A.M. Best Downgrades Debt Ratings of St. Paul Travelers; Affirms Financial Strength Ratings

July 25, 2004

A.M. Best Co. has downgraded the debt ratings of St. Paul Travelers Companies Inc. (St. Paul Travelers) to “a-” from “a” on senior debt, “bbb+” from “a-” on subordinated debt, “bbb” from “bbb+ on trust preferred securities and “bbb” from “bbb+” on preferred stock. Best has also downgraded the debt ratings of Travelers Property Casualty Corp. (Travelers) and Travelers Insurance Group Holdings Inc. to “a-” from “a” on senior debt and “bbb+” from “a-” on subordinated notes. The debt rating AMB-1 has been affirmed on the commercial paper of St. Paul Travelers. All ratings have a stable outlook.

These rating actions follow Friday’s pre-announcement by St. Paul Travelers that it would increase reserves by $1.625 billion in second quarter 2004 to be reported on July 28, 2004. These rating actions consider this substantial reserve increase and its negative effects on statutory earnings, capital accumulation and holding company cash, which were not previously anticipated.

From a GAAP accounting standpoint, depending on guidance from the Securities and Exchange Commission (SEC), the reserve increase could be recorded through St. Paul Travelers’ income statement and could result in a substantial net loss for the second quarter, or potentially, under purchase accounting, be charged directly to St. Paul Travelers’ opening balance sheet and not impact earnings. Alternatively, some of the charges could be recorded through the income statement and some directly to the opening balance sheet. However, under statutory accounting principles, the charge will be recorded through the income statement.

The debt rating downgrades reflect Best’s view of St. Paul Travelers, which considers the elimination of dividends from the St. Paul Companies (St. Paul, MN) in the second half of 2004 and the planned $650 million dividend from Travelers Property Casualty Pool (Travelers PC Pool) (Hartford, CT) for the benefit of the St. Paul Companies. Short-term borrowings—expected to be repaid—will remain outstanding through 2004, and holding company cash will fall short of Best’s expectations. It is important to note, however, that barring any unusual charges, prospective earnings for the group should be more than adequate to service existing debt obligations, stockholder dividends and the repayment of its commercial paper program.

Additionally, Best has affirmed the financial strength ratings of A+ (Superior), A (Excellent) and A- (Excellent) of Travelers PC Pool, St. Paul Companies and Discover Reinsurance Company (Indiana), respectively. The rating outlook for Travelers PC Pool remains stable. The rating outlook for the St. Paul Companies has been revised to stable from positive given that virtually all of the charges to be taken in second quarter 2004 are related to the St. Paul Companies. In addition, the rating outlook for Discover Reinsurance Company has been revised to negative from stable, reflecting the potential for further reserve strengthening at the company in 2004.

The $1.625 billion reserve increase by the St. Paul Companies in the second quarter 2004 exceeded Best’s expectations by a sizable margin. The degree and need for Travelers to financially support the St. Paul Companies was unanticipated. While St. Paul Travelers has referred to the $1.625 billion reserve increase as conforming reserve valuation adjustments, Best considers nearly all of the reserve increase to be akin to loss reserve strengthening. Moreover, statutory earnings, surplus and holding company cash projections have all been revised downward.

With regard to asbestos and environmental (A&E) reserves, Best is cautiously awaiting the completion of an internal annual reserve study to be concluded in fourth quarter 2004, which may result in the possibility of further A&E reserve strengthening at the St. Paul Companies. Furthermore, despite the added conservatism to the St. Paul Companies’ core reserves, as well as reserves on discontinued businesses, Best believes some additional reserve adjustments may be necessary. As such, additional surplus infusions may be required at the St. Paul Companies.

The financial strength rating affirmations reflect the progress made to date with regard to the St. Paul Travelers’ merger, the adequacy of surplus relative to the ratings assigned to the St. Paul Companies and Travelers PC Pool and the solid earnings prospects of St. Paul Travelers, albeit on a longer-term horizon.

St. Paul Travelers has a market profile and franchise that ranks second in the United States in commercial lines, as well as in personal lines agency companies. The ability to cross-sell complementary products should enhance its position within the commercial lines market at a time when pricing in the industry is leveling off and growth is expected to soften. Expense savings are also expected to be realized through 2005. Despite the planned $650 million dividend from Travelers PC Pool in the second half of 2004, the capitalization of Travelers PC Pool should remain supportive of its current rating.

For a comprehensive list of St. Paul Travelers Companies, Inc.’s financial strength and debt ratings, visit: www.ambest.com/press/072301stpaul.pdf.

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