ST PAUL COMPANIES INC /MN/ - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002
------------------
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 001-10898
---------

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 Identification
incorporation or organization) No.)

385 Washington St., Saint Paul, MN 55102
---------------------------------- ----------------
(Address of principal executive (Zip Code)
offices)

Registrant's telephone number, including area code: (651) 310-7911
-------------

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
----- -----

The number of shares of the Registrant's Common Stock, without par
value, outstanding at November 11, 2002, was 226,482,632.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page No.
PART I. FINANCIAL INFORMATION -------

Consolidated Statements of Income (Unaudited),
Three and Nine Months Ended September 30, 2002 and 2001 3

Consolidated Balance Sheets, September 30, 2002 4
(Unaudited) and December 31, 2002

Consolidated Statements of Shareholders' Equity,
Nine Months Ended September 30, 2002
(Unaudited) and Twelve Months Ended
December 31, 2001 6

Consolidated Statements of Comprehensive Income
(Unaudited), Nine Months Ended September 30, 2002
and 2001 7

Consolidated Statements of Cash Flows (Unaudited),
Nine Months Ended September 30, 2002 and 2001 8

Notes to Consolidated Financial Statements
(Unaudited) 9

Management's Discussion and Analysis of
Financial Condition and Results of
Operations 27

Controls and Procedures 62

PART II. OTHER INFORMATION

Item 1 through Item 6 63

Signatures 64

Certification 65

EXHIBIT INDEX 67

PART I FINANCIAL INFORMATION
THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
For the three months and nine months ended September 30, 2002 and 2001
(In millions, except per share data)

Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
Revenues
Premiums earned $1,928 $1,860 $5,782 $5,231
Net investment income 302 289 881 924
Asset management 95 95 274 265
Realized investment
gains (losses) (78) (81) (148) 2
Other 41 62 117 116
------ ------ ------ ------
Total revenues 2,288 2,225 6,906 6,538
------ ------ ------ ------

Expenses
Insurance losses and
loss adjustment expenses 1,493 2,455 4,873 4,984
Policy acquisition expenses 375 397 1,189 1,133
Operating and administrative
expenses 325 250 917 867
------ ------ ------ ------
Total expenses 2,193 3,102 6,979 6,984
------ ------ ------ ------
Income (loss) from
continuing operations
before income taxes 95 (877) (73) (446)
Income tax expense
(benefit) 26 (282) (72) (156)
------ ------ ------ ------
Income (loss) before
cumulative effect of
accounting change 69 (595) (1) (290)

Cumulative effect of
accounting change,
net of taxes - - (6) -
------ ------ ------ ------
Income (loss) from
continuing operations 69 (595) (7) (290)

Discontinued operations:
Operating loss, net of taxes - - - (1)
Loss on disposal, net of taxes (6) (64) (19) (61)
------ ------ ------ ------
Loss from discontinued
operations, net of taxes (6) (64) (19) (62)
------ ------ ------ ------
Net income (loss) $ 63 $ (659) $ (26) $ (352)
====== ====== ====== ======

Basic earnings (loss) per share:
Income (loss) from continuing
operations $ 0.29 $(2.86) $(0.09) $(1.42)
Discontinued operations,
net of taxes (0.02) (0.30) (0.09) (0.29)
------ ------ ------ ------
Net income (loss) $ 0.27 $(3.16) $(0.18) $(1.71)
====== ====== ====== ======

Diluted earnings (loss) per share:
Income (loss) from continuing
operations $ 0.29 $(2.86) $(0.09) $(1.42)
Discontinued operations,
net of taxes (0.02) (0.30) (0.09) (0.29)
------ ------ ------ ------
Net income (loss) $ 0.27 $(3.16) $(0.18) $(1.71)
====== ====== ====== ======

Dividends declared on
common stock $ 0.29 $ 0.28 $ 0.87 $ 0.84
====== ====== ====== ======

See notes to consolidated financial statements.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2002 (unaudited) and December 31, 2001
(In millions)

2002 2001
Assets ------- -------
Investments:
Fixed maturities, at estimated
fair value $17,320 $15,911
Equities, at estimated fair value 370 1,410
Real estate and mortgage loans 875 972
Venture capital, at estimated fair value 581 859
Securities on loan 729 775
Short-term investments 2,838 2,153
Other investments 448 98
------- -------
Total investments 23,161 22,178
Cash 429 151
Reinsurance recoverables:
Unpaid losses 7,079 6,848
Paid losses 387 351
Ceded unearned premiums 734 667
Receivables:
Insurance premiums 2,828 3,123
Interest and dividends 261 260
Other 254 246
Deferred policy acquisition costs 635 628
Deferred income taxes 1,286 1,248
Office properties and equipment 471 486
Goodwill and intangible assets 957 690
Other assets 1,453 1,445
------- -------
Total Assets $39,935 $38,321
======= =======

See notes to consolidated financial statements.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
September 30, 2002 (unaudited) and December 31, 2001
(In millions)

2002 2001
------- -------
Liabilities:
Insurance reserves:
Loss and loss adjustment expenses $22,616 $22,101
Unearned premiums 4,022 3,957
------- -------
Total insurance reserves 26,638 26,058

Debt 2,586 2,130
Payables:
Reinsurance premiums 891 943
Accrued expenses and other 1,220 1,036
Securities lending collateral 790 790
Other liabilities 1,407 1,357
------- -------
Total Liabilities 33,532 32,314
------- -------
Company-obligated mandatorily
redeemable preferred securities of
trusts holding solely subordinated
debentures of the company 889 893
------- -------
Shareholders' Equity:
Preferred:
SOP convertible preferred stock 107 111
Guaranteed obligation - SOP (40) (53)
------- -------
Total Preferred
Shareholders' Equity 67 58
------- -------
Common:
Common stock 2,592 2,192
Retained earnings 2,301 2,500
Accumulated other comprehensive
income, net of taxes:
Unrealized appreciation
of investments 627 442
Unrealized loss on foreign
currency translation (73) (76)
Unrealized loss on derivatives - (2)
------- -------
Total accumulated other
comprehensive income 554 364
------- -------
Total Common Shareholders Equity 5,447 5,056
------- -------
Total Shareholders' Equity 5,514 5,114
------- -------
Total Liabilities, Redeemable
Preferred Securities and
Shareholders' Equity $39,935 $38,321
======= =======

See notes to consolidated financial statements.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 2002 (unaudited) and
Twelve Months Ended December 31, 2001
(In millions)

2002 2001
------- -------
Preferred Shareholders' Equity:
SOP convertible preferred stock:
Beginning of period $ 111 $ 117
Redemptions (4) (6)
------- -------
End of period 107 111
------- -------
Guaranteed obligation - SOP:
Beginning of period (53) (68)
Principal payments 13 15
------- -------
End of period (40) (53)
------- -------
Total preferred shareholders' equity 67 58
------- -------

Common Shareholders' Equity:
Common stock:
Beginning of period 2,192 2,238
Stock issued:
Public stock offering 413 -
Stock incentive plans 21 67
Present value of equity unit
forward purchase contracts (46) -
Preferred shares redeemed 10 13
Reacquired common shares - (135)
Other 2 9
------- -------
End of period 2,592 2,192
------- -------
Retained earnings:
Beginning of period 2,500 4,243
Net loss (26) (1,088)
Dividends declared on common stock (186) (235)
Dividends declared on preferred
stock, net of taxes (6) (9)
Reacquired common shares - (454)
Other changes 19 43
------- -------
End of period 2,301 2,500
------- -------
Unrealized appreciation on
investments, net of taxes:
Beginning of period 442 765
Change during the period 185 (323)
------- -------
End of period 627 442
------- -------
Unrealized loss on foreign
currency translation, net of taxes:
Beginning of period (76) (68)
Change during the period 3 (8)
------- -------
End of period (73) (76)
------- -------
Unrealized loss on
derivatives, net of taxes:
Beginning of period (2) -
Change during the period 2 (2)
------- -------
End of period - (2)
------- -------
Total common
shareholders' equity 5,447 5,056
------- -------

Total shareholders' equity $5,514 $5,114
======= =======

See notes to consolidated financial statements.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In millions)

Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(in millions) 2002 2001 2002 2001
----------- ------ ------ ------ ------

Net income (loss) $ 63 $(659) $ (26) $(352)
------ ------ ------ ------

Other comprehensive income
(loss), net of taxes:
Change in unrealized
appreciation 164 48 185 (195)
Change in unrealized loss
on foreign currency
translation (8) (7) 3 (1)
Change in unrealized loss
on derivatives - (4) 2 (5)
------ ------ ------ ------
Other comprehensive
income (loss) 156 37 190 (201)
------ ------ ------ ------
Comprehensive income (loss) $ 219 $(622) $ 164 $(553)
====== ====== ====== ======

See notes to consolidated financial statements.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(In millions)

2002 2001
------ ------
OPERATING ACTIVITIES
Net loss $ (26) $ (352)
Adjustments:
Loss from discontinued operations 19 62
Change in insurance reserves 163 3,047
Change in reinsurance balances (181) (1,792)
Realized investment losses (gains) 148 (2)
Change in deferred acquisition costs 2 (95)
Change in insurance premiums receivable 342 (300)
Change in accounts payable and accrued expenses (72) (105)
Change in income taxes payable/refundable 186 (82)
Provision for federal deferred tax benefit (133) (3)
Depreciation and amortization 67 75
Other (80) (121)
------ ------
Net cash provided by
continuing operations 435 332
Net cash provided by
discontinued operations - 217
------ ------
Net cash provided by
operating activities 435 549
------ ------
INVESTING ACTIVITIES
Purchases of investments (6,011) (4,334)
Proceeds from sales and maturities of investments 5,929 4,599
Net purchases of short-term investments (679) (232)
Change in open security transactions 111 43
Venture capital distributions 77 6
Purchase of office property and equipment (47) (52)
Sales of office property and equipment 10 4
Acquisitions, net of cash acquired (195) (203)
Proceeds from sale of subsidiaries - 358
Other 67 3
------ ------
Net cash provided (used)
by continuing operations (738) 192
Net cash used by
discontinued operations (1) (591)
------ ------
Net cash used by
investing activities (739) (399)
------ ------

FINANCING ACTIVITIES
Dividends paid on common and preferred stock (185) (185)
Proceeds from issuance of debt 941 637
Repayment of debt and preferred securities (534) (196)
Net proceeds from issuance of common shares 413 -
Repurchase of common shares (1) (588)
Subsidiary's repurchase of common shares (133) (128)
Stock options exercised and other 71 84
------ ------
Net cash provided (used) by
continuing operations 572 (376)
Net cash provided by
discontinued operations - 343
------ ------
Net cash provided (used) by
financing activities 572 (33)
------ ------
Effect of exchange rate changes on cash 10 (1)
------ ------
Increase in cash 278 116
Cash at beginning of period 151 52
------ ------
Cash at end of period $ 429 $ 168
====== ======

See notes to consolidated financial statements.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Unaudited
September 30, 2002

Note 1 - Basis of Presentation
- ------------------------------

The financial statements include The St. Paul Companies, Inc. and
subsidiaries ("The St. Paul" or "the company"), and have been
prepared in conformity with United States generally accepted
accounting principles ("GAAP").

These consolidated financial statements rely, in part, on
estimates. Our most significant estimates are those relating to
our reserves for losses and loss adjustment expenses ("LAE"). We
continually review our estimates and make adjustments as
necessary, but actual results could turn out to be significantly
different from what we expected when we made these estimates. In
the opinion of management, all necessary adjustments, consisting
of normal recurring adjustments, have been reflected for a fair
presentation of the results of operations, financial position and
cash flows in the accompanying unaudited consolidated financial
statements. The results for the period are not necessarily
indicative of the results to be expected for the entire year.

Reference should be made to the "Notes to Consolidated Financial
Statements" in our annual report to shareholders for the year
ended Dec. 31, 2001. The amounts in those notes have not changed
materially except as a result of transactions in the ordinary
course of business or as otherwise disclosed in these notes.

Some amounts in the 2001 consolidated financial statements have
been reclassified to conform to the 2002 presentation. These
reclassifications had no effect on net income or loss,
comprehensive income or shareholders' equity, as previously
reported.

Reference is made to Note 1 to our 2001 annual report to
shareholders which includes a summary of our significant
accounting policies. Expanded versions of certain of those
policies are set forth below.

Premiums Earned
- ---------------
Premiums on insurance policies are our largest source of revenue.
We recognize the premiums as revenues evenly over the policy
terms using the daily pro rata method or, in the case of Lloyd's
business, the one-eighths method. The one-eighths method
reflects the fact that we convert Lloyd's syndicate accounts to
U.S. GAAP on a quarterly basis. Quarterly financial statements
are prepared for Lloyd's syndicates, using the Lloyd's three-year
accounting basis, which are subsequently converted to U.S. GAAP.
Since Lloyd's accounting does not currently recognize the concept
of earned premium, we calculate earned premium as part of the
conversion to GAAP. We recognize written premium for U.S. GAAP
purposes quarterly, and assume that it is written at the middle
of each quarter (i.e., evenly throughout each period),
effectively breaking the calendar year into earning periods of
eighths.

We record the premiums that we have not yet recognized as
revenues as unearned premiums on our balance sheet. Assumed
reinsurance premiums are recognized as revenues proportionately
over the contract period. Premiums earned are recorded in our
statement of operations, net of our cost to purchase reinsurance.

Revenues in our Health Care segment in 2002 include premiums
generated from extended reporting endorsements. Our medical
liability claims-made policies give our insureds the right to
purchase a reporting endorsement, which is also referred to as
"tail coverage," at the time their policies expire. This
endorsement protects an insured against any claims that arise
from a medical incident that occurred while the claims-made
policy was in force, but which had not yet been reported by the
time the policy expired. Premiums on these endorsements are
fully earned as revenue, and the expected losses are fully
reserved, at the time the endorsement is written.

Insurance Reserves
- ------------------
We establish reserves for the estimated total unpaid costs of
losses and LAE, which cover events that occurred in 2002 and
prior years. These reserves reflect our estimates of the total
cost of claims that were reported to us, but not

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 1 - Basis of Presentation (continued)
- ------------------------------------------

yet paid ("case" reserves), and the cost of claims incurred but
not yet reported to us ("IBNR"). We reduce our loss reserves for
estimated amounts of salvage and subrogation recoveries.
Estimated amounts recoverable from reinsurers on unpaid losses
and LAE are reflected as assets.

For reported losses, we establish reserves on a "case" basis
within the parameters of coverage provided in the insurance
policy or reinsurance agreement. For IBNR losses, we estimate
reserves using established actuarial methods. Our case and IBNR
reserve estimates consider such variables as past loss
experience, changes in legislative conditions, changes in
judicial interpretations of legal liability and policy coverages,
and inflation. We consider not only monetary increases in the
cost of what we insure, but also changes in societal factors that
influence jury verdicts and case law and, in turn, claim costs.

Because many of the coverages we offer involve claims that may
not ultimately be settled for many years after they are incurred,
subjective judgments as to our ultimate exposure to losses are an
integral and necessary component of our loss reserving process.
We record our reserves by considering a range of estimates
bounded by a high and low point. Within that range, we record
our best estimate. We continually review our reserves, using a
variety of statistical and actuarial techniques to analyze
current claim costs, frequency and severity data, and prevailing
economic, social and legal factors. We adjust reserves
established in prior years as loss experience develops and new
information becomes available. Adjustments to previously
estimated reserves are reflected in our financial results in the
periods in which they are made.

Reserves for environmental and asbestos exposures cannot be
estimated solely with the traditional loss reserving techniques
described above, which rely on historical accident year
development factors and take into consideration the previously
mentioned variables. Environmental and asbestos reserves are
more difficult to estimate than our other loss reserves because
of legal issues, societal factors and difficulty in determining
the parties who may ultimately be held liable. Therefore, in
addition to taking into consideration the traditional variables
that are utilized to arrive at our other loss reserve amounts, we
also look at the length of time necessary to clean up polluted
sites, controversies surrounding the identity of the responsible
party, the degree of remediation deemed to be necessary, the
estimated time period for litigation expenses, judicial
expansions of coverage, medical complications arising with
asbestos claimants' advanced age, case law, and the history of
prior claim development.

Accordingly, case reserves and loss adjustment expense reserves
are established where sufficient information has been obtained to
indicate coverage under a specific insurance policy.
Furthermore, IBNR reserves are established to cover additional
estimated exposures on both known and unasserted claims. These
reserves are continually reviewed and updated as additional
information is acquired.

While our reported reserves make a reasonable provision for our
unpaid loss and LAE obligations, it should be noted that the
process of estimating required reserves does, by its very nature,
involve uncertainty. The level of uncertainty can be influenced
by factors such as the existence of coverage with long duration
payment patterns and changes in claim handling practices, as well
as the factors noted above. Ultimate actual payments for claims
and LAE could turn out to be significantly different from our
estimates.

Lloyd's
- -------
We participate in Lloyd's as an investor in underwriting
syndicates and as the owner of a managing agency. Using the
periodic method, which provides for current recognition of
profits and losses, we record our pro rata share of syndicate
assets, liabilities, revenues and expenses, after making
adjustments to convert Lloyd's accounting to U.S. GAAP. The most
significant U.S. GAAP adjustments relate to income recognition.
Lloyd's syndicates determine underwriting results by year of
account at the end of three years. We record adjustments to
recognize underwriting results as incurred, including the
expected ultimate cost of losses incurred. These adjustments to
losses are based on

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 1 - Basis of Presentation (continued)
- -----------------------------------------

actuarial analysis of syndicate accounts, including forecasts of
expected ultimate losses provided by the syndicates. The results
of our operations at Lloyd's are recorded on a one-quarter lag
due to time constraints in obtaining and analyzing such results
for inclusion in our consolidated financial statements on a
current basis. (Also see discussion under "Premiums Earned"
above.)

Asset Management Operations - Revenue
- -------------------------------------
The John Nuveen Company ("Nuveen") has three principal sources of
revenue: ongoing investment advisory fees on assets under
management, including mutual funds, exchange-traded funds, and
separately managed accounts; distribution revenues earned upon
the sale of certain investment products; and incentive fees
earned on certain institutional accounts based on the performance
of such accounts.

Investment advisory fees account for the vast majority of
Nuveen's consolidated revenues. Total advisory fee income earned
during any period is directly related to the market value of the
assets managed. Advisory fee income increases or decreases with
a rise or fall, respectively, in the level of assets under
management. Investment advisory fees are recognized as revenue
in the statement of operations ratably over the period that
assets are under management. With respect to funds, Nuveen
receives fees based either on each fund's average daily net
assets or on a combination of the average daily net assets and
gross interest income. With respect to managed accounts, Nuveen
generally earns fees, on a quarterly basis, based on the value of
the assets managed on a particular date, such as the last
calendar day of a quarter, or on the average asset value for the
period.

Nuveen's distribution revenues are earned as defined portfolio
and mutual fund products are sold to the public through financial
advisors. Distribution revenues will rise and fall commensurate
with the level of sales of these products and have been reduced
as Nuveen stopped depositing new defined portfolio trusts at the
end of March 2002. Underwriting fees are earned on the initial
public offering of our exchange-traded funds.

Through its subsidiary Symphony Asset Management, which manages
equity and fixed-income market-neutral accounts and funds for
institutional investors, Nuveen earns performance fees for
investment performance above specifically defined benchmarks.
These fees are recognized as revenue only at the performance
measurement date contained in the individual account management
agreement. Currently, approximately 80% of such measurement
dates fall in the second half of the calendar year.

