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 June 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 August 9, 2002, was 226,318,181.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

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

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

Consolidated Balance Sheets, June 30, 2002
(Unaudited) and December 31, 2001 4

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

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

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

Notes to Consolidated Financial Statements
(Unaudited) 9

Management's Discussion and Analysis of
Financial Condition and Results of
Operations 25

PART II. OTHER INFORMATION

Item 1 through Item 6 51

Signatures 52

EXHIBIT INDEX 53

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

Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
2002 2001 2002 2001
------ ------ ------ ------
Revenues:
Premiums earned $1,920 $1,743 $3,855 $3,371
Net investment income 286 300 579 635
Asset management 89 85 179 170
Realized investment
gains (losses) (33) 7 (71) 83
Other 52 28 89 65
------ ------ ------ ------
Total revenues 2,314 2,163 4,631 4,324
------ ------ ------ ------

Expenses:
Insurance losses and
loss adjustment expenses 1,986 1,346 3,379 2,529
Policy acquisition expenses 405 356 815 736
Operating and administrative
expenses 287 328 605 628
------ ------ ------ ------
Total expenses 2,678 2,030 4,799 3,893
------ ------ ------ ------
Income (loss) from
continuing operations
before income taxes (364) 133 (168) 431
Income tax expense (benefit) (146) 37 (98) 126
------ ------ ------ ------
Income (loss) before
cumulative effect of
accounting change (218) 96 (70) 305
Cumulative effect of
accounting change,
net of taxes - - (6) -
------ ------ ------ ------
Income (loss) from
continuing operations (218) 96 (76) 305

Discontinued operations:
Operating loss, net of taxes - - - (1)
Gain (loss) on disposal,
net of taxes (5) 8 (14) 2
------ ------ ------ ------
Income (loss) from
discontinued operations,
net of taxes (5) 8 (14) 1
------ ------ ------ ------
Net income (loss) $ (223) $ 104 $ (90) $ 306
====== ====== ====== ======

Basic earnings (loss) per share:
Income (loss) from
continuing operations $(1.07) $ 0.43 $(0.41) $ 1.37
Discontinued operations,
net of taxes (0.02) 0.04 (0.06) 0.01
------ ------ ------ ------
Net income (loss) $(1.09) $ 0.47 $(0.47) $ 1.38
====== ====== ====== ======
Diluted earnings (loss) per share:
Income (loss) from
continuing operations $(1.07) $ 0.41 $(0.41) $ 1.32
Discontinued operations,
net of taxes (0.02) 0.04 (0.06) 0.01
------ ------ ------ ------
Net income (loss) $(1.09) $ 0.45 $(0.47) $ 1.33
====== ====== ====== ======
Dividends declared on
common stock $ 0.29 $ 0.28 $ 0.58 $ 0.56
====== ====== ====== ======

See notes to consolidated financial statements.

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

2002 2001
Assets: ------- -------
Investments:
Fixed maturities, at estimated fair value $ 16,942 15,911
Equities, at estimated fair value 556 1,410
Real estate and mortgage loans 897 972
Venture capital, at estimated fair value 821 859
Securities on loan 644 775
Short-term investments 1,758 2,153
Other investments 94 98
------- ------
Total investments 21,712 22,178
Cash 166 151
Reinsurance recoverables:
Unpaid losses 6,997 6,848
Paid losses 323 351
Ceded unearned premiums 728 667
Receivables:
Insurance premiums 3,085 3,123
Interest and dividends 256 260
Other 198 246
Deferred policy acquisition costs 654 628
Deferred income taxes 1,303 1,248
Office properties and equipment 479 486
Goodwill and intangible assets 806 690
Other assets 1,514 1,445
------- ------
Total Assets $ 38,221 $38,321
======= =======

See notes to consolidated financial statements.

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

2002 2001
Liabilities: ------- ------
Insurance reserves:
Loss and loss adjustment expenses $ 22,516 $22,101
Unearned premiums 4,105 3,957
------- ------
Total insurance reserves 26,621 26,058
Debt 2,122 2,130
Payables:
Reinsurance premiums 948 943
Accrued expenses and other 787 1,036
Securities lending collateral 657 790
Other liabilities 1,214 1,357
------- ------
Total Liabilities 32,349 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 108 111
Guaranteed obligation - SOP (48) (53)
------- ------
Total Preferred Shareholders' Equity 60 58
------- ------
Common:
Common stock 2,221 2,192
Retained earnings 2,304 2,500
Accumulated other comprehensive
income, net of taxes:
Unrealized appreciation of investments 463 442
Unrealized loss on foreign currency
translation (65) (76)
Unrealized loss on derivatives - (2)
------- ------
Total accumulated other
comprehensive income 398 364
------- ------
Total Common Shareholders' Equity 4,923 5,056
------- ------
Total Shareholders' Equity 4,983 5,114
------- ------
Total Liabilities, Redeemable
Preferred Securities and
And Shareholders' Equity $ 38,221 $38,321
======= =======

See notes to consolidated financial statements.

THE ST. PAUL COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended June 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 (3) (6)
------- ------
End of period 108 111
------- ------
Guaranteed obligation - SOP:
Beginning of period (53) (68)
Principal payments 5 15
------- ------
End of period (48) (53)
------- ------
Total preferred shareholders' equity 60 58
------- ------

Common Shareholders' Equity:
Common stock:
Beginning of period 2,192 2,238
Stock issued:
Stock incentive plans 20 67
Preferred shares redeemed 8 13
Reacquired common shares - (135)
Other 1 9
------- ------
End of period 2,221 2,192
------- ------
Retained earnings:
Beginning of period 2,500 4,243
Net loss (90) (1,088)
Dividends declared on common stock (121) (235)
Dividends declared on preferred
stock, net of taxes (4) (9)
Reacquired common shares - (454)
Other changes 19 43
------- ------
End of period 2,304 2,500
------- ------
Unrealized appreciation on
investments, net of taxes:
Beginning of period 442 765
Change during the period 21 (323)
------- ------
End of period 463 442
------- ------
Unrealized loss on foreign
currency translation, net of taxes:
Beginning of period (76) (68)
Change during the period 11 (8)
------- ------
End of period (65) (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 4,923 5,056
------- ------
Total shareholders' equity $ 4,983 $ 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 Six Months
Ended June 30 Ended June 30
-------------- --------------
(in millions) 2002 2001 2002 2001
----------- ----- ----- ----- ----
Net income (loss) $(223) $ 104 $ (90) $306
----- ----- ----- ----

Other comprehensive income
(loss), net of taxes:
Change in unrealized appreciation 139 (130) 21 (243)
Change in unrealized loss
on foreign currency translation 7 (13) 11 6
Change in unrealized loss
on derivatives 2 1 2 (1)
----- ----- ----- ---
Other comprehensive
income (loss) 148 (142) 34 (238)
----- ----- ----- ---
Comprehensive income (loss) $ (75) $ (38) $ (56) $68
===== ===== ===== =====

See notes to consolidated financial statements.

