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 For the fiscal year ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission file number 0-3021 THE ST. PAUL COMPANIES, INC. (Exact name of Registrant as specified in its charter) Minnesota 41-0518860 ------------------- --------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 385 Washington 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 23, 1998, was $7,575,147,530. The number of shares of the Registrant's Common Stock, without par value, outstanding at March 23, 1998, was 84,021,148. An Exhibit Index is set forth at page 36 of this report. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- The Form 8-K Current Report dated Feb. 26, 1998 containing portions of the Registrant's 1997 Annual Report to Shareholders is 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 5, 1998, are incorporated by reference into Parts III and IV of this report. Page 1 of 36 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 asset management-investment banking 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 238th-largest U.S. corporation, based on total 1996 revenues. At March 23, 1998, The St. Paul and its subsidiaries employed approximately 10,000 persons. In January 1998, The St. Paul and USF&G Corporation (USF&G) announced a proposed merger of the two companies, which, if completed, would create the eighth-largest property-liability insurance company in the United States, based on 1996 net written premium volume. The merger, which is subject to approvals by both companies' shareholders and various regulatory authorities, would be a tax-free exchange of stock accounted for as a pooling of interests. The merger would result in USF&G becoming a wholly- owned subsidiary of The St. Paul. Both companies have scheduled separate special shareholder meetings for April 7, 1998 to vote on resolutions relating to the proposed merger. The combined company will operate under The St. Paul name and remain based in Saint Paul, Minn. The merger is expected to be consummated in the second quarter of 1998. Under the terms of the merger agreement, USF&G shareholders will receive shares of The St. Paul's common stock having a value to be determined according to an exchange ratio based on the average price of The St. Paul's stock during a twenty-day period ending on the third day prior to the USF&G shareholder meeting to vote on the proposed merger. The total value of the transaction is expected to be approximately $3.5 billion, which includes the assumption of USF&G's debt and capital securities. Note 18 to The St. Paul's consolidated financial statements, which is included in The St. Paul's Form 8-K Current Report dated Feb. 26, 1998, contains additional information about the proposed merger and is incorporated herein by reference. In May 1997, The St. Paul completed the sale of its brokerage operation, Minet, to Aon Corporation (Aon). Gross proceeds from the sale were approximately equal to the remaining carrying value of Minet at the date of sale. The St. Paul agreed to indemnify Aon against most of Minet's preclosing liabilities. The St. Paul recorded a $68 million after-tax loss on disposal of Minet in 1997, resulting primarily from commitments for certain severance, employee benefits, future lease commitments and other costs related to Minet. Note 12 to The St. Paul's consolidated financial statements, which is included in The St. Paul's Form 8-K Current Report dated Feb. 26, 1998, contains additional information relating to the Minet sale and is incorporated herein by reference. Business Segments The St. Paul's insurance underwriting operations, composed of six distinct underwriting business segments and an investment operations segment, accounted for at least 95% of consolidated revenues from continuing operations in each of the years 1997, 1996 and 1995. The asset management-investment banking segment and parent company accounted for the remaining revenues in each of those years. Financial information about The St. Paul's business segments is set forth in Note 16 to The St. Paul's consolidated financial statements included in the Form 8-K Current Report dated Feb. 26, 1998, and is incorporated herein by reference.
The following table summarizes the sources of The St. Paul's consolidated revenues from continuing operations for each of the last three years. Following the table is a narrative description of each of The St. Paul's business segments as they existed at the date of this report. The descriptions do not reflect the anticipated impact of the proposed merger with USF&G Corporation on The St. Paul's business segments, because the merger had not been approved or consummated at the date of this report. Percentage of Consolidated Revenues 1997 1996 1995 ---- ---- ---- Underwriting: Worldwide Insurance Operations St. Paul Fire and Marine: Specialized Commercial 20.8% 22.2% 24.3% Commercial 15.5 15.0 11.6 Personal Insurance 12.0 12.4 13.0 Medical Services 9.6 10.5 12.0 ----- ----- ----- Total Fire and Marine 57.9 60.1 60.9 St. Paul International Underwriting 4.4 4.6 4.7 ----- ----- ----- Total Worldwide Insurance Operations 62.3 64.7 65.6 St. Paul Re 12.0 12.8 13.0 Investment Operations: Net investment income 14.2 13.9 14.5 Realized investment gains 6.4 3.6 1.5 ----- ----- ----- Total Investment Operations 20.6 17.5 16.0 Other 0.6 0.8 0.6 ----- ----- ----- Total Underwriting 95.5 95.8 95.2 Asset management-investment banking 4.3 4.1 4.7 Parent company and elimations 0.2 0.1 0.1 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== NARRATIVE DESCRIPTION OF BUSINESS Underwriting Operations 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 and 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 13th on the basis of 1996 written premiums. Principal Departments and Products. The "Underwriting Results by Segment" table included in the 8-K Current Report dated Feb. 26, 1998, which summarizes written premiums, underwriting results and combined ratios for each of its underwriting segments for the last three years, is incorporated herein by reference. The following discussion summarizes the business structure of The St. Paul's insurance underwriting operations.
WORLDWIDE INSURANCE OPERATIONS St. Paul Fire and Marine Fire and Marine underwrites insurance through the following business segments: Specialized Commercial. This is the largest of Fire and Marine's operations, based on written premium volume. 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-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. 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 1996 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. Special Property underwrites large property accounts, layered and excess property programs, large deductible accounts, stop-loss and loss limit programs and other customized property business. National Programs underwrites coverages for nationwide, multiple- policyholder programs through a single agency source. Transportation provides large motor carriers with customized insurance programs. 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 also 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-liability insurance to a broad range of small to midsized 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 individuals, groups or franchise operations, including offices, retailers and family restaurants.