New Accounting Policy - Goodwill and Intangible Assets
- ------------------------------------------------------
Effective with our first-quarter 2002 adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets," as described in Note 10,
our accounting for goodwill and intangible assets has changed.
In a business combination, the excess of the amount we paid over
the fair value of the acquired company's tangible net assets is
recorded as either an intangible asset, if it meets certain
criteria, or goodwill. Intangible assets with a finite useful
life (generally over five to 20 years) are amortized to expense
over their estimated life, on a basis expected to be consistent
with their estimated future cash flows. Intangible assets with
an indefinite useful life and goodwill, which represents the
excess purchase price over the fair value of tangible and
intangible assets, are no longer amortized, effective January 1,
2002, but remain subject to tests for impairment.

During the second quarter of 2002, we completed the evaluation of
our recorded goodwill for impairment in accordance with
provisions of SFAS No. 142. That evaluation concluded that none
of our goodwill was impaired. In connection with our
reclassification of certain assets previously accounted for as
goodwill to other intangible assets in 2002, we established a
deferred tax liability of $6 million in the second quarter of
2002. That provision was classified as a cumulative effect of
accounting change effective as of January 1, 2002.

We will evaluate our goodwill for impairment on an annual basis.
If an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its
carrying amount, we will test for impairment between annual
tests.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 2 - Earnings Per Common Share
- ----------------------------------

The following table provides the calculation of our earnings per
common share for the three months and nine months ended September
30, 2002 and 2001:

Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(in millions) 2002 2001 2002 2001
----------- ------ ------ ------ ------

EARNINGS (LOSS)
Basic:
Net income (loss), as reported $ 63 $ (659) $ (26) $ (352)
Preferred stock dividends,
net of taxes (2) (2) (6) (6)
Premium on preferred
shares redeemed (1) (1) (6) (6)
------ ------ ------ ------
Net income (loss) available
to common shareholders $ 60 $ (662) $ (38) $ (364)
====== ====== ====== ======

Diluted:
Net income (loss) available
to common shareholders $ 60 $ (662) $ (38) $ (364)
Effect of dilutive securities:
Convertible preferred stock 2 - - -
Zero coupon convertible notes 1 - - -
------ ------ ------ ------
Net income (loss), as adjusted $ 63 $ (662) $ (38) $ (364)
====== ====== ====== ======

COMMON SHARES
Basic:
Weighted average common
shares outstanding 221 209 212 213
====== ====== ====== ======

Diluted:
Weighted average common
shares outstanding 221 209 212 213
Effect of dilutive securities:
Stock options 1 - - -
Convertible preferred stock 6 - - -
Zero coupon convertible notes 2 - - -
------ ------ ------ ------
Total 230 209 212 213
====== ====== ====== ======

Earnings (Loss) per Common Share
Basic $ 0.27 $(3.16) $(0.18) $(1.71)
====== ====== ====== ======
Diluted $ 0.27 $(3.16) $(0.18) $(1.71)
====== ====== ====== ======

Diluted EPS is the same as Basic EPS for the nine month
period ended September 30, 2002, as well as for the reported
periods ended 2001, because Diluted EPS calculated in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share," for our loss from
continuing operations, results in a lesser loss per share
than the Basic EPS calculation does. The provisions of SFAS
No. 128 prohibit this "anti-dilution" of earnings per share,
and require that the larger Basic loss per share also be
reported as the Diluted loss per share amount.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 3 - Investments
- --------------------

Investment Activity. Following is a summary of our investment
purchases, sales and maturities for continuing operations.

Nine Months
Ended September 30
------------------
(in millions) 2002 2001
----------- ------ ------
Purchases:
Fixed maturities $4,856 $2,754
Equities 644 1,279
Real estate and mortgage loans 3 51
Venture capital 160 235
Other investments 348 15
------ ------
Total purchases 6,011 4,334
------ ------
Proceeds from sales and maturities:
Fixed maturities 4,225 3,057
Equities 1,570 1,274
Real estate and mortgage loans 76 94
Venture capital 53 13
Other investments 5 161
------ ------
Total sales and maturities 5,929 4,599
------ ------

Net purchases (sales) $ 82 $ (265)
====== ======

Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common
shareholders' equity was as follows:
Nine Twelve
Months Ended Months ended
September 30 December 31
(in millions) 2002 2001
------------ ------------
Fixed maturities $ 480 $ 187
Equities (64) (347)
Venture capital (120) (314)
Other 10 (80)
------- -------
Total change in pretax unrealized
appreciation - continuing operations 306 (554)
Change in deferred taxes 121 214
------- -------
Total change in unrealized
appreciation - continuing operations,
net of taxes 185 (340)

Change in pretax unrealized
appreciation - discontinued operations - 26
Change in deferred taxes - (9)
------- -------
Total change in unrealized
appreciation - discontinued operations,
net of taxes - 17
------- -------
Total change in unrealized
appreciation, net of taxes $ 185 $ (323)
======= =======

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 4 - Income Taxes
- ---------------------

The components of income tax expense (benefit) on income from
continuing operations were as follows:

Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(in millions) 2002 2001 2002 2001
----------- ------ ------ ------ ------
Income tax expense (benefit):
Federal current $ 72 $ (71) $ 43 $ (96)
Federal deferred (51) (152) (133) (3)
------ ------ ------ ------
Total federal 21 (223) (90) (99)
Foreign 2 (62) 10 (64)
State 3 3 8 7
------ ------ ------ ------
Total income tax
expense (benefit) $ 26 $(282) $ (72) $(156)
====== ====== ====== ======

Note 5 - Contingent Liabilities
- -------------------------------

General - In the ordinary course of conducting business, we, and
some of our subsidiaries, have been named as defendants in
various lawsuits. Some of these lawsuits attempt to establish
liability under insurance contracts issued by our underwriting
operations, including liability under environmental protection
laws and for injury caused by exposure to asbestos products.
Plaintiffs in these lawsuits are seeking money damages that in
some cases are substantial or extra contractual in nature or are
seeking to have the court direct the activities of our operations
in certain ways.

Although the ultimate outcome of these matters is not presently
determinable, it is possible that the resolution of one or more
matters may be material to our results of operations; however, we
do not believe that the total amounts that we and our
subsidiaries will ultimately have to pay in all of these lawsuits
will have a material effect on our liquidity or overall financial
position.

Asbestos Litigation Settlement Agreement - On June 3, 2002, we
announced that we and certain of our subsidiaries had entered
into an agreement for the settlement of all existing and future
claims arising out of an insuring relationship of United States
Fidelity and Guaranty Company ("USF&G"), St. Paul Fire and Marine
Insurance Company and their affiliates and subsidiaries,
including us (collectively, the "USF&G Parties") with any of
MacArthur Company, Western MacArthur Company, and Western
Asbestos Company (the "MacArthur Companies"). At the May 15,
2002 filing of our Form 10-Q for the period ended March 31, 2002,
based on the status of the Western MacArthur claim at that time,
we determined that we could not reasonably estimate a range of
potential loss for the Western MacArthur claim, and no adjustment
to reserves was made. We disclosed in that Form 10-Q that we
were a defendant in the Western MacArthur matter and that the
resolution of one or more of such legal matters may be material
to our results of operations. On June 3, 2002, settlement was
reached, the necessary reserve charge was determined, and we
filed a Report on Form 8-K disclosing such information. The
settlement agreement was filed as an exhibit to our Report on
Form 8-K dated July 23, 2002. This description is qualified in
its entirety by the terms of the settlement agreement.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 5 - Contingent Liabilities (continued)
- ------------------------------------------

The settlement agreement provides that the MacArthur Companies
will file voluntary petitions under Chapter 11 of the Bankruptcy
Code to permit the channeling of all current and future asbestos-
related claims solely to a trust to be established pursuant to
Section 524(g) of the Bankruptcy Code. Consummation of most
elements of the settlement agreement is contingent upon
bankruptcy court approval of the settlement agreement as part of
a broader plan for the reorganization of the MacArthur Companies
(the "Plan"). Approval of the Plan involves substantial
uncertainties that include the need to obtain agreement among
existing asbestos plaintiffs, a person to be appointed to
represent the interests of unknown, future asbestos plaintiffs,
the MacArthur Companies and the USF&G Parties as to the terms of
such Plan. Accordingly, there can be no assurance that an
acceptable Plan will be developed or that bankruptcy court
approval of a Plan will be obtained.

Upon final approval of the Plan, and upon payment by the USF&G
Parties of the amounts described below, the MacArthur Companies
will release the USF&G Parties from any and all asbestos-related
claims for personal injury, and all other claims in excess of $1
million in the aggregate, that may be asserted relating to or
arising from, directly or indirectly, any alleged coverage
provided by any of the USF&G Parties to any of the MacArthur
Companies, including any claim for extra-contractual relief.

The after-tax impact on our year-to-date 2002 net income, net
of expected reinsurance recoveries and the re-evaluation
and application of asbestos and environmental reserves,
was approximately $380 million. This calculation was based upon
payments of $235 million during the second quarter of 2002, and
$740 million on the earlier of the final, non-appealable approval
of the Plan, or January 15, 2003, plus interest on the $740
million from the settlement date to the date of such payment.
The $740 million (plus interest) payment, together with $60
million of the original $235 million, shall be returned to the
USF&G Parties if the Plan is not finally approved. The
settlement agreement also provides for the USF&G Parties to pay
$13 million and to advance certain fees and expenses incurred in
connection with the settlement, bankruptcy proceedings,
finalization of the Plan and efforts to achieve approval of the
Plan, subject to a right of reimbursement in certain
circumstances of amounts advanced. That amount was also paid in
the second quarter of 2002.

As a result of the settlement, pending litigation with the
MacArthur Companies has been stayed pending final approval of the
Plan. Whether or not the Plan is approved, $175 million of the
$235 million will be paid to the bankruptcy trustee, counsel for
the MacArthur Companies, and persons holding judgments against
the MacArthur Companies as of June 3, 2002 and their counsel, and
the USF&G Parties will be released from claims by such holders to
the extent of $110 million paid to such holders.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 5 - Contingent Liabilities (continued)
- ------------------------------------------

Our second-quarter 2002 results of operations included a net
pretax loss of $585 million ($380 million after-tax) related to
this settlement. Our estimate of the impact of the settlement
includes the application of approximately $153 million of
asbestos IBNR reserves, and $250 million of reinsurance
recoverables, net of an allowance for uncollectible amounts. The
loss related to this settlement is calculated as follows:

(in millions)
-----------
Total cost of settlement $ (988)
Less:
Utilization of existing
IBNR loss reserves 153
Reinsurance recoverables,
net of an allowance 250
------
Net pretax loss (585)
Tax benefit @ 35% (205)
------
Net after-tax loss $ (380)
======

Our gross asbestos reserves at September 30, 2002 included $740
million of reserves for the Western MacArthur settlement.

In October and early November, 2002, three purported class action
lawsuits were filed against The St. Paul and our chief executive
and chief financial officers. The lawsuits make various
allegations regarding the adequacy of The St. Paul's previous
public disclosures and reserves relating to the Western MacArthur
litigation, and seek unspecified damages and other relief. The
Company views these lawsuits as without merit and intends to
contest them vigorously.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 6 - Debt
- -------------

Debt consisted of the following at September 30, 2002
and December 31, 2001:

September 30, 2002 December 31, 2001
------------------ -----------------
(in millions) Book Fair Book Fair
----------- Value Value Value Value
------ ------ ------ ------

Medium-term notes $ 550 $ 588 $ 571 $ 596
5.25% senior notes 443 461 - -
5.75% senior notes 498 513 - -
7.875% senior notes 249 273 249 269
8.125% senior notes 249 277 249 275
Nuveen line of credit
borrowings 55 55 183 183
Zero coupon convertible notes 106 105 103 106
Commercial paper 227 227 606 606
7.125% senior notes 80 86 80 84
Variable rate borrowings 64 64 64 64
Real estate debt - - 2 2
------ ------ ------ ------
Total obligations 2,521 2,649 2,107 2,185
Fair value of interest
rate swap agreements 65 65 23 23
------ ------ ------ ------
Total debt reported
on balance sheet $2,586 $2,714 $2,130 $2,208
====== ====== ====== ======

In March 2002, we issued $500 million of 5.75% senior notes due
in 2007. Proceeds from the issuance were primarily used to repay
a portion of our commercial paper outstanding.

In July 2002, the St. Paul issued common stock and equity units
to the public for total net proceeds of $842 million. Net
common stock proceeds, including the over-allotment options
exercised by the underwriters, was $413 million. Net proceeds
from the equity units, including the over-allotment options, was
$429 million. Each equity unit has a stated amount of $50, and
initially consists of a forward purchase contract for the
company's common stock (maturing in 2005), and a 5.25% senior
note of the company (maturing in 2007). We issued $443 million
of senior notes, which were recorded on our balance sheet as
debt. We also recorded $46 million, representing the present
value of the stock purchase contract fee payments associated with
the equity units, as a reduction to shareholders' equity. The
proceeds from the offering were used primarily for contributions
of capital to our insurance underwriting subsidiaries, with the
balance being used for general corporate purposes.

At September 30, 2002, we were party to a number of interest rate
swap agreements related to several of our debt securities
outstanding. The notional amount of these swaps, which qualified
for hedge accounting, totaled $480 million, and their aggregate
fair value at September 30, 2002 was an asset of $65 million with
a corresponding increase to debt on our balance sheet.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 7 - Segment Information
- ----------------------------

We have seven reportable business segments in our property-
liability insurance operations, consisting of Specialty
Commercial, Commercial Lines, Surety and Construction, Health
Care, Lloyd's and Other, Reinsurance, and Investment Operations.
We also have an asset management segment, consisting of our
majority ownership in The John Nuveen Company. We evaluate the
performance of our property-liability underwriting segments based
on underwriting results. The property-liability investment
operation is disclosed as a separate reportable segment because
that operation is managed at the corporate level and the invested
assets, net investment income and realized gains are not
allocated to individual underwriting segments. The asset
management segment is evaluated based on its pretax income, which
includes investment income.

The tabular information that follows provides revenue and income
data from continuing operations for each of our business segments
for the third quarters and first nine months of 2002 and 2001.
In the fourth quarter of 2001, we implemented a new segment
reporting structure for our property-liability underwriting
operations. Data for 2001 in the tables have been reclassified
to be consistent with the new segment reporting structure. In
the fourth quarter of 2001, we also announced our decision to
exit certain lines of business. See Note 3 in our 2001 Annual
Report to Shareholders.

Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(in millions) 2002 2001 2002 2001
----------- ------ ------ ------ ------
REVENUES FROM CONTINUING
OPERATIONS
Property-liability insurance:
Specialty Commercial $ 602 $ 456 $1,713 $1,323
Commercial Lines 428 379 1,305 1,134
Surety and Construction 288 237 859 707
Health Care 160 221 503 585
Lloyd's and Other 147 123 417 438
------ ------ ------ ------
Total primary
insurance operations 1,625 1,416 4,797 4,187
Reinsurance 303 444 985 1,044
------ ------ ------ ------
Total insurance
premiums earned 1,928 1,860 5,782 5,231
------ ------ ------ ------

Investment operations:
Net investment income 300 285 873 910
Realized investment losses (74) (77) (151) (20)
------ ------ ------ ------
Total investment operations 226 208 722 890
------ ------ ------ ------

Other 30 57 94 106
------ ------ ------ ------
Total property-
liability insurance 2,184 2,125 6,598 6,227
------ ------ ------ ------

Asset management 101 99 286 273
------ ------ ------ ------
Total reportable segments 2,285 2,224 6,884 6,500

Parent company, other
operations and consolidating
eliminations 3 1 22 38
------ ------ ------ ------
Total revenues $2,288 $2,225 $6,906 $6,538
====== ====== ====== ======

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 7 - Segment Information (continued)
- ---------------------------------------

Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(in millions) 2002 2001 2002 2001
----------- ------ ------ ------ ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS
Property-liability insurance:
Specialty Commercial $ 66 $ (81) $ 122 $ (74)
Commercial Lines 37 (153) (482) (38)
Surety and Construction (37) (25) (28) 15
Health Care (79) (70) (178) (324)
Lloyd's and Other (58) (230) (117) (281)
------ ------ ------ ------
Total primary
insurance operations (71) (559) (683) (702)
Reinsurance (24) (512) (14) (569)
------ ------ ------ ------
Total underwriting
result (95) (1,071) (697) (1,271)
------ ------ ------ ------

Investment operations:
Net investment income 300 285 873 910
Realized investment losses (74) (77) (151) (20)
------ ------ ------ ------
Total investment operations 226 208 722 890
------ ------ ------ ------

Other (18) (7) (55) (52)
------ ------ ------ ------
Total property-
liability insurance 113 (870) (30) (433)
------ ------ ------ ------
Asset management:
Pretax income before
minority interest 52 47 151 137
Minority interest (11) (11) (33) (32)
------ ------ ------ ------
Total asset management 41 36 118 105
------ ------ ------ ------
Total reportable segments 154 (834) 88 (328)

Parent company, other
operations and consolidating
eliminations (59) (43) (161) (118)
------ ------ ------ ------
Total income (loss) from
continuing operations
before income taxes $ 95 $ (877) $ (73) $ (446)
====== ====== ====== ======

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 8 - Reinsurance
- --------------------

Our consolidated financial statements reflect the effects of
assumed and ceded reinsurance transactions. Assumed reinsurance
refers to our acceptance of certain insurance risks that other
insurance companies have underwritten. Ceded reinsurance
involves transferring certain insurance risks (along with the
related written and earned premiums) we have underwritten to
other insurance companies who agree to share these risks. The
primary purpose of ceded reinsurance is to reduce earnings
volatility and insulate us from potential losses in excess of
the amount we are prepared to accept. We expect those to whom
we have ceded reinsurance to honor their obligations. In the
event these companies are unable to honor their obligations
to us, we will not recover these amounts. As of
September 30, 2002, we have established allowances of
approximately $189 million for possible nonpayment of amounts
due to us by our reinsurers.

In the first nine months of 2002, we were not party to an all-
lines, corporate excess-of-loss reinsurance treaty. In 2001, we
were party to such a treaty that we entered into effective Jan. 1
of that year, but coverage under that treaty was not triggered in
the first nine months of the year. However, we ceded $9 million
and $7 million of written and earned premiums, respectively,
related to the treaty in the first nine months of 2001,
representing the initial premium paid to our reinsurer. Our
Reinsurance segment was party to a separate aggregate excess-of-
loss reinsurance treaty, unrelated to the corporate treaty, in
both 2002 and 2001. Coverage was not triggered under that treaty
in the third quarter or first nine months of 2002, however St.
Paul Re did cede a modest amount of written and earned premiums,
representing the initial premium for this treaty. In the third
quarter of 2001, St. Paul Re ceded $73 million of written
premiums, $77 million of earned premiums and $171 million of
insurance losses and loss adjustment expenses, for a net benefit
of $94 million as a result of the Reinsurance segment treaty.
For the nine months ended September 30, 2001, St. Paul Re ceded
$118 million of written premiums, $120 million of earned premiums
and $273 million of insurance losses and loss adjustment expenses
for a net pretax benefit of $153 million.

