inc. and its subsidiaries. James Hom joined The St. Paul in October 1994. For two years prior to that date, Mr. Hom served as vice president-corporate claims and project management for The Home Insurance Company. Prior to that, Mr. Hom spent seven years managing insurance consulting groups for two large public accounting firms. Positions Term of Office Presently and Period of Name Age Held Service - ---- --- ---------- ------------- Douglas W. 59 Chairman, President Serving at the Leatherdale and Chief Executive pleasure of the Officer Board from 5-90 Patrick A. Thiele 45 Executive Vice Serving at the President and pleasure of the Chief Financial Board from 12-91 Officer Nicholas M. 41 Executive Vice Serving at the Brown Jr. President and pleasure of the Chief Operating Board from 5-94 Officer- Fire and Marine Michael J. Conroy 54 Executive Vice Serving at the President and pleasure of the Chief Administrative Board from 8-95 Officer James F. Duffy 52 President and Serving at the Chief Executive pleasure of the Officer- Board from 9-93 St. Paul Re Mark L. Pabst 49 President and Serving at the Chief Executive pleasure of the Officer-St. Paul Board from 2-95 International Underwriting Susan J. Albrecht 49 President- Serving at the Major Markets- pleasure of the Fire and Marine Board from 12-94 Stephen J. Klingel 45 President- Serving at the Personal pleasure of the Insurance- Board from 8-95 Fire and Marine Joseph B. Nardi 51 President- Serving at the Medical Services- pleasure of the Fire and Marine Board from 8-82 Janet R. Nelson 46 President- Serving at the Custom Markets- pleasure of the Fire and Marine Board from 5-94 James A. Schulte 46 President- Serving at the Commercial- pleasure of the Fire and Marine Board from 10-93 Howard E. Dalton 58 Senior Vice Serving at the President and pleasure of the Chief Accounting Board from 9-87 Officer Andrew I. Douglass 52 Senior Vice Serving at the President and pleasure of the General Counsel Board from 8-93 Gary P. Hanson 52 Senior Vice Serving at the President - Sales pleasure of the and Marketing Board from 8-95 James Hom 40 Senior Vice Serving at the President- pleasure of the Corporate Planning Board from 10-94 Greg A. Lee 46 Senior Vice Serving at the President- pleasure of the Human Resources Board from 1-93 Bruce A. Backberg 47 Vice President Serving at the and Corporate pleasure of the Secretary Board from 5-92 James L. Boudreau 60 Vice President Serving at the and Treasurer pleasure of the Board from 11-90 Part II ------- Item 5. Market for the Registrant's Common Equity and - ------ Related Stockholder Matters. --------------------------------------------- The "Stock Trading" and "Stock Price and Dividend Rate" portions of the "Shareholder Information" section on the inside back cover of The St. Paul's 1995 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 44 and 45 of the 1995 Annual Report to Shareholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial - ------ Condition and Results of Operations. ------------------------------------------------- The "Management's Discussion and Analysis" section on pages 16 to 43 of the 1995 Annual Report to Shareholders is incorporated herein by reference. In early February 1996, The St. Paul's board of directors authorized the repurchase of up to five percent of the company's common shares. Such repurchases may be made from time to time on the open market and through private transactions following management's determination that such repurchases are appropriate to protect or increase shareholder value. From the date of the board's authorization through March 18, 1996, the company repurchased 341,700 shares. Item 8. Financial Statements and Supplementary Data. - ------ ------------------------------------------- The financial statements and supplementary data on pages 46 to 67 of the 1995 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 7, 1996, 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 12 to 20 and the "Board of Directors Compensation" section on pages 6 to 9 of the Proxy Statement relating to the annual meeting of shareholders to be held May 7, 1996, 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 21 to 24 of the Proxy Statement relating to the annual meeting of shareholders to be held May 7, 1996, are incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- None. Part IV ------- Item 14. Exhibits, Financial Statements, Financial Statement - ------- Schedules and Reports on Form 8-K. --------------------------------------------------- (a) Filed documents. The following documents are filed as part of this report: 1. Financial Statements. Incorporated by reference into Part II of this report: The St. Paul Companies, Inc. and Subsidiaries: Consolidated Statements of Income - Years Ended December 31, 1995, 1994 and 1993 Consolidated Balance Sheets - December 31, 1995 and 1994 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows - Years Ended December 31, 1995, 1994 and 1993 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 of The St. Paul are incorporated herein by reference to Form 10-Q for the quarter ended June 30, 1995. The current bylaws of The Paul are incorporated herein by reference to Form 10-Q for the quarter ended March 31, 1994. (4) A specimen certificate of The St. Paul's common stock is incorporated herein by reference to the Form 10-K for the year ended December 31, 1992. The Amended and Restated Shareholder Protection Rights Agreement is incorporated herein by reference to Form 10-Q for the quarter ended June 30, 1995. There are no long-term debt instruments in which the total amount of securities authorized exceeds 10% of the total assets of The St. Paul and its subsidiaries on a consolidated basis. The St. Paul agrees to furnish a copy of any of its long-term debt instruments to the Securities and Exchange Commission upon request. (10) The Deferred Stock Grant Agreement with Mr. Mark L. Pabst. The Directors' Charitable Award Program is incorporated by reference to the Form 10-K for the year ended December 31, 1994. The Compensation Arrangement with Mr. Nicholas M. Brown Jr. is incorporated by reference to the Form 10-K for the year ended December 31, 1994. The Relocation Loan Payback Agreement with Mr. James F. Duffy is incorporated by reference to the Form 10-K for the year ended December 31, 1994. The Pension Service Agreement with Mr. Andrew I. Douglass is incorporated by reference to the Form 10-K for the year ended December 31, 1994. The 1994 Stock Incentive Plan is incorporated by reference to Form 10-Q for the quarter ended March 31, 1994. The 1994 Annual Incentive Plan is incorporated by reference to Form 10-Q for the quarter ended March 31, 1994. The Long-Term Incentive Plan is incorporated by reference to Form 10-Q for the quarter ended March 31, 1994. The Non-Employee Director Stock Retainer Plan is incorporated by reference to Form 10-K for the year ended December 31, 1991. The summary description of the Outside Directors' Retirement Plan is incorporated by reference to the Proxy Statement relating to the annual meeting of shareholders to be held May 7, 1996. The 1988 Stock Option Plan as in effect for options granted prior to June 1994, as amended, is incorporated by reference to Form 10-K for the year ended December 31, 1990. The Restricted Stock Award Plan, as amended, is incorporated by reference to Form 10-K for the year ended December 31, 1989. The Benefit Equalization Plan and Special Severance Policy are incorporated by reference to Form 10-K for the year ended December 31, 1987. The 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 1995 Annual Report to Shareholders. The following portions of such annual report, representing those portions expressly incorporated by reference in this report on Form 10-K, are filed as an exhibit to this report: Portions of Annual Report Items in for the year ended this December 31, 1995 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 1995 Annual Report to Shareholders is furnished to the Commission in a paper format pursuant to Rule 14a-3(c). (21) List of subsidiaries of The St. Paul Companies, Inc. (23) Consent of independent auditors to incorporation by reference of certain reports into Registration Statements on Form S-8 (SEC File No. 2-69894, No. 33-15392, No. 33- 20516, No. 33-23446, No. 33-23948, No. 33-24220, No. 33- 24575, No. 33-26923, No. 33-49273, No. 33-56987 and No. 333- 01065) and Form S-3 (SEC File No. 33-33931, No. 33-50115 and No. 33-58491). (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 29, 1996, was filed relating to the announcement of The St. Paul's financial results for the year ended December 31, 1995. 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 20, 1996 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 20, 1996 By /s/ Douglas W. Leatherdale -------------- -------------------------- Douglas W. Leatherdale, Director, Chairman of the Board, President and Chief Executive Officer Date March 20, 1996 By /s/ Patrick A. Thiele -------------- --------------------- Patrick A. Thiele, Director, Executive Vice President and Chief Financial Officer Date March 20, 1996 By /s/ Howard E. Dalton -------------- -------------------- Howard E. Dalton, Senior Vice President and Chief Accounting Officer Date March 20, 1996 By /s/ Michael R. Bonsignore -------------- ------------------------- Michael R. Bonsignore*, Director Date March 20, 1996 By /s/ John H. Dasburg -------------- ------------------- John H. Dasburg*, Director Date March 20, 1996 By /s/ W. John Driscoll -------------- -------------------- W. John Driscoll*, Director Date March 20, 1996 By /s/ Pierson M. Grieve -------------- --------------------- Pierson M. Grieve*, Director Date March 20, 1996 By /s/ Ronald James -------------- ---------------- Ronald James*, Director Date March 20, 1996 By /s/ William H. Kling -------------- -------------------- William H. Kling*, Director Date March 20, 1996 By /s/ Bruce K. MacLaury -------------- --------------------- Bruce K. MacLaury*, Director Date March 20, 1996 By /s/ Ian A. Martin -------------- ----------------- Ian A. Martin*, Director Date March 20, 1996 By /s/ Glen D. Nelson -------------- ------------------ Glen D. Nelson*, Director Date March 20, 1996 By /s/ Anita M. Pampusch -------------- --------------------- Anita M. Pampusch*, Director Date March 20, 1996 By /s/ Gordon M. Sprenger -------------- ---------------------- Gordon M. Sprenger*, Director Date March 20, 1996 *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 29, 1996, we reported on the consolidated balance sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in the 1995 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 1995. 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 Note 4 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," in 1993. /s/ KPMG Peat Marwick LLP Minneapolis, Minnesota --------------------- January 29, 1996 KPMG Peat Marwick LLP THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1995 (In thousands) 1995 ------------------------------------- Amount at which shown in the Cost* Value* balance sheet --------- --------- -------------- Type of investment: Fixed maturities: - ---------------- United States Government and government agencies and authorities $ 2,087,057 $ 2,205,997 $ 2,205,997 States, municipalities and political subdivisions 4,295,822 4,665,893 4,665,893 Foreign governments 893,677 929,994 929,994 Corporate securities 1,348,506 1,429,390 1,429,390 Mortgage-backed securities 1,089,891 1,141,616 1,141,616 ---------- ---------- ---------- Total fixed maturities 9,714,953 10,372,890 10,372,890 ---------- ========== ---------- Equity securities: - ----------------- Common stocks: Public utilities 55,208 71,035 71,035 Banks, trusts and insurance companies 66,082 80,655 80,655 Industrial, miscellaneous and all other 429,741 559,781 559,781 ---------- --------- --------- Total equity securities 551,031 711,471 711,471 ---------- ========= --------- Venture capital 259,324 $ 388,599 388,599 ---------- ========= --------- Real estate 631,656** 611,656 Other investments 42,776 42,776 Short-term investments 939,528 939,528 ---------- ---------- Total investments $12,139,268 $13,066,920 ========== ========== * See Notes 1, 3, 4 and 5 to the consolidated financial statements included in The St. Paul's 1995 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, 1995 and 1994 (In thousands) Assets: 1995 1994 ------ ----- Investment in subsidiaries $4,514,440 $3,308,561 Investments: Fixed maturities 138,552 42,385 Equity securities 52,235 41,288 Short-term investments 40,130 5,040 Deferred income taxes 136,427 139,396 Notes and other receivables from subsidiaries 1,017 350 Other assets 88,266 46,579 --------- --------- Total assets $4,971,067 $3,583,599 ========= ========= Liabilities: Debt $ 1,074,657 $ 766,016 Dividends payable to shareholders 33,559 31,549 Other liabilities 132,730 48,565 --------- --------- Total liabilities 1,240,946 846,130 --------- --------- Shareholders' Equity: Preferred: Convertible preferred stock 144,165 146,102 Guaranteed obligation - PSOP (133,293) (141,567) --------- --------- Total preferred shareholders' equity 10,872 4,535 --------- --------- Common: Common stock, authorized 240,000 shares; issued 83,976 shares (84,202 in 1994) 460,458 445,222 Retained earnings 2,704,075 2,362,286 Guaranteed obligation - ESOP (32,294) (44,410) Unrealized appreciation of investments 627,791 13,948 Unrealized loss on foreign currency translation (40,781) (44,112) --------- --------- Total common shareholders' equity 3,719,249 2,732,934 --------- --------- Total shareholders' equity 3,730,121 2,737,469 --------- --------- Total liabilities and shareholders' equity $4,971,067 $3,583,599 ========= ========= 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, 1995, 1994 and 1993 (In thousands) 1995 1994 1993 ----- ----- ----- Revenues: Net investment income $ 9,165 $ 4,470 $ 4,647 Realized investment gains 8,800 4,240 5,551 ------ ------ ------ Total revenues 17,965 8,710 10,198 ------ ------ ------ Expenses: Interest expense 63,744 48,457 43,349 Administrative and other 29,476 21,312 25,403 ------ ------ ------ Total expenses 93,220 69,769 68,752 ------ ------ ------ Loss before income tax benefit (75,255) (61,059) (58,554) Income tax benefit (18,941) (22,608) (24,977) ------ ------ ------ Net loss - Parent only (56,314) (38,451) (33,577) Equity in net income of subsidiaries 577,523 481,279 461,186 ------- ------- ------- Consolidated net income $521,209 $442,828 $427,609 ======= ======= ======= 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, 1995, 1994 and 1993 (In thousands) 1995 1994 1993 ----- ----- ----- Operating Activities: Net loss $ (56,314) $ (38,451) $ (33,577) Cash dividends from subsidiaries 206,118 210,523 208,333 Tax payments from subsidiaries 159,216 104,509 99,751 State and federal income tax payments (103,000) (84,910) (83,200) Adjustments to reconcile net loss to net cash provided by operating activities: Deferred tax benefit (1,077) (19,660) (7,609) Realized investment gains (8,800) (4,240) (5,551) Other (110) 1,897 (14,205) ------- ------- ------- Cash provided by operating activities 196,033 169,668 163,942 ------- ------- ------- Investing Activities: Purchases of investments (218,525) (93,601) (61,614) Proceeds from sales and maturities of investments 93,919 84,337 62,656 Capital contributions to subsidiaries (223,623) (53,466) (75,136) Acquisitions - (10,643) - Other (870) 14 1,356 ------- ------- ------- Cash used in investing activities (349,099) (73,359) (72,738) ------- ------- ------- Financing Activities: Dividends paid to shareholders (144,662) (136,062) (129,218) Proceeds from issuance of debt 455,028 87,721 77,243 Repayment of debt (125,446) (20,350) (51,735) Repurchase of common shares (41,714) (34,150) (207) Stock options exercised and other 9,860 6,532 12,713 ------- ------- ------- Cash provided by (used in) financing activities 153,066 (96,309) (91,204) ------- ------- ------- 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 1995 Annual Report to Shareholders. 2. Debt consists of the following (in thousands): December 31, -------------------- 1995 1994 ------- ------- Medium-term notes $ 397,433 $ 204,433 Convertible subordinated debentures (1) 262,026 - Commercial paper 149,629 275,635 Guaranteed PSOP debt (1) 133,293 141,567 9-3/8% notes 99,982 99,971 Guaranteed ESOP debt 25,001 36,112 Guaranteed ESOP debt (1) 7,293 8,298 --------- ------- Total debt $1,074,657 $766,016 ========= ======= (1) Eliminated in consolidation. See Note 8 to the consolidated financial statements included in the 1995 Annual Report to Shareholders for further information on debt outstanding at Dec. 31, 1995. The amount of debt, other than debt eliminated in consolidation, that becomes due during each of the next five years is as follows: 1996, $11.1 million; 1997, $111.1 million; 1998, $27.8 million; 1999, $20.0 million; and 2000, $149.6 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 --------- ---------------- -------- --------- 1995 - ---- Property-Liability Insurance Underwriting: Fire and Marine: Specialized Commercial $119,150 $ 3,377,431 $ 753,479 - Personal Insurance 58,153 405,266 286,121 - Medical Services 58,777 2,129,471 647,878 - Commercial 60,561 1,399,928 290,475 - ------- ---------- --------- ------- Total Fire and Marine 296,641 7,312,096 1,977,953 - St. Paul Re 57,256 1,843,843 249,376 - International 18,277 1,091,131 133,699 - ------- ---------- --------- ------- Total $372,174 $10,247,070 $2,361,028 - ======= ========== ========= ======= 1994 - ---- Property-Liability Insurance Underwriting: Fire and Marine: Specialized Commercial $110,792 $3,209,219 $ 688,662 - Personal Insurance 56,597 417,761 268,760 - Medical Services 48,131 2,179,849 592,627 - Commercial 56,309 1,450,462 265,210 - ------- --------- --------- ------- Total Fire and Marine 271,829 7,257,291 1,815,259 - St. Paul Re 40,318 1,912,028 192,861 - International 12,211 254,110 101,050 - ------- --------- --------- ------- Total $324,358 $9,423,429 $2,109,170 - ======= ========= ========= ======= 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 1995 earned income expenses expenses expenses written -------- ---------- ---------- ----------- --------- ------- Property-Liability Underwriting: Fire and Marine: Specialized Commercial $1,230,790 - $ 961,801 $298,765 $ 98,328 $1,304,062 Personal Insurance 655,347 - 486,275 145,547 56,524 673,347 Medical Services 605,468 - 387,716 97,695 44,557 673,980 Commercial 587,016 - 378,754 155,125 57,580 617,767 --------- -------- --------- -------- ------- --------- Total Fire and Marine 3,078,621 - 2,214,546 697,132 256,989 3,269,156 St. Paul Re 654,981 - 461,033 132,521 56,936 713,475 International 237,727 - 188,728 27,326 44,857 260,582 Net investment income - $731,096 - - - - Other - - - - 82,130 - --------- -------- --------- ------- ------- --------- Total $3,971,329 $731,096 $2,864,307 $856,979 $440,912 $4,243,213 ========= ======== ========= ======= ======= ========= 1994 - ---- Property-Liability Insurance Underwriting: Fire and Marine: Specialized Commercial $1,015,397 - $ 764,760 $252,577 $ 88,046 $1,085,514 Personal Insurance 619,414 - 455,879 138,512 51,338 635,557 Medical Services 638,413 - 369,571 109,517 38,848 689,716 Commercial 498,543 - 365,555 137,661 59,079 529,741 --------- -------- --------- ------- ------- --------- Total Fire and Marine 2,771,767 - 1,955,765 638,267 237,311 2,940,528 St. Paul Re 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 - - - - 66,581 - --------- ------- --------- ------- ------- --------- 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 - $ 778,042 $263,138 $ 91,570 $1,000,255 Personal Insurance 360,305 - 249,345 70,221 56,053 375,518 Medical Services 688,980 - 389,483 122,323 48,777 710,281 Commercial 543,894 - 406,741 170,155 38,381 489,861 --------- ------- --------- ------- ------- --------- Total Fire and Marine 2,604,618 - 1,823,611 625,837 234,781 2,575,915 St. Paul Re 395,008 - 301,060 74,026 38,152 431,242 International 178,712 - 179,067 32,274 30,042 171,388 Net investment income - $646,396 - - - - Other - - - - 59,855 - --------- ------- --------- ------- ------- --------- Total $3,178,338 $646,396 $2,303,738 $732,137 $362,830 $3,178,545 ========= ======= ========= ======= ======= =========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE IV - REINSURANCE Years Ended December 31, 1995, 1994 and 1993 (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 - -------------- ------- --------- --------- -------- --------- 1995 $3,678,190 641,351 934,490 3,971,329 23.5% ========= ======= ======= ========= 1994 $3,296,215 594,121 709,987 3,412,081 20.8% ========= ======= ======= ========= 1993 $3,021,203 523,491 680,626 3,178,338 21.4% ========= ======= ======= ========= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1995, 1994 and 1993 (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 - ----------- ---------- --------- --------- ----------- -------- 1995 - ---- Real estate valuation adjustment $20,000 - - - 20,000 ====== ====== ===== ===== ====== Allowance for uncollectible: Agency loans $ 1,664 - - - 1,664 ====== ====== ===== ===== ====== Premiums receivable from: Underwriting activities $20,938 4,192 - 6,212 18,918 ====== ====== ===== ===== ====== Brokerage activities $19,529 967 - 2,978 17,518 ====== ====== ===== ===== ====== Reinsurance $25,823 - - 4,292 21,531 ====== ====== ===== ===== ====== 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 ====== ====== ===== ===== ====== (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) Amended and Restated Shareholder Protection Rights Agreement***...................................... (9) Voting trust agreements**........................................ (10) Material contracts (a) The Deferred Stock Grant Agreement with Mr. Mark L. Pabst..... (1) (b) The Directors' Charitable Award Program***.................... (c) Compensation Arrangement with Mr. Nicholas M. Brown Jr.***... (d) Relocation Loan Payback Agreement with Mr. James F. Duffy***.. (e) Pension Service Agreement with Mr. Andrew I. Douglass***...... (f) 1994 Stock Incentive Plan***.................................. (g) 1994 Annual Incentive Plan***................................. (h) Long-Term Incentive Plan***................................... (i) Non-Employee Director Stock Retainer Plan***.................. (j) Outside Directors' Retirement Plan***......................... (k) Amended 1988 Stock Option Plan***............................. (l) Restricted Stock Award Plan***................................ (m) Benefit Equalization Plan***.................................. (n) Special Severance Policy***................................... (o) Deferred Management Incentive Awards Agreement - Prime Rate***............................................... (p) Deferred Management Incentive Awards Agreement - Phantom Stock***............................................ (q) Directors' Deferred Compensation Agreement - Prime Rate***............................................... (r) Directors' Deferred Compensation Agreement - Phantom Stock***............................................ (s) Alternative Long-Term Incentive Plan***....................... (t) Annual Incentive Plan***...................................... (u) Executive Post-Retirement Life Insurance Plan***.............. (v) 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 with the copies of this report that are filed with the Securities and Exchange Commission. However, copies of the exhibits may be obtained from The St. Paul for a reasonable fee by writing to the Corporate Secretary, The St. Paul Companies, Inc., 385 Washington Street, St. Paul, Minnesota 55102. ** These items are not applicable. *** These items are incorporated by reference as described in Item 14(a)(3) of this report. (1) Filed electronically. P Filed on paper under cover of Form SE pursuant to Rule 311(c) of Regulation S-T. EX-10 2 THE ST. PAUL COMPANIES, INC. DEFERRED STOCK GRANT AGREEMENT Agreement made and entered into this 2nd day of November, 1993, by and between The St. Paul Companies Inc., ("Company") and Mark Pabst ("Employee"). In consideration of the mutual promises herein contained, the parties hereto hereby agree as follows: 1. Grant of Shares Subject to Deferral. The Employee hereby acknowledges that the Company has on this date and on the terms and conditions of this Agreement, agreed to issue to the Employee two thousand (2,000) common shares, without par value, of the Company as presently constituted, on the dates and subject to satisfaction of the conditions set forth herein. The shares which are the subject of this Agreement shall hereinafter be referred to as the "Deferred Shares". In the event that, prior to the issuance of any Deferred Shares which become subject to issuance hereunder, the Company issues any common shares for less than fair value as determined reasonably and in good faith by the Board of Directors (including stock splits and stock dividends but excluding shares issued to employees of the Company or its subsidiaries or pursuant to employee benefit plans), the number of Deferred Shares subject to this Agreement shall, to the extent the consideration is less than fair value, be adjusted (increased or decreased) appropriately at the time they are issued pursuant hereto so as to prevent the equity interest in the Company represented by unissued Deferred Shares from being unfairly diluted. 2. Conditions. The Employee hereby agrees that, until the Deferred Shares are issued, the Employee will not have any rights of a shareholder with respect to the Deferred Shares and will not have the right or power to sell, assign, transfer, pledge, encumber or otherwise alienate, hypothecate or dispose of any Deferred Shares. Employee does not have the right to sell, assign or transfer any interest in this Agreement. 3. Condition Precedent. It is a condition precedent to the issuance of any Deferred Shares that the Employee be an employee of the Company or one of its subsidiaries at the event or on the date set out below for issuance of such Deferred Shares unless his employment shall have terminated involuntarily without cause or that he shall have died or become disabled and while an employee of the Company or one of its subsidiaries. Unless the Employee's employment shall have terminated earlier for reasons other than death or disability or involuntary termination without cause, the Company shall cause the issuance, fully paid and nonassessable, and delivery to the Employee of two thousand Deferred Shares duly registered in the Employee's name upon: 1) his return to the U.S. from expatriate assignment; 2) involuntary termination without cause; 3) his death or disability; or 4) April 5, 1996. 4. Termination of Employment. In the event of termination of the Employee's employment with the Company and all of its subsidiaries prior to the date/event fixed for the issuance of Deferred Shares for any cause whatsoever other than death or disability or involuntary termination without cause, the Employee shall not be entitled to have issued to him any unissued Deferred Shares and the reservation of such Deferred Shares for issuance to the Employee shall terminate without further obligation to the Employee. In the event the termination of Employee's employment with the Company and all of its subsidiaries is involuntary without cause or occurs by reason of his death or disability, the full number of Deferred Shares subject to deferral shall, unless previously issued under paragraph 3 above, be issued immediately to Employee or, if he is deceased, to his spouse, if he is married, otherwise to the representative of his estate. The employment of the Employee shall be considered for purposes of this Agreement to have been terminated because of disability if, while an employee of the Company or any of its subsidiaries, he becomes physically or mentally disabled, whether totally or partially, so that he is prevented from satisfactorily performing his duties as an employee for a period of six consecutive months or for shorter periods aggregating six months in any period of twelve consecutive months, and as a result his employment with the Company and all of its subsidiaries is terminated. An involuntary termination without cause shall mean a Company (or subsidiary) initiated termination based on a business decision and unrelated to the Employee's performance and conduct. In the event that the Employee is not an employee of the Company or one of its subsidiaries on the date he becomes entitled to have Deferred Shares issued to him pursuant hereto, the Company may, in lieu of issuing Deferred Shares, elect to pay to him (or his surviving spouse or the representative of his estate, as the case may be) an amount equal to the market value on the date of the Deferred Shares that would have otherwise been issuable to him. The "market value" of such Deferred Shares shall be the closing price in the principal United States market for common shares of the Company on that day, or if the market is closed on the day, on the next preceding day on which the market was open. 5. Payment in Lieu of Dividends. On the day fixed for the payment of cash dividends on its common shares while Employee is employed by the Company or one of its subsidiaries, or if Employee shall have ceased to be employed by the Company or one of its subsidiaries because of his death or disability or involuntary termination without cause, the Company shall pay to the Employee (or his surviving spouse or the representative of his estate) an amount equal to any dividends which would have been paid on any unissued Deferred Shares if they had been issued and outstanding on the record date of the payment of that dividend. 6. Payment of Taxes. Employee shall properly remit to the Company within two weeks of the date of the issuance of Deferred Shares, or any payment in lieu of dividends with respect to any Deferred Shares, the amount of all tax and other withholding for income, employment or other taxes, which are due in connection with the grant, issuance and delivery of the Deferred Shares or a payment in lieu of dividends. The Company or any of its subsidiaries may, at its option, withhold the amount of any such taxes or other withholding from Deferred Shares otherwise issuable and any cash dividend equivalents otherwise payable hereunder or from other amounts otherwise payable to the Employee. If the condition precedent to the issuance of Deferred Shares is satisfied by reason of the Employee's death or disability and the value of the unissued Deferred Shares would be treated as income to Employee, his spouse or estate, for the year in which the condition is satisfied, the Company shall issue a sufficient number of Deferred Shares based on fair market value to pay any taxes on account of unissued Deferred Shares. 7. Governing Law. This Agreement and the legal relations between the parties as to all matters, including without limitation, matters of validity, interpretation construction, effect, performance and remedies, will be governed by and construed in accordance with the internal laws of the State of Minnesota (without regard to the laws of conflict of any jurisdiction), the place of incorporation and the principal place of business of the Company, and the Employee consents to the jurisdiction of the courts of the State of Minnesota or U.S. Federal courts sitting in Minnesota for all disputes arising under or connected with this Agreement. 8. Compliance with Securities Laws. If in the opinion of counsel of the Employee reasonably acceptable to the Company, it is necessary for compliance with securities laws of the United States and/or any state thereof which are applicable to the proposed sale by the Employee (or his surviving spouse or the representative of his estate) of any Deferred Shares within 3 years after issuance thereof pursuant to this Agreement, on receipt of the Employee's request and a copy of his counsel's opinion, the Company will register the sale of and/or qualify the Deferred Shares under applicable United States federal laws and the laws of the state where the sale is to take place for immediate sale and will maintain that registration and/or qualification in effect for at least 20 business days; provided that the Company need not register fewer than 1000 Deferred Shares at one time and need not register any Deferred Shares more than once; provided further that, on receiving the Employee's request that it register and/or qualify such Deferred Shares, the Company may in turn notify the Employee that it elects instead to purchase the Deferred Shares from the Employee, which purchase shall take place on delivery to the Company of the Deferred Shares duly endorsed for transfer to the Company within seven days after the day on which the Company notifies the Employee of its election at the closing price for common shares of the Company in the principal United States market for common shares of the Company on the day the Deferred Shares are delivered to the Company or if the market is closed on that day, that day on the next preceding day on which the market was open. If the Company unreasonably refuses or fails to register or qualify Deferred Shares pursuant hereto at the Employee's request and does not offer to purchase them by the date scheduled for their delivery to the Company, the Employee may require the Company to purchase the Deferred Shares on the terms and conditions set forth for above for a purchase at the Company's election. In witness whereof the parties have executed this Agreement as of the day and year set forth above. THE ST. PAUL COMPANIES, INC. By /s/ Douglas W. Leatherdale /s/ Mark Pabst --------------------------- ---------- Douglas W. Leatherdale Mark Pabst Chairman & CEO AMENDMENT NO. 1 TO THE ST. PAUL COMPANIES, INC. DEFERRED STOCK GRANT AGREEMENT WITH MARK PABST DATED NOVEMBER 2, 1993 Section 3 of the Deferred Stock Grant Agreement (the "Agreement") made and entered into the 2nd day of November, 1993 by and between The St. Paul Companies, Inc. and Mark Pabst is hereby amended as follows: 3. Condition Precedent. It is a condition precedent to the issuance of any Deferred Shares that the Employee be an employee of the Company or one of its subsidiaries at the event or on the date set out below for issuance of such Deferred Shares unless his employment shall have terminated involuntarily without cause or that he shall have died or become disabled and while an employee of the Company or one of its subsidiaries. Unless the Employee's employment shall have terminated earlier for reasons other than death or disability or involuntary termination without cause, the Company shall cause the issuance, fully paid and nonassessable, and delivery to the Employee of two thousand Deferred Shares duly registered in the Employee's name upon: 1) his return to the U.S. from expatriate assignment; 2) involuntary termination without cause; 3) his death or disability; or 4) March 14, 1997. The capitalized terms used above shall have the same meaning as defined in the Agreement. In witness whereof, the parties have executed this Amendment No. 1 to the Agreement as of the 6th day of March, 1996 and such Amendment shall be effective as of that date. THE ST. PAUL COMPANIES, INC. By /s/ Greg Lee /s/ Mark Pabst ----------------------------- ------------------ Greg Lee Mark Pabst Senior Vice President EX-11 3 EXHIBIT 11 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings per Common Share (In thousands, except per share amounts) Twelve Months Ended December 31, ----------------------------- 1995 1994 1993 ----- ----- ----- INCOME AVAILABLE TO COMMON SHARES: PRIMARY Net income, as reported $521,209 $442,828 $427,609 Adjusted for: Preferred dividends (net of taxes) (8,582) (8,448) (8,395) Premium on preferred shares redeemed (823) - - ------- ------- ------- Net income available to common shares $511,804 $434,380 $419,214 ======= ======= ======= FULLY DILUTED Net income, as reported $521,209 $442,828 $427,609 Adjusted for: Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (3,477) (3,782) (4,080) Dividends on monthly income preferred securities (net of taxes) 5,046 - - Premium on preferred shares redeemed (823) - - ------- ------- ------- Net income available to common shares $521,955 $439,046 $423,529 ======= ======= ======= WEIGHTED AVERAGE SHARES: PRIMARY Common shares 84,385 84,183 84,417 Adjusted for: Outstanding stock options (based on treasury stock method using average market price) 1,014 633 799 ------- ------- ------- Weighted average, as adjusted 85,399 84,816 85,216 ======= ======= ======= FULLY DILUTED Common shares 84,385 84,183 84,417 Adjusted for: Assumed conversion of preferred stock 4,027 4,073 4,106 Assumed conversion of monthly income preferred shares 2,211 - - Outstanding stock options (based on treasury stock method using market price at end of period) 1,220 811 946 ------- ------- ------- Weighted average, as adjusted 91,843 89,067 89,469 ======= ======= ======= EARNINGS PER COMMON SHARE: Primary $5.99 $5.12 $4.92 ======= ======= ======= Fully diluted $5.68 $4.93 $4.73 ======= ======= ======= EX-12 4 EXHIBIT 12 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Ratios (In thousands, except ratios) Twelve Months Ended December 31, --------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- EARNINGS (LOSS): Income (loss) before income taxes $656,233 $563,578 $522,606 $(225,063) $528,061 Add: fixed charges 68,069 62,718 65,633 70,897 65,045 Less: capitalized interest - - - 4,580 3,571 ------- ------- ------- ------- ------- Income (loss), as adjusted $724,302 $626,296 $588,239 $(158,746) $589,535 ======= ======= ======= ======= ======= FIXED CHARGES AND PREFERRED DIVIDENDS: Fixed charges: Interest costs $ 46,822 $ 39,736 $ 40,921 $ 40,288 $ 39,275 Rental expense (1) 21,247 22,982 24,712 30,609 25,770 ------- ------- ------- ------- ------- Total fixed charges 68,069 62,718 65,633 70,897 65,045 Preferred stock dividends 18,120 18,337 18,488 18,395 18,451 Dividend on monthly income preferred securities 7,763 - - - - ------- ------- ------- ------- ------- Total fixed charges and preferred dividends $ 93,952 $ 81,055 $ 84,121 $ 89,292 $ 83,496 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges (2) 10.64 9.99 8.96 - 9.06 ======= ======= ======= ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends (2) 7.71 7.73 6.99 - 7.06 ======= ======= ======= ======= ======= 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 5 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 Companies STRENGTH REFLECTED IN THIRD YEAR OF RECORD EARNINGS 1995 was a solid year on virtually all fronts for The St. Paul. Operating in a property-liability industry where challenging and competitive market conditions persist, we generated consolidated pretax earnings totaling $656 million, our third consecutive year of record results. Double-digit premium growth, reduced expense levels and impressive investment returns combined to produce pretax earnings in excess of $650 million in our underwriting segment. The John Nuveen Company also contributed to our record results, rebounding in 1995 to post its highest earnings ever. However, our insurance brokerage operation, Minet, continued to struggle amid difficult market conditions in that industry. Our balance sheet at the end of the year reflected the successes achieved in 1995 - common shareholders' equity increased by nearly $1 billion since the end of 1994. The following table provides a consolidated overview of our results for the last three years: (In millions) Year ended December 31 1995 1994 1993 ---- ---- ---- Pretax income (loss): Underwriting $ 652 $ 561 $ 507 Insurance brokerage (13) (10) (13) Investment banking-asset management 88 72 83 Parent company and consolidating eliminations (71) (59) (54) ---- ---- ---- Pretax income 656 564 523 Income tax expense 135 121 95 ---- ---- ---- Net income $ 521 $ 443 $ 428 ==== ==== ==== Per share $5.68 $4.93 $4.73 ==== ==== ==== In 1994, consolidated pretax income of $564 million was $41 million higher than in 1993, as our underwriting segment overcame significant catastrophe losses to post pretax earnings that were 11% higher than comparable 1993 earnings. Nuveen's earnings in 1994 declined from 1993 levels due to a difficult interest rate environment and investor uncertainty in the municipal bond market. Our operating earnings, which exclude after-tax realized investment gains, totaled $465 million in 1995, compared with earnings of $414 million in 1994 and $387 million in 1993. Our revenues grew significantly in 1995. The following table provides a look at revenues generated by our industry segments in the last three years: (In millions) Year ended December 31 1995 1994 1993 ---- ---- ---- Revenues: Underwriting $4,814 $4,152 $3,906 Insurance brokerage 366 346 321 Investment banking-asset management 236 220 246 Parent company and consolidating eliminations (6) (17) (13) ----- ----- ----- Total revenues $5,410 $4,701 $4,460 ===== ===== ===== Change from prior year 15% 5% (1)% ----- ----- ----- Revenues in our underwriting segment grew 16% in 1995, primarily due to a significant increase in net earned premiums in our commercial underwriting operations, and at St. Paul Re, chiefly due to business acquired from the Cigna Corporation. Virtually all of our other underwriting business centers also experienced strong growth in premium revenues in 1995. In addition, the favorable conditions that prevailed in the bond, equity and venture capital markets throughout 1995 contributed to consolidated pretax realized investment gains of $85 million for the year, more than double 1994's comparable total. In 1994, consolidated revenues increased 5% 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 the following pages, we take a more detailed look at 1995 results for each of the three industry segments in which we conduct business. We underwrite property-liability insurance through St. Paul Fire and Marine (Fire and Marine), St. Paul Re and St. Paul International Underwriting. We operate in the insurance brokerage industry through the Minet group of companies, based in London. We are involved in the investment banking-asset management industry through our 78% ownership interest in The John Nuveen Company, based in Chicago. (GRAPHIC IMAGE NO. 1-SEE APPENDIX) (GRAPHIC IMAGE NO. 2-SEE APPENDIX) UNDERWRITING SHOWS STRONG GROWTH, PROFITABILITY In a competitive marketplace, the primary challenge facing insurers is to increase premium volume while at the same time maintaining an acceptable combined ratio. We were successful on both counts in 1995. Written premiums in our underwriting segment totaled $4.2 billion in 1995, an increase of $620 million, or 17%, over 1994 premiums of $3.6 billion. Premium growth in Fire and Marine was centered in its Specialized Commercial and Commercial operations. At St. Paul Re, the incremental impact of business acquired from the Cigna Corporation in late 1994 and other new business resulted in a $200 million increase in premium volume over 1994. We also retained more (reinsured less) of the business in many of our underwriting operations in 1995, which was another factor in companywide net premium growth for the year. In 1994, written premiums grew 14% over 1993's total of $3.2 billion, primarily due to the acquisition of Economy in August 1993. St. Paul Re also contributed to premium growth in 1994. The combined ratio of 101.8 was our best in 16 years. Our loss ratio, which measures losses and loss adjustment expenses as a percentage of earned premiums, was level with 1994 at 72.1. The expense ratio, which measures underwriting expenses as a percentage of written premiums, improved one-half point to 29.7 in 1995, dipping below 30 for the first time since 1991. For several years in the early 1990s, significant losses in our reinsurance and commercial operations were mitigated somewhat by underwriting profits in our Medical Services operation. The aggressive steps we have taken to improve reinsurance and commercial results have been successful - we have achieved three consecutive years of improved underwriting results in spite of lower levels of profitability in Medical Services. An improvement in underwriting results and an 8% increase in investment income resulted in pretax income of $652 million for the underwriting segment in 1995. Comparable earnings in 1994 and 1993 were $561 million and $507 million, respectively. Pretax investment income in 1995 totaled $731 million, compared with $675 million in 1994 and $646 million in 1993. Catastrophe losses once again played a role in our underwriting results in 1995. Over the last several years we've increased the amount of property insurance and reinsurance we underwrite while at the same time taking steps to prevent inordinately large losses from individual catastrophic events. The losses we incurred in 1995 were not out of line with what we've come to expect for catastrophe experience - 2.5 to 3 points of earned premiums. The following table isolates the impact of catastrophe losses on our consolidated GAAP underwriting results and combined ratios for the last three years (premiums have not been adjusted), illustrating the improvement in noncatastrophe loss experience over that time span. (Dollars in millions) Year ended December 31 1995 1994 1993 ---- ---- ---- Actual: GAAP underwriting loss $ (103) $ (113) $ (150) Combined ratio 101.8 102.3 104.5 Adjustment: Catastrophe losses $ (124) $ (105) $ (62) Impact on combined ratio 3.1 3.1 1.9 ---- ---- ---- Excluding catastrophe losses: GAAP underwriting result $ 21 $ (8) $ (88) Combined ratio 98.7 99.2 102.6 ==== ==== ==== Spring storms and several hurricanes accounted for the bulk of our catastrophe experience in 1995. In 1994, the California earthquake, winter ice storms and summer hail storms put an end to the temporary lull in significant catastrophe activity in 1993. 