In July 1996, Fire and Marine acquired Northbrook Holdings, Inc. and its three commercial underwriting subsidiaries (Northbrook) from Allstate Insurance Company. Northbrook underwrites various property-liability commercial insurance coverages throughout the United States. Northbrook accounted for $230 million and $140 million of written premiums in Fire and Marine's Commercial operations in 1997 and 1996, respectively. Personal Insurance. This operation provides a broad portfolio of property-liability insurance products and services for individuals. Through a variety of single-line policies and multi-line 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 such as 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 accounting for approximately 8% of the U.S. market in 1996 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 Canada, and ten countries in Europe, Africa and Latin America. It also includes The St. Paul's participation in Lloyd's of London as a provider of capital to selected underwriting syndicates 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 both its multinational customers as well as its 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 several specialty coverages. According to data published by the Reinsurance Association of America, St. Paul Re ranked as the eighth-largest U.S. reinsurance underwriter based on written premium volume for the first nine months of 1997. In 1996, The St. Paul completed a $68.5 million securitized reinsurance transaction that provided St. Paul Re with 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 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. St. Paul Re utilized a portion of this securitized reinsurance capacity in 1997. 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 1997 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 6,000 independent insurance agencies and 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 headquarters, as well as from its offices in London, Miami, Chicago, Atlanta, Philadelphia, Brussels, Munich, Singapore, Tokyo and Sydney. St. Paul Re obtains business primarily through the broker or intermediary market. Approximately 40% of St. Paul Re's business in 1997 originated from outside the United States. St. Paul International Underwriting is headquartered in London and underwrites insurance through local operations in 11 markets outside the United States (South Africa, Botswana, Argentina, Mexico, Canada, the Netherlands, the Republic of Ireland, Spain, France, Germany and the United Kingdom). A portion of The St. Paul's property-liability insurance written premium volume originates with insurance brokers. In 1997, approximately 18% of The St. Paul's underwriting operations' gross written premium volume originated with two brokerage firms - Aon Corporation, and J&H Marsh & McLennan, Inc.
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 at Dec. 31, 1997 cover claims that were incurred not only in 1997 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 9 presents a development of net loss and LAE reserve liabilities and payments for the years 1987 through 1997. 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 1997. In 1997, The St. Paul changed the method by which it assigns loss activity to a particular year for assumed reinsurance written by its U.K.-based reinsurance operation. Prior to 1997, that loss activity was assigned to the year in which the underlying reinsurance contract was written. In 1997, The St. Paul's analysis indicated that an excess amount of loss activity was being assigned to prior years because of this practice. As a result, The St. Paul implemented an improved procedure in 1997 that more accurately assigns loss activity for this business to the year in which it occurred. This change had the impact of increasing favorable development on previously established reserves by approximately $110 million in 1997. There was no net impact on total incurred losses, however, because there was a corresponding increase in the provision for current year loss activity in 1997. Development data for individual years prior to 1997 in this table were not restated to reflect this new procedure because reliable data to do so was not available. 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 1987 reserve of $4,745 million developed to $4,727 million, or an $18 million redundancy, by the end of 1988. By the end of 1997, the 1987 reserve had developed a redundancy of $512 million. The changes in the estimate of 1987 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 1997), 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, 1997) 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, 1997, $3,814 million of the currently estimated $4,233 million of losses and LAE that have been incurred for the years up to and including 1987 have been paid. Thus, as of Dec. 31, 1997, it is estimated that $419 million of incurred losses and LAE have yet to be paid for the years up to and including 1987. 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 1987 losses is included in the cumulative redundancy for the years 1987 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 to The St. Paul's consolidated financial statements, which is included in the Form 8-K Current Report dated Feb. 26, 1998, includes a reconciliation of beginning and ending loss reserve liabilities for each of the last three years and 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." Those sections are also included in The St. Paul's Form 8-K Current Report dated Feb. 26, 1998, and are incorporated herein by reference.
Analysis of Loss and Loss Adjustment Expense (LAE) Development (in millions) <TABLE> <CAPTION> Year ended December 31 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 - ---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Net liability for <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> unpaid losses and LAE $4,745 5,502 5,907 6,279 6,688 7,207 7,640 7,890 8,393 9,783 9,925 ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== <S> Liability re-estimated as of: One year later 4,727 5,313 5,656 6,037 6,436 6,984 7,312 7,642 8,141 9,295 Two years later 4,489 4,914 5,338 5,787 6,259 6,704 7,027 7,330 7,672 Three years later 4,268 4,789 5,135 5,628 6,066 6,563 6,781 6,905 Four years later 4,226 4,731 5,027 5,490 6,063 6,384 6,426 Five years later 4,178 4,707 4,975 5,521 5,960 6,155 Six years later 4,180 4,682 5,058 5,472 5,814 Seven years later 4,169 4,796 5,038 5,407 Eight years later 4,163 4,798 5,013 Nine years later 4,183 4,826 Ten years later 4,233 Cumulative redundancy $512 676 894 872 874 1,052 1,214 985 721 488 ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== Cumulative