The effect of assumed and ceded reinsurance on premiums written,
premiums earned and insurance losses and loss adjustment expenses
was as follows:

Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(in millions) 2002 2001 2002 2001
----------- ------ ------ ------ ------
Premiums written
Direct $ 1,883 $ 1,798 $ 5,629 $ 5,016
Assumed 419 755 1,684 2,103
Ceded (489) (526) (1,605) (1,393)
------ ------ ------ ------
Net premiums written $ 1,813 $ 2,027 $ 5,708 $ 5,726
====== ====== ====== ======
Premiums earned
Direct $ 1,942 $ 1,659 $5,626 $ 4,687
Assumed 476 738 1,665 1,976
Ceded (490) (537) (1,509) (1,432)
------ ------ ------ ------
Net premiums earned $ 1,928 $ 1,860 $ 5,782 $ 5,231
====== ====== ====== ======

Insurance losses and loss
adjustment expenses
Direct $ 1,420 $ 2,171 $ 5,136 $ 4,597
Assumed 288 1,941 1,064 2,938
Ceded (215) (1,657) (1,327) (2,551)
------ ------ ------ ------
Net insurance losses
and loss adjustment
expenses $ 1,493 $ 2,455 $ 4,873 $ 4,984
====== ====== ====== ======

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 9 - Restructuring Charges
- ------------------------------

Fourth Quarter 2001 Strategic Review - In December 2001, we
announced the results of a strategic review of all of our
operations, which included a decision to exit a number of
businesses and countries. Note 3 in our 2001 annual report to
shareholders provides more detailed information on this strategic
review. Related to this review, we recorded a pretax charge of
$62 million, including $46 million of employee-related costs
(related to the expected elimination of 800 positions during
2002), $9 million of occupancy-related costs, $4 million of
equipment charges and $3 million of legal costs. Note 16 in our
2001 annual report to shareholders provides more information on
this charge. During the first nine months of 2002, we recorded
an additional $3 million of employee-related charges related to
this strategic review, as we met the criteria for accrual. As of
September 30, 2002, 574 positions had been eliminated.

The following presents a rollforward of activity related to
this accrual:

(In millions)
----------- Original Reserve Reserve
Charges to Pre-tax at Dec. 31, at Sept. 30,
earnings: Charge 2001 Payments Adjustments 2002
-------- -------- ---------- -------- ----------- -----------
Employee-related $ 46 $ 46 $ (32) $ 3 $ 17
Occupancy-related 9 9 - - 9
Equipment charges 4 N/A N/A N/A N/A
Legal costs 3 3 (1) - 2
------ ------ ------ ------ ------
Total $ 62 $ 58 $ (33) $ 3 $ 28
====== ====== ====== ====== ======

Other Restructuring Charges - Since 1997, we have recorded
several restructuring and other charges related to actions taken
to improve our operations. Note 16 in our 2001 annual report to
shareholders provides more detailed information regarding these
charges.

In connection with our April 2000 acquisition of MMI, we recorded
a pretax charge of $28 million, including $4 million of employee-
related costs (related to the elimination of approximately 120
positions) and $24 million of occupancy-related costs.

In connection with a cost reduction program announced in August
1999, we recorded a pretax charge of $60 million, including $25
million of employee-related costs (related to the elimination of
approximately 590 positions), $33 million in occupancy-related
charges and $2 million in equipment charges.

In connection with our merger with USF&G, in the second quarter
of 1998 we recorded a pretax charge to earnings of $292 million,
primarily consisting of severance and other employee-related
costs (related to the elimination of approximately 2,200
positions), facilities exit costs, asset impairments and
transaction costs.

All actions have been taken and all obligations have been met
regarding these other restructuring charges, with the exception
of certain remaining lease commitments. The lease commitment
charges related to excess space created by the elimination of
positions. During the first nine months of 2002, we reduced the
lease commitment reserve by $1 million related to sublease
activity. We expect to be obligated under certain lease
commitments for approximately seven years.
PAGE 22

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 9 - Restructuring Charges (continued)
- -----------------------------------------

The following presents a rollforward of activity related to these
lease commitments:

(In millions)
----------- Original Reserve Reserve
Pre-tax at Dec. 31, at Sept. 30,
Charge 2001 Payments Adjustments 2002
-------- ---------- -------- ----------- -----------

Lease
commitments
charged to
earnings: $91 $39 $(9) $(1) $29
====== ====== ====== ====== ======

Note 10 - Adoption of Accounting Pronouncement
- ----------------------------------------------

In the first quarter of 2002, we began implementing the
provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for
acquired goodwill and other intangible assets. The statement
changes prior accounting practice in the way intangible assets
with indefinite useful lives, including goodwill, are tested for
impairment on an annual basis. Generally, it also requires that
those assets meeting the criteria for classification as
intangible assets with estimable useful lives be amortized to
expense over those lives, while intangible assets with indefinite
useful lives and goodwill are not to be amortized. As a result
of implementing the provisions of this statement, we did not
record any goodwill amortization expense in the first, second, or
third quarters of 2002. In the first nine months of 2001,
goodwill amortization expense totaled $30 million. Amortization
expense associated with intangible assets totaled $14 million in
the first nine months of 2002, compared with $2 million in the
same 2001 period.

During the second quarter of 2002, we completed the evaluation of
our recorded goodwill for impairment in accordance with
provisions of SFAS No. 142, which required a two-step approach
for determining impairment of goodwill. The first step was to
test for potential impairment by comparing the fair value of our
respective reporting units to the carrying value of each unit.
The second step measured the impairment loss by using the unit's
implied fair value as compared to its carrying amount. As no
impairment was indicated in the first step, the second step was
not necessary. This evaluation concluded that none of our
goodwill was impaired. In connection with our reclassification
of certain assets previously accounted for as goodwill to other
intangible assets in 2002, we established a deferred tax
liability of $6 million in the second quarter of 2002. That
provision was classified as a cumulative effect of accounting
change effective as of January 1, 2002.

Related to our adoption of SFAS No. 142, we also reviewed the
amortization method and useful lives of existing intangible
assets, and adjusted as appropriate. Generally speaking,
amortization was accelerated and useful lives shortened.

The following presents a summary of our acquired intangible
assets.

(In millions)
-----------
Amortizable intangible Gross Carrying Accumulated Net
assets: Amount Amortization Amount
--------------------- -------------- ------------ ------
Customer relationships $ 72 $ 3 $ 69
Present value of future
profits 70 13 57
Renewal rights 16 5 11
Internal use software 2 1 1
------ ------ ------
Total $160 $22 $138
====== ====== ======

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 10 - Adoption of Accounting Pronouncement (continued)
- ---------------------------------------------------------

At September 30, 2002, our estimated amortization expense for
the next five years was as follows.

(In millions)
------------
Estimated amortization expense for
the year ending Dec. 31:
----------------------------------------
2003 $19
2004 16
2005 15
2006 13
2007 12

The changes in the carrying value of goodwill on our balance
sheet were as follows. The increase in goodwill in our Asset
Management segment results from Nuveen's purchase of shares from
minority shareholders and from the purchase of NWQ Investment
Management. See Note 11 for a discussion of the increase to the
Specialty Commercial and Surety and Construction segments. The
increase in goodwill in our Lloyd's and Other segment relates to
an increase in syndicate capacity at Lloyd's.

Balance Balance
(In millions) at Dec. 31, Goodwill Impair- at Sept. 30,
----------- 2001 acquired ment 2002
---------- -------- ------ -----------

Goodwill by Segment:
Specialty Commercial $ 36 $ 6 $ - $ 42
Commercial Lines 33 - - 33
Surety and
Construction 14 13 - 27
Lloyd's and Other 7 5 - 12
Asset Management 519 185 704
------ ------ ---- ------
Total $ 609 $ 209 $ - $ 818
====== ====== ==== ======

The following presents the pro forma impact of ceasing
amortization of goodwill for the three and nine-month periods
ended September 30, 2002 and 2001.

Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(In millions) 2002 2001 2002 2001
----------- ------ ------ ------ ------
Reported net income (loss) $ 63 $ (659) $ (26) $ (352)
Add back goodwill
amortization - 12 - 30
------ ------ ------ ------
Adjusted net
income (loss) $ 63 $ (647) $ (26) $ (322)
====== ====== ====== ======

Basic earnings per share:
Reported net income (loss) $ 0.27 $(3.16) $(0.18) $(1.71)
Goodwill amortization - 0.06 - 0.14
------ ------ ------ ------
Adjusted net
income (loss) $ 0.27 $(3.10) $(0.18) $(1.57)
====== ====== ====== ======

Diluted earnings per share:
Reported net income (loss) $ 0.27 $(3.16) $(0.18) $(1.71)
Goodwill amortization - 0.06 - 0.14
------ ------ ------ ------
Adjusted net
income (loss) $ 0.27 $(3.10) $(0.18) $(1.57)
====== ====== ====== ======

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 11 - Acquisition of London Guarantee
- -----------------------------------------

In late March 2002, we completed our acquisition of London
Guarantee Insurance Company ("London Guarantee"), a specialty
property-liability insurance company focused on providing surety
products and management liability, bond, and professional
indemnity products. The total cost of the acquisition was
approximately $80 million. The preliminary allocation of this
purchase price resulted in $20 million of goodwill and $37
million of other intangible assets. The acquisition was funded
through internally-generated funds. London Guarantee,
headquartered in Toronto, generated approximately $35 million in
surety net written premiums for the year ended Dec. 31, 2001, and
approximately $18 million in net written premiums from the
remaining lines of business we acquired. London Guarantee's
assets and liabilities were included in our consolidated balance
sheet as of September 30, 2002, and the results of their
operations since the acquisition date were included in our
statements of operations for the three months and nine months
ended September 30, 2002. London Guarantee generated net written
premiums of $41 million and an underwriting profit of $3 million
since the acquisition date.

Note 12 - Discontinued Operations
- ---------------------------------

Life Insurance
- --------------
On September 28, 2001, we completed the sale of our life
insurance company, Fidelity and Guaranty Life Insurance Company,
and its subsidiary, Thomas Jefferson Life, (together, "F&G Life")
to Old Mutual plc ("Old Mutual") for $335 million in cash and
$300 million in Old Mutual shares. Pursuant to the sale
agreement, we were originally required to hold the 190,356,631
Old Mutual shares we received for one year after the closing of
the transaction, and the proceeds from the sale of F&G Life were
subject to possible adjustment based on the movement of the
market price of Old Mutual's shares at the end of the one-year
period. The amount of possible adjustment was to be determined
by a derivative "collar" agreement included in the sale
agreement. In May 2002, Old Mutual granted us a release from the
one-year holding requirement in order to facilitate our sale of
those shares in a placement made outside the United States,
together with a concurrent sale of shares by Old Mutual by means
of granting an overallotment option, which was exercised by the
underwriters. We sold all of the Old Mutual shares we were
holding on June 6, 2002 for a total net consideration of $287
million, resulting in a pretax realized loss of $13 million that
was recorded as a component of discontinued operations on our
statement of operations. The fair value of the collar agreement
was recorded as an asset on our balance sheet and adjusted
quarterly. At the time of the sale of the Old Mutual shares, the
collar had a fair value of $12 million, which we agreed to
terminate at no value as part of the sale. The amount was
recorded as a component of discontinued operations on our
statement of operations.

Standard Personal Insurance Business
- ------------------------------------
In 1999, we sold our standard personal insurance operations to
Metropolitan Property and Casualty Insurance Company
("Metropolitan"). Metropolitan purchased Economy Fire & Casualty
Company and its subsidiaries ("Economy"), as well as the rights
and interests in those non-Economy policies constituting our
remaining standard personal insurance operations. Those rights
and interests were transferred to Metropolitan by way of a
reinsurance and facility agreement ("Reinsurance Agreement").

The Reinsurance Agreement relates solely to the non-Economy
standard personal insurance policies, and was entered into solely
as a means of accommodating Metropolitan through a transition
period. The Reinsurance Agreement allows Metropolitan to write
non-Economy business on our policy forms while Metropolitan
obtains the regulatory license, form and rate approvals necessary
to write non-Economy business through their own insurance
subsidiaries. Any business written on our policy forms during
this transition period is then fully ceded to Metropolitan under
the Reinsurance Agreement. We recognized no gain or loss on the
inception of the Reinsurance Agreement and will not incur any net
revenues or expenses related to the Reinsurance Agreement. All
economic risk of post-sale activities related to the Reinsurance
Agreement has been transferred to Metropolitan. We anticipate
that Metropolitan will pay all claims incurred related to this
Reinsurance Agreement. In the event Metropolitan does not honor
their obligations to us, we will pay these amounts.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 12 - Discontinued Operations (continued)
- --------------------------------------------

As part of the sale to Metropolitan, we guaranteed the adequacy
of Economy's loss and loss expense reserves. Under that
guarantee, we will pay for any deficiencies in those reserves and
will share in any redundancies that develop by Sept. 30, 2002. We
remain liable for claims on non-Economy policies that result from
losses occurring prior to closing. By agreement, Metropolitan
will adjust those claims and share in redundancies in related
reserves that may develop. As of September 30, 2002, we have
estimated that we will owe Metropolitan $7 million on these
guarantees, an estimate that was unchanged from our estimate at
Dec. 31, 2001. We anticipate paying that liability in the fourth
quarter of 2002. Any losses incurred by us under these
agreements are reflected in discontinued operations in the period
they are determined. For the first nine months of 2002 and 2001,
we recorded pretax losses of $12 million and $7 million,
respectively, in discontinued operations, related to pre-sale
claims. We have no other contingent liabilities related to the
sale.

Note 13 - Derivative Financial Instruments
- ------------------------------------------

We have the following derivative instruments, which have been
designated into one of three categories based on their intended
use:

Fair Value Hedges: We have several pay-floating, receive-fixed
interest rate swaps, totaling $480 million notional amount, that
are designated as fair value hedges of a portion of our medium-
term and senior notes, that we have entered into for the purpose
of managing the effect of interest rate fluctuations on this
debt. The terms of the swaps match those of the debt
instruments, and the swaps are therefore considered 100%
effective. The impact related to the nine months ended September
30, 2002 and September 30, 2001 movement in interest rates was a
$42 million increase and a $17 million increase, respectively, in
the fair value of the swaps and the related debt on the balance
sheet, with the income statement impacts again offsetting.

Cash Flow Hedges: We have purchased foreign currency forward
contracts that are designated as cash flow hedges. They are
utilized to minimize our exposure to fluctuations in foreign
currency values that result from forecasted foreign currency
payments, as well as from foreign currency payables and
receivables. In the nine months ended September 30, 2002, we
recognized a $1 million gain on the cash flow hedges, which is
included in "Other Comprehensive Income." The comparable amount
for the nine months ended September 30, 2001 was a $7 million
loss. The amounts included in other comprehensive income will be
reclassified into earnings concurrent with the timing of the
hedged cash flows. We do not anticipate any of the "Other
Comprehensive Income" will be reclassified into earnings within
the next twelve months. In the nine months ended September 30,
2002 and September 30, 2001 we recognized a gain of less than $1
million and a $1 million loss, respectively, on the income
statement representing the portions of the forward contracts
deemed ineffective.

Non-Hedge Derivatives: We have entered into a variety of other
financial instruments considered to be derivatives, but which are
not designated as hedges, that we utilize to minimize the
potential impact of market movements in certain investment
portfolios. These included our investment in an embedded collar
on Old Mutual shares received as partial consideration from the
sale of our life insurance business, foreign currency put options
on British Pounds Sterling to hedge currency risk associated with
our former position in Old Mutual shares and stock warrants in
our venture capital business. We recorded a $2 million gain and
a $2 million loss in continuing operations for the nine months
ended September 30, 2002 and September 30, 2001, respectively,
relating to the change in the market value of these derivatives
during the period. We also recorded $21 million of losses in
discontinued operations for the nine months ended September 30,
2002 relating to non-hedge derivatives associated with the sale
of our life business. These non-hedge derivatives were
terminated during the second quarter of 2002. See Note 12 for
further discussion.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued

Note 14 - Subsequent Event - Sale of Ongoing Reinsurance Business
- -----------------------------------------------------------------

On November 1, 2002, we completed the transfer of our continuing
reinsurance business and certain related assets, including
renewal rights, to Platinum Underwriters Holdings, Ltd.
("Platinum"), a newly formed Bermuda company that underwrites
property and casualty reinsurance business on a worldwide basis.
The Formation and Separation Agreement effecting this transfer
was executed on October 28, 2002, a form of which was filed as
an Exhibit to Platinum's Form S-1/A dated October 23, 2002 and
is incorporated herein by reference. This description is qualified
in its entirety by the terms of the Formation and Separation Agreement.
As part of this transaction, we contributed $122 million of cash
to Platinum and transferred approximately $350 million in assets
relating to transferred insurance reserves. In exchange, we
acquired six million common shares, representing a 14% ownership
interest in Platinum and a ten-year option to buy up to six
million additional common shares at an exercise price of $27 per
share, which represents 120% of the initial public offering price
of Platinum's shares.

We entered into various agreements with Platinum and its
subsidiaries effective on the closing date of Nov. 1, 2002 (or
the following day), including quota share agreements by which
Platinum reinsured St. Paul Fire and Marine Insurance Company and
St. Paul Reinsurance Company Limited, two of our subsidiaries,
for the majority of their reinsurance contracts incepting in
2002. Platinum did not reinsure the reinsurance liabilities of
St. Paul Fire and Marine Insurance Company and St. Paul
Reinsurance Company Limited relating to reinsurance contracts
incepting prior to January 1, 2002. We retained those
liabilities and the related assets and reserves.

We expect the transaction to result in an estimated pretax gain
of between $18 million and $20 million and an estimated after-tax
loss of between $40 million and $60 million, as we continue to
evaluate the recoverability of deferred tax assets associated
with the reinsurance liabilities that we retained.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES

Forward-looking Statement Disclosure and Certain Risks
------------------------------------------------------

This report contains certain forward-looking statements within
the meaning of the Private Securities 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. Examples of these forward-looking statements include
statements concerning:

- market and other conditions and their effect on future
premiums, revenues, earnings, cash flow and investment income;
- price increases, improved loss experience and expense
savings resulting from the restructuring actions announced in
recent years;
- and statements concerning the anticipated approval of the
Western MacArthur asbestos litigation settlement.

In light of the risks and uncertainties inherent in forward-
looking statements, many of which are beyond our control, actual
results could differ materially from those in forward-looking
statements. Forward-looking statements should not be regarded as
a representation that anticipated events will occur or that
expected objectives will be achieved. Risks and uncertainties
include, but are not limited to, the following:

- changes in the demand for, pricing of, or supply of our
products;
- competitive considerations, including the continued
ability to implement price increases, possible actions by
competitors and an increase in competition for our products;
- general economic conditions, including changes in
interest rates and the performance of financial markets;
- the risk that losses related to credit-sensitive
insurance products, including surety bonds, could be material
in the event of a sustained economic downturn;
- the possibility of worse-than-anticipated loss
development from business written in prior years;
- additional statement of operations charges if our
property-liability loss reserves are insufficient;
- our exposure to natural or man-made catastrophic events,
which are unpredictable, with a frequency or severity
exceeding our estimates, resulting in material losses;
- the impact of the Sept. 11, 2001 terrorist attack and the
ensuing global war on terrorism on the insurance and
reinsurance industry in general and potential governmental
intervention in the insurance and reinsurance markets to make
available insurance coverage for acts of terrorism;
- risks relating to our potential exposure to losses
arising from acts of terrorism and our ability to obtain
reinsurance covering such exposures;
- risks relating to our continuing ability to obtain
reinsurance covering catastrophe, surety, and other exposures
at appropriate prices and/or in sufficient amounts;
- risks relating to the collectibility of reinsurance and
the adequacy of reinsurance to protect us against losses;
- changes in domestic and foreign laws, tax laws and
changes in the regulation of our businesses which affect our
profitability and our growth;
- the possibility of downgrades in our claims-paying and
financial strength ratings significantly adversely affecting
us, including reducing the number of insurance policies we
write, generally, or causing clients who require an insurer
with a certain rating level to use higher-rated insurers;
- the risk that our investment portfolio suffers reduced
returns or investment losses which could reduce our
profitability; the impact of assessments and other surcharges
for guaranty funds and second-injury funds and other mandatory
pooling arrangements;
- risks relating to the transfer of our going forward
reinsurance operations to Platinum Underwriters Holdings,
Ltd.;
- loss of significant customers;
- risks relating to the approval by the bankruptcy court of
the settlement of the Western MacArthur matter;
- changes in our estimate of insurance industry losses
resulting from the Sept. 11, 2001 terrorist attack (including
the impact if that attack were deemed two insurable events
rather than one);

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES

Forward-looking Statement Disclosure and Certain Risks (continued)
-----------------------------------------------------------------

- adverse developments in non-Western MacArthur related
asbestos litigation (including claims that certain asbestos-
related insurance policies are not subject to aggregate
limits);
- adverse developments in environmental litigation
involving policy coverage and liability issues;
- the effects of emerging claim and coverage issues on our
business, including adverse judicial decisions and rulings;
- the inability of our subsidiaries to pay dividends to us
in sufficient amounts to enable us to meet our obligations and
pay future dividends;
- the adverse effects of consolidation in the insurance
industry on our margins and demand for our products and
services;
- the cyclicality of the property-liability insurance
industry causing fluctuations in our results;
- risks relating to the nature of our asset management
business; our dependence on the business provided to us by
agents and brokers;
- our implementation of new strategies, including our
intention to withdraw from certain lines of business, as a
result of the strategic review completed in late 2001;
- and various other matters.