1996 Underwriting Outlook - We expect the pace of premium growth to diminish in 1996, as premium rates in virtually all property-liability market sectors, particularly commercial and reinsurance, are trending downward. Our challenge in this competitive pricing environment will be to maintain an acceptable combined ratio while continuing to pursue premium growth. 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 1994 and 1993 information to conform to our 1995 presentation. Following the table, we take a closer look at what happened in 1995 and look ahead to 1996 for each operation. (Dollars in millions) % of 1995 Written Year ended December 31 Premiums 1995 1994 1993 -------- ---- ---- ---- St. Paul Fire and Marine Specialized Commercial Written premiums 30% $ 1,304 $ 1,086 $ 1,000 Underwriting result $ (124) $ (89) $ (116) Combined ratio 109.0 107.1 111.9 Medical Services Written premiums 16% $ 674 $ 690 $ 710 Underwriting result $ 76 $ 118 $ 133 Combined ratio 86.6 80.3 80.0 Personal Insurance Written premiums 16% $ 673 $ 635 $ 376 Underwriting result $ (33) $ (26) $ (16) Combined ratio 104.6 103.9 103.4 Commercial Written premiums 15% $ 618 $ 530 $ 490 Underwriting result $ (3) $ (63) $ (71) Combined ratio 99.6 111.7 114.8 Total St. Paul Fire and Marine Written premiums 77% $ 3,269 $ 2,941 $ 2,576 Underwriting result $ (84) $ (60) $ (70) Combined ratio 101.8 101.0 102.6 St. Paul Re Written premiums 17% $ 713 $ 513 $ 431 Underwriting result $ 4 $ (22) $ (18) Combined ratio 99.1 105.1 103.1 St. Paul International Underwriting Written premiums 6% $ 261 $ 169 $ 172 Underwriting result $ (23) $ (31) $ (62) Combined ratio 109.4 117.6 135.9 Total Underwriting Written premiums 100% $ 4,243 $ 3,623 $ 3,179 Underwriting result $ (103) $ (113) $ (150) Combined ratio: Loss and loss expense ratio 72.1 72.1 72.5 Underwriting expense ratio 29.7 30.2 32.0 ----- ----- ----- Combined ratio 101.8 102.3 104.5 ===== ===== ===== Combined ratio including policyholders' dividends 102.0 102.3 104.7 ===== ===== ===== Figures are on a GAAP basis, except for combined ratios, which are not derived from our GAAP financial statements. Underwriting St. Paul Fire and Marine - ------------------------ Fire and Marine is our U.S. insurance underwriting operation, which underwrites property-liability insurance and provides insurance- related products and services to commercial, professional and individual customers. Fire and Marine utilizes a network of independent insurance agents and brokers to deliver its insurance products. Based on 1994 written premium volume, Fire and Marine ranked as the 16th-largest U.S. property-liability underwriter; its Medical Services operation ranked as the largest medical liability insurance underwriter in the United States. (PHOTO IMAGE NO. 1 - SEE APPENDIX) (PHOTO IMAGE NO. 2 - SEE APPENDIX) St. Paul Fire and Marine Specialized Commercial - ---------------------- Specialized Commercial is composed of Custom Markets, which serves specific commercial customer segments (Financial Services, Ocean Marine, Professional Liability, Public Sector Services, Surplus Lines and Technology), and Major Markets, which provides specialized products and services for targeted industry groups (Construction, Surety and National Accounts). The results of our Special Property operation and our participation in insurance pools are also included here. Premiums - Written premiums in this category totaled $1.3 billion in 1995, a 20% increase over 1994 premium volume of $1.1 billion. Nearly all of Specialized Commercial's operations experienced premium gains in 1995. National Accounts, which offers custom-designed insurance programs for large commercial accounts, posted an $85 million increase in premiums over 1994. Premiums in Construction, which serves medium- and large-size contractors, grew $33 million, or 16%, in 1995. Surplus Lines volume increased 28% in 1995; Ocean Marine premiums grew 26%; Technology volume was up 16%; and Financial Services premiums were 11% higher than 1994. In all of these operations, we judged market and pricing conditions favorable enough in 1995 to underwrite significant amounts of new business and retain a greater portion of that business. We have achieved growth by focusing on specific market niches where our underwriting and product expertise and our financial credibility have been competitive advantages. We did not relax our underwriting standards for the sake of growth, but instead took advantage of the opportunities we saw to expand our involvement in the specialized commercial market in 1995. (PHOTO IMAGE NO. 3 - SEE APPENDIX) (PHOTO IMAGE NO. 4 - SEE APPENDIX) (PHOTO IMAGE NO. 5 - SEE APPENDIX) Underwriting Result - Specialized Commercial's 1995 underwriting loss was $124 million, compared with a loss of $89 million in 1994. An increase in environmental and asbestos reserves for North American business written in the United Kingdom prior to 1980 contributed to the deterioration in underwriting results in 1995. (See the "Environmental and Asbestos Claims" section on page 31 for additional information.) Increased losses from our participation in insurance pools were also a factor in the 1995 underwriting result. These losses overshadowed improved loss experience in several other business sectors, particularly Construction and Technology, where favorable development on prior-year losses resulted in a significant reduction in underwriting losses compared with 1994. Specialized Commercial's expense ratio improved by nearly a point over last year. (PHOTO IMAGE NO. 6 - SEE APPENDIX) 1994 vs. 1993 - In 1994, Specialized Commercial's written premiums grew 9% over 1993. Premium growth resulted primarily from new business and was centered in Ocean Marine, Surplus Lines, Public Sector Services and Special Property. Construction premiums in 1994 were virtually level with 1993, and National Accounts and Technology volume declined from 1993 levels. Specialized Commercial's underwriting loss in 1994 was $27 million less than the comparable 1993 loss. The improvement originated in those market sectors experiencing the greatest premium growth, particularly Special Property and Ocean Marine. 1996 Outlook - We expect the rate of Specialized Commercial's written premium growth to decline in 1996, due to less favorable conditions in several market sectors. With the success of our own Special Property operation, we will reduce our participation in property insurance pools in 1996. We will seek to identify additional niches in the specialized commercial marketplace with the goal of developing new business opportunities. St. Paul Fire and Marine Medical Services - ---------------- Medical Services offers medical professional liability, property and general liability insurance to the health care delivery system. Products include coverages for health care professionals (physicians and surgeons, dental professionals and nurses), individual health care facilities (including hospitals, long-term care facilities and other facilities such as laboratories), and entire systems, such as hospital networks and managed care systems. Specialized claim and loss control services are vital components of Medical Services' insurance products. Medical Services underwrites through three major business lines - Health Care Professionals, Health Care Facilities and Major Accounts. Premiums - Written premiums of $674 million declined 2% from 1994 volume of $690 million. The decline was primarily attributable to continued intense competition in the medical liability marketplace. The potential for significant Medical Services premium growth also continued to be hindered by an industrywide trend toward higher levels of self-insured retentions on large accounts, which reduce our exposure to losses but also result in less written premiums. Underwriting Result - Medical Services' underwriting profit of $76 million in 1995 was $42 million less than the comparable 1994 profit of $118 million. The decline was primarily due to a reduction in the extent of favorable prior-year loss development, particularly in Health Care Professionals. Nonetheless, Medical Services continued its history of strong financial performance - the 1995 result was its seventh consecutive annual underwriting profit, and its combined ratio has been below 100 over that time span. 1994 vs. 1993 - In 1994, the shift toward higher levels of self- insurance was the primary factor in the 3% decline in Medical Services' written premiums from 1993. The underwriting profit in 1994 was $15 million less than the 1993 profit due to reduced levels of favorable prior-year loss development. 1996 Outlook - We expect continued profitability from Medical Services in 1996, but we anticipate that our combined ratio will continue to edge upward as the extent of favorable prior-year loss development continues to diminish. We expect further success from Major Accounts, as the trend toward larger health care delivery systems continues. In the interest of bolstering new business production, we will continue to focus on strengthening our partnership with key medical agents and brokers. Our expansion into four Western states and the acquisition of a Nevada medical liability underwriting company in 1995 should translate into an increase in our Health Care Professionals market share in that region of the country in 1996. St. Paul Fire and Marine Personal Insurance - ------------------ Personal Insurance provides property-liability insurance coverage for individuals. Through a variety of monoline and package policies, individuals can acquire coverages for personal property, such as homes, autos and boats, and for personal liability. Premiums - Premium volume grew to $673 million in 1995, a 6% increase over 1994. Premiums generated by our primary package policy, PAK II, were 10% higher than 1994 due to growth in new business. Underwriting Result - Underwriting results in Personal Insurance deteriorated by $7 million in 1995, primarily due to less favorable loss experience in several monoline coverages. The expense ratio of 30.4 in 1995 was virtually level with 1994. Catastrophe losses in this operation totaled $20 million in 1995, compared with $26 million in 1994. (PHOTO IMAGE NO. 7 - SEE APPENDIX) 1994 vs. 1993 - In 1994, Personal Insurance premiums were 69% higher than 1993. The increase reflected the inclusion of Economy, acquired in August 1993, for a full year. The underwriting loss of $26 million in 1994 was $10 million worse than 1993, primarily the result of an increase in catastrophe losses. 1996 Outlook - In 1996, we will focus on enhancing our personal insurance products to retain our current customers, position ourselves for future growth in this very competitive market and improve underwriting results. The integration of Economy into our operations will be completed in 1996 with the consolidation of business processes and underwriting functions, which will result in increased organizational efficiencies. (GRAPHIC IMAGE NO. 3 - SEE APPENDIX) (PHOTO IMAGE NO. 8 - SEE APPENDIX) St. Paul Fire and Marine Commercial - ---------- Commercial offers property and liability insurance to the small commercial market and the commercial middle market. Business coverages marketed include fire, inland marine, general liability, workers' compensation, commercial auto and umbrella excess liability. Commercial offers tailored coverages and insurance products for specific customer groups, such as museums, golf courses, manufacturers, wholesalers and processors. Coverages marketed to the small commercial customer include our Package Accounts for Commercial Enterprises (PACE) policies for offices, retailers and family restaurants. Premiums - Commercial premium volume in 1995 increased 17% to $618 million. Premium growth occurred across a broad spectrum of commercial coverages and was largely due to new business. We also retained more of our business in 1995, which contributed to net premium gains. Over the last several years, we've completely revamped the product and service delivery systems in Commercial in order to be more responsive to the unique needs of customers in particular market sectors. We believe the strong premium growth and expense savings over the last two years reflect the success of that initiative. Underwriting Result - Commercial's underwriting result improved by $60 million in 1995, driven by improvement in current- and prior-year loss development in our general liability line. In addition, losses from our workers' compensation business have declined due to favorable changes in the regulatory environment in several states. The improvement in 1995 results occurred in spite of a $19 million increase in catastrophe losses compared with 1994. In 1995, the operational efficiencies achieved in this operation were reflected in a more than three point improvement in the expense ratio. Over the last two years, Commercial written premiums have grown at a compound annual rate of 12%, while noncommission underwriting expenses have been flat. (PHOTO IMAGE NO. 9 - SEE APPENDIX) 1994 vs. 1993 - Commercial premiums in 1994 of $530 million were $40 million higher than 1993, primarily the result of new business in many commercial market sectors. Underwriting results improved $8 million compared with 1993, largely due to better results from workers' compensation business and a decline in involuntary costs. 1996 Outlook - With another year of keen competition anticipated from our national and regional company competitors, it will be a challenge to meet our goals of continued premium growth and increased profitability in 1996. We will strive to enhance our competitive advantage through further productivity improvements, selective underwriting and customer focus. We anticipate growth in small business premiums in 1996 as a result of recent enhancements made to our PACE products. (PHOTO IMAGE NO. 10 - SEE APPENDIX) Underwriting St. Paul Re - ----------- St. Paul Re underwrites reinsurance for leading property-liability insurance companies worldwide. St. Paul Re obtains business primarily in the broker or intermediary market, writing both treaty and facultative reinsurance for property, liability, ocean marine and certain specialty classes. Premiums - St. Paul Re's premium volume increased $200 million in 1995. We acquired the opportunity to renew the Cigna Corporation's book of international property-liability reinsurance in late 1994, and that business provided $119 million of new reinsurance premiums for St. Paul Re in 1995. We also took advantage of favorable market and pricing conditions in the property reinsurance marketplace and aggressively sought out new reinsurance business in 1995. Underwriting Result - St. Paul Re recorded a $4 million underwriting profit in 1995, compared with an underwriting loss of $22 million in 1994. A decline in losses on property reinsurance coverages accounted for the majority of 1995's improved results. Catastrophe losses in our reinsurance operation totaled $37 million in 1995, down slightly from last year's losses of $42 million. 1994 vs. 1993 - In 1994, St. Paul Re's premium volume was 19% higher than 1993, due to price increases, higher retentions and new business in several market sectors, particularly nonmarine treaty business. St. Paul Re's underwriting loss of $22 million in 1994 was only slightly worse than the comparable 1993 loss of $18 million, despite a significant increase in catastrophe losses. (PHOTO IMAGE NO. 11 - SEE APPENDIX) 1996 Outlook - We do not expect the favorable market conditions that prevailed throughout much of 1995 to continue into 1996. We anticipate that reinsurance rates will continue to trend downward in 1996, and premium growth from new business will be more difficult to attain. With reasonable levels of catastrophe losses, however, we expect to maintain current levels of profitability. Our challenge will be to maintain adequate pricing levels to mitigate the impact of cyclical swings in the reinsurance market. Underwriting International Underwriting - -------------------------- International includes most primary insurance written outside the United States, mainly in the United Kingdom, Canada, Spain and the Republic of Ireland, and insurance on U.S. risks of foreign insureds (multinational accounts). International offers a range of commercial and personal products and services tailored to meet the unique needs of customers located outside the United States. (PHOTO IMAGE NO. 12 - SEE APPENDIX) Premiums - Written premiums in this operation of $261 million for the year were $92 million higher than 1994 premiums of $169 million. In 1995, we recorded initial premiums of $54 million from our subsidiary Camperdown Corporation, which is our vehicle for writing business through Lloyd's of London. Premium volume from personal insurance coverages written in the United Kingdom increased $27 million in 1995, and premiums written in Canada increased 22% over 1994 levels. Underwriting Result - Improved loss experience on personal and commercial business in the United Kingdom was the primary factor in an $8 million improvement in underwriting results in 1995. 1994 vs. 1993 - In 1994, we undertook steps to realign the mix of our International business, and the result was a slight decline in written premiums from 1993 levels. Improved loss experience in Canada and the United Kingdom resulted in a $31 million improvement in underwriting results compared with 1993. 1996 Outlook - The 1996 outlook for International is characterized by growth and continued improvement in profitability. We are focusing our expansion efforts in several European countries, Latin America, Canada and Africa. We currently envision that our expansion will be facilitated primarily through our own start-up operations, initially in commercial markets. Through Camperdown, we will continue to invest in Lloyd's underwriting syndicates that underwrite global or regional specialty coverages. (PHOTO IMAGE NO. 13 - SEE APPENDIX) Underwriting Insurance Reserves - ------------------ Reserves for losses and loss adjustment expenses are our largest liability. 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). We establish loss reserves on an undiscounted basis after reductions for estimates of salvage and subrogation. 