redundancy excluding foreign exchange (1) $512 686 874 872 881 1,045 1,209 984 714 489 ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== Net liability for unpaid losses and LAE 7,207 7,640 7,890 8,393 9,783 9,925 Reinsurance recoverable on unpaid losses 1,606 1,545 1,533 1,854 1,890 1,893 ----- ----- ----- ----- ----- ----- Gross liability 8,813 9,185 9,423 10,247 11,673 11,818 ===== ===== ===== ====== ====== ====== Gross re-estimated liability: One year later 8,692 8,842 9,599 9,980 11,262 Two years later 8,389 8,934 9,274 9,295 Three years later 8,622 8,665 8,681 Four years later 8,426 8,178 Five years later 8,092 Gross cumulative redundancy 721 1,007 742 952 411 ===== ===== ===== ===== ===== Gross cumulative redundancy excluding foreign exchange (1) 680 980 702 934 410 ===== ===== ===== ===== ===== Cumulative amount of net liability paid through: One year later $1,101 1,196 1,318 1,450 1,452 1,547 1,566 1,591 1,839 2,228 Two years later 1,884 2,044 2,209 2,361 2,493 2,576 2,608 2,751 3,084 Three years later 2,466 2,646 2,797 3,015 3,155 3,245 3,373 3,543 Four years later 2,869 3,043 3,216 3,442 3,584 3,745 3,881 Five years later 3,132 3,348 3,496 3,713 3,922 4,090 Six years later 3,322 3,554 3,674 3,942 4,178 Seven years later 3,453 3,691 3,846 4,137 Eight years later 3,573 3,819 4,002 Nine years later 3,666 3,975 Ten years later 3,814 Cumulative amount of gross liability paid through: One year later 1,935 1,872 1,958 2,160 2,532 Two years later 3,199 3,136 3,352 3,377 Three years later 4,047 4,065 4,129 Four years later 4,678 4,563 Five years later 5,018 (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 1997. 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. </TABLE>
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 to The St. Paul's consolidated financial statements, which is included in the Form 8- K Current Report dated Feb. 26, 1998, provides a schedule of ceded reinsurance information and is incorporated herein by reference. INVESTMENT OPERATIONS 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 and enhance shareholder value through investments in certain other investment classes, such as equity securities, venture capital and real estate. 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 85% of The St. Paul's underwriting operations' investment portfolio at Dec. 31, 1997. The portfolio is primarily composed of high-quality, intermediate-term taxable U.S. government agency and corporate bonds and tax-exempt U.S. municipal bonds. 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 - ---- -------- -------- ---------- -------- -------- 1997 $11,745.2 $12,414.3 $812.9 7.1% 5.4% 1996 11,425.5 11,908.2 740.4 7.0% 5.4% 1995 9,712.7 10,394.5 671.9 7.2% 5.6% 1994 9,015.4 8,938.2 637.2 7.4% 5.7% 1993 8,490.8 9,249.3 618.1 7.4% 5.9% 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 1997 consisted of intermediate-term, investment-grade taxable and tax-exempt securities. The fixed maturities portfolio is carried on The St. Paul's balance sheet at estimated market value, with unrealized appreciation and depreciation (net of taxes) recorded in common shareholders' equity. At Dec. 31, 1997, pretax unrealized appreciation totaled $669 million.
The fixed maturities portfolio is managed conservatively to provide reasonable returns 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 5% of the underwriting operations' investments at Dec. 31, 1997, and consist of a diversified portfolio of common stocks, which are held with the primary objective of achieving capital appreciation. Sales of equities generated $155 million of pretax realized investment gains in 1997, and dividend income totaled $15 million. The portfolio's carrying value at year-end included $232 million of unrealized appreciation. Real Estate. The St. Paul's real estate holdings, which comprised 5% of total investments at Dec. 31, 1997, consist of a diversified portfolio of commercial office and warehouse properties that The St. Paul owns directly or has partial interest in through joint ventures. The properties are geographically distributed throughout the United States. This portfolio produced $44 million of pretax investment income in 1997, and sales of real estate investments in 1997 generated $35 million of pretax realized gains. The St. Paul does not have a portfolio of real estate mortgage investments, but included in debt outstanding are two mortgages totaling $15 million on two of its warehouse properties. Venture Capital. Securities of small to medium sized companies spanning a variety of industries comprise The St. Paul's venture capital investments, which accounted for 2% of total investments at Dec. 31, 1997. These investments are in the form of limited partnership interests or direct equity investments. Sales of venture capital investments in 1997 generated pretax realized investment gains of $213 million. This included a gain of $129 million on the sale of the stock of Advanced Fibre Communications, Inc., a direct equity investment. The carrying value of venture capital investments at Dec. 31, 1997 included $138 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 3% of total investments at Dec. 31, 1997. Notes 3, 4 and 5 to The St. Paul's consolidated financial statements, which are included in the Form 8-K Current Report dated Feb. 26, 1998, provide additional information about The St. Paul's investment portfolio and are incorporated herein by reference. The "Investment Operations" and "Exposures to Market Risk" sections of "Management's Discussion and Analysis" in said Form 8-K Current Report are also incorporated herein by reference. Asset Management-Investment Banking The John Nuveen Company (Nuveen) is The St. Paul's asset management- investment banking subsidiary. The St. Paul and Fire and Marine hold a combined 77% interest in Nuveen. Nuveen is headquartered in Chicago and maintains regional sales offices in other cities across the United States. Nuveen specializes in the sponsorship, marketing and management of fixed income and equity investment products, and in municipal and corporate investment banking services. Through John Nuveen & Co. Incorporated, a wholly-owned subsidiary, Nuveen markets open-end and closed-end (exchange-traded) managed funds. Nuveen also underwrites and trades municipal bonds and tax- free and taxable 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 Securities Division, Nuveen underwrites and distributes municipal bonds, trades municipal bonds in the secondary market and serves as remarketing agent for variable rate bonds. The majority of its underwritings are for governmental and not-for-profit entities and substantially all of its sales are to institutional investors.