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

2002 2001
------- -------
Operating Activities:
Net income (loss) $ (90) $ 306
Adjustments:
Loss (gain) from discontinued operations 14 (1)
Change in insurance reserves 332 601
Change in reinsurance balances (136) (661)
Realized investment losses (gains) 71 (83)
Change in deferred acquisition costs (21) (65)
Change in insurance premiums receivable 55 (71)
Change in accounts payable and accrued expenses (90) (81)
Change in income taxes payable/refundable 104 (31)
Provision for federal deferred
tax expense (benefit) (82) 147
Depreciation and amortization 43 49
Other (118) (155)
------- -------
Net cash provided (used)
by continuing operations 82 (45)
Net cash provided by
discontinued operations - 101
------- -------
Net cash provided by operating activities 82 56
------- -------

Investing Activities:
Purchases of investments (3,834) (2,968)
Proceeds from sales and maturities of investments 3,975 3,198
Net sales of short-term investments 287 267
Change in open security transactions (184) 44
Purchase of office property and equipment (37) (34)
Sales of office property and equipment 10 3
Acquisitions, net of cash acquired (59) -
Other (51) (13)
------- -------
Net cash provided by continuing operations 107 497
Net cash used by discontinued operations (5) (365)
------- -------
Net cash provided by investing activities 102 132
------- -------

Financing Activities:
Dividends paid on common and preferred stock (123) (124)
Proceeds from issuance of debt 498 292
Repayment of debt and preferred securities (526) (161)
Repurchase of common shares - (389)
Subsidiary's repurchase of common shares (105) (60)
Stock options exercised and other 84 59
------- -------
Net cash used by continuing operations (172) (383)
Net cash provided by discontinued operations - 238
------- -------
Net cash used by financing activities (172) (145)
------- -------
Effect of exchange rate changes on cash 3 (1)
------- -------
Increase in cash 15 42
Cash at beginning of period 151 52
------- -------
Cash at end of period $ 166 $ 94
======= =======

See notes to consolidated financial statements.

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

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. 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, comprehensive
income or shareholders' equity, as previously reported.

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 are no longer amortized,
effective January 1, 2002, but remain subject to tests for
impairment.

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).

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 six months ended June 30,
2002 and 2001:

Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
(in millions) 2002 2001 2002 2001
---- ---- ---- ----
Earnings (Loss)
Basic:
Net income (loss), as reported $(223) $104 $(90) $306
Preferred stock dividends, net of taxes (2) (2) (4) (4)
Premium on preferred shares redeemed (2) (3) (5) (5)
---- ---- ---- ----
Net income (loss) available
to common shareholders $(227) $ 99 $(99) $297
==== ==== ==== ====
Diluted:
Net income (loss) available to
common shareholders $(227) $ 99 $(99) $297
Effect of dilutive securities:
Convertible preferred stock - 2 - 3
Zero coupon convertible notes - 1 - 2
---- ---- ---- ----
Net income (loss), as adjusted $(227) $102 $(99) $302
==== ==== ==== ====

Common Shares
Basic:
Weighted average common
shares outstanding 208 214 208 215
==== ==== ==== ====
Diluted:
Weighted average common
shares outstanding 208 214 208 215
Effect of dilutive securities:
Stock options - 4 - 4
Convertible preferred stock - 7 - 7
Zero coupon convertible notes - 2 - 2
---- ---- ---- ----
Total 208 227 208 228
==== ==== ==== ====

Earnings (Loss) per Common Share:
Basic $(1.09) $0.47 $(0.47) $1.38
==== ==== ==== ====

Diluted $(1.09) $0.45 $(0.47) $1.33
==== ==== ==== ====

Diluted EPS is the same as Basic EPS for both periods of 2002
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.
Six Months
Ended June 30
------------------
(in millions) 2002 2001
----- -----
Purchases:
Fixed maturities $3,168 $1,896
Equities 537 868
Real estate and mortgage loans 3 48
Venture capital 119 147
Other investments 7 9
----- -----
Total purchases 3,834 2,968
----- -----
Proceeds from sales and maturities:
Fixed maturities 2,502 2,061
Equities 1,376 866
Real estate and mortgage loans 55 99
Venture capital 36 22
Other investments 6 150
----- -----
Total sales and maturities 3,975 3,198
----- -----
Net sales $ (141) $ (230)
===== =====

Change in Unrealized Appreciation. The increase (decrease) in
unrealized appreciation of investments recorded in common
shareholders' equity was as follows:
Six Twelve
Months Ended Months ended
June 30 December 31
------------ ------------
(in millions) 2002 2001
- ------------ -------- --------

Fixed maturities $ 138 $ 187
Equities (23) (347)
Venture capital (49) (314)
Other (6) (80)
-------- --------
Total change in pretax unrealized
appreciation - continuing operations 60 (554)
Change in deferred taxes (39) 214
-------- --------
Total change in unrealized appreciation -
continuing operations, net of taxes 21 (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 $ 21 $(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 Six Months
Ended June 30 Ended June 30
------------- -------------
(in millions) 2002 2001 2002 2001
- ----------- ---- ---- ---- ----
Income tax expense (benefit):
Federal current $ (67) $(13) $(29) $ (25)
Federal deferred (85) 51 (82) 147
---- ---- ---- ----
Total federal (152) 38 (111) 122
Foreign 4 (2) 8 (1)
State 2 1 5 5
---- ---- ---- ----
Total income tax
expense (benefit) $(146) $ 37 $(98) $126
==== ==== ==== ====

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"). 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 second-quarter and six-months 2002
net of expected reinsurance recoveries and the reevaluation 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.

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.
Related to the Western MacArthur settlement, and as part of an in-
depth analysis of our environmental and asbestos reserves, we
recorded a $150 million reduction in net environmental reserves,
and a corresponding $150 million increase in net asbestos
reserves. 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 June 30, 2002 included $740
million of reserves related to this settlement, after a $248
million payment in June 2002.

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

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

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

June 30, 2002 December 31, 2001
---------------- -----------------
(in millions) Book Fair Book Fair
Value Value Value Value
------ ------ ------ ------
Medium-term notes $ 557 $ 580 $ 571 $ 596
5.75% senior notes 498 514 - -
7.875% senior notes 250 272 249 269
8.125% senior notes 249 281 249 275
Nuveen line of credit borrowings 183 183 183 183
Zero coupon convertible notes 105 104 103 106
Commercial paper 100 100 606 606
7.125% senior notes 80 86 80 84
Variable rate borrowings 64 64 64 64
Real estate debt - - 2 2
------ ------ ------ ------
Total obligations 2,086 2,184 2,107 2,185
Fair value of interest rate
swap agreements 36 36 23 23
------ ------ ------ ------
Total debt reported
on balance sheet $2,122 $2,220 $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.

At June 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 June 30, 2002 was an asset of $36 million with a corresponding
increase to debt on our balance sheet.

See note 15 for a discussion of debt issued subsequent to June
30, 2002.

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

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

The tabular information that follows provides revenue and income
data from continuing operations for each of our business segments
for the second quarters and first six 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 Six Months
Ended June 30 Ended June 30
------------- -------------
(in millions) 2002 2001 2002 2001
---- ---- ---- ----
Revenues from continuing operations:
Property-liability insurance:
Specialty Commercial $ 573 $ 445 $ 1,127 $ 878
Commercial Lines 429 381 861 745
Surety and Construction 294 234 571 469
Health Care 159 182 343 364
Lloyd's and Other 160 204 270 315
----- ----- ----- -----
Total primary insurance operations 1,615 1,446 3,172 2,771
Reinsurance 305 297 683 600
----- ----- ----- -----
Total insurance premiums earned 1,920 1,743 3,855 3,371
----- ----- ----- -----

Investment operations:
Net investment income 283 295 573 625
Realized investment gains (losses) (38) 6 (77) 58
----- ----- ----- -----
Total investment operations 245 301 496 683
----- ----- ----- -----

Other 43 24 77 59
----- ----- ----- -----
Total property-liability insurance 2,208 2,068 4,428 4,113
----- ----- ----- -----

Asset management 91 87 185 174
----- ----- ----- -----
Total reportable segments 2,299 2,155 4,613 4,287
Parent company, other operations
and consolidating eliminations 15 8 18 38
----- ----- ----- -----
Total revenues $2,314 $2,163 $4,631 $4,325
===== ===== ===== =====

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

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

Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
(in millions) 2002 2001 2002 2001
---- ---- ---- ----
Income (loss) from continuing operations:
Property-liability insurance:
Specialty Commercial $ 60 $ 17 $ 64 $ 7
Commercial Lines (530) 37 (527) 114
Surety and Construction 5 21 9 41
Health Care (102) (124) (100) (254)
Lloyd's and Other (20) (28) (59) (51)
----- ----- ----- -----
Total primary insurance operations (587) (77) (613) (143)
Reinsurance (4) (36) 11 (57)
----- ----- ----- -----
Total underwriting result (591) (113) (602) (200)
----- ----- ----- -----