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. Both our case and IBNR reserve estimates reflect such variables as past loss experience, social trends in damage awards, changes in judicial interpretation of legal liability and policy coverages, and inflation. We take into account not only monetary increases in the cost of what we insure, but also changes in societal factors that influence jury verdicts and case law and, in turn, claim costs. Many of the coverages we offer involve claims that may not ultimately be settled for many years after they are incurred, so subjective judgments as to our ultimate exposure to losses are an integral and necessary component of our loss reserving process. We continually review our reserves, using a variety of statistical and actuarial techniques to analyze current claim costs, frequency and severity data, and prevailing economic, social and legal factors. We adjust reserves established in prior years as loss experience develops and new information becomes available. Adjustments to previously estimated reserves are reflected in our financial results in the periods in which they are made. For a reconciliation of beginning and ending consolidated loss and loss adjustment expense reserves for the last three years, see Note 6 to the consolidated financial statements on page 56. As shown in that reconciliation, we have recorded reductions in the loss provision for claims incurred in prior years totaling $248 million, $328 million and $223 million in 1995, 1994 and 1993, respectively. This recurring reduction in previously established reserves runs contrary to the experiences of many of our peers in the property- liability insurance industry. A number of factors have contributed to our divergence from industry experience. First, we believe that generally, our reserving philosophy is more conservative than others in the industry. Second, we underwrite more medical liability coverages than any of our peers, and while the extent of favorable prior-year development on that business has begun to diminish, it has been the primary contributor to this favorable development over the last several years. Finally, we have experienced a comparatively lower amount of adverse development on environmental and asbestos claim losses relative to our peers. (GRAPHIC IMAGE NO. 4 - SEE APPENDIX) (GRAPHIC IMAGE NO. 5 - SEE APPENDIX) Medical Services has accounted for the majority of favorable prior- year loss development in each of the last three years. Our conservative reserving philosophy in this operation is the product of many years of experience underwriting liability coverages in that 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. The medical liability claims environment in recent years has been relatively favorable, but our response in terms of reserving has been cautious and gradual, since our prior experience with these coverages has shown that reserves previously believed to be adequate can rapidly revert to a deficiency due to shifting trends in social, legal and regulatory factors. It should be noted that the pricing of Medical Services' coverages reflects the favorable loss development on previously established reserves. In 1995 and 1994, we also experienced favorable prior-year loss development in several of our Specialized Commercial business sectors, particularly in general liability and workers' compensation. Improvement in claim experience and favorable changes in the legal and regulatory environments in certain geographic locations have caused us to reduce our estimate of the ultimate cost of losses incurred since reserves were initially established. Underwriting Environmental 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 environmental and asbestos claims. In our opinion, court decisions in certain jurisdictions have tended to expand insurance coverage beyond the intent of the original policies. Our ultimate liability for environmental claims is difficult to estimate. Insured parties have submitted claims for losses not covered in the insurance policy, and the ultimate resolution of these claims may be subject to lengthy litigation, making it difficult to estimate our potential liability. In addition, variables, such as the length of time necessary to clean up a polluted site and controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of an environmental claim. Estimating our ultimate liability for asbestos claims is equally difficult. The primary factors influencing our estimate of the total cost of these claims are case law and a history of prior claims, both of which are still developing. (PHOTO IMAGE NO. 14 - SEE APPENDIX) In the third quarter of 1994, we specifically reallocated, for environmental and asbestos claims, a portion of previously established IBNR reserves. Prior to 1994, we made no specific allocation of our IBNR reserves for environmental or asbestos claims, but rather identified reserves only for reported claims (case reserves). We have previously reported on our difficulty in reasonably estimating a range of possible additional North American environmental and asbestos losses on policies written in the United Kingdom prior to 1980 (primarily relating to our involvement with the "Weavers" insurance pool). Prior to 1995, we had no reliable information on which to base such an estimate. In the fourth quarter of 1995, having received new information, we completed an evaluation of potential additional losses arising from those policies and the collectibility of related reinsurance recoverables. Our 1995 evaluation concluded that gross reserves for these North American losses should be stated at $442 million, and net reserves should be stated at $211 million. Prior to this evaluation, reserves for these losses were recorded on a net basis because we had insufficient information on which to base an estimate of gross losses. As a result, in the fourth quarter of 1995, we recorded additional gross reserves of $360 million and specifically reallocated $113 million of previously recorded net reserves for these losses. We allocated the additional net reserves to the insurance pools line of Specialized Commercial. These reserves were reallocated from other business centers in Specialized Commercial ($82 million), Commercial ($17 million) and St. Paul Re ($14 million). The following table represents a reconciliation of total gross and net environmental reserve development for each of the years in the three-year period ended Dec. 31, 1995. Amounts in the "net" column are reduced by reinsurance recoverable. The gross incurred losses are less than the net incurred losses in 1995 due to reinsurance commutation agreements. 1995 1994 1993 ---- ---- ---- (In millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- ENVIRONMENTAL Beginning reserves $275 $200 $105 $ 73 $ 88 $ 62 Incurred losses 59 68 71 56 32 22 Reserve reallocation 233 79 132 95 - - Paid losses (39) (28) (33) (24) (15) (11) --- --- --- --- --- --- Ending reserves $528 $319 $275 $200 $105 $ 73 === === === === === === Many significant environmental claims currently being brought against insurance companies arise out of contamination that occurred 20 to 30 years ago. Since 1970, our Commercial General Liability policy form has included a specific pollution exclusion and, since 1986, an industry standard absolute pollution exclusion for policies underwritten in the United States. The following table represents a reconciliation of total gross and net reserve development for asbestos claims for each of the years in the three-year period ended Dec. 31, 1995. Gross and net incurred losses in 1995 are negative because of favorable loss development on our domestic commercial business. 1995 1994 1993 (In millions) Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- ASBESTOS Beginning reserves $185 $ 145 $ 62 $ 48 $ 70 $ 54 Incurred losses (13) (9) 13 14 17 15 Reserve reallocation 127 34 127 95 - - Paid losses (16) (12) (17) (12) (25) (21) --- --- --- --- --- --- Ending reserves $283 $ 158 $185 $145 $ 62 $ 48 === === === === === === Most of the asbestos claims we have received pertain to policies written prior to 1986. Since 1986, for policies underwritten in the United States, our Commercial General Liability policy has included the industry standard absolute pollution exclusion, which we believe applies to asbestos claims. After our evaluation of additional North American exposures and the resulting reserve reallocation in 1995, based on all information currently available to us, our reserves for environmental and asbestos losses at Dec. 31, 1995, represent our best estimate of our ultimate liability for such losses. However, because of the difficulty inherent in estimating such losses, we cannot give assurances that our ultimate liability for environmental and asbestos losses will, in fact, match our current reserves. We will continue to evaluate new information and developing loss patterns, but we believe any future additional loss provisions for environmental and asbestos claims will not materially impact the results of our operations, liquidity or financial position. Total gross environmental and asbestos reserves at Dec. 31, 1995, of $811 million represented approximately 8% of gross consolidated reserves of $10.2 billion. Underwriting Legal Matters - ------------- In May 1995, a purported class action lawsuit brought in the District Court of Brazoria County, Texas, was served on three of our subsidiaries on behalf of persons who, from 1983 through 1985, purchased interests in certain limited partnerships for which Damson Oil Corporation served as general partner. The complaint seeks unspecified actual damages, treble damages, punitive damages, attorneys' fees, costs, and pre- and post-judgment interest. In April 1995, plaintiffs sent our subsidiaries a letter under the Texas Deceptive Trade Practices Act demanding $400 million of alleged actual damages plus unspecified attorneys' fees in settlement of their claims. The subsidiaries rejected the plantiffs' demand and are vigorously contesting these proceedings. If the final outcome of these proceedings is adverse, it might materially impact the results of our operations and liquidity in the period in which that outcome occurs, but we believe it should not have a material adverse effect on our overall financial position. (GRAPHIC IMAGE NO. 6 - SEE APPENDIX) (GRAPHIC IMAGE NO. 7 - SEE APPENDIX) Underwriting Investments - ----------- Our primary investment objective is to maintain a widely diversified, high-quality investment portfolio structured to maximize investment income while minimizing credit risk. Fixed maturity securities constitute the majority of our underwriting operations' investment portfolio. We also invest in 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. We have had limited involvement with derivative financial instruments, primarily using them for the purposes of hedging against fluctuations in interest rates, equity security values and foreign currency values. 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, provide the funds used to build our investment portfolio. Both sources of funds have been strong for the last several years, and, consequently, our investment portfolio has continued to grow, resulting in an increase in investment income. The underwriting segment's pretax investment income grew 8% in 1995 to $731 million. In 1994, pretax investment income of $675 million was 4% higher than 1993 income of $646 million. From a total return perspective, factoring in pretax investment income, realized investment gains and the increase in unrealized appreciation, our underwriting segment's total investment portfolio produced a pretax return of $1.7 billion in 1995. Falling interest rates and a significant increase in equity security market values were the primary factors pushing the unrealized appreciation on our total portfolio to just under $1 billion at the end of 1995. 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 our major investment classes. (In millions) December 31 1995 1994 1993 ---- ---- ---- Fixed maturities $10,395 $ 8,938 $ 9,249 Equities 659 490 516 Real estate 612 528 489 Venture capital 389 330 298 Short-term investments 318 342 269 Other investments 42 47 47 ------ ------ ------ Total investments $12,415 $10,675 $10,868 ====== ====== ====== Fixed Maturities - Fixed maturities accounted for 84% of the underwriting segment's total investments at the end of 1995. This portfolio is composed of high-quality, intermediate-term taxable U.S. government agency and corporate bonds and tax-exempt U.S. municipal bonds. Taxable bonds account for 56% of total fixed maturities, compared with 54% at the end of 1994. After several years of almost exclusive purchases of taxable securities, we began purchasing tax- exempt bonds in the second half of 1995 due to yield considerations and changes in our consolidated tax position. Approximately 96% 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. We carry the fixed maturities portfolio on our balance sheet at market value. Because that value is based on the relationship between the portfolio's stated yields and prevailing market yields at any given time, interest rate fluctuations can have a swift and significant impact on the carrying value of those securities. At the end of 1995, after a year of declining interest rates, the carrying value included $682 million of pretax unrealized appreciation. Interest rates moved sharply upward in 1994, and the result was $78 million in unrealized depreciation at the end of the year. In 1993, year-end unrealized appreciation totaled $758 million. A look at the amortized cost of those investments at the end of 1995, 1994 and 1993 - $9.7 billion, $9.0 billion and $8.5 billion, respectively - reveals the extent of real growth in this asset class. Fixed maturities produced investment income of $672 million in 1995, a 5% increase over 1994 income of $637 million. This was the first time in several years we've experienced real growth in returns from these investments, which is attributable to the significant growth in invested assets in 1995, the incremental impact of a full year's investment income from the securities purchased in the higher interest rate environment of 1994, and the diminishing phenomenon of older, higher-yielding bond maturities being replaced with securities bearing comparatively lower current yields. Fixed maturity income in 1994 was $19 million higher than 1993, but that was almost entirely due to the incremental impact of the acquisition of Economy. Equities - Our equity holdings account for 5% of the underwriting segment's total investments and consist of a diversified portfolio of common stocks. In 1995, we recorded dividend income of $14 million on this portfolio, compared with $13 million in 1994 and $12 million in 1993. Our portfolio benefited from the significant appreciation in (GRAPHIC IMAGE NO. 8 - SEE APPENDIX) (GRAPHIC IMAGE NO. 9 - SEE APPENDIX) equity values in 1995. We recorded realized gains from sales of equity securities of $43 million for the year, and the portfolio's carrying value at the end of the year included $154 million of unrealized appreciation, compared with appreciation of $29 million at the end of 1994. Equity sales generated realized gains of $20 million and $43 million in 1994 and 1993, respectively. Real Estate - Our real estate holdings (5% of the underwriting segment's total investments) consist of direct and joint venture equity investments, primarily in commercial office and warehouse properties geographically distributed throughout the United States. We do not have a portfolio of real estate mortgage loans. In 1995, we earned pretax investment income of $33 million on our real estate properties, compared with $28 million in 1994. We also generated operational cash flows in excess of $60 million from these properties. Venture Capital - This investment class (3% of the underwriting segment's total investments) consists of private investments spanning a variety of industries, with a particular concentration on information technology, health care and consumer firms. The carrying value of this portfolio at year-end 1995 included $129 million of unrealized appreciation. In 1995, we recorded $38 million of realized gains from sales of venture capital investments, compared with $18 million in 1994 and $24 million in 1993. 1996 Outlook - Barring significant changes in interest rates or operational cash flows, we anticipate investment income will continue to grow in 1996. We believe it is unlikely the pretax total return from our investment portfolio will approach 1995's total of $1.7 billion. The majority of our investment purchases will again consist of high-grade fixed-maturity securities, with additional investments in our other asset classes as market conditions warrant. As our underwriting business continues to expand internationally, we expect to deploy a growing percentage of our funds available for investment in those foreign locations. In 1996, we will explore the possibility of developing an investment portfolio of derivative financial instruments. (PHOTO IMAGE NO. 15 - SEE APPENDIX) INSURANCE BROKERAGE OPERATES IN DIFFICULT MARKET Minet Our insurance brokerage operation, Minet, provides retail and wholesale insurance broking, reinsurance broking and risk advisory services for major corporations and large professional organizations worldwide. Minet, based in London, is a broker of specialized coverages, such as professional indemnity, directors and officers, financial institutions, energy, technology and construction. Minet's U.S.-based Swett & Crawford Group is the nation's largest wholesale brokerage network in terms of total revenues. Minet recorded a pretax loss of $13 million in 1995, compared with a loss of $10 million in 1994. Brokerage fees and commissions totaled $323 million in 1995, an increase of 2% over 1994. Revenue growth for Minet and the insurance brokerage industry as a whole has been plagued for some time by excess capacity in worldwide insurance markets. Operating expenses grew 7% in 1995, primarily due to an increase in personnel costs associated with the development of new specialty broker teams. Minet's 1994 pretax loss represented a slight improvement over the pretax loss of $13 million in 1993. Brokerage fees and commissions grew 7% in 1994. (PHOTO IMAGE NO. 16 - SEE APPENDIX) 1996 Outlook - We expect Minet's results to improve in 1996. We anticipate that we will begin to see the benefits of the substantial re-engineering and reinvestment program that we've executed at Minet over the last several years. Our focus will be on maturing and developing our chosen business lines. INVESTMENT BANKING-ASSET MANAGEMENT PERFORMS WELL The John Nuveen Company Nuveen's core businesses are asset management; developing, marketing and distributing tax-free investment products; and investment banking. Nuveen markets tax-free open-end and closed-end (exchange-traded) managed fund shares and provides investment advice to and administers the business affairs of its managed funds. Nuveen also underwrites and trades municipal bonds and tax-free unit investment trusts (UITs), and provides pricing and surveillance services to its UITs. We held a 78% ownership interest in Nuveen at the end of 1995. (PHOTO IMAGE NO. 17 - SEE APPENDIX) Profits realized on securities held in inventory and successful efforts to contain expenses combined to produce record earnings for The John Nuveen Company in 1995. Nuveen's pretax earnings of $114 million were 20% higher than 1994 earnings of $95 million. Our portion of Nuveen's 1995 pretax earnings was $88 million, compared with $72 million in 1994. Nuveen's revenues increased $16 million in 1995, largely the result of gains recognized on tax-free securities held for future sale to investors. Nuveen realizes profits or losses from the changes in the market value of its UIT inventories and municipal bond inventories held for future UIT products. In the declining interest rate environment of 1995, Nuveen realized $5 million in pretax gains on these inventory securities. In 1994, amid rapidly rising interest rates, Nuveen experienced pretax losses of $8 million on its inventory holdings. This swing in inventory profits, coupled with cost reduction efforts that produced a 3% decline in operating expenses, accounted for the improvement in Nuveen's 1995 results. Investment advisory fees generated from Nuveen's asset management business totaled $183 million in 1995, virtually level with 1994. A decline in incremental revenues from new product sales was offset by increased fee revenues generated by growth in the market value of existing managed assets. Assets under management at the end of 1995 stood at $32.4 billion, compared with $29.7 billion at the end of 1994. Growth in assets under management occurred primarily from appreciation in the value of underlying fund investments, which was fueled by falling interest rates during the year. UIT sales in 1995 of $1.1 billion were down 11% from 1994 sales of $1.2 billion. In 1994, Nuveen's pretax earnings declined 15% from 1993's total of $112 million, as rising interest rates, a significant decline in municipal new issue volume and investor uncertainty combined to produce some of the most difficult market conditions in the municipal bond business in 50 years. (Our portion of Nuveen's earnings in 1993 was $83 million.) Nuveen's revenues declined 10% in 1994, and sales of tax-free, exchange-traded funds in 1994 were $470 million, compared with 1993 sales of $4.0 billion. UIT sales were also down, and assets under management at the end of 1994 declined by $3.0 billion from $32.7 billion a year earlier, due to a decline in the market value of underlying fund investments. CAPITAL BASE APPROACHES $4.7 BILLION, CASH FLOW STRONG The St. Paul Companies CAPITAL RESOURCES Our capital resources consist of shareholders' equity, debt and monthly income preferred securities, which represent funds deployed or available to be deployed to support our business operations. The following table summarizes our capitalization at the end of the last three years: (In millions) December 31 1995 1994 1993 ---- ---- ---- Shareholders' equity: Common shareholders' equity: Common stock and retained earnings $3,165 $2,808 $2,521 Unrealized appreciation of investments 628 14 589 ESOP obligation and unrealized foreign exchange loss (74) (89) (105) ----- ----- ----- Total common shareholders' equity 3,719 2,733 3,005 Preferred shareholders' equity 11 4 (1) ----- ----- ----- Total shareholders' equity 3,730 2,737 3,004 Debt 704 623 640 Company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. 