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. In 1997, Nuveen acquired Flagship Resources, Inc., a municipal bond mutual fund sponsor and asset management firm, for cash and preferred stock with a total value of $72 million. This acquisition expanded the range of municipal investments offered to investors and added approximately $4.6 billion to Nuveen's assets under management. Also in 1997, Nuveen acquired Rittenhouse Financial Services, Inc., an equity and balanced portfolio investment management firm serving affluent investors, for $147 million in cash. This acquisition added approximately $9 billion to Nuveen's managed assets. As the leading sponsor of tax-free UITs, Nuveen currently sponsors trusts with assets at Dec. 31, 1997 of approximately $12 billion in national, state and insured portfolios. During 1997, Nuveen offered UITs which invested in equities, treasury bonds and corporate bonds. Nuveen manages 40 tax-free mutual funds and money market funds with net assets of approximately $11 billion in national, state, insured and money market portfolios. Nuveen also manages six taxable mutual funds investing in equity and balanced portfolios. In addition, Nuveen manages 57 tax-free exchange- traded funds with approximately $26 billion in net assets. In 1997, Nuveen repurchased 1.8 million of its outstanding common shares for a total cost of $55 million. The repurchases were proportioned between The St. Paul and minority shareholders to maintain the combined 77% ownership interest in Nuveen held by The St. Paul and Fire and Marine. The St. Paul received proceeds of $41 million from Nuveen's share repurchases. COMPETITION AND REGULATION The insurance underwriting and asset management-investment banking 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 1997, The St. Paul received from Fire and Marine $200.0 million of cash dividends, and a noncash dividend in the form of common shares of The John Nuveen Company with a market value of $211.1 million. In 1998, up to $427.5 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 regulations 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. Asset Management-Investment Banking. 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 broker and dealer registered 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 four subsidiaries are investment advisers registered under the Investment Advisers Act of 1940. As such, they are subject to regulation by the Securities and Exchange Commission. FORWARD-LOOKING STATEMENT DISCLOSURE This report contains certain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. Forward- looking statements are statements other than historical information or statements of current condition. Words such as expects, anticipates, intends, plans, believes, seeks or estimates, or variations of such words, and similar expressions are also intended to identify forward-looking statements. In light of the risks and uncertainties inherent in future projections, many of which are beyond The St. Paul's control, actual results could differ materially from those in the forward-looking statements. These statements should not be regarded as a representation that the objectives will be achieved. Risks and uncertainties include, but are not limited to, the following: general economic conditions including changes in interest rates and the performance of financial markets; changes in domestic and foreign laws, regulation and taxes; changes in the demand for, pricing of, or supply of reinsurance or insurance; catastrophic events of unanticipated frequency or severity; loss of significant customers; judicial decisions and rulings; and various other matters, including the effects of the proposed merger with USF&G Corporation. The St. Paul undertakes no obligation to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Item 2. Properties. - ------ ---------- St. Paul Fire and Marine Insurance Company owns The St. Paul's corporate headquarters buildings, located at 385 Washington Street and 130 West Sixth Street, Saint Paul, Minnesota. These buildings are adjacent to one another and connected by skyway, and 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 a building in London, England which houses a portion of its operations. As part of the agreement to sell its brokerage operation, Minet, to Aon in 1997, The St. Paul retained ownership of two former Minet buildings in London and is currently leasing office space in those buildings to Aon. 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 to The St. Paul's consolidated financial statements, and the "Environmental and Asbestos Claims" section of "Management's Discussion and Analysis," which are included in the Form 8-K Current Report dated Feb. 26, 1998, 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. Minet, a former insurance brokerage subsidiary of The St. Paul, 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. When The St. Paul sold Minet in May 1997, it agreed to indemnify the purchaser for most of Minet's preclosing liabilities, including liabilities relating to the Weavers matter. The proceedings will be 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, 1997.
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 and James Hom have held 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. 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. 61 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 47 Executive Vice Serving at the President, President pleasure of the and Chief Executive Board from 5-96 Officer-Worldwide Insurance Operations Paul J. Liska 42 Executive Vice Serving at the President and pleasure of the Chief Financial Board from 1-97 Officer Michael J. Conroy 56 Executive Vice Serving at the President and pleasure of the Chief Administrative Board from 8-95 Officer-Fire and Marine James F. Duffy 54 President - Serving at the St. Paul Re pleasure of the Board from 9-93 Mark L. Pabst 51 President - Serving at the St. Paul pleasure of the International Board from 2-95 Underwriting
Joseph B. Nardi 53 Executive Vice Serving at the President - Fire and pleasure of the Marine; President - Board from 2-98 Specialty Commercial James A. Schulte 48 Executive Vice Serving at the President - Fire and pleasure of the Marine; President - Board from 2-98 General Commercial Stephen J. Klingel 47 President- Serving at the Personal pleasure of the Insurance- Board from 8-95 Fire and Marine Bruce A. Backberg 49 Senior Vice Serving at the President and pleasure of the Chief Legal Counsel Board from 11-97 James L. Boudreau 62 Senior Vice Serving at the President - Finance pleasure of the Board from 3-98 Howard E. Dalton 60 Senior Vice Serving at the President and pleasure of the Chief Accounting Board from 9-87 Officer Karen L. Himle 42 Senior Vice Serving at the President- pleasure of the Public Affairs Board from 11-97 James Hom 42 Senior Vice Serving at the President- pleasure of the Corporate Planning Board from 10-94 Greg A. Lee 48 Senior Vice Serving at the President- pleasure of the Human Resources Board from 1-93 Sandra Ulsaker 38 Corporate Serving at the Wiese Secretary pleasure of the Board from 2-98
In addition to these current employees, The St. Paul has announced that the executives of USF&G named below have agreed, if the merger is consummated, to become part of The St. Paul's senior management structure. There are no family relationships between these executives and the current executives and directors of The St. Paul, and there are no arrangements and understandings between these executives and any other person pursuant to which the executive was chosen to be an officer of The St. Paul upon consummation of the merger. Norman P. Blake, Jr. - ------------------- Age 56. Currently Chairman of the Board, President, and Chief Executive Officer of USF&G Corporation. Would serve as Vice Chairman of The St. Paul's Board of Directors. Mr. Blake has been employed by USF&G for more than five years. John A. MacColl - --------------- Age 49. Currently Executive Vice President and General Counsel of USF&G. Would join The St. Paul as an Executive Vice President in charge of the Baltimore, Md. office. During the previous five years, Mr. MacColl served in various USF&G executive capacities. Robert J. Lamendola - ------------------- Age 53. Currently President of USF&G's Surety Group. Would join The St. Paul as Senior Vice President of St. Paul Fire and Marine Insurance Company and President - Surety. Mr. Lamendola has been employed by USF&G for more than five years. Kenneth E. Cihiy - ---------------- Age 51. Currently Executive Vice President - Claim of USF&G. Would join The St. Paul as Senior Vice President - Claim for St. Paul Fire and Marine Insurance Company. Mr. Cihiy joined USF&G in 1993. Prior to that, he was Vice President with Aetna Life and Casualty Co. Stephen W. Lilienthal - --------------------- Age 48. Currently President - Commercial Insurance Group and Executive Vice President - Chief Underwriting Officer of USF&G. Would join The St. Paul as Senior Vice President - Operations for St. Paul Fire and Marine Insurance Company. Mr. Lilienthal has been employed by USF&G in various underwriting positions for the last five years. Harry N. Stout - -------------- Age 45. Currently President of Fidelity and Guaranty Life Insurance Company, a subsidiary of USF&G. Would continue in that role for The St. Paul. Mr. Stout has been employed by USF&G since May 1993. Prior to that, he was Senior Vice President of United Pacific Insurance Company. Thomas A. Bradley - ----------------- Age 40. Currently Vice President and Corporate Controller of USF&G. Would join The St. Paul as Senior Vice President and Corporate Controller. Mr. Bradley has been employed by USF&G since 1993. Prior to that, he was Vice President and Chief Financial Officer of the Commercial Insurance Division of Maryland Casualty Company.