Investment operations:
Net investment income 283 295 573 625
Realized investment gains (losses) (38) 6 (77) 58
----- ----- ----- -----
Total investment operations 245 301 496 683
----- ----- ----- -----

Other (12) (41) (37) (45)
----- ----- ----- -----
Total property-liability insurance (358) 147 (143) 438
----- ----- ----- -----

Asset management:
Pretax income before minority interest 50 45 99 90
Minority interest (11) (11) (22) (21)
----- ----- ----- -----
Total asset management 39 34 77 69
----- ----- ----- -----
Total reportable segments (319) 181 (66) 507
Parent company, other operations
and consolidating eliminations (45) (48) (102) (76)
----- ----- ----- -----
Total income (loss) from
continuing operations before
income taxes $ (364) $ 133 $ (168) $ 431
===== ===== ===== =====

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 with whom
we have ceded reinsurance to honor their obligations. In the
event these companies are unable to honor their obligations, we
will pay these amounts. We have established allowances of
approximately $192 million for possible nonpayment of amounts
due to us.

In the first six months of 2002, we were not party to an all-
lines, corporate excess-of-loss reinsurance treaty. In the
preceding three years, cessions made under similar treaties had a
significant impact on our reported financial results for certain
periods. 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 six months of the year.
However, we ceded $9 million and $5 million of written and earned
premiums, respectively, related to the treaty in the first six
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 second quarter or first six
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 second quarter of 2001, St. Paul Re ceded
$42 million of written premiums, $40 million of earned premiums
and $76 million of insurance losses and loss adjustment expenses,
for a net benefit of $36 million as a result of the Reinsurance
segment treaty. For the six months ended June 30, 2001, St. Paul
Re ceded $45 million of written premiums, $43 million of earned
premiums and $102 million of insurance losses and loss adjustment
expenses for a net pretax benefit of $59 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 Six Months
Ended June 30 Ended June 30
------------- --------------
(in millions) 2002 2001 2002 2001
----- ----- ----- -----
Premiums written
Direct $1,773 $1,606 $3,746 $3,219
Assumed 622 778 1,265 1,348
Ceded (606) (531) (1,116) (868)
----- ----- ----- -----
Net premiums written $1,789 $1,853 $3,895 $3,699
===== ===== ===== =====
Premiums earned
Direct $1,869 $1,546 $3,684 $3,028
Assumed 628 715 1,190 1,237
Ceded (577) (518) (1,019) (894)
----- ----- ----- -----
Net premiums earned $1,920 $1,743 $3,855 $3,371
===== ===== ===== =====
Insurance losses and loss
adjustment expenses
Direct $2,204 $1,206 $3,716 $2,426
Assumed 428 650 776 1,061
Ceded (646) (510) (1,113) (958)
----- ----- ----- -----
Net insurance losses and
loss adjustment expenses $1,986 $1,346 $3,379 $2,529
===== ===== ===== =====

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 six 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 June
30, 2002, 504 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 June 30,
earnings: Charge 2001 Payments Adjustments 2002
-------- -------- ---------- -------- ----------- ----------
Employee-related $ 46 $ 46 $ (29) $ 3 $ 20
Occupancy-related 9 9 - - 9
Equipment charges 4 N/A N/A N/A N/A
Legal costs 3 3 - - 3
---- ---- ---- ---- ----
Total $ 62 $ 58 $ (29) $ 3 $ 32
==== ==== ==== ==== ====

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 six 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.

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:

Original Reserve Reserve
(In millions) Pre-tax at Dec. 31, at June 30,
----------- Charge 2001 Payments Adjustments 2002
-------- ---------- -------- ----------- ----------
Lease
commitments
charged to
earnings: $91 $39 $(5) $(1) $33
===== ==== ==== ==== ====

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 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 or second quarters
of 2002. In the first six months of 2001, goodwill amortization
expense totaled $18 million. Amortization expense associated
with intangible assets totaled $9 million in the first six months
of 2002, compared with $1 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).

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.

As of June 30, 2002
(In millions) -----------------------------------
----------- Gross
Amortizable intangible Carrying Accumulated Net
assets: Amount Amortization Amount
---------------------- -------- ------------ -------
Present value of future profits 70.3 $ 10.5 $ 59.8
Customer relationships 43.8 2.1 41.7
Renewal rights 16.2 3.6 12.6
Internal use software 1.6 0.3 1.3
Favorable leases 0.4 0.2 0.2
------ ----- ------
Total $ 132.3 $ 16.7 $ 115.6
====== ===== ======

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

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

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

(In millions)
-----------
Estimated amortization expense
for the year ended Dec. 31:
------------------------------
2003 $20
2004 17
2005 15
2006 10
2007 8

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. 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.

(In millions)
-----------
Balance at Balance at
Dec. 31, Goodwill Impairment June 30,
Goodwill by Segment 2001 Acquired Losses 2002
------------------- ------- ----- ------ --------
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 58 - 577
---- --- ---- ----
Total $ 609 $ 82 $ - $ 691
==== === ==== ====

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

For Three For Six Months
Months Ended Ended
June 30, June 30,
------------ -------------
(In millions) 2002 2001 2002 2001
----------- ----- ----- ----- -----
Reported net income (loss) $(223) $ 104 $ (90) $ 306
Add back goodwill amortization - 9 - 18
---- ---- ---- ----
Adjusted net income (loss) $(223) $ 113 $ (90) $ 324
==== ==== ==== ====

Basic earnings per share:
Reported net income (loss) $(1.09) $0.47 $(0.47) $1.38
Goodwill amortization - 0.04 - 0.08
---- ---- ---- ----
Adjusted net income (loss) $(1.09) $0.51 $(0.47) $1.46
==== ==== ==== ====

Diluted earnings per share:
Reported net income (loss) $(1.09) $0.45 $(0.47) $1.33
Goodwill amortization - 0.04 - 0.08
---- ---- ---- ----
Adjusted net income (loss) $(1.09) $0.49 $(0.47) $1.41
==== ==== ==== ====

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 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 six months ended June 30,
2002. London Guarantee generated net written premiums of $23
million and an underwriting profit of $2 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 June 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. Any losses incurred by us under these agreements
are reflected in discontinued operations in the period they are
determined. For the first six months of 2002 and 2001, we
recorded pretax losses of $6 million and $19 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 six months ended June 30,
2002 and June 30, 2001 movement in interest rates was a $13
million increase and a $0.5 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 six months ended June 30, 2002, we
recognized a $1.8 million gain on the cash flow hedges, which is
included in "Other Comprehensive Income." The comparable amount
for the six months ended June 30, 2001 was a $1.3 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 both the six months ended June 30,
2002 and June 30, 2001 we recognized a gain of $66 thousand 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 position in Old Mutual shares and stock warrants in our
venture capital business. We recorded a $1.5 million gain and a
$723 thousand loss, respectively, in continuing operations for
both the six months ended June 30, 2002 and June 30, 2001
relating to the change in the market value of these derivatives
during the period. We also recorded $21.4 million of losses in
discontinued operations for the six months ended June 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 - Planned Transfer of Ongoing Reinsurance Operations
- ------------------------------------------------------------

On April 25, 2002, we announced that we planned to transfer our
ongoing reinsurance operations to a newly formed Bermuda-based
reinsurer, Platinum Underwriters Holdings, Ltd. ("Platinum"). We
intended to transfer to Platinum certain renewal opportunities
and tangible and intangible assets of our reinsurance operation,
St. Paul Re, and enter into various agreements with Platinum and
its subsidiaries, in exchange for a percentage interest in the
common shares of Platinum that will be determined prior to
closing. A registration statement for the offering was filed
with the U.S. Securities and Exchange Commission on April 25,
2002. On July 9, 2002, we announced that the initial public
offering of Platinum was being temporarily postponed due to
unfavorable capital market conditions. We intend to complete the
transaction as market conditions allow.

