A.M. Best Affirms St. Paul's Financial Strength Rating and Lowers Debt Ratings.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Dec. 12, 2001

A.M. Best Co. has affirmed the A+ (Superior) financial strength rating of The St. Paul Companies, Inc., St. Paul, Minnesota, (NYSE:SPC) property/casualty subsidiaries and lowered the company's long-term debt ratings.

Senior debt has been lowered from "a+" to "a"; subordinated debt from "a" to "a-" and preferred securities from "a" to "a-". The company's commercial paper rating of AMB-1 has been affirmed. All ratings have been removed from under review.

This action follows A.M. Best's review of the group's capitalization in the wake of losses from the September 11 terrorist attacks and its announcement to record a $900 million pre-tax charge in the fourth quarter 2001. A.M. Best has also reviewed the group's loss reserves, particularly in the problematic healthcare book, and initiatives to reduce volatility in earnings and dependence on stop loss reinsurance resulting from the strategic review of operations by the group's new CEO, Jay S. Fishman.

As a result of this comprehensive strategic and financial review, the group has announced a significant restructuring of its business, primarily in the global healthcare, international and reinsurance segments. Management believes these businesses either do not offer attractive returns for the long-term or subject St. Paul's results to undesirable earnings volatility. The healthcare, reinsurance and international businesses will either be re-underwritten, sold or run off in order to secure a foundation on which to build a leaner, more focused company. A.M. Best believes these initiatives will lead to substantially improved profitability and capitalization for the group in 2002 and 2003. The strategic repositioning of the group should enable it to redirect valuable capital resources toward its profitable core commercial and specialty lines operations, where it can leverage its underwriting skills in pursuit of business with higher risk-adjusted returns. As a result of the hardening property/casualty markets, pricing trends remain highly favorable in the majority of St. Paul's specialty and commercial property/casualty business segments.

The affirmation of St. Paul's A+ financial strength rating was heavily influenced by the organization's strong capital levels that withstood A.M. Best's stress testing of reserve adequacy and underwriting results. Management projects significant decreases in reserve levels resulting from the proposed business initiatives, which will require lower capital levels in 2002. However, A.M. Best considered several scenarios that contemplated varying stages of these business changes and capitalization remained strong.

St. Paul's long history of adequate reserves and balance sheet integrity is expected to continue under the company's new leadership. Management intends to take a $750 million reserve charge in the fourth quarter of 2001, principally for the healthcare reserves, in order to ensure balance sheet stability and earnings quality and consistency going forward. Revised losses resulting from the WTC attack currently total between $916 million and $941 million and was the impetus to a $575 million issue of trust preferred securities in early November 2001, of which $500 million was used to recapitalize the main operating subsidiary.

The rating decision incorporated the fact that St. Paul will report sizable pre-tax losses in 2001, including a $75 million fourth quarter restructuring charge. WTC losses will not be ceded to the corporate aggregate excess reinsurance arrangement. Going forward, more consistent earnings will be expected and reported results will provide a clearer picture of underwriting performance without the potentially expensive use of stop loss reinsurance.

A.M. Best believes St. Paul has sufficient liquidity at the holding company to cover fixed charges in 2002. Additionally, the company maintains approximately $600 million of hidden asset value in its 77% ownership of John Nuveen. Nevertheless, the debt rating downgrades resulted from increased leverage and cash flow requirements caused by the recent $575 million trust preferred issue and the potential for conflicting demands between upstreaming subsidiary dividends and maintaining quality surplus levels. Although the cash cushion is somewhat lower than A.M. Best's expectations for the existing rating, the company maintains excellent financial flexibility including access to the capital markets. Improved consistency of earnings from the reduction in unprofitable business segments will improve the quality of earnings and cash flow to support current financial leverage.

St. Paul's rating outlook is dependent upon management's success in executing its strategic initiatives on a timely basis, properly setting reserves for both continuing and run-off business segments and maintaining quality underwriting standards. While capital levels are expected to remain sufficient for the A+ rating, under several scenarios, any significant reserve increases in 2002, particularly for healthcare, will cause diminished confidence in reserve quality. Additionally, significant variation to A.M. Best's 2002 underwriting outlook for the company could provide a catalyst for a rating review for potential downgrade.

For a complete listing of companies with affected financial strength and debt ratings, please visit http:\\www.ambest.com\press\stpaul2.pdf.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.