Part II ------- Item 5. Market for the Registrant's Common Equity and - ------ Related Stockholder Matters. --------------------------- The St. Paul's common 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 The St. Paul's common stock was 7,677 as of March 25, 1998. The following table sets forth the amount of cash dividends declared per share and the high and low closing sales prices of The St. Paul's common stock for each quarter during 1997 and 1996: Cash Dividend High Low Declared 1997 ---- ---- --------- - ---- 1st Quarter $71 5/8 $57 7/8 $0.47 2nd Quarter 80 1/8 64 1/8 0.47 3rd Quarter 81 13/16 73 1/8 0.47 4th Quarter 85 5/16 79 1/8 0.47 Cash dividend paid in 1997 was $1.85. Cash Dividend High Low Declared 1996 ---- ---- --------- - ---- 1st Quarter $60 $54 $0.44 2nd Quarter 56 1/8 50 7/8 0.44 3rd Quarter 55 1/2 50 5/8 0.44 4th Quarter 59 5/8 54 0.44 Cash dividend paid in 1996 was $1.72. 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, 1997, issued 20,488 shares of its common stock to the eleven former shareholders of Gravett & Tilling (Holdings) Limited in an exempt transaction pursuant to Section 4(2) of the Securities Act of 1933, as amended. As part of this acquisition, The St. Paul also issued to the eleven former shareholders of Gravett & Tilling (Holdings) Limited 28,748 shares on Dec. 31, 1996. The market value of each share issuance was approximately one million pounds sterling. Item 6. Selected Financial Data. - ------ ----------------------- The "Eleven-year Summary of Selected Financial Data" included in the Form 8-K Current Report dated February 26, 1998 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" included in the Form 8-K Current Report dated February 26, 1998 is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. - ------- ---------------------------------------------------------- The "Exposures to Market Risk" section in the Form 8-K Current Report dated February 26, 1998 is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. - ------ ------------------------------------------- The "Management's Responsibility for Financial Statements," "Independent Auditors' Report," Consolidated Balance Sheets, Consolidated Statements of Income, Shareholders' Equity, Comprehensive Income and Cash Flows, and Notes to Consolidated Financial Statements included in the Form 8-K Current Report dated Feb. 26, 1998 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 5, 1998, is incorporated herein by reference. In addition, Ronald James, 47, is currently a director of The St. Paul, but is not standing for re-election at the annual meeting of shareholders to be held May 5, 1998. Information regarding The St. Paul's executive officers is included in Part I of this report. If the proposed merger agreement with USF&G is consummated, Mr. Norman P. Blake, Jr. (currently Chairman of the Board, President and Chief Executive Officer of USF&G) and two additional USF&G directors selected by the board governance committee of The St. Paul's Board of Directors will be appointed to The St. Paul's Board. Item 11. Executive Compensation. - ------- ---------------------- The "Executive Compensation" section on pages 25 to 36 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 5, 1998, 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 39 to 41 of the Proxy Statement relating to the annual meeting of shareholders to be held May 5, 1998, is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- The "Indebtedness of Management" section on page 38 of the Proxy Statement relating to the annual meeting of shareholders to be held May 5, 1998, is incorporated herein by reference.
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, 1997, 1996 and 1995 Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Comprehensive Income - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements The foregoing documents are incorporated by reference to the Form 8-K Current Report dated Feb. 26, 1998. 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 36 of this report. (2) The definitive Agreement and Plan of Merger among The St. Paul, USF&G Corporation and SP Merger Corporation is incorporated herein by reference to the Form 8-K Current Report dated January 19, 1998. (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 St. Paul are incorporated herein by reference to Form 10-Q for the quarter ended March 31, 1994.
(4) (a) 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. (b) 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) (a) The Deferred Management Incentive Awards Plan is filed herewith. (b) The Directors' Deferred Compensation Plan is filed herewith. (c) The Relocation Loan Payback Agreement with Mr. James F. Duffy is filed herewith. (d) The 1994 Stock Incentive Plan, as amended, is filed herewith. (e) The Benefit Equalization Plan - 1995 Revision is filed herewith. (f) First Amendment to Benefit Equalization Plan - 1995 Revision is filed herewith. (g) Executive Post-Retirement Life Insurance Plan - Summary Plan Description is filed herewith. (h) Executive Long-Term Disability Plan - Summary Plan Description is filed herewith. (i) Letter Agreement dated Jan. 18, 1998 among The St. Paul, USF&G Corporation, SP Merger Corporation and Mr. Norman P. Blake, Jr. pertaining to Mr. Blake's duties with The St. Paul subsequent to the consummation of the proposed merger of The St. Paul and USF&G Corporation is filed herewith. (j) The St. Paul Re Long-Term Incentive Plan is incorporated by reference to the Form S-8 Registration Statement filed March 17, 1998 (Commission File No. 333-48121). (k) Letter Agreement between The St. Paul and Mr. Paul J. Liska relating to the terms of his employment is incorporated by reference to Form 10-Q for the quarter ended March 31, 1997. (l) Letter Agreement between The St. Paul and Mr. Paul J. Liska relating to severance benefits is incorporated by reference to Form 10-Q for the quarter ended March 31, 1997. (m) The Special Leveraged Stock Purchase Plan is incorporated by reference to Form 10-Q for the quarter ended March 31, 1997. (n) Amendment to Deferred Stock Agreement with Mr. Mark L. Pabst is incorporated by reference to Form 10-Q for the quarter ended March 31, 1997.
