-----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, UjfS2gGGR2yOuHtUebYF2igRB7rqdvgbMU2apQ6EcW82+TpkCH2a9j51gtuiVjkT Nu050mNoQHJI9n4a44zW7Q== 0000086312-97-000011.txt : 19970327 0000086312-97-000011.hdr.sgml : 19970327 ACCESSION NUMBER: 0000086312-97-000011 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 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: 97563855 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 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 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 21, 1997, was $5,742,457,489. The number of shares of the Registrant's Common Stock, without par value, outstanding at March 21, 1997, was 83,516,157. An Exhibit Index is set forth at page 32 of this report. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the Registrant's 1996 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 6, 1997, are incorporated by reference into Parts III and IV of this report. Page 1 of 32 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 property-liability insurance and reinsurance underwriting. The St. Paul also has a presence in the investment banking-asset management industry through its majority ownership of The John Nuveen Company. 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 244th largest U. S. corporation, based on total 1995 revenues. At March 17, 1997, The St. Paul and its subsidiaries employed approximately 10,200 persons. In 1996, The St. Paul decided to exit the insurance brokerage business and to dispose of Minet, its brokerage operations. Discussions concerning a sale are ongoing, but there can be no assurance as to when or on what terms such a sale will occur. Minet had experienced operating losses for several years amid highly competitive conditions in worldwide brokerage markets. Minet was classified as a discontinued operation in 1996, and results for 1995 and 1994 were restated to be consistent with the 1996 classification. Note 13 on page 66 of The St. Paul's 1996 Annual Report to Shareholders, which contains additional information relating to The St. Paul's discontinued operations, is incorporated herein by reference. The St. Paul's underwriting segment accounted for 96% of consolidated revenues from continuing operations in 1996. The investment banking-asset management segment accounted for the remaining 4% of 1996 revenues. Note 16 on pages 67 and 68 of The St. Paul's 1996 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 from continuing operations for each of the last three years: Percentage of Consolidated Revenues 1996 1995 1994 ---- ---- ---- Underwriting: Worldwide Insurance Operations St. Paul Fire and Marine: Specialized Commercial 22.2% 24.3% 23.2% Commercial 15.0 11.6 11.4 Personal Insurance 12.4 13.0 14.2 Medical Services 10.5 12.0 14.6 ----- ----- ----- Total Fire and Marine 60.1 60.9 63.4 St. Paul International Underwriting 4.6 4.7 3.6 ----- ----- ----- Total Worldwide Insurance Operations 64.7 65.6 67.0 St. Paul Re 12.8 13.0 11.1 Net investment income 13.9 14.5 15.4 Realized investment gains 3.6 1.5 0.8 Other 0.8 0.6 0.7 ----- ----- ----- Total underwriting 95.8 95.2 95.0 Investment banking-asset management 4.1 4.7 5.0 Parent company and eliminations 0.1 0.1 - ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== UNDERWRITING Overview. The St. Paul's primary insurance underwriting business is conducted through its Worldwide Insurance Operations, which include St. Paul Fire and Marine (Fire and Marine) and St. Paul International Underwriting (International). Fire and Marine, The St. Paul's U.S. insurance operation, underwrites property and liability insurance and provides insurance-related products and services to commercial, professional and individual customers throughout the United States. International underwrites primary property-liability insurance coverages outside the United States. International also includes insurance written for foreign exposures of U.S.-based corporations and U.S. exposures of foreign-based companies. The St. Paul's reinsurance business operates under the name St. Paul Re, which underwrites reinsurance for leading property-liability insurance companies worldwide. The primary sources of the underwriting operations' revenues are premiums earned from insurance policies and reinsurance contracts, income earned from the investment portfolio and sales of investments. According to the most recent industry statistics published in "Best's Review" with respect to property-liability insurers doing business in the United States, The St. Paul's underwriting operations ranked 14th on the basis of 1995 written premiums. Principal Departments and Products The "Underwriting Results by Operation" table on page 22 of The St. Paul's 1996 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. WORLDWIDE INSURANCE 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 which serve specific commercial customer segments or provide specialized products and services for targeted industry groups. 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 specific customer segments consist of the following: Financial and Professional Services provides fidelity and property- liability coverages for depository institutions, and markets errors and omissions coverages for lawyers, insurance agents and other nonmedical professionals, including directors and officers. Ocean Marine provides a variety of property and liability insurance related to ocean and inland waterways traffic, including cargo and hull property protection. Public Sector Services markets insurance products and services, including professional liability insurance, to all levels of government entities. 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. Based on 1995 written premiums, The St. Paul ranked as the eighth-largest U.S.-based surplus lines underwriter. Technology underwrites a range of specialized coverages for information technology firms, including manufacturers of electronics, synthetics, industrial machinery and medical equipment. The following operations provide products and services for targeted industry groups. 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. Surety underwrites surety bonds, primarily for construction contractors, which guarantee that third parties will be indemnified against the nonperformance of contractual obligations. Based on 1995 written premiums, Fire and Marine's surety operation ranked as the sixth-largest underwriter of surety bonds in the United States. Manufacturing provides liability insurance and risk management products and services for large manufacturing operations. Service Industries provides large service-related businesses with insurance and risk management programs. Businesses served include retailers, wholesalers, insurance companies, and hospitality and entertainment firms. National Programs underwrites coverages for nationwide, multiple-policyholder programs through a single agency source. Transportation provides large motor carriers with customized insurance programs. Specialized Commercial also includes Fire and Marine's Special Property operation, which underwrites large property accounts, layered and excess property programs, large deductible accounts, stop-loss and loss limit programs and other customized property business. Fire and Marine's limited participation in insurance pools and associations, which provide specialized underwriting skills and risk management services for the classes of business that they write, is included in Specialized Commercial results. These pools and associations serve to increase the underwriting capacity of participating companies for insurance policies where the concentration of risk is so high or the amount so large that a single company could not prudently accept the entire risk. 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, multipurpose recreational facilities, manufacturers, wholesalers and processors. Coverages marketed to the small commercial customer include the Package Accounts for Commercial Enterprises (PACE) policy for offices, retailers and family restaurants. On July 31, 1996, Fire and Marine acquired Northbrook Holdings, Inc. (Northbrook) and its three commercial underwriting subsidiaries from Allstate Insurance Company. Northbrook underwrites various property- liability commercial insurance coverages throughout the United States. Northbrook accounted for $140 million of incremental written premiums in Fire and Marine's Commercial operations in 1996. Personal Insurance. This operation provides a broad portfolio of property and liability insurance products and services 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 9% of the U.S. market in 1995 based on premium data published in "Best's Review." St. Paul International Underwriting St. Paul International Underwriting includes most primary insurance written outside the United States. International has a domestic presence as a licensed insurance company in several countries in Europe, Africa and Latin America, and in Canada. It also includes The St. Paul's participation in Lloyd's of London as an investor and as the owner of two managing agencies. International also includes insurance written for foreign operations of multinational corporations based in the United States, and insurance written to cover exposures in the United States for foreign-based companies. This 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. 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 sixth largest U.S. reinsurance underwriter based on written premium volume for the first nine months of 1996. In December 1996, The St. Paul completed a $68.5 million securitized reinsurance transaction that will provide St. Paul Re with additional property catastrophe reinsurance capacity of $45.1 million for up to three years and up to $21.1 million in the subsequent seven years. A newly formed, single-purpose reinsurance company called George Town Re was organized in 1996 to reinsure only St. Paul Re. Collateral for claims is provided from the proceeds raised in a private placement. This reinsurance allows St. Paul Re to write more catastrophe-exposed property business without having to seek additional capital and without any impact on The St. Paul's consolidated balance sheet. In January 1997, St. Paul Re acquired the right to renew Constitution Reinsurance Corporation's approximately $20 million book of U.S. casualty facultative reinsurance business. 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 1996 property-liability written premiums were produced in each of Illinois, California, Minnesota, New York and Texas. Fire and Marine's business is produced primarily through approximately 6,500 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, Munich, Singapore and Tokyo. St. Paul Re obtains business primarily through the broker or intermediary market. Approximately 45% of St. Paul Re's business in 1996 originated from outside the United States. St. Paul International Underwriting is headquartered in London and underwrites insurance through local operations in several markets outside the United States, including South Africa, Botswana, Lesotho, Argentina, Canada, the Netherlands, the Republic of Ireland, Spain and the United Kingdom. A portion of The St. Paul's property-liability insurance written premium volume originates with insurance brokers. In the first quarter of 1997, two large brokerage firms finalized their merger and two other large brokerage firms announced plans to merge. In January 1997, Aon Corporation finalized its acquisition of Alexander and Alexander Services Inc. In March 1997, Marsh & McLennan Companies, Inc. announced an agreement to acquire Johnson & Higgins. In 1996, approximately 15% of The St. Paul's underwriting operations' gross written premium volume originated with these four brokerage firms. Reserves for Losses and Loss Adjustment Expenses General Information. When claims are made by or against policyholders, any amounts that The St. Paul's underwriting operations pay or expect to pay to the claimant are referred to as losses. The costs of investigating, resolving and processing these claims are referred to as loss adjustment expenses (LAE). The St. Paul establishes reserves that reflect the estimated unpaid total cost of these two items. The reserves for unpaid losses and LAE cover claims that were incurred not only in 1996 but also in prior years. They include estimates of the total cost of claims that have already been reported but not yet settled ("case" reserves), and those that have been incurred but not yet reported ("IBNR" reserves). Loss reserves are not discounted, but they are reduced for estimates of salvage and subrogation. Management continually reviews loss reserves, using a variety of statistical and actuarial techniques to analyze current claim costs, frequency and severity data, and prevailing economic, social and legal factors. Management believes that the reserves currently established for losses and LAE are adequate to cover their eventual costs. However, final claim payments may differ from these reserves, particularly when these payments may not take place for several years. Reserves established in prior years are adjusted as loss experience develops and new information becomes available. Adjustments to previously estimated reserves are reflected in results in the year in which they are made. Ten-year Development. The table on page 8 presents a development of net loss and LAE reserve liabilities and payments for the years 1986 through 1996. 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 1996, and the reinsurance operations are included on an underwriting year basis. 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" 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 1986 reserve of $4,043 million developed up to $4,087 million, or a $44 million deficiency, by the end of 1987. By the end of 1996, the 1986 reserve had developed a redundancy of $30 million. The changes in the estimate of 1986 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 1996), 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, 1996) 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, 1996, $3,634 million of the currently estimated $4,013 million of losses and LAE that have been incurred for the years up to and including 1986 have been paid. Thus, as of Dec. 31, 1996, it is estimated that $379 million of incurred losses and LAE have yet to be paid for the years up to and including 1986. Caution should be exercised in evaluating the information shown on this table. It should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the portion of the development shown for year-end 1995 reserves that relates to 1986 losses is included in the cumulative redundancy for the years 1986 through 1995. In addition, the table presents calendar year data. It does not present accident or policy year development data, which some readers may be more accustomed to analyzing. The social, economic and legal conditions and other trends which have had an impact on the changes in the estimated liability in the past are not necessarily indicative of the future. Accordingly, readers are cautioned against extrapolating any conclusions about future results from the information presented in this table. Note 6 on page 58 of the 1996 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 "Loss and Loss Adjustment Expense Reserves" and "Environmental and Asbestos Claims" sections of "Management's Discussion and Analysis" on pages 31 through 36 of the 1996 Annual Report to Shareholders, which are incorporated herein by reference. Analysis of Loss and Loss Adjustment Expense (LAE) Development (in millions)
Year ended December 31 1986 1987 1987 1989 1990 1991 1992 1993 1994 1995 1996 - ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Net liability for unpaid losses and LAE $4,043 4,745 5,502 5,907 6,279 6,688 7,207 7,640 7,890 8,393 9,783 ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== Liability re-estimated as of: One year later 4,087 4,727 5,313 5,656 6,037 6,436 6,984 7,312 7,642 8,141 Two years later 4,078 4,489 4,914 5,338 5,787 6,260 6,703 7,027 7,330 Three years later 3,955 4,268 4,789 5,135 5,628 6,066 6,563 6,781 Four years later 3,874 4,226 4,731 5,027 5,490 6,063 6,384 Five years later 3,874 4,178 4,707 4,975 5,521 5,960 Six years later 3,885 4,180 4,682 5,058 5,472 Seven years later 3,914 4,169 4,796 5,038 Eight years later 3,951 4,163 4,798 Nine years later 3,983 4,183 Ten years later 4,013 Cumulative redundancy $ 30 562 704 869 807 728 823 859 560 252 ===== ==== ===== ===== ===== ===== ===== ===== ===== ===== Cumulative redundancy excluding foreign exchange (1) $ 30 562 713 848 805 733 814 851 553 239 ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== Net liability for unpaid losses and LAE 7,207 7,640 7,890 8,393 9,783 Reinsurance recoverable on unpaid losses 1,606 1,545 1,533 1,854 1,890 ----- ----- ----- ------ ------ Gross liability 8,813 9,185 9,423 10,247 11,673 ===== ===== ===== ====== ====== Gross re-estimated liability: One year later 8,692 8,842 9,599 9,980 Two years later 8,389 8,934 9,273 Three years later 8,622 8,665 Four years later 8,426 Gross cumulative redundancy 387 520 150 267 === === === === Gross cumulative redundancy excluding foreign exchange(1) 346 493 108 246 === === === === Cumulative amount of net liability paid through: One year later 1,008 1,101 1,196 1,318 1,450 1,452 1,547 1,566 1,591 1,839 Two years later 1,787 1,884 2,044 2,209 2,361 2,493 2,576 2,608 2,751 Three years later 2,332 2,466 2,646 2,797 3,015 3,155 3,245 3,373 Four years later 2,732 2,869 3,043 3,216 3,442 3,584 3,745 Five years later 3,012 3,132 3,348 3,496 3,713 3,922 Six years later 3,205 3,322 3,554 3,674 3,942 Seven years later 3,343 3,453 3,691 3,846 Eight years later 3,447 3,573 3,819 Nine years later 3,551 3,666 Ten years later 3,634 Cumulative amount of gross liability paid through: One year later 1,935 1,872 1,958 2,160 Two years later 3,199 3,136 3,352 Three years later 4,047 4,065 Four years later 4,678 (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 1996. The foreign currency translation impact on the cumulative redundancy arises from the difference between reserve developments translated at the exchange rates at the end of the year in which the liabilities were originally estimated, and the exchange rates at the end of the year in which the liabilities were re-estimated.
Ceded Reinsurance Through ceded reinsurance, other insurers and reinsurers agree to share certain risks that The St. Paul's subsidiaries have underwritten. The purpose of reinsurance is to limit a ceding insurer's maximum net loss arising from large risks or catastrophes. Reinsurance also serves to increase the direct writing capacity of the ceding insurer. Amounts recoverable on ceded losses are recorded as an asset. With respect to ceded reinsurance, The St. Paul strives to protect its assets from large individual risk and occurrence losses, and provide its respective underwriting operations with the capacity necessary to write large limits on accounts. The collectibility of reinsurance is subject to the solvency of reinsurers. The St. Paul's Reinsurance Security Committee, which has established financial standards to determine qualified, financially secure reinsurers, guides the placement of ceded reinsurance. Uncollectible reinsurance recoverables have not had a material adverse impact on The St. Paul's results of operations, liquidity or financial position. Note 14 on page 67 of the 1996 Annual Report to Shareholders, which provides a schedule of ceded reinsurance information, is incorporated herein by reference. 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 hold a combined 78% interest in Nuveen. Nuveen is headquartered in Chicago and maintains regional sales offices in other cities across the United States. 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, Nuveen also serves state and local governments and their authorities by financing community projects through both negotiated and competitive financings. Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp., wholly-owned subsidiaries of John Nuveen & Co. Incorporated, provide investment advice to and administer the business affairs of the Nuveen family of management investment companies. Nuveen Institutional Advisory Corp. also provides investment management services for individuals and public utility nuclear power plant decommissioning and postretirement benefits trust funds. In 1996, Nuveen purchased a minority ownership interest in Institutional Capital Corporation (ICAP), an institutional equity manager. ICAP served as subadviser to the Nuveen Growth and Income Stock Fund, which was introduced in 1996 and generated new assets under management of almost $500 million by year-end. As the leading sponsor of tax-free UITs, Nuveen currently sponsors trusts with assets at Dec. 31, 1996 of approximately $14 billion in 3,520 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 57 exchange-traded funds with approximately $25 billion in net assets, which are traded on national stock exchanges. In 1996, Nuveen repurchased 3.8 million of its outstanding common shares for a total cost of $101 million. The repurchases were proportioned between The St. Paul and minority shareholders to maintain the combined 78% ownership interest in Nuveen held by The St. Paul and Fire and Marine. The St. Paul received proceeds of $74 million from Nuveen's share repurchases. In early 1997, Nuveen completed its acquisition of Flagship Resources Inc., a tax-exempt mutual fund and money management firm, which added $4.6 billion to assets under management. 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 for purposes of hedging against fluctuations in interest rates. The St. Paul has not participated in the derivatives market for trading or speculative purposes. Fixed Maturities. Fixed maturities constituted 83% of The St. Paul's investment portfolio at Dec. 31, 1996. 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 - ---- -------- -------- ---------- -------- --------- 1996 $11,485.0 $11,944.1 $738.4 7.0% 5.4% 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% 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 1996 were comprised of intermediate-term, investment- grade taxable and tax-exempt securities. The acquisition of Northbrook in 1996 added $1.14 billion of fixed maturities to The St. Paul's portfolio, which accounted for $25 million of incremental investment income in 1996. 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, 1996, pretax unrealized appreciation totaled $459 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 securities comprised 6% of The St. Paul's investments at Dec. 31, 1996, and consist of a diversified portfolio of common stocks, which are held with the primary objective of achieving capital appreciation. This portfolio provided $129 million of pretax realized investment gains and $16 million of dividend income in 1996, and its carrying value at year-end included $186 million of unrealized appreciation. Real Estate. The St. Paul's real estate holdings, which comprised 5% of total investments at Dec. 31, 1996, consist primarily of a diversified portfolio of commercial office and warehouse buildings geographically distributed throughout the United States. This portfolio produced $36 million of pretax investment income in 1996. The St. Paul does not have a portfolio of real estate mortgage investments. 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 4% of total investments at Dec. 31, 1996. These investments are in the form of limited partnership interests or direct equity investments. Sales of venture capital investments in 1996 generated pretax realized investment gains of $86 million. The carrying value of venture capital investments at year-end included $292 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 2% of total investments at Dec. 31, 1996. Notes 3, 4 and 5 on pages 56 through 58 of the 1996 Annual Report to Shareholders, and the "Investments" section of "Management's Discussion and Analysis" on pages 36 through 41 of said Annual Report, which provide additional information about The St. Paul's investment portfolio, are incorporated herein by reference. COMPETITION AND REGULATION The insurance underwriting and investment banking-asset management industries are both highly competitive. Underwriting. The St. Paul's domestic and international underwriting subsidiaries compete with a large number of other insurers and reinsurers. In addition, many large commercial customers self-insure their risks or utilize large deductibles on purchased insurance. The St. Paul's subsidiaries compete principally by attempting to offer a combination of superior products, underwriting expertise and services at a competitive price. The combination of products, services, pricing and other methods of competition varies by line of insurance and by coverage within each line of insurance. The St. Paul and its underwriting subsidiaries are subject to regulation by certain states as an insurance holding company system. Such regulation generally provides that transactions between companies within the holding company system must be fair and equitable. Transfers of assets among such affiliated companies, certain dividend payments from underwriting subsidiaries and certain material transactions between companies within the system may be subject to prior notice to or approval of state regulatory authorities. During 1996, The St. Paul received from Fire and Marine $186.5 million of cash dividends, and a noncash dividend in the form of common shares of The John Nuveen Company with a carrying value of $30.8 million and a market value of $75.0 million. In 1997, up to $477.3 million in cash dividends can be paid by Fire and Marine to The St. Paul without regulatory approval. In addition, any change of control (generally presumed by the holding company laws to occur with the acquisition of 10% or more of an insurance holding company's voting securities) of The St. Paul and its underwriting subsidiaries is subject to 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 and risk management services, increasing premium rates or by a combination of these. The freedom of The St. Paul's insurance underwriting subsidiaries to meet emerging adverse underwriting trends may be slowed, from time to time, by the effects of 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. 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. St. Paul Fire and Marine Insurance Company also owns a building in Freeport, Illinois that houses a portion of its personal insurance operations. St. Paul International Insurance Company Ltd. owns its building in London, England which houses its 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 most cities in which they operate. Management considers the currently owned and leased office facilities of The St. Paul and its subsidiaries adequate for the current and anticipated future level of operations. Item 3. Legal Proceedings. - ------ ----------------- The information set forth in the "Legal Matters" section of Note 11 on page 66 of the 1996 Annual Report to Shareholders, the "Legal Matters" section of "Management's Discussion and Analysis" on page 36 of said Annual Report, and the "Environmental and Asbestos Claims" section of "Management's Discussion and Analysis" on pages 34 through 36 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. 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, 1996. Executive Officers of the Registrant. All of the following persons are regarded as executive officers of The St. Paul Companies, Inc. because of their responsibilities and duties as elected officers of The St. Paul, Fire and Marine, St. Paul International Underwriting or St. Paul Re. There are no family relationships between any of The St. Paul's executive officers and directors, and there are no arrangements or understandings between any of these officers and any other person pursuant to which the officer was selected as an officer. All of the following officers except Paul J. Liska, Michael J. Conroy, 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. Paul J. Liska joined The St. Paul in January 1997. For three years prior to that date, Mr. Liska held various management positions with Specialty Foods Corporation, including the position of president and chief executive officer from January 1996 to January 1997. For six years prior to joining Specialty Foods Corporation, Mr. Liska held several executive positions with Kraft General Foods. 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. 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. 