Common use of Expense Ratio Clause in Contracts

Expense Ratio. St. Paul Re's reported expense ratio for the six months ended June 30, 2002 was 29.2%, compared with 36.5% in the same period of 2001. The significant improvement in the expense ratio was due to the exiting of unprofitable lines of business. YEAR ENDED DECEMBER 31, 2001 VS. YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 Loss Ratio St. Paul Re's reported loss ratio in 2001 included a 42.6 percentage point detriment from losses incurred in the terrorist attack. The reported loss ratios in 2001, 2000 and 1999 also included benefits from the reinsurance treaties. Catastrophe losses totaled $880 million in 2001, of which $788 million was due to the September 11, 2001 terrorist attack. Most of the other $92 million of catastrophe losses were the result of a variety of storms throughout the year in the U.S. and the explosion of a chemical 176 manufacturing plant in Toulouse, France. In 2000 and 1999, catastrophe losses totaled $135 million and $143 million, respectively. Additional loss development arising from severe windstorms that struck portions of Europe in late 1999 and severe flooding in the United Kingdom drove the 2000 total. Major events contributing to the 1999 total included Hurricane Floyd, earthquakes in Taiwan and Turkey, and European windstorms. Expense Ratio St. Paul Re's reported expense ratio in 2001 included an 8.2 percentage point benefit resulting from a $91 million reduction in contingent commissions that had been accrued prior to September 11, 2001. The magnitude of losses from the terrorist attack resulted in the reversal of that accrual. The reported expense ratios in 2001, 2000 and 1999 included detriments from the reinsurance treaties. No underwriting expenses were ceded under the treaties; however, the expense ratios in all three years included the effects of written premiums ceded under the treaties. During 2000, St. Paul Re reduced its estimate of ultimate losses on certain non-traditional reinsurance business by $56 million, and made a corresponding increase in its estimate of reserves for contingent commissions by $66 million. Although these changes in estimate did not have a significant impact on underwriting results for the year, they did distort the components of the combined ratio in 2000. Excluding these changes, the loss ratio would have been 89.8%, and the expense ratio would have been 29.8% (both excluding the benefits of the reinsurance treaties). The following pages provide a more detailed discussion of results for the years ended December 2001, 2000 and 1999 and for the three month and six-month periods ended June 30, 2002 and 2001 produced by St. Paul Re's four business segments. To provide a more meaningful analysis of the underlying performance of St. Paul Re's business segments, the discussion of segment results excludes the impact of the September 11, 2001 terrorist attack in 2001 and the reinsurance treaties in all three years. The impact of the terrorist attack on individual segment results, and the impact of the reinsurance treaties was discussed earlier in this prospectus.

Expense Ratio. St. Paul Re's reported expense ratio for the six months ended June 30, 2002 was 29.2%, compared with 36.5% in the same period of 2001. The significant improvement in the expense ratio was due to the exiting of unprofitable lines of business. YEAR ENDED