207 - - ----- ----- ----- Total capitalization $4,641 $3,360 $3,644 ===== ===== ===== Ratio of debt to total capitalization 15% 19% 18% ----- ----- ----- Our total capitalization increased by nearly $1.3 billion in 1995, due to growth in the unrealized appreciation of our investment portfolio, record earnings and the issuance of monthly income preferred securities. The declining interest rate environment in 1995 resulted in a $490 million after-tax increase in the unrealized appreciation of our fixed maturity holdings. The after-tax appreciation of our equity and venture capital portfolios increased $124 million in 1995. In 1994, total capitalization declined by nearly $300 million, in spite of strong earnings, due to the decrease in the unrealized appreciation of our fixed maturity holdings. In May 1995, we issued 4,140,000 company-obligated mandatorily redeemable preferred securities, also known as convertible monthly income preferred securities, which generated proceeds of $207 million. We used a portion of the proceeds to pay down some of our commercial paper debt, and we used the remaining funds for general corporate purposes. Debt outstanding at the end of 1995 of $704 million was 13% higher than the year-end 1994 total of $623 million. We issued $193 million of medium-term notes in 1995, and we had just under $400 million of (GRAPHIC IMAGE NO. 1O - SEE APPENDIX) (GRAPHIC IMAGE NO. 11 - SEE APPENDIX) those notes outstanding at the end of the year, bearing a weighted average interest rate of 7%. At the end of 1994, debt was slightly lower than a year earlier, as a decline in short-term borrowings at Nuveen more than offset a $74 million increase in commercial paper outstanding. We may issue additional medium-term notes in 1996. At year-end, we had the ability to issue an additional $82 million of debt under a $300 million shelf registration with the Securities and Exchange Commission (SEC). We expect to register additional debt securities with the SEC in 1996. We paid common shareholder dividends of $133 million in 1995, compared with dividends of $125 million and $117 million in 1994 and 1993, respectively. In February 1996, our board of directors increased our common dividend rate to $1.76 per share, representing the 10th consecutive year of dividend rate increases. Our other major capital expenditures in both 1995 and 1994 consisted of repurchasing shares of our common stock for various employee benefit plans. We repurchased 778,000 shares in 1995 and 860,000 shares in 1994 for total costs of $42 million and $34 million, respectively. These repurchases were funded internally. In 1993, we purchased Economy Fire & Casualty Company 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. We do not anticipate any major capital expenditures in 1996, but if any were to occur, they would involve acquisitions of existing businesses or further stock repurchases. We have no major capital improvements planned for 1996. The St. Paul Companies LIQUIDITY Liquidity refers to our ability to generate sufficient cash flows to meet the short- and long-term cash requirements of our business segments. The underwriting segment's short-term cash needs primarily consist of paying insurance loss and loss adjustment expenses and day- to-day operating expenses. Those needs are met through cash receipts from operations, which consist primarily of insurance premiums collected and investment income. Our investment portfolio is also a source of liquidity, in the form of readily marketable fixed maturities, equity securities 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. Strong cash flows resulted in a net increase in underwriting's invested assets of $796 million (not including increases in market value) in 1995. Minet's primary source of operational cash flows is insurance brokerage fees and commissions. In the last three years, we have supplemented Minet's liquidity requirements through capital contributions totaling $162 million. (GRAPHIC IMAGE NO. 12 - SEE APPENDIX) Nuveen's operational cash flows consist chiefly of asset management fees and product distribution revenues, which are more than adequate to meet Nuveen's liquidity needs. 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 in 1996 and beyond 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 were $918 million in 1995, compared with $899 million in 1994 and $754 million in 1993. The underwriting segment's cash flows in 1995 were virtually level with 1994. Minet's cash flows from operations improved by $13 million, but Nuveen experienced a $20 million decline compared with 1994. In 1994, cash flows in all of our industry segments improved over 1993, led by our underwriting segment, where reduced underwriting losses and increased investment receipts resulted in a $71 million increase in cash flows from operations. 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. The St. Paul Companies NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which is required to be implemented no later than 1996. This statement requires that entities review for impairment long-lived assets and certain intangible assets, such as goodwill, whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Under certain circumstances, an impairment loss equal to the amount by which the carrying amount of an asset exceeds its fair value shall be recognized. We will implement the provisions of this statement in 1996, and we do not anticipate any material impact on our results of operations. In late 1995, the FASB issued SFAS No. 123, "Accounting for Stock- Based Compensation," which is also required to be implemented no later than 1996. This statement establishes a fair value-based method of accounting for stock-based compensation plans, but permits continued application of the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in determining compensation expense related to stock-based compensation. Companies that continue to apply Opinion No. 25 must nonetheless comply with the new disclosure requirements of SFAS No. 123. We will continue to account for stock-based compensation under the provisions of Opinion No. 25 and its related interpretations. We will adopt the new disclosure requirements of SFAS No. 123 in 1996. This adoption will not have any impact on the results of our operations in 1996 or succeeding years. APPENDIX TO ITEM 7 - NARRATIVE DESCRIPTION OF GRAPHIC AND PHOTO 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 1991 through 1995. 1991: $4.23 1992: ($4.04) 1993: $4.28 1994: $4.60 1995: $5.07 CAPTION: "For the third consecutive year, The St. Paul generated record operating earnings." GRAPHIC IMAGE NO. 2 - Bar graph depicting Return on Beginning Equity for the years 1991 through 1995. 1991: 17.0% 1992: -- 1993: 17.2% 1994: 13.5% 1995: 16.7% CAPTION: "We calculate return on equity by dividing operating earnings (less preferred dividends) by common shareholders' equity at the beginning of the year." PHOTO IMAGE NO. 1 - Photo of Mr. Nicholas M. Brown Jr. Executive Vice President, Chief Operating Officer St. Paul Fire and Marine PHOTO IMAGE NO. 2 - Photo of Mr. Michael J. Conroy Executive Vice President, Chief Administrative Officer St. Paul Fire and Marine PHOTO IMAGE NO. 3 - Photo of two individuals at a construction site. CAPTION: Customer: Yonkers Contracting Company, Inc. ------------------------------------------ "A safe work site is in the best interests of all, including the contractor, the insurance agent and the insurance company. George Cesarini (left), St. Paul regional construction loss control manager, brings his own experience as a construction superintendent/engineer to this work site on the Manhattan Bridge in New York City. Yonkers Contracting Company, Inc. is the general contractor for this multiyear, multimillion-dollar rehabilitation project. Working with contractors before projects begin, Cesarini helps develop a safety plan and visits the site regularly through completion. Henry Lombardi (right) is executive vice president of Allied Coverage Corp., Yonkers' independent insurance agency. Allied specializes in insurance for the construction industry. Together, The St. Paul and Allied bring a unique understanding of the loss exposures, regulations and standards impacting contractors to this and other construction projects." PHOTO IMAGE NO. 4 - Photo of Ms. Janet R. Nelson President, Custom Markets Specialized Commercial PHOTO IMAGE NO. 5 - Photo of Ms. Susan J. Albrecht President, Major Markets Specialized Commercial PHOTO IMAGE NO. 6 - Photo of Mr. Joseph B. Nardi President, Medical Services GRAPHIC IMAGE NO. 3 - Bar graph depicting Underwriting Operations Written Premiums for the years 1991 through 1995. (in billions) 1991: $3.2 1992: $3.1 1993: $3.2 1994: $3.6 1995: $4.2 CAPTION: "Strong growth in virtually all of our underwriting operations resulted in a 17% increase in premium volume over 1994." PHOTO IMAGE NO. 7 - Photo of Mr. Stephen J. Klingel President, Personal Insurance PHOTO IMAGE NO. 8 - Photo of two individuals in a hardware store. CAPTION: Customer: Ace Hardware Corporation ---------------------------------- "It's Saturday morning at Terry's Ace Hardware in Hastings, Minn. Families have purchased tools and home fix-up supplies from Ace Hardware stores since 1924. For 10 years, The St. Paul has customized insurance coverages and loss control programs for store owners. Personal property, general liability, automobile, workers' compensation and umbrella excess coverages are offered within The St. Paul's Business Owners Services PACE (Package Accounts for Commercial Enterprises) small-business owner's policy. Approximately 1,400 Ace stores nationwide are covered by The St. Paul. Ace Hardware Corporation is a dealer-owned cooperative composed of more than 5,000 stores in 50 states and 55 countries and territories." PHOTO IMAGE NO. 9 - Photo of Mr. James A. Schulte President, Commercial PHOTO IMAGE NO. 10 - Photo of two individuals in New York City. CAPTION: Customer: Korean Reinsurance Company ------------------------------------ "St. Paul Re's financial strength and consistency in the worldwide reinsurance marketplace continue to appeal to customers. Elizabeth Mui, assistant vice president- international underwriting for St. Paul Re, is pictured with Mr. Ho In Lee, New York representative of the Korean Reinsurance Company. Mr. Lee is Korean Re's liaison to St. Paul Re and other U.S. reinsurers. Mui works with U.S. brokers to provide reinsurance to Korean insurance companies and St. Paul Re's other customers throughout the Asia- Pacific region." PHOTO IMAGE NO. 11 - Photo of Mr. James F. Duffy Chief Executive Officer, St. Paul Re PHOTO IMAGE NO. 12 - Photo of Mr. Mark L. Pabst President, Chief Executive Officer, St. Paul International Underwriting PHOTO IMAGE NO. 13 - Photo two individuals standing in front of a hospital. CAPTION: Customer: The Princess Margaret Hospital ---------------------------------------- "Already the largest insurer of U.K. National Health Service Trusts, The St. Paul has also recognized the growth potential of the U.K. private health care sector. St. Paul International Underwriting has developed products and services to address these customers' emerging insurance requirements. The Princess Margaret Hospital in Windsor, England, is part of General Healthcare Group plc (GHG), one of the largest providers of private health care in the United Kingdom. The St. Paul provides GHG - its largest private health care account in Europe - with medical professional liability, employer's and public liability, material property and business interruption insurance." GRAPHIC IMAGE NO. 4 - Pie chart depicting Underwriting Operations Premium Distribution in 1995. Specialized Commercial 30% Medical Services 16% Personal Insurance 16% Commercial 15% St. Paul Re 17% St. Paul International Underwriting 6% CAPTION: "Our underwriting operations, which produced $4.2 billion in written premiums in 1995, offer a wide range of insurance products and services." GRAPHIC IMAGE NO. 5 - Bar graph depicting Underwriting Operations Combined Ratio for the years 1991 through 1995. 1991 1992 1993 1994 1995 ----- ----- ----- ----- ----- Loss ratio 75.2 85.6 72.5 72.1 72.1 Expense ratio 29.4 32.2 32.0 30.2 29.7 ----- ----- ----- ----- ----- Combined ratio 104.6 117.8 104.5 102.3 101.8 ===== ===== ===== ===== ===== CAPTION: "Our expense ratio dipped below 30 for the first time since 1991, contributing to our best combined ratio in 16 years. The lower the combined ratio, the better the result." PHOTO IMAGE NO. 14 - Photo of two individuals standing in front of a quilt. CAPTION: Customer: Anabaptist and Church of the Brethren Communities ----------------------------------------------------------- "The St. Paul's Multicultural Business Group has begun a unique partnership with the Anabaptist and Brethren Agency Inc. in Akron, Pa. The St. Paul will offer insurance to Anabaptist and Church of the Brethren communities - nearly 700,000 church members in more than 5,000 congregations, with heaviest concentrations in Pennsylvania and the Midwest. A tradition common to these communities is quilting, an art which has been passed on for generations by family members like this grandmother and granddaughter, pictured in Akron. Quilts have also become a source of income, and volunteer-created quilts are auctioned to help support these communities' international relief agencies, enabling them to express their ministry of peace-making. Formed in 1995, the Multicultural Business Group works with many St. Paul underwriting units to serve cultural groups and organizations throughout the United States." GRAPHIC IMAGE NO. 6 - Chart depicting The St. Paul's Claims-paying Ratings as of December 31, 1995. Organization Rating ----------------- ------ A.M. Best A+ Moody's Aa1 Standard & Poor's AAA CAPTION: "Independent rating agencies have long recognized The St. Paul for its claims-paying ability." GRAPHIC IMAGE NO. 7 - Pie chart depicting composition of Underwriting Operations Investment Portfolio. Fixed maturities 84% Equities 5% Real Estate 5% Venture Capital 3% Short-term and Other Investments 3% CAPTION: "Investment income, unrealized appreciation and realized gains from sales of investments combined to produce a total pretax return of $1.7 billion from the portfolio in 1995." GRAPHIC IMAGE NO. 8 - Bar graph depicting Underwriting Operations Net Investment Income for the years 1991 through 1995. (in millions) 1991: $641 1992: $642 1993: $646 1994: $675 1995: $731 CAPTION: "Strong performance by all invested asset classes - bonds, stocks, real estate and venture capital - contributed to investment income growth of 8% in 1995. Investment income is a steady, reliable component of our total earnings." GRAPHIC IMAGE NO. 9 - Table depicting Underwriting Operations Bond Portfolio Ratings. Rating Percent ------------ ------------- AAA 54% AA 24 A 15 BBB 3 Nonrated 4 --- 100 CAPTION: "The carrying value of our underwriting operations' bond portfolio at year-end included $682 million of unrealized appreciation." PHOTO IMAGE NO. 15 - Photo of man holding bottle in brewery. CAPTION: Customer: The South African Breweries Limited --------------------------------------------- "Bottles are prepared for washing before being filled at the Alrode Brewery, south of Johannesburg, South Africa. This state-of-the-art brewery is one of eight in South Africa owned by The South African Breweries Limited (SAB), a consumer-oriented company that is Africa's largest industrial group, with a product portfolio including beer, soft drinks, retailing, hotels and mass market consumer goods manufacturing. Minet, The St. Paul's insurance brokerage operation, has provided insurance broking services through its association with M.I.B Group (Pty) Limited to SAB for over 30 years. Minet is the Lloyd's broker with the largest presence in Africa, including 25 percent ownership of M.I.B, South Africa's leading independent broker. M.I.B provides insurance broking and risk management services to SAB. Minet places a substantial portion of SAB's insurance into the London market." PHOTO IMAGE NO. 16 - Photo of Mr. Peter S. Christie Chairman, Chief Executive Officer, Minet PHOTO IMAGE NO. 17 - Photo of Mr. Richard J. Franke Chairman, Chief Executive Officer, The John Nuveen Company GRAPHIC IMAGE NO. 10 - Bar graph depicting Total Capitalization at the end of the years 1991 through 1995. (in billions) 1991 1992 1993 1994 1995 ----- ----- ----- ----- ----- Debt $0.5 $0.6 $0.6 $0.6 $0.7 Redeemable Preferred Securities and Share- holders' Equity 2.5 2.2 3.0 2.8 3.9 ----- ----- ----- ----- ----- Total $3.0 $2.8 $3.6 $3.4 $4.6 ===== ===== ===== ===== ===== CAPTION: "Record earnings, growth in the unrealized appreciation of our investments and the issuance of new securities pushed our capitalization to $4.6 billion at year-end. Debt remains at a conservative level." GRAPHIC IMAGE NO. 11 - Bar graph depicting Book Value per Common Share at the end of the years 1991 through 1995. 1991: $29.78 1992: $26.18 1993: $35.47 1994: $32.46 1995: $44.29 CAPTION: "The $1 billion increase in common shareholders' equity translated into a 36% increase in book value per common share in 1995." GRAPHIC IMAGE NO. 12 - Bar graph depicting Dividends Paid per Common Share for the years 1991 through 1995. 1991: $1.28 1992: $1.35 1993: $1.39 1994: $1.48 1995: $1.58 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 124 consecutive years and increased dividends in 64 of those years." Item 6. SELECTED FINANCIAL DATA -----------------------
The St. Paul Companies Eleven-year Summary of Selected Financial Data Consolidated (Dollars in thousands) For the year ended December 31 1995 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- From Continuing Operations Revenues $5,409,630 $4,701,285 $4,460,172 $4,498,692 $4,351,700 $4,005,237 Operating earnings (loss) 464,852 413,866 386,628 (333,791) 380,804 385,458 Income (loss) before cumulative effects and extraordinary credit 521,209 442,828 427,609 (232,521) 405,062 391,270 Investment Activity Net investment income 771,612 694,594 661,106 666,374 675,604 669,989 Realized investment gains (losses), net of taxes 56,357 28,962 40,981 36,437 24,258 5,812 Change in unrealized appreciation of investments, net of taxes* 613,843 (574,896) 525,175 (23,815) 55,093 (67,558) Other Selected Financial Data (As of December 31) Total assets 19,656,502 17,495,820 17,149,196 15,392,054 14,744,717 13,907,293 Debt 704,042 622,624 639,729 566,717 486,779 473,829 Common shareholders' equity 3,719,249 2,732,934 3,005,128 2,202,499 2,532,841 2,196,371 Common shares outstanding** 83,975,864 84,202,417 84,714,676 84,118,554 85,042,484 84,468,058 Per Common Share Data** Operating earnings (loss) 5.07 4.60 4.28 (4.04) 4.23 4.09 Income (loss) before cumulative effects and extraordinary credit 5.68 4.93 4.73 (2.84) 4.50 4.16 Book value 44.29 32.46 35.47 26.18 29.78 26.00 Year-end market price 55.63 44.75 44.94 38.50 36.44 31.38 Cash dividends declared 1.60 1.50 1.40 1.36 1.30 1.20 Operating Earnings Return On Beginning Common Equity 16.7% 13.5% 17.2% _ 17.0% 16.1% *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. Underwriting (Dollars in thousands) For the year ended December 31 1995 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- ---- Written premiums $4,243,213 $3,623,026 $3,178,545 $3,142,419 $3,233,729 $3,052,032 Statutory underwriting result (152,703) (143,317) (143,599) (557,463) (170,894) (141,751) GAAP underwriting result (103,045) (113,008) (150,255) (566,886) (163,782) (120,730) Net investment income 731,096 674,818 646,396 642,301 640,856 629,242 Pretax operating earnings (loss) 577,509 524,742 457,752 20,781 451,184 457,161 Pretax income 651,912 560,709 507,181 81,132 486,063 466,731 Statutory combined ratio: Loss and loss expense ratio 72.1 72.1 72.5 85.6 75.2 73.2 Underwriting expense ratio 29.7 30.2 32.0 32.2 29.4 30.0 ----- ----- ----- ----- ----- ----- Combined ratio 101.8 102.3 104.5 117.8 104.6 103.2 Combined ratio including policyholders' dividends 102.0 102.3 104.7 118.2 105.0 104.2
The St. Paul Companies Eleven-year Summary of Selected Financial Data Consolidated (Dollars in thousands) For the year ended December 31 1989 1988 1987 1986 1985 ---- ---- ---- ---- ---- From Continuing Operations Revenues $3,788,648 $3,634,953 $3,358,918 $3,190,754 $2,762,126 Operating earnings (loss) 338,267 349,261 324,315 153,882 42,061 Income (loss) before cumulative effects and extraordinary credit 398,158 352,615 318,826 159,585 90,899 Investment Activity Net investment income 662,211 592,032 534,767 458,710 381,280 Realized investment gains (losses), net of taxes 59,891 3,354 (5,489) 5,703 48,838 Change in unrealized appreciation of investments, net of taxes 60,045 20,428 (19,959) (13,396) 3,317 Other Selected Financial Data (As of December 31) Total assets 12,734,411 11,997,989 9,712,307 8,669,598 7,861,877 Debt 293,802 417,140 96,576 344,299 750,876 Common shareholders' equity 2,349,254 2,015,219 1,711,362 1,440,565 1,012,245 Common shares outstanding** 98,607,762 92,728,168 92,603,714 92,495,700 80,200,900 Per Common Share Data** Operating earnings (loss) 3.45 3.63 3.38 1.67 0.52 Income (loss) before cumulative effects and extraordinary credit 4.06 3.66 3.34 1.77 1.17 Book value 23.82 21.73 18.48 15.57 12.62 Year-end market price 29.57 21.75 23.00 20.13 19.97 Cash dividends declared 1.10 1.00 0.88 0.75 0.75 Operating Earnings Return On Beginning Common Equity 16.8% 20.4% 22.5% 15.2% 4.3% **All years presented reflect the effect of the 2-for-1 stock split executed June 6, 1944. Underwriting (Dollars in thousands) For the year ended December 31 1989 1988 1987 1986 1985 ---- ---- ---- ---- ---- ---- Written premiums $2,807,223 $2,690,536 $2,704,165 $2,556,425 $2,234,910 Statutory underwriting result (207,977) (92,741) (145,061) (265,105) (460,306) GAAP underwriting result (196,378) (90,209) (127,066) (275,184) (408,755) Net investment income 614,119 548,766 498,251 431,594 366,687 Pretax operating earnings (loss) 364,352 420,339 358,493 142,532 (58,387) Pretax income 456,167 424,187 351,358 151,552 31,674 Statutory combined ratio: Loss and loss expense ratio 75.7 73.6 76.2 82.0 91.3 Underwriting expense ratio 30.5 30.0 28.9 27.9 28.5 ----- ----- ----- ----- ----- ----- Combined ratio 106.2 103.6 105.1 109.9 119.8 Combined ratio including policyholders' dividends 106.6 104.0 105.3 110.5 120.8