60 Chairman, President Serving at the Leatherdale and Chief Executive pleasure of the Officer-The St. Paul Board from 5-90 Companies, Inc. Patrick A. Thiele 46 Executive Vice Serving at the President, President pleasure of the and Chief Executive Board from 5-96 Officer-Worldwide Insurance Operations Paul J. Liska 41 Executive Vice Serving at the President and pleasure of the Chief Financial Board from 1-97 Officer Michael J. Conroy 55 Executive Vice Serving at the President and pleasure of the Chief Administrative Board from 8-95 Officer-Fire and Marine James F. Duffy 53 President and Serving at the Chief Executive pleasure of the Officer- Board from 9-93 St. Paul Re Mark L. Pabst 50 President and Serving at the Chief Executive pleasure of the Officer-St. Paul Board from 2-95 International Underwriting Susan J. Albrecht 50 President- Serving at the Major Markets- pleasure of the Fire and Marine Board from 12-94 Stephen J. Klingel 46 President- Serving at the Personal pleasure of the Insurance- Board from 8-95 Fire and Marine Joseph B. Nardi 52 President- Serving at the Medical Services- pleasure of the Fire and Marine Board from 8-82 Janet R. Nelson 47 President- Serving at the Custom Markets- pleasure of the Fire and Marine Board from 5-94 James A. Schulte 47 President- Serving at the Commercial- pleasure of the Fire and Marine Board from 10-93 Howard E. Dalton 59 Senior Vice Serving at the President and pleasure of the Chief Accounting Board from 9-87 Officer Andrew I. Douglass 53 Senior Vice Serving at the President and pleasure of the General Counsel Board from 8-93 James Hom 41 Senior Vice Serving at the President- pleasure of the Corporate Planning Board from 10-94 Greg A. Lee 47 Senior Vice Serving at the President- pleasure of the Human Resources Board from 1-93 Bruce A. Backberg 48 Vice President Serving at the and Corporate pleasure of the Secretary Board from 5-92 James L. Boudreau 61 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 1996 Annual Report to Shareholders are incorporated herein by reference. As partial consideration for the acquisition of the economic interest of Gravett & Tilling (Holdings) Limited, a United Kingdom corporation, The St. Paul, on Dec. 31, 1996, issued 28,748 shares of its common stock in an exempt transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Act"). As part of this acquisition, The St. Paul, pursuant to the November 13, 1996 acquisition agreement, is also to issue, to the eleven former shareholders of Gravett & Tilling (Holdings) Limited, an additional number of shares, having a market value of approximately one million pounds sterling, on Dec. 31, 1997. In transactions that are also exempt from registration pursuant to Section 4(2) of the Act, during 1996 The St. Paul also entered into Deferred Stock Grant Agreements with seven non-U.S. based employees pursuant to which The St. Paul is to issue a total of 7,500 shares of common stock to the employees if they remain employed with The St. Paul for various periods of time. Item 6. Selected Financial Data. - ------ ----------------------- The "Eleven-year Summary of Selected Financial Data" section on pages 46 and 47 of the 1996 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 45 of the 1996 Annual Report to Shareholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. - ------ ------------------------------------------- The financial statements and supplementary data on pages 48 to 69 of the 1996 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 "Election of Directors - Nominees for Directors" section, which provides information regarding The St. Paul's directors, on pages 4 to 6 of The St. Paul's Proxy Statement relating to the annual meeting of shareholders to be held May 6, 1997, 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 17 to 27 and the "Election of Directors - Board of Directors Compensation" section on pages 7 to 9 of the Proxy Statement relating to the annual meeting of shareholders to be held May 6, 1997, 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 28 to 30 of the Proxy Statement relating to the annual meeting of shareholders to be held May 6, 1997, 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, 1996, 1995 and 1994 Consolidated Balance Sheets - December 31, 1996 and 1995 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 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 32 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 Management Incentive Awards Plan. The Directors' Deferred Compensation Plan. The Deferred Stock Grant Agreement with Mr. Mark L. Pabst is incorporated by reference to the Form 10-K for the year ended December 31, 1995. The Directors' Charitable Award Program 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 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 fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends. (13) The 1996 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, 1996 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 1996 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, No. 333- 01065 and No. 333-22329) and Form S-3 (SEC File No. 33- 33931, No. 33-50115, No. 33-58491 and No. 333-06456). (24) Power of attorney. (27) Financial data schedule. (b) Reports on Form 8-K. A Form 8-K Current Report dated October 1, 1996, was filed relating to the announcement of the anticipated impact of weather related losses on The St. Paul's third-quarter 1996 operating results. A Form 8-K Current Report dated October 29, 1996 was filed relating to the announcement of The St. Paul's financial results for the quarter ended September 30, 1996. A Form 8-K Current Report dated January 27, 1997, was filed relating to the announcement of The St. Paul's financial results for the year ended December 31, 1996. A Form 8-K Current Report dated February 7, 1997, was filed relating to the announcement of The St. Paul's share repurchase and stock ownership plans. 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 25, 1997 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 25, 1997 By /s/ Douglas W. Leatherdale -------------- -------------------------- Douglas W. Leatherdale, Director, Chairman of the Board, President and Chief Executive Officer Date March 25, 1997 By /s/ Patrick A. Thiele -------------- --------------------- Patrick A. Thiele, Director, Executive Vice President, President and Chief Executive Officer - Worldwide Insurance Operations Date March 25, 1997 By /s/ Paul J. Liska -------------- ----------------- Paul J. Liska, Executive Vice President and Chief Financial Officer Date March 25, 1997 By /s/ Howard E. Dalton -------------- -------------------- Howard E. Dalton, Senior Vice President and Chief Accounting Officer Date March 25, 1997 By /s/ Michael R. Bonsignore -------------- ------------------------- Michael R. Bonsignore*, Director Date March 25, 1997 By /s/ John H. Dasburg -------------- ------------------- John H. Dasburg*, Director Date March 25, 1997 By /s/ W. John Driscoll -------------- -------------------- W. John Driscoll*, Director Date March 25, 1997 By /s/ Pierson M. Grieve -------------- --------------------- Pierson M. Grieve*, Director Date March 25, 1997 By /s/ Ronald James -------------- ---------------- Ronald James*, Director Date March 25, 1997 By /s/ David G. John -------------- ----------------- David G. John*, Director Date March 25, 1997 By /s/ William H. Kling -------------- --------------------- William H. Kling*, Director Date March 25, 1997 By /s/ Bruce K. MacLaury -------------- --------------------- Bruce K. MacLaury*, Director Date March 25, 1997 By /s/ Glen D. Nelson -------------- ------------------ Glen D. Nelson*, Director Date March 25, 1997 By /s/ Anita M. Pampusch -------------- --------------------- Anita M. Pampusch*, Director Date March 25, 1997 By /s/ Gordon M. Sprenger -------------- ---------------------- Gordon M. Sprenger*, Director Date March 25, 1997 *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 27, 1997, we reported on the consolidated balance sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31, 1996 and 1995, 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, 1996, as contained in the 1996 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 1996. 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. Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP January 27, 1997 ------------------------- KPMG Peat Marwick LLP THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1996 (In thousands) 1996 ------------------------------------- Amount at which shown in the Cost* Value* balance sheet ----------- --------- ------------ Type of investment: Fixed maturities: - ---------------- United States Government and government agencies and authorities $ 2,401,760 $ 2,444,966 $ 2,444,966 States, municipalities and political subdivisions 4,992,485 5,287,966 5,287,966 Foreign governments 1,077,869 1,125,606 1,125,606 Corporate securities 1,546,721 1,586,262 1,586,262 Mortgage-backed securities 1,466,168 1,499,285 1,499,285 ---------- ---------- ---------- Total fixed maturities 11,485,003 11,944,085 11,944,085 ---------- ========== ---------- Equity securities: - ----------------- Common stocks: Public utilities 12,213 15,902 15,902 Banks, trusts and insurance companies 65,639 87,155 87,155 Industrial, miscellaneous and all other 544,028 705,238 705,238 ---------- ---------- ---------- Total equity securities 621,880 808,295 808,295 ---------- ---------- ---------- Venture capital 293,837 $ 586,222 586,222 ---------- ========== ---------- Real estate 707,910** 693,910 Other investments 43,311 43,311 Short-term investments 289,793 289,793 ---------- ---------- Total investments $13,441,734 $14,365,616 ========== ========== * See Notes 1, 3, 4 and 5 to the consolidated financial statements included in The St. Paul's 1996 Annual Report to Shareholders. ** The cost of real estate represents the cost of properties before valuation provisions. (See Schedule V on page 31). THE ST. PAUL COMPANIES, INC. (Parent Only) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET INFORMATION December 31, 1996 and 1995 (In thousands) Assets: 1996 1995 ---- ---- Investment in subsidiaries $4,533,106 $4,514,440 Investments: Fixed maturities 162,895 138,552 Equity securities 40,424 52,235 Short-term investments 25,271 40,130 Deferred income taxes 453,560 136,427 Other assets 102,280 89,283 --------- --------- Total assets $5,317,536 $4,971,067 ========= ========= Liabilities: Debt $1,090,477 $1,074,657 Dividends payable to shareholders 36,579 33,559 Other liabilities 186,660 132,730 --------- --------- Total liabilities 1,313,716 1,240,946 --------- --------- Shareholders' Equity: Preferred: Convertible preferred stock 142,131 144,165 Guaranteed obligation - PSOP (126,068) (133,293) --------- --------- Total preferred shareholders' equity 16,063 10,872 --------- --------- Common: Common stock, authorized 240,000 shares; issued 83,198 shares (83,976 in 1995) 475,710 460,458 Retained earnings 2,935,928 2,704,075 Guaranteed obligation - ESOP (20,353) (32,294) Unrealized appreciation of investments 616,968 627,791 Unrealized loss on foreign currency translation (20,496) (40,781) --------- --------- Total common shareholders' equity 3,987,757 3,719,249 --------- --------- Total shareholders' equity 4,003,820 3,730,121 --------- --------- Total liabilities and shareholders' equity $5,317,536 $4,971,067 ========= ========= 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, 1996, 1995 and 1994 (In thousands) 1996 1995 1994 ---- ---- ---- Revenues: Net investment income $ 12,695 $ 9,165 $ 4,470 Realized investment gains 8,810 8,800 4,240 ------- ------- ------- Total revenues 21,505 17,965 8,710 ------- ------- ------- Expenses: Interest expense 75,409 63,744 48,457 Administrative and other 29,228 29,476 21,312 ------- ------- ------- Total expenses 104,637 93,220 69,769 ------- ------- ------- Loss before income tax benefit (83,132) (75,255) (61,059) Income tax benefit (46,462) (18,941) (22,608) ------- ------- ------- Net loss from continuing operations- parent only (36,670) (56,314) (38,451) ------- ------- ------- Income tax benefit - discontinued operations (291,493) - - ------- ------- ------- Net income (loss) - parent only 254,823 (56,314) (38,451) Equity in net income of subsidiaries and loss from discontinued operations 195,276 577,523 481,279 ------- ------- ------- Consolidated net income $450,099 $521,209 $442,828 ======= ======= ======= 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, 1996, 1995 and 1994 (In thousands) 1996 1995 1994 ---- ---- ---- Operating Activities: Net income (loss) $ 254,823 $ (56,314) $ (38,451) Cash dividends from subsidiaries 200,648 206,118 210,523 Tax payments from subsidiaries 93,928 159,216 104,509 State and federal income tax payments (70,000) (103,000) (84,910) Adjustments to reconcile net loss to net cash provided by operating activities: Tax benefit - discontinued operations (291,493) - - Deferred tax benefit -operations (21,891) (1,077) (19,660) Realized investment gains (8,810) (8,800) (4,240) Other (3,951) (110) 1,897 ------- ------- ------- Cash provided by operating activities 153,254 196,033 169,668 ------- ------- ------- Investing Activities: Purchases of investments (104,322) (218,525) (93,601) Proceeds from sales and maturities of investments 109,958 93,919 84,337 Capital contributions to subsidiaries (55,922) (223,623) (53,466) Acquisitions - - (10,643) Other (268) (870) 14 ------- ------- ------- Cash used in investing activities (50,554) (349,099) (73,359) ------- ------- ------- Financing Activities: Dividends paid to shareholders (155,268) (144,662) (136,062) Proceeds from issuance of debt 53,000 455,028 87,721 Repayment of debt (17,711) (125,446) (20,350) Repurchase of common shares (74,217) (41,714) (34,150) Proceeds from Nuveen stock repurchase 73,966 - - Stock options exercised and other 17,530 9,860 6,532 ------- ------- ------- Cash provided by (used in) financing activities (102,700) 153,066 (96,309) ------- ------- ------- 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 1996 Annual Report to Shareholders. 2. Debt consists of the following (in thousands): December 31, --------------------------- 1996 1995 ---- ---- Medium-term notes $ 430,427 $ 397,433 Convertible subordinated debentures (1) 262,026 262,026 Commercial paper 131,610 149,629 Guaranteed PSOP debt (1) 126,068 133,293 9-3/8% notes 99,994 99,982 Intercompany loan (1) 20,000 - Guaranteed ESOP debt 13,890 25,001 Guaranteed ESOP debt (1) 6,462 7,293 --------- --------- Total debt $1,090,477 $1,074,657 ========= ========= (1) Eliminated in consolidation. See Note 8 to the consolidated financial statements included in the 1996 Annual Report to Shareholders for further information on debt outstanding at Dec. 31, 1996. The amount of debt, other than debt eliminated in consolidation, that becomes due during each of the next five years is as follows: 1997, $111.1 million; 1998, $27.8 million; 1999, $20.0 million; 2000, $144.8 million; and 2001, $45.5 million. THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (In thousands) At December 31, --------------------------------------------- Gross loss Deferred and loss Other policy policy adjustment Gross claims and acquisition expense unearned benefits expenses reserves premiums payable --------- ------------- --------- ---------- 1996 - ---- Property-Liability Insurance Underwriting: Worldwide Insurance Operations: Fire and Marine: Specialized Commercial $120,222 $3,345,102 $719,969 - Commercial 78,702 2,629,381 483,135 - Personal Insurance 59,803 483,414 303,658 - Medical Services 60,087 2,053,221 650,199 - ------- ---------- --------- ------ Total Fire and Marine 318,814 8,511,118 2,156,961 - International 17,700 1,122,397 138,029 - ------- ---------- --------- ------ Total Worldwide Insurance 336,514 9,633,515 2,294,990 St. Paul Re 65,254 2,039,633 271,561 - ------- ---------- --------- ------ Total $401,768 $11,673,148 $2,566,551 - ======= ========== ========= ====== 1995 - ---- Property-Liability Insurance Underwriting: Worldwide Insurance Operations: Fire and Marine: Specialized Commercial $119,150 $ 3,377,431 $ 753,479 - Commercial 60,561 1,399,928 290,475 - Personal Insurance 58,153 405,266 286,121 - Medical Services 58,777 2,129,471 647,878 - ------- ---------- --------- ------ Total Fire and Marine 296,641 7,312,096 1,977,953 - International 18,277 1,091,131 133,699 - ------- ---------- --------- ------ Total Worldwide Insurance 314,918 8,403,227 2,111,652 St. Paul Re 57,256 1,843,843 249,376 - ------- ---------- --------- ------ Total $372,174 $10,247,070 $2,361,028 - ======= ========== ========= ====== 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 earned income expenses expenses expenses written --------- -------- --------- ---------- ------- -------- Worldwide Insurance Operations: Fire and Marine: Specialized Commercial $1,272,561 - $826,670 $303,206 $97,935 $1,278,814 Commercial 862,092 - 637,693 204,904 83,957 778,487 Personal Insurance 707,299 - 694,551 156,109 58,456 724,616 Medical Services 601,679 - 409,124 100,086 38,680 585,876 --------- ------- --------- ------- ------- ------- Total Fire and Marine 3,443,631 - 2,568,038 764,305 279,028 3,367,793 International 268,830 - 196,948 47,308 46,360 267,805 --------- ------- --------- ------- ------- --------- Total Worldwide Insurance 3,712,461 - 2,764,986 811,613 325,388 3,635,598 St. Paul Re 735,787 - 553,315 163,843 55,327 760,524 Net investment income - $794,901 - - - - Other - - - - 131,761 - --------- ------- --------- ------- ------- --------- Total $4,448,248 $794,901 $3,318,301 $975,456 $512,476 $4,396,122 ========= ======= ========= ======= ======= ========= 1995 - ---- Worldwide Insurance Operations: Fire and Marine: Specialized Commercial $1,230,790 - $ 961,801 $298,765 $ 98,328 $1,304,062 Commercial 587,016 - 378,754 155,125 57,580 617,767 Personal Insurance 655,347 - 486,275 145,547 56,524 673,347 Medical Services 605,468 - 387,716 97,695 44,557 673,980 --------- ------- --------- ------- ------- --------- Total Fire and Marine 3,078,621 - 2,214,546 697,132 256,989 3,269,156 International 237,727 - 188,728 27,326 44,857 260,582 --------- ------- --------- ------- ------- --------- Total Worldwide Insurance 3,316,348 - 2,403,274 724,458 301,846 3,529,738 St. Paul Re 654,981 - 461,033 132,521 56,936 713,475 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 - ---- Worldwide Insurance Operations: Fire and Marine: Specialized Commercial $1,015,397 - $ 764,760 $252,577 $ 88,046 $1,085,514 Commercial 498,543 - 365,555 137,661 59,079 529,741 Personal Insurance 619,414 - 455,879 138,512 51,338 635,557 Medical Services 638,413 - 369,571 109,517 38,848 689,716 --------- ------- --------- ------- ------- --------- Total Fire and Marine 2,771,767 - 1,955,765 638,267 237,311 2,940,528 International 156,946 - 133,920 25,398 28,797 169,176 --------- ------- --------- ------- ------- --------- Total Worldwide Insurance 2,928,713 - 2,089,685 663,665 266,108 3,109,704 St. Paul Re 483,368 - 372,013 90,281 42,877 513,322 Net investment income - $674,818 - - - - Other - - - - 66,581 - --------- ------- --------- ------- ------- --------- Total $3,412,081 $674,818 $2,461,698 $753,946 $375,566 $3,623,026 ========= ======= ========= ======= ======= ========= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE IV - REINSURANCE Years Ended December 31, 1996, 1995 and 1994 (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 --------- -------- --------- -------- --------- 1996 $4,001,384 528,409 975,273 4,448,248 21.9% ========= ======= ======= ========= 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% ========= ======= ======= ========= THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1996, 1995 and 1994 (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 - ----------- ---------- ---------- ---------- ---------- -------- 1996 - ---- Real estate valuation adjustment $34,000 - - 20,000 14,000 ====== ====== ===== ====== ====== Allowance for uncollectible: Agency loans $1,664 - - - 1,664 ====== ====== ===== ====== ====== Premiums receivable from underwriting activities $18,918 5,073 - 2,832 21,159 ====== ====== ===== ====== ====== Reinsurance $21,531 1,150 - - 22,681 ====== ====== ===== ====== ====== 1995 - ---- Real estate valuation adjustment $24,000 10,000 - - 34,000 ====== ====== ===== ====== ====== Allowance for uncollectible: Agency loans $ 1,664 - - - 1,664 ====== ====== ===== ====== ====== Premiums receivable from underwriting activities $20,938 4,192 - 6,212 18,918 ====== ====== ===== ====== ====== Reinsurance $25,823 - - 4,292 21,531 ====== ====== ===== ====== ====== 1994 - ---- Real estate valuation adjustment $14,000 10,000 - - 24,000 ====== ====== ===== ====== ====== Allowance for uncollectible: Agency loans $ 4,750 - - 3,086 1,664 ====== ====== ===== ====== ====== Premiums receivable from underwriting activities $22,218 2,373 - 3,653 20,938 ====== ====== ===== ====== ====== Reinsurance $26,202 492 - 871 25,823 ====== ====== ===== ====== ====== (1) Deductions include write-offs of amounts determined to be uncollectible, unrealized foreign exchange gains and losses and, for real estate, a reduction in the valuation allowance for properties sold during the year. 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 Management Incentive Awards Plan.........(1) (b) The Directors' Deferred Compensation Plan.............(1) (c) The Deferred Stock Grant Agreement with Mr. Mark L. Pabst***............................ (d) The Directors' Charitable Award Program***............ (e) Relocation Loan Payback Agreement with Mr. James F. Duffy***........................... (f) Pension Service Agreement with Mr. Andrew I. Douglass***....................... (g) 1994 Stock Incentive Plan***.......................... (h) 1994 Annual Incentive Plan***......................... (i) Long-Term Incentive Plan***........................... (j) Non-Employee Director Stock Retainer Plan***.......... (k) Outside Directors' Retirement Plan***................. (l) Amended 1988 Stock Option Plan***..................... (m) Restricted Stock Award Plan***........................ (n) Benefit Equalization Plan***.......................... (o) Special Severance Policy***........................... (p) Directors' Deferred Compensation Agreement - Prime Rate***........................................ (q) Directors' Deferred Compensation Agreement - Phantom Stock***..................................... (r) Alternative Long-Term Incentive Plan***............... (s) Annual Incentive Plan***.............................. (t) Executive Post-Retirement Life Insurance Plan***...... (u) Executive Excess Long-Term Disability Plan***......... (11) Statements re computation of per share earnings.........(1) (12) Statements re computation of ratios.....................(1) (13) Annual report to security holders.......................(1) (16) Letter re change in certifying accountant**............. (18) Letter re change in accounting principles**............. (21) Subsidiaries of the Registrant..........................(1) (22) Published report regarding matters submitted to vote of security holders**.......................... (23) Consent of experts and counsel..........................(1) (24) Power of attorney.......................................(1) (27) Financial data schedule.................................(1) (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. EX-10 2 THE ST. PAUL COMPANIES, INC DEFERRED MANAGEMENT INCENTIVE AWARDS PLAN ----------------------------------------- (As Amended and Restated Effective as of January 1, 1996) Section 1 --------- Introduction 1.1 The Plan and Its Effective Date. The St. Paul Companies, Inc. Deferred Management Incentive Awards Plan ("Plan") was established as of January 1, 1984. The effective date of the amendment and restatement of the Plan as set forth herein is January 1, 1996. 1.2 Purpose. The St. Paul Companies, Inc. (the "Company") has established the Plan for a select group of management and highly compensated employees of the Company or any subsidiary or affiliate that adopts the Plan in accordance with Section 6 to retain and attract highly qualified personnel by offering the benefits of a non-qualified, unfunded plan of deferred compensation. The Plan is intended to be a top-hat plan described in Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"). 1.3 Administration. The Plan shall be administered by the Plan Administrator who shall be appointed by the Personnel and Compensation Committee (the "Committee") of the board of directors of the Company (the "Board of Directors"). In the absence of the appointment of a Plan Administrator, the officer of the Company having direct responsibility for compensation and benefits shall be the Plan Administrator. The Plan Administrator shall have the authority to delegate, from time to time, his responsibilities under the Plan to such person or persons as he deems advisable and may revoke any such delegation of responsibility. Any action by the delegate in the exercise of delegated responsibilities shall have the same force and effect as if such action was taken by the Plan Administrator. Section 2 --------- Participation and Deferral Elections 2.1 Eligibility and Participation. Subject to the conditions and limitations of the Plan, officers of the Company or an Employer (as defined in Section 6.1) who both (i) participate in the Company's Annual Incentive Plan (the "Employees' Incentive Plan") or the Company's Annual Incentive Plan for executive officers (the "Executive Officers' Incentive Plan") and (ii) have an annual base salary equal to or greater than $95,000 shall be eligible to participate in the Plan ("Eligible Employees"). Any Eligible Employee who makes a Deferral Election as described in Section 2.2 below shall become a participant in the Plan ("Participant") and shall remain a Participant until the entire balance of all his Deferred Compensation Accounts (defined in Section 3.1 below) are distributed to him. 2.2 Rules for Deferral Elections. Any Eligible Employee may make an irrevocable election ("Deferral Election") to defer receipt of all or any percentage of his annual incentive compensation award ("Incentive Award") under the Employees' Incentive Plan or the Executive Officers' Incentive Plan for a calendar year in accordance with the rules set forth below: (a) An individual shall be eligible to make a Deferral Election only if he is an Eligible Employee on the date such election is made. (b) The minimum amount that may be deferred for any year is $1,000. If the amount or percentage specified for deferral in an Eligible Employee's Deferral Election would result in the deferral of less than $1,000, the amount or percentage specified will not be deferred hereunder but will be paid to the Eligible Employee at the time that Incentive Awards are otherwise payable. (c) All Deferral Elections must be made in writing on such form as the Plan Administrator may prescribe and must be received by the Plan Administrator no later than October 31 of the calendar year immediately preceding the calendar year in which such Incentive Award is otherwise payable. (d) Amounts will be deferred to the date specified by the Eligible Employee at the time of his Deferral Election (the "Distribution Date") and payment will be made or will commence within 30 days after the Valuation Date (as defined in Section 3.4) coinciding with or next following the Distribution Date. Except as provided in subsection (j), the Distribution Date specified at the time of the Eligible Employee's Deferral Election is irrevocable. (e) The Distribution Date shall be one of the following as specified by the Participant at the time of his Deferral Election: (1) the earliest date following the Participant's Termination of Employment (as defined in subsection (f) below) on which the Participant is entitled to commence receiving retirement benefits under The St. Paul Companies, Inc. Employees' Retirement Plan; (2) the Participant's Termination of Employment (as defined in subsection (f) below); (3) a specified date (the "Designated Distribution Date"), which may include a specified date coinciding with or next following the Eligible Employee's Termination of Employment (e.g., January 1 coinciding with or next following the Eligible Employee's Termination of Employment); or (4) the earliest to occur of (1) and (3), above, or (2) and (3), above, as elected by the Participant. In addition, a Participant may elect, in his Deferral Election, to receive a distribution of his Deferral Account in the event the Participant becomes Disabled (as defined in Section 4.2 below). (f) For purposes of this Plan, a "Termination of Employment" occurs when a person leaves the employ of the Company (including all subsidiaries and affiliates) by reason of a resignation, discharge, retirement, disability or death. (g) At the time of the Participant's Deferral Election, the Participant must elect, in writing on such form as the Plan Administrator may prescribe, the form of payment of the Participant's Deferred Compensation Account. The Deferred Compensation Account may be paid in a single lump sum or in substantially equal annual installments over a period of up to ten years in accordance with Section 4.1. (h) At the time of the Participant's Deferral Election, the Participant shall specify, in writing on such form as may be prescribed by the Plan Administrator, the manner in which income, gains, losses and expenses are credited or charged to a Participant's Deferred Compensation Accounts in accordance with Section 3. (i) A Deferral Election filed with the Plan Administrator shall remain in effect for the current and all future Incentive Awards unless the Eligible Employee files a change in his Deferral Election. A change in Deferral Election will not be effective with respect to an Incentive Award unless the change in Deferral Election is filed with the Plan Administrator on or before October 31 of the calendar year immediately preceding the calendar year in which such Incentive Award is otherwise payable. Notwithstanding the foregoing, if a Participant receives a distribution on account of hardship under any qualified plan that is described in Section 401(k) of the Internal Revenue Code (the "Code") and which is maintained by the Company, an Employer or a commonly controlled entity (as defined in Code Sections 414(b) and (c)) of the Company or an Employer (a "401(k) Plan"), then no amounts may be deferred under the Plan for a period of 12 months following the date the Participant receives the distribution on account of hardship from the 401(k) Plan. (j) A Participant may make a one-time election with respect to each Deferred Compensation Account after the Participant's Deferral Election with respect to such Deferred Compensation Account to extend the Distribution Date; provided that such election shall not be effective unless the Plan Administrator receives the election at least one year and one day before the Distribution Date elected by the Participant in his Deferral Election; and further provided, that an election under this Section 2.2(j) by a Section 16b Insider (as defined in Section 4.7) shall be conditioned upon the approval of the Committee and shall not be effective unless the Committee approves the election at least one year and one day before the Distribution Date elected by the Section 16b Insider in his Deferral Election. Section 3 --------- Deferred Compensation Accounts 3.1 Deferred Compensation Accounts. A bookkeeping account shall be established in the Participant's name for each year for which a Participant defers an Incentive Award pursuant to a Deferral Election ("Deferred Compensation Account"). Amounts deferred pursuant to a Deferral Election shall be credited to the Deferred Compensation Account as of the date (the "Deferral Crediting Date") on which, in the absence of a Deferral Election, the Participant would otherwise have received the deferred amounts. 