(o) 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. (p) The Directors' Charitable Award Program is incorporated by reference to the Form 10-K for the year ended December 31, 1994. (q) The 1994 Annual Incentive Plan is incorporated by reference to Form 10-Q for the quarter ended March 31, 1994. (r) The Long-Term Incentive Plan is incorporated by reference to Form 10-Q for the quarter ended March 31, 1994. (s) The Non-Employee Director Stock Retainer Plan is incorporated by reference to Form 10-K for the year ended December 31, 1991. (t) 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 5, 1998. (u) 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. (v) The Restricted Stock Award Plan, as in effect for awards granted prior to June 1994, as amended, is incorporated by reference to Form 10-K for the year ended December 31, 1989. (w) Special Severance Policy is incorporated by reference to Form 10-K for the year ended December 31, 1987. (x) Stock option agreement between The St. Paul Companies, Inc. and USF&G Corporation dated as of January 19, 1998 is incorporated by reference to the Form 8-K Current Report dated January 19, 1998. (11) A statement regarding the computation of per share earnings is filed herewith. (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 is filed herewith. (13) The St. Paul's 1997 Annual Report to Shareholders is furnished to the Commission in paper format pursuant to Rule 14a-3(c). The following portions of such annual report were filed electronically with the Commission in the Form 8-K Current Report dated Feb. 26, 1998 and are incorporated herein by reference to such Form 8-K: Portions of Annual Report Items in for the year ended this December 31, 1997 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 Eleven-year Summary of Selected Financial Data Item 6
(21) List of subsidiaries of The St. Paul Companies, Inc. is filed herewith. (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, No. 333-22329, No. 333-25203, No. 333-28915 and No. 333-48121), Form S-3 (SEC File No. 33-33931, No. 33- 50115, No. 33-58491 and No. 333-06465) and Form S-4 (SEC File No. 333-47007) is filed herewith. (24) Power of attorney is filed herewith. (27) Financial data schedule is filed herewith. (b) Reports on Form 8-K. A Form 8-K Current Report dated October 27, 1997 was filed relating to the announcement of The St. Paul's financial results for the quarter ended September 30, 1997. A Form 8-K Current Report dated January 19, 1998, was filed relating to the announcement of The St. Paul's definitive merger agreement and stock option agreement with USF&G Corporation. A Form 8-K Current Report dated January 26, 1998, was filed relating to the announcement of The St. Paul's financial results for the year ended December 31, 1997. A Form 8-K Current Report dated February 26, 1998, was filed containing the following documents for The St. Paul for the year ended Dec. 31, 1997: Audited Financial Statements, Notes to Consolidated Financial Statements, Management's Discussion and Analysis of Financial Condition and Results of Operations, Eleven-year Summary of Selected Financial Data, Independent Auditors' Report, Statement Regarding Management's Responsibility for Financial Statements, Consent of Independent Auditors and Financial Data Schedule.
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 26, 1998 By /s/ Bruce A. Backberg -------------- --------------------- Bruce A. Backberg Senior Vice President and Chief Legal Counsel 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 26, 1998 By /s/ Douglas W. Leatherdale -------------- -------------------------- Douglas W. Leatherdale, Director, Chairman of the Board, President and Chief Executive Officer Date: March 26, 1998 By /s/ Patrick A. Thiele -------------- --------------------- Patrick A. Thiele, Director, Executive Vice President, President and Chief Executive Officer - Worldwide Insurance Operations Date: March 26, 1998 By /s/ Paul J. Liska -------------- ----------------- Paul J. Liska, Executive Vice President and Chief Financial Officer Date: March 26, 1998 By /s/ Howard E. Dalton -------------- -------------------- Howard E. Dalton, Senior Vice President and Chief Accounting Officer Date: March 26, 1998 By /s/ Michael R. Bonsignore -------------- ------------------------- Michael R. Bonsignore*, Director Date: March 26, 1998 By /s/ John H. Dasburg -------------- ------------------- John H. Dasburg*, Director Date: March 26, 1998 By /s/ W. John Driscoll -------------- -------------------- W. John Driscoll*, Director Date: March 26, 1998 By /s/ Pierson M. Grieve -------------- --------------------- Pierson M. Grieve*, Director Date: March 26, 1998 By /s/ Thomas R. Hodgson -------------- --------------------- Thomas R. Hodgson*, Director Date: March 26, 1998 By /s/ Ronald James -------------- ---------------- Ronald James*, Director Date: March 26, 1998 By /s/ David G. John -------------- ----------------- David G. John*, Director
Date: March 26, 1998 By /s/ William H. Kling -------------- -------------------- William H. Kling*, Director Date: March 26, 1998 By /s/ Bruce K. MacLaury -------------- --------------------- Bruce K. MacLaury*, Director Date: March 26, 1998 By /s/ Glen D. Nelson -------------- ------------------ Glen D. Nelson*, Director Date: March 26, 1998 By /s/ Anita M. Pampusch -------------- --------------------- Anita M. Pampusch*, Director Date: March 26, 1998 By /s/ Gordon M. Sprenger -------------- ---------------------- Gordon M. Sprenger*, Director Date: March 26, 1998 *By /s/ Bruce A. Backberg -------------- --------------------- Bruce A. Backberg, Attorney- in-fact
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES The Board of Directors and Shareholders The St. Paul Companies, Inc.: Under date of January 26, 1998, we reported on the consolidated balance sheets of The St. Paul Companies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 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 1997. 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 26, 1998 --------------------- KPMG Peat Marwick LLP
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1997 (In thousands) 1997 ------------------------------------ Amount at which shown in the Cost* Value* balance sheet -------- --------- ------------- Type of investment: Fixed maturities: - ---------------- United States Government and government agencies and authorities $ 2,257,397 $ 2,364,982 $ 2,364,982 States, municipalities and political subdivisions 5,071,738 5,438,306 5,438,306 Foreign governments 946,317 979,274 979,274 Corporate securities 1,840,337 1,925,971 1,925,971 Mortgage-backed securities 1,690,048 1,741,260 1,741,260 ---------- ---------- ---------- Total fixed maturities 11,805,837 12,449,793 12,449,793 ---------- ---------- ---------- Equity securities: - ----------------- Common stocks: Public utilities 27,521 40,446 40,446 Banks, trusts and insurance companies 154,287 203,850 203,850 Industrial, miscellaneous and all other 602,461 789,624 789,624 ---------- ---------- ---------- Total equity securities 784,269 1,033,920 1,033,920 ---------- ---------- ---------- Venture capital 324,333 $ 461,892 461,892 ---------- ========== ---------- Real estate 654,114** 649,114 Other investments 41,359 41,359 Short-term investments 400,004 400,004 ---------- ---------- Total investments $14,009,916 $15,036,082 ========== ========== * See Notes 1, 3, 4 and 5 to the consolidated financial statements included in The St. Paul's 1997 Annual Report to Shareholders. ** The cost of real estate represents the cost of the properties before valuation provisions. (See Schedule V on page 35).