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- Management's Responsibility for Financial Statements Scope of Responsibility - Management prepares the accompanying financial statements and related information and is responsible for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles. These financial statements include amounts that are based on management's estimates and judgments, particularly our reserves for losses and loss adjustment expenses. We believe that these statements present fairly the company's financial position and results of operations and that the other information contained in the annual report is consistent with the financial statements. Internal Controls - We maintain and rely on systems of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized and recorded. We continually monitor these internal accounting controls, modifying and improving them as business conditions and operations change. Our internal audit department also independently reviews and evaluates these controls. We recognize the inherent limitations in all internal control systems and believe that our systems provide an appropriate balance between the costs and benefits desired. We believe our systems of internal accounting controls provide reasonable assurance that errors or irregularities that would be material to the financial statements are prevented or detected in the normal course of business. Independent Auditors - Our independent auditors, KPMG Peat Marwick LLP, have audited the consolidated financial statements. Their audit was conducted in accordance with generally accepted auditing standards, which includes the consideration of our internal controls to the extent necessary to form an independent opinion on the consolidated financial statements prepared by management. Audit Committee - The audit committee of the board of directors, composed solely of outside directors, oversees management's discharge of its financial reporting responsibilities. The committee meets periodically with management, our internal auditors and representatives of KPMG Peat Marwick LLP to discuss auditing, financial reporting and internal control matters. Both internal audit and KPMG Peat Marwick LLP have access to the audit committee without management's presence. Code of Conduct - We recognize our responsibility for maintaining a strong ethical climate. This responsibility is addressed in the company's written code of conduct. /s/ Douglas W. Leatherdale /s/ Howard E. Dalton ----------------------- --------------------- Douglas W. Leatherdale Howard E. Dalton Chairman, President and Senior Vice President Chief Executive Officer Chief Accounting Officer 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, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 4 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," in 1993. /s/ KPMG Peat Marwick LLP --------------------- KPMG Peat Marwick LLP Minneapolis, Minnesota January 29, 1996 The St.Paul Companies CONSOLIDATED STATEMENTS OF INCOME (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- REVENUES Premiums earned $3,971,329 $3,412,081 $3,178,338 Net investment income 771,612 694,594 661,106 Insurance brokerage fees and commissions 310,512 303,152 283,680 Investment banking-asset management 221,007 211,789 241,730 Realized investment gains 84,572 41,974 58,254 Other 50,598 37,695 37,064 --------- --------- --------- Total revenues 5,409,630 4,701,285 4,460,172 --------- --------- --------- EXPENSES Insurance losses and loss adjustment expenses 2,864,307 2,461,698 2,303,738 Policy acquisition expenses 856,979 753,946 732,137 Operating and administrative 1,032,111 922,063 901,691 --------- --------- --------- Total expenses 4,753,397 4,137,707 3,937,566 --------- --------- --------- Income before income taxes 656,233 563,578 522,606 Income tax expense (benefit): Federal current 180,743 151,347 148,508 Other (45,719) (30,597) (53,511) --------- --------- --------- Total income tax expense 135,024 120,750 94,997 --------- --------- --------- Net Income $ 521,209 $ 442,828 $ 427,609 ========= ========= ========= EARNINGS PER COMMON SHARE Primary $ 5.99 $ 5.12 $ 4.92 --------- --------- --------- Fully Diluted $ 5.68 $ 4.93 $ 4.73 --------- --------- --------- See notes to consolidated financial statements. The St. Paul Companies CONSOLIDATED BALANCE SHEETS In thousands) December 31 1995 1994 ---- ---- ASSETS Investments: Fixed maturities $10,372,890 $ 8,828,684 Equities 711,471 531,042 Real estate 611,656 528,144 Venture capital 388,599 330,032 Other investments 42,776 46,539 Short-term investments 939,528 898,081 ---------- ---------- Total investments 13,066,920 11,162,522 Cash 34,440 46,664 Investment banking inventory securities 249,662 148,031 Reinsurance recoverables: Unpaid losses 1,853,817 1,533,250 Paid losses 74,568 88,900 Receivables: Underwriting premiums 1,316,560 1,107,788 Insurance brokerage activities 652,801 891,823 Interest and dividends 197,740 182,938 Other 81,885 88,657 Deferred policy acquisition expenses 372,174 324,358 Ceded unearned premiums 226,943 255,687 Deferred income taxes 528,805 790,508 Office properties and equipment 478,286 477,570 Goodwill 314,457 279,308 Other assets 207,444 117,816 ---------- ---------- Total Assets $19,656,502 $17,495,820 ========== ========== LIABILITIES Insurance reserves: Losses and loss adjustment expenses $10,247,070 $ 9,423,429 Unearned premiums 2,361,028 2,109,170 ---------- ---------- Total insurance reserves 12,608,098 11,532,599 Debt 704,042 622,624 Payables: Insurance brokerage activities 979,964 1,191,089 Reinsurance premiums 179,249 155,833 Income taxes 139,058 183,659 Accrued expenses and other 618,903 600,211 Other liabilities 490,067 472,336 ---------- ---------- Total Liabilities 15,719,381 14,758,351 Company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. 207,000 - ---------- ---------- SHAREHOLDERS' EQUITY Preferred: Convertible preferred stock 144,165 146,102 Guaranteed obligation - PSOP (133,293) (141,567) ---------- ---------- Total Preferred Shareholders' Equity 10,872 4,535 ---------- ---------- Common: Common stock 460,458 445,222 Retained earnings 2,704,075 2,362,286 Guaranteed obligation - ESOP (32,294) (44,410) Unrealized appreciation of investments 627,791 13,948 Unrealized loss on foreign currency translation (40,781) (44,112) ---------- ---------- Total Common Shareholders' Equity 3,719,249 2,732,934 ---------- ---------- Total Shareholders' Equity 3,730,121 2,737,469 ---------- ---------- Total Liabilities, Redeemable Preferred Securities and Shareholders' Equity $19,656,502 $17,495,820 ========== ========== See notes to consolidated financial statements. The St. Paul Companies CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- PREFERRED SHAREHOLDERS' EQUITY Series B convertible preferred stock: Beginning of year $ 146,102 $ 147,608 $ 149,161 Redemptions during the year (1,937) (1,506) (1,553) --------- --------- --------- End of year 144,165 146,102 147,608 --------- --------- --------- GUARANTEED OBLIGATION - PSOP: Beginning of year (141,567) (148,929) (149,734) Principal payments 8,274 7,362 805 --------- --------- --------- End of year (133,293) (141,567) (148,929) --------- --------- --------- Total Preferred Shareholders' Equity 10,872 4,535 (1,321) --------- --------- --------- COMMON SHAREHOLDERS' EQUITY Common stock: Beginning of year 445,222 438,559 422,249 Stock issued under stock option and other incentive plans 19,481 11,130 16,334 Reacquired common shares (4,245) (4,467) (24) --------- --------- --------- End of year 460,458 445,222 438,559 --------- --------- --------- Retained earnings: Beginning of year 2,362,286 2,082,832 1,781,113 Net income 521,209 442,828 427,609 Dividends declared on common stock, $1.60 per share in 1995 ($1.50 in 1994 and $1.40 in 1993) (133,956) (124,921) (116,962) Dividends declared on preferred stock, net of taxes (8,582) (8,448) (8,395) Reacquired common shares (38,291) (30,005) (533) Tax benefit on employee stock options and awards 1,409 - - --------- --------- --------- End of year 2,704,075 2,362,286 2,082,832 --------- --------- --------- GUARANTEED OBLIGATION - ESOP: Beginning of year (44,410) (56,005) (67,452) Principal payments 12,116 11,595 11,447 --------- --------- --------- End of year (32,294) (44,410) (56,005) --------- --------- --------- UNREALIZED APPRECIATION OF INVESTMENTS, NET OF TAXES: Beginning of year 13,948 588,844 63,669 Change for the year 613,843 (574,896) 23,193 Change due to adoption of SFAS No. 115 - - 501,982 --------- --------- --------- End of year 627,791 13,948 588,844 --------- --------- --------- UNREALIZED GAIN (LOSS) ON FOREIGN CURRENCY TRANSLATION, NET OF TAXES: Beginning of year (44,112) (49,102) 2,920 Change for the year 3,331 4,990 (52,022) --------- --------- --------- End of year (40,781) (44,112) (49,102) --------- --------- --------- Total Common Shareholders' Equity 3,719,249 2,732,934 3,005,128 --------- --------- --------- Total Shareholders' Equity $3,730,121 $2,737,469 $3,003,807 ========= ========= ========= See notes to consolidated financial statements. The St. Paul Companies CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- OPERATING ACTIVITIES Underwriting: Net income $ 533,776 $ 452,756 $ 423,109 Adjustments: Change in net insurance reserves 753,543 445,791 204,423 Change in underwriting premiums receivable (217,877) (89,147) 89,441 Deferred tax benefit (55,192) (36,085) (48,976) Realized investment gains (74,403) (35,967) (49,429) Other (61,509) 146,886 194,990 ------- ------- ------- Total underwriting 878,338 884,234 813,558 ------- ------- ------- Insurance brokerage: Net loss (21,400) (19,571) (24,710) Adjustments: Change in premium balances (3,371) 4,303 (20,718) Change in accounts payable and accrued expenses 4,185 (19,334) (8,985) Depreciation and goodwill amortization 27,414 23,948 20,233 Other 4,770 9,749 (2,833) ------- ------- ------- Total insurance brokerage 11,598 (905) (37,013) ------- ------- ------- Investment banking-asset management: Net income 54,746 44,196 52,103 Adjustments: Change in inventory securities (103,016) 156,823 (79,472) Change in short-term borrowings 25,000 (80,383) 60,383 Change in short-term investments 45,659 (94,968) (17,048) Change in open security transactions (10,138) 10,879 (3,143) Other 25,642 21,051 8,872 ------- ------- ------- Total investment banking- asset management 37,893 57,598 21,695 ------- ------- ------- Parent company and consolidating eliminations: Net loss (45,913) (34,553) (22,893) Realized investment gains (10,169) (6,007) (8,825) Other adjustments 45,997 (1,152) (12,672) ------- ------- ------- Total parent company and consolidating eliminations (10,085) (41,712) (44,390) ------- ------- ------- Net Cash Provided by Operating Activities 917,744 899,215 753,850 ------- ------- ------- INVESTING ACTIVITIES Purchases of investments (2,857,778) (2,087,104) (2,484,731) Proceeds from sales and maturities of investments 1,991,357 1,465,668 1,954,206 Change in short-term investments (56,491) (40,922) 151,213 Change in open security transactions 6,516 (6,156) 56,463 Net purchases of office properties and equipment (54,872) (66,564) (47,210) Purchase of Economy Fire & Casualty, net of cash acquired - - (274,561) Acquisition of brokerage companies, net of cash acquired (51,693) (18,721) (48,862) Other 9,611 (1,809) 19,996 ------- ------- ------- Net Cash Used in Investing Activities (1,013,350) (755,608) (673,486) ------- ------- ------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (144,662) (136,062) (129,218) Proceeds from issuance of company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. 207,000 - - Proceeds from issuance of debt 193,002 94,194 77,243 Repayment of debt (125,446) (20,350) (51,735) Repurchase of common shares (41,714) (34,150) (207) Other (4,938) (26,855) 23,929 ------- ------- ------- Net Cash Provided by (Used in) Financing Activities 83,242 (123,223) (79,988) ------- ------- ------- Effect of exchange rate changes on cash 140 860 (1,604) ------- ------- ------- Increase (Decrease) in Cash (12,224) 21,244 (1,228) ------- ------- ------- Cash at beginning of year 46,664 25,420 26,648 ------- ------- ------- Cash at End of Year $ 34,440 $ 46,664 $ 25,420 ======= ======= ======= See 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. Accounting Principles - We prepare our financial statements in accordance with generally accepted accounting principles (GAAP). We follow the accounting standards established by the Financial Accounting Standards Board and the American Institute of Certified Public Accountants. Consolidation - We combine our financial statements with those of our subsidiaries and present them on a consolidated basis. The consolidated financial statements do not include the results of material transactions between us and our subsidiaries or among our subsidiaries. We record the results of our insurance brokerage and foreign underwriting operations on a one-quarter lag. Reclassifications - We reclassified some figures in our 1994 and 1993 financial statements and notes to conform with the 1995 presentation. These reclassifications had no effect on net income, or common or preferred shareholders' equity, as previously reported for those years. Stock Split - In 1994, we executed a 2-for-1 stock split. All references in these financial statements and related notes to per- share amounts and to the number of shares of common stock reflect the effect of this stock split on all periods presented. ACCOUNTING FOR OUR UNDERWRITING OPERATIONS Premiums Earned - Premiums on insurance policies are our largest source of revenue. We reflect the premiums as revenues evenly over the policy terms. The premiums that we have not yet recognized as revenues are recorded on our balance sheet 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 income 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 1995 and prior years. These reserves reflect our estimates of the total cost of claims that were reported to us, but not yet paid, and the cost of claims incurred but not yet reported to us (IBNR). Our estimates consider such variables as past loss experience, current claim trends and the prevailing social, economic and legal environments. We reduce our loss reserves for estimated amounts of salvage and subrogation. Estimated amounts recoverable from reinsurers on unpaid losses and loss expenses are reflected as assets. We believe that the reserves we have established are adequate to cover the ultimate costs of losses and loss adjustment expenses. Final claim payments, however, may differ from the established reserves, particularly when these payments may not occur for several years. Any adjustments we make to reserves are reflected in the results for the year during which the adjustments are made. Policy Acquisition Expenses - The costs directly related to writing an insurance policy are referred to as policy acquisition expenses and consist of commissions, state premium taxes and other direct underwriting expenses. Although these expenses arise when we issue a policy, we defer and amortize them over the same period as the corresponding premiums are recorded as revenues. If deferred policy acquisition expenses were to exceed the sum of unearned premiums and related anticipated investment income less expected losses and loss adjustment expenses, we would immediately expense the excess costs. 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 $380.3 million and $385.0 million at the end of 1995 and 1994, respectively. ACCOUNTING FOR OUR INVESTMENT BANKING-ASSET MANAGEMENT OPERATIONS The John Nuveen Company comprises our investment banking-asset management segment. We held a 78% interest in Nuveen on Dec. 31, 1995. Nuveen markets tax-free 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-free 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. We consolidate 100% of Nuveen's assets, liabilities, revenues and expenses, with reductions on the balance sheet and statement of income for the minority shareholders' proportionate interest in Nuveen's equity and earnings. Minority interest of $71.4 million and $66.5 million was recorded in other liabilities at the end of 1995 and 1994, respectively. ACCOUNTING FOR OUR INVESTMENTS Fixed Maturities - Our entire fixed maturity investment portfolio is classified as "available-for-sale," as defined by Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, we carry that portfolio on our balance sheet at estimated market value. Equities - Our equity securities are also classified as "available-for- sale" and carried at estimated market value. Real Estate - Our real estate investments primarily consist of commercial buildings which we own directly or which we have a partial interest in through joint ventures with other investors. For direct investments, we carry land at cost and buildings at cost less accumulated depreciation and valuation adjustments. We depreciate real estate assets on a straight-line basis over 40 years. Tenant improvements are amortized over the term of the corresponding lease. The accumulated depreciation of our real estate assets was $68.8 million and $60.2 million at Dec. 31, 1995 and 1994, respectively. We use the "equity method" of accounting for our joint ventures, which means we carry these investments at cost, adjusted for our share of earnings or losses, and reduced by cash distributions from the joint ventures and valuation adjustments. Venture Capital - We invest in securities of small- to medium-sized companies. These investments are in the form of limited partnerships or direct ownership. The limited partnerships are carried at our equity in the estimated market value of the investments held by these limited partnerships. The securities we own directly are carried at estimated market value. Realized Investment Gains and Losses - We record the cost of each individual investment so that when we sell any of them, we are able to identify and record the gain or loss on that transaction in the "Revenues" section of our statement of income. We continually monitor the difference between the cost and estimated market value of our investments. If any of our investments experience a decline in value that is other than temporary, we establish a valuation allowance for the decline and record a realized loss on the statement of income. Unrealized Appreciation and Depreciation of Investments - For investments we carry at estimated market value, we record the difference between cost and market, net of deferred taxes, as a part of common shareholders' equity. This difference is referred to as unrealized appreciation or depreciation of investments. GOODWILL Goodwill is the excess of the amount we paid to acquire a company over the fair value of its net assets, reduced by amortization and any subsequent valuation adjustments. We amortize goodwill over periods of up to 15 years. The accumulated amortization of goodwill was $138.4 million and $102.9 million at Dec. 31, 1995 and 1994, respectively. We monitor the value of our goodwill based on our estimates of discounted future earnings. If we determine that our goodwill has been impaired, we reduce its carrying value with a corresponding charge to expenses. 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 $277.8 million and $243.9 million at the end of 1995 and 1994, respectively. FOREIGN CURRENCY TRANSLATION We assign functional currencies to our foreign operations, which are generally the currencies of the local operating environment. Foreign currency amounts are converted to the functional currency, and the resulting foreign exchange gains or losses are reflected in the statement of income. Functional currency amounts are then translated into U.S. dollars. The unrealized gain or loss from this translation is recorded as a part of common shareholders' equity. Both the conversion and translation are calculated using current exchange rates for the balance sheets and average exchange rates for the statements of income. SUPPLEMENTAL CASH FLOW INFORMATION Interest and Income Taxes Paid - We paid interest of $44.9 million in 1995, $40.0 million in 1994 and $41.2 million in 1993. We paid federal income taxes of $184.4 million in 1995, $122.7 million in 1994 and $121.8 million in 1993. Federal tax payments in 1995 include $45 million in taxes and interest for a partial settlement with the IRS regarding certain issues raised in its audit of our consolidated tax returns for the years 1991 through 1994. 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 per common share (EPS) amounts were calculated by dividing net income, as adjusted, by the adjusted average common shares outstanding. (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- PRIMARY Net income, as reported $521,209 $442,828 $427,609 PSOP preferred dividends declared (net of taxes) (8,582) (8,448) (8,395) Premium on preferred shares redeemed (823) - - ------- ------- ------- Net income, as adjusted $511,804 $434,380 $419,214 ======= ======= ======= FULLY DILUTED Net income, as reported $521,209 $442,828 $427,609 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (3,477) (3,782) (4,080) Dividends on monthly income preferred securities (net of taxes) 5,046 - - Premium on preferred shares redeemed (823) - - ------- ------- ------- Net income, as adjusted $521,955 $439,046 $423,529 ======= ======= ======= ADJUSTED AVERAGE COMMON SHARES OUTSTANDING Primary 85,399 84,816 85,216 Fully diluted 91,843 89,067 89,469 Adjusted average common shares outstanding include the common and common equivalent shares outstanding for the year and, for fully diluted EPS, common shares that would be issuable upon conversion of PSOP preferred stock and the monthly income preferred securities. 