3.2 Investment Elections. A Participant must make an investment election at the time of his Deferral Election. The investment election shall designate the portion of the amounts deferred which are to be treated as invested in each Investment Fund (as defined in Section 3.3 below). A Participant's investment election shall remain in effect with respect to each subsequent deferral until the Participant files a change in investment election with the Plan Administrator. A Participant may change his investment election either with respect to new deferrals following the change in investment election (in increments of 1%) or with respect to the investment allocation of all of the Participant's existing Deferred Compensation Accounts (in increments of 10%), as the Participant may elect. A change in investment election must be filed with the Plan Administrator on a form prescribed by the Plan Administrator. A change in investment election will become effective on the first business day of the calendar month following the Plan Administrator's receipt of the change in investment election; provided that the Plan Administrator receives the change in investment election no later than the 15th day of the preceding calendar month (or such earlier or later date as may be permitted or required by the Plan Administrator). 3.3 Investment Funds. The "Investment Funds" shall consist of the following two funds: (a) Prime Rate Fund: An Investment Fund that is deemed to be invested in an interest bearing account which is credited with interest at the prime rate of interest charged by First Bank, N.A. in the manner described in Section 3.4(a). (b) Phantom Stock Fund: An Investment Fund that is deemed to be invested in common stock of the Company ("Company Stock"). The Plan Administrator may, in his sole discretion, designate additional Investment Funds which provide a rate of return equal to the rate of return that an employee would earn if the amounts credited to such Investment Fund were invested in a mutual fund, insurance company separate account or such other investment vehicle designated by the Plan Administrator. 3.4 Valuation of Investment Funds. As of the last business day of each calendar month (or such other dates as the Plan Administrator, in his discretion, may designate) ("Valuation Date"), each Participant's Deferred Compensation Account will be credited with income, gains and deposits and charged with losses and distributions equal to the amount by which the Deferred Compensation Account would have been credited or charged since the prior Valuation Date had the Participant's Deferred Compensation Account been invested in the Investment Funds selected by the Participant in accordance with the Participant's investment elections. The manner in which a Participant's deemed investment in each Investment Fund is calculated is described below. (a) Prime Rate Fund. The value of the portion of the Participant's Deferred Contribution Account deemed to be invested in the Prime Rate Fund as of a Valuation Date shall equal the Participant's deemed account balance in such fund as of the immediately preceding Valuation Date plus interest and deposits credited to the account since the immediately preceding Valuation Date and reduced by distributions since such preceding Valuation Date. As of each Valuation Date, interest shall be credited to the portion of the Participant's Deferred Compensation Account deemed to be invested in the Prime Rate Fund at the prime rate of interest charged by First Bank, N.A. in effect as of the Valuation Date for daily balances (determined without regard to any interest credited to the Deferred Compensation Account during the calendar year containing such Valuation Date) for the period commencing the day after the later of the immediately preceding Valuation Date or the Deferral Crediting Date, as applicable, and ending on the Valuation Date calculated on the basis of a three hundred sixty (360) day year compounded annually. (b) Phantom Stock Fund. The value of the Participant's Deferred Contribution Account treated as invested in the Phantom Stock Fund as of a Valuation Date shall equal the fair market value of the shares of the Company Stock deemed to be credited to the Participant's Deferred Compensation Account on such Valuation Date. Dividends shall be deemed to be reinvested in shares of Company Stock valued at fair market value as of the record date for the dividend. The portion of the amount deferred that a Participant designates for investment in the Phantom Stock Fund shall be deemed to be invested in Company Stock valued at fair market value as of the Deferral Crediting Date. The amount transferred into the Phantom Stock Fund pursuant to a change in investment election shall be deemed to be invested in Company Stock valued at fair market value as of the Valuation Date on which such investment election becomes effective. For purposes of this subsection (b), the fair market value of a share of Company Stock as of any day shall mean the closing price of Company Stock on the New York Stock Exchange on such day (or the last business day preceding such day on which Company Stock was traded). (c) If the Plan Administrator designates one or more additional Investment Funds, the Plan Administrator shall establish a valuation and income crediting methodology for determining the value of the portion of a Deferred Contribution Account treated as invested in such Investment Fund which methodology shall be similar to the methodology described in subsection (b) above. 3.5 Vesting. A Participant shall be fully vested at all times in the balance of his Deferred Compensation Account. Section 4 --------- Payment of Benefits 4.1 Time and Method of Payment. Payment of a Participant's Deferred Compensation Account shall be made in the form of a single lump sum or shall commence in the form of installments as elected by the Participant in his Deferral Election. Notwithstanding the foregoing, a Participant may make a one-time election with respect to each Deferred Contribution Account to change the form of payment previously elected by the Participant; provided that such election shall not be effective unless the election to change the form of payment is received by the Plan Administrator at least one year and one day before the Participant's Distribution Date; and further provided, that an election under this Section 4.1 by a Section 16b Insider (as defined in Section 4.7) shall be conditioned upon the approval of the Committee and shall not be effective unless the Committee approves the election at least one year and one day before the Section 16b Insider's Distribution Date. A Participant who makes an election pursuant to this Section 4.1 to receive payment of his Deferred Compensation Account in the form of installments shall designate the number of years, up to a maximum of ten years, over which the installments will be paid. If a Participant's Deferred Compensation Account is payable in a single lump sum, the payment shall be made within 30 days after the Valuation Date coinciding with or next following the Participant's Distribution Date in an amount equal to the value of the Participant's Deferred Compensation Account as of the Valuation Date coinciding with or immediately preceding the date on which the balance of the Deferred Compensation Account is paid to the Participant. If a Participant's Deferred Compensation Account is payable in the form of installment payments, then the Participant's Deferred Compensation Account shall be paid in substantially equal annual installments over the period elected by the Participant; provided that the number of annual installments shall not exceed the Participant's Deferred Compensation Account balance as of the Valuation Date coinciding with or next following the Distribution Date divided by $1,000 (rounded down to the next whole number). If the Participant's entire Deferred Compensation Account balance is less than $1,000 as of the Valuation Date coinciding with or next following the Distribution Date it will be distributed in a single lump payment. The initial installment payment shall be paid within 30 days after the Valuation Date coinciding with or next following the Participant's Distribution Date. Subsequent installment payments shall be paid each January commencing with the first January following the Participant's Distribution Date. Each installment payment shall be computed by dividing the balance of the Participant's Deferred Compensation Account as of the Valuation Date coinciding with or immediately preceding the installment payment date by the number of remaining installment payments. 4.2 Payment Upon Disability. If a Participant elects, in his Deferral Election, to receive a distribution in the event he becomes Disabled (as defined below) before his Distribution Date, payment of the Participant's Deferred Compensation Account shall be made or shall commence (in the form of payment elected by the Participant in accordance with Sections 2.2(g) and 4.1) within 30 days after the Valuation Date coinciding with or next following the date on which the Plan Administrator determines that the Participant is Disabled. For purposes of this Section 4.2, a Participant shall be "Disabled" if he has a physical or mental condition resulting from a bodily injury, disease, or mental disorder, which renders the Participant incapable of engaging in any suitable gainful employment or occupation and such physical or mental condition is expected to be permanent and continuous during the remainder of the Participant's life. Such determination shall be made by the Plan Administrator on the basis of such medical and other competent evidence as the Plan Administrator shall deem relevant. 4.3 Payment Upon Death of a Participant. Notwithstanding any election by the Participant regarding the timing and manner of payment of his Deferred Compensation Account, a Participant's Deferred Compensation Account shall be paid to the Participant's Beneficiary (designated in accordance with Section 4.4) in a single lump sum as soon as practical following the Valuation Date coinciding with or next following the date of the Participant's death. 4.4 Beneficiary. A Participant's Beneficiary or Beneficiaries shall be the beneficiary or beneficiaries designated by the Participant under the Company's group life insurance plan. If no Beneficiary is named by a Participant under the Company's group life insurance plan, or if he survives all of his named beneficiaries, the Deferred Compensation Account shall be paid to the Participant's estate. 4.5 Form of Payment. All payments shall be made in cash. 4.6 Withholding of Taxes. The Company shall withhold any applicable Federal, state or local income tax from payments due under the Plan. The Company shall also withhold Social Security taxes, including the Medicare portion of such taxes, and any other employment taxes as necessary to comply with applicable laws. 4.7 Limitations for Section 16b Insiders. A "Section 16b Insider" shall include any Participant who has been deemed to be subject to Section 16 of the Securities and Exchange Act of 1934 (the "Exchange Act") by the Board of Directors. Notwithstanding any provision of the Plan, the Plan Administrator may impose such limitations and restrictions on the Section 16b Insiders' investment elections under Sections 2.2(h) and 3.2 as he deems necessary or appropriate so that transactions by Section 16b Insiders do not present a risk of possible liability under Section 16b of the Exchange Act. Section 5 --------- Miscellaneous 5.1 Funding. Benefits payable under the Plan to any Participant shall be paid directly by the Participant's Employer (including the Company if the Participant is employed by the Company). No Employer (including the Company) shall have any obligation to pay any benefits under the Plan with respect to an employee of any other Employer. The Company and the Employers shall not be required to fund, or otherwise segregate assets to be used for payment of benefits under the Plan. While the Company and the Employers may make investments (a) in shares of Company Stock through open market purchases or (b) in other investments in amounts equal or unequal to Participants' investment elections hereunder, the Company and the Employers shall not be under any obligation to make such investments and any such investment shall remain an asset of the Company or the Employer subject to the claims of its general creditors. Notwithstanding the foregoing, the Company and the Employers, in the discretion of the Board of Directors or the Committee, may maintain one or more grantor trusts ("Trust") to hold assets to be used for payment of benefits under the Plan. The assets of the Trust with respect to benefits payable to the employees of an Employer shall remain subject to the claims of such Employer's general creditors. Any payments by a Trust of benefits provided to a Participant under the Plan shall be considered payment by the Company or the Employer and shall discharge the Company or the Employer of any further liability under the Plan for such payments. 5.2 Benefit Statements. As soon as practical after the end of each calendar quarter (or after such additional date or dates as the Plan Administrator, in his discretion, may designate), the Plan Administrator shall provide each Participant with a statement of the balance of each of his Deferred Compensation Accounts hereunder as of the last day of such calendar quarter (or as of such other dates as the Plan Administrator, in his discretion may designate). 5.3 Employment Rights. Establishment of the Plan shall not be construed to give any Eligible Employee the right to be retained in the Company's or any Employer's service or to any benefits not specifically provided by the Plan. 5.4 Interests Not Transferable. Except as to withholding of any tax under the laws of the United States or any state or locality and the provisions of Section 4.4, no benefit payable at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, or other legal process, or encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such benefits, whether currently or thereafter payable, shall be void. No person shall, in any manner, be liable for or subject to the debts or liabilities of any person entitled to such benefits. If any person shall attempt to, or shall alienate, sell, transfer, assign, pledge or otherwise encumber his benefits under the Plan, or if by any reason of his bankruptcy or other event happening at any time, such benefits would devolve upon any other person or would not be enjoyed by the person entitled thereto under the Plan, then the Plan Administrator, in his discretion, may terminate the interest in any such benefits of the person entitled thereto under the Plan and hold or apply them for or to the benefit of such person entitled thereto under the Plan or his spouse, children or other dependents, or any of them, in such manner as the Plan Administrator may deem proper. 5.5 Forfeitures and Unclaimed Amounts. Unclaimed amounts shall consist of the amounts of the Deferred Compensation Account of a Participant that cannot be distributed because of the Plan Administrator's inability, after a reasonable search, to locate a Participant or his Beneficiary, as applicable, within a period of two (2) years after the Valuation Date upon which the payment of benefits become due. Unclaimed amounts shall be forfeited at the end of such two-year period. These forfeitures will reduce the obligations of the Company under the Plan. After an unclaimed amount has been forfeited, the Participant or Beneficiary, as applicable, shall have no further right to his Deferred Compensation Account. 5.6 Controlling Law. The law of Minnesota, except its law with respect to choice of law, shall be controlling in all matters relating to the Plan to the extent not preempted by ERISA. 5.7 Gender and Number. Words in the masculine gender shall include the feminine, and the plural shall include the singular and the singular shall include the plural. 5.8 Action by the Company. Except as otherwise specifically provided herein, any action required of or permitted by the Company under the Plan shall be by resolution of either the Board of Directors or the Committee or by action of such person(s) authorized by resolution of the Board of Directors or the Committee. Section 6 --------- Employer Participation 6.1 Adoption of Plan. Any subsidiary or affiliate of the Company (an "Employer") may, with the approval of the Board of Directors or the Committee and under such terms and conditions as the Board of Directors or Committee may prescribe, adopt the Plan by resolution of the Employer's board of directors. An adopting Employer shall not have the authority to amend or terminate the Plan under Section 7. 6.2 Withdrawal from the Plan by Employer. Any such Employer shall have the right, at any time, upon the approval of and under such conditions as may be provided by the Board of Directors or the Committee, to withdraw from the Plan by delivering to the Board of Directors or the Committee written notice of its election so to withdraw. The portion of the Trust assets attributable to amounts deferred while Participants were employees of such withdrawing Employer shall be disposed of in accordance with the terms of the Trust. Section 7 --------- Amendment and Termination The Company intends the Plan to be permanent, but reserves the right at any time to modify, amend or terminate the Plan, provided, however, that any amendment or termination of the Plan shall not reduce or eliminate any Deferred Compensation Account accrued through the date of such amendment or termination. Upon termination of the Plan, the Company may elect either (a) to continue making payments of Deferred Compensation Accounts in accordance with the terms of the Deferral Elections in effect at the time of the termination and crediting Participant's Deferred Compensation Accounts with income and gains and charging their Deferred Compensation Accounts for losses and distributions in accordance with Section 3.4, or (b) to distribute the Participant's Deferred Compensation Accounts in a single lump sum. Executed this 31st day of December, 1996. THE ST. PAUL COMPANIES, INC. By: /s/ Greg A. Lee ----------- Greg A. Lee Title: Senior Vice President - Human Resources EX-10 3 THE ST. PAUL COMPANIES, INC. DIRECTORS' DEFERRED COMPENSATION PLAN ------------------------------------- (As Amended and Restated Effective as of January 1, 1997) Section 1 Introduction 1.1 The Plan and Its Effective Date. The St. Paul Companies, Inc. Directors' Deferred Compensation Plan ("Plan") was established as of January 1, 1986. The effective date of the amendment and restatement of the Plan as set forth herein is January 1, 1997. 1.2 Purpose. The St. Paul Companies, Inc. (the "Company") has established the Plan for its nonemployee directors to retain and attract highly qualified individuals to serve as directors by offering the benefits of a non-qualified, unfunded plan of deferred compensation. 1.3 Administration. The Plan shall be administered by the Plan Administrator who shall be appointed by the Personnel and Compensation Committee (the "Committee") of the board of directors of the Company (the "Board of Directors"). In the absence of the appointment of a Plan Administrator, the officer of the Company having direct responsibility for compensation and benefits shall be the Plan Administrator. The Plan Administrator shall have the authority to delegate, from time to time, his responsibilities under the Plan to such person or persons as he deems advisable and may revoke any such delegation of responsibility. Any action by the delegate in the exercise of delegated responsibilities shall have the same force and effect as if such action was taken by the Plan Administrator. Section 2 --------- Participation and Deferral Elections 2.1 Eligibility and Participation. Subject to the conditions and limitations of the Plan, nonemployee members of the Board of Directors ("Eligible Directors") shall be eligible to participate in the Plan. Any Eligible Director who makes a Deferral Election as described in Section 2.2 below shall become a participant in the Plan ("Participant") and shall remain a Participant until the entire balance of all his Deferred Compensation Accounts (defined in Section 3.1 below) are distributed to him. 2.2 Rules for Deferral Elections. Any Eligible Director may make an irrevocable election ("Deferral Election") to defer receipt of all or any percentage of his annual fees and/or meeting fees (collectively "Fees") payable for a calendar year ("Attendance Year") by the Company in accordance with the rules set forth below: (a) An individual shall be eligible to make a Deferral Election only if he is an Eligible Director on the date such election is made. (b) The minimum amount that may be deferred for any year is $1,000. If the amount or percentage specified for deferral in an Eligible Director's Deferral Election would result in the deferral of less than $1,000, the amount or percentage of Fees specified in the Deferral Election will not be deferred hereunder but will be paid to the Eligible Director at the time that such Fees are otherwise payable. (c) All Deferral Elections must be made in writing on such form as the Plan Administrator may prescribe and must be received by the Plan Administrator no later than October 31 of the calendar year immediately preceding the Attendance Year for which such Fees are otherwise payable. Notwithstanding the foregoing, an individual may file a Deferral Election for the Attendance Year in which he becomes an Eligible Director at any time prior to the commencement of his term as Eligible Director. (d) Amounts will be deferred to the date specified by the Eligible Director at the time of his Deferral Election (the "Distribution Date") and payment will be made or will commence within 30 days after the Valuation Date (as defined in Section 3.4) coinciding with or next following the Distribution Date. Except as provided in subsection (h), the Distribution Date specified at the time of the Eligible Director's Deferral Election is irrevocable. (e) At the time of the Participant's Deferral Election, the Participant must elect, in writing on such form as the Plan Administrator may prescribe, the form of payment of the Participant's Deferred Compensation Account. The Deferred Compensation Account may be paid in a single lump sum or in substantially equal annual installments over a period of up to ten years in accordance with Section 4.1. (f) At the time of the Participant's Deferral Election, the Participant shall specify, in writing on such form as may be prescribed by the Plan Administrator, the manner in which income, gains, losses and expenses are credited or charged to a Participant's Deferred Compensation Accounts in accordance with Section 3. (g) A Deferral Election filed with the Plan Administrator shall remain in effect for all future Attendance Years unless the Eligible Director files a change in his Deferral Election. A change in Deferral Election will not be effective with respect to an Attendance Year unless the change in Deferral Election is filed with the Plan Administrator on or before October 31 of the calendar year immediately preceding the Attendance Year. (h) A Participant may make a one-time election with respect to each Deferred Compensation Account after the Participant's Deferral Election with respect to such Deferred Compensation Account to extend the Distribution Date; provided that an election under this Section 2.2(h) shall be conditioned upon the approval of the Committee and shall not be effective unless the Committee approves the election at least one year and one day before the Distribution Date elected by the Participant in his Deferral Election. Section 3 --------- Deferred Compensation Accounts 3.1 Deferred Compensation Accounts. A bookkeeping account shall be established in the Participant's name for each Attendance Year for which a Participant defers Fees pursuant to a Deferral Election ("Deferred Compensation Account"). Amounts deferred pursuant to a Deferral Election shall be credited to the Deferred Compensation Account as of the date (the "Deferral Crediting Date") on which, in the absence of a Deferral Election, the Participant would otherwise have received the Fees. 3.2 Investment Elections. A Participant must make an investment election at the time of his Deferral Election. The investment election shall designate the portion of the amounts deferred which are to be treated as invested in each Investment Fund (as defined in Section 3.3 below). A Participant's investment election shall remain in effect with respect to each subsequent deferral until the Participant files a change in investment election with the Plan Administrator. A Participant may change his investment election either with respect to new deferrals following the change in investment election (in increments of 1%) or with respect to the investment allocation of all of the Participant's existing Deferred Compensation Accounts (in increments of 10%), as the Participant may elect. A change in investment election must be filed with the Plan Administrator on a form prescribed by the Plan Administrator. A change in investment election will become effective on the first business day of the calendar month following the Plan Administrator's receipt of the change in investment election; provided that the Plan Administrator receives the change in investment election no later than the 15th day of the preceding calendar month (or such earlier or later date as may be permitted or required by the Plan Administrator). 3.3 Investment Funds. The "Investment Funds" shall consist of the following two funds: (a) Prime Rate Fund: An Investment Fund that is deemed to be invested in an interest bearing account which is credited with interest at the prime rate of interest charged by First Bank, N.A. in the manner described in Section 3.4(a). (b) Phantom Stock Fund: An Investment Fund that is deemed to be invested in common stock of the Company ("Company Stock"). The Plan Administrator may, in his sole discretion, designate additional Investment Funds which provide a rate of return equal to the rate of return that the Eligible Director would earn if the amounts credited to such Investment Fund were invested in a mutual fund, insurance company separate account or such other investment vehicle designated by the Plan Administrator. 3.4 Valuation of Investment Funds. As of the last business day of each calendar month (or such other dates as the Plan Administrator, in his discretion, may designate) ("Valuation Date"), each Participant's Deferred Compensation Account will be credited with income, gains and deposits and charged with losses and distributions equal to the amount by which the Deferred Compensation Account would have been credited or charged since the prior Valuation Date had the Participant's Deferred Compensation Account been invested in the Investment Funds selected by the Participant in accordance with the Participant's investment elections. The manner in which a Participant's deemed investment in each Investment Fund is calculated is described below. (a) Prime Rate Fund. The value of the portion of the Participant's Deferred Contribution Account deemed to be invested in the Prime Rate Fund as of a Valuation Date shall equal the Participant's deemed account balance in such fund as of the immediately preceding Valuation Date plus interest and deposits credited to the account since the immediately preceding Valuation Date and reduced by distributions since such preceding Valuation Date. As of each Valuation Date, interest shall be credited to the portion of the Participant's Deferred Compensation Account deemed to be invested in the Prime Rate Fund at the prime rate of interest charged by First Bank, N.A. in effect as of the Valuation Date for average daily balances (determined without regard to any interest credited to the Deferred Compensation Account during the calendar year containing such Valuation Date) for the period commencing the day after the later of the immediately preceding Valuation Date, and ending on the Valuation Date calculated on the basis of a three hundred sixty (360) day year compounded annually. (b) Phantom Stock Fund. The value of the Participant's Deferred Contribution Account treated as invested in the Phantom Stock Fund as of a Valuation Date shall equal the fair market value of the shares of the Company Stock deemed to be credited to the Participant's Deferred Compensation Account on such Valuation Date. Dividends shall be deemed to be reinvested in shares of Company Stock valued at fair market value as of the record date for the dividend. The portion of any Fees deferred that a Participant designates for investment in the Phantom Stock Fund shall be deemed to be invested in Company Stock valued at fair market value as of the Deferral Crediting Date. The amount transferred into the Phantom Stock Fund pursuant to a change in investment election shall be deemed to be invested in Company Stock valued at fair market value as of the Valuation Date on which such investment election becomes effective. For purposes of this subsection (b), the fair market value of a share of Company Stock as of any day shall mean the closing price of Company Stock on the New York Stock Exchange on such day (or the last business day preceding such day on which Company Stock was traded). (c) If the Plan Administrator designates one or more additional Investment Funds, the Plan Administrator shall establish a valuation and income crediting methodology for determining the value of the portion of a Deferred Contribution Account treated as invested in such Investment Fund which methodology shall be similar to the methodology described in subsection (b) above. 