We undertake no obligation to release publicly the results of any
future revisions we may make to forward-looking statements to
reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operations
September 30, 2002

Consolidated Highlights
-----------------------

The following table summarizes our results for the third quarters
and nine months ended September 30, 2002 and 2001.

Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
(in millions, except per- 2002 2001 2002 2001
share amounts) ------ ------ ------ ------
-------------
Pretax income (loss):

Property-liability insurance:
Underwriting result $ (95) $(1,071) $ (697) $(1,271)
Net investment income 300 285 873 910
Realized investment losses (74) (77) (151) (20)
Other expenses (18) (7) (55) (52)
------ ------ ------ ------
Total property-liability
insurance 113 (870) (30) (433)
Asset management 41 36 118 105
Parent and other (59) (43) (161) (118)
------ ------ ------ ------
Pretax income (loss) from
continuing operations
before cumulative effect
of accounting change 95 (877) (73) (446)
Income tax expense (benefit) 26 (282) (72) (156)
------ ------ ------ ------
Income (loss) from
continuing operations before
cumulative effect of
accounting change 69 (595) (1) (290)
Cumulative effect of
accounting change, net of taxes - - (6) -
------ ------ ------ ------
Income (loss) from
continuing operations 69 (595) (7) (290)

Discontinued operations, net
of taxes (6) (64) (19) (62)
------ ------ ------ ------
Net income (loss) $ 63 $ (659) $ (26) $ (352)
====== ====== ====== ======

Per common share (basic) $ 0.27 $(3.16) $(0.18) $(1.71)
====== ====== ====== ======
Per common share (diluted) $ 0.27 $(3.16) $(0.18) $(1.71)
====== ====== ====== ======

Consolidated Results
- --------------------
Our pretax income from continuing operations of $95 million in
the third quarter of 2002 was a significant improvement over our
pretax loss of $877 million in the same period of 2001, which
included $866 million in losses associated with the Sept. 11,
2001 terrorist attack. Excluding the impact of the terrorist
attack, the third-quarter 2001 pretax loss from continuing
operations was $11 million. The increase in third-quarter 2002
pretax income over the adjusted 2001 pretax total was driven by
an improvement in underwriting results in our property-liability
operations, and an increase in investment income. In addition,
our asset management subsidiary, The John Nuveen Company,
recorded a $5 million increase in pretax income over the third
quarter of 2001 primarily as the result of an increase in assets
managed.

Our nine-month 2002 pretax loss from continuing operations of $73
million included a $585 million loss provision recorded upon
entering into a settlement agreement with respect to certain
asbestos litigation (described in more detail on the following
page). Excluding that loss in 2002, and the losses from the
terrorist attack in 2001, our adjusted nine-month pretax income
in 2002 of $512 million was $92 million higher than adjusted nine-
month 2001 pretax income of $420 million, due to strong
improvement in underwriting results in our property-liability
operations which more than offset a significant increase in
realized investment losses. Pretax losses in the "Parent and
other" category exceeded comparable third quarter and nine-month
2001 losses, primarily due to an increase in preferred security
expenses related to securities issued in the fourth quarter of
2001.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

Our tax benefit on the year-to-date consolidated 2002 pretax loss
from continuing operations, in relation to the pretax loss, is
high primarily because the pretax loss includes significant non-
taxable income produced by tax-exempt securities in our
investment portfolio.

Asbestos Litigation Settlement Agreement
- ----------------------------------------
In June 2002, we and certain of our subsidiaries entered into an
agreement for the settlement of all existing and future claims
arising out of an insuring relationship of United States Fidelity
and Guaranty Company ("USF&G"), St. Paul Fire and Marine
Insurance Company and their affiliates and subsidiaries,
including us (collectively, the "USF&G Parties") with any of
MacArthur Company, Western MacArthur Company, and
Western Asbestos Company (the "MacArthur Companies"). At the May
15, 2002 filing of our Form 10-Q for the period ended March 31,
2002, based on the status of the Western MacArthur claim at that
time, we determined that we could not reasonably estimate a range
of potential loss for the claim, and no adjustment to reserves
was made. We disclosed in that Form 10-Q that we were a
defendant in the Western MacArthur matter and that the resolution
of one or more of such legal matters may be material to our
results of operations. On June 3, 2002, settlement was reached,
the necessary reserve charge was determined, and we filed a
Current Report on Form 8-K disclosing such information. The
settlement agreement was filed as an exhibit to our Current
Report on Form 8-K dated July 23, 2002. This description is
qualified in its entirety by the terms of the settlement
agreement.

The settlement agreement provides that the MacArthur Companies will
file voluntary petitions under Chapter 11 of the Bankruptcy Code to
permit the channeling of all current and future asbestos-related
claims solely to a trust to be established pursuant to Section 524(g)
of the Bankruptcy Code. Consummation of most elements of the
settlement agreement is contingent upon bankruptcy court approval
of the settlement agreement as part of a broader plan for the
reorganization of the MacArthur Companies (the "Plan"). Approval
of the Plan involves substantial uncertainties that include the
need to obtain agreement among existing asbestos plaintiffs, a
person to be appointed to represent the interests of unknown,
future asbestos plaintiffs, the MacArthur Companies and the USF&G
Parties as to the terms of such Plan. Accordingly, there can be
no assurance that an acceptable Plan will be developed or that
bankruptcy court approval of a Plan will be obtained.

Upon final approval of the Plan, and upon payment by the USF&G
Parties of the amounts described below, the MacArthur Companies
will release the USF&G Parties from any and all asbestos-related
claims for personal injury, and all other claims in excess of $1
million in the aggregate, that may be asserted relating to or
arising from, directly or indirectly, any alleged coverage
provided by any of the USF&G Parties to any of the MacArthur
Companies, including any claim for extra-contractual relief.

The after-tax impact on our year-to-date net loss, net of expected
reinsurance recoveries and the re-evaluation and application
of asbestos and environmental reserves, was approximately $380 million.
This calculation was based upon payments of $235 million during the
second quarter of 2002, and $740 million on the earlier of the
final, non-appealable approval of a plan of reorganization of
Western MacArthur or January 15, 2003, plus interest on the $740 million
from the settlement date to the date of such payment. The $740
million (plus interest) payment, together with $60 million of the
original $235 million, shall be returned to the USF&G Parties if
the Plan is not finally approved. The settlement agreement also
provides for the USF&G Parties to pay $13 million and to advance
certain fees and expenses incurred in connection with the
settlement, bankruptcy proceedings, finalization of the Plan and
efforts to achieve approval of the Plan, subject to a right of
reimbursement in certain circumstances of amounts advanced. That
amount was also paid in the second quarter.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

As a result of the settlement, pending litigation with the
MacArthur Companies has been stayed pending final approval of the
Plan. Whether or not the Plan is approved, $175 million of the
$235 million will be paid to the bankruptcy trustee, counsel for
the MacArthur Companies, and persons holding judgments against
the MacArthur Companies as of June 3, 2002 and their counsel, and
the USF&G Parties will be released from claims by such holders to
the extent of $110 million paid to such holders.

Our year-to-date 2002 results of operations included a net pretax
loss of $585 million ($380 million after-tax) related to this
settlement, calculated as shown in the following table. (See
further discussion of asbestos reserves on pages 54 through 57 of
this report).

(in millions)
-----------
Total cost of settlement $ (988)
Less:
Utilization of IBNR loss
reserves 153
Reinsurance recoverables,
net of an allowance 250
-----
Net pretax loss (585)
Tax benefit @ 35% (205)
-----
Net after-tax loss $ (380)
=====

Issuance of Common Stock and Equity Units
- -----------------------------------------
In July 2002, we sold 17.8 million of our common shares in a
public offering for gross consideration of $431 million, or
$24.20 per share. In a separate concurrent public offering, we
sold 8.9 million equity units, each having a stated amount of
$50, for gross consideration of $443 million. Each equity unit
initially consists of a three-year forward purchase contract for
our common stock and an unsecured $50 senior note of the company
due in August 2007. Total annual distributions on the equity
units are at the rate of 9.00%, consisting of interest on the
note at a rate of 5.25% and fee payments under the forward
contract of 3.75%. The forward contract requires the investor to
purchase, for $50, a variable number of shares of our common
stock on the settlement date of August 16, 2005. The $46 million
present value of the forward contract fee payments was recorded
as a reduction to our reported common shareholders' equity. The
number of shares to be purchased will be determined based on a
formula that considers the average trading price of the stock
immediately prior to the time of settlement in relation to the
$24.20 per share price at the time of the offering. Had the
settlement date been September 30, 2002, we would have issued
approximately 15 million common shares based on the average
trading price of our common stock immediately prior to that date.

The combined net proceeds of these offerings, after underwriting
commissions and other fees, were approximately $842 million, of
which $750 million was contributed as capital to our insurance
underwriting subsidiaries.

Judicial Ruling - Petrobas Oil Rig Construction
- -----------------------------------------------
In September 2002, the United States District Court for the
Southern District of New York entered a judgment in the amount of
approximately $370 million to Petrobas, an energy company that is
majority-owned by the government of Brazil, in a claim related to
the construction of two oil rigs. One of our subsidiaries
provided a portion of the surety coverage for that construction.
We recorded a pretax loss of $34 million ($22 million after-tax)
in the third quarter in our Surety and Construction business
segment. The loss recorded was net of reinsurance and previously
established case reserves for this exposure, and prior to any
possible recoveries related to indemnity. We are actively
pursuing an appeal of this judgment.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

Acquisition
- -----------
In late March 2002, we completed our acquisition of London
Guarantee Insurance Company ("London Guarantee"), a specialty
property-liability insurance company focused on providing surety
products and management liability, bond, and professional
indemnity products. The total cost of the acquisition was
approximately $80 million. The preliminary allocation of this
purchase price resulted in $20 million of goodwill and $37
million of other intangible assets. The acquisition was funded
through internally-generated funds. London Guarantee,
headquartered in Toronto, recorded approximately $35
million in surety net written premiums for the year ended Dec.
31, 2001, and approximately $18 million in net written premiums
from the remaining lines of business we acquired. London
Guarantee's assets and liabilities were included in our
consolidated balance sheet beginning June 30, 2002, and the
results of their operations since the acquisition date were
included in our statements of operations for the three months and
nine months ended September 30, 2002. London Guarantee
generatedproduced net written premiums of $41 million and an
underwriting profit of $3 million since the acquisition date.

Withdrawal from Certain Lines of Business
- -----------------------------------------
In the fourth quarter of 2001, we announced our intention to
withdraw from several lines of business in our property-liability
insurance operations. Beginning in January 2002, the operations
listed below were placed in "runoff," meaning that we have ceased
or plan to cease underwriting new business in these operations as
soon as possible, and remaining business activities will relate
to the settlement of claims. We are pursuing the sale of certain
of these operations.

- All coverages in our Health Care segment.
- All underwriting operations in Germany, France, the
Netherlands, Argentina, Mexico (excluding surety business,
which continues), Spain, Australia, New Zealand, Botswana, and
South Africa.
- In the United Kingdom, all coverages offered to the
construction industry. (Unionamerica, a United Kingdom
medical liability underwriting entity that we acquired in
2000, was placed in runoff in late 2000, except for business
we are contractually committed to underwrite through certain
syndicates at Lloyd's through 2004. Effective in the second
quarter of 2002, those contractual obligations were
eliminated.
- At Lloyd's, casualty insurance and reinsurance, U.S.
surplus lines business, non-marine reinsurance and, when our
contractual commitment expires at the end of 2003, our
participation in the insuring of the Lloyd's Central Fund.
Effective in the second quarter of 2002, we made the decision
to resume underwriting U.S. surplus lines business as a result
of changing market conditions.
- In our reinsurance operations, most North American
reinsurance business underwritten in the United Kingdom, all
but traditional finite reinsurance business underwritten by
St. Paul Re's Financial Solutions business center, bond and
credit reinsurance, and aviation reinsurance.

In the second quarter of 2002, we announced our intent to
transfer our ongoing reinsurance operations to Platinum
Underwriters Holdings, Ltd., and include the results of those
operations with those of the lines of business ultimately to be
exited by The St. Paul.

None of these operations qualifies as "discontinued operations"
for accounting purposes; therefore, results from these operations
are included in their respective property-liability segment
results discussed on pages 45 to 53 of this report. For the nine
months ended September 30, 2002, these operations collectively
accounted for $1.30 billion, or 23%, of our reported net written
premiums, and generated negative underwriting results totaling
$348 million (an amount that does not include investment income
from the assets maintained to support these operations). Premium

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

volume for these operations in 2002 was centered in our
Reinsurance segment, in our Health Care segment, where we are
required to offer continuing coverage to certain policyholders in
the form of extended reporting endorsements and where we renewed
certain policies prior to approval of an exit plan in certain
states, and in our Lloyd's and Other segment, where we are
contractually obligated to underwrite business in certain Lloyd's
syndicates through 2003 and 2004.

Our consolidated net loss and loss adjustment expense reserves of
$15.5 billion at September 30, 2002 included approximately $6.1
billion of net reserves for our Reinsurance and domestic Health
Care segments. The payment of claims from these reserves and
those related to our other runoff operations will negatively
impact our investment income in future periods as the invested
assets related to these reserves decline.

September 11, 2001 Terrorist Attack
- -----------------------------------
In the third quarter of 2001, we recorded estimated net pretax
losses totaling $866 million related to the September 11, 2001
terrorist attack in the United States. Our estimated gross
pretax losses and loss adjustment expenses incurred as a result
of the terrorist attack totaled $2.16 billion. The estimated net
pretax operating loss of $866 million recorded in the third
quarter of 2001 included an estimated benefit of $1.20 billion
from cessions made under various reinsurance agreements, a $40
million provision for uncollectible reinsurance, a net $44
million benefit from additional and reinstated insurance and
reinsurance premiums, and a $90 million reduction in contingent
commission expenses in our Reinsurance segment.

Our estimated losses were based on a variety of actuarial
techniques, coverage interpretation and claims estimation
methodologies, and include an estimate of losses incurred but not
reported, as well as estimated costs related to the settlement of
claims.

In the fourth quarter of 2001, we recorded an additional pretax
loss of $75 million related to the terrorist attack, primarily in
our Reinsurance segment. We have recorded no additional loss
provision related to the terrorist attack during the first nine
months of 2002; however, in the third quarter, we decreased our
estimate of losses in our primary insurance operations and
increased our estimate of losses in our reinsurance operation.

The impacts on our business segments of the estimated net pretax
operating loss of $866 million recorded in the third quarter of
2001 and the reallocation of losses among segments in the third
quarter of 2002 are shown in the following table.

Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(In millions) 2002 2001 2002 2001
------ ------ ------ ------
Lloyd's and Other $ 14 $(155) $ 14 $(155)
Commercial Lines 15 (146) 15 (146)
Specialty Commercial (8) (56) (8) (56)
Health Care - (6) - (6)
Surety and Construction - (3) - (3)
------ ------ ------ ------
Total Primary Insurance 21 (366) 21 (366)
Reinsurance (21) (500) (21) (500)
------ ------ ------ ------
Total Property-
Liability Insurance $ - $(866) $ - $(866)
====== ====== ====== ======

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

Through September 30, 2002, we have made cumulative net loss
payments of $270 million related to the attack, of which $208
million were made in the first nine months of 2002, including $60
million in the third quarter. For further information regarding
the impact of the terrorist attack on our operations, refer to
Note 2 in our 2001 annual report to shareholders.

Restructuring Charge
- --------------------
In December 2001, in connection with the withdrawal from the
foregoing lines of business and as part of our overall plan to
reduce company-wide expenses, we recorded a $62 million pretax
restructuring charge. The majority of the charge - $46 million -
pertained to employee-related costs associated with our plan to
eliminate an estimated total of 800 positions by the end of 2002.
As of September 30, 2002, we had terminated 574 employees and
made payments of $32 million related to the $46 million charge.
The remainder of the $62 million charge consisted of legal,
equipment and occupancy-related costs, for which approximately $1
million had been paid as of September 30, 2002.

In the first nine months of 2002, we recorded an additional
pretax restructuring charge of $3 million, related to additional
employee-related expenses that did not meet the criteria for
accrual at Dec. 31, 2001. This charge was partially offset by a
$1 million reduction in occupancy-related restructuring charges
recorded in prior years.

Adoption of SFAS No. 142
- ------------------------
In the first quarter of 2002, we began implementing the
provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets," which established financial accounting and reporting for
acquired goodwill and other intangible assets. The statement
changed prior accounting requirements in the method by which
intangible assets with indefinite useful lives, including
goodwill, are tested for impairment on an annual basis. It also
required that those assets meeting the criteria for
classification as intangible with finite useful lives be
amortized to expense over those lives, while intangible assets
with indefinite useful lives and goodwill are not to be
amortized. As a result of implementing the provisions of this
statement, we did not record any goodwill amortization expense in
the first nine months of 2002. In the first nine months of 2001,
goodwill amortization expense totaled $30 million. Amortization
expense associated with intangible assets totaled $14 million in
the first nine months of 2002, compared with $2 million in the
same 2001 period.

In the second quarter of 2002, we completed the evaluation of our
recorded goodwill for impairment in accordance with provisions of
SFAS No. 142. That evaluation concluded that none of
our goodwill was impaired. In connection with our
reclassification of certain assets previously accounted for as
goodwill to other intangible assets in 2002, we established a
deferred tax liability of $6 million in the second quarter of
2002. That provision was classified as a cumulative effect of
accounting change effective as of January 1, 2002. In accordance
with SFAS No. 142, we restated our results for the first quarter
of 2002, reducing net income for that period from the reported
$139 million, or $0.63 per common share (diluted) to $133
million, or $0.60 per common share (diluted).

Purchase of Terrorism Coverage and Exposure to Future Terrorist Events
- ----------------------------------------------------------------------
After the terrorist attack in September 2001, reinsurers, in
general, specifically excluded terrorism coverage from property
reinsurance treaties that subsequently renewed. As a result, in
the second quarter, we purchased limited specific terrorism
coverage in the form of two separate property reinsurance
treaties - a per-risk terrorism treaty and

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

a catastrophe terrorism treaty. The per-risk treaty provides
coverage on a per building, per event basis for a loss of up to $110
million, after a first layer of $15 million of losses retained by us.
The catastrophe terrorism treaty provides coverage of up to $200
million in excess of the first $100 million of losses resulting
from catastrophic losses caused by terrorism. Both treaties have
one additional set of limits for subsequent terrorism events. In
addition, we have renewed the majority of our reinsurance
treaties covering our workers' compensation and general liability
business. Thus far, those renewals included coverage for
terrorism. Our reinsurance treaties do not cover acts of
terrorism involving nuclear, biological or chemical events.