THE ST. PAUL COMPANIES, INC. (Parent Only) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET INFORMATION December 31, 1997 and 1996 (In thousands) Assets: 1997 1996 ------- ------- Investment in subsidiaries $5,096,653 $4,533,106 Investments: Fixed maturities 159,957 162,895 Equity securities 52,834 40,424 Short-term investments 11,472 25,271 Deferred income taxes 455,445 453,560 Other assets 257,925 102,280 --------- --------- Total assets $6,034,286 $5,317,536 ========= ========= Liabilities: Debt $1,091,995 $1,090,477 Dividends payable to shareholders 39,305 36,579 Other liabilities 276,276 186,660 --------- --------- Total liabilities 1,407,576 1,313,716 --------- --------- Shareholders' Equity: Preferred: Convertible preferred stock 137,892 142,131 Guaranteed obligation - PSOP (121,167) (126,068) --------- --------- Total preferred shareholders' equity 16,725 16,063 --------- --------- Common: Common stock, authorized 240,000 shares; issued 83,728 shares (83,198 in 1996) 512,162 475,710 Retained earnings 3,450,601 2,935,928 Guaranteed obligation - ESOP (8,453) (20,353) Accumulated other comprehensive income: Unrealized appreciation of investments 677,069 616,968 Unrealized loss on foreign currency translation (21,394) (20,496) --------- --------- Total accumulated other comprehensive income 655,675 596,472 --------- --------- Total common shareholders' equity 4,609,985 3,987,757 --------- --------- Total shareholders' equity 4,626,710 4,003,820 --------- --------- Total liabilities and shareholders' equity $6,034,286 $5,317,536 ========= ========= 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, 1997, 1996 and 1995 (In thousands) 1997 1996 1995 ------ ------ ------ Revenues: Net investment income $ 17,472 $ 12,695 $ 9,165 Realized investment gains 7,211 8,810 8,800 ------- ------- ------- Total revenues 24,683 21,505 17,965 ------- ------- ------- Expenses: Interest expense 66,726 64,731 54,672 Administrative and other 52,160 39,906 38,548 ------- ------- ------- Total expenses 118,886 104,637 93,220 ------- ------- ------- Loss before income tax benefit (94,203) (83,132) (75,255) Income tax benefit (113,366) (46,462) (18,941) ------- ------- ------- Net income (loss) from continuing operations- parent only 19,163 (36,670) (56,314) Provision for loss on disposal of discontinued operations (67,750) (88,543) - ------- ------- ------- Net loss - parent only (48,587) (125,213) (56,314) Equity in net income of subsidiaries 754,060 575,312 577,523 ------- ------- ------- Consolidated net income $705,473 $450,099 $521,209 ======= ======= ======= 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, 1997, 1996 and 1995 (In thousands) 1997 1996 1995 ------ ------ ------ Operating Activities: Net loss $ (48,587) $(125,213) $ (56,314) Cash dividends from subsidiaries 216,301 200,648 206,118 Tax payments from subsidiaries 166,423 93,928 159,216 State and federal income tax payments (61,000) (70,000) (103,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for loss on discontinued operations 67,750 88,543 - Deferred tax benefit - operations (59,779) (21,891) (1,077) Realized investment gains (7,211) (8,810) (8,800) Other (19,458) (3,951) (110) ------- ------- ------- Cash provided by operating activities 254,439 153,254 196,033 ------- ------- ------- Cash outflow resulting from sale of discontinued operations (54,018) - - Investing Activities: Purchases of investments (55,756) (104,322) (218,525) Proceeds from sales and maturities of investments 75,674 109,958 93,919 Capital contributions and loans to subsidiaries (107,120) (55,922) (223,623) Other (3,221) (268) (870) ------- ------- ------- Cash used in investing activities (90,423) (50,554) (349,099) ------- ------- ------- Financing Activities: Dividends paid to shareholders (165,809) (155,268) (144,662) Proceeds from issuance of debt 117,572 53,000 455,028 Repayment of debt (100,000) (17,711) (125,446) Repurchase of common shares (26,503) (74,217) (41,714) Proceeds from Nuveen stock repurchase 41,069 73,966 - Stock options exercised and other 23,673 17,530 9,860 ------- ------- ------- Cash provided by (used in) financing activities (109,998) (102,700) 153,066 ------- ------- ------- 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 1997 Annual Report to Shareholders. The Annual Report includes The St. Paul's Consolidated Statements of Shareholders' Equity and Comprehensive Income. Some data in the accompanying condensed financial information for the years 1996 and 1995 were reclassified to conform with the 1997 presentation. 2. Debt consists of the following (in thousands): December 31, ------------------ 1997 1996 ----- ----- Medium-term notes $ 511,920 $ 430,427 Convertible subordinated debentures (1) 262,026 262,026 Commercial paper 168,429 131,610 Guaranteed PSOP debt (1) 121,167 126,068 Intercompany loan (1) 20,000 20,000 Guaranteed ESOP debt (1) 5,673 6,462 Guaranteed ESOP debt 2,780 13,890 9-3/8% notes - 99,994 --------- --------- Total debt $1,091,995 $1,090,477 ========= ========= (1) Eliminated in consolidation. See Note 8 to the consolidated financial statements included in the 1997 Annual Report to Shareholders for further information on debt outstanding at Dec. 31, 1997. The amount of debt, other than debt eliminated in consolidation, that becomes due during each of the next five years is as follows: 1998, $27.8 million; 1999, $20.0 million; 2000, none; 2001, $45.5 million; and 2002, $217.1 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 ---------- -------------- -------- ---------- 1997 - ---- Property-Liability Insurance Underwriting: Worldwide Insurance Operations: Fire and Marine: Specialized Commercial $127,208 $ 3,441,821 $ 700,917 - Commercial 72,415 2,397,658 359,713 - Personal Insurance 60,594 516,924 324,712 - Medical Services 56,381 2,009,335 563,925 - ------- ---------- ---------- ------- Total Fire and Marine 316,598 8,365,738 1,949,267 - International 20,715 1,227,370 154,181 - ------- ---------- ---------- ------- Total Worldwide Insurance 337,313 9,593,108 2,103,448 - St. Paul Re 66,961 2,224,525 276,255 - ------- ---------- ---------- ------- Total $404,274 $11,817,633 $2,379,703 - ======= ========== ========= ======= 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 - ======= ========== ========= =======