3.5 Vesting. A Participant shall be fully vested at all times in the balance of his Deferred Compensation Account. Section 4 --------- Payment of Benefits 4.1 Time and Method of Payment. Payment of a Participant's Deferred Compensation Account shall be made in the form of a single lump sum or shall commence in the form of installments as elected by the Participant in his Deferral Election. Notwithstanding the foregoing, a Participant may make a one-time election with respect to each Deferred Contribution Account to change the form of payment previously elected by the Participant; provided that an election under this Section 4.1 shall be conditioned upon the approval of the Committee and shall not be effective unless the Committee approves the election at least one year and one day before the Eligible Director's Distribution Date. A Participant who makes an election pursuant to this Section 4.1 to receive payment of his Deferred Compensation Account in the form of installments shall designate the number of years, up to a maximum of ten years, over which the installments will be paid. If a Participant's Deferred Compensation Account is payable in a single lump sum, the payment shall be made within 30 days after the Valuation Date coinciding with or next following the Participant's Distribution Date in an amount equal to the value of the Participant's Deferred Compensation Account as of the Valuation Date coinciding with or immediately preceding the date on which the balance of the Deferred Compensation Account is paid to the Participant. If a Participant's Deferred Compensation Account is payable in the form of installment payments, then the Participant's Deferred Compensation Account shall be paid in substantially equal annual installments over the period elected by the Participant; provided that the number of annual installments shall not exceed the Participant's Deferred Compensation Account balance as of the Valuation Date coinciding with or next following the Distribution Date divided by $1,000 (rounded down to the next whole number). If the Participant's entire Deferred Compensation Account balance is less than $1,000 as of the Valuation Date coinciding with or next following the Distribution Date it will be distributed in a single lump payment. The initial installment payment shall be paid within 30 days after the Valuation Date coinciding with or next following the Participant's Distribution Date. Subsequent installment payments shall be paid each January commencing with the first January following the Participant's Distribution Date. Each installment payment shall be computed by dividing the balance of the Participant's Deferred Compensation Account as of the Valuation Date coinciding with or immediately preceding the installment payment date by the number of remaining installment payments. 4.2 Payment Upon Death of a Participant. Notwithstanding any election by the Participant regarding the timing and manner of payment of his Deferred Compensation Account, a Participant's Deferred Compensation Account shall be paid to the Participant's Beneficiary (designated in accordance with Section 4.3) in a single lump sum as soon as practical following the Valuation Date coinciding with or next following the date of the Participant's death. 4.3 Beneficiary. A Participant may designate a Beneficiary or Beneficiaries to receive the balance of the Participant's Deferral Account in the event the Participant dies before the payment of his entire Deferred Compensation Account by filing a written Beneficiary designation with the Plan Administrator on such form as the Plan Administrator may prescribe. A Participant may revoke an existing Beneficiary designation by filing another written Beneficiary designation with the Plan Administrator. The latest Beneficiary designation received by the Committee shall be controlling. If no Beneficiary is named by a Participant or if he survives all of his named Beneficiaries, the Deferral Account shall be paid in the following order of precedence: (1) the Participant's spouse; (2) the Participant's children (including adopted children), per stirpes; or (3) the Participant's estate. 4.4 Form of Payment. All payments shall be made in cash. 4.5 Withholding of Taxes. The Company may withhold from payments due under the Plan such amount as it deems proper to protect the Company against liability for the payment of any applicable Federal, state or local income or other taxes. 4.6 Limitations for Section 16b Insiders. Notwithstanding any provision of the Plan, the Plan Administrator may impose such limitations and restrictions on Participants' investment elections under Sections 2.2(f) and 3.2 as he deems necessary or appropriate so that transactions by Participants do not present a risk of possible liability under Section 16b of the Securities and Exchange Act of 1934. Section 5 --------- Miscellaneous 5.1 Funding. Benefits payable under the Plan to any Participant shall be paid directly by the Company. The Company shall not be required to fund, or otherwise segregate assets to be used for payment of benefits under the Plan. While the Company may make investments (a) in shares of Company Stock through open market purchases or (b) in other investments in amounts equal or unequal to Participants' investment elections hereunder, the Company shall not be under any obligation to make such investments and any such investment shall remain an asset of the Company subject to the claims of its general creditors. Notwithstanding the foregoing, the Company may maintain one or more grantor trusts ("Trust") to hold assets to be used for payment of benefits under the Plan. The assets of the Trust shall remain subject to the claims of the Company's general creditors. Any payments by a Trust of benefits provided to a Participant under the Plan shall be considered payment by the Company and shall discharge the Company of any further liability under the Plan for such payments. 5.2 Benefit Statements. As soon as practical after the end of each calendar quarter (or after such additional date or dates as the Plan Administrator, in its discretion, may designate), the Plan Administrator shall provide each Participant with a statement of the balance of each of his Deferred Compensation Accounts hereunder as of the last day of such calendar quarter (or as of such other dates as the Plan Administrator, in his discretion may designate). 5.3 Interests Not Transferable. Except as to withholding of any tax under the laws of the United States or any state or locality and the provisions of Section 4.3, no benefit payable at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, or other legal process, or encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such benefits, whether currently or thereafter payable, shall be void. No person shall, in any manner, be liable for or subject to the debts or liabilities of any person entitled to such benefits. If any person shall attempt to, or shall alienate, sell, transfer, assign, pledge or otherwise encumber his benefits under the Plan, or if by any reason of his bankruptcy or other event happening at any time, such benefits would devolve upon any other person or would not be enjoyed by the person entitled thereto under the Plan, then the Plan Administrator, in his discretion, may terminate the interest in any such benefits of the person entitled thereto under the Plan and hold or apply them for or to the benefit of such person entitled thereto under the Plan or his spouse, children or other dependents, or any of them, in such manner as the Plan Administrator may deem proper. 5.4 Forfeitures and Unclaimed Amounts. Unclaimed amounts shall consist of the amounts of the Deferred Compensation Account of a Participant that cannot be distributed because of the Plan Administrator's inability, after a reasonable search, to locate a Participant or his Beneficiary, as applicable, within a period of two (2) years after the Valuation Date upon which the payment of benefits become due. Unclaimed amounts shall be forfeited at the end of such two-year period. These forfeitures will reduce the obligations of the Company under the Plan. After an unclaimed amount has been forfeited, the Participant or Beneficiary, as applicable, shall have no further right to his Deferred Compensation Account. 5.5 Controlling Law. The law of Minnesota, except its law with respect to choice of law, shall be controlling in all matters relating to the Plan to the extent not preempted by ERISA. 5.6 Gender and Number. Words in the masculine gender shall include the feminine, and the plural shall include the singular and the singular shall include the plural. 5.7 Action by the Company. Except as otherwise specifically provided herein, any action required of or permitted by the Company under the Plan shall be by resolution of either the Board of Directors or the Committee or by action of such person(s) authorized by resolution of the Board of Directors or the Committee. Section 6 --------- Amendment and Termination The Company intends the Plan to be permanent, but reserves the right at any time to modify, amend or terminate the Plan, provided, however, that any amendment or termination of the Plan shall not reduce or eliminate any Deferred Compensation Account accrued through the date of such amendment or termination. Upon termination of the Plan, the Company may elect either (a) to continue making payments of Deferred Compensation Accounts in accordance with the terms of the Deferral Elections in effect at the time of the termination and crediting Participant's Deferred Compensation Accounts with income and gains and charging their Deferred Compensation Accounts for losses and distributions in accordance with Section 3.4, or (b) to distribute the Participant's Deferred Compensation Accounts in a single lump sum. Executed this 31st day of December, 1996. THE ST. PAUL COMPANIES, INC. By: /s/ Greg A. Lee ----------- Greg A. Lee Title: Senior Vice President - Human Resources EX-11 4 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, --------------------------- 1996 1995 1994 ----- ----- ----- INCOME AVAILABLE TO COMMON SHARES: PRIMARY Net income, as reported $450,099 $521,209 $442,828 Adjusted for: Preferred dividends (net of taxes) (8,664) (8,582) (8,448) Premium on preferred shares redeemed (1,033) (823) - ------- ------- ------- Net income available to common shares $440,402 $511,804 $434,380 ======= ======= ======= FULLY DILUTED Net income, as reported $450,099 $521,209 $442,828 Adjusted for: Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (3,015) (3,477) (3,782) Dividends on monthly income preferred securities (net of taxes) 8,073 5,046 - Premium on preferred shares redeemed (1,033) (823) - ------- ------- ------- Net income available to common shares $454,124 $521,955 $439,046 ======= ======= ======= WEIGHTED AVERAGE SHARES: PRIMARY Common shares 83,474 84,385 84,183 Adjusted for: Outstanding stock options (based on treasury stock method using average market price) 945 1,014 633 ------- ------- ------- Weighted average, as adjusted 84,419 85,399 84,816 ======= ======= ======= FULLY DILUTED Common shares 83,474 84,385 84,183 Adjusted for: Assumed conversion of preferred stock 3,969 4,027 4,073 Assumed conversion of monthly income preferred securities 3,509 2,211 - Outstanding stock options (based on treasury stock method using market price at end of period) 1,088 1,220 811 ------- ------- ------- Weighted average, as adjusted 92,040 91,843 89,067 ======= ======= ======= EARNINGS PER COMMON SHARE: Primary $5.22 $5.99 $5.12 ======= ======= ======= Fully diluted $4.93 $5.68 $4.93 ======= ======= ======= EX-12 5 EXHIBIT 12 THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES Computation of Ratios (In thousands, except ratios) Twelve Months Ended December 31, --------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- EARNINGS: Income from continuing operations before income taxes $699,136 $669,325 $573,525 $535,235 $207,464 Add: fixed charges 70,802 65,590 58,355 59,881 60,082 Less: capitalized interest - - - - 4,580 ------- ------- ------- ------- ------- Income as adjusted $769,938 $734,915 $631,880 $595,116 $262,966 ======= ======= ======= ======= ======= FIXED CHARGES AND PREFERRED DIVIDENDS: Fixed charges: Interest costs $ 48,703 $ 46,376 $ 39,659 $ 40,921 $ 40,292 Rental expense (1) 22,099 19,214 18,696 18,960 19,790 ------- ------- ------- ------- ------- Total fixed charges 70,802 65,590 58,355 59,881 60,082 Preferred stock dividends 17,863 18,120 18,337 18,488 18,395 Dividend on monthly income preferred securities 12,420 7,763 - - - ------- ------- ------- ------- ------- Total fixed charges and preferred dividends $ 101,085 $ 91,473 $ 76,692 $ 78,369 $ 78,477 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 10.87 11.20 10.83 9.94 4.38 ======= ======= ======= ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends 7.62 8.03 8.24 7.59 3.35 ======= ======= ======= ======= ======= 1) Interest portion deemed implicit in total rent expense. EX-13 6 PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS INCORPORATED BY REFERENCE INTO 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 INVESTMENT GAINS PUSH PRETAX INCOME TO NEW HIGH; COMMITMENT TO SELL MINET LOWERS NET INCOME IN 1996 The St. Paul's pretax income from continuing operations grew to a new high of $699 million in 1996. Pretax realized investment gains of $219 million, a record amount for The St. Paul, mitigated the impact of the second-most severe catastrophe experience in our history. Our investment banking-asset management operation, The John Nuveen Company, recorded its second consecutive year of record earnings amid challenging conditions in the municipal bond market. After several years of unsatisfactory results from Minet, we decided in 1996 to exit the insurance brokerage business and dispose of all of our brokerage operations. As a result, Minet is classified as a discontinued operation, and we've restated 1995 and 1994 results to be consistent with our 1996 presentation. (GRAPHIC IMAGE NO. 1 - SEE APPENDIX) The 1996 loss from discontinued operations, which included an $89 million after-tax provision for loss on disposal of Minet, pushed net income down to $450 million, 14% lower than 1995 net income of $521 million. The following table summarizes our results for each of the last three years: (In millions) Year ended December 31 ---------------------- 1996 1995 1994 ---- ---- ---- Pretax income (loss): Underwriting $686 $652 $561 Investment banking-asset management 92 88 72 Parent company and consolidating eliminations (79) (71) (59) ---- ---- ---- Pretax income from continuing operations 699 669 574 Income tax expense 141 131 114 ---- ---- ---- Income from continuing operations 558 538 460 Loss from discontinued operations, net of taxes (108) (17) (17) ---- ---- ---- Net income $450 $521 $443 ==== ==== ==== Per share $4.93 $5.68 $4.93 ==== ==== ==== In 1995, earned premium growth, reduced expense levels and strong investment returns in our underwriting segment drove pretax income from continuing operations to $669 million, 17% higher than equivalent 1994 income of $574 million. The John Nuveen Company also contributed to our strong results in 1995. After-tax operating earnings from continuing operations, which exclude realized investment gains, totaled $415 million in 1996, compared with earnings of $481 million and $431 million in 1995 and 1994, respectively. Common shareholders' equity at the end of 1996 stood at $4 billion, which translated into a book value per common share of $47.93. The following table summarizes the source of our consolidated revenues for the last three years: (In millions) Year ended December 31 ---------------------- 1996 1995 1994 ---- ---- ---- Revenues: Premiums earned $4,448 $3,971 $3,412 Net investment income 807 741 673 Investment banking-asset management 220 221 212 Realized investment gains 219 85 42 Other 40 38 29 ----- ----- ----- Total revenues $5,734 $5,056 $4,368 ===== ===== ===== Change from prior year 13% 16% 5% ===== ===== ===== Earned premium growth of 12% in 1996 was centered in our reinsurance operation, St. Paul Re, and in our commercial underwriting operations. Our acquisition of Northbrook Holdings, Inc. and its three commercial underwriting companies (Northbrook) accounted for $214 million of incremental earned premiums in 1996. The additional increase in 1996 was more a reflection of the residual effect of strong written premium growth in 1995 than a significant increase in 1996 volume. Nuveen's revenues in 1996 were level with 1995, but Nuveen succeeded in reducing expenses, and the result was a second year of record earnings. The majority of 1996 realized investment gains originated from sales of venture capital investments and equity securities. (GRAPHIC IMAGE NO. 2 - SEE APPENDIX) In 1995, revenue growth was driven by an increase in earned premiums, resulting from new business in our commercial underwriting operations and at St. Paul Re, chiefly due to business acquired from Cigna Corporation. Our other underwriting business centers also experienced strong growth in premium revenues in 1995. In the following pages, we take a more detailed look at 1996 results for our underwriting and investment banking-asset management business segments. We underwrite property-liability insurance through our Worldwide Insurance Operations organization, which includes St. Paul Fire and Marine, our U.S. underwriting operation, and St. Paul International Underwriting. We also underwrite reinsurance through St. Paul Re. We are involved in the investment banking-asset management industry through our 78% ownership interest in The John Nuveen Company, based in Chicago. SEVERE CATASTROPHE LOSSES, COMPETITIVE MARKETS TAKE TOLL ON UNDERWRITING RESULTS 1996 was characterized by very competitive conditions in virtually all property-liability insurance and reinsurance markets worldwide. In that environment, our efforts in 1996 were focused on maintaining our premium volume without compromising profitability. Written premiums of $4.40 billion in 1996 were $153 million, or 4%, higher than 1995 premium volume of $4.24 billion. On July 31, 1996, we acquired Northbrook from Allstate Insurance Company for approximately $190 million. Our written premium growth in 1996 was largely due to $140 million of volume from Northbrook. Medical Services experienced an $88 million decline in premiums in 1996, which was substantially offset by premium increases in Personal Insurance and St. Paul Re. In 1995, written premiums grew 17% over 1994 volume of $3.62 billion. Premium growth in Fire and Marine was centered in the Specialized Commercial and Commercial operations. At St. Paul Re, the impact of business acquired from 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. Our underwriting results in 1996 were dominated by catastrophe losses of $207 million. In our history, that total was second only to the $305 million of losses we incurred during 1992 - the Hurricane Andrew year. 1996 was an unusually active year for weather-related insured damage. The catastrophes that impacted us in 1996 included a blizzard on the East Coast; numerous spring and summer storms in the Midwest; flooding in western and southwestern states; and several hurricanes, including Hurricane Fran. An increase in noncatastrophe, but weather-related, loss experience in Personal Insurance was also a major contributing factor to the deterioration in our 1996 underwriting result. (GRAPHIC IMAGE NO. 3 - SEE APPENDIX) 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). With our current mix of business, we believe our catastrophe experience should fall between 2.5 and 3.5 points of earned premium in a "normal" year. As the table indicates, our 1996 experience was well outside of that range. (Dollars in millions) Year ended December 31 ---------------------- 1996 1995 1994 ---- ---- ---- Actual: GAAP underwriting loss $(216) $(103) $(113) Combined ratio 105.5 101.8 102.3 Adjustment: Catastrophe losses $(207) $(124) $(105) Impact on combined ratio 4.6 3.1 3.1 ----- ----- ----- Excluding catastrophe losses: GAAP underwriting result $ (9) $ 21 $ (8) Combined ratio 100.9 98.7 99.2 ===== ===== ===== Our combined ratio (the combination of a loss ratio and an expense ratio) of 105.5 in 1996 slipped from 1995's 101.8. The loss ratio, which measures losses and loss adjustment expenses as a percentage of earned premiums, was 2.5 points worse than 1995. The expense ratio, which measures underwriting expenses as a percentage of written premiums, edged up to 30.9 in 1996, reflecting a decline in the written premium growth rate in 1996 and additional expenses associated with Northbrook integration efforts. Our expense ratio in 1995 was 29.7. Despite the severity of underwriting losses in 1996, pretax earnings in our underwriting segment grew to $686 million, 5% ahead of comparable 1995 earnings of $652 million. Pretax gains from the sale of investments totaled $209 million in 1996, nearly three times the 1995 total of $74 million. In addition, investment income generated by our portfolio in 1996 increased by $64 million over 1995, approximately $25 million of which was incremental investment income resulting from the Northbrook acquisition. In 1995, underwriting pretax earnings were 16% higher than comparable 1994 earnings of $561 million, primarily due to an improvement in noncatastrophe underwriting results and an 8% increase in investment income. Our loss ratio in 1995 was level with 1994, but the expense ratio improved by one-half point. Underwriting Outlook for 1997 - We do not anticipate any significant improvement in property-liability market conditions in 1997. As a result, we will focus on maintaining a satisfactory combined ratio while striving to identify profitable new market niches, particularly in our commercial operations. Improving our Personal Insurance results will be a top priority, as will maintaining Medical Services' market leadership position. We anticipate completing the full integration of Northbrook into our existing operations in 1997. We expect our International Underwriting operations to grow more rapidly in 1997 as we pursue new opportunities in emerging markets around the world. (GRAPHIC IMAGE NO. 4 - SEE APPENDIX) (PHOTO IMAGE NO. 1 - SEE APPENDIX) 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. The table reflects the reporting format of our underwriting operations in 1996. Following the table, we take a closer look at each operation's 1996 results and look ahead to 1997. (Dollars in millions) % of 1996 Year ended December 31 Written ---------------------- Premiums 1996 1995 1994 ---- ---- ---- Worldwide Insurance Operations St. Paul Fire and Marine Specialized Commercial Written premiums 29% $ 1,279 $ 1,304 $ 1,086 Underwriting result $ 49 $ (124) $ (89) Combined ratio 96.2 109.0 107.1 Commercial Written premiums 18% $ 778 $ 618 $ 530 Underwriting result $ (60) $ (3) $ (63) Combined ratio 109.9 99.6 111.7 Personal Insurance Written premiums 17% $ 725 $ 673 $ 635 Underwriting result $ (202) $ (33) $ (26) Combined ratio 128.2 104.6 103.9 Medical Services Written premiums 13% $586 $ 674 $ 690 Underwriting result $ 55 $ 76 $ 118 Combined ratio 91.8 86.6 80.3 ------ ------ ------ Total St. Paul Fire and Marine Written premiums 77% $ 3,368 $ 3,269 $ 2,941 Underwriting result $ (158) $ (84) $ (60) Combined ratio 105.3 101.8 101.0 St. Paul International Underwriting Written premiums 6% $ 267 $ 261 $ 169 Underwriting result $ (21) $ (23) $ (31) Combined ratio 108.1 109.4 117.6 ------ ------ ------ Total Worldwide Insurance Operations Written premiums 83% $ 3,635 $ 3,530 $ 3,110 Underwriting result $ (179) $ (107) $ (91) Combined ratio 105.5 102.4 101.9 St. Paul Re Written premiums 17% $ 761 $ 713 $ 513 Underwriting result $ (37) $ 4 $ (22) Combined ratio 105.3 99.1 105.1 ------ ------ ------ Total Underwriting Written premiums 100% $ 4,396 $ 4,243 $ 3,623 Underwriting result $ (216) $ (103) $ (113) ====== ====== ====== Combined ratio: Loss and loss expense ratio 74.6 72.1 72.1 Underwriting expense ratio 30.9 29.7 30.2 ------ ------ ------ Combined ratio 105.5 101.8 102.3 ====== ====== ====== Combined ratio including policyholders' dividends 105.7 102.0 102.3 ====== ====== ====== Amounts are on a GAAP basis, except for combined ratios, which are not derived from our GAAP financial statements. (GRAPHIC IMAGE NO. 5 - SEE APPENDIX) (PHOTO IMAGE NO. 2 - SEE APPENDIX) WORLDWIDE INSURANCE OPERATIONS St. Paul Fire and Marine St. Paul 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. Fire and Marine ranked as the 14th-largest U.S. property-liability underwriter based on 1995 premium volume. Its Medical Services operation ranked as the largest medical liability insurance underwriter in the United States. (PHOTO IMAGE NO. 3 - SEE APPENDIX) St. Paul Fire and Marine Specialized Commercial - ---------------------- Specialized Commercial is composed of Custom Markets, which serves specific commercial customer segments (Financial and Professional Services, Ocean Marine, Public Sector Services, Surplus Lines and Technology), and Major Markets, which provides specialized products and services for targeted industry groups (Construction, Surety, Manufacturing, Service Industries, National Programs and Transportation). The results of our Special Property operation and our participation in insurance pools are also included here. Premiums - Written premiums in 1996 totaled $1.28 billion, down slightly from last year's volume of $1.30 billion. New business in Financial and Professional Services, Surety, Public Sector and Ocean Marine offset a decline in Construction and Technology volume resulting from competitive market conditions. After several years of unsatisfactory results, we withdrew from several insurance pool arrangements in 1996, which negatively impacted Specialized Commercial premium volume by $47 million in 1996. (PHOTO IMAGE NO. 4 - SEE APPENDIX) (PHOTO IMAGE NO. 5 - SEE APPENDIX) Underwriting Result - Specialized Commercial's underwriting profit of $49 million in 1996 represented a significant turnaround from a loss of $124 million in 1995. Our withdrawal from several insurance pools that experienced severe losses in 1995 was the primary cause of the improvement in 1996 results. Pool results in 1995 were also adversely impacted by reserve reallocations relating to asbestos and environmental losses. Financial and Professional Services and Surety posted particularly strong results in 1996. Results in our Technology operation were $13 million worse than 1995, due to less favorable loss experience. We experienced strong premium growth in 1995, and stated then that we had not relaxed our underwriting standards for the sake of growth. The strong improvement in our core Specialized Commercial underwriting results in 1996 reflects our success in identifying and capitalizing on profitable new business opportunities in the comparatively more favorable market conditions of 1995. 1995 vs. 1994 - New business initiatives during 1995 in Specialized Commercial operations fueled a 20% increase in premium volume over 1994, as we obtained a substantial amount of new business and retained a greater portion of that business. Specialized Commercial's underwriting loss in 1995 was $35 million worse than 1994's loss of $89 million, due to a net provision of $31 million for environmental and asbestos losses on certain business written prior to 1980, and an increase in losses from our participation in insurance pools. Those losses masked significant underlying improvement in our Construction and Technology business sectors. Outlook for 1997 - We do not anticipate appreciable premium growth in 1997 due to unfavorable conditions in most of the markets served by Specialized Commercial. We will focus on maintaining current levels of volume and profitability while continuing to pursue our successful strategy of identifying and developing insurance products for newly emerging niches in the commercial marketplace. (SIDEBAR CAPSULE NO. 1 - SEE APPENDIX) (PHOTO IMAGE NO. 6 - SEE APPENDIX) St. Paul Fire and Marine Commercial - ------------------------ Commercial provides property and liability insurance to small to midsized commercial enterprises. 