Discontinued Operations
- -----------------------
F&G Life - In September 2001, we completed the sale of our life
insurance company, Fidelity and Guaranty Life Insurance Company,
and its subsidiary, Thomas Jefferson Life, (together, "F&G Life")
to Old Mutual plc ("Old Mutual") for $335 million in cash and
$300 million in Old Mutual shares. Pursuant to
the sale agreement, we were originally required to hold the
190,356,631 Old Mutual shares we received for one year after the
closing of the transaction, and the proceeds from the sale of F&G
Life were subject to possible adjustment based on the movement of
the market price of Old Mutual's shares at the end of the
one-year period. The amount of possible adjustment was to be
determined by a derivative "collar" agreement included in the
sale agreement. In May 2002, Old Mutual granted us a release
from the one-year holding requirement in order to facilitate
our sale of those shares in a public placement
made outside the United States, together with a concurrent sale
of shares by Old Mutual by means of granting an overallotment
option, which was exercised by the underwriters. We sold all of
the Old Mutual shares we were holding on June 6, 2002 for a total
net consideration of $287 million, resulting in a pretax realized
loss of $13 million that was recorded as a component of
discontinued operations on our statement of operations.
The fair value of the collar agreement was recorded
as an asset on our balance sheet and
adjusted quarterly. At the time of the sale of the Old
Mutual shares, the collar had a fair value of $12 million,
which we agreed to terminate at no value as
part of the sale. The amount was recorded as a component of
discontinued operations on our statement of operations.

Standard Personal Insurance - In 1999, we sold our standard
personal insurance operations to Metropolitan Property and
Casualty Insurance Company (Metropolitan). Metropolitan purchased
Economy Fire & Casualty Company and subsidiaries (Economy), and
the rights and interests in those non-Economy policies
constituting the remainder of our standard personal insurance
operations. Those rights and interests were transferred to
Metropolitan by way of a reinsurance and facility agreement. We
guaranteed the adequacy of Economy's loss and loss expense
reserves, and we remain liable for claims on non-Economy policies
that result from losses occurring prior to the Sept. 30, 1999
closing date. Under the reserve guarantee, we will pay for any
deficiencies in those reserves and will share in any redundancies
that develop by Sept. 30, 2002. Any losses incurred by us under
these agreements are reflected in discontinued operations in the
period during which they are determined. As of Sept. 30, 2002,
our analysis indicated that we would owe Metropolitan
approximately $7 million related to the reserve guarantee, an
estimate that was unchanged from our estimate at Dec. 31, 2001.
We anticipate paying that liability in the fourth quarter of
2002. In the first nine months of 2002 and 2001, we recorded
pretax losses of $12 million and $7 million, respectively, in
discontinued operations, related to pre-sale claims.

Subsequent Event - Purported Class Action Lawsuits
- --------------------------------------------------
In October and early November 2002, three purported class action
lawsuits were filed against us, our chief executive officer and
our chief financial officer. The lawsuits make various
allegations relating to the adequacy of our previous public
disclosures and reserves relating to the Western MacArthur
asbestos litigation, and seek unspecified damages and other
relief. We view these lawsuits as without merit and intend to
contest them vigorously.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

Subsequent Event - Transfer of Ongoing Reinsurance Operations to
Platinum Underwriters Holdings, Ltd.
- ------------------------------------
On November 1, 2002, we completed the transfer of our continuing
reinsurance business and certain related assets, including
renewal rights, to Platinum Underwriters Holdings, Ltd.
("Platinum"), a newly formed Bermuda company that underwrites
property and casualty reinsurance business on a worldwide basis.
The Formation and Separation Agreement effecting this transfer was
executed on October 28, 2002, a form of which was filed as an
Exhibit to Platinum's Form S-1/A dated October 23, 2002 and is
incorporated herein by reference. This description is qualified
in its entirety by the terms of the Formation and Separation Agreement.
As part of this transaction, we also contributed $122 million of
cash to Platinum and transferred approximately $350 million in
assets relating to transferred insurance reserves. In exchange,
we acquired six million common shares, representing a 14%
ownership interest in Platinum, and a ten-year option to buy up
to six million additional common shares at an exercise price of
$27 per share, which represents 120% of the initial public
offering price of Platinum's shares.

We entered into various agreements with Platinum and its
subsidiaries effective on the closing date of Nov. 1, 2002 (or
the following day), including quota share agreements by which
Platinum reinsured St. Paul Fire and Marine Insurance Company and
St. Paul Reinsurance Company Limited, two of our subsidiaries,
for the majority of their reinsurance contracts incepting in
2002. Platinum did not reinsure the reinsurance liabilities of
St. Paul Fire and Marine Insurance Company and St. Paul
Reinsurance Company Limited relating to reinsurance contracts
incepting prior to January 1, 2002. We retained those
liabilities and the related assets and reserves.

We expect the transaction to result in an estimated pretax gain
of between $18 million and $20 million and an estimated after-tax
loss of between $40 million and $60 million, as we continue to
evaluate the recoverability of deferred tax assets associated
with the reinsurance liabilities that we retained.

Critical Accounting Policies
- ----------------------------
Overview - The St. Paul Companies, Inc. is a holding company with
subsidiaries operating in the property-liability insurance
industry and the asset management industry. Our significant
accounting policies are described in Note 1 to our 2001 annual
report to shareholders, which have been expanded in Note 1 to
this Form 10-Q. The following is a summary of the critical
accounting policies related to accounting estimates that 1)
require us to make assumptions about highly uncertain matters and
2) could materially impact our financial statements if we made
different assumptions.

Insurance Loss and Loss Adjustment Expense ("LAE") Reserves - Our
most significant estimates relate to our reserves for property-
liability insurance losses and LAE. We establish reserves for
the estimated total unpaid cost of losses and LAE, which cover
events that have already occurred. These reserves reflect our
estimates of the total cost of claims that were reported to us,
but not yet paid ("case" reserves), and the cost of claims
incurred but not yet reported to us ("IBNR" reserves).

For reported losses, we establish case reserves within the
parameters of coverage provided in the insurance policy or
reinsurance agreement. For IBNR losses, we estimate reserves
using established actuarial methods. We continually review our
reserves, using a variety of statistical and actuarial techniques
to analyze current claim costs, frequency and severity data, and
prevailing economic, social and legal factors. We also take into
consideration other variables such as past loss experience,
changes in legislative conditions, changes in judicial
interpretation of legal liability and policy coverages, changes
in claims handling practices, and inflation. We consider not
only monetary increases in the cost of what we insure, but also
changes in societal factors that influence jury verdicts and case
law, our approach to claims resolution, and, in turn, claim
costs.

For certain catastrophic events, there is considerable
uncertainty underlying the assumptions and associated estimated
reserves for losses and LAE. Reserves are reviewed regularly
and, as experience develops and additional information becomes
known, including revised industry estimates of the magnitude of a
catastrophe, the reserves are adjusted as we deem necessary.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

Because many of the coverages we offer involve claims that may
not ultimately be settled for many years after they are incurred,
subjective judgments as to our ultimate exposure to losses are an
integral and necessary component of our loss reserving process.
We analyze our reserves by considering a range of estimates
bounded by a high and low point, and record our best estimate
within that range. We adjust reserves established in prior years
as loss experience develops and new information becomes
available. Adjustments to previously estimated reserves, both
positive and negative, are reflected in our financial results in
the periods in which they are made, and are referred to as prior
period development. Because of the high level of uncertainty
involved in these estimates, revisions to our estimated reserves
could have a material impact on our results of operations in the
period recognized, and ultimate actual payments for claims and
LAE could turn out to be significantly different from our
estimates.

Reserves for environmental and asbestos exposures cannot be
estimated solely with the traditional loss reserving techniques
described above, which rely on historical accident year
development factors and take into consideration the previously
mentioned variables. Environmental and asbestos reserves are
more difficult to estimate than our other loss reserves because
of legal issues, societal factors and difficulty in determining
the parties who may ultimately be held liable. Therefore, in
addition to taking into consideration the traditional variables
that are utilized to arrive at our other loss reserve amounts, we
also look at the length of time necessary to clean up polluted
sites, controversies surrounding the identity of the responsible
party, the degree of remediation deemed to be necessary, the
estimated time period for litigation expenses, judicial
expansions of coverage, medical complications arising with
asbestos claimants' advanced age, case law, and the history of
prior claim development.

Reinsurance - Our reported written premiums, earned premiums and
losses and LAE reflect the net effects of assumed and ceded
reinsurance. Premiums are recorded at the inception of each
policy, based on information received from ceding companies and
their brokers. For excess-of-loss contracts, the amount of
premium is usually contractually documented at inception, and no
management judgment is necessary in accounting for this.
Premiums are earned on a pro rata basis over the coverage period.
For proportional treaties, the amount of premium is normally
estimated at inception by the ceding company. We account for
such premium using the initial estimates, and adjust them once a
sufficient period for actual premium reporting has elapsed.
Reinstatement and additional premiums are written at the time a
loss event occurs where coverage limits for the remaining life of
the contract are reinstated under pre-defined contract terms.
Reinstatement premiums are the premiums charged for the
restoration of the reinsurance limit of a catastrophe contract to
its full amount after payment by the reinsurer of losses as a
result of an occurrence. These premiums relate to the future
coverage obtained during the remainder of the initial policy
term, and are earned over the remaining policy term. Additional
premiums are premiums charged after coverage has expired, related
to experience during the policy term, which are earned
immediately.

Reinsurance accounting is followed for assumed and ceded
transactions when risk transfer requirements have been met.
These requirements involve significant assumptions being made
relating to the amount and timing of expected cash flows, as well
as the interpretation of underlying contract terms. Reinsurance
contracts that do not transfer significant insurance risk are
considered financing transactions and are required to be
accounted for as deposits.

We estimate, and record, an allowance for reinsurance amounts
that may not be collectible, due to credit issues, disputes over
coverage, or other considerations. Increasing the level of risk
and uncertainty involved in estimating reinsurance recoverables
is the difficulty of collecting when policies are old or lost.

Investments - We continually monitor the difference between our
cost and the estimated fair value of our investments, which
involves uncertainty as to whether declines in value are
temporary in nature.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

If we believe a decline in the value of a particular investment
is temporary, we record the decline as an unrealized loss in our
common shareholders' equity. If we believe the decline is "other
than temporary," we write down the carrying value of the
investment and record a realized loss on our statement of
operations. Our assessment of a decline in value includes our
current judgment as to the financial position and future
prospects of the entity that issued the investment security. If
that judgment changes in the future we may ultimately record a
realized loss after having originally concluded that the decline
in value was temporary. The following table summarizes the total
pretax gross unrealized loss recorded in our common shareholders'
equity at Sept. 30, 2002 and Dec. 31 2001, by invested asset
class.

(in millions) 2002 2001
----------- ----- -----
Fixed maturities (including
securities on loan) $ 79 $ 78
Equities 78 112
Venture capital 131 117
----- -----
Total unrealized loss $288 $307
===== =====

The following table summarizes, for all securities in an
unrealized loss position at Sept. 30, 2002 and Dec. 31, 2001, the
aggregate fair value and gross unrealized loss by length of time
those securities have been continuously in an unrealized loss
position.

September 30, 2002 December 31, 2001
------------------ -----------------
($ in millions) Gross Gross
------------- Fair unrealized Fair Unrealized
value loss value loss
----- ---------- ----- ----------
Fixed maturities
(including securities
on loan):
0 - 6 months $ 653 $ 24 $2,405 $ 47
7 - 12 months 163 27 86 8
Greater than 12 months 179 28 256 23
----- ----- ----- -----
Total 995 79 2,747 78
----- ----- ----- -----
Equities:
0 - 6 months 250 64 593 92
7 - 12 months 17 13 57 13
Greater than 12 months 1 1 20 7
----- ----- ----- -----
Total 268 78 670 112
----- ----- ----- -----

Venture capital:
0 - 6 months 91 57 104 52
7 - 12 months 12 20 39 34
Greater than 12 months 50 54 36 31
----- ----- ----- -----
Total 153 131 179 117
----- ----- ----- -----
Total $1,416 $ 288 $3,596 $ 307
===== ===== ====== =====

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

At Sept. 30, 2002, our fixed maturity investment portfolio
included non-investment grade securities and nonrated securities
that in total comprised approximately 6% of the portfolio.
Included in those categories at that date were securities in an
unrealized loss position that, in the aggregate, had an amortized
cost of $193 million and a fair value of $155 million, resulting
in a net pretax unrealized loss of $38 million. These securities
represented 1% of the total amortized cost and fair value of the
fixed maturity portfolio at Sept. 30, 2002, and accounted for 49%
of the total pretax unrealized loss in the fixed maturity
portfolio. Included in those categories at Dec. 31, 2001 were
securities in an unrealized loss position that, in the aggregate,
had an amortized cost of $212 million and a fair value of $193
million, resulting in a net pretax unrealized loss of $19
million. These securities represented 1% of the total amortized
cost and fair value of the fixed maturity portfolio at Dec. 31,
2001, and accounted for 24% of the total pretax unrealized loss
in the fixed maturity portfolio.

The following table presents information regarding our fixed
maturity investments, by remaining period to maturity date, that
were in an unrealized loss position at Sept. 30, 2002.

September 30, 2002

(in millions) Amortized Estimated
Cost Fair Value
--------- ----------
Remaining period to maturity date:
One year or less $ 66 $ 65
Over one year through five years 170 154
Over five years through ten years 377 336
Over ten years 149 136
Asset/mortgage-backed securities
with various maturities 312 304
----- -----
Total $1,074 $ 995
===== =====

Our investment portfolio includes non-publicly traded securities,
the vast majority of which are held in our venture capital and
real estate portfolios. Our venture capital investments
represent direct ownership interests in small- to medium-sized
companies, which are carried at estimated fair value. Fair
values are based on an estimate determined by an internal
valuation committee for securities for which there is no public
market. The internal valuation committee reviews such factors as
recent financings, operating results, balance sheet stability,
growth, and other business and market sector fundamental
statistics in estimating fair values of specific investments.
For our real estate joint ventures, we use the equity method of
accounting, meaning that we carry these investments at cost,
adjusted for our share of earnings or losses, and reduced by cash
distributions from the partnerships and valuation adjustments.
Due to time constraints in obtaining financial results from the
partnerships, the results of these operations are recorded on a
one-month lag. If events occur during the lag period, which are
material to our consolidated results, the impact is included in
current period results.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

The following discussion summarizes our process of reviewing our
investments for possible impairment.

Fixed Maturities and Securities on Loan - On a monthly basis,
these investments are reviewed by portfolio managers for
impairment. In general, the managers focus their attention on
those fixed-maturity securities whose market value was less than
80% of their amortized cost for at least one month in the
previous nine months. Factors considered in evaluating potential
impairment include the following:

- The degree to which any appearance of impairment is
attributable to an overall change in market conditions (e.g.,
interest rates) rather than changes in the individual factual
circumstances and risk profile of the issuer;
- The degree to which an issuer is current or in arrears in
making principal and interest payments on the debt securities
in question;
- The issuer's fixed-charge ratio at the date of
acquisition and date of evaluation;
- The issuer's current financial condition and its ability
to make future scheduled principal and interest payments on a
timely basis;
- The independent auditors' report on the issuer's recent
financial statements;
- Buy/hold/sell recommendations of outside investment
advisors and analysts; and
- Relevant rating history, analysis and guidance provided
by rating agencies and analysts.

Equities - On a monthly basis, these investments are reviewed by
portfolio managers for impairment. In general, the managers
focus their attention on those equity securities whose market
value was less than 80% of their cost for six consecutive months.
Factors considered in evaluating potential impairment include the
following:

- Whether the decline appears to be related to general
market or industry conditions or is issuer-specific;
- The relationship of market prices per share to book value
per share at date of acquisition and date of evaluation;
- The price-earnings ratio at the time of acquisition and
date of evaluation;
- Our ability and intent to hold the security for a period
of time sufficient to allow for recovery in the market
value;
- The financial condition and near-term prospects of the
issuer, including any specific events that may influence the
issuer's operations;
- The recent income or loss of the issuer;
- The independent auditors' report on the issuer's recent
financial statements;
- The dividend policy of the issuer at date of acquisition
and date of evaluation;
- Any buy/hold/sell recommendations of investment advisors;
- Rating agency announcements; and
- Price projections of investment analysts.

Venture Capital - On a quarterly basis, individual public
investments are analyzed for impairment by portfolio managers as
well as an internal valuation committee. In general, attention
is focused on those marketable (public equity) securities whose
market value has been less than cost for six consecutive months.
Factors considered are the same as those enumerated above for our
equity investments. With respect to non-publicly traded venture
capital investments, on a quarterly basis, the portfolio managers
as well as the internal valuation committee review and consider a
variety of factors in determining the potential for loss
impairment. Factors considered are:

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Consolidated Highlights (continued)
----------------------------------

- The issuer's most recent financing events;
- An analysis of whether fundamental deterioration has
occurred;
- Whether or not the issuer's progress has been
substantially less than expectations;
- Whether or not valuations have declined significantly in
the entity's market sector;
- Whether or not our internal valuation committee believes
there is a 50% probability that the issuer will need financing
within six months at a lower price than our carrying value;
and
- Whether or not we have the ability and intent to hold the
security for a period of time sufficient to allow for
recovery, enabling us to receive value equal to or greater
than our cost.

The quarterly (or monthly) valuation procedures described above
are in addition to the portfolio managers' ongoing responsibility
to frequently monitor developments affecting those invested
assets, paying particular attention to events that might give
rise to impairment write-downs.

The size of our investment portfolio allows our portfolio
managers a degree of flexibility in determining which individual
investments should be sold to achieve our primary investment
goals of assuring our ability to meet our commitments to
policyholders and other creditors and maximizing our investment
returns. In order to meet the objective of maintaining a
flexible portfolio that can achieve these goals, our fixed
maturity and equity portfolios are classified as "available-for-
sale." We continually evaluate these portfolios, and our
purchases and sales of investments are based on our cash
requirements, the characteristics of our insurance liabilities,
and current market conditions. At the time we determine an
"other than temporary" impairment in the value of a particular
investment to have occurred, we consider the current facts and
circumstances and make a decision to either record a writedown in
the carrying value of the security or sell the security; in
either case, recognizing a realized loss.

With respect to our venture capital portfolio, we manage our
portfolio to maximize return, evaluating current market
conditions and the future outlook for the entities in which we
have invested. Because this portfolio primarily consists of
privately-held, early-stage venture investments, events giving
rise to impairment can occur in a brief period of time (e.g., the
entity has been unsuccessful in securing additional financing,
other investors decide to withdraw their support, complications
arise in the product development process, etc.), and decisions
are made at that point in time, based on the specific facts and
circumstances, with respect to a recognition of "other than
temporary" impairment, or sale of the investment.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance
----------------------------

Overview
- --------
Our consolidated reported third-quarter written premiums of $1.81
billion were 11% below comparable 2001 premiums of $2.03 billion.
In the first nine months of 2002, reported premium volume of
$5.71 billion was less than 1% lower than reported 2001 nine-
month volume of $5.73 billion. Strong growth in the Specialty
Commercial and Surety and Construction segments in 2002 was
largely offset by premium declines in our Health Care,
Reinsurance and Lloyd's and Other segments, where our runoff
operations are concentrated. In addition, nine-month 2002
written premium volume was reduced by premiums ceded related to
the terrorism reinsurance policies purchased as described on
pages 34 and 35 of this report, whereas our reported 2001 nine-
month premium total was increased by $49 million of net
reinstated and additional premiums associated with the Sept. 11,
2001 terrorist attack. Excluding premiums in both years produced
by those operations being exited, written premium volume of $1.51
billion in the third quarter was 28% ahead of comparable 2001
premiums of $1.18 billion, and year-to-date volume of $4.41
billion was 24% higher than the adjusted 2001 nine-month premium
total of $3.56 billion. The strong growth was driven by price
increases averaging 27% in the first nine months of 2002 in our
U.S. commercial insurance underwriting operations. We expect the
favorable pricing environment to continue throughout the
remainder of 2002 and into 2003.