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 1997 earned income expenses expenses expenses written - ---- ------- --------- ---------- ----------- --------- -------- Worldwide Insurance Operations: Fire and Marine: Specialized Commercial $1,291,702 - $ 861,148 $ 289,193 $116,017 $1,281,745 Commercial 964,121 - 683,618 247,866 101,792 872,999 Personal Insurance 747,449 - 587,344 155,897 67,462 767,523 Medical Services 594,186 - 455,623 98,371 51,357 522,960 --------- ------- --------- ------- ------- --------- Total Fire and Marine 3,597,458 - 2,587,733 791,327 336,628 3,445,227 International 274,968 - 229,629 49,989 46,357 289,883 --------- ------ --------- ------- ------- --------- Total Worldwide Insurance 3,872,426 - 2,817,362 841,316 382,985 3,735,110 St. Paul Re 744,030 - 527,806 180,307 68,380 744,793 Net investment income - $880,802 - - - - Other - - - - 102,159 - --------- ------- --------- ------- ------- --------- Total $4,616,456 $880,802 $3,345,168 $1,021,623 $553,524 $4,479,903 ========= ======= ========= ========= ======= ========= 1996 - ---- 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 ========= ======= ========= ======= ======= =========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE IV - REINSURANCE Years Ended December 31, 1997, 1996 and 1995 (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 - --------------- ------- --------- --------- -------- ---------- 1997 $4,142,706 484,358 958,108 4,616,456 20.8% ========= ======= ======= ========= 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% ========= ======= ======= =========
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1997, 1996 and 1995 (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 - ----------- --------- ---------- --------- ---------- ------- 1997 - ---- Real estate valuation adjustment $14,000 - - 9,000 5,000 ====== ====== ===== ====== ====== Allowance for uncollectible: Agency loans $ 1,664 - - - 1,664 ====== ====== ===== ====== ====== Premiums receivable from underwriting activities $21,159 10,227 - 7,091 24,295 ====== ====== ===== ====== ====== Reinsurance $22,681 5,784 - 1,712 26,753 ====== ====== ===== ====== ====== Uncollectible deductibles $15,694 3,257 - - 18,951 ====== ====== ===== ====== ====== 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 ====== ====== ===== ====== ====== Uncollectible deductibles $16,000 - - 306 15,694 ====== ====== ===== ====== ====== 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 ====== ====== ===== ====== ====== Uncollectible deductibles $16,000 - - - 16,000 ====== ====== ===== ====== ====== (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 (a) Definitive Agreement and Plan of Merger among The St. Paul, USF&G Corporation and SP Merger Corporation***............................................. (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) Relocation Loan Payback Agreement with Mr. James F. Duffy....(1) (d) 1994 Stock Incentive Plan, as Amended........................(1) (e) Benefit Equalization Plan - 1995 Revision....................(1) (f) First Amendment to Benefit Equalization Plan - 1995 Revision........................................(1) (g) Executive Post-Retirement Life Insurance Plan - Summary Plan Description....................................(1) (h) Executive Long-Term Disability Plan - Summary Plan Description....................................(1) (i) Letter Agreement dated Jan. 18, 1998 among The St. Paul, USF&G Corporation, SP Merger Corporation and Mr. Norman P. Blake, Jr. pertaining to Mr. Blake's duties with The St. Paul subsequent to the consummation of the proposed merger of The St. Paul and USF&G Corporation................(1) (j) The St. Paul Re Long-Term Incentive Plan***.................. (k) Letter Agreement dated May 8, 1997 between The St. Paul and Mr. Paul J. Liska related to the terms of his employment***........................................... (l) Letter Agreement, agreed to January 20, 1997 between The St. Paul and Mr. Paul J. Liska related to severance benefits***................................................. (m) The Special Leveraged Stock Purchase Plan***................. (n) Amendment to Deferred Stock Agreement with Mr. Mark L. Pabst***.................................................... (o) The Deferred Stock Grant Agreement with Mr. Mark L. Pabst***.................................................... (p) The Directors' Charitable Award Program***................... (q) 1994 Annual Incentive Plan***................................ (r) Long-Term Incentive Plan***.................................. (s) Non-Employee Director Stock Retainer Plan***................. (t) Outside Directors' Retirement Plan***........................ (u) 1988 Stock Option Plan***.................................... (v) Restricted Stock Award Plan***............................... (w) Special Severance Policy***.................................. (x) Stock Option Agreement between The St. Paul Companies, Inc. and USF&G Corporation dated as of January 19, 1998***................................... (11) Statements re computation of per share earnings................(1) (12) Statements re computation of ratios............................(1) (13) Annual report to security holders**............................ (16) Letter re change in certifying accountant**.................... (18) Letter re change in accounting principles**.................... (21) Subsidiaries of The St. Paul...................................(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 herewith.