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, colleges and schools, manufacturers, wholesalers and processors. The small-commercial product line includes our Package Accounts for Commercial Enterprises (PACE) policies for individuals, groups or franchise operations, including offices, retailers and family restaurants. Premiums - Premium volume in 1996 increased $160 million, or 26%, over 1995. Our acquisition of Northbrook in July provided $140 million of incremental written premiums in 1996. Fiercely competitive conditions in the small and midsized commercial markets in 1996 resulted in downward pressure on rates, making it very difficult to achieve real premium growth without sacrificing quality in our book of business. In that environment, we focused on maintaining a favorable business mix in 1996. The historically profitable general liability and commercial auto lines comprised almost half of our Commercial product mix, while the more volatile workers' compensation line accounted for just 10% of our business. Underwriting Result - Commercial's underwriting loss of $60 million in 1996 deteriorated significantly from 1995's loss of $3 million. Catastrophe losses of $56 million and underwriting losses of $27 million from Northbrook dominated 1996 results. Catastrophe losses in 1995 totaled $30 million. Expenses associated with our initial Northbrook integration efforts caused the expense ratio to increase to 35.9 in 1996; excluding the Northbrook effect, the expense ratio improved nearly a point from 1995. We expect the Northbrook business to positively contribute to our results in 1997 as we selectively reunderwrite the book of business we acquired. 1995 vs. 1994 - Commercial premiums in 1995 grew 17% over 1994 volume of $530 million, driven by new business across a wide spectrum of commercial coverages and higher retention levels. Improved loss experience in general liability and a reduction in workers' compensation losses in several states were the major factors contributing to Commercial's $60 million improvement in underwriting results in 1995. Expense savings also played a role in the 1995 results, as evidenced by a more than three-point improvement in the expense ratio. Outlook for 1997 - We anticipate that competition from other commercial carriers will remain intense during the coming year. We expect slow growth in Commercial's core book of business as we selectively target and price new accounts. However, the incremental impact of Northbrook should result in significant premium growth overall. Over time, Northbrook integration efforts should result in a reduced expense ratio. In 1997, training costs will increase. We'll continue to develop an operationally efficient model for servicing small commercial accounts. (SIDEBAR CAPSULE NO. 2 - SEE APPENDIX) (PHOTO IMAGE NO. 7 - SEE APPENDIX) (PHOTO IMAGE NO. 8 - SEE APPENDIX) 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 - Written premiums of $725 million in 1996 were 8% higher than 1995 volume of $673 million. The increase resulted primarily from new business in our two package products - PAK II and Combo - which accounted for $43 million of premium growth in 1996. Underwriting Result - The Personal Insurance underwriting loss of $202 million in 1996 was significantly worse than 1995's loss of $33 million. In 1996, results were severely impacted by an increase in the severity of noncatastrophe, but weather-related, losses on current- year business and adverse development on prior-year business. Catastrophe losses of $74 million were $54 million higher than last year, another major factor in the 1996 loss. 1995 vs. 1994 - New business in our PAK II line was the major factor in the 1995 increase of 6% in premiums over 1994. The Personal Insurance underwriting loss in 1995 was $7 million worse than 1994's loss of $26 million, due to a deterioration in loss experience for several monoline coverages. Catastrophe losses in 1995 were $6 million less than in 1994. Outlook for 1997 - We have launched an aggressive 1997 operational plan aimed at turning around Personal Insurance's poor financial performance in 1996. We are pursuing several corrective actions that we believe will significantly improve our combined ratio in 1997. These measures include improving the quality of our book of business, implementing effective pricing strategies, increasing the efficiency of claim handling and reducing expenses. (SIDEBAR CAPSULE NO. 3 - SEE APPENDIX) (PHOTO IMAGE NO. 9 - SEE APPENDIX) 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 $586 million in 1996 were down $88 million, or 13%, from 1995 premiums of $674 million. The decline in premiums was largely due to our mid-1995 transition to annual policy terms for a portion of our business, which essentially resulted in a one-time phenomenon in which 18 months of premiums for about half of our physicians and surgeons book of business were recorded during 1995. Very competitive conditions in the medical liability marketplace, which negatively impacted pricing on existing business and opportunities for new business, were also a contributing factor to the decline in premiums in 1996. Premium volume in Major Accounts and Health Care Facilities was virtually level with 1995. Despite the decline in 1996 premiums, we are holding our own in terms of market share, with the number of hospital beds and doctors insured slightly above 1995 levels. Underwriting Result - Medical Services posted an underwriting profit of $55 million in 1996, down from the 1995 profit of $76 million. The trend of declining underwriting profits over the last several years is the result of a sustained period of flat pricing coupled with the diminishing impact of favorable development on loss reserves established in prior years. The Health Care Professionals line, which has been most severely impacted by competitive market pressures, experienced a $23 million decline in underwriting profits in 1996. Medical Services nonetheless continued to produce strong results amid the market challenges it faces - the 1996 result represented its eighth consecutive annual underwriting profit. 1995 vs. 1994 - Written premiums in 1995 declined 2% from 1994, reflecting intense competition in the medical liability marketplace and an industrywide trend toward higher levels of self-insured retentions on large accounts. Medical Services' 1995 underwriting profit declined $42 million from 1994's profit of $118 million, due to a reduction in the extent of favorable development on previously established loss reserves. Outlook for 1997 - The trends of flat pricing and the diminishing impact of favorable developments with respect to loss reserves established in prior years are expected to continue in 1997. We anticipate continued profitability, although our combined ration will continue to edge higher as the extent of favorable prior-year loss development diminishes. We expect competitive market conditions to persist in 1997, hindering our ability to achieve significant premium growth. Our capability to serve the sophisticated risk-transfer needs of large national and regional health care entities should serve us well as we keep pace with the evolving health care delivery system. We will also increase our emphasis on new product development and introductions in 1997 as we strive to maintain our leadership position in the medical liability market. (SIDEBAR CAPSULE NO. 4 - SEE APPENDIX) (PHOTO IMAGE NO. 10 - SEE APPENDIX) WORLDWIDE INSURANCE OPERATIONS St. Paul International Underwriting - ----------------------------------- International includes most insurance written outside the United States. We have a presence as a licensed insurance company in nine countries in Europe, Africa, Latin America and in Canada. Our participation in Lloyd's of London as an investor and as the owner of two managing agencies is also a part of our International operations, as is the arrangement of insurance programs for multinational clients. International offers a range of commercial and personal products and services tailored to meet the unique needs of international customers. Premiums - Written premiums in 1996 of $267 million grew 3% over 1995 premium volume of $261 million. Much like our U.S. markets, international property-liability insurance markets are experiencing competitive conditions, hindering premium growth opportunities. Premiums generated by our subsidiary Camperdown Corporation, our vehicle for writing primary business through Lloyd's of London, increased 9% in 1996. We also recorded premiums of $6 million from our newly acquired operation in Argentina. Underwriting Result - International's underwriting loss of $21 million in 1996 was slightly better than 1995's loss of $23 million. An improvement in underwriting results in Canada was substantially offset by deterioration in results from personal insurance in the United Kingdom. 1995 vs. 1994 - Written premiums in 1995 grew 54% over 1994, largely the result of $54 million in initial premiums recorded for Camperdown. Personal insurance premiums generated in the United Kingdom and premiums written in Canada also increased over 1994. Underwriting results improved $8 million in 1995, primarily the result of reduced losses from personal and commercial business in the United Kingdom. Outlook for 1997 - Our commitment to international expansion will continue in 1997, with new operations planned in France, Germany and Mexico. We will continue to develop regional strategies for emerging commercial markets in Europe, Latin America and Africa within the framework of our successful customer-focused underwriting philosophy. We anticipate additional growth in our international premium volume through our access to the worldwide markets served by Lloyd's of London. (SIDEBAR CAPSULE NO. 5 - SEE APPENDIX) (PHOTO IMAGE NO. 11 - SEE APPENDIX) Underwriting St. Paul Re - ------------ St. Paul Re underwrites reinsurance for leading property-liability insurance companies worldwide, obtaining business primarily in the broker or intermediary market. St.Paul Re writes both treaty and facultative reinsurance for property, liability, ocean marine, surety and certain specialty classes of coverage. Premiums - Written premiums of $761 million in 1996 were 7% higher than 1995, despite competitive market conditions throughout the year, which put downward pressure on reinsurance rates. North American property-liability treaty premiums increased in 1996, reflecting growth in excess-of-loss business as well as a shift on the part of customers to more financially secure reinsurers. In late 1994, we acquired the opportunity to renew Cigna Corporation's book of international business. In 1996, we wrote $128 million of that business, compared with $119 million in 1995. Underwriting Result - St. Paul Re's underwriting loss of $37 million in 1996 reflected an increase in noncatastrophe loss experience compared with 1995, when we posted a $4 million underwriting profit. The majority of losses in 1996 were centered in our North American casualty reinsurance coverages. Over the last few years, we've taken several measures to reduce the magnitude of catastrophe losses. The success of that effort was evident in 1996 - our reinsurance catastrophe losses totaled only $18 million, compared with $37 million in 1995. 1995 vs. 1994 - St. Paul Re's 1995 premium volume was $200 million higher than 1994. The Cigna international reinsurance acquisition contributed $119 million of incremental premiums in 1995. We also wrote a significant amount of other new reinsurance business in the the favorable market conditions of 1995. St. Paul Re's 1995 underwriting result improved $26 million over 1994, reflecting a decline in losses on property coverages. Outlook for 1997 - We will focus on profitability objectives in 1997 amid expectations of continuing competitive pressures in the reinsurance markets. At the end of 1996, we completed a $69 million securitized reinsurance transaction that will provide St. Paul Re with additional catastrophe reinsurance capacity for up to 10 years. In early 1997, we acquired the right to renew Constitution Reinsurance Corporation's book of U.S. casualty facultative business, which we expect will contribute to premium growth in 1997. (SIDEBAR CAPSULE NO. 6 - SEE APPENDIX) (PHOTO IMAGE NO. 12 - SEE APPENDIX) Underwriting Loss and Loss Adjustment Expense Reserves - ----------------------------------------- We establish reserves that reflect our estimates of the total losses and loss adjustment expenses we will ultimately have to pay under insurance and reinsurance policies. These reserves include losses that have been reported but not settled and losses that have been incurred but not reported to us (IBNR). Our loss reserves are not discounted, but they are reduced for estimates of salvage and subrogation. For reported losses, we establish reserves on a "case" basis within the parameters of coverage provided in the 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 58. As shown in that reconciliation, we have recorded reductions in the loss provision for claims incurred in prior years totaling $252 million, $248 million and $328 million in 1996, 1995 and 1994, respectively. (GRAPHIC IMAGE NO. 6 - SEE APPENDIX) A number of factors have contributed to the favorable development on previously established reserves, experience which runs contrary to that of many of our peers in the property-liability insurance industry. First and foremost, we believe that in general, our reserving philosophy is more conservative than most others in the industry. Second, we underwrite more medical liability coverages than any of our peers, and that business has been a major factor in reserve reductions 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 on commercial policies written prior to 1985. Favorable prior-year loss development in several of our Specialized Commercial business sectors, particularly in general liability and workers' compensation, has been a major factor in our reserve reductions in the last three years. 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. Medical Services has also accounted for a significant amount of our favorable prior-year loss development for the last several years, although not at the same magnitude as that experienced during the early 1990s. Our conservative medical liability reserving philosophy results from the unique nature of these claims. Changes in the frequency and severity of medical liability claims can occur suddenly, but it can be several years before we know how those changes will ultimately impact our claim costs. The current pricing of our Medical Services' coverages takes into account the favorable loss development on previously established reserves. Underwriting Environmental and Asbestos Claims - --------------------------------- We receive claims under policies underwritten many years ago alleging injuries from environmental pollution or alleging covered property damages for the cost to clean up polluted sites. We also receive asbestos claims arising out of product liability coverages under general liability policies. Significant legal issues, primarily pertaining to issues of coverage, exist with regard to 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. In addition, variables, such as the length of time necessary to clean up a polluted site, controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of an environmental claim. Estimating our ultimate liability for asbestos claims is equally difficult. The primary factors influencing our estimate of the total cost of these claims are case law and a history of prior claim experience, both of which are still developing. In 1994, we specifically reallocated, for environmental and asbestos claims, a portion of our previously established IBNR reserves. Prior to that, we made no specific allocation of our IBNR reserves for these claims, but rather identified reserves only for reported claims. In 1995, we recorded additional gross reserves of $360 million and specifically reallocated $113 million of previously recorded net reserves for North American environmental and asbestos losses on policies written in the United Kingdom prior to 1980. The following table represents a reconciliation of total gross and net environmental reserve development for each of the years in the three-year period ended Dec. 31, 1996. Amounts in the "net" column are reduced by reinsurance recoverable. (In millions) 1996 1995 1994 ----------- ----------- ----------- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- ENVIRONMENTAL Beginning reserves $528 $319 $275 $200 $105 $ 73 Northbrook reserves acquired 18 7 - - - - Incurred losses 67 72 59 68 71 56 Reserve reallocation - - 233 79 132 95 Paid losses (32) (30) (39) (28) (33) (24) --- --- --- --- --- --- Ending reserves $581 $368 $528 $319 $275 $200 === === === === === === Many significant environmental claims 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, 1996. Gross and net incurred losses in 1995 are negative because of favorable loss development in our U.S. commercial business. (In millions) 1996 1995 1994 ----------- ----------- ----------- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- ASBESTOS Beginning reserves $283 $158 $185 $145 $ 62 $ 48 Northbrook reserves acquired 6 6 - - - - Incurred losses 12 18 (13) (9) 13 14 Reserve reallocation - - 127 34 127 95 Paid losses (23) (13) (16) (12) (17) (12) --- --- --- --- --- --- Ending reserves $278 $169 $283 $158 $185 $145 === === === === === === 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 used the industry standard absolute pollution exclusion, which we believe applies to asbestos claims. Based on all information currently available to us, our reserves for environmental and asbestos losses as of Dec. 31, 1996, represent our best estimate of our ultimate liability for such losses. Because of the difficulty inherent in estimating such losses, however, we cannot give assurances that our ultimate liability for environmental and asbestos losses will, in fact, match our current reserves. We 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 as of Dec. 31, 1996, of $859 million represented approximately 7% of gross consolidated reserves of $11.67 billion. Underwriting Legal Matters - ------------- In 1996, we settled two significant lawsuits on which we have previously reported. In May 1995, three of our subsidiaries were served with a purported class action lawsuit brought in the District Court of Brazoria County, Texas, on behalf of persons who had purchased interests in certain limited partnerships for which Damson Oil Corporation served as general partner. The plaintiffs subsequently demanded $400 million of alleged actual damages and attorneys' fees to settle their claims. We settled all claims and related expenses associated with this lawsuit in 1996. In 1993, the Superior Court of California entered judgment in an action brought against St. Paul Fire and Marine in 1987 by Arntz Contracting Company and certain affiliates. The judgment affirmed a jury's award of approximately $16.5 million in compensatory damages and $100 million in punitive damages. That portion of the judgment granting punitive damages was subsequently vacated. In 1996, we settled all claims associated with this lawsuit. We are not aware of any legal matters that might have a material impact on our overall financial position. Underwriting Investments - ------------ Fixed maturity investments, consisting of securities issued by government agencies, corporate bonds and municipal tax-exempt securities, account for 84% of our underwriting operations' investment portfolio. We maintain a widely diversified, high-quality fixed maturity portfolio structured to maximize investment income while minimizing credit risk. In an effort to provide for long-term growth in the value of our investment portfolio and ultimately enhance shareholder value, we also invest in equity securities, venture capital and real estate. These investment classes have the potential for higher returns but also involve a greater degree of risk, including less stable rates of return and less liquidity. We have been involved with derivative financial instruments on a limited basis for purposes of hedging against fluctuations in interest rates. (GRAPHIC IMAGE NO. 7 - SEE APPENDIX) Pretax investment income in our underwriting operations totaled $795 million in 1996, 9% higher than 1995 income of $731 million. Our acquisition of Northbrook in July 1996, which added $1.14 billion of high-quality fixed maturities to our portfolio, accounted for approximately $25 million of incremental investment income in 1996. Investment income in 1995 grew 8% over the 1994 total of $675 million. Funds provided by underwriting cash flows and investment cash flows are the source of growth in our investment portfolio. Underwriting cash flows consist of the excess of premiums collected over losses and expenses paid. Investment cash flows consist of income on existing investments and proceeds from sales and maturities of investments. Underwriting cash flows declined in 1996 due to a reduction in the rate of written premium growth and an increase in insurance loss payments due to catastrophes. Investment cash flows, however, remained strong in 1996 and were the primary contributor to the growth in our invested assets (excluding the impact of Northbrook). (PHOTO IMAGE NO. 13 - SEE APPENDIX) Strong capital markets in 1996 contributed to record-high realized gains from the sale of investments and an increase in the unrealized appreciation of our venture capital and equity security investment classes. Virtually all of the $209 million of pretax realized gains in 1996 originated from sales of venture capital and equity securities. Pretax realized gains in 1995 and 1994 were $74 million and $36 million, respectively. The following table provides a look at the composition and carrying value of our underwriting segment's investment portfolio at the end of the last three years, followed by additional information about each of our major investment classes. (In millions) December 31 ------------------------ 1996 1995 1994 ---- ---- ---- Fixed maturities $11,908 $10,395 $ 8,938 Equities 768 659 490 Real estate 694 612 528 Venture capital 586 389 330 Short-term investments 193 318 342 Other investments 43 42 47 ------ ------ ------ Total investments $14,192 $12,415 $10,675 ====== ====== ====== Fixed Maturities - The fixed maturities portfolio is composed of high- quality, intermediate-term taxable U.S. government agency and corporate bonds and tax-exempt U.S. municipal bonds. We manage our fixed maturity portfolio conservatively, investing almost exclusively in investment-grade (BBB or better) securities. Approximately 96% of our portfolio at the end of 1996 was rated at investment grade, with the remaining 4% consisting of nonrated securities, most of which, in our opinion, would be considered investment grade if rated. Our consolidated tax position, along with the yield relationship between taxable and tax-exempt securities, are the predominant factors in determining the mix of our taxable and tax-exempt security purchases. Taxable bonds, which accounted for the majority of our new investment purchases in 1996, comprised 57% of our fixed maturity portfolio at the end of 1996. (GRAPHIC IMAGE NO. 8 - SEE APPENDIX) Since the end of 1993, we've carried fixed maturities on our balance sheet at market value, with the corresponding appreciation or depreciation recorded in shareholders' equity net of taxes. The extent of actual growth in these invested assets is distorted by fluctuations in their market value, which largely result from changes in the relationship between the stated yields of securities we own and prevailing market yields at any given time. Movement in market interest rates and anticipated future trends in market yields can quickly and significantly impact bond values, resulting in substantial swings in carrying value over a relatively short period of time. While there was a lack of significant actual interest rate movement in 1996, a variety of conflicting economic indicators caused uncertainty in the bond markets, and the result was a decline in bond values. At the end of 1996, the pretax unrealized appreciation on our fixed maturities portfolio of $483 million was down from comparable 1995 appreciation of $682 million despite a $1.71 billion increase in the amortized cost of investments. Conversely, after a year of declining interest rates in 1995, the unrealized appreciation of fixed maturities by the end of 1995 was $760 million higher than the previous year. The amortized cost of fixed maturity investments at the end of 1996, 1995 and 1994, which excludes market appreciation and depreciation, was $11.42 billion, $9.71 billion and $9.02 billion, respectively. The growth in 1996 reflected the impact of the Northbrook acquisition and strong operational cash flows, which fueled net purchases of $571 million of new securities in 1996. Fixed maturities produced investment income of $738 million in 1996, compared with $672 million in 1995 and $637 million in 1994. The fixed maturities portfolio carried a weighted average pretax yield of 7.0% and had a weighted average maturity period of 9.1 years at the end of 1996. Equities - Our equity holdings account for 5% of the underwriting segment's total investments and consist of a diversified portfolio of common stocks. Favorable stock market conditions in 1996 resulted in sizable growth in both realized and unrealized gains, translating into a 23% total return on our portfolio. Pretax realized gains from the sale of equities in 1996 totaled $122 million, and the carrying value of our portfolio at year-end included $177 million of pretax unrealized appreciation. Realized gains in 1995 and 1994 were $43 million and $20 million, respectively. Dividend income in 1996 totaled $15 million, compared with $14 million in 1995 and $13 million in 1994. Our carrying value at the end of 1995 included $157 million of unrealized appreciation. Real Estate - Real estate comprises 5% of our total investments. Our investments in this asset class primarily consist of commercial office and warehouse properties that we own directly or in which we have a partial interest through joint ventures. Our properties are geographically distributed throughout the United States. We do not invest in real estate mortgage loans, but a warehouse complex we purchased in 1996 is subject to a $13.2 million mortgage. The mortgage is included in our debt outstanding at the end of 1996. Pretax investment income from real estate totaled $36 million in 1996, compared with income of $33 million in 1995 and $28 million in 1994. Operational cash flows from our real estate investments were $62 million in 1996, compared with $60 million in 1995 and $51 million in 1994. (GRAPHIC IMAGE NO. 9 - SEE APPENDIX) Venture Capital - This investment class comprises only 4% of our total invested assets at the end of 1996, but accounted for a significant portion of both our realized and unrealized gains during the year. These private investments span a variety of industries but are concentrated in information technology, health care and consumer products. Pretax realized gains for the year totaled $86 million, compared with $38 million in 1995 and $18 million in 1994. The carrying value of this portfolio at year-end 1996 included $292 million of unrealized appreciation, representing 100% growth over the cost of these investments. Outlook for 1997 - We anticipate pretax investment income growth to fall in the upper single-digit range, unless interest rates or operational cash flows differ significantly from our expectations. 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. In 1996, we took steps to expand our international equity investment portfolio, and we anticipate continuing that effort in 1997. (PHOTO IMAGE NO. 14 - SEE APPENDIX) NUVEEN POSTS SECOND CONSECUTIVE YEAR OF RECORD EARNINGS Investment Banking-Asset Management The John Nuveen Company - ------------------------------------ The John Nuveen Company comprises our investment banking-asset management business segment. Nuveen's core businesses are asset management; the development, marketing and distribution of investment products; and municipal and corporate investment banking services. Nuveen markets open-end and closed-end (exchange-traded) mutual funds as well as individual managed accounts. Nuveen also provides municipal and corporate investment banking services and underwrites and trades municipal bonds. We held a 78% ownership interest in Nuveen at the end of 1996. The John Nuveen Company posted its second consecutive year of record earnings in 1996 amid challenging conditions in the municipal bond markets. Nuveen's 1996 pretax earnings totaled $118 million, slightly higher than earnings of $114 million in 1995. Our portion of Nuveen's pretax earnings in 1996 was $92 million, compared with $88 million in 1995. (SIDEBAR CAPSULE NO. 7 - SEE APPENDIX) Nuveen's total revenues of $232 million (including investment income) in 1996 were slightly below the 1995 total of $236 million. The strength of the stock market, coupled with investor uncertainty about interest rate movements in 1996, lessened market demand for municipal bond funds and trusts. As a result, Nuveen's underwriting and distribution revenues were down slightly from 1995. Profits recognized on securities held for sale declined $5 million from 1995 levels, reflecting the less favorable interest rate environment in 1996. Asset management fee revenues of $186 million in 1996 increased $3 million over 1995. Total expenses in 1996 declined $7 million from 1995, primarily due to a reduction in operating expenses. Assets under management totaled $33.19 billion at the end of 1996, slightly higher than 1995. Nuveen became involved in managing equity securities for the first time in 1996, successfully introducing the Nuveen Growth and Income Stock Fund, which generated nearly $500 million of new assets under management by year-end. Institutional Capital Corporation, an institutional equity manager in which Nuveen holds preferred stock convertible into a 20% interest, serves as subadviser to and manages the investments of this fund. In early 1997, Nuveen completed its acquisition of Flagship Resources Inc., a tax-exempt mutual fund and money management firm, which added $4.6 billion to Nuveen's assets under management. The total cost of the Flagship acquisition was $63 million, plus as much as $20 million contingent upon meeting future growth targets. Nuveen repurchased and retired 3.8 million of its common shares in 1996 for a total cost of $101 million. The repurchases were proportioned between our holdings and those of minority shareholders to maintain our 78% ownership interest in Nuveen. Our total proceeds from Nuveen's repurchase were $74 million. In 1995, Nuveen's pretax earnings of $114 million grew 20% over 1994 earnings of $95 million, largely due to gains recognized from changes in the market value of tax-free securities held for sale to investors. Those pretax gains totaled $5 million in the declining interest rate environment of 1995, compared with pretax losses of $8 million on its inventory holdings in 1994. This turnaround in inventory profits and successful efforts to reduce costs accounted for the improvement in Nuveen's 1995 results. Nuveen's assets under management at the end of 1995 were $2.65 billion higher than the previous year, largely due to an increase in the market value of underlying fund investments. SHAREHOLDERS' EQUITY EXCEEDS $4 BILLION, DEBT REMAINS AT CONSERVATIVE LEVEL The St. Paul Companies Capital Resources - ---------------------- (GRAPHIC IMAGE NO. 10 - SEE APPENDIX) Capital resources represent those funds deployed or available to be deployed to support our business operations and are composed of shareholders' equity, debt and monthly income preferred securities. The following table summarizes our capital resources at the end of the last three years: (In millions) December 31 ------------------------ 1996 1995 1994 ---- ---- ---- Shareholders' equity: Common shareholders' equity: Common stock and retained earnings $3,412 $3,165 $2,808 Unrealized appreciation of investments 617 628 14 ESOP obligation and unrealized foreign exchange loss (41) (74) (89) ----- ----- ----- Total common shareholders' equity 3,988 3,719 2,733 Preferred shareholders' equity 16 11 4 ----- ----- ----- Total shareholders' equity 4,004 3,730 2,737 Debt 689 697 616 Company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. 