In the first nine months of 2002, we were not party to an all-
lines, corporate aggregate excess-of-loss reinsurance treaty. In
2001, we were party to such a treaty that we entered into
effective January 1 of that year, but coverage under that treaty
was not triggered in the first nine months of the year, and the
impact of the treaty on our nine-month results was limited to
cessions of a modest amount of deposit premiums to our reinsurer.

Our Reinsurance segment, St. Paul Re, was party to a separate
aggregate excess-of-loss treaty, unrelated to the corporate
treaty, in both 2002 and 2001. In the third quarter and first
nine months of 2002, coverage was not triggered under that
treaty, but St. Paul Re ceded a modest amount of net written and
earned deposit premiums to its reinsurer. In the third quarter
of 2001, St. Paul Re ceded $73 million of written premiums, $77
million of earned premiums and $171 million of insurance losses
and loss adjustment expenses under that treaty, for a net pretax
benefit of $94 million. For the nine months ended Sept. 30,
2001, St. Paul Re ceded $118 million of written premiums, $120
million of earned premiums and $273 million of insurance losses
and loss adjustment expenses for a net pretax benefit of $153
million.

Our reported consolidated loss ratio, which measures insurance
losses and loss adjustment expenses as a percentage of earned
premiums, was 77.5 for the third quarter of 2002, compared with a
reported loss ratio of 132.0 in the same 2001 period. The Sept.
11, 2001 terrorist attack accounted for 52.0 points of the
reported third-quarter 2001 loss ratio. Excluding the impact of
the terrorist attack and the benefit of the Reinsurance segment
treaty described above on third-quarter 2001 results, the
reported third-quarter 2002 loss ratio was over eight points
better than the adjusted third-quarter 2001 loss ratio.

For the first nine months of 2002, our reported consolidated loss
ratio of 84.3 included a 10.1 point impact from the asbestos
litigation settlement described on pages 30 and 31 of this
report, whereas the nine-month 2001 loss ratio of 95.3 included a
net 18.5 point detriment from the terrorist attack and the
benefit of the Reinsurance segment treaty. Excluding those
factors in both years, our year-to-date 2002 adjusted loss ratio
of 74.2 was six points better than the comparable 2001 adjusted
ratio of 80.2. The adjusted year-to-date loss ratios in 2002 and
2001 include $97 million and $195 million, respectively, of prior-
year reserve strengthening in our Health Care segment. The 2002
nine-month ratio also reflected significant prior-year loss
activity in our Lloyd's and Other segment. The improvement in

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

both the third-quarter and nine-month adjusted loss ratios in
2002 over the same periods of 2001 was concentrated in the
Reinsurance segment, reflecting the impact of our strategic
initiative to exit unprofitable market sectors and a decline in
catastrophe losses, and in our Specialty Commercial and
Commercial Lines segments, where significant price increases and
our focus on underwriting profitability have resulted in a
significant improvement in current accident year underwriting
results.

Catastrophe losses in the third quarter of 2002 totaled $49
million, compared with losses of $1.09 billion in last year's
third quarter, the majority of which resulted from the terrorist
attack. Since catastrophe losses are not recognized until an
event occurs, the occurrence of a catastrophic event can have a
material impact on our results of operations during the period
incurred. Subsequent changes to our estimate of catastrophic
losses, based on better information, also can materially impact
our results of operations during that period.

Our reported consolidated expense ratio, measuring underwriting
expenses as a percentage of written premiums, was 28.3 in the
third quarter of 2002, compared with the reported 2001 third-
quarter ratio of 25.6. The 2001 ratio was unusually low due to a
$90 million reduction in contingent commission expenses in our
Reinsurance segment subsequent to the Sept. 11, 2001 terrorist
attack. Excluding that reduction, and the impact of the
Reinsurance segment treaty, the 2002 third-quarter ratio was 1.4
points better than the adjusted third-quarter 2001 ratio of 29.7.
The improvement in 2002 reflected the positive effects of strong
price increases and our recent aggressive expense reduction
efforts. Through the first nine months of 2002, our reported
expense ratio of 28.3 was a point and a half better than the 2001
nine-month ratio of 29.8 (adjusted for the contingent commission
expense reduction and the Reinsurance segment treaty). The
impact of expense savings on our year-to-date expense ratio was
somewhat offset by written premiums ceded for terrorism coverage.

The table on the following page summarizes key financial results
(from continuing operations) by property-liability underwriting
business segment (underwriting results are presented on a GAAP
basis; combined ratios are presented on a statutory accounting
basis). In the fourth quarter of 2001, we implemented a new
segment reporting structure for our property-liability
underwriting operations. Data for 2001 in the table have been
reclassified to be consistent with the new segment reporting
structure.

Following the table is a detailed discussion of the results for
each segment. In those discussions, we sometimes use the term
"prior accident year loss development" (or similar terms) which
refers to an increase or decrease in losses recorded in the
current year that relate to losses incurred prior to 2002.
Similarly, we sometimes refer to "current accident year loss
development" (or similar terms), which refers to losses recorded
for events which occurred in 2002.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

Three Months Ended Nine Months Ended
(dollars in millions) September 30 September 30
------------------- ------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
Specialty Commercial
Written Premiums 32%* $691 $509 $1,850 $1,437
Underwriting Result $66 $(81) $122 $(74)
Combined Ratio 87.6 117.0 92.1 105.3

Commercial Lines
Written Premiums 24%* $457 $420 $1,364 $1,251
Underwriting Result $37 $(153) $(482) $(38)
Combined Ratio 89.5 139.1 136.4 101.8

Surety and Construction
Written Premiums 17%* $282 $227 $959 $748
Underwriting Result $(37) $(25) $(28) $15
Combined Ratio 115.5 112.0 102.0 96.7

Health Care
Written Premiums 4%* $46 $259 $223 $583
Underwriting Result $(79) $(70) $(178) $(324)
Combined Ratio 167.9 131.3 149.7 157.0

Lloyd's and Other
Written Premiums 7%* $106 $117 $419 $511
Underwriting Result --- $(58) $(230) $(117) $(281)
Combined Ratio 146.7 287.8 128.9 163.0
----- ----- ----- -----
Total Primary
Insurance
Written Premiums 84%* $1,582 $1,532 $4,815 $4,530
Underwriting Result $(71) $(559) $(683) $(702)
Combined Ratio 105.2 138.7 115.1 116.2

Reinsurance
Written Premiums 16%* $231 $495 $893 $1,196
Underwriting Result --- $(24) $(512) $(14) $(569)
Combined Ratio 108.2 218.0 100.3 154.7
----- ----- ----- -----
Total Property-
Liability Insurance
Written Premiums 100%* $1,813 $2,027 $5,708 $5,726
===
GAAP Underwriting
Result $(95) $(1,071) $ (697) $(1,271)
Statutory
Combined Ratio
Loss and Loss
Expense Ratio 77.5 132.0 84.3 95.3
Underwriting
Expense Ratio 28.3 25.6 28.3 28.6
----- ----- ----- -----
Combined Ratio 105.8 157.6 112.6 123.9
===== ===== ===== =====

* Percentage of year-to-date total.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

Underwriting Results by Segment
- -------------------------------

The following segment discussions exclude, in 2002, the impact of
the change in estimate of losses related to the Sept. 11, 2001
terrorist attack, and, in 2001, the original losses recorded as a
result of the terrorist attack. Additionally, the Reinsurance
segment discussion excludes the impact of cessions made under its
aggregate, excess-of-loss reinsurance treaty in 2001. These
items represent reconciling differences between generally
accepted accounting principles ("GAAP") and pro forma results.
The pro forma results are not in accordance with GAAP; however,
they are intended to provide a clearer understanding of the
underlying performance of our business operations. Our GAAP
segment results are presented on page 44 of this report, the
impact of the terrorist attack on our reported results for both
2002 and 2001 is discussed on pages 33 and 34 of this report, and
the impact of the Reinsurance segment treaty is discussed on page
42 of this report.

Specialty Commercial
- --------------------
The Specialty Commercial segment includes the following 11
business centers: Technology, Financial and Professional
Services, Ocean Marine, Catastrophe Risk, Public Sector Services,
Discover Re, Umbrella/Excess & Surplus Lines, Oil and Gas,
Transportation, National Programs and International Specialty.
These business centers are considered specialty operations
because each provides dedicated underwriting, claim and risk
control services that require specialized expertise, and each
focuses exclusively on the respective customer group each serves.
The following table summarizes results for this segment for the
third quarters and nine months ended September 30, 2002 and 2001
excluding the impact of the Sept. 11, 2001 terrorist attack for
all periods presented.

Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------
Net written premiums $691 $517 $1,850 $1,445
Percentage increase over 2001 34% 28%

Underwriting result $74 $(24) $129 $(18)

Statutory combined ratio:
Loss and loss adjustment
expense ratio 64.6 78.6 68.3 74.7
Underwriting expense ratio 21.8 25.9 23.4 26.3
----- ----- ----- -----
Combined ratio 86.4 104.5 91.7 101.0
===== ===== ===== =====

The strong premium growth in 2002 was driven by domestic price
increases that averaged 32% in the third quarter and 29% year-to-
date across the entire segment. The following discussion
summarizes results from several of the larger business centers in
this segment. All ratios quoted for both years exclude the
impact of the terrorist attack.

- Financial & Professional Services - Written premiums of
$167 million in the third quarter of 2002 grew 76% over the
same 2001 period, driven by new business and price increases
on domestic renewal business averaging 50%. Year-to-date
premiums of $391 million in 2002 grew 39% over the first nine
months of 2001. The loss ratio of 66.9 in the third quarter
of 2002 was over 12 points better than the comparable 2001
ratio of 79.6. The improvement was driven by favorable
current-year results.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

- Technology - Premium volume of $94 million in the third
quarter grew 4% over comparable third-quarter 2001 volume, as
a decline in new business was offset by domestic price
increases averaging 20% in the quarter. Through the first
nine months of 2002, premium volume of $294 million was 2%
ahead of the same period of 2001. The loss ratio was 50.7 in
the third quarter of 2002, virtually level with the 2001 third-
quarter ratio of 50.9.

- International Specialty - Premium volume of $88 million
in the third quarter of 2002 grew 13% over the 2001 third-
quarter total, with the increase primarily due to significant
price increases throughout the international markets in which
we do business. Year-to-date premium volume in 2002 totaled
$271 million, 32% higher than the same 2001 period. As part
of the strategic initiatives announced at the end of 2001, we
are now limiting our ongoing international business to Canada,
the United Kingdom and Ireland. The third-quarter 2002 loss
ratio in this business center of 67.9 was significantly better
than the comparable 2001 ratio of 104.5, reflecting the impact
of our withdrawal from unprofitable international markets.

- Public Sector - Written premiums totaled $87 million in
2002's third quarter, up 11% from the same period of 2001
primarily due to price increases averaging 22%, which offset a
reduction in new business. Nine-month 2002 premium volume of
$188 million was also 11% ahead of the same period of last
year. The third-quarter loss ratio of 72.1 in 2002 was
slightly better than the comparable 2001 ratio of 72.4,
primarily due to improvement in current-year loss experience.

- Umbrella/Excess & Surplus Lines - Price increases
averaging 47% and new business combined to produce third-
quarter 2002 written premiums of $64 million, compared with
premiums of $42 million in the same period of 2001. Year-to-
date premium volume of $187 million was nearly double the nine-
month 2001 total of $98 million. The nine-month 2002 loss
ratio of 77.7 was significantly better than the comparable
2001 ratio of 97.9, reflecting the benefit of price increases
and a reduction in prior-year loss experience.

Commercial Lines
- ----------------
The Commercial Lines segment includes our Small Commercial,
Middle Market Commercial, Large Account Casualty and Property
Solutions business centers, as well as the results of our limited
involvement in insurance pools. The Small Commercial business
center services commercial firms that typically have between one
and fifty employees through its proprietary Mainstreet St. Paul
(SM) and Advantage St. Paul (SM) products, with a particular
focus on offices, wholesalers, retailers, artisan contractors and
other service risks. The Middle Market Commercial business
center offers comprehensive insurance coverages for a wide
variety of commercial enterprises where annual insurance costs
range from $75,000 to $1 million. The Large Account Casualty
business center offers insurance programs to larger commercial
businesses that are willing to share insurance risk through
significant deductibles and self-insured retentions. The
Property Solutions business center combines our Large Accounts
Property business with a portion of our catastrophe risk business
and allows us to take a unified approach to large
property risks. The following table summarizes results for
this segment for the third quarters and nine months ended
September 30, 2002 and 2001, excluding the impact of the Sept.
11, 2001 terrorist attack for all periods presented.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------
Net written premiums $457 $447 $1,364 $1,279
Percentage increase over 2001 2% 7%

Underwriting result $22 $(7) $(497) $108

Statutory combined ratio:
Loss and loss adjustment
expense ratio 62.5 72.1 107.3 59.5
Underwriting expense ratio 30.6 28.5 30.3 29.7
----- ----- ----- -----
Combined ratio 93.1 100.6 137.6 89.2
===== ===== ===== =====

The lack of significant premium growth in the third quarter and
first nine months of 2002 compared with the same 2001 periods
reflected our efforts to actively manage our growth while
focusing on increasing our profitability. We have capitalized on
favorable market conditions in 2002 by implementing significant
price increases, rejecting inadequately priced new and renewal
business, and selectively adding new business that meets our
pricing and underwriting criteria. Price increases across the
entire segment averaged 25% in the third quarter and 24% year-to-
date. Middle Market Commercial premiums in the third quarter
totaled $252 million, compared with $238 million in the same 2001
period. In our Small Commercial business center, third quarter
premiums of $164 million grew 18% over the third quarter of 2001.
These increases were substantially offset by a reduction in our
involvement in certain insurance pools.

The nearly ten-point improvement in the third-quarter 2002 loss
ratio compared with the same period of 2001 reflected favorable
current-year loss experience throughout the segment, including
the absence of significant catastrophe losses, as well as
favorable prior-year loss development. Our reported year-to-date
loss ratio and underwriting result in 2002 were dominated by the
$585 million pretax impact of the asbestos litigation settlement
in the second quarter described on pages 30 and 31 of this
report, which was recorded entirely in the Commercial Lines
segment. Excluding the impact of that settlement, the nine-month
2002 loss ratio was 62.5, three points worse than the comparable
2001 loss ratio. Last year's reported nine-month loss ratio was
unusually favorable due to the impact of a $100 million first-
quarter reduction in previously established reserves that
pertained to certain business written in years prior to 1989.
Those reserves were reduced based on actuarial analyses, which
indicated that ultimate losses on that business would fall short
of the established reserves. Excluding the reserve reduction in
2001, the adjusted 2002 nine-month ratio was over five points
better than the adjusted nine-month 2001 loss ratio of 68.1.
Current accident year results in the first nine months of 2002
for all business centers in the Commercial Lines segment improved
over comparable results in 2001, reflecting the impact of price
increases and an improvement in the quality of our book of
business. The slight increase in the nine-month 2002 expense
ratio over the same period of 2001 reflected the impact of
premiums ceded for terrorism reinsurance coverage, which
increased the commission component of the expense ratio. In
addition, our investment in developing a small commercial
business platform in 2002 substantially offset cost savings
realized through our expense reduction initiatives in this
segment. The 2001 year-to-date expense ratio was favorably
impacted by a reduction in our accrual for guaranty funds
(recorded in "Pools and other").

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

Surety and Construction
- -----------------------
Our Surety business center underwrites surety bonds, which
guarantee that third parties will be indemnified against the
nonperformance of contractual obligations. Our Construction
business center provides insurance products and services to a
broad range of contractors and owners of construction projects.
The following table summarizes key financial data for this
segment for the third quarters and nine months ended September
30, 2002 and 2001, excluding the impact of the terrorist attack
for all periods.

Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------
Net written premiums $282 $228 $959 $749
Percentage increase over 2001 24% 28%

Underwriting result $(37) $(23) $(28) $18

Statutory combined ratio:
Loss and loss adjustment
expense ratio 77.8 72.9 67.8 59.7
Underwriting expense ratio 37.7 38.0 34.2 36.7
----- ----- ----- -----
Combined ratio 115.5 110.9 102.0 96.4
===== ===== ===== =====

Premium volume in our Surety business center totaled $138 million
in the third quarter of 2002, 31% higher than premiums of $106
million in the same 2001 period. The increase was primarily
driven by premiums generated by London Guarantee Insurance
Company, acquired near the end of March 2002. (See page 32 of
this report for further details about the acquisition), and
premiums resulting from our acquisition in late 2001 of the right
to seek to renew surety business previously underwritten by
Fireman's Fund Insurance Company. Surety's year-to-date premium
volume of $389 million grew 22% over the same period of 2001, due
to $41 million of premiums from London Guarantee and $45 million
of premiums from Fireman's Fund renewals. Excluding the impact
of the two acquisitions, our surety premium volume through the
first nine months of 2002 was slightly below comparable 2001
levels, reflecting the tightened underwriting standards
instituted over the last two years, particularly with respect to
our commercial surety business, amid an uncertain economic
environment. In the Construction business center, third-quarter
premium volume of $144 million was 18% ahead of the same period
of 2001, and nine-month premium volume of $570 million was 33%
higher than 2001. The strong growth was driven by price
increases averaging 29% in the first nine months of the year, as
well as new business.

The Surety business center accounted for the deterioration in
underwriting results in this segment compared with the third
quarter and first nine months of 2001. In the third quarter we
recorded a pretax loss of $34 million after a judicial decision
regarding surety bonds issued in connection with the construction
of two large Brazilian oil rigs (see further discussion on page
31 of this report). Excluding that loss, Surety's third-quarter
2002 loss ratio was 59.6, compared with 48.4 in the same 2001
period. The deterioration in the loss ratio was primarily the
result of reinstatement premiums paid for contract surety reinsurance,
which reduced our net earned premiums, as well as increased losses
in our contract surety business where we have experienced an increase
in frequency of low-severity losses.

The commercial surety business tends to be characterized by low
frequency but potentially high severity losses. Since November of
2000, we have taken actions to significantly reduce our exposure
in our commercial surety business. Nonetheless, we continue to
have commercial surety exposure for outstanding bonds. In that regard,
we have exposures related to commercial surety bonds issued on
behalf of companies which have experienced deterioration in
creditworthiness. Given the current economic climate and its
impact on these and other companies, there is an

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

increased likelihood that we may experience an increase in filed
claims and, possibly, incur high severity losses. Such losses
would be recorded if and when claims are filed and determined to be
valid.

With regard to commercial surety bonds issued on behalf of companies
operating in the energy trading sector (excluding our exposure to
Enron Corporation, which is discussed on page 17 of our 2001 annual
report to shareholders), our aggregate pretax exposure, net of
facultative reinsurance, is with six companies for a total of
approximately $464 million ($388 million of which is from gas
supply bonds), an amount which will decline over the
contract periods. The largest individual exposure (Aquila, Inc. and
subsidiaries) approximates $200 million (pretax). These companies
all continue to perform their bonded obligations and, therefore,
no claims have been filed. In the event a claim is filed and paid,
we would have the rights of an unsecured creditor with respect
to the amount paid.

Construction's third-quarter loss ratio of 70.7 was significantly
improved over the comparable 2001 loss ratio of 92.9 (as adjusted
to exclude the impact of the terrorist attack), due to favorable
current-year loss development and significant rate increases in
recent quarters.