At the time of the closing of the offering, Platinum will
reinsure St. Paul Fire and Marine Insurance Company and St. Paul
Reinsurance Company Limited for certain reinsurance contracts
incepting in 2002. Platinum will 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 will retain
those liabilities and the related reserves.

Note 15 - Subsequent Events
- ---------------------------

Common Stock and Equity Units Offerings
- ---------------------------------------
On July 31, 2002, we completed the sale of 17.8 million of our
common shares for gross consideration of $431 million, or $24.20
per share. In addition, in a separate concurrent offering, we
completed the sale of 8.9 million of 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 August 2007. Total annual
distributions on the equity units will be 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 at an annual rate 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 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.

The combined net proceeds of the offerings, after underwriting
commissions and other fees, were approximately $842 million, of
which $750 million was contributed to the surplus of our
insurance underwriting subsidiaries. The remainder was retained
at the parent company and will be used for general corporate
purposes.

Form 8-K Dated July 30, 2002 - Surety Ruling
- --------------------------------------------
As previously reported in the Current Report on Form 8-K dated
July 30, 2002, the United States District Court for the Southern
District of New York issued a ruling which could result in a
judgment awarding $237 million in insurance payments, plus
interest and costs, to Petrobas, an energy company that is
majority-owned by the country 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 announced on July 30, 2002 that the impact on our after-tax
earnings in the third quarter of 2002 as a result of this ruling
is not expected to exceed $25 million, net of reinsurance, case
reserves and taxes, prior to any recoveries. We believe the
recoveries may be significant, but we cannot at this time
reasonably estimate them.

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

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 and the anticipated public offering of Platinum
Underwriters Holdings, Ltd.

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
attacks 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 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 ability of Platinum
Underwriters Holdings, Ltd. to receive required regulatory
approvals and undertake a successful public offering of its
common shares in the time frame we anticipate, and of the
proposed transfer of our going forward reinsurance operations to
Platinum; 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); 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, Continued

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

The following table summarizes our results for the second quarter
and six months ended June 30, 2002 and 2001.
Three Months Six Months
Ended June 30 Ended June 30
-------------- --------------
(in millions, except per-share amounts) 2002 2001 2002 2001
- ------------------------------------- ---- ---- ---- ----

Pretax income (loss):
Property-liability insurance:
Underwriting result $(591) $(113) $(602) $(200)
Net investment income 283 295 573 625
Realized investment gains (losses) (38) 6 (77) 58
Other expenses (12) (41) (37) (45)
---- ---- ---- ----
Total property-liability insurance (358) 147 (143) 438
Asset management 39 34 77 69
Parent and other (45) (48) (102) (76)
---- ---- ---- ----
Pretax income (loss) from continuing
operations before cumulative effect
of accounting change (364) 133 (168) 431
Income tax expense (benefit) (146) 37 (98) 126
---- ---- ---- ----
Income (loss) from continuing
operations before cumulative effect
of accounting change (218) 96 (70) 305
Cumulative effect of accounting
change, net of taxes - - (6) -
---- ---- ---- ----
Income (loss) from
continuing operations (218) 96 (76) 305

Discontinued operations, net
of taxes (5) 8 (14) 1
---- ---- ---- ----
Net income (loss) $(223) $ 104 $ (90) $ 306
==== ==== ==== ====

Per common share (Basic) $(1.09) $0.47 $(0.47) $1.38
==== ==== ==== ====

Per common share (Diluted) $(1.09) $0.45 $(0.47) $1.33
==== ==== ==== ====

Consolidated Results
- --------------------
Our pretax loss from continuing operations of $364 million in the
second quarter of 2002 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, our second-quarter pretax
income from continuing operations of $221 million was $88 million
higher than pretax income in the comparable 2001 period,
primarily due to strong improvement in underwriting results in
our remaining property-liability operations. Through the first
half of 2002, our pretax income from continuing operations,
excluding the asbestos settlement, totaled $417 million, which
was 3% below comparable income of $431 million in the same 2001
period. The decline resulted from significant reductions in
realized investment gains and investment income in our property-
liability insurance operations, which more than offset a $183
million improvement in underwriting results (excluding the
asbestos settlement). In addition, pretax losses in the "Parent
and other" category exceeded comparable six-month 2001 losses due
to a decline in realized investment gains. Our asset management
subsidiary, The John Nuveen Company, achieved an increase in
earnings in both the second quarter and first half of 2002 when
compared to the same 2001 periods, driven by strong investment
product sales and growth in assets under management.

The tax benefit on our second-quarter and year-to-date
consolidated 2002 pretax loss from continuing operations is
higher than would be expected because the tax benefit on the $585
million pretax loss related to the asbestos litigation settlement
was recorded at the federal statutory rate of 35%, whereas
federal tax expense on our pretax income excluding that
settlement was recorded at an effective tax rate that is lower
than the statutory rate, primarily because of significant non-
taxable income produced by tax-exempt securities in our
investment portfolio.

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

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

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"). 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 settlement agreement provides that the MacArthur Companies
will file voluntary petitions under Chapter 11 of the Bankruptcy Code,
in order 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 Bankruptcty 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 second-quarter and
six-months 2002 net of expected reinsurance recoveries
and the reevaluation 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.

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
Management's Discussion, Continued

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

Our second-quarter 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 page 47 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)
====

Announcement of Intention to Transfer Ongoing Reinsurance
Operations to Bermuda-Based Reinsurer
- -------------------------------------
On April 25, 2002, we announced that we planned to transfer our
ongoing reinsurance operations to a newly formed Bermuda-based
reinsurer, Platinum Underwriters Holdings, Ltd. ("Platinum"). We
intend to transfer to Platinum certain renewal opportunities
and tangible and intangible assets of our reinsurance operation,
St. Paul Re, and enter into various agreements with Platinum and
its subsidiaries, in exchange for a percentage interest in the
common shares of Platinum that will be determined prior to
closing. A registration statement for the offering was filed
with the U.S. Securities and Exchange Commission on April 25,
2002. On July 9, 2002, we announced that the initial public
offering of Platinum was being temporarily postponed due to
unfavorable capital market conditions. We intend to complete the
transaction as market conditions allow.

At the time of the closing of the offering, Platinum will
reinsure St. Paul Fire and Marine Insurance Company and St. Paul
Reinsurance Company Limited for certain reinsurance contracts
incepting in 2002. Platinum will 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 will retain
those liabilities and the related reserves.

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 as of 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 six months
ended June 30, 2002. London Guarantee produced net
written premiums of $23 million and an underwriting profit of $2
million since the acquisition date.

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

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

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. 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);
- 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;
- 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.

Beginning in the second quarter of 2002, we changed our view of
the remaining ongoing reinsurance operations due to
our announced intent to transfer those ongoing operations to
Platinum, 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 qualify as "discontinued operations" for
accounting purposes; therefore, results from these operations are
included in their respective property-liability segment results
discussed on pages 38 to 44 of this report. For the six months
ended June 30, 2002, these operations collectively accounted for
$998 million, or 26%, of our reported net written premiums, and
generated negative underwriting results totaling $150 million (an
amount that does not include investment income from the assets
maintained to support these operations). Premium 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. For the six months ended June 30, 2001,
these operations collectively accounted for $1.32 billion, or
36%, of our net written premiums, and generated negative
underwriting results totaling $373 million.

Our consolidated net loss and loss adjustment expense reserves of
$15.5 billion on June 30, 2002 included approximately $6.3
billion of net reserves for our Reinsurance and Health Care
segments. The payments 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.