207 207 - ----- ----- ----- Total capitalization $4,900 $4,634 $3,353 ===== ===== ===== Ratio of debt to total capitalization 14% 15% 18% ===== ===== ===== Net income of $450 million in 1996 pushed our shareholders' equity past the $4 billion mark for the first time. The after-tax appreciation of our investments at the end of 1996 was virtually unchanged from 1995, as a decline in the market value of our fixed maturity holdings was offset by strong growth in the unrealized appreciation of our equity and venture capital portfolios. In 1996, we returned nearly $220 million of capital to shareholders, in the form of common dividends and share repurchases. In 1995, total capitalization grew by nearly $1.28 billion over 1994 due to growth in unrealized appreciation, our record earnings and the issuance of convertible monthly income preferred securities (MIPS). We used the $207 million of MIPS proceeds to pay down commercial paper debt and for general corporate purposes. At the end of 1996, our debt outstanding totaled $689 million, down slightly from year-end 1995. We filed a shelf registration statement with the Securities and Exchange Commission in 1996, which gave us the capacity to issue up to $275 million of additional debt. We subsequently issued $33 million of medium-term notes under this registration statement, bringing our total medium-term debt to $430 million. Proceeds from the notes issued in 1996 were used for general corporate purposes and for paying down commercial paper outstanding. Medium-term notes account for over 60% of debt outstanding at year-end 1996 and bear a weighted average interest rate of 7.1%. At the end of 1996, we had the capacity to issue an additional $242 million of debt under the shelf registration. We may issue additional debt in 1997. At the end of 1995, debt outstanding was 13% higher than a year earlier, due to the issuance of medium-term notes during the year. We paid common shareholder dividends of $144 million in 1996, compared with dividends of $133 million and $125 million in 1995 and 1994, respectively. In February 1997, our board of directors increased our common dividend rate to $1.88 per share, representing the 11th consecutive year of dividend rate increases. We have paid dividends without interruption for the last 125 years, and our dividend rate has grown at a compound rate of 7% over the last five years. (GRAPHIC IMAGE NO. 11 - SEE APPENDIX) We purchased Northbrook Holdings, Inc. from Allstate Insurance Company in 1996 for a total cost of approximately $190 million. The acquisition was financed with internally generated funds. We repurchased 1.4 million of our common shares in 1996 for a total cost of $74 million. We also repurchased 778,000 shares in 1995 and 860,000 shares in 1994 for total costs of $42 million and $34 million, respectively. The share repurchases in the last three years were funded internally and were consistent with our goal of enhancing shareholder value through the sound use of our capital. We may continue to repurchase our shares from time to time in the future. We do not anticipate any major capital expenditures in 1997, 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 1997. We anticipate funding the maturity of our $100 million, 9 3/8% notes in June 1997 either through the issuance of new debt or internally generated funds. 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 losses 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, through the sale of readily marketable fixed maturities, equity securities and short-term investments, as well as longer-term investments that have appreciated in value. Underwriting's net positive cash flows from underwriting and investment activities 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 $650 million (not including increases in market value and the Northbrook acquisition) in 1996. (GRAPHIC IMAGE NO. 12 - SEE APPENDIX) Because of the nature of our underwriting operations, where premiums are collected and invested in most cases before related losses are paid, we believe long-term liquidity requirements beyond 1997 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. The $89 million provision for loss on disposal of discontinued operations recorded in 1996 was a noncash charge and did not impact our consolidated liquidity position. Cash flows from operations were $970 million in 1996, compared with $906 million in 1995 and $900 million in 1994. Our underwriting segment's operational cash flows in 1996 were slightly below 1995 levels, as an increase in insurance loss payments due to catastrophes was substantially offset by growth in premium revenues and in investment income. The John Nuveen Company experienced strong growth in operational cash flows in 1996, accounting for the increase in our consolidated total for the year. In 1995, cash flows from our underwriting segment were virtually level with 1994, but The John Nuveen Company's cash flows were down $20 million from 1994. 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 both 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. APPENDIX TO ITEM 7 - NARRATIVE DESCRIPTION OF GRAPHIC AND PHOTO IMAGES AND SIDEBAR CAPSULES 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 from Continuing Operations per Common Share for the years 1992 through 1996. 1992: $1.06 1993: $4.50 1994: $4.80 1995: $5.25 1996: $4.55 CAPTION: "Severe catastrophe losses in 1996 contributed to the drop in operating earnings, after three record years." GRAPHIC IMAGE NO. 2 - Bar graph depicting Return on Beginning Equity for the years 1992 through 1996. 1992: 3.6% 1993: 18.1% 1994: 14.1% 1995: 17.3% 1996: 10.9% CAPTION: "We calculate return on equity by dividing operating earnings (less preferred dividends) by common shareholders' equity at the beginning of the year." GRAPHIC IMAGE NO. 3 - Bar graph depicting Underwriting Operations Written Premiums for the years 1992 through 1996. (in billions) 1992: $3.1 1993: $3.2 1994: $3.6 1995: $4.2 1996: $4.4 CAPTION: "Written premium growth in 1996 was largely due to our acquisition of Northbrook. Premium increases in Personal Insurance and at St. Paul Re also contributed to growth in 1996." GRAPHIC IMAGE NO. 4 - Pie chart depicting Underwriting Operations Premium Distribution in 1996. Specialized Commercial 29% Commercial 18% Personal Insurance 17% Medical Services 13% International Underwriting 6% St. Paul Re 17% CAPTION: "Our underwriting operations, which produced $4.4 billion in written premiums in 1996, offer a wide range of insurance products and services." PHOTO IMAGE NO. 1 - Photo of two individuals at oil well. CAPTION: "Sometimes, finding insurance coverage can be as hard as, well, finding oil. St. Paul Athena, part of St. Paul Fire and Marine's surplus lines underwriting operation, is in the business of insuring unique and hard-to-place risks. The energy market niche - primarily oil and natural gas drilling operations - has long been a core business for Athena and is its single largest program. The Hickman Drilling Company has been a St. Paul Fire and Marine policyholder since 1991. Here, Hickman Rig No. 3 is searching for oil in a small canyon a few miles from the Caddo Jake Bridge in Hinton, Okla. St. Paul Athena's Barb Hadler, manager-casualty, and Mike Schaff, manager-property, oversee the underwriting of the Hickman account. Some of its customized features include property coverage for physical damage to the rig and "control of well" coverage to get a well under control and back on line in the case of an underground or above ground blow-out. Liability coverages include general liability, umbrella and pollution, which pays for the cleanup caused by "sudden and accidental" pollution of land - a common coverage for a rare occurrence. Long after starting in the oil drilling business in 1943, H.C. "Red" Hickman founded his own company 22 years ago in Woodward, Okla." GRAPHIC IMAGE NO. 5 - Bar graph depicting Underwriting Operations Combined Ratio for the years 1992 through 1996. 1992 1993 1994 1995 1996 ----- ----- ----- ----- ----- Loss ratio 85.6 72.5 72.1 72.1 74.6 Expense ratio 32.2 32.0 30.2 29.7 30.9 ----- ----- ----- ----- ----- Combined ratio 117.8 104.5 102.3 101.8 105.5 ===== ===== ===== ===== ===== CAPTION: "Pretax catastrophe losses of $207 million were a major factor in the increase in our 1996 combined ratio. (The lower the combined ratio, the better the result.)" PHOTO IMAGE NO. 2 - Photo of Mr. Patrick A. Thiele President and Chief Executive Officer, Worldwide Insurance Operations CAPTION: "Our goal in 1997, as it is every year, is profitable growth. I believe we'll achieve that goal in three ways: efficiency improvements, human resources development and by leveraging new business opportunities. We need to continually refresh our portfolio of businesses since there is a life cycle to each of them. We have to ensure that we have new business units coming in the front door as others mature." PHOTO IMAGE NO. 3 - Photo of Mr. Michael J. Conroy Executive Vice President, Chief Administrative Officer, St. Paul Fire and Marine CAPTION: "We were hit hard by a number of storm losses in 1996. If we have a 'normal' catastrophe year in 1997, our results should improve. Market conditions continue to be extremely competitive. We'll succeed if we stay focused and maintain traditional underwriting standards and pricing discipline." PHOTO IMAGE NO. 4 - Photo of Ms. Susan J. Albrecht President, Major Markets Specialized Commercial St. Paul Fire and Marine CAPTION: "1996 was a year of organizational redesign. In 1997, we will execute our plans. We'll continue to integrate our new underwriting niches, retain and grow business in our defined markets, and measure our service delivery to our large customers. Our pace and execution will accelerate as we continue to penetrate the large account market." PHOTO IMAGE NO. 5 - Photo of Ms. Janet R. Nelson President, Custom Markets Specialized Commercial St. Paul Fire and Marine CAPTION: "We recognize that the extremely competitive marketplace will put significant pressure on Custom Markets to maintain acceptable levels of profitability in 1997. However, we're always finding new growth areas that fit well with our niche strategy. These pockets of opportunity, coupled with our ongoing productivity efforts, will be critical to achieving our goals in 1997." SIDEBAR CAPSULE NO. 1 - Specialized Commercial ---------------------- Major Markets - ------------- "St. Paul Construction underwrites 80 of the 'Engineering News Record' Top 400 construction accounts in the United States." "In an effort to enhance claim service to its national customers, Major Markets created the position of claim service coordinator in 14 locations." Custom Markets - -------------- "Technology continues to increase its presence in the international arena. In 1996, premium for international exposures of U.S.-based Technology accounts grew 34 percent." "Public Sector Services continued to strengthen its presence and reputation as a provider of property and liability insurance for a variety of government entities." PHOTO IMAGE NO. 6 - Photo of Mr. James A. Schulte President, Commercial St. Paul Fire and Marine CAPTION: "In 1997, Commercial will be heavily involved in executing Northbrook integration plans throughout our 12 regions. On the small commercial side, we'll continue to focus on the development of new products and more efficient processes." SIDEBAR CAPSULE NO. 2 - Commercial ---------- "The acquisition of Northbrook moves St. Paul Commercial closer to its goal of becoming a major force in the U.S. commercial insurance market for small to midsized businesses." "Our small-commercial insurance operation introduced agency interface and an automated rating disk to selected agents in 1996. Agents who have completed interface training indicated that this system is user-friendly and efficient." "All commercial account managers and team leaders completed a sales training program in 1996. The objectives of the program were to improve relationships between agents and underwriting team members and to help team members better sell the benefits of doing business with Commercial and St. Paul Fire and Marine." PHOTO IMAGE NO. 7 - Photo of individuals in restaurant. CAPTION: "Niche marketing - packaging specialized underwriting expertise, processing systems and distribution strategies to match a specific type of customer and gain a competitive advantage - has been a hallmark of The St. Paul's success. One of St. Paul Fire and Marine's Major Markets niches is Service Industries - including the retail, wholesale, insurance, property management, entertainment, hospitality and automobile leasing markets. Seated in the restaurant of the Wyndham Garden Hotel in Bloomington, Minn., is The St. Paul's Lezlie Taylor, vice president-service industries. St. Paul Fire and Marine began underwriting general liability and commercial auto coverage for Wyndham in 1990. Headquartered in Dallas, Wyndham Hotel Corporation has more than 80 locations in the United States, Canada and the Caribbean. Wyndham has focused on developing a brand name that is recognized in the upscale hotel market and on earning the loyalty of its core upscale customers: individual business travelers, business groups, other group customers and leisure travelers. St. Paul customers like Wyndham have needs unique to their industry and their size. Most insurers have not specialized their business segments as finely as The St. Paul has. That allows Major Markets to differentiate itself from others in the large accounts marketplace. St. Paul niches, like Service Industries, have experts that know their markets and speak their language. Customers benefit from the specialty expertise and experience The St. Paul brings to the table." PHOTO IMAGE NO. 8 - Photo of Mr. Steven J. Klingel President, Personal Insurance St. Paul Fire and Marine CAPTION: "Our efforts in 1997 will focus on leveraging the strengths we've gained through our integration of Economy Fire & Casualty Company and eliminating the obstacles that stand between us and profitability. We have a strong plan and a clear focus." SIDEBAR CAPSULE NO. 3 - Personal Insurance ------------------ "Approximately 95 percent of Personal Insurance policyholders surveyed recently agreed that St. Paul Fire and Marine has an excellent reputation for providing responsive service." "1996 marked the first year of true integration between St. Paul Fire and Marine and Economy Fire & Casualty Company. All financial, billing and claim systems have been consolidated, and product servicing has been moved to Freeport, Ill." "A new direct repair program will be offered to Personal Insurance policyholders in 1997. The program is expected to increase customer satisfaction, while reducing costs." PHOTO IMAGE NO. 9 - Photo of Mr. Joseph B. Nardi President, Medical Services St. Paul Fire and Marine CAPTION: "During 1997, we intend to maintain our position as the medical liability insurance market leader. We're committed to insuring the business of health care. Our customers can rely on our experience and expertise in dealing with their evolving risks and the ongoing changes in the delivery system, including the almost universal movement to a managed care environment." SIDEBAR CAPSULE NO. 4 - Medical Services ---------------- "An enhanced Key Medical Producers' Program was unveiled in Medical Services during 1996. The program provides sales incentives, product training and sales skill communications to 150 top-producing insurance agencies and brokerage offices." "In 1996, the Nevada State Medical Association endorsed St. Paul Fire and Marine as the organization's preferred medical liability insurance provider." "St. Paul Medical Services now insures approximately one- third of all privately owned hospitals in Puerto Rico." PHOTO IMAGE NO. 10 - Photo of Mr. Mark L. Pabst President, St. Paul International Underwriting CAPTION: "St. Paul International Underwriting will pursue a three-pronged strategy: to build domestic insurance operations in selected markets to serve local insurance needs; to enter global and regional customer segments through ownership of two Lloyd's of London managing agencies; and to build The St. Paul's capability of servicing the non-U.S. risks of U.S. corporate policyholders and underwriting foreign-based companies' exposures in the United States." SIDEBAR CAPSULE NO. 5 - St. Paul International Underwriting ----------------------------------- "St. Paul International Insurance Company Ltd. won the 'General Insurer of the Year' award at the British Insurance Awards." "During 1996, St. Paul International Insurance Company Ltd. maintained its position as the preferred property-liability insurer of National Health Trusts in the United Kingdom." "Since purchasing a minority shareholder interest in El Plata S.A. Argentina de Seguros in 1996, St. Paul International Underwriting has increased its ownership in the Argentine insurance company to 80 percent." PHOTO IMAGE NO. 11 - Photo of Mr. James F. Duffy President, St. Paul Re CAPTION: "In 1997, we will continue to build our leadership position in the reinsurance marketplace, increasing our influence and visibility in various markets. We will continue to diversify both geographically and in our product mix. Finally, we will grow, using our financial strength and other competitive advantages to seize opportunities." SIDEBAR CAPSULE NO. 6 - St. Paul Re ----------- "The portion of St. Paul Re's business underwritten outside the United States grew from 25 percent in 1991 to 45 percent in 1996, to better balance and diversify its book of business and to enhance its position in a consolidating global insurance marketplace. By 2000, that percentage is expected to reach 50 percent." PHOTO IMAGE NO. 12 - Photo of individuals in train station. CAPTION: "The Gatwick Express, a 30-minute trip between Gatwick Airport and London's Victoria Railway Station, carries approximately 12,500 passengers each day. The Gatwick Express was one of the first train services removed from public ownership in the British government's railway privatization program. National Express plc acquired the operating franchise in 1996. A team of St. Paul employees - which included (from left) Keith Purvis, deputy general manager- commercial insurance; Michele Baron, risk management adviser; and Colin Hamling, manager- strategic innovation and development - identified the property and liability coverage opportunities afforded by the privatization program and created products and services to meet the new demand. Working together with specialist brokers, St. Paul International Insurance Company Ltd. secured 13 of 16 passenger train operators in 1996. The St. Paul's initiative was voted best new product (commercial lines) in the United Kingdom's Insurance Broker Industry Awards. The privatized passenger railroad initiative accounted for about $10 million in written premium for St. Paul International in 1996." GRAPHIC IMAGE NO. 6 - Chart depicting The St. Paul's Claims- paying Ratings as of December 31, 1996. Organization Rating ----------------- ------ A.M. Best A+ Moody's Aa1 Standard & Poor's AAA CAPTION: "Independent rating agencies have long recognized St. Paul Fire and Marine Insurance Company 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 4% Short-term and Other Investments 2% CAPTION: "Our widely diversified fixed maturity portfolio is structured to maximize investment income while minimizing credit risk. Our equity securities and venture capital investments performed well in the strong 1996 capital markets." PHOTO IMAGE NO. 13 - Photo of individual in front of theater. CAPTION: "Old meets new in Munich, a thriving center for industry, culture and transportation. The German nonlife reinsurance market totals an estimated $15 billion, ranking it second only to the United States. In August 1996, St. Paul Re opened a Munich office, its third in Europe (the others are in London and Brussels) to better serve its clients and to develop reinsurance business in Germany, Austria and Switzerland. Consolidations within world reinsurance markets made available to St. Paul Re an experienced management team for the new Munich office. Joachim Rumpff, a St. Paul underwriter, is pictured here next to a bronze statue of King Maximilian I Joseph, first king of Bavaria. The statue greets visitors to the National Theater, home to the Bavarian State Opera. Although the European reinsurance market is dominated by established giants, St. Paul Re is confident it can compete by delivering underwriting expertise, especially in excess-of- loss reinsurance, and the highly rated financial security that European insurers seek." GRAPHIC IMAGE NO. 8 - Bar graph depicting Underwriting Operations Net Investment Income for the years 1992 through 1996. (in millions) 1992: $642 1993: $646 1994: $675 1995: $731 1996: $795 CAPTION: "The Northbrook acquisition added $1.1 billion of high-quality fixed maturities to our investment portfolio, contributing to the increase in investment income in 1996." GRAPHIC IMAGE NO. 9 - Table depicting Underwriting Operations Bond Portfolio Ratings. Rating Percent ------------ ------------- AAA 58% AA 21 A 14 BBB 3 Nonrated 4 --- 100 CAPTION: "The carrying value of our underwriting operations' bond portfolio at year-end included $483 million of unrealized appreciation." PHOTO IMAGE NO. 14 - Photo of Mr. Timothy R. Schwertfeger Chairman, Chief Executive Officer The John Nuveen Company CAPTION "Our commitment is to preserve and build upon our $50 billion relationship with Nuveen investors. We will do this over the long term by offering an increasingly broad array of investment products and services which deliver consistent performance, high quality and security throughout market cycles." SIDEBAR CAPSULE NO. 7 - The John Nuveen Company ----------------------- "Nuveen's return on beginning equity in 1996 was 22 percent." "Since 1961, more than 1.3 million individuals have invested over $65 billion in Nuveen funds and trusts." "In four of the last five years, Nuveen has produced record earnings." GRAPHIC IMAGE NO. 10 - Bar graph depicting Total Capitalization at the end of the years 1992 through 1996. (in billions) 1992 1993 1994 1995 1996 ----- ----- ----- ----- ----- Debt $0.6 $0.6 $0.6 $0.7 $0.7 Redeemable Preferred Securities and Share- holders' Equity 2.2 3.0 2.8 3.9 4.2 ----- ----- ----- ----- ----- Total $2.8 $3.6 $3.4 $4.6 $4.9 ===== ===== ===== ===== ===== CAPTION: "Total capitalization increased 6% over 1995. Outstanding debt, comprising just 14% of total capitalization, was down slightly from already conservative levels." GRAPHIC IMAGE NO. 11 - Bar graph depicting Book Value per Common Share at the end of the years 1992 through 1996. 1992: $26.18 1993: $35.47 1994: $32.46 1995: $44.29 1996: $47.93 CAPTION: "At the end of 1996, common shareholders' equity stood at nearly $4 billion, translating into a book value per common share of $47.93, an 8% increase over 1995." GRAPHIC IMAGE NO. 12 - Bar graph depicting Dividends Paid per Common Share for the years 1992 through 1996. 1992: $1.35 1993: $1.39 1994: $1.48 1995: $1.58 1996: $1.72 CAPTION: "Dividends are an important aspect of our total return to investors. We have paid a common share dividend for 125 consecutive years and increased dividends in 65 of those years." Item 6. SELECTED FINANCIAL DATA -----------------------
Eleven-year Summary of Selected Financial Data The St. Paul Companies Year ended December 31 (Dollars in thousands) 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- CONSOLIDATED Revenues from continuing operations $ 5,734,156 $ 5,056,199 $ 4,368,434 $ 4,150,554 $ 4,180,145 $ 4,017,548 Operating earnings from continuing operations 414,755 481,491 431,040 406,347 99,308 388,273 Net income (loss) 450,099 521,209 442,828 427,609 (156,038) 405,062 INVESTMENT ACTIVITY Net investment income 807,305 740,912 673,272 639,893 636,930 635,163 Realized investment gains (losses), net of taxes 143,103 56,357 28,962 40,981 101,270 24,258 Change in unrealized appreciation of investments, net of taxes (10,823) 613,843 (574,896) 525,175 (23,815) 55,093 OTHER SELECTED FINANCIAL DATA (As of December 31) Total assets 20,680,976 18,519,294 16,141,739 15,913,554 14,298,616 13,709,649 Debt 689,141 697,045 616,151 639,729 566,717 486,779 Common shareholders' equity 3,987,757 3,719,249 2,732,934 3,005,128 2,202,499 2,532,841 Common shares outstanding 83,198,411 83,975,864 84,202,417 84,714,676 84,118,554 85,042,484 PER COMMON SHARE DATA Operating earnings from continuing operations 4.55 5.25 4.80 4.50 1.06 4.32 Net income (loss) 4.93 5.68 4.93 4.73 (1.94) 4.50 Book value 47.93 44.29 32.46 35.47 26.18 29.78 Year-end market price 58.63 55.63 44.75 44.94 38.50 36.44 Cash dividends declared 1.76 1.60 1.50 1.40 1.36 1.30 Operating Earnings Return on Beginning Common Equity 10.9% 17.3% 14.1% 18.1% 3.6% 17.3% Net Income Return on Beginning Common Equity 11.9% 18.8% 14.5% 19.0% - 18.1% Year ended December 31 (Dollars in thousands) 1996 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- UNDERWRITING Written premiums $4,396,122 $4,243,213 $3,623,026 $3,178,545 $3,142,419 $3,233,729 Statutory underwriting result (227,070) (152,703) (143,317) (143,599) (557,463) (170,894) GAAP underwriting result (216,160) (103,045) (113,008) (150,255) (566,886) (163,782) Net investment income 794,901 731,096 674,818 646,396 642,301 640,856 Pretax operating earnings 477,535 577,509 524,742 457,752 20,781 451,184 Pretax income 686,084 651,912 560,709 507,181 81,132 486,063 Statutory combined ratio: Loss and loss expense ratio 74.6 72.1 72.1 72.5 85.6 75.2 Underwriting expense ratio 30.9 29.7 30.2 32.0 32.2 29.4 ----- ----- ----- ----- ----- ----- Combined ratio 105.5 101.8 102.3 104.5 117.8 104.6 Combined ratio including policyholders' dividends 105.7 102.0 102.3 104.7 118.2 105.0
Eleven-year Summary of Selected Financial Data The St. Paul Companies Year ended December 31 (Dollars in thousands) 1990 1989 1988 1987 1986 ---- ---- ---- ---- ---- CONSOLIDATED Revenues from continuing operations $ 3,691,811 $ 3,507,117 $ 3,397,564 $ 3,296,241 $ 3,120,549 Operating earnings from continuing operations 389,985 317,064 353,260 323,550 146,578 Net income (loss) 391,270 398,158 355,257 356,523 217,115 INVESTMENT ACTIVITY Net investment income 628,359 622,587 568,505 527,317 449,906 Realized investment gains (losses), net of taxes 5,812 59,892 3,354 (5,489) 5,702 Change in unrealized appreciation of investments, net of taxes (67,558) 60,045 20,428 (19,959) (13,396) OTHER SELECTED FINANCIAL DATA (As of December 31) Total assets 12,862,538 12,126,981 11,186,778 9,531,050 8,459,565 Debt 473,829 293,802 417,140 96,576 344,299 Common shareholders' equity 2,196,371 2,349,254 2,015,219 1,711,362 1,440,565 Common shares outstanding 84,468,058 98,607,762 92,728,168 92,603,714 92,495,700 PER COMMON SHARE DATA Operating earnings from continuing operations 4.14 3.24 3.67 3.39 1.64 Net income (loss) 4.16 4.06 3.69 3.73 2.38 Book value 26.00 23.82 21.73 18.48 15.57 Year-end market price 31.38 29.57 21.75 23.00 20.13 Cash dividends declared 1.20 1.10 1.00 0.88 0.75 Operating Earnings Return on Beginning Common Equity 16.3% 11.6% 20.6% 22.5% 14.5% Net Income Return on Beginning Common Equity 16.3% 14.6% 20.8% 24.7% 21.4% Year ended December 31 (Dollars in thousands) 1990 1989 1988 1987 1986 ---- ---- ---- ---- ---- UNDERWRITING Written premiums $3,052,032 $2,807,223 $2,690,536 $2,704,165 $2,556,425 Statutory underwriting result (141,751) (207,977) (92,741) (145,061) (265,105) GAAP underwriting result (120,730) (196,378) (90,209) (127,066) (275,184) Net investment income 629,242 614,119 548,766 498,251 431,594 Pretax operating earnings 457,161 364,352 420,339 358,493 142,532 Pretax income 466,731 456,167 424,187 351,358 151,552 Statutory combined ratio: Loss and loss expense ratio 73.2 75.7 73.6 76.2 82.0 Underwriting expense ratio 30.0 30.5 30.0 28.9 27.9 ----- ----- ----- ----- ----- Combined ratio 103.2 106.2 103.6 105.1 109.9 Combined ratio including policyholders' dividends 104.2 106.6 104.0 105.3 110.5