The segment-wide nine-month 2002 expense ratio was 2.5 points
better than the comparable 2001 ratio, reflecting the combined
impact of strong written premium growth and the continued success
of expense reduction initiatives in both the Surety and
Construction business centers.

Health Care
- -----------
Our Health Care segment historically has provided property-
liability insurance throughout the entire health care delivery
system. In late 2001, we announced our intention to exit that
market, subject to applicable regulatory requirements. As a
result, we consider the entire segment to be in runoff in 2002.
The following table summarizes key financial data for the Health
Care segment for the quarters and nine months ended September 30,
2002 and 2001 excluding the impact of the terrorist attack for
all periods presented.

Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------
Net written premiums $46 $263 $223 $587
Percentage decline from 2001 (82%) (62%)

Underwriting result $(79) $(64) $(179) $(318)

Statutory combined ratio:
Loss and loss adjustment
expense ratio 132.3 106.3 119.6 132.0
Underwriting expense ratio 35.6 21.8 30.1 23.6
----- ----- ----- -----
Combined ratio 167.9 128.1 149.7 155.6
===== ===== ===== =====

Written premiums in the third quarter of 2002 primarily consisted
of premiums generated by extended reporting endorsements, which
we are required to offer to claims-made policyholders at the time
their policies are nonrenewed. These endorsements cover losses
incurred in prior periods that have not yet been reported.
Unlike typical policies, premiums on these endorsements are fully
earned, and the expected losses are fully reserved, at the time
the endorsement is written. Our exit from the Health Care market
continues to proceed as planned when we announced the action at
the end of 2001. As of Sept. 30, 2002, we had obtained
regulatory approval to cease underwriting new business in all but
two states, and we are nonrenewing policies where such approval
had been obtained. The two states where regulatory approval is
pending accounted for approximately 6% of net written premium
volume in the Health Care segment for the year ended Dec. 31,
2001.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

The underwriting loss in the third quarter consisted
predominantly of current-year losses related to reporting
endorsements underwritten in 2002. No additional losses related
to prior years were recorded in the third quarter. The year-to-
date underwriting loss included $97 million in provisions to
increase prior accident year loss reserves. In the year ended
Dec. 31, 2001, we recorded cumulative provisions of $735 million
to strengthen prior accident year loss reserves in this segment.
The following table presents a rollforward of loss activity for
the domestic portion of our Health Care segment for the third
quarters and nine months ended Sept. 30, 2002 and 2001.

Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(in millions) 2002 2001 2002 2001
----------- ------ ------ ------ ------
Reserves for losses and
allocated LAE at beginning
of period $2,377 $2,195 $2,577 $2,201
Losses and allocated
LAE incurred:
Reserve strengthening - - 97 195
Other incurred 182 293 418 580
Losses and LAE paid (268) (262) (801) (750)
----- ----- ----- -----
Reserve for losses and
allocated LAE at end of
period $2,291 $2,226 $2,291 $2,226
===== ===== ===== =====

Number of claims paid
during period 3,913 5,313 12,785 15,706
Number of claims pending
at end of period 16,337 19,196 16,337 19,196

The following presents a summary, by quarter, of trends we
observed within our Health Care segment in 2001 and the first
nine months of 2002. In general, the reserve increases discussed
below have primarily resulted from claim payments being greater
than anticipated due to the recent escalation of large jury
awards, which included substantially higher than expected pain
and suffering awards. This affected our view of not only those
cases going to trial, but also our view of all cases where
settlements are negotiated and the threat of a large jury verdict
aids the plaintiff bar in the negotiation process. St. Paul Fire
and Marine (F&M), the company's primary U.S. insurance company
writing medical malpractice coverage prior to the acquisition of
MMI (and its primary company, ACIC) had, as had most of the
industry, been under a period of relatively benign inflation on
this line of business up until the late 1990's.The recent
escalation in claim costs in the periods noted below that
resulted from these developments was significantly higher than
originally projected trends (which had not forecasted the change
in the judicial environment), and has been considered in our
actuarial analysis and the projection of ultimate loss costs. In
addition, a portion of the reserve increase in the fourth quarter
of 2001 resulted from information obtained from the work of a
Health Care Claims Task Force, created during the first half of
2001, which focused resolution efforts on our largest claims with
the intent of lowering our ultimate loss costs.

In the first quarter of 2001, we determined that trends that had
begun to appear in the third and fourth quarters of 2000 with
respect to the book of business of American Continental Insurance
Company ("ACIC") (acquired in our April 2000 purchase of MMI
Companies, Inc.) were outside of expected trends, resulting in
increases to our expected average case reserve outstanding and
average paid claims. Within the St Paul Fire and Marine
Insurance Company ("F&M") book of business, we also observed a
continuation of the increase in the average outstanding case
reserve levels and in the average paid claims. We believe the
principal cause of these increases was the judicial trend noted
above. We revised our estimate of ultimate losses and made a
reserve addition of $90 million.

In the second quarter of 2001, we determined that the sharp
increases in average paid claims and outstanding case reserve
levels during the prior quarters and the second quarter of 2001,
indicated a need to increase our actuarial estimate of required
reserves (without changing our projected trends) in light of the
adverse judicial awards noted above, and we made a reserve
addition of $105 million.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

In the third quarter of 2001, while case reserve levels
increased, the average paid claims were within an expected level.
Certain of our models indicated a need for increased reserves,
while other methods, including the results of stress testing the
underlying assumptions (primarily the level of case reserves and
paid activity), indicated that reserves were appropriate in total
for our Health Care segment. Management considered all available
information and determined that reserves were appropriate as of
September 30, 2001.

In the fourth quarter of 2001, we revised certain actuarial
assumptions based on the adverse trends observed in the prior
three quarters. Average case reserve levels increased
significantly due to our efforts to identify cases that could be
expected to have a significant impact and manage them to closure
more actively. After careful analysis and determination of
development patterns and the resulting revision of our actuarial
assumptions, a charge to reserves of $540 million was determined
to be necessary and was appropriately recorded.recorded during
the fourth quarter of 2001.

In the first quarter of 2002, average paid claims and average
case reserve data came in at expected levels. No additional
reserve action was taken.

In the second quarter of 2002, average paid claims were again
somewhat above expectations, and a reserve addition of $97
million was made to reflect these increases.

In the third quarter of 2002, average paid claims and the
continuing decrease in the number of open claims were both within
our expectations. Although we observed an increase in the
average case reserve outstanding, such increase did not require
a reserve charge given the favorable effects we anticipate
realizing, now that we have begun to execute our claims strategy
in a runoff environment. We expect that our execution of such
strategy will result in significant savings on the ultimate
claim costs.

Our continuing actuarial analyses may or may not conclude that
further reserve adjustments are necessary going forward, in part
due to the uncertainty related to our assumptions regarding the
handling of runoff claims that could prove to be incorrect.

The following table summarizes, for the domestic portion of our
Health Care segment, for each quarter of 2002 and 2001, our
ending net reserves for losses and allocated loss adjustment
expenses, any prior-period reserve strengthening recorded in the
quarter, and the percentage such reserve strengthening
represented in relation to beginning of period total loss
liability.

($ in millions)
------------- Percent of
Reserve Prior Quarter
Quarter Ending Reserves Adjustment Reserves
------- --------------- ---------- -------------
2001 Q1 $2,195 $90 4%
2001 Q2 $2,195 $105 5%
2001 Q3 $2,226 - -
2001 Q4 $2,577 $540 24%

2002 Q1 $2,439 - -
2002 Q2 $2,377 $97 4%
2002 Q3 $2,291 - -

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

Lloyd's and Other
- -----------------
Our Lloyd's and Other segment consists of the following
components: our operations at Lloyd's, where we provide capital
to five underwriting syndicates and own a managing agency; our
participation in the insuring of the Lloyd's Central Fund, which
would be utilized if an individual member of Lloyd's were to be
unable to pay its share of a syndicate's losses; and results from
Unionamerica, a London-based insurance operation we acquired in
April 2000 as part of our purchase of MMI Companies, Inc. In
late 2001, we announced that we would cease underwriting certain
business through Lloyd's, and would, when current contractual
commitments expire in 2003, end our involvement in the insuring
of the Lloyd's Central Fund. Our ongoing business in the Lloyd's
and Other segment at the beginning of 2002 consisted of the
following coverages offered through our involvement at Lloyd's:
aviation, marine, financial and professional services, property
insurance and personal lines, including kidnap and ransom,
accident and health, creditor and other personal specialty
products. In April 2002, we announced that we would further
narrow the focus of our operations at Lloyd's to the following
key product lines: marine, personal lines, property and aviation,
and, as a result of changing market conditions, resume
underwriting U.S. surplus lines business. At Unionamerica, we
ceased underwriting new business in late 2000 except for that
business we had been contractually obligated to underwrite
through 2004. Effective in the second quarter of 2002, we were
no longer obligated to underwrite this business at Unionamerica.
The following table summarizes this segment's results for the
quarters and nine months ended September 30, 2002 and 2001,
excluding the impact of the Sept. 11, 2001 terrorist attack in
all periods presented.

Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------
Net written premiums $103 $117 $415 $511
Percentage decline from 2001 (12%) (19%)

Underwriting result $(73) $(75) $(132) $(126)

Statutory combined ratio:
Loss and loss adjustment
expense ratio 119.7 126.3 103.6 101.3
Underwriting expense ratio 38.1 35.2 28.9 26.3
----- ----- ----- -----
Combined ratio 157.8 161.5 132.5 127.6
===== ===== ===== =====

The decline in reported premium volume in the third quarter and
first nine months of 2002 compared with the same periods of 2001
reflected the impact of our reduced involvement at Lloyd's and a
decrease in premiums generated by Unionamerica. Excluding those
lines of business in runoff, premium volume in the third quarter
and first nine months of 2002 increased 77% and 42%,
respectively, over the same periods of 2001, driven entirely by
strong price increases throughout our ongoing operations in this
segment.

Our runoff operations at Lloyd's and Unionamerica accounted for
the majority of underwriting losses for all periods presented in
the above table. Provisions to strengthen prior-year loss
reserves were the primary factor contributing to those losses in
all periods.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

Reinsurance
- -----------
Our Reinsurance segment ("St. Paul Re") underwrites treaty and
facultative reinsurance for property, liability, ocean marine,
surety and certain specialty classes of coverage, and also
underwrites "nontraditional" reinsurance, which provides limited
traditional underwriting risk combined with financial risk
protection. In late 2001, we announced our intention to cease
underwriting certain types of reinsurance coverages in 2002, as
described in more detail on page 32 of this report. As discussed
in more detail on page 36 of this report, in November 2002, we
transferred our ongoing reinsurance operations to Platinum
Underwriters Holdings, Ltd. while retaining liabilities generally
for reinsurance contracts incepting prior to January 1, 2002.
The following table summarizes key financial data for the
Reinsurance segment for the third quarters and first nine months
of 2002 and 2001, excluding the impact of the Sept. 11, 2001
terrorist attack on all periods and the impact on both periods of
2001 of the aggregate excess-of-loss reinsurance treaty exclusive
to this segment that is described on page 42 of this report.

Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------
Net written premiums $234 $479 $897 $1,225
Percentage increase over 2001 (51%) (27%)

Underwriting result $(4) $(106) $7 $(222)

Statutory combined ratio:
Loss and loss adjustment
expense ratio 75.3 91.6 69.9 85.9
Underwriting expense ratio 25.9 33.9 28.3 34.1
----- ----- ----- -----
Combined ratio 101.2 125.5 98.2 120.0
===== ===== ===== =====

After the actions announced at the end of 2001, our Reinsurance
segment in 2002 has focused almost exclusively on property
catastrophe reinsurance, excess-of-loss casualty reinsurance,
marine reinsurance and traditional finite reinsurance. The
decline in premium volume in the third quarter and first nine
months of 2002 reflected our narrowed business focus, and our
total reinsurance exposures were down significantly compared with
2001. Market conditions in worldwide reinsurance markets in 2002
have been characterized by favorable terms and conditions, and
strong price increases amid heightened demand for reinsurance
coverages.

The significant improvement in St. Paul Re's underwriting result
in the third quarter and first nine months of 2002 compared with
the same prior-year periods reflected the positive impact of
significant price increases, as well as the success of our
strategic emphasis on those lines of business we believe offer
the greatest potential for profitable results. Third-quarter
2002 results in this segment included catastrophe losses of $30
million related to floods in Europe, whereas third-quarter 2001
results included losses of $50 million resulting from the
explosion of a chemical plant in Toulouse, France. The strong
improvement in the 2002 year-to-date expense ratio was primarily
the result of actions we have taken in 2002 to reduce expenses in
this segment, including personnel reductions and the closing of
branch offices in several locations around the world.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

Investment Operations
- ---------------------
Net pretax investment income of $300 million in our property-
liability insurance operations in the third quarter of 2002 was
5% higher than comparable 2001 income of $285 million. Through
the first nine months of 2002, investment income totaled $873
million, down 4% from the prior-year total of $910 million. Last
year's nine-month total was unusually high due to $22 million of
income generated by the sale of certain properties in our real
estate investment portfolio. The growth in third-quarter
investment income over 2001 reflected the impact of our strategic
decision in 2002 to liquidate a significant portion of our equity
portfolio and redeploy those funds in fixed-maturity investments.
In addition, third-quarter 2002 investment income benefited from
returns on the net $842 million of proceeds received from our
issuance of common stock and equity units in July 2002.

Our investment income in recent years has been negatively
impacted by declining yields on new investments and a general
reduction in the amount of funds available for investment due to
significant cash payments for insurance losses and loss
adjustment expenses, particularly in our Health Care, Reinsurance
and Lloyd's and Other segments. We also made cumulative premium
payments totaling $639 million between the fourth quarter of 1999
and the first quarter of 2001 related to our corporate aggregate
excess-of-loss reinsurance program. In addition, during the
period from Jan. 1, 1999 through the third quarter of 2001, we
repurchased 42 million of our common shares for a total cost of
$1.48 billion, further reducing funds available for investment.
Since the end of 1999, average new money rates on taxable and tax-
exempt securities have fallen from 7.2% and 5.4%, respectively,
to 5.5% and 3.6%, respectively, at Sept. 30, 2002.

We expect future investment income levels to benefit from
continued price increases and improving loss experience in our
ongoing insurance operations, as well as continuing returns on
the proceeds received from the recent common stock and equity
unit offerings. These factors will be mitigated somewhat,
however, by the payment of claims related to the September 11,
2001 terrorist attack, as well as claims payable from reserves
related to our operations in runoff, as the investment assets
related to those reserves decline. In addition, the June 2002
payment of $248 million and the anticipated January 2003 payment
of $740 million related to the Western MacArthur asbestos
litigation settlement and fees will negatively impact our
investment income in future periods.

Pretax realized investment losses in our property-liability
insurance operations totaled $74 million in the third quarter of
2002, compared with realized losses of $77 million in the same
2001 period. Losses in this year's third quarter were centered
in our venture capital portfolio, where we sold the vast majority
of our partnership investment holdings resulting in a total
pretax loss of approximately $56 million. As part of our
strategic reallocation of our investment portfolio, we have
reduced our equity investments by $665 million (at cost) since
the end of 2001. Realized losses from equity investments in the
third quarter totaled $34 million. Our year-to-date realized
investment losses of $151 million included the losses from the
sale of venture capital partnerships and total losses of $41
million from equity investments. In addition, we recorded
writedowns in the carrying value of WorldCom Corporation and
Adelphia Corporation bonds in our portfolio totaling $17 million
in the first nine months of the year. Net pretax realized losses
were $20 million in the first nine months of 2001 despite a gain
of $77 million on the sale of our investment in RenaissanceRe
Holdings Ltd., a Bermuda-based reinsurer.

Included in the 2002 realized losses were other than temporary
and permanent writedowns of $93 million in the third quarter and
$133 million year-to-date. The third-quarter writedowns included
$50 million in venture capital, $26 million in fixed maturities,
and $17 million in equities. Through nine months, the writedowns
in those investment classes totaled $77 million, $39 million, and
$17 million, respectively.

During the year ended Dec. 31, 2001, we recorded a $20 million
write-down in the carrying value of various Argentina government
and corporate bonds following economic upheaval in that country,
and also recorded a $19 million write-down in the carrying value
of Enron Corporation bonds following that company's bankruptcy
filing. We recorded additional other-than-temporary impairment
write-downs totaling $38 million in our fixed-maturity portfolio
during 2001 related to various other issuers, with $12 million
due to other companies filing for bankruptcy,

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Property-Liability Insurance (continued)
---------------------------------------

and the remainder related to credit risk associated with the issuers'
deteriorating financial position and anticipated restructurings. Each
of these write-downs was carried out by writing our stated book
value down to quoted market prices.

In addition, we recorded write-downs, which in the aggregate
totaled $88 million, related to 31 of our direct venture capital
investments in 2001. For publicly-traded securities, the amounts
of the write-downs were determined by writing our investments
down to quoted market prices. For non-publicly-traded
securities, the write-downs were reviewed and approved by our
internal valuation committee, which, on a quarterly basis,
evaluates recent financings, operating results, balance sheet
stability, growth, and other business and sector fundamentals in
determining fair values of the specific investments. On an
ongoing basis, our venture capital portfolio managers monitor the
activities of both our publicly-traded and non-publicly-traded
securities, keeping in mind developments that might give rise to
necessary valuation adjustments. These managers may report any
such developments to the internal valuation committee.

The market value of our $16.2 billion fixed maturity portfolio
exceeded its cost by $1.04 billion at Sept. 30, 2002.
Approximately 94% of that portfolio is rated at investment grade
(BBB or above), with a weighted average rating of AA. The
weighted average pretax yield on those investments was 6.4% at
Sept. 30, 2002, down from 6.8% a year ago.

Environmental and Asbestos Claims
---------------------------------

We continue to receive claims, including through lawsuits,
alleging injury or damage from environmental pollution or seeking
payment for the cost to clean up polluted sites. We also receive
asbestos injury claims, including through lawsuits, arising out
of coverages under general liability policies. Most of these
claims arise from policies written many years ago. Significant
legal issues, primarily pertaining to the scope of coverage,
complicate the determination of our alleged liability for both
environmental and asbestos claims.

In our opinion, court decisions in certain jurisdictions have
tended to broaden insurance coverage for both environmental and
asbestos matters beyond the intent of the original insurance
policies.

Our ultimate liability for environmental claims is difficult to
estimate because of these legal issues. Insured parties are
seeking recovery for losses not covered in their respective
insurance policies, and the ultimate resolution of these claims
may be subject to lengthy litigation, making it difficult to
estimate our potential liability. In addition, variables, such
as the length of time necessary to clean up a polluted site and
controversies surrounding the identity of the responsible party
and the degree of remediation deemed necessary, make it difficult
to estimate the total cost of an environmental claim.

Estimating the ultimate liability for asbestos claims is more
difficult. The primary factors influencing our estimate of the
total cost of these claims are case law and a history of prior
claim development, both of which continue to evolve and are
complicated by aggressive litigation against insurers, including
us. Estimating ultimate liability is also complicated by the
difficulty of assessing what rights, if any, we may have to seek
contribution from other insurers of any policyholder.