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

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

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
terminate an estimated total of 800 employees by the end of 2002.
As of June 30, 2002, we had terminated 504 employees and made
payments of $29 million related to the $46 million charge. The
remainder of the $62 million charge consisted of legal, equipment
and occupancy-related costs, for which less than $1 million in
payments had been made as of June 30, 2002.

In the first six 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 six months of 2002. In the first six months of 2001,
goodwill amortization expense totaled $18 million. Amortization
expense associated with intangible assets totaled $9 million in
the first six months of 2002, compared with $1 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).

September 11, 2001 Terrorist Attack
- -----------------------------------
In 2001, we recorded estimated net pretax losses totaling $941
million related to the September 11, 2001 terrorist attack in the
United States. We are continually evaluating the adequacy of the
net loss provision recorded, based on claim experience,
collections from our reinsurers, and other factors. Our estimate
was based on our belief that property-liability insurance losses
from the terrorist attack will total between $30 billion and $35
billion for the insurance industry as a whole, and on the
industry's determination that the attack constituted one event
for purposes of determining coverage. In the first six months of
2002, we did not record any additions or reductions to our
original estimated loss provision recorded in 2001. Through June
30, 2002, we have made cumulative net loss payments of $210
million related to the attack since it occurred, of which $148
million were made in the first six months of 2002, including $63
million in the second 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.

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

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

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 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 detonations.

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 of 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 - 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 June 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.
In the first six months of 2002 and 2001, we recorded pretax
losses of $6 million and $19 million, respectively, in
discontinued operations, related to pre-sale claims.

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

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

Subsequent Events
- -----------------
Issuance of Common Stock and Equity Units - On July 31, 2002, we
completed the sale of 17.8 million of our common shares for a gross
consideration of $431 million, or $24.20 per share. In addition, in
a separate concurrent offering, we completed the sale of 8.9 million
of 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 will be 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 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.

The combined net proceeds of the offerings, after underwriting
commissions and other fees, were approximately $842 million, of which
$750 million was contributed to the surplus of our insurance
underwriting subsidiaries. The remainder was retained at the parent
company and will be used for general corporate purposes.

Form 8-K Dated July 30, 2002 - Surety Ruling - As previously reported in the
Current Report on Form 8-K dated July 30, 2002, the United States District
Court for the Southern District of New York issued a ruling which
could result in a judgment awarding $237 million in insurance payments,
plus interest and costs, to Petrobas, an energy company that is
majority-owned by the country 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 announced on
July 30, 2002 that the impact on our after-tax earnings in the
third quarter of 2002 as a result of this ruling is not expected to
exceed $25 million, net of reinsurance, case reserves and taxes, prior
to any recoveries. We believe the recoveries may be significant,
but we cannot at this time reasonably estimate them.

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. 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.

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

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

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.

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.

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. If any of these investments experience a
decline in value that we believe is other than temporary, we
write down the investment for the decline and record a realized
loss on our statement of operations.

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

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

Overview
- --------
Our consolidated reported second-quarter written premiums of
$1.79 billion were 3% less than comparable 2001 premiums of $1.85
billion. For the first half of 2002, reported premium volume of
$3.90 billion was 5% higher than reported 2001 six-month volume
of $3.70 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, second-quarter 2002 written premium volume was reduced
by premiums ceded related to the terrorism reinsurance policies
purchased as described on page 31 of this report. Excluding
premiums produced by those operations to be exited in both
years, written premium volume of $1.48 billion in the second
quarter was 21% ahead of comparable 2001 premiums of $1.22
billion, and year-to-date volume of $2.90 billion was 22% higher
than the adjusted 2001 six-month premium total of $2.38 billion.
The strong growth was driven by price increases averaging 26% in
the first half 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 half of 2002, we were not party to an all-lines,
corporate aggregate excess-of-loss reinsurance treaty. In the
preceding three years, cessions made under such treaties had a
significant impact on our reported financial results for certain
periods. 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 six months of the year, and
the impact of the treaty on our six-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 second quarter and first
six 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 second quarter of
2001, St. Paul Re ceded $42 million of written premiums, $40
million of earned premiums and $76 million of insurance losses
and loss adjustment expenses under that treaty, for a net pretax
benefit of $36 million. For the six months ended June 30, 2001,
St. Paul Re ceded $45 million of written premiums, $43 million of
earned premiums and $102 million of insurance losses and loss
adjustment expenses for a net pretax benefit of $59 million.

Our reported consolidated loss ratio, which measures insurance
losses and loss adjustment expenses as a percentage of earned
premiums, was 103.5 for the second quarter of 2002, compared with
a reported loss ratio of 77.2 in the same 2001 period. The 2002
ratio was dominated by the $585 million asbestos litigation
settlement described on pages 27 and 28 of this report, which was
recorded entirely in our Commercial Lines segment. Excluding
that loss in 2002 and the benefit of the Reinsurance segment
treaty in 2001, our second-quarter 2002 adjusted loss ratio of
73.0 was almost seven points better than the comparable 2001
adjusted ratio of 79.8. The adjusted second-quarter loss ratios
in 2002 and 2001 include $97 million and $107 million,
respectively, of prior-year reserve strengthening in our Health
Care segment. The improvement in 2002 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 marked
improvement in current accident year underwriting results.

Catastrophe losses in the second quarter of 2002 totaled $21
million, compared with losses of $69 million in last year's
second quarter, the majority of which resulted from Tropical
Storm Allison in the United States. 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.

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

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

Our reported consolidated expense ratio, measuring underwriting
expenses as a percentage of written premiums, was 28.8 in the
second quarter of 2002, compared with the reported 2001 second-
quarter ratio of 29.3. Excluding the impact of the Reinsurance
segment treaty in 2001, the adjusted second-quarter 2001 ratio of
28.7 was virtually level with the 2002 ratio. The positive
effects of strong price increases and our aggressive expense
reduction efforts in recent years were somewhat offset in the
second quarter of 2002 by premiums ceded for terrorism coverage.
Through the first six months of 2002, our reported expense ratio
of 28.3 was over a point better than the 2001 six-month ratio of
29.8 (adjusted for the Reinsurance segment treaty).

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 Six Months Ended
(dollars in millions) June 30 June 30
------------------- ------------------ ----------------
2002 2001 2002 2001
------ ------ ------ ------
Specialty Commercial
Written Premiums 30%* $604 $485 $1,180 $941
Underwriting Result $60 $17 $64 $7
Combined Ratio 88.5 95.7 93.8 98.9

Commercial Lines
Written Premiums 23%* $381 $388 $887 $818
Underwriting Result $(530) $37 $(527) $114
Combined Ratio 226.5 90.3 161.6 83.1

Surety and Construction
Written Premiums 17%* $329 $257 $677 $521
Underwriting Result $5 $21 $9 $41
Combined Ratio 96.7 87.8 95.6 89.1

Health Care
Written Premiums 5%* $29 $147 $177 $324
Underwriting Result $(102) $(124) $(100) $(254)
Combined Ratio 205.0 175.3 142.4 172.9

Lloyd's and Other
Written Premiums 8%* $245 $296 $312 $394
Underwriting Result ----- $(20) $(28) $(59) $(51)
Combined Ratio 111.2 113.5 120.9 115.2
----- ----- ----- -----
Total Primary Insurance
Written Premiums 83%* $1,588 $1,573 $3,233 $2,998
Underwriting Result $(587) $(77) $(613) $(143)
Combined Ratio 137.8 105.2 120.1 104.6

Reinsurance
Written Premiums 17%* $201 $280 $662 $701
Underwriting Result ----- $(4) $(36) $11 $(57)
Combined Ratio 104.5 114.6 96.5 107.5

Total Property-
Liability Insurance
Written Premiums 100% $1,789 $1,853 $3,895 $3,699
GAAP Underwriting ====
Result $(591) $(113) $(602) $(200)

Statutory Combined
Ratio
Loss and Loss Expense Ratio 103.5 77.2 87.7 75.0
Underwriting Expense Ratio 28.8 29.3 28.3 30.2
----- ----- ----- -----
Combined Ratio 132.3 106.5 116.0 105.2
===== ===== ===== =====

* 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
- -------------------------------

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
products and services requiring specialty expertise and each
focuses on the respective customer group it serves. The following
table summarizes results for this segment for the second quarters
and six months ended June 30, 2002 and 2001.

Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------

Net written premiums $604 $485 $1,180 $941
Percentage increase over 2001 25% 25%

Underwriting result $60 $17 $64 $7

Statutory combined ratio:
Loss and loss adjustment
expense ratio 66.1 69.3 69.9 72.4
Underwriting expense ratio 22.4 26.4 23.9 26.5
----- ----- ----- -----
Combined ratio 88.5 95.7 93.8 98.9
===== ===== ===== =====

The strong premium growth in 2002 was driven by domestic price
increases that averaged 28% in the second quarter and 27% year-to-
date across the entire segment. The following discussion
summarizes results from several of the largest business centers
in this segment.

- International Specialty - Premium volume of $119 million
in the second quarter of 2002 grew 65% over the 2001 second-
quarter total, with the increase primarily due to price
increases that averaged in excess of 40% in the international
markets where we operate. Year-to-date premium volume in 2002
totaled $182 million, 43% 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 second-quarter
loss ratio in this business center improved by over 30 points
to 81.2, reflecting the impact of our decision to exit those
international markets where we lacked the scale to produce
profitable results. The year-to-date loss ratio of 80.6 was
nearly 25 points better than the comparable 2001 ratio.

- Financial & Professional Services - Written premiums of
$108 million in the second quarter of 2002 grew 14% over the
same 2001 period, driven by price increases on domestic
renewal business averaging 35%. Year-to-date premiums of $224
million in 2002 grew 19% over the first half of 2001. The
loss ratio of 65.7 in the second quarter of 2002 was
significantly worse than the comparable 2001 ratio of 42.3.
The 2001 ratio was driven by favorable prior-year development
on lawyers' professional liability business. Current year
loss development in 2002 was slightly better than comparable
current year development in 2001.

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

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

- Technology - Premium volume of $101 million in the second
quarter fell 6% compared with second-quarter 2001 volume,
reflecting slowing growth in the technology market sector.
Price increases averaged 22% in the second quarter. Through
the first half of 2002, premium volume of $200 million was
level with the same period of 2001. The loss ratio was 56.2
in the second quarter of 2002, compared with the 2001 second-
quarter ratio of 68.2. Improvement in current accident year
loss experience was the primary factor driving the reduction
in the loss ratio.

- Umbrella/Excess & Surplus Lines - Price increases
averaging 42% and new business combined to produce second-
quarter 2002 written premiums of $61 million, an increase of
$29 million over the same period of 2001. Year-to-date
premium volume of $123 million was more than double the six-
month 2001 total of $56 million. The six-month 2002 loss
ratio of 73.6 was nearly nine points better than the
comparable 2001 ratio of 82.3.

- Public Sector - Written premiums totaled $36 million in
2002's second quarter, down 13% from the same period of 2001
due to a reduction in new business, as well as lower retention
rates. Price increases on renewal business averaged 23% in
the second quarter of 2002. Six-month 2002 premium volume of
$101 million was 11% ahead of the same period last year. The
second-quarter loss ratio of 62.7 in 2002 was much improved
over the comparable 2001 ratio of 77.0, primarily due to
significant improvement in current accident year loss
experience.

Commercial Lines
- ----------------
The Commercial Lines segment includes our Small Commercial,
Middle Market Commercial and Large Accounts business centers, as
well as the results of our limited involvement in insurance
pools. The Small Commercial business center serves small
businesses such as retailers, wholesalers, service companies,
professional offices, manufacturers and contractors. 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 Accounts business center offers insurance programs to
larger commercial businesses that are willing to share insurance
risk through significant deductibles and self-insured retentions.
The following table summarizes results for this segment for the
second quarters and six months ended June 30, 2002 and 2001.

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

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

Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------

Net written premiums $381 $388 $887 $818
Percentage change from 2001 (2%) 8%

Underwriting result $(530) $37 $(527) $114

Statutory combined ratio:
Loss and loss adjustment
expense ratio 193.4 60.6 130.8 52.7
Underwriting expense ratio 33.1 29.7 30.8 30.4
----- ----- ----- -----
Combined ratio 226.5 90.3 161.6 83.1
===== ===== ===== =====

The slight decline in second-quarter premium volume compared with
2001 was due to premiums ceded in the quarter related to
terrorism reinsurance coverage, and a deliberate focus on price
increases which led to a reduction in new business volume,
particularly in the Middle Market Commercial business center. The
increase in year-to-date premium volume was principally driven by
strong price increases, as we took the opportunity presented by
favorable market conditions to actively manage our growth while
focusing on improving profitability. Price increases across the
entire segment averaged 25% in the second quarter and 23% year-to-
date. Middle Market Commercial premiums in the second quarter
totaled $199 million, compared with $219 million in the same 2001
period. In our Small Commercial business center, second quarter
premiums of $149 million grew 7% over the second quarter of 2001.
We are in the process of building a field organization and
business platform to more efficiently serve the small commercial
insurance market.

The reported loss ratio and underwriting result in the Commercial
Lines segment in the second quarter of 2002 was dominated by the
$585 million asbestos litigation settlement described on pages 27
and 28 of this report. Excluding that settlement, the second-
quarter 2002 loss ratio was 57.1, over three points improved
compared with the 2001 second-quarter ratio of 60.6. The year-to-
date 2002 loss ratio without the asbestos settlement was 62.9.
Last year's reported six-month loss ratio was unusually favorable
due to the impact of a $100 million 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, the six-month 2001 loss ratio was 66.1,
over three points worse than the adjusted 2002 six-month ratio.
Current accident year results in 2002 for both the Small and
Middle Market Commercial business centers improved over
comparable results in 2001, reflecting the impact of price
increases and an improvement in the quality of our book of
business. The 3.4-point expense ratio increase in the second
quarter over the prior year primarily reflected the impact of
premiums ceded for terrorism reinsurance coverage, which
increased the commission component of the expense ratio.
Additionally, the 2001 second-quarter expense ratio was impacted
by a reduction in our accrual for guaranty funds (recorded in
"Pools and other").

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 second quarters and six months ended June 30,
2002 and 2001.

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

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

Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------

Net written premiums $329 $257 $677 $521
Percentage change from 2001 28% 30%

Underwriting profit $5 $21 $9 $41

Statutory combined ratio:
Loss and loss adjustment
expense ratio 62.2 51.9 62.8 53.0
Underwriting expense ratio 34.5 35.9 32.8 36.1
----- ----- ----- -----
Combined ratio 96.7 87.8 95.6 89.1
===== ===== ===== =====

Surety premium volume of $141 million in 2002's second quarter
grew 30% over premiums of $108 million in the same 2001 period,
driven by $17 million of surety premiums generated by London
Guarantee Insurance Company, acquired near the end of March 2002.
(See page 28 of this report for further details about the
acquisition). Surety's year-to-date premium volume of $251
million grew 18% over the same period of 2001, due to the
additional premiums from London Guarantee and $27 million of
premiums generated from our acquisition in late 2001 of the right
to seek to renew surety business previously underwritten by
Fireman's Fund Insurance Company. Excluding the impact of the
two acquisitions, our surety premium volume through the first
half of 2002 was slightly below comparable 2001 levels,
reflecting the tightened underwriting standards we have
maintained over the last two years in an uncertain economic
environment. In 2001, our Surety operation began to reduce
its commercial surety business. In the Construction business center,
second-quarter and six-month premium volume of $188 million and $426
million, respectively, was 27% and 39% ahead of the respective
periods of 2001. The strong growth was driven by price increases
averaging 28% in the first half of the year.