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP --------------------- KPMG Peat Marwick LLP Minneapolis, Minnesota January 27, 1997 The St. Paul Companies Consolidated Statements of Income Year ended December 31 ----------------------------------- (in thousands) 1996 1995 1994 ---- ---- ---- REVENUES Premiums earned $4,448,248 $3,971,329 $3,412,081 Net investment income 807,305 740,912 673,272 Investment banking-asset management 219,922 221,007 211,789 Realized investment gains 218,525 84,572 41,974 Other 40,156 38,379 29,318 --------- --------- --------- Total revenues 5,734,156 5,056,199 4,368,434 --------- --------- --------- EXPENSES Insurance losses and loss adjustment expenses 3,318,301 2,864,307 2,461,698 Policy acquisition expenses 975,456 856,979 753,946 Operating and administrative 741,263 665,588 579,265 --------- --------- --------- Total expenses 5,035,020 4,386,874 3,794,909 --------- --------- --------- Income from continuing operations before income taxes 699,136 669,325 573,525 Income tax expense (benefit): Federal current 114,035 182,422 154,034 Other 27,243 (50,945) (40,511) --------- --------- --------- Total income tax expense 141,278 131,477 113,523 --------- --------- --------- Income from continuing operations 557,858 537,848 460,002 Discontinued operations: Operating loss, net of taxes (19,216) (16,639) (17,174) Loss on disposal, net of taxes (88,543) - - --------- --------- --------- Loss from discontinued operations (107,759) (16,639) (17,174) --------- --------- --------- Net Income $ 450,099 $ 521,209 $ 442,828 ========= ========= ========= PRIMARY EARNINGS PER COMMON SHARE Income from continuing operations $ 6.49 $ 6.19 $ 5.32 Loss from discontinued operations (1.27) (0.20) (0.20) --------- --------- --------- Net Income $ 5.22 $ 5.99 $ 5.12 ========= ========= ========= FULLY DILUTED EARNINGS PER COMMON SHARE Income from continuing operations $ 6.10 $ 5.86 $ 5.12 Loss from discontinued operations (1.17) (0.18) (0.19) --------- --------- --------- Net Income $ 4.93 $ 5.68 $ 4.93 ========= ========= ========= See notes to consolidated financial statements. The St. Paul Companies Consolidated Balance Sheets December 31 ------------------- (In thousands) 1996 1995 ---- ---- ASSETS Investments: Fixed maturities $11,944,085 $10,372,890 Equities 808,295 711,471 Real estate 693,910 611,656 Venture capital 586,222 388,599 Other investments 43,311 42,776 Short-term investments 289,793 430,719 ---------- ---------- Total investments 14,365,616 12,558,111 Cash 37,214 25,475 Investment banking inventory securities 143,594 249,662 Reinsurance recoverables: Unpaid losses 1,890,105 1,853,817 Paid losses 68,692 74,568 Receivables: Underwriting premiums 1,558,967 1,316,560 Interest and dividends 213,883 195,764 Other 104,865 91,334 Deferred policy acquisition expenses 401,768 372,174 Ceded unearned premiums 243,663 226,943 Deferred income taxes 908,220 521,864 Office properties and equipment 281,093 297,384 Goodwill 167,338 123,130 Other assets 295,958 612,508 ---------- ---------- Total Assets $20,680,976 $18,519,294 ========== ========== LIABILITIES Insurance reserves: Losses and loss adjustment expenses $11,673,148 $10,247,070 Unearned premiums 2,566,551 2,361,028 ---------- ---------- Total insurance reserves 14,239,699 12,608,098 Debt 689,141 697,045 Payables: Reinsurance premiums 181,524 170,902 Income taxes 219,081 139,058 Accrued expenses and other 484,062 484,605 Other liabilities 656,649 482,465 ---------- ---------- Total Liabilities 16,470,156 14,582,173 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. 207,000 207,000 ---------- ---------- SHAREHOLDERS' EQUITY Preferred: Convertible preferred stock 142,131 144,165 Guaranteed obligation - PSOP (126,068) (133,293) ---------- ---------- Total Preferred Shareholders' Equity 16,063 10,872 ---------- ---------- Common: Common stock 475,710 460,458 Retained earnings 2,935,928 2,704,075 Guaranteed obligation - ESOP (20,353) (32,294) Unrealized appreciation of investments 616,968 627,791 Unrealized loss on foreign currency translation (20,496) (40,781) ---------- ---------- Total Common Shareholders' Equity 3,987,757 3,719,249 ---------- ---------- Total Shareholders' Equity 4,003,820 3,730,121 ---------- ---------- Total Liabilities, Redeemable Preferred Securities and Shareholders' Equity $20,680,976 $18,519,294 ========== ========== See notes to consolidated financial statements. The St. Paul Companies Consolidated Statements of Shareholders' Equity Year ended December 31 ----------------------- (In thousands) 1996 1995 1994 ---- ---- ---- PREFERRED SHAREHOLDERS' EQUITY Series B convertible preferred stock: Beginning of year $ 144,165 $ 146,102 $ 147,608 Redemptions during the year (2,034) (1,937) (1,506) -------- -------- -------- End of year 142,131 144,165 146,102 -------- -------- -------- Guaranteed obligation - PSOP: Beginning of year (133,293) (141,567) (148,929) Principal payments 7,225 8,274 7,362 -------- -------- -------- End of year (126,068) (133,293) (141,567) -------- -------- -------- Total Preferred Shareholders' Equity 16,063 10,872 4,535 -------- -------- -------- COMMON SHAREHOLDERS' EQUITY Common stock: Beginning of year 460,458 445,222 438,559 Stock issued under stock incentive plans 21,393 19,481 11,130 Stock issued for acquisition 1,664 - - Reacquired common shares (7,805) (4,245) (4,467) -------- -------- -------- End of year 475,710 460,458 445,222 -------- -------- -------- Retained earnings: Beginning of year 2,704,075 2,362,286 2,082,832 Net income 450,099 521,209 442,828 Dividends declared on common stock, $1.76 per share in 1996 ($1.60 in 1995 and $1.50 in 1994) (145,956) (133,956) (124,921) Dividends declared on preferred stock, net of taxes (8,664) (8,582) (8,448) Reacquired common shares (67,445) (38,291) (30,005) Tax benefit on employee stock options and awards 3,819 1,409 - --------- --------- --------- End of year 2,935,928 2,704,075 2,362,286 --------- --------- --------- Guaranteed obligation - ESOP: Beginning of year (32,294) (44,410) (56,005) Principal payments 11,941 12,116 11,595 --------- --------- --------- End of year (20,353) (32,294) (44,410) --------- --------- --------- Unrealized appreciation of investments, net of taxes: Beginning of year 627,791 13,948 588,844 Change for the year (10,823) 613,843 (574,896) --------- --------- --------- End of year 616,968 627,791 13,948 --------- --------- --------- Unrealized loss on foreign currency translation, net of taxes: Beginning of year (40,781) (44,112) (49,102) Currency translation adjustments (5,309) 3,331 4,990 Realized loss relating to discontinued operations 25,594 - - --------- --------- --------- End of year (20,496) (40,781) (44,112) --------- --------- --------- Total Common Shareholders' Equity 3,987,757 3,719,249 2,732,934 --------- --------- --------- Total Shareholders' Equity $4,003,820 $3,730,121 $2,737,469 ========= ========= ========= See notes to consolidated financial statements. The St. Paul Companies Consolidated Statements of Cash Flows Year ended December 31 -------------------------- (In thousands) 1996 1995 1994 ---- ---- ---- OPERATING ACTIVITIES Underwriting: Net income $ 551,293 $ 533,776 $ 452,756 Adjustments: Change in net insurance reserves 344,259 753,543 445,791 Change in underwriting premiums receivable (56,347) (217,877) (89,147) Deferred tax benefit (11,542) (55,192) (36,085) Realized investment gains (208,549) (74,403) (35,967) Other 254,541 (61,509) 146,886 --------- --------- --------- Total underwriting 873,655 878,338 884,234 --------- --------- --------- Investment banking-asset management: Net income 56,601 54,746 44,196 Adjustments: Change in inventory securities 107,453 (103,016) 156,823 Change in short-term borrowings (25,000) 25,000 (80,383) Change in short-term investments (457) 45,659 (94,968) Change in open security transactions (1,205) (10,138) 10,879 Other 2,694 25,642 21,051 --------- --------- --------- Total investment banking- asset management 140,086 37,893 57,598 --------- --------- --------- Parent company, consolidating eliminations and discontinued operations: Net loss (157,795) (67,313) (54,124) Adjustments: Provision for loss on disposal, net of taxes 88,543 - - Realized investment gains (9,976) (10,169) (6,007) Other 35,135 67,397 18,419 --------- --------- --------- Total parent company, consolidating eliminations and discontinued operations (44,093) (10,085) (41,712) --------- --------- --------- Net Cash Provided by Operating Activities 969,648 906,146 900,120 --------- --------- --------- INVESTING ACTIVITIES Purchases of investments (3,148,120)(2,857,778)(2,087,104) Proceeds from sales and maturities of investments 2,486,056 1,991,357 1,465,668 Change in short-term investments 141,647 (6,116) (66,783) Change in open security transactions (35,556) 6,516 (6,156) Net purchases of office properties and equipment (38,454) (41,614) (49,338) Purchase of Northbrook Holdings, Inc., net of cash acquired (184,568) - - Other 32,504 (56,809) (16,312) --------- --------- --------- Net Cash Used in Investing Activities (746,491) (964,444) (760,025) --------- --------- --------- FINANCING ACTIVITIES Dividends paid on common and preferred stock (155,268) (144,662) (136,062) Proceeds from issuance of debt 46,220 193,002 87,721 Repayment of debt (17,711) (125,446) (20,350) Repurchase of common shares (74,217) (41,714) (34,150) Proceeds from issuance of company- obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. - 207,000 - Other (10,442) (25,216) (26,855) --------- --------- --------- Net Cash Provided by (Used in) Financing Activities (211,418) 62,964 (129,696) --------- --------- --------- Increase in Cash 11,739 4,666 10,399 --------- --------- --------- Cash at beginning of year 25,475 20,809 10,410 --------- --------- --------- Cash at End of Year $ 37,214 $ 25,475 $ 20,809 ========= ========= ========= See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The St. Paul Companies NOTE 1 - Summary of Significant Accounting Policies Accounting Principles - We prepare our financial statements in accordance with generally accepted accounting principles (GAAP). We follow the accounting standards established by the Financial Accounting Standards Board 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 foreign underwriting operations on a one- quarter lag. Discontinued Operations - In 1996, we decided to exit the insurance brokerage business. As a result, we no longer include the financial statements of our insurance brokerage operations with our other subsidiaries. The financial statements presented reflect insurance brokerage results as discontinued operations. Reclassifications - We reclassified some figures in our 1995 and 1994 financial statements and notes to conform with the 1996 presentation. These reclassifications had no effect on net income, or common or preferred shareholders' equity, as previously reported for those years. Use of Estimates - We make estimates and assumptions that have an effect on the amounts that we report in our financial statements. Our most significant estimates are those relating to our reserves for losses and loss adjustment expenses. We continually review our estimates and make adjustments as necessary, but actual results could turn out significantly different than what we envisioned when we made these estimates. Stock Split - In 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. We record the premiums that we have not yet recognized as revenues as unearned premiums on our balance sheet. Insurance Losses and Loss Adjustment Expenses - Losses represent the amounts we paid or expect to pay to claimants for events that have occurred. The costs of investigating, resolving and processing these claims are known as loss adjustment expenses. We record these items on our statement of income net of reinsurance, meaning 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 1996 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 adjustment expenses are reflected as assets. We believe that the reserves we have established are adequate to cover the ultimate costs of losses and loss adjustment expenses. Final claim payments, 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 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, 1996 and 1995. Nuveen develops and markets tax- free open-end and closed-end (exchange-traded) managed funds 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. Those inventory securities are carried at market value. Nuveen's revenues include investment advisory fees, revenues from the distribution of 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 $59.9 million and $71.4 million was recorded in other liabilities at the end of 1996 and 1995, respectively. Nuveen repurchased and retired 3.8 million of its common shares in 1996 for a total cost of $101.1 million. The repurchases were proportioned between us and minority shareholders to maintain our 78% ownership of Nuveen. Our proceeds from the Nuveen repurchases totaled $74.0 million. ACCOUNTING FOR OUR INVESTMENTS Fixed Maturities - Our entire fixed maturity investment portfolio is classified as available-for-sale. Accordingly, we carry that portfolio on our balance sheet at estimated 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 that we own directly or in which we have a partial interest 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 investments was $81.8 million and $68.8 million at Dec. 31, 1996 and 1995, 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 on 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 $113.3 million and $88.0 million at Dec. 31, 1996 and 1995, 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 PROERTIES 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 $217.5 million and $194.7 million at the end of 1996 and 1995, 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 We paid interest of $48.4 million in 1996, $44.5 million in 1995 and $40.0 million in 1994. We paid federal income taxes of $91.5 million in 1996, $184.4 million in 1995 and $122.7 million in 1994. Federal tax payments in 1995 included $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. 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 ---------------------- 1996 1995 1994 ---- ---- ---- PRIMARY Net income, as reported $450,099 $521,209 $ 442,828 PSOP preferred dividends declared (net of taxes) (8,664) (8,582) (8,448) Premium on preferred shares redeemed (1,033) (823) - ------- ------- ------- Net income, as adjusted $440,402 $511,804 $434,380 ======= ======= ======= FULLY DILUTED Net income, as reported $450,099 $521,209 $442,828 Additional PSOP expense (net of taxes) due to assumed conversion of preferred stock (3,015) (3,477) (3,782) Dividends on monthly income preferred securities (net of taxes) 8,073 5,046 - Premium on preferred shares redeemed (1,033) (823) - ------- ------- ------- Net income, as adjusted $454,124 $521,955 $439,046 ======= ======= ======= ADJUSTED AVERAGE COMMON SHARES OUTSTANDING Primary 84,419 85,399 84,816 Fully diluted 92,040 91,843 89,067 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 company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C.(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. (In thousands) December 31, 1996 -------------------------------------------- Gross Gross Estimated Unrealized Unrealized Market Cost Appreciation Depreciation Value ----- ------------ ------------ --------- Fixed maturities: U.S. government $ 2,401,760 $ 56,345 $(13,139) $ 2,444,966 States and political subdivisions 4,992,485 300,755 (5,274) 5,287,966 Foreign governments 1,077,869 59,421 (11,684) 1,125,606 Corporate securities 1,546,721 48,262 (8,721) 1,586,262 Mortgage-backed securities 1,466,168 39,452 (6,335) 1,499,285 --------- ---------- -------- ---------- Total fixed maturities 11,485,003 504,235 (45,153) 11,944,085 Equities 621,880 193,002 (6,587) 808,295 Venture capital 293,837 308,858 (16,473) 586,222 ---------- ---------- -------- ---------- Total $12,400,720 $1,006,095 $(68,213) $13,338,602 ========== ========== ======== ========== (In thousands) December 31, 1995 --------------------------------------------- Gross Gross Estimated Unrealized Unrealized Market 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 ========== ========= ======== ========== Statutory Deposits - At Dec. 31, 1996, our underwriting operations had investments in fixed maturities with an estimated market value of $466.5 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) December 31, 1996 ------------------------- Amortized Estimated Cost Market Value --------- ------------ One year or less $ 174,382 $ 177,090 Over one year through five years 1,622,772 1,684,036 Over five years through 10 years 4,243,672 4,461,087 Over 10 years 3,978,009 4,122,587 Mortgage-backed securities with various maturities 1,466,168 1,499,285 ---------- ---------- Total $11,485,003 $11,944,085 ========== ========== NOTE 4 - Investment Transactions Investment Activity - Here is a summary of our investment purchases, sales and maturities. (In thousands) Year ended December 31 ---------------------------- 1996 1995 1994 ---- ---- ---- PURCHASES Fixed maturities $1,885,428 $1,829,942 $1,235,653 Equities 1,037,185 837,288 700,568 Real estate 114,770 116,925 74,420 Venture capital 94,891 66,247 66,622 Other investments 15,846 7,376 9,841 --------- --------- --------- Total purchases 3,148,120 2,857,778 2,087,104 --------- --------- --------- PROCEEDS FROM SALES AND MATURITIES Fixed maturities: Sales 506,999 326,382 181,126 Maturities and redemptions 730,612 709,104 533,292 Equities 1,110,060 836,683 707,608 Real estate 17,608 14,428 6,718 Venture capital 118,011 87,512 28,817 Other investments 2,766 17,248 8,107 --------- --------- --------- Total sales and maturities 2,486,056 1,991,357 1,465,668 --------- --------- --------- Net purchases $ 662,064 $ 866,421 $ 621,436 ========= ========= ========= Net Investment Income - Here is a summary of our net investment income. (In thousands) Year ended December 31 ---------------------------- 1996 1995 1994 ---- ---- ---- Fixed maturities $738,396 $665,364 $626,263 Equities 15,655 14,644 12,984 Real estate 36,260 32,830 28,049 Venture capital 324 (171) (1,849) Other investments (2,142) (965) 346 Short-term investments 31,008 38,842 24,571 ------- ------- ------- Total 819,501 750,544 690,364 Investment expenses (12,196) (9,632) (17,092) ------- ------- ------- Net investment income $807,305 $740,912 $673,272 ======= ======= ======= Realized and Unrealized Investment Gains (Losses) - The following summarizes our pretax realized investment gains and losses, and the change in unrealized appreciation of investments recorded in common shareholders' equity. (In thousands) Year ended December 31 ---------------------------- 1996 1995 1994 ---- ---- ---- PRETAX REALIZED INVESTMENT GAINS (LOSSES) Fixed maturities: Gross realized gains $ 7,033 $ 3,091 $ 5,232 Gross realized losses (8,236) (5,728) (1,849) ------- ------- ------- Total fixed maturities (1,203) (2,637) 3,383 ------- ------- ------- Equities: Gross realized gains 160,639 78,772 59,548 Gross realized losses (31,282) (29,548) (38,626) ------- ------- ------- Total equities 129,357 49,224 20,922 ------- ------- ------- Real estate: Gross realized gains 2,678 2,305 21 Gross realized losses (1,267) (474) (10,479) ------- ------- ------- Total real estate 1,411 1,831 (10,458) ------- ------- ------- Venture capital: Gross realized gains 109,879 71,412 26,556 Gross realized losses (23,868) (33,237) (8,940) ------- ------- ------- Total venture capital 86,011 38,175 17,616 ------- ------- ------- Other investments 2,949 (2,021) 10,511 ------- ------- ------- Total pretax realized investment gains $218,525 $ 84,572 $ 41,974 ======= ======= ======= CHANGE IN UNREALIZED APPRECIATION Fixed maturities $(198,855) $ 742,626 $(847,554) Equities 25,975 130,247 (30,106) Venture capital 163,110 59,880 (4,064) --------- --------- --------- Total change in pretax unrealized appreciation (9,770) 932,753 (881,724) Change in deferred tax asset (1,053) (318,910) 306,828 --------- --------- --------- Total change in unrealized appreciation, net of taxes $ (10,823) $ 613,843 $(574,896) ========= ========= ========= 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 for purposes of hedging against fluctuations in interest rates. All investments, including derivative instruments, have some degree of market and credit risk associated with them. However, the market risk on our derivatives substantially offsets the market risk associated with fluctuations in interest rates. We minimize our credit risk by conducting derivative transactions only with reputable, investment- grade counter parties. We enter into interest rate swap agreements for the purpose of minimizing the effect of interest rate fluctuations on some of our debt and investments. We are party to 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 2000. At Dec. 31, 1996 and 1995, the estimated market value of this swap agreement was an asset of $1.4 million and $200,000, respectively. At Dec. 31, 1995, we had investments in perpetual floating rate notes totaling $35 million, and we were party to interest rate swap agreements for notional amounts equaling this total at that date. We recorded 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 the agreements been terminated at the balance sheet date. At Dec. 31, 1995, we recorded an asset of $941,000 associated with these agreements. At Dec. 31, 1996, we had no investments in perpetual floating rate notes, nor were we party to any related interest rate swap agreements. NOTE 6 - Reserves for Losses and Loss Adjustment Expenses Reconciliation of Loss Reserves - 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 --------------------------------- 1996 1995 1994 ---- ---- ---- Loss and LAE reserves at beginning of year, as reported $10,247,070 $ 9,423,429 $ 9,185,191 Less reinsurance recoverables on unpaid losses at beginning of year (1,853,817) (1,533,250) (1,545,026) ---------- --------- --------- Net loss and LAE reserves at beginning of year 8,393,253 7,890,179 7,640,165 Net reserves of acquired companies 1,015,826 12,329 - Provision for losses and LAE for claims incurred: Current year 3,570,545 3,112,193 2,790,164 Prior years (252,244) (247,886) (328,466) --------- --------- --------- Total incurred 3,318,301 2,864,307 2,461,698 --------- --------- --------- Losses and LAE payments for claims incurred: Current year (1,101,077) (783,633) (667,255) Prior years (1,839,463) (1,590,701) (1,566,083) --------- --------- --------- Total paid (2,940,540) (2,374,334) (2,233,338) --------- --------- --------- Unrealized foreign exchange (gain) loss (3,797) 772 21,654 --------- --------- --------- Net loss and LAE reserves at end of year 9,783,043 8,393,253 7,890,179 Plus reinsurance recoverables on unpaid losses at end of year 1,890,105 1,853,817 1,533,250 ---------- ---------- --------- Loss and LAE reserves at end of year, as reported $11,673,148 $10,247,070 $9,423,429 ========== ========== ========= 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, 1996 and 1995. Amounts in the "net" column are reduced by reinsurance. (In thousands) December 31 ----------------------------------- 1996 1995 ------------------ ----------------- Gross Net Gross Net Environmental $581,000 $368,000 $528,000 $319,000 Asbestos 278,000 169,000 283,000 158,000 ------- ------- ------- ------- Total environmental and asbestos reserves $859,000 $537,000 $811,000 $477,000 ======= ======= ======= ======= 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 ---------------------------- 1996 1995 1994 ---- ---- ---- STATEMENTS OF INCOME Expense on continuing operations $141,278 $131,477 $113,523 Expense on discontinued operations 401 3,547 7,227 Benefit on loss on disposal (291,493) - - ------- ------- ------- Total income tax expense (benefit) included in statements of income (149,814) 135,024 120,750 ------- ------- ------- COMMON SHAREHOLDERS' EQUITY Benefit for deductions relating to: Dividends on unallocated ESOP and PSOP shares (3,626) (4,094) (4,578) Employee stock options and awards (3,819) (1,409) - Deferred expense (benefit) for the change in unrealized appreciation of investments and unrealized foreign exchange (1,561) 319,195 (308,073) Total income tax expense (benefit) included in common shareholders' equity (9,006) 313,692 (312,651) -------- ------- ------- Total income tax expense (benefit) included in financial statements $(158,820) $448,716 $(191,901) ======== ======= ======== Components of Income Tax Expense - The components of income tax expense on continuing operations are as follows: (In thousands) Year ended December 31 ---------------------------- 1996 1995 1994 ---- ---- ---- Federal current tax expense $114,035 $182,422 $154,034 Federal deferred tax benefit (1,185) (58,330) (47,390) ------- ------- ------- Total federal income tax expense 112,850 124,092 106,644 Foreign income taxes 22,074 1,791 1,680 State income taxes 6,354 5,594 5,199 ------- ------- ------- Total income tax expense on continuing operations $141,278 $131,477 $113,523 ======= ======= ======= 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 ----------------------------- 1996 1995 1994 ---- ---- ---- Federal income tax expense at statutory rates $244,698 $234,264 $200,734 Increase (decrease) attributable to: Nontaxable investment income (94,156) (83,395) (87,630) Foreign operations (22,915) (12,050) (11,168) Other (14,777) (14,727) 4,708 ------- ------- ------- Federal income tax expense $112,850 $124,092 $106,644 ======= ======= ======= 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 --------------------- 1996 1995 ---- ---- DEFERRED TAX ASSETS Loss reserves $ 808,248 $ 735,808 Loss on disposal of insurance brokerage operations 370,900 - Unearned premium reserves 172,382 141,882 Deferred compensation 78,006 83,543 Other 181,065 153,785 --------- --------- Total gross deferred tax assets 1,610,601 1,115,018 Less valuation allowance (72,879) (21,084) --------- --------- Net deferred tax assets 1,537,722 1,093,934 --------- --------- DEFERRED TAX LIABILITIES Unrealized appreciation of investments 325,824 325,694 Deferred acquisition costs 135,455 124,178 Real estate 43,125 47,404 Other 125,098 74,794 --------- --------- Total gross deferred tax liabilities 629,502 572,070 --------- --------- Deferred income taxes $ 908,220 $ 521,864 ========= ========= 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 an increase of $51.8 million in 1996 and a decrease of $20.7 million in 1995, relating to our foreign underwriting operations for both years and our provision for loss on disposal of insurance brokerage operations in 1996. 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 $10.0 million of our foreign operations' undistributed earnings as of Dec. 31, 1996, 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 $131.0 million of undistributed earnings related to our majority ownership of The John Nuveen Company as of Dec. 31, 1996, 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 1992 and is currently examining the years 1993 and 1994. We believe that any additional taxes assessed as a result of these examinations would not materially affect our overall financial position, results of operations or liquidity. NOTE 8 - Capital Structure The following summarizes our capital structure: (In thousands) December 31 --------------------- 1996 1995 ---- ---- Debt $ 689,141 $ 697,045 Company-obligated mandatorily redeemable preferred securities of St. Paul Capital L.L.C. 207,000 207,000 Preferred shareholders' equity 16,063 10,872 Common shareholders' equity 3,987,757 3,719,249 --------- --------- Total capital $4,899,961 $4,634,166 ========= ========= Ratio of debt to total capital 14% 15% --------- --------- DEBT Debt consists of the following: (In thousands) December 31 ----------------------------------- 1996 1995 Book Fair Book Fair Value Value Value Value ------------------------------------ Medium-term notes $430,427 $435,500 $397,433 $419,500 Commercial paper 131,610 131,610 149,629 149,629 9 3/8% notes 99,994 101,500 99,982 105,300 Guaranteed ESOP debt 13,890 14,000 25,001 26,200 Real estate mortgage 13,220 13,220 - - Short-term borrowings - - 25,000 25,000 ------- ------- ------- ------- Total debt $689,141 $695,830 $697,045 $725,629 ======= ======= ======= ======= Fair Value - The fair value of our commercial paper and short-term borrowings approximates their book value because of their short-term nature. The fair value of the real estate mortgage approximates its book value because we entered into this debt near the end of 1996. 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%, with a weighted average rate of 7.1%. Maturities range from five 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 1996, 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 1996 ranged from 5.1% to 6.6%; in 1995 the range was 5.4% to 6.6%; and in 1994 the range was 3.1% to 6.1%. 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. Real Estate Mortgage - The real estate mortgage represents a portion of the $31 million purchase price of our investment in a warehouse complex in 1996. The mortgage bears a fixed interest rate of 6.7% and matures in November 2000. Interest Expense - Our interest expense was $48.5 million in 1996, $46.2 million in 1995 and $39.5 million in 1994. Maturities - The amount of debt that becomes due in each of the next five years is as follows: 1997, $111.1 million; 1998, $27.8 million; 1999, $20.0 million; 2000, $144.8 million; and 2001, $45.5 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 securities of SPCLLC, a special purpose limited liability company which was formed for the sole purpose of issuing the MIPS. We have effectively fully and unconditionally guaranteed SPCLLC's obligations under the MIPS. The MIPS are convertible into 0.8475 shares of our common stock (equivalent to a conversion price of $59 per share). The MIPS are redeemable after May 31, 1999, but we may redeem them before then 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. 