Late in 2001, we hired a new Executive Vice President of Claims,
with extensive experience with environmental and asbestos claims
handling and environmental and asbestos reserves, who conducted a
summary level review of our environmental and asbestos reserves.
As a result of observations made in this review, we undertook
more detailed actuarial and claims analyses of environmental
reserves. No adjustment to reserves was made in the fourth
quarter of 2001, since management did not have a sufficient basis
for making an adjustment until such supplemental analyses were
completed, and we believed our environmental and asbestos
reserves were adequate as of December 31, 2001.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Environmental and Asbestos Claims (continued)
--------------------------------------------

Our historical methodology (through first quarter 2002) for
reviewing the adequacy of environmental and asbestos reserves
utilized a survival ratio method, which considers ending reserves
in relation to calendar year paid losses. When the environmental
reserve analyses were completed in the second quarter of 2002, we
supplemented our survival ratio analysis with the detailed
additional analyses referred to above, and concluded that our
environmental reserves were redundant by approximately $150
million. Based on our additional analyses, we released
approximately $150 million of environmental reserves in the
second quarter of 2002. Had we continued to rely solely on our
survival ratio analysis, we would have recorded no adjustment to
our environmental reserves through the six months ended June 30,
2002.

We also supplemented our survival ratio analysis of asbestos
reserves with a detailed claims analysis. We determined that,
excluding the impact of the Western MacArthur settlement, our
asbestos reserves were adequate; however, including that impact,
we determined that our asbestos reserves were inadequate. (See
further discussion regarding our asbestos reserves on the
following page).

As a result of developments in the asbestos litigation
environment generally, we determined in the first quarter of 2002
that it would be desirable to seek earlier and ultimately less
costly resolutions of certain pending asbestos-related
litigations. As a result, we have decided where possible to seek
to resolve these matters while continuing to vigorously assert
defenses in pending litigations. We are taking a similar
approach to environmental litigations. As discussed in more
detail on pages 30 and 31 of this report, in the second quarter
of 2002 we entered into a definitive agreement to settle asbestos
claims for a total cost of $988 million arising from an insuring
relationship one of our subsidiaries had with Western MacArthur
Company.

The following table represents a reconciliation of total gross
and net environmental reserve development for the nine months
ended Sept. 30, 2002, and the years ended Dec. 31, 2001 and 2000.
Amounts in the "net" column are reduced by reinsurance
recoverables. The disclosure of environmental reserve
development includes all claims related to environmental
exposures. Additional disclosure has been provided to separately
identify loss payments and reserve amounts related to policies
that were specifically underwritten to cover environmental
exposures, referred to as "Underwritten," as well as amounts
related to environmental exposures that were not specifically
underwritten, referred to as "Not Underwritten." In 1988, we
completed our implementation of a pollution exclusion in our
commercial general liability policies; therefore, activity
related to accident years after 1988 generally relates to
policies underwritten to include environmental exposures.

The amounts presented for paid losses in the following table as
"Underwritten" include primarily exposures related to accident
years after 1988 for policies which the underwriter contemplated
providing environmental coverage. In addition, certain pre-1988
exposures, such as oil and gas exposures, transportation of
hazardous materials exposures, and first party losses are
included since, they too, were contemplated by the underwriter to
include environmental coverage. "Not Underwritten" primarily
represents exposures related to accident years 1988 and prior for
policies which were not contemplated by the underwriter to
include environmental coverage.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Environmental and Asbestos Claims (continued)
--------------------------------------------

Environmental 2002
------------- (nine months) 2001 2000
------------ ----------- -----------
(In millions) Gross Net Gross Net Gross Net
----------- ----- ---- ----- ---- ----- ----
Beginning reserves $582 $507 $665 $563 $698 $599
Incurred losses (150) (152) 1 18 25 14
Paid losses:
Not underwritten (37) (30) (73) (63) (45) (38)
Underwritten (11) (10) (11) (11) (13) (12)
----- ---- ----- ---- ----- ----
Ending reserves $384 $315 $582 $507 $665 $563
===== ==== ===== ==== ===== ====

Included in the gross and net incurred losses for the nine months
ended September 30, 2002 was the $150 million reduction of
environmental reserves discussed previously.

For the year 2000, the gross and net environmental "underwritten"
reserves at the beginning of the year totaled $27 million and $25
million, respectively, and at the end of the year totaled $27
million and $26 million, respectively. For 2001, the year-end
gross and net environmental "underwritten" reserves were both $28
million, and at Sept. 30, 2002 the gross and net reserves were
both $34 million. These reserves relate to policies, which were
specifically underwritten to include environmental exposures.
These "underwritten" reserve amounts are included in the total
reserve amounts in the preceding table.

The following table represents a reconciliation of total gross
and net reserve development for asbestos claims for the nine
months ended Sept. 30, 2002, and the years ended Dec. 31, 2001
and 2000. No policies have been underwritten to specifically
include asbestos exposure.

Asbestos 2002
-------- (nine months) 2001 2000
------------ ----------- -----------
(In millions) Gross Net Gross Net Gross Net
----------- ----- ---- ----- ---- ----- ----
Beginning reserves $478 $367 $397 $299 $398 $298
Incurred losses 991 741 133 110 41 33
Paid losses (294) (288) (52) (42) (42) (32)
----- ---- ----- ---- ----- ----
Ending reserves $1,175 $820 $478 $367 $397 $299
===== ==== ===== ==== ===== ====

Included in the gross and net incurred losses for the nine months
ended Sept. 30, 2002 were $988 million of gross losses and $740
million of net losses related to the Western MacArthur litigation
settlement. Also included in the gross and net incurred losses
for the nine months ended Sept. 30, 2002 was a $150 million
increase in asbestos reserves. Gross and net paid losses include
the $248 million Western MacArthur payment made in June 2002.

Our reserves for environmental and asbestos losses at September
30, 2002 represent our best estimate of our ultimate liability
for such losses, based on all information currently available.
Because of the inherent difficulty in estimating such losses,
however, we cannot give assurances that our ultimate liability
for environmental and asbestos losses will, in fact, match
current reserves. We continue to evaluate new information and
developing loss patterns, as well as the potential impact of our
determination to seek earlier and ultimately less costly
resolutions of certain pending

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Environmental and Asbestos Claims (continued)
--------------------------------------------

asbestos and environmental related litigations. Future changes
in our estimates of our ultimate liability for environmental and
asbestos claims may be material to our results of operations, but
we do not believe they will materially impact our liquidity or
overall financial position.

Total gross environmental and asbestos reserves at September 30,
2002, of $1.56 billion represented approximately 7% of gross
consolidated reserves of $22.6 billion.

Asset Management
----------------

Our asset management segment consists of our 79% majority
ownership interest in The John Nuveen Company (Nuveen). Nuveen
provides customized individual accounts, mutual funds and
exchange-traded funds through financial advisors serving the
affluent, high net worth and institutional market segments.
Highlights of Nuveen's performance for the quarters and nine
months ended September 30, 2002 and 2001 were as follows:

Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(in millions) 2002 2001 2002 2001
----------- ------ ------ ------ ------
Revenues $ 101 $ 99 $ 286 $ 273
Expenses 49 52 135 136
------ ------ ------ ------
Pretax earnings 52 47 151 137
Minority interest (11) (11) (33) (32)
------ ------ ------ ------
The St. Paul's share
of pretax earnings $ 41 $ 36 $ 118 $105
====== ====== ====== ======
Assets under
management $76,928 $66,477
====== ======

An increase in investment advisory fees accounted for the growth
in Nuveen's revenues over the third quarter and first nine months
of 2001. Gross sales of investment products totaled $4.7 billion
in the third quarter of 2002, compared with sales of $3.2 billion
in the same 2001 period. Third-quarter 2002 sales were comprised
of $2.4 billion of closed-end exchange-traded funds, $1.9 billion
of retail and institutional and managed accounts and $0.4 billion
of mutual funds. Nuveen's broad range of fixed-income
investments were attractive to investors through the first nine
months of 2002 as they continued to focus on strategies that
reduce overall risk, provide balance in their portfolios and
offer quality yields. Nuveen's net flows (equal to the sum of
sales, reinvestments and exchanges, less redemptions and
withdrawals) during the first nine months of 2002 totaled $5.1
billion, compared with net flows of $6.2 billion in the same
period of 2001. Net flows for the third quarter of 2002 were
positive across all product lines.

Managed assets at the end of the third quarter consisted of
$38.5 billion of exchange-traded funds, $18.8 billion of retail
managed accounts, $7.8 billion of institutional managed accounts
and $11.9 billion of mutual funds. The 16% growth in managed
assets over the same time a year ago was driven by positive net
flows in 2002 and Nuveen's August 2002 acquisition of NWQ
Investment Management Company, Inc. ("NWQ"), a Los Angeles-based
equity management firm that added $6.9 billion to Nuveen's
assets under management. The NWQ purchase price, consisting of
$120 million paid at closing and up to an additional $20 million
payable over five years, was funded through a combination of
available cash and borrowings under an intercompany credit
facility between The St. Paul and Nuveen.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Capital Resources
-----------------

Common shareholders' equity of $5.45 billion at September 30,
2002 was $391 million, or 8%, higher than the year-end 2001 total
of $5.06 billion. The increase was driven by our July 2002
issuance of 17.8 million shares of common stock in a public
offering that generated $431 million in net proceeds, which
served to partially offset our $26 million year-to-date net loss
and dividends declared on our common stock totaling $186 million.
In addition, the $46 million present value of stock purchase
contract fee payments associated with our issuance of 8.9 million
equity units (described in more detail on page 31 of this report)
was recorded as a reduction of shareholders' equity. The net
after-tax unrealized appreciation on our investments increased by
$185 million over year-end 2001, primarily reflecting an increase
in the market value of our fixed-maturity portfolio amid a market
environment of declining interest rates.

Total debt at September 30, 2002 of $2.59 billion grew by $456
million over the year-end 2001 total of $2.13 billion. In March
2002, we issued $500 million of 5.75% senior notes that mature in
2007, the proceeds of which were primarily used to repay a like
amount of our commercial paper outstanding. In July 2002, as a
component of our equity unit offering, we issued $443 million of
5.25% senior notes that mature in 2005. Our ratio of total debt
obligations to total capitalization was 28% at the end of the
third quarter, compared with 26% at the end of 2001. Net
interest expense related to debt totaled $81 million in the first
nine months of 2002, compared with $86 million in the same period
of 2001. The decline in 2002 was primarily attributable to our
floating rate debt, which has benefited from the decline in
interest rates. Preferred distribution expense related to
mandatorily redeemable preferred securities of trusts guaranteed
by us totaled $53 million in the first nine months of 2002,
compared with $21 million in the same 2001 period. The increase
was due to the issuance of $575 million of 7.6% mandatorily
redeemable preferred securities in November 2001.

Capital expenditures that we might consider during the remainder
of 2002 include acquisitions of existing businesses consistent
with our commercial insurance focus or that of our asset
management subsidiary. As of November 12, 2002 we had the
capacity to make up to approximately $89 million in common stock
repurchases under a repurchase program authorized by our board of
directors in February 2001; however, we do not anticipate
repurchasing any of our common shares during the remainder of
2002.

For the first nine months of 2002, our loss from continuing
operations was inadequate to cover "fixed charges" by $73 million
and "combined fixed charges and preferred stock dividend
requirements" by $83 million. For the first nine months of 2001,
the ratio of earnings to fixed charges was inadequate to cover
"fixed charges" by $446 million and "combined fixed charges and
preferred stock dividend requirements" by $456 million. Fixed
charges consist of interest expense, dividends on preferred
capital securities and that portion of rental expense deemed to
be representative of an interest factor.

Liquidity
---------

Liquidity is a measure of our ability to generate sufficient cash
flows to meet the short- and long-term cash requirements of our
business operations. Our chief source of liquidity is cash
provided from operations, which primarily consists of insurance
premiums collected and investment income. As necessary,
additional liquidity is provided by net sales from our investment
portfolio and access to the debt and equity markets.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Liquidity (continued)
--------------------

Net cash flows provided by continuing operations totaled $435
million in the first nine months of 2002, compared with cash
provided by continuing operations of $332 million in the same
period of 2001. Operational cash flows generated by our ongoing
property-liability operations in 2002 were substantially better
than those in the same period of 2001, due to significant price
increases and improving loss experience. In addition, we made no
premium payments related to corporate aggregate excess-of-loss
reinsurance programs in the first nine months of 2002, whereas
such payments totaled $164 million in the same 2001 period. As
discussed previously, no such program was implemented in 2002.
Our operational cash flows in 2002 were negatively impacted by
the $248 million payment made in June related to the Western
MacArthur asbestos litigation settlement and fees, and loss
payments totaling $208 million related to the September 11, 2001
terrorist attack.

We expect operational cash flows during the remainder of 2002 to
continue to be negatively impacted by insurance losses and loss
adjustment expenses payable related to the September 11, 2001
terrorist attack, as well as losses payable related to our
operations in runoff. However, we expect continued improvement
in operational cash flows from ongoing operations in the
remainder of 2002 as a result of price increases and expense
reductions throughout those operations. In the first quarter of
2003, our operational cash flows and, consequently, our future
investment income will be negatively impacted by the payment of
an additional $740 million related to the Western MacArthur
asbestos litigation settlement. This will be partially offset,
however, by the investment income generated by the $842 million
of net proceeds received from the common stock and equity units
offering that we completed in July 2002.

In the second and third quarters of 2002, certain independent
financial rating agencies downgraded various ratings of The St.
Paul. As a result, we may pay higher interest rates on debt
securities we may issue in the future, compared with rates
available had the downgrades not occurred. We believe our
financial strength continues to provide us with the flexibility
and capacity to obtain funds externally through debt or equity
financings on both a short-term and long-term basis. In
addition, the commercial paper market continues to be an
efficient and cost effective source of short-term funding. We
continue to maintain an $800 million commercial paper program
with $600 million of back-up liquidity, consisting of bank credit
agreements totaling $540 million entered into during the second
quarter and $60 million of highly-liquid, high-quality fixed
income securities.

Impact of Accounting Pronouncements to be Adopted in the Future
- ---------------------------------------------------------------

In June 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which establishes financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs.
It requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are to be capitalized as part
of the carrying amount of the long-lived asset. This statement
is effective for fiscal years beginning after June 15, 2002. We
do not expect the adoption of SFAS No. 143 to have a material
impact on our financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes
SFAS No. 121. The new Statement establishes a single accounting
model, based on the framework originally established SFAS No.
121, for long-lived assets to be disposed of by sale, and
resolves significant implementation issues related to that
Statement. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. We do not expect the adoption of SFAS
No. 144 to have a material impact on our financial statements.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
Management's Discussion, Continued

Impact of Accounting Pronouncements to be Adopted in the Future (continued)
- --------------------------------------------------------------------------

In April 2002, the FASB issued SFAS No. 145, "Recission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections." The primary impact of SFAS No. 145
was to rescind the requirement to report the gain or loss from
the extinguishment of debt as an extraordinary item on the
statement of income. The provisions of this Statement are
generally effective for fiscal years beginning after May 15,
2002. We do not expect the adoption of SFAS No. 145 to have a
material impact on our financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than the current
practice of recognizing those costs at the date of a commitment
to exit or a disposal plan. The provisions of SFAS No. 146 are
to be applied prospectively to exit or disposal activities
initiated after December 31, 2002.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES

Controls and Procedures
-----------------------

Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the
participation of the Company's management, including our Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of these disclosure controls and
procedures were effective. No significant changes were made in
our internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.

PART II OTHER INFORMATION

Item 1. Legal Proceedings.
The information set forth in Note 5 to the
consolidated financial statements is incorporated
herein by reference.

Item 2. Changes in Securities.
Not applicable.

Item 3. Defaults Upon Senior Securities.
Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.

Item 5. Other Information.
Not applicable.

Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. An Exhibit Index is set forth as the
last page in this document.

(b) Reports on Form 8-K.

1) The St. Paul filed a Form 8-K Current Report dated July
16, 2002 related to the disclosure of the pro forma impact of
the adoption of Statement of Financial Standards No. 142,
"Goodwill and Other Intangible Assets," on The St. Paul's
consolidated results for the years ended Dec. 31, 2001, 2000
and 1999.

2) The St. Paul filed a Form 8-K Current Report dated July
23, 2002 related to the announcement of The St. Paul's
financial results for the second quarter and six months ended
June 30, 2002. In addition, this Form 8-K included as an
exhibit the Western MacArthur asbestos litigation settlement
agreement.

3) The St. Paul filed a Form 8-K Current Report dated July
30, 2002 related to the announcement of the anticipated impact
on third-quarter 2002 earnings of a United States District
Court ruling regarding surety coverage provided by one of The
St. Paul's subsidiaries for the construction of two oil rigs
in Brazil.

4) The St. Paul filed a Form 8-K Current Report dated July
31, 2002 related to the completion of the sale of common stock
and equity units, and included the related documents as
exhibits.

5) The St. Paul filed a Form 8-K Current Report dated
November 4, 2002 related to the announcement of the completion
of the transfer of ongoing reinsurance business to Platinum
Underwriters Holdings, Ltd.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

THE ST. PAUL COMPANIES, INC.
(Registrant)

Date: November 14, 2002 By Bruce A. Backberg
----------------- -----------------
Bruce A. Backberg
Senior Vice President
(Authorized Signatory)

Date: November 14, 2002 By John C. Treacy
---------------- --------------
John C. Treacy
Vice President and
Corporate Controller
(Principal Accounting Officer)

CERTIFICATION

I, Jay S. Fishman, Chairman and Chief Executive Officer,
certify that:

1. I have reviewed this quarterly report on Form 10-Q of The
St. Paul Companies, Inc.;

2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report.

3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.

4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and
procedures to ensure that material information
related to the registrant, including its
consolidated subsidiaries, is made known to us
by others within those entities, particularly
during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the
registrant's disclosure controls and procedures
as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation
Date); and

c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and audit committee of registrant's
board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that
involves management or other employees who have
a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Date: November 14, 2002 By: Jay S. Fishman
----------------- --------------
Jay S. Fishman
Chairman and
Chief Executive Officer

CERTIFICATION

I, Thomas A. Bradley, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The
St. Paul Companies, Inc.;

2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by
this quarterly report.

3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.

4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-
14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and
procedures to ensure that material information
related to the registrant, including its
consolidated subsidiaries, is made known to us
by others within those entities, particularly
during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the
registrant's disclosure controls and procedures
as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation
Date); and

c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and audit committee of registrant's
board of directors (or persons performing the equivalent
function):

a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that
involves management or other employees who have
a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Date: November 14, 2002 By: Thomas A. Bradley
----------------- -----------------
Thomas A. Bradley
Executive Vice President and
Chief Financial Officer

EXHIBIT INDEX
-------------
Exhibit

(2) The Formation and Separation Agreement between
The St. Paul Companies, Inc. and Platinum Underwriters
Holdings, Ltd., dated as of October 28, 2002 (A form
of the Formation and Separation Agreement is
incorporated by reference to Exhibit 2 of Platinum
Underwriters Holdings, Ltd.'s October 23, 2002
amendment (Registration No. 333-86906) to its
Registration Statement on Form S-1 (Registration
No. 333-99019))***..............................................

(3) (i) Articles of incorporation*...................................
(ii) By-laws*....................................................

(4) Instruments defining the rights of security holders,
including indentures*.........................................

(10) Material contracts*..............................................

(11) Statement re computation of per share earnings**.................(1)

(12) Statement re computation of ratios**.............................(1)

(15) Letter re unaudited interim financial information*...............

(18) Letter re change in accounting principles*.......................

(19) Report furnished to security holders*............................

(22) Published report regarding matters submitted to
vote of security holders*.....................................

(23) Consents of experts and counsel*.................................

(24) Power of attorney*...............................................

(99) Additional exhibits*.............................................

* These items are not applicable.

** This exhibit is included only with the copies of this
report that are filed with the Securities and Exchange
Commission. However, a copy of the exhibit may be obtained
from the Registrant for a reasonable fee by writing to The
St. Paul Companies, Inc., 385 Washington Street, Saint
Paul, MN 55102, Attention: Corporate Secretary.

*** Incorporated herein by reference.

(1) Filed herewith.