The Surety business center accounted for the decline in
underwriting profit in this segment compared with the second
quarter and first six months of 2001. Surety's six-month loss
ratio of 44.4 was nearly eleven points worse than the comparable
2001 ratio of 33.5, primarily due to an increase in the current
accident year loss ratio. Despite that deterioration, however,
Surety's operations remained profitable, posting a $2 million
underwriting profit in 2002, compared with a profit of $32
million in the first half of 2001. In July 2002, we announced
that after-tax losses in our Surety operation in the third
quarter resulting from a recent court ruling regarding surety
bonds issued in connection with the construction of two large
Brazilian oil rigs are not expected to exceed $25 million. See
page 32 of this report for further details about this ruling.

Construction's second-quarter loss ratio of 72.8 was worse than
the comparable 2001 ratio of 66.4, due to favorable prior-year
loss development in 2001. Despite the loss ratio increase, the
Construction business center posted an underwriting profit of $6
million in the second quarter of 2002, level with the same period
of 2001. The segment-wide six-month 2002 expense ratio was over
three 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.

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

Property-Liability Insurance (continued)
---------------------------------------
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 six months ended June 30, 2002
and 2001.

Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------

Net written premiums $29 $147 $177 $324
Percentage decline from 2001 (80%) (45%)

Underwriting result $(102) $(124) $(100) $(254)

Statutory combined ratio:
Loss and loss adjustment
expense ratio 150.4 148.9 113.7 147.8
Underwriting expense ratio 54.6 26.4 28.7 25.1
----- ----- ----- -----
Combined ratio 205.0 175.3 142.4 172.9
===== ===== ===== =====

Written premiums in 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 June 30, 2002, we had obtained regulatory
approval to cease underwriting new business in all but two
states, and 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. We
anticipate net written premium volume of approximately $350
million in the Health Care segment for the full year of 2002,
with reporting endorsement premiums expected to account for the
majority of that total.

The underwriting loss in the second quarter and first half of
2002 primarily resulted from an approximately $100 million
provision 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. Our continuing actuarial analysis may or may not
conclude that further reserve increases 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 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 beginning in 2002, and would, when
current contractual commitments expire in 2003, end our
involvement in the insuring of the Lloyd's Central Fund. At
Unionamerica, we ceased underwriting new business in late 2000
except for that business we are contractually obligated to
underwrite through 2004. The following table summarizes this
segment's results for the quarters and six months ended June 30,
2002 and 2001.

Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------

Net written premiums $245 $296 $312 $394
Percentage decline from 2001 (17%) (21%)

Underwriting result $(20) $(28) $(59) $(51)

Statutory combined ratio:
Loss and loss adjustment
expense ratio 89.0 94.6 95.1 91.6
Underwriting expense ratio 22.2 18.9 25.8 23.6
----- ----- ----- -----
Combined ratio 111.2 113.5 120.9 115.2
===== ===== ===== =====

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 four key product lines: marine, personal lines,
property and aviation. The decline in reported premium volume in
the second quarter and first half 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 second quarter and first six months of 2002 increased 41% and
29%, 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. Our ongoing operations at Lloyd's produced an
underwriting profit of $8 million in the second quarter of 2002,
compared with an underwriting profit of $2 million in the same
2001 period. We are continuing to review the role of our
operations at Lloyd's in our long-term corporate strategy.

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 29 of this report. In April
2002, we announced our intention to transfer our ongoing
reinsurance operations to a Bermuda-based reinsurer, as described
in more detail on page 28 of this report. The following table
summarizes key financial data for the Reinsurance segment for the
first quarters of 2002 and 2001, excluding the impact of the
aggregate excess-of-loss reinsurance treaty exclusive to this
segment that is described on page 35 of this report.

Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Dollars in millions) 2002 2001 2002 2001
------------------- ------ ------ ------ ------

Net written premiums $201 $322 $662 $746
Percentage decline from 2001 (38%) (11%)

Underwriting result $(4) $(72) $11 $(116)

Statutory combined ratio:
Loss and loss adjustment
expense ratio 70.0 88.1 67.4 82.1
Underwriting expense ratio 34.5 35.0 29.1 34.3
----- ----- ----- -----
Combined ratio 104.5 123.1 96.5 116.4
===== ===== ===== =====

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 second quarter and first six
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 second quarter and first half 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. Underwriting
results in both periods of 2002 benefited from the absence of
major catastrophes and favorable development on catastrophe
losses incurred in prior years, whereas 2001 second-quarter and
six-month results included catastrophe losses resulting from
Tropical Storm Allison in the United States. 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 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
- ---------------------
Second-quarter 2002 pretax net investment income in our property-
liability insurance operations of $283 million was $12 million,
or 4%, below investment income in the same period of 2001.
Through the first six months of 2002, investment income totaled
$573 million, down 8% from the prior year total of $625 million.
Last year's six-month total was unusually high due to $22 million
of income generated by the sale of certain properties in our real
estate investment portfolio. Our investment income in recent
quarters 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. In
addition, we made cumulative premium payments totaling $639
million between the fourth quarter of 1999 and the first quarter
of 2001 related to our corporate reinsurance program. 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 6.0%
and 3.8%, respectively, at June 30, 2002.

We expect our investment income levels in future periods to be
negatively impacted 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 the 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 will negatively impact our
investment income in future periods. We expect these factors to
be mitigated somewhat, however, by continued price increases and
improving loss experience in our ongoing insurance operations, as
well as investment returns on the net $842 million of proceeds
received from our issuance of common stock and equity units in
July 2002.

Pretax realized investment losses in our property-liability
insurance operations totaled $38 million in the second quarter of
2002, compared with realized gains of $6 million in the same 2001
period. Losses in this year's second quarter were centered in
our equity portfolio. During the second quarter, we made a
strategic decision to liquidate a substantial portion of our
equity investment holdings and redeploy those funds in fixed
maturities. Accordingly, we reduced our equity investments by
approximately $500 million in the second quarter. In addition,
we recorded writedowns in the carrying value of WorldCom
Corporation and Adelphia Corporation bonds in our portfolio
totaling $13 million in the second quarter. Through the first
half of 2002, pretax realized losses totaled $77 million,
compared with realized gains of $58 million in the same 2001
period. Losses generated by our venture capital portfolio in the
first quarter of 2002 accounted for a significant portion of our
year-to-date 2002 losses. Pretax realized gains in the first
half of 2001 included a gain of $77 million on the sale of our
investment in RenaissanceRe Holdings Ltd., a Bermuda-based
reinsurer.

The market value of our $16.1 billion fixed maturities portfolio
exceeded its cost by $699 million at June 30, 2002.
Approximately 96% of that portfolio is rated at investment grade
(BBB or above). The weighted average pretax yield on those
investments was 6.5% at June 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.

PAGE>

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

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

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.

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 27 and 28 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. Following a comprehensive review of our known
environmental and asbestos exposures, we determined that our
environmental reserves were higher than necessary, and that,
including the impact of the Western MacArthur settlement, our
asbestos reserves were inadequate. As a result, we determined a
reclassification adjustment was appropriate. (See further
discussion on the following page regarding our asbestos and
environmental reserves.)

The following table represents a reconciliation of total gross
and net environmental reserve development for the six months
ended June 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)
--------------------------------------------

2002
Environmental (six months) 2001 2000
------------- ---------- ----------- -----------
(In millions) Gross Net Gross Net Gross Net
----------- ----- --- ----- --- ----- ---

Beginning reserves $582 $507 $665 $563 $698 $599
Incurred losses (152) (153) 1 18 25 14
Paid losses:
Not underwritten (22) (18) (73) (63) (45) (38)
Underwritten (6) (5) (11) (11) (13) (12)
---- ---- ---- ---- ---- ----
Ending reserves $402 $331 $582 $507 $665 $563
==== ==== ==== ==== ==== ====

Included in the gross and net incurred losses for the six months
ended June 30, 2002 was a $150 million reduction of
environmental reserves.