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 and the redemption of preferred shares to meet employee distribution requirements. Upon the redemption of preferred shares, we issue shares of our common stock to the trust to fulfill the redemption obligations. 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 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. Our cost for reacquired shares in 1996, 1995 and 1994 was $74.2 million, $41.7 million and $34.2 million, respectively. 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. In 1996, we issued 28,748 shares of our common stock valued at $1.7 million as partial consideration for our acquisition of a Lloyd's of London managing agency. A summary of our common stock activity for the last three years is as follows: (Shares) Year ended December 31 ------------------------------ 1996 1995 1994 ---- ---- ---- Outstanding at beginning of year 83,975,864 84,202,417 84,714,676 Shares issued: Stock incentive plans 542,169 534,096 344,756 Conversion of preferred stock 56,047 17,543 3,125 Acquisition 28,748 - - Reacquired shares (1,404,417) (778,192) (860,140) ---------- ---------- ---------- Outstanding at end of year 83,198,411 83,975,864 84,202,417 ========== ========== ========== 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 1997, $477.3 million will be available for dividends free from such restrictions. During 1996, we received cash dividends of $186.5 million from our U.S. underwriting subsidiary, and a $30.8 million noncash dividend of a portion of its investment in The John Nuveen Company. NOTE 9 - Retirement Plans Pension Plans - We maintain funded defined benefit pension plans for most of our U.S. employees. Benefits are based on years of service and the employee's compensation while employed by the company. Pension benefits generally vest after five years of service. Our pension plans are noncontributory. This means that employees do not pay anything into the plans. Our funding policy is to contribute amounts sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act and any additional amounts that may be necessary. This may result in no contribution being made in a particular year. Net periodic pension cost for our funded pension plans was $9.7 million, $13.9 million and $22.4 million for the years 1996, 1995 and 1994, respectively. The key components of our pension plans are summarized as follows: (In thousands) December 31 ------------------------ 1996 1995 ---- ---- FUNDED STATUS Accumulated benefit obligation $287,334 $288,680 Projected benefit obligation 368,158 367,707 Plan assets at fair value 407,404 350,266 ASSUMPTIONS Discount rate 7.25% 6.75% Rate of increase in compensation 4.00 3.75 Expected rate of return on plan assets 9.00 9.00 Plan assets are invested primarily in equities and fixed maturities and included 380,172 shares of our common stock with a market value of $22.3 million and $21.1 million at Dec. 31, 1996 and 1995, respectively. Employee Stock Ownership Plan - We maintain an ESOP for qualified U.S. employees. 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. We recorded ESOP expense of $6.2 million, $7.3 million and $8.3 million for the years 1996, 1995 and 1994, respectively. The ESOP allocated 498,715 shares in 1996, 500,834 shares in 1995 and 505,776 shares in 1994. The remaining 603,627 shares at Dec. 31, 1996, 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 $11.72 annually and is currently convertible into four shares of common stock. 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. We recorded PSOP expense of $7.8 million, $7.3 million and $10.7 million for the years 1996, 1995 and 1994, respectively. The PSOP allocated 60,803 shares in 1996, 59,998 shares in 1995 and 66,609 shares in 1994. The remaining 672,891 shares at Dec. 31, 1996, 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. Net periodic postretirement benefits cost was $11.4 million, $11.0 million and $12.5 million for the years 1996, 1995 and 1994, respectively. The key components of our postretirement benefits plans are summarized as follows: (In thousands) December 31 -------------------- 1996 1995 ---- ---- FUNDED STATUS Accumulated postretirement benefit obligation $132,086 $134,497 Plan assets at fair value 17,107 16,430 ASSUMPTIONS Discount rate 7.50% 7.00% Rate of increase in compensation 4.00 3.75 Expected rate of return on plan assets 9.00 8.00 A health care inflation rate of 7.5% was assumed to change to 7% in 1997, decrease annually to 5% in 2002 and then remain at that level. A 1% increase in the health care cost trend rate assumption would not have had a material impact on the accumulated postretirement benefit obligation or the expense for the year. NOTE 10 - Stock Incentive Plans We have made fixed stock option grants to certain U.S.-based company officers and outside directors. We also have made separate fixed option grants to certain employees of our non-U.S. operations. These plans are referred to as "fixed plans" because the measurement date for determining compensation costs is fixed on the date of grant. In 1996, we also made a one-time variable stock option grant to certain company officers. This was considered a "variable" grant because the measurement date is contingent upon future increases in the market price of our common stock. At the end of 1996, approximately 1,790,000 shares remained available for grant under our stock incentive plan. We follow the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for our stock option plans. In 1996, we implemented the disclosure provisions required by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock- Based Compensation" for our option plans. SFAS No. 123 requires pro forma net income and earnings per share information, which is calculated assuming we had accounted for our stock option plans under the "fair value" method described in that Statement. FIXED OPTION GRANTS U.S.-based Plans - Our fixed option grants for certain U.S.- based company officers and outside directors give these individuals the right to buy our stock at the market price on the day the options were granted. Fixed stock options granted under the stock incentive plan adopted by our shareholders in May 1994 may be exercised between one and 10 years subsequent to the date of grant. Options granted under our option plan in effect prior to May 1994 may be exercised at any time up to 10 years after the grant date. Non-U.S. Plans - We also have separate stock option plans for certain employees of our non-U.S. operations. The options granted under these plans were priced at the market price of our common stock on the grant date. Generally, they can be exercised from three to 10 years after the grant date. Approximately 150,000 option shares remained available at year-end for future grants under our non-U.S. plans. The following table summarizes the activity for our fixed option plans for the last three years. All grants were made at fair value on the date of grant. Weighted Option Average Shares Exercise Price --------- -------------- Outstanding Jan. 1, 1994 2,692,825 $32.66 Granted 554,100 40.85 Exercised (241,626) 28.77 Canceled (31,002) 34.70 --------- ------ Outstanding Dec. 31, 1994 2,974,297 34.48 Granted 670,050 48.52 Exercised (478,684) 33.11 Canceled (12,667) 38.65 --------- ------ Outstanding Dec. 31, 1995 3,152,996 37.65 Granted 773,100 54.04 Exercised (441,037) 33.99 Canceled (112,169) 35.92 --------- ------ Outstanding Dec. 31, 1996 3,372,890 $41.95 ========= ====== The following table summarizes the options exercisable at the end of the last three years and the weighted average fair value of options granted during 1996 and 1995. The fair value of options is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 3.3% and 3.5%; expected volatility of 18.9% and 16.9%; risk-free interest rates of 6.3% and 7.1%; and an expected life of 7.2 years for both years. SFAS No. 123 does not require fair value calculations for grants made prior to 1995. 1996 1995 1994 --------- --------- --------- Options exercisable at year-end 2,545,540 2,404,446 2,347,497 Weighted average fair value of options granted during the year $12.27 $10.93 N/A The following tables summarize the status of fixed stock options outstanding and exercisable at Dec. 31, 1996: Options Outstanding --------------------------------------- Weighted Average Weighted Range of Number of Remaining Average Exercise Prices Options Contractual Life Exercise Price - --------------- --------- ---------------- -------------- $21.63 - 34.25 957,123 3.6 years $31.56 35.00 - 43.00 854,017 6.1 years 38.01 43.19 - 50.88 1,203,500 8.4 years 48.44 52.75 - 58.00 358,250 9.1 years 57.26 - -------------- --------- --------- ------ $21.63 - 58.00 3,372,890 6.5 years $41.95 ============== ========= ========= ====== Options Exercisable ----------------------------------------- Weighted Number of Average Range of Exercise Prices Options Exercise Price - ------------------------ --------- -------------- $21.63 - 34.25 957,123 $31.56 35.00 - 43.00 810,017 37.88 43.19 - 50.88 767,400 47.12 52.75 - 58.00 11,000 52.75 - -------------- --------- ------ $21.63 - 58.00 2,545,540 $38.36 ============== ========= ====== VARIABLE STOCK OPTION GRANT In 1996, we made a one-time variable option grant of 825,300 shares from our 1994 stock incentive plan to certain of our key officers. One-half of the options will vest when the market price of our stock reaches a 20-consecutive-day average of $100 per share. The remaining options will vest when our stock price reaches a 20-consecutive-day average of $110 per share. The exercise price of each option is equal to the market price of our stock on the grant date, which was $58.75. These options may be exercised between four and five years after the date of grant provided the stock price targets are achieved. All of the variable options granted in 1996 were outstanding at Dec. 31, 1996. These options have a remaining contractual life of 4.9 years and an estimated fair value of $9.08 per option. The fair value of the variable options was estimated on the date of grant using a variable option- pricing model with the following assumptions: dividend yield of 3.0%; expected volatility of 20.0%; risk-free interest rate of 5.8%; and an expected life of 5 years. RESTRICTED STOCK AWARDS Up to 20% of the 4 million shares available under our 1994 stock incentive plan may be granted as restricted stock awards. The stock is restricted because recipients receive the stock only upon completing a specified objective or period of employment, generally one to five years. The shares are considered issued when awarded, but the recipient does not own and cannot sell the shares during the restriction period. Up to 760,000 shares remain available for restricted stock awards at Dec. 31, 1996. PRO FORMA INFORMATION Had we calculated compensation expense for our stock option grants based on the "fair value" method described in SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts as indicated. (In thousands) Year ended December 31 ---------------------- 1996 1995 ---- ---- NET INCOME As reported $450,099 $521,209 Pro forma 445,090 517,750 PRIMARY EARNINGS PER SHARE As reported 5.22 5.99 Pro forma 5.16 5.95 FULLY DILUTED EARNINGS PER SHARE As reported 4.93 5.68 Pro forma 4.88 5.65 NOTE 11 - Commitments and Contingencies Investment Commitments - We have long-term commitments to fund venture capital and real estate investments totaling $82.9 million as of Dec. 31, 1996. We estimate these commitments will be paid as follows: $34.8 million in 1997; $26.0 million in 1998; $14.4 million in 1999; $7.2 million in 2000; $0.5 million in 2001. 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 $67.0 million in 1996, $58.2 million in 1995 and $55.1 million in 1994. Certain leases are noncancelable, and we would remain responsible for payment even if we stopped using the space or equipment. On Dec. 31, 1996, the minimum annual rents for which we would be liable under these types of leases are as follows: $40.1 million in 1997, $35.2 million in 1998, $30.7 million in 1999, $20.2 million in 2000, $16.2 million in 2001 and $61.1 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. NOTE 12 - Acquisition of Northbrook On July 31, 1996, we acquired Northbrook Holdings, Inc. and its three insurance subsidiaries from Allstate Insurance Company. Northbrook and its subsidiaries, which had 1995 net written premiums of $587 million, underwrite various property-liability commercial insurance products throughout the United States. Our total cost for this acquisition was approximately $190 million, which was provided from internal funds. We recorded goodwill of approximately $68 million that we are amortizing over 15 years. In the Northbrook purchase agreement, we agreed to pay Allstate additional consideration of up to $50 million in the event a redundancy develops on the acquired Northbrook reserves between the purchase date and July 31, 2000. Similarly, Allstate agreed to pay us consideration of up to $100 million in the event a deficiency develops on those reserves during the same time period. Any amounts to be paid by either party will depend on the extent of the redundancy or deficiency and will be determined in accordance with terms described in the purchase agreement. We accounted for the acquisition as a purchase. As a result, Northbrook's results were included in our consolidated results from the date of purchase. Consolidated results would not have been materially different had this acquisition been completed at the beginning of 1995. NOTE 13 - Discontinued Operations In December 1996, we decided to sell our entire insurance brokerage operation, Minet. As a result, Minet is accounted for as a discontinued operation in 1996, and we've restated 1995 and 1994 results to be consistent with the 1996 presentation. The following summarizes the discontinued operations for the last three years: (In thousands) Year ended December 31 ---------------------------- 1996 1995 1994 ---- ---- ---- Revenues $348,887 $365,880 $345,676 ======= ======= ======= Operating loss, before income taxes $(18,815) $(13,092) $ (9,947) Income tax expense 401 3,547 7,227 ------- ------- ------- Operating loss, net of taxes (19,216) (16,639) (17,174) ------- ------- ------- Loss on disposal, before income taxes (380,036) - - Income tax benefit (291,493) - - ------- ------- ------- Loss on disposal, net of taxes (88,543) - - ------- ------- ------- Loss from discontinued operations $(107,759) $(16,639) $(17,174) ======= ======= ======= The estimated pretax loss of $380 million on the disposal of Minet in 1996 represents the estimated difference between the fair value and the carrying value of Minet at the date of disposal. The loss provision encompasses Minet's estimated operating losses through the disposal date, the realization of previously unrealized foreign exchange losses, pension and postretirement curtailment gains, and estimated selling costs. We also recorded a net $291 million tax benefit in 1996, consisting of a $353 million tax benefit on the provision for loss on disposal reduced by a valuation allowance of $62 million. Our federal income tax carrying value of Minet was substantially higher than our carrying value for financial statement purposes, so the tax benefit was not proportionate to the pretax loss. The net assets of our discontinued operations at Dec. 31, 1996, consisted of the estimated proceeds we'll receive upon disposal, along with the net tax assets associated with the disposal. We restated our Dec. 31, 1995, balance sheet to record the net assets of discontinued operations in other assets. NOTE 14 - Reinsurance Our financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to our acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance means other insurance companies agree to share certain risks with us. The primary purpose of ceded reinsurance is to protect us from potential losses in excess of what we are prepared to accept. 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 ------------------------------ 1996 1995 1994 ---- ---- ---- PREMIUMS WRITTEN Direct $3,945,053 $3,825,517 $3,491,466 Assumed 969,420 1,030,331 745,810 Ceded (518,351) (612,635) (614,250) --------- --------- --------- Net premiums written $4,396,122 $4,243,213 $3,623,026 ========= ========= ========= PREMIUMS EARNED Direct $4,001,384 $3,678,190 $3,296,215 Assumed 975,273 934,490 709,987 Ceded (528,409) (641,351) (594,121) --------- --------- --------- Net premiums earned $4,448,248 $3,971,329 $3,412,081 ========= ========= ========= INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES Direct $2,851,403 $2,926,261 $2,245,796 Assumed 671,401 743,740 595,492 Ceded (204,503) (805,694) (379,590) --------- --------- --------- Net insurance losses and loss adjustment expenses $3,318,301 $2,864,307 $2,461,698 ========= ========= ========= NOTE 15 - Statutory Accounting Practices Our underwriting operations are required to file financial statements with state and foreign regulatory authorities. The accounting principles used to prepare these statutory financial statements follow prescribed accounting principles, which differ from GAAP. On a statutory accounting basis, our underwriting operations reported net income of $584.0 million in 1996, $476.3 million in 1995 and $285.3 million in 1994. Statutory surplus (shareholder's equity) of these operations was $3.0 billion and $2.5 billion as of Dec. 31, 1996 and 1995, respectively. NOTE 16 - Segment Information Geographic Areas - We provide international property- liability insurance coverages. The following summary presents financial data of our continuing operations based on their location. (In thousands) Year ended December 31 ---------------------------------- 1996 1995 1994 ---- ---- ---- REVENUES U.S. $5,051,190 $4,435,770 $3,954,560 Non-U.S. 682,966 620,429 413,874 --------- --------- --------- Total revenues $5,734,156 $5,056,199 $4,368,434 ========= ========= ========= INCOME (LOSS) BEFORE INCOME TAXES U.S. $ 622,834 $ 728,108 $ 546,062 Non-U.S. 76,302 (58,783) 27,463 -------- --------- --------- Total income before income taxes $ 699,136 $ 669,325 $ 573,525 ======== ========= ========= (In thousands) December 31 ----------------------------------- 1996 1995 1994 ---- ---- ---- IDENTIFIABLE ASSETS U.S. $17,571,323 $15,590,934 $14,258,779 Non-U.S. 2,633,783 2,352,907 1,487,241 ---------- ---------- ---------- Total identifiable assets 20,205,106 17,943,841 15,746,020 Parent company, consolidating eliminations and discontinued operations 475,870 575,453 395,719 ---------- ---------- ---------- Total assets $20,680,976 $18,519,294 $16,141,739 ========== ========== ========== Industry - Our two industry segments are underwriting and investment banking-asset management. The summary on the next page presents revenues, income from continuing operations before income taxes and identifiable assets for both industry segments. Each segment's revenues and pretax income include investment income. (In thousands) Year ended December 31 ----------------------------------- 1996 1995 1994 ---- ---- ---- REVENUES FROM CONTINUING OPERATIONS Underwriting: St. Paul Fire and Marine: Specialized Commercial $ 1,272,561 $ 1,230,790 $ 1,015,397 Commercial 862,092 587,016 498,543 Personal Insurance 707,299 655,347 619,414 Medical Services 601,679 605,468 638,413 ---------- ---------- ----------- Total St. Paul Fire and Marine 3,443,631 3,078,621 2,771,767 St. Paul International Underwriting 268,830 237,727 156,946 ---------- ---------- ----------- Total Worldwide Insurance Operations 3,712,461 3,316,348 2,928,713 St. Paul Re 735,787 654,981 483,368 ---------- ---------- ----------- Total premiums earned 4,448,248 3,971,329 3,412,081 Net investment income 794,901 731,096 674,818 Realized investment gains 208,549 74,403 35,967 Other 40,619 37,282 29,053 ---------- ---------- ----------- Total underwriting 5,492,317 4,814,110 4,151,919 ---------- ---------- ----------- Investment banking- asset management 232,347 236,230 220,303 ---------- ---------- ----------- Total industry segments 5,724,664 5,050,340 4,372,222 Parent company and consolidating eliminations 9,492 5,859 (3,788) ---------- ---------- ----------- Total revenues $ 5,734,156 $ 5,056,199 $ 4,368,434 ========== ========== =========== INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Underwriting: St. Paul Fire and Marine: Specialized Commercial $ 49,186 $ (124,078) $ (89,116) Commercial (60,228) (3,668) (62,988) Personal Insurance (201,815) (33,000) (26,315) Medical Services 55,179 76,399 118,379 ---------- ---------- ---------- Total St. Paul Fire and Marine (157,678) (84,347) (60,040) St. Paul International Underwriting (21,784) (23,188) (31,166) ---------- ---------- ---------- Total Worldwide Insurance Operations (179,462) (107,535) (91,206) St. Paul Re (36,698) 4,490 (21,802) ---------- ---------- ---------- Total GAAP underwriting result (216,160) (103,045) (113,008) Net investment income 794,901 731,096 674,818 Realized investment gains 208,549 74,403 35,967 Other (101,206) (50,542) (37,068) ---------- ---------- ---------- Total underwriting 686,084 651,912 560,709 ---------- ---------- ---------- Investment banking- asset management: Pretax income before minority interest 117,502 113,770 94,635 Minority interest (25,805) (25,573) (22,777) ---------- ---------- ---------- Total investment banking- asset management 91,697 88,197 71,858 ---------- ---------- ---------- Total industry segments 777,781 740,109 632,567 Parent company and consolidating eliminations (78,645) (70,784) (59,042) ---------- ---------- ---------- Total income from continuing operations before income taxes $ 699,136 $ 669,325 $ 573,525 ========== ========== ========== (In thousands) December 31 ---------------------------------- 1996 1995 1994 ---- ---- ---- IDENTIFIABLE ASSETS Underwriting $19,848,788 $17,541,329 $15,397,173 Investment banking- asset management 356,318 402,512 348,847 ---------- ---------- ---------- Total industry segments 20,205,106 17,943,841 15,746,020 Parent company, consolidating eliminations and discontinued operations 475,870 575,453 395,719 ---------- ---------- ---------- Total assets $20,680,976 $18,519,294 $16,141,739 ========== ========== ========== NOTE 17 - Quarterly Results of Operations (Unaudited) The following is an unaudited summary of our quarterly results for the last three years. (In thousands) 1996 ------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- Revenues $1,329,891 $1,364,474 $1,476,158 $1,563,633 Income from continuing operations 144,411 135,295 114,823 163,329 Net income 128,821 130,053 128,934 62,291 Earnings per common share: Primary: Income from continuing operations 1.67 1.57 1.33 1.91 Net income 1.49 1.51 1.50 0.71 Fully diluted: Income from continuing operations 1.57 1.48 1.26 1.79 Net income 1.40 1.42 1.42 0.69 (In thousands) 1995 ------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenues $1,192,755 $1,244,183 $1,270,351 $1,348,910 Income from continuing operations 127,384 118,341 137,108 155,015 Net income 110,596 112,967 142,399 155,247 Earnings per common share: Primary: Income from continuing operations 1.47 1.36 1.58 1.78 Net income 1.27 1.30 1.64 1.78 Fully diluted: Income from continuing operations 1.42 1.30 1.48 1.67 Net income 1.23 1.24 1.54 1.67 (In thousands) 1994 ------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenues $1,090,928 $1,083,912 $1,107,136 $1,086,458 Income from continuing operations 74,398 134,877 130,424 120,303 Net income 64,437 127,762 129,808 120,821 Earnings per common share: Primary: Income from continuing operations 0.85 1.57 1.51 1.39 Net income 0.73 1.49 1.51 1.40 Fully diluted: Income from continuing operations 0.82 1.51 1.46 1.34 Net income 0.71 1.43 1.45 1.35 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 7,685 as of Feb. 28, 1997. 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. Cash Dividend 1996 High Low Declared - ---- ---- ---- -------- First Quarter $60 $54 $0.44 Second Quarter 56 1/8 50 7/8 0.44 Third Quarter 55 1/2 50 5/8 0.44 Fourth Quarter 59 5/8 54 0.44 Cash dividend paid in 1996 was $1.72. 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. EX-21 7 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 (xii) Seaboard Surety Company New York Subsidiary: (a) Seaboard Surety Company of Canada Canada (xiii) Northbrook Holdings, Inc. Delaware Subsidiaries: (a) Northbrook National Insurance Co. Delaware (b) Northbrook Property and Casualty Insurance Co. Delaware (c) Northbrook Indemnity Co. Delaware (xiv) St. Paul Lloyds Holdings, Inc. Texas (xv) 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) Minet Risk Services (Vermont), Inc. Vermont (3) St. Paul Holdings Limited United Kingdom Subsidiaries: (i) St. Paul Reinsurance Company Limited United Kingdom (ii) St. Paul Management Limited United Kingdom (iii) St. Paul Investment Services Ltd. United Kingdom (iv) St. Paul Investments Ltd. United Kingdom (v) St. Paul International Insurance Company Limited United Kingdom (vi) St. Paul Insurance Espana Seguros Y Reaseguros, S.A. Spain (vii) Camperdown UK Limited United Kingdom (viii) New World Insurance Company Ltd. Guernsey (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) El Plata SA Argentina De Seguros Argentina (7) Camperdown Corporation Delaware (8) St. Paul Capital L.L.C. Delaware (9) St. Paul Multinational Holdings, Inc. Delaware Subsidiary: (i) St. Paul Insurance Company SA Limited South Africa (10) St. Paul Bermuda Holdings, Inc. Delaware Subsidiaries: (i) St. Paul (Bermuda), Ltd. Bermuda (ii) St. Paul Re (Bermuda), Ltd. Bermuda (11) St. Paul Venture Capital, Inc. Delaware (12) Minet Holdings Guernsey Limited Guernsey Subsidiary: (i) Minet Group Holdings United Kingdom (a) Minet Group* United Kingdom Subsidiaries: (i) JH Minet Reinsurance Brokers Limited United Kingdom (ii) Minet Consultancy Services Limited United Kingdom (iii) Minet Hong Kong Limited Hong Kong (iv) Minet Inc. Canada (v) Minet Limited United Kingdom (vi) M.I.B. Group (Pty) Limited South Africa (vii) Minet Australia Limited Australia (viii) Minet Burn & Roche Pty Limited Australia *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, 1996. **The John Nuveen Company is a majority-owned subsidiary jointly owned by The St. Paul, which holds a 47% interest, and Fire and Marine, which holds a 31% interest. EX-23 8 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, No. 333-01065 and No. 333-22329) and Form S-3 (SEC File No. 33-33931, No. 33-50115, No. 33-58491 and No. 333-06456) of The St. Paul Companies, Inc., of our reports dated January 27, 1997, relating to the consolidated balance sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31, 1996 and 1995, 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, 1996, and all related schedules, which reports appear in the December 31, 1996 annual report on Form 10-K of The St. Paul Companies, Inc. Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP March 17, 1997 --------------------- KPMG Peat Marwick LLP EX-24 9 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, 1996, 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 4, 1997 Signature: /s/ Michael R. Bonsignore ------------------------- Name: Michael R. Bonsignore Dated: February 4, 1997 Signature: /s/ John H. Dasburg ------------------------- Name: John H. Dasburg Dated: February 4, 1997 Signature: /s/ W. John Driscoll ------------------------- Name: W. John Driscoll Dated: February 4, 1997 Signature: /s/ Pierson M. Grieve ------------------------- Name: Pierson M. Grieve Dated: February 4, 1997 Signature: /s/ Ronald James ------------------------- Name: Ronald James Dated: February 4, 1997 Signature: /s/ David G. John ------------------------- Name: David G. John Dated: February 4, 1997 Signature: /s/ William H. Kling ------------------------- Name: William H. Kling Dated: February 4, 1997 Signature: /s/ Bruce K. MacLaury ------------------------- Name: Bruce K. MacLaury Dated: February 4, 1997 Signature: /s/ Glen D. Nelson ------------------------- Name: Glen D. Nelson Dated: February 4, 1997 Signature: /s/ Anita M. Pampusch ------------------------- Name: Anita M. Pampusch Dated: February 4, 1997 Signature: /s/ Gordon M. Sprenger ------------------------- Name: Gordon M. Sprenger EX-27 10
7 1,000 YEAR YEAR YEAR DEC-31-1996 DEC-31-1995 DEC-31-1994 DEC-31-1996 DEC-31-1995 DEC-31-1994 11,944,085 10,372,890 8,828,684 0 0 0 0 0 0 808,295 711,471 531,042 0 0 0 693,910 611,656 528,144 14,365,616 12,558,111 10,728,393 37,214 25,475 20,809 68,692 74,568 88,900 401,768 372,174 324,358 20,680,976 18,519,294 16,141,739 11,673,148 10,247,070 9,423,429 2,566,551 2,361,028 2,109,170 0 0 0 0 0 0 689,141 697,045 616,151 207,000 207,000 0 16,063 10,872 4,535 475,710 460,458 445,222 3,512,047 3,258,791 2,287,712 20,680,976 18,519,294 16,141,739 4,448,248 3,971,329 3,412,081 807,305 740,912 673,272 218,525 84,572 41,974 260,078 259,386 241,107 3,318,301 2,864,307 2,461,698 975,456 856,979 753,946 741,263 665,588 579,265 699,136 669,325 573,525 141,278 131,477 113,523 557,858 537,848 460,002 (107,759) (16,639) (17,174) 0 0 0 0 0 0 450,099 521,209 442,828 5.22 5.99 5.12 4.93 5.68 4.93 10,247,070 9,423,429 9,185,191 3,570,545 3,112,193 2,790,164 (252,244) (247,886) (328,466) 1,101,077 783,633 667,255 1,839,463 1,590,701 1,566,083 11,673,148 10,247,070 9,423,429 246,000 (199,000) 343,000
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