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. Gross Gross Estimated (In thousands) Unrealized Unrealized Market December 31, 1995 Cost Appreciation Depreciation Value ---- ----------- ----------- -------- Fixed maturities: U.S. government $2,087,057 $120,093 $ (1,153) $ 2,205,997 States and political subdivisions 4,295,822 370,910 (839) 4,665,893 Foreign governments 893,677 42,605 (6,288) 929,994 Corporate securities 1,348,506 85,458 (4,574) 1,429,390 Mortgage-backed securities 1,089,891 53,283 (1,558) 1,141,616 ---------- ------- ------- ---------- Total fixed maturities 9,714,953 672,349 (14,412) 10,372,890 Equities 551,031 166,653 (6,213) 711,471 Venture capital 259,324 141,969 (12,694) 388,599 ---------- ------- ------- ---------- Total $10,525,308 $980,971 $(33,319) $11,472,960 ========== ======= ======= ========== Gross Gross Estimated (In thousands) Unrealized Unrealized Market December 31, 1994 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 ========= ======= ======== ========= Statutory Deposits - At Dec. 31, 1995, our underwriting operations had investments in fixed maturities with an estimated market value of $434.1 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. (In thousands) Amortized Estimated December 31, 1995 Cost Market Value --------- --------- One year or less $ 72,833 $ 73,139 Over one year through five years 1,372,589 1,435,758 Over five years through ten years 3,658,385 3,933,742 Over 10 years 3,521,255 3,788,635 Mortgage-backed securities with various maturities 1,089,891 1,141,616 --------- --------- Total $9,714,953 $10,372,890 ========= ========= Note 4 INVESTMENT TRANSACTIONS Investment Activity - Here is a summary of our investment purchases, sales and maturities. (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- PURCHASES Fixed maturities $1,829,942 $1,235,653 $1,816,965 Equities 837,288 700,568 465,056 Real estate 116,925 74,420 110,371 Venture capital 66,247 66,622 79,410 Other investments 7,376 9,841 12,929 --------- --------- --------- Total purchases 2,857,778 2,087,104 2,484,731 --------- --------- --------- PROCEEDS FROM SALES AND MATURITIES Fixed maturities: Sales 326,382 181,126 169,330 Maturities and redemptions 709,104 533,292 1,236,912 Equities 836,683 707,608 437,610 Real estate 14,428 6,718 40,764 Venture capital 87,512 28,817 59,124 Other investments 17,248 8,107 10,466 --------- --------- --------- Total sales and maturities 1,991,357 1,465,668 1,954,206 --------- --------- --------- Net purchases $ 866,421 $ 621,436 $ 530,525 ========= ========= ========= Net Investment Income - Here is a summary of our net investment income. (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- Fixed maturities $665,364 $626,263 $607,067 Equities 14,644 12,984 12,035 Real estate 32,830 28,049 19,288 Venture capital (171) (1,849) (2,012) Other investments (965) 346 698 Short-term investments 69,542 45,893 37,952 --------- --------- --------- Total 781,244 711,686 675,028 --------- --------- --------- Investment expenses (9,632) (17,092) (13,922) --------- --------- --------- Net investment income $771,612 $694,594 $661,106 ========= ========= ========= 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. (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- PRETAX REALIZED INVESTMENT GAINS (LOSSES) Fixed maturities: Gross realized gains $ 3,091 $ 5,232 $ 8,916 Gross realized losses (5,728) (1,849) (3,585) --------- --------- --------- Total fixed maturities (2,637) 3,383 5,331 --------- --------- --------- Equities: Gross realized gains 78,772 59,548 62,310 Gross realized losses (29,548) (38,626) (18,782) --------- --------- --------- Total equities 49,224 20,922 43,528 --------- --------- --------- Real estate 1,831 (10,458) (10,188) Venture capital 38,175 17,616 24,046 Other investments (2,021) 10,511 (4,463) --------- --------- --------- Total pretax realized investment gains $84,572 $41,974 $58,254 ========= ========= ========= CHANGE IN UNREALIZED APPRECIATION Fixed maturities $742,626 $(847,554) $771,598 Equities 130,247 (30,106) (23,993) Venture capital 59,880 (4,064) 52,550 --------- --------- --------- Total change in pretax unrealized appreciation 932,753 (881,724) 800,155 Increase (decrease) in deferred tax asset (318,910) 306,828 (274,980) --------- --------- --------- Total change in unrealized appreciation, net of taxes $ 613,843 $(574,896) $ 525,175 ========= ========= ========= We implemented SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as of Dec. 31, 1993. Prior to our adoption of SFAS No. 115, 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 year ended Dec. 31, 1993, was $257.8 million. Note 5 DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are defined as futures, forward, swap or option contracts and other financial instruments with similar characteristics. We have had limited involvement with these instruments primarily for purposes of hedging. 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, 1995 and 1994, we had investments in perpetual floating rate notes totaling $35 million and $45 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, 1995 and 1994, we recorded an asset of $941,000 and a liability of $1.7 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, 1995 and 1994, the estimated market value of this swap agreement was an asset of $200,000 and $5.8 million, respectively. 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, 1995 and 1994, our open position on foreign exchange forward contracts totaled $26.5 million and $26.4 million, respectively. The unrealized loss on these contracts was $1.1 million and $412,000 at the end of 1995 and 1994, 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. We recorded the market value of these options on our balance sheet. At Dec. 31, 1994, we recorded an unrealized loss of $276,000 associated with these options. We had no such options outstanding at the end of 1995. Note 6 INSURANCE RESERVES Reserves for Losses and Loss Adjustment Expenses - The following table represents a reconciliation of beginning and ending consolidated insurance loss and loss adjustment expense (LAE) reserves for each of the last three years. (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- Loss and LAE reserves at beginning of year, as reported $9,423,429 $9,185,191 $8,812,559 Less reinsurance recoverables on unpaid losses at beginning of year (1,533,250) (1,545,026) (1,605,824) --------- --------- --------- Net loss and LAE reserves at beginning of year 7,890,179 7,640,165 7,206,735 Reserves of acquired companies 12,329 - 279,600 Provision for losses and LAE for claims incurred: Current year 3,112,193 2,790,164 2,526,675 Prior years (247,886) (328,466) (222,937) --------- --------- --------- Total incurred 2,864,307 2,461,698 2,303,738 --------- --------- --------- Losses and LAE payments for claims incurred: Current year (783,633) (667,255) (579,779) Prior years (1,590,701) (1,566,083) (1,546,737) --------- --------- --------- Total paid (2,374,334) (2,233,338) (2,126,516) --------- --------- --------- Unrealized foreign exchange loss (gain) 772 21,654 (23,392) --------- --------- --------- Net loss and LAE reserves at end of year 8,393,253 7,890,179 7,640,165 Plus reinsurance recoverables on unpaid losses at end of year 1,853,817 1,533,250 1,545,026 --------- --------- --------- Loss and LAE reserves at end of year, as reported $10,247,070 $ 9,423,429 $ 9,185,191 ========= ========= ========= Environmental and Asbestos Reserves - Our underwriting operations continue to receive claims under policies written many years ago alleging injuries from environmental pollution or alleging covered property damages for the cost to clean up polluted sites. We have also received asbestos claims arising out of product liability coverages under general liability policies. The following table summarizes the environmental and asbestos reserves reflected in our consolidated balance sheet at Dec. 31, 1995 and 1994. Amounts in the "net" column are reduced by reinsurance. (In thousands) 1995 1994 December 31 Gross Net Gross Net ----- --- ----- --- Environmental $528,000 $319,000 $275,000 $200,000 Asbestos 283,000 158,000 185,000 145,000 ------- ------- ------- ------- Total environmental and asbestos reserves $811,000 $477,000 $460,000 $345,000 ======= ======= ======= ======= Note 7 INCOME TAXES Method for Computing Income Tax Expense - We are required to compute our income tax expense under the liability method. This means deferred income taxes reflect the estimated future tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the carrying value of assets and liabilities for income tax purposes. A current tax liability is recognized for the estimated taxes payable for the current year. Income Tax Expense (Benefit) - Income tax expense or benefits are recorded in various places in our financial statements. A summary of the amounts and places follows: (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- STATEMENTS OF INCOME Expense related to income $135,024 $ 120,750 $ 94,997 --------- --------- --------- COMMON SHAREHOLDERS' EQUITY Benefit for deductions relating to: Dividends on unallocated ESOP and PSOP shares (4,094) (4,578) (4,873) Employee stock options and awards (1,409) - - Deferred expense (benefit) for the change in unrealized appreciation of investments and unrealized foreign exchange 319,195 (308,073) 274,126 --------- --------- --------- Total income tax expense (benefit) included in common shareholders' equity 313,692 (312,651) 269,253 --------- --------- --------- Total income tax expense (benefit) included in financial statements $448,716 $(191,901) $364,250 ========= ========= ========= Components of Income Tax Expense - The components of income tax expense are as follows: (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- Federal current tax expense $180,743 $ 151,347 $148,508 Federal deferred tax benefit (60,036) (47,933) (54,935) Impact of tax rate change - - (15,383) --------- --------- --------- Total federal income tax expense 120,707 103,414 78,190 Foreign income taxes 8,488 11,788 9,692 State income taxes 5,829 5,548 7,115 --------- --------- --------- Total income tax expense $135,024 $ 120,750 $ 94,997 ========= ========= ========= Our Tax Rate is Different from the Statutory Rate - Our total federal income tax expense differs from the statutory rate of 35% of pretax income as shown in the following table: (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- Federal income tax expense at statutory rates $229,682 $197,252 $182,912 Increase (decrease) attributable to: Nontaxable investment income (83,395) (87,630) (90,502) Foreign operations (8,588) (9,335) 9,869 Impact of tax rate change - - (15,383) Other (16,992) 3,127 (8,706) --------- --------- --------- Federal income tax expense $120,707 $103,414 $ 78,190 ========= ========= ========= Major Components of Deferred Income Taxes on Our Balance Sheet - Differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years are called temporary differences. The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are presented in the following table: (In thousands) December 31 1995 1994 ---- ---- DEFERRED TAX ASSETS Loss reserves $ 735,808 $ 642,368 Unearned premium reserves 141,882 119,363 Deferred compensation 87,825 82,456 Foreign loss carryforwards 21,871 43,263 Alternative minimum tax credit carryforwards 9,165 41,096 Other 137,706 125,001 --------- -------- Total gross deferred tax assets 1,134,257 1,053,547 Less valuation allowance (33,382) (50,359) --------- -------- Net deferred tax assets 1,100,875 1,003,188 --------- -------- DEFERRED TAX LIABILITIES Unrealized appreciation of investments 325,694 1,889 Deferred acquisition costs 124,178 105,428 Real estate 47,404 43,994 Other 74,794 61,369 --------- -------- Total gross deferred tax liabilities 572,070 212,680 --------- -------- DEFERRED INCOME TAXES $ 528,805 $ 790,508 ========= ======== If we believe that all of our deferred tax assets will not result in future tax benefits, we must establish a "valuation allowance" for the portion of these assets that we think will not be realized. The net change in the valuation allowance for deferred tax assets was a decrease of $17.0 million in 1995, a decrease of $8.6 million in 1994, and an increase of $4.7 million in 1993, 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 $15.7 million of our foreign operations' undistributed earnings as of Dec. 31, 1995, as such earnings are intended to be permanently reinvested in those operations. Furthermore, any taxes paid to foreign governments on these earnings may be used as credits against the U.S. tax on any dividend distributions from such earnings. We have not provided taxes on approximately $118.7 million of undistributed earnings related to our majority ownership of The John Nuveen Company as of Dec. 31, 1995, 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 through 1994. During 1995, we reached a partial settlement with the IRS regarding certain issues that were raised during the course of their audit. The agreement required us to make an additional payment of tax and interest to the IRS for the years 1991 through 1994 in the amount of $45 million. We believe that any additional taxes assessed as a result of any further adjustments for these years would not materially affect our overall financial position, results of operations or liquidity. Note 8 CAPITAL STRUCTURE The following summarizes our capital structure: (In thousands) December 31 1995 1994 ---- ---- Debt $ 704,042 $ 622,624 Company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. 207,000 - Preferred shareholders' equity 10,872 4,535 Common shareholders' equity 3,719,249 2,732,934 --------- -------- Total capital $4,641,163 $3,360,093 ========= ======== Ratio of debt to total capital 15% 19% --------- -------- DEBT Debt consists of the following: 1995 1994 (In thousands) Book Fair Book Fair December 31 Value Value Value Value ----- ----- ----- ----- Medium-term notes $397,433 $419,500 $204,433 $189,400 Commercial paper 149,629 149,629 275,635 275,635 9-3/8% notes 99,982 105,300 99,971 102,800 Guaranteed ESOP debt 25,001 26,200 36,112 37,200 Short-term borrowings 25,000 25,000 - - Pound sterling loan notes 6,997 6,997 6,473 6,473 ------- ------- ------- ------- Total debt $704,042 $ 732,626 $622,624 $611,508 ======= ======= ======= ======= 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. Medium-term Notes - The medium-term notes bear interest rates ranging from 5.9% to 8.4%. Maturities range from seven to 15 years after the issuance date. Commercial Paper - Our commercial paper is supported by a $400 million credit agreement that expires in 2000. The credit agreement requires us to stay below a certain ratio of debt to equity, maintain a stated amount of common shareholders' equity and meet certain other requirements. As of year-end 1995, we had not borrowed any funds under the agreement, and we were in compliance with all of its provisions. Interest rates on commercial paper issued in 1995 ranged from 5.4% to 6.6%; in 1994 the range was 3.1% to 6.1%; and in 1993 the range was 3.0% to 3.6%. 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 bore an interest rate of 6.4% and 4.9% at Dec. 31, 1995 and 1994, respectively. Interest Expense - Our interest expense was $46.7 million in 1995, $39.6 million in 1994 and $40.8 million in 1993. Maturities - The amount of debt that becomes due in each of the next five years is as follows: 1996, $36.1 million; 1997, $111.1 million; 1998, $27.8 million; 1999, $20.0 million; and 2000, $149.6 million. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF ST. PAUL CAPITAL L.L.C. In 1995, we issued, through St. Paul Capital L.L.C. (SPCLLC), 4,140,000 company-obligated mandatorily redeemable preferred securities, generating proceeds of $207 million. These securities are also known as convertible monthly income preferred securities (MIPS). The MIPS pay a monthly dividend at an annual rate of 6% of the liquidation preference of $50 per security. We directly or indirectly own all of the common shares of SPCLLC, a special purpose limited liability company which was formed for the sole purpose of issuing the MIPS. We have effectively fully and unconditionally guaranteed SPCLLC's obligations under the MIPS. The MIPS are convertible into 0.8475 shares of our common stock (equivalent to a conversion price of $59 per share). The MIPS are redeemable after four years, but we may redeem them before four years upon the occurrence of certain events. PREFERRED SHAREHOLDERS' EQUITY The preferred shareholders' equity on our balance sheet represents the par value of preferred shares outstanding that we issued to our Preferred Stock Ownership Plan (PSOP) Trust, less the remaining principal balance on the PSOP Trust debt. The PSOP Trust borrowed funds from our U.S. underwriting subsidiary to finance the purchase of the preferred shares, and we guaranteed the PSOP debt. In 1995, we reclassified our net convertible preferred stock balance to shareholders' equity. We had previously classified this item on our balance sheet between liabilities and common shareholders' equity. The PSOP trust may at any time convert any or all of the preferred shares into shares of our common stock at a rate of four shares of common stock for each preferred share. Our board of directors has reserved a sufficient number of our authorized common shares to satisfy the conversion of all preferred shares issued to the PSOP trust. In addition, the trust may redeem preferred shares to meet employee distribution requirements. Upon the redemption of preferred shares, we may make the payment required in the form of cash or through issuance of our common shares. Until August 1995, our intent and practice had been to pay for the preferred share redemptions with cash. Beginning in September 1995, our intent and practice has been and will continue to be to issue shares of our common stock to the trust to fulfill the redemption obligations. As a result of our intent to exclusively issue common shares to the trust in the future, we reclassified the net convertible preferred stock balance to permanent equity. We reclassified the Dec. 31, 1994, convertible preferred stock balance to conform to the 1995 presentation. COMMON SHAREHOLDERS' EQUITY Common Stock and Reacquired Shares - We are governed by the Minnesota Business Corporation Act. All authorized shares of voting common stock have no par value. Shares of common stock reacquired are considered unissued shares. In 1994, our shareholders voted to amend the company's Restated Articles of Incorporation to increase the number of authorized shares of voting common stock from 120 million to 240 million. The board of directors subsequently approved a 2-for-1 stock split, issuing one additional voting common share on June 6, 1994, for each outstanding share to shareholders of record on May 17, 1994. In 1995, we reacquired 778,000 of our common shares for a total cost of $41.7 million. During 1994, we reacquired 860,000 of our common shares for a total cost of $34.2 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: (Shares) Year ended December 31 1995 1994 1993 ---- ---- ---- Outstanding at beginning of year 84,202,417 84,714,676 84,118,554 Issued under stock option and other incentive plans 534,096 344,756 595,814 Issued upon conversion of preferred stock 17,543 3,125 5,132 Reacquired (778,192) (860,140) (4,824) ---------- ---------- ---------- Outstanding at end of year 83,975,864 84,202,417 84,714,676 ========== ========== ========== Undesignated Shares - Our articles of incorporation allow us to issue five million undesignated shares. The board of directors may designate the type of shares and set the terms thereof. The board designated 50,000 shares as Series A Junior Participating Preferred Stock in connection with the establishment of our Shareholder Protection Rights Plan. The board designated 1,450,000 shares as Series B Convertible Preferred Stock in connection with the formation of our Preferred Stock Ownership Plan. In 1995, the board designated 41,400 shares as Series C Cumulative Convertible Preferred Stock in connection with St. Paul Capital L.L.C.'s issuance of company-obligated mandatorily redeemable preferred securities. 