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 June 30, 2002 the gross and net reserves were
both $30 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 six
months ended June 30, 2002, and the years ended Dec. 31, 2001 and
2000. No policies have been underwritten to specifically include
asbestos exposure.

2002
Asbestos (six months) 2001 2000
-------- ---------- ----------- -----------
(In millions) Gross Net Gross Net Gross Net
----------- ----- --- ----- --- ----- ---

Beginning reserves $ 478 $367 $397 $299 $398 $298
Incurred losses 988 737 133 110 41 33
Paid losses (279) (274) (52) (42) (42) (32)
----- ---- ---- ---- ---- ----
Ending reserves $1,187 $830 $478 $367 $397 $299
===== ==== ==== ==== ==== ====

Included in the gross and net incurred losses for the six months
ended June 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 six months ended June 30, 2002 was a $150 million
increase in asbestos reserves. Gross and net paid losses include
the $248 million payment made in June 2002.

Our reserves for environmental and asbestos losses at June 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 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 June 30, 2002,
of $1.6 billion represented approximately 7% of gross
consolidated reserves of $22.5 billion.

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

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

Our asset management segment consists of our 78% majority
ownership interest in The John Nuveen Company (Nuveen). Nuveen
provides customized individual accounts, mutual funds, exchange-
traded funds and defined portfolios through financial advisors
serving the affluent, high net worth and institutional market
segments. Highlights of Nuveen's performance for the quarters
and six months ended June 30, 2002 and 2001 were as follows:

Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(in millions) 2002 2001 2002 2001
----------- ------ ------ ------ ------
Revenues $ 91 $ 87 $ 185 $ 174
Expenses 41 42 86 84
---- ---- ---- ----
Pretax earnings 50 45 99 90
Minority interest (11) (11) (22) (21)
---- ---- ---- ----
The St. Paul's share
of pretax earnings $ 39 $ 34 $ 77 $ 69
==== ==== ==== ====

Assets under management $68,496 $62,990
====== ======

Nuveen's revenue growth in the second quarter and first six
months of 2002 was driven by an increase in investment advisory
fees over the same periods of 2001. Gross sales of investment
products totaled $3.3 billion in the second quarter of 2002,
level with the same period of 2001. Second-quarter 2002 sales
were comprised of $1.5 billion of retail and institutional
managed accounts, $1.4 billion of closed-end exchange-traded
funds and $0.4 billion of mutual funds. Nuveen's commitment to
core, long-term investment disciplines and specialized investment
expertise has led to continued earnings growth despite a
challenging investment environment. Difficult market conditions
for equity investments caused strong demand for Nuveen's broad
range of fixed-income investments in the second quarter of 2002.
Nuveen's net flows (equal to the sum of sales, reinvestments and
exchanges, less redemptions and withdrawals) during the first
half of 2002 totaled $2.5 billion, compared with net flows of
$4.7 billion in the same period of 2001.

Managed assets at the end of the second quarter consisted of
$35.1 billion of exchange-traded funds, $17.0 billion of retail
managed accounts, $4.8 billion of institutional managed accounts
and $11.6 billion of mutual funds. Total
managed assets at June 30, 2002 were down slightly from the
comparable total at the end of the first quarter, reflecting the
impact of a decline in equity values. Managed assets were,
however, 9% higher than a year ago, primarily due to Nuveen's
July 2001 acquisition of Symphony Asset Management LLC, an
institutional money management firm, which added approximately $4
billion in managed assets. In May 2002, Nuveen announced an
agreement to acquire NWQ Investment Management, an asset
management firm based in Los Angeles. On August 1, 2002, Nuveen
announced that this acquisition had been completed, which added
approximately $7 billion to Nuveen's assets under management.

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

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

Common shareholders' equity totaled $4.92 billion at June 30,
2002, down $133 million, or 3%, from the year-end 2001 total of
$5.06 billion. The decline was driven by our net loss of $90
million in the first half of the year and dividends declared on
our common stock totaling $121 million. These reductions to
equity were partially offset by a $21 million increase in the
unrealized appreciation of our investment portfolio and an $11
million reduction in the unrealized loss on foreign currency
translation.

Total debt at June 30, 2002 of $2.12 billion was virtually level
with the year-end 2001 total of $2.13 billion. In March 2002, we
issued $500 million of 5.25% senior notes that mature in 2007,
the proceeds of which were primarily used to repay a like amount
of our commercial paper outstanding. Our ratio of total debt
obligations to total capitalization of 26% at the end of the
second quarter was level with the year-end 2001 ratio of 26%.
Net interest expense related to debt totaled $53 million in the
first half of 2002, compared with $59 million in the same period
of 2001. Preferred distribution expense related to mandatorily
redeemable preferred securities of trusts guaranteed by us
totaled $35 million in the first half of 2002, compared with $14
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.

The 17.8 million common shares we issued in July 2002 will
increase our common equity by $413 million, net of commissions
and expenses paid. The debt component of the equity units we
issued in July 2002 will increase the total debt on our balance
sheet by $443 million. However, the present value of the stock
purchase contracts associated with the equity units will be
classified as a contra-equity account reducing our reported
common equity by approximately $46 million.

Capital expenditures that we might consider during the remainder
of 2002 include acquisitions of existing businesses consistent
with our commercial insurance focus. As of August 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 six months of 2002, our loss from continuing
operations was inadequate to cover "fixed charges" by $168
million and "combined fixed charges and preferred stock
dividends" by $175 million. For the first six months of 2001,
the ratio of earnings to fixed charges was 6.03, and the ratio of
earnings to combined fixed charges and preferred stock dividend
requirements was 5.57. 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 $82
million in the first six months of 2002, compared with cash used
by continuing operations of $45 million in the same period of
2001. 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 loss
payments totaling $148 million related to the September 11, 2001
terrorist attack. Operational cash flows generated by our
ongoing property-liability operations in 2002 were substantially
better than the same period of 2001, due to significant price
increases and improving loss experience. In addition, we made no
premium payments related to our corporate reinsurance program in
the first six months of 2002, whereas such payments totaled $164
million in the same 2001 period.

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 second
half 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 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.

During and subsequent to the second quarter, 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. The common
stock and equity units offering in July 2002 is evidence of this
capacity. 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 disposal plan. The provisions of SFAS No. 146 are to
be applied prospectively to exit or disposal activities initiated
after December 31, 2002.

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 April
25, 2002 related to the announcement of The St. Paul's intent
to transfer its ongoing reinsurance operation to a newly
formed Bermuda-based reinsurer, Platinum Underwriters
Holdings, Ltd.

2) The St. Paul filed a Form 8-K Current Report dated June
3, 2002 related to the announcement of the settlement of the
Western MacArthur asbestos litigation.

3) 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.

4) 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.

5) 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.

6) 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.

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

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

EXHIBIT INDEX

Exhibit
- -------

(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession*..........................................

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

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

(10) Material contracts**
(a) Retention Incentive Agreement between The St. Paul and
Mr. John A. MacColl dated May 20, 2002...........................(1)

(b) Settlement Agreement dated June 3, 2002 among MacArthur
Company, Western MacArthur Company and Western
Asbestos Company, together with each of their predecessors
and successors, affiliates and subsidiaries,
United States Fidelity & Guaranty Co., The St. Paul
Fire and Marine Insurance Company, The St. Paul
Companies, Inc., its affiliates and subsidiaries,
and the Asbestos Plaintiffs***....................................

(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 from The St. Paul's
Current Report on Form 8-K dated July 23, 2002.

(1) Filed herewith.