A.M. Best Downgrades St. Paul's Financial Strength and Debt Ratings.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--June 3, 2002

A.M. Best Co. has downgraded the financial strength rating to A (Excellent) from A+ (Superior) of The St. Paul Companies, Inc.'s (NYSE: SPC), St. Paul, Minnesota, property/casualty subsidiaries and its senior debt rating to "a-" from "a", subordinated debt to "bbb+" from "a-" and preferred securities to "bbb+" from "a-". The company's commercial paper rating of AMB-1 has been affirmed. The rating outlook is stable.

This action follows St. Paul's announcement that it has entered into an approximate $1 billion settlement agreement with its largest asbestos claimant, Western MacArthur, and takes into consideration A.M. Best's review of the group's earnings, cash flow and balance sheet strength in the wake of this announcement.

Net of reinsurance, tax benefits and a reduction in asbestos and environmental (A&E) incurred but not reported reserves (IBNR), the net loss to St. Paul is estimated to be approximately $380 million. Although this is a significant setback to earnings in 2002, A.M. Best anticipates a portion of this settlement will be offset by an estimated $100 million to $150 million of after-tax gains from the previously announced spin-off of its reinsurance operations planned for mid-year 2002. Moreover, A.M. Best views this large settlement as an anomaly for St. Paul, which historically insured small and middle market companies.

With regard to non-asbestos related exposures, A.M. Best believes there are significant ongoing uncertainties relating to the reserves established for St. Paul's run-off business segments, specifically global healthcare, reinsurance and international operations. This action recognizes the size and volatility of these run-off segments relative to "core" operations, which are inconsistent with A.M. Best's expectations for a Superior-rated organization. In A.M. Best's opinion, there is the potential for additional reserve charges in one or more of these discontinued business segments in 2002 or 2003, particularly for healthcare where industry-wide loss costs have accelerated. Likewise, surety exposure to Enron may result in additional charges. Despite these challenges, A.M. Best continues to consider St. Paul's capitalization as strong.

A.M. Best regards St. Paul's continuing core operating segments as stable, well managed businesses that maintain a well-respected franchise. This is evidenced by St. Paul's favorable operating profit and combined ratio produced in the first quarter of 2002. In addition to continued price increases, a highly qualified and experienced management team has significantly reduced the overall risk profile of the company with the discontinuance of reinsurance, healthcare and unprofitable international businesses. As a result of the hardening property/casualty markets, pricing trends remain highly favorable in the majority of St. Paul's core commercial and specialty market segments. It should benefit from the flight to quality.

A.M. Best believes St. Paul has sufficient liquidity at the holding company to cover fixed charges in 2002. Additionally, the company maintains approximately $1.5 billion of unrecognized asset value in its 77% ownership of John Nuveen. Nevertheless, the downgrading of the debt ratings are a result of increased leverage and more constrained holding company cash flows, partially as the result of $1.2 billion of stock repurchases over the past few years and reduced operating earnings in 2001. In 2003, the holding company will be dependent on its insurance subsidiaries to upstream dividends creating a potential conflict with maintaining adequate surplus levels--particularly if policy counts increase or run-off reserves develop adversely. 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 and in its ownership of John Nuveen. 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.

For a complete listing of companies with affected financial strength and debt ratings, please visit http://www.ambest.com/press/stpaul3.pdf

For a list of A.M. Best's current debt ratings, please visit www.ambest.com/ratings/debtrating/companies.html.

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.