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 1996, $331.6 million will be available for dividends free from such restrictions. During 1995, we received cash dividends of $196.0 million from our U.S. underwriting subsidiary. Note 9 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 requirementsof 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. (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- Service cost - benefits earned during the year $30,167 $ 37,611 $ 29,515 Interest cost on projected benefits obligation 42,199 40,606 36,670 Actual return on plan assets (92,279) (6,928) (66,449) Net amortization and deferral 41,571 (35,243) 28,270 ------ ------ ------ Net periodic pension cost $21,658 $ 36,046 $ 28,006 ====== ====== ====== The following table summarizes the funded status of our plans. (In thousands) 1995 1994 December 31 U.S. Non-U.S. U.S. Non-U.S. ----- -------- ----- -------- Accumulated benefits obligation: Vested $254,634 $185,713 $180,793 $186,317 Nonvested 34,046 426 23,072 424 ------- ------- ------- ------- Subtotal 288,680 186,139 203,865 186,741 Effect of projected salary increases 85,310 58,980 86,557 45,588 ------- ------- ------- ------- Projected benefits obligation 373,990 245,119 290,422 232,329 Plan assets at fair value 350,266 280,107 245,852 239,025 ------- ------- ------- ------- Assets (greater) less than projected benefits obligation 23,724 (34,988) 44,570 (6,696) Unrecognized net gain (loss) 274 11,845 9,071 (18,022) Unrecognized net asset at transition 9,573 12,853 11,273 15,684 Unrecognized prior service cost 441 (2,512) 420 (2,844) ------- ------- ------- ------- Accrued (prepaid) pension cost recorded on the balance sheet $ 34,012 $ (12,802) $65,334 $(11,878) ======= ======= ======= ======= 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: 1995 1994 1993 1992 ---- ---- ---- ---- U.S. PLANS Discount rate 6.75% 8.00% 6.25% 7.25% Rate of increase in compensation 3.75 5.00 4.25 5.50 Expected rate of return on plan assets 9.00 9.00 9.00 9.00 NON-U.S. PLANS Discount rate 8.50 8.50 7.50 9.50 Rate of increase in compensation 6.00 6.00 5.50 7.50 Expected rate of return on plan assets 10.00 10.00 9.50 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 $21.1 million and $17.0 million at Dec. 31, 1995 and 1994, 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 1995 and 1994, we had a liability of $21.2 million and $17.5 million, respectively, recorded for these plans. 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: (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- Compensation expense $12,305 $12,330 $12,037 Interest expense 3,146 4,108 5,032 Dividends paid to ESOP trust (6,289) (6,325) (6,181) Proceeds from sales of forfeited shares, and interest income (485) (273) (221) ------ ------ ------ Net pretax ESOP expense $ 8,677 $ 9,840 $10,667 ====== ====== ====== Cash contributions to trust $ 8,540 $ 9,171 $10,091 ====== ====== ====== The following table details the shares held in the ESOP: (Shares) December 31 1995 1994 ---- ---- Allocated 2,963,826 2,630,265 Committed to be released 142,139 142,467 Unallocated 1,102,342 1,603,176 --------- --------- Total 4,208,307 4,375,908 ========= ========= The ESOP allocated 500,834 shares in 1995, 505,776 shares in 1994 and 499,256 shares in 1993. The remaining unallocated shares at Dec. 31, 1995, 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. 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: (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- Compensation expense $ 8,242 $ 10,409 $ 7,268 Interest expense 12,796 13,602 14,044 Dividends paid to PSOP trust (11,998) (11,993) (12,022) ------ ------ ------ Net pretax PSOP expense $ 9,040 $ 12,018 $ 9,290 ====== ====== ====== Cash contributions to trust $ 9,431 $ 9,205 $ 2,728 ====== ====== ====== The following table details the shares held in the PSOP: (Shares) December 31 1995 1994 ---- ---- Allocated 237,853 187,194 Committed to be released 27,518 31,601 Unallocated 733,693 793,691 --------- --------- Total 999,064 1,012,486 ========= ========= The PSOP allocated 59,998 shares in 1995, 66,609 shares in 1994 and 53,342 shares in 1993. The remaining unallocated shares at Dec. 31, 1995, will be released for allocation annually through Jan. 31, 2005. Postretirement Benefits Other Than Pension - We provide certain health care and life insurance benefits for retired U.S. employees and their eligible dependents. We currently anticipate that most of our employees will become eligible for these benefits if they retire while working for us. The cost of these benefits is shared with the retiree. The benefits are generally provided through our employee benefits trust, to which periodic contributions are made to cover benefits paid during the year. We accrue postretirement benefits expense during the period of the employee's service. The following table details the components of the net periodic postretirement benefits cost: (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- Service cost - benefits attributed to service during the year $ 3,654 $ 5,089 $ 4,227 Interest cost on accumulated postretirement benefits obligation 9,664 9,645 8,699 Actual return on plan assets (2,677) 320 (686) Net amortization and deferral 1,196 (1,448) (590) ------ ------ ------ Net periodic postretire- ment benefits cost $11,837 $13,606 $11,650 ====== ====== ====== The following table summarizes the funded status of the plan. (In thousands) December 31 1995 1994 ---- ---- Accumulated postretirement benefits obligation: Retirees $ 81,533 $ 66,350 Fully eligible active plan participants 8,205 7,174 Other active plan participants 49,237 33,822 ------- ------- Subtotal 138,975 107,346 Plan assets at fair value 16,430 13,753 ------- ------- Assets less than accumulated postretirement benefits obligation 122,545 93,593 Unrecognized net gain (loss) (6,098) 16,398 Unrecognized prior service cost 4,664 5,017 ------- ------- Accrued postretirement benefits cost recorded on the balance sheet $121,111 $115,008 ======= ======= 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: 1995 1994 1993 1992 ---- ---- ---- ---- Discount rate 7.00% 8.50% 7.00% 7.75% Rate of increase in compensation 3.75 5.00 4.25 5.50 Expected rate of return on plan assets 8.00 8.00 7.50 7.50 A health care inflation rate of 8% was assumed to change to 7.5% in 1996, decrease annually to 5% 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, 1995, by $16.9 million and the 1995 periodic benefits cost by $2.4 million. Note 10 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 3,330,000 shares remained at year-end for grant under the 1994 plan, of which approximately 770,000 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 590,000 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, 1993 $ 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 Granted 48.13 - 52.75 719,513 Canceled 21.75 - 47.88 (12,955) Exercised 21.25 - 43.19 (504,803) ------------- --------- Outstanding Dec. 31, 1995 $ 21.25 - 52.75 3,472,000 ============= ========= Exercisable Dec. 31, 1995 $ 21.25 - 46.63 2,480,918 ============= ========= Note 11 COMMITMENTS AND CONTINGENCIES Investment Commitments - We have long-term commitments to fund venture capital and real estate investments totaling $71.4 million as of Dec. 31, 1995. We estimate these commitments will be paid as follows: $32.5 million in 1996; $21.9 million in 1997; $11.6 million in 1998; $5.4 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 $64.4 million in 1995, $69.6 million in 1994 and $74.9 million in 1993. Certain leases are noncancelable, and we would remain responsible for payment even if we stopped using the space or equipment. On Dec. 31, 1995, the minimum annual rents for which we would be liable under these types of leases are as follows: $63.3 million in 1996, $55.4 million in 1997, $49.2 million in 1998, $43.0 million in 1999, $31.1 million in 2000 and $122.1 million thereafter. Legal Matters - In the ordinary course of conducting business, we and some of our subsidiaries have been named as defendants in various lawsuits. Some of these lawsuits attempt to establish liability under insurance contracts issued by our underwriting operations. Plaintiffs in these lawsuits are asking for money damages or to have the court direct the activities of our operations in certain ways. Although it is possible that the settlement of a contingency may be material to our results of operations and liquidity in the period in which the settlement occurs, we believe that the total amounts that we and our subsidiaries will ultimately have to pay in all of these lawsuits will have no material effect on our overall financial position. For further discussion see "Legal Matters" in Management's Discussion and Analysis on page 34. Note 12 ACQUISITIONS 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. In addition, Minet has acquired specialty brokerage companies in various locations throughout the world. The cost of these companies, net of cash acquired, totaled $51.7 million in 1995, $18.7 million in 1994 and $48.9 million in 1993. All of these acquisitions were accounted for as purchases. As a result, the acquired companies' results were included in our consolidated results from the date of purchase. Consolidated results would not have been materially different had these acquisitions been completed at the beginning of 1993. Note 13 REINSURANCE Our financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to our acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance means other insurance companies agree to share certain risks with us. The primary purpose of ceded reinsurance is to protect us from potential losses in excess of what we are prepared to accept. We report balances pertaining to reinsurance transactions "gross" on the balance sheet, meaning that reinsurance recoverables on unpaid losses and ceded unearned premiums are not deducted from insurance reserves but are recorded as assets. The largest concentration (approximately 16%) of our total reinsurance recoverables and ceded unearned premiums was with General Reinsurance Corporation. That company is rated "A++" by A.M. Best, "Aaa" by Moody's and "AAA" by Standard & Poor's for its property- liability insurance claims-paying ability. We expect the companies to which we have ceded reinsurance to honor their obligations. In the event these companies are unable to honor their obligations to us, we will pay these amounts. We have established allowances for possible nonpayment of amounts due to us. The effect of assumed and ceded reinsurance on premiums written, premiums earned and insurance losses and loss adjustment expenses is as follows: (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- PREMIUMS WRITTEN Direct $3,825,517 $3,491,466 $3,053,532 Assumed 1,030,331 745,810 686,557 Ceded (612,635) (614,250) (561,544) --------- --------- --------- Net premiums written $4,243,213 $3,623,026 $3,178,545 ========= ========= ========= PREMIUMS EARNED Direct $3,678,190 $3,296,215 $3,021,203 Assumed 934,490 709,987 680,626 Ceded (641,351) (594,121) (523,491) --------- --------- --------- Net premiums earned $3,971,329 $3,412,081 $3,178,338 ========= ========= ========= INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES Direct $2,926,261 $2,245,796 $1,968,839 Assumed 743,740 595,492 721,141 Ceded (805,694) (379,590) (386,242) --------- --------- --------- Net insurance losses and loss adjustment expenses $2,864,307 $2,461,698 $2,303,738 ========= ========= ========= Note 14 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 $476.3 million in 1995, $285.3 million in 1994, and $441.1 million in 1993. Statutory surplus (shareholder's equity) of these operations was $2.5 billion and $1.9 billion as of Dec. 31, 1995 and 1994, respectively. Note 15 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: (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- REVENUES U.S. $ 4,567,436 $ 4,071,932 $ 3,875,545 Non-U.S. 842,194 629,353 584,627 --------- --------- --------- Total revenues $ 5,409,630 $ 4,701,285 $ 4,460,172 ========= ========= ========= INCOME (LOSS) BEFORE INCOME TAXES U.S. $ 706,741 $ 520,983 $ 559,512 Non-U.S. (50,508) 42,595 (36,906) --------- --------- --------- Total income before income taxes $ 656,233 $ 563,578 $ 522,606 ======== ======== ======== (In thousands) December 31 1995 1994 1993 ---- ---- ---- IDENTIFIABLE ASSETS U.S. $16,113,823 $14,716,603 $14,703,637 Non-U.S. 3,542,679 2,779,217 2,445,559 --------- --------- --------- Total assets $19,656,502 $17,495,820 $17,149,196 ========= ========= ========= Industry - Our industry segments consist of underwriting, insurance brokerage and investment banking-asset management. The summary on the next page 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. (In thousands) Year ended December 31 1995 1994 1993 ---- ---- ---- REVENUES Underwriting: St. Paul Fire and Marine: Specialized Commercial $1,230,790 $1,015,397 $1,011,439 Personal Insurance 655,347 619,414 360,305 Medical Services 605,468 638,413 688,980 Commercial 587,016 498,543 543,894 --------- --------- --------- Total St. Paul Fire and Marine 3,078,621 2,771,767 2,604,618 St. Paul Re 654,981 483,368 395,008 International Underwriting 237,727 156,946 178,712 --------- --------- --------- Total premiums earned 3,971,329 3,412,081 3,178,338 Net investment income 731,096 674,818 646,396 Realized investment gains 74,403 35,967 49,429 Other 37,282 29,053 31,723 --------- --------- --------- Total underwriting 4,814,110 4,151,919 3,905,886 --------- --------- --------- Insurance brokerage: Fees and commissions 322,961 315,977 294,579 Net investment income 30,700 21,322 21,213 Other 12,219 8,377 4,725 --------- --------- --------- Total insurance brokerage 365,880 345,676 320,517 --------- --------- --------- Investment banking-asset management 236,230 220,303 245,732 --------- --------- --------- Total industry segments 5,416,220 4,717,898 4,472,135 Parent company and consolidating eliminations (6,590) (16,613) (11,963) --------- --------- --------- Total revenues $5,409,630 $4,701,285 $4,460,172 ========= ========= ========= INCOME (LOSS) BEFORE INCOME TAXES UNDERWRITING: St. Paul Fire and Marine: Specialized Commercial $(124,078) $(89,116) $(116,126) Personal Insurance (33,000) (26,315) (15,314) Medical Services 76,399 118,379 132,922 Commercial (3,668) (62,988) (70,836) --------- --------- --------- Total St. Paul Fire and Marine (84,347) (60,040) (69,354) St. Paul Re 4,490 (21,802) (18,230) International Underwriting (23,188) (31,166) (62,671) --------- --------- --------- Total GAAP underwriting result (103,045) (113,008) (150,255) Net investment income 731,096 674,818 646,396 Realized investment gains 74,403 35,967 49,429 Other (50,542) (37,068) (38,389) --------- --------- --------- Total underwriting 651,912 560,709 507,181 --------- --------- --------- Insurance brokerage (13,092) (9,947) (12,629) --------- --------- --------- Investment banking-asset management: Pretax income before minority interest 113,770 94,635 111,663 Minority interest (25,573) (22,777) (29,076) --------- --------- --------- Total investment banking- asset management 88,197 71,858 82,587 --------- --------- --------- Total industry segments 727,017 622,620 577,139 Parent company and consolidating eliminations (70,784) (59,042) (54,533) --------- --------- --------- Total income before income taxes $656,233 $563,578 $522,606 ========= ========= ========= (In thousands) December 31 1995 1994 1993 ---- ---- ---- IDENTIFIABLE ASSETS Underwriting $17,541,329 $15,397,173 $15,144,260 Insurance brokerage 1,590,464 1,738,060 1,616,574 Investment banking- asset management 402,512 348,847 410,764 --------- --------- --------- Total industry segments 19,534,305 17,484,080 17,171,598 Parent company and consolidating eliminations 122,197 11,740 (22,402) --------- --------- --------- Total assets $19,656,502 $17,495,820 $17,149,196 ========== ========== ========== Note 16 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is an unaudited summary of our quarterly results for the last three years. First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1995 Revenues $1,267,459 $1,330,728 $1,364,866 $1,446,577 Net income 110,596 112,967 142,399 155,247 Net income per common share: Primary 1.27 1.30 1.64 1.78 Fully diluted 1.23 1.24 1.54 1.67 First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1994 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 First Second Third Fourth (In thousands) Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1993 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 Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ----------------------------------------- Shareholder Information Stock Trading The company's stock is traded nationally on the New York Stock Exchange, where it is assigned the symbol SPC. The stock is also listed on the London Stock Exchange under the symbol SPA. The number of holders of record, including individual owners, of our common stock was 7,652 as of March 1, 1996. 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 1995 High Low Declared - ---- ---- --- -------- First Quarter $50 3/4 $43 5/8 $0.40 Second Quarter 51 1/2 48 0.40 Third Quarter 58 3/8 46 3/8 0.40 Fourth Quarter 59 1/4 50 0.40 Cash dividend paid in 1995 was $1.58. Cash Dividend 1994 High Low Declared - ---- ---- --- -------- First Quarter $44 3/8 $38 13/16 $0.375 Second Quarter 41 11/16 37 7/8 0.375 Third Quarter 44 1/2 39 1/2 0.375 Fourth Quarter 45 1/8 40 0.375 Cash dividend paid in 1994 was $1.48. EX-21 6 EXHIBIT 21 Subsidiaries of the Registrant State or - ------------------------------ Other Jurisdiction of Name Incorporation - ----- ----------- (1) St. Paul Fire and Marine Insurance Company Minnesota Subsidiaries: (i) St. Paul Mercury Insurance Co. Minnesota (ii) St. Paul Guardian Insurance Co. Minnesota (iii) The St. Paul Insurance Co. Texas (iv) The St. Paul Insurance Co. of Illinois Illinois (v) St. Paul Specialty Underwriting, Inc. Delaware Subsidiaries: (a) St. Paul Surplus Lines Insurance Co. Delaware (b) St. Paul Risk Services, Inc. Minnesota (c) St. Paul Medical Liability Insurance Co. Minnesota (d) Athena Assurance Co. Minnesota (vi) St. Paul Property and Casualty Insurance Co. Nebraska (vii) St. Paul Insurance Co. of North Dakota North Dakota (viii)St. Paul Fire and Casualty Insurance Co. Wisconsin (ix) Economy Fire & Casualty Co. Illinois (a) Economy Preferred Insurance Co. Illinois (b) Economy Premier Assurance Co. Illinois (x) St. Paul Indemnity Insurance Co. Indiana (xi) St. Paul Properties, Inc. Delaware Subsidiaries: (a) 77 Water Street, Inc. Minnesota (b) St. Paul Interchange, Inc. Minnesota (c) St. Paul 345, Inc. Minnesota (d) 350 Market Street Minnesota (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 (ii) Minet Re North America, Inc. New York (iii) Minet, Inc. New Jersey (iv) Minet Settlement Services, Inc. Minnesota (v) Special Risk Services, Inc. New York (vi) SRS Insurance Services, Inc. California (vii) Minet Limited - Bermuda Bermuda (viii) Continental Underwriters Ltd. Louisiana (ix) Minet Risk Services (Vermont), Inc. Vermont (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) JH Minet Reinsurance Brokers Limited United Kingdom (b) Minet Consultancy Services Limited United Kingdom (c) Minet Hong Kong Limited Hong Kong (d) Minet Inc. Canada (e) Minet Limited United Kingdom (f) M.I.B. Group (Pty) Limited South Africa (g) Minet Australia Limited Australia (h) Minet Burn & Roche Pty Limited Australia (vii) Camperdown UK United Kingdom (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 (8) St. Paul Capital L.L.C. Delaware (9) St. Paul Multinational Holdings, Inc. Delaware (10) St. Paul Bermuda Holdings, Inc. Delaware *Minet Holdings, Inc. and Minet Group and their listed subsidiaries also conduct insurance brokerage business through a number of wholly-owned subsidiaries and through partial ownership in a number of other brokerage companies. These additional operations, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of Dec. 31, 1995. **The John Nuveen Company is a majority-owned subsidiary jointly owned by The St. Paul, which holds a 41% interest, and Fire and Marine, which holds a 37% interest. EX-23 7 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors The St. Paul Companies, Inc.: We consent to incorporation by reference in the Registration Statements on Form S-8 (SEC File No. 2-69894, No. 33-15392, No. 33- 20516, No. 33-23446, No. 33-23948, No. 33-24220, No. 33-24575, No. 33-26923, No. 33-49273, No. 33-56987 and No. 333-01065) and Form S- 3 (SEC File No. 33-33931, No. 33-50115 and No. 33-58491) of The St. Paul Companies, Inc., of our reports dated January 29, 1996, relating to the consolidated balance sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, and all related schedules, which reports appear in the December 31, 1995 annual report on Form 10-K of The St. Paul Companies, Inc. Our reports refer to changes in the method of accounting for certain investments. Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP March 13, 1996 ------------------------- KPMG Peat Marwick LLP EX-24 8 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, 1995, 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 6, 1996 Signature: /s/ Michael R. Bonsignore ------------------------- Name: Michael R.Bonsignore Dated: February 6, 1996 Signature: /s/ John H. Dasburg ------------------------- Name: John H. Dasburg Dated: February 6, 1996 Signature: /s/ W. John Driscoll ------------------------- Name: W. John Driscoll Dated: February 6, 1996 Signature: /s/ Pierson M. Grieve ------------------------- Name: Pierson M. Grieve Dated: February 6, 1996 Signature: /s/ Ronald James ------------------------- Name: Ronald James Dated: February 6, 1996 Signature: /s/ William H. Kling ------------------------- Name: William H. Kling Dated: February 6, 1996 Signature: /s/ Bruce K. MacLaury ------------------------- Name: Bruce K. MacLaury Dated: February 6, 1996 Signature: /s/ Ian A. Martin ------------------------- Name: Ian A. Martin Dated: February 6, 1996 Signature: /s/ Glen D. Nelson ------------------------- Name: Glen D. Nelson Dated: February 6, 1996 Signature: /s/ Anita M. Pampusch ------------------------- Name: Anita M. Pampusch Dated: February 6, 1996 Signature: /s/ Gordon M. Sprenger ------------------------- Name: Gordon M. Sprenger EX-27 9
7 1,000 YEAR DEC-31-1995 DEC-31-1995 10,372,890 0 0 711,471 0 611,656 13,066,920 34,440 74,568 372,174 19,656,502 10,247,070 2,361,028 0 0 704,042 207,000 10,872 460,458 3,258,791 19,656,502 3,971,329 771,612 84,572 582,117 2,864,307 856,979 1,032,111 656,233 135,024 521,209 0 0 0 521,209 5.99 5.68 9,423,429 3,112,193 (247,886) 783,633 1,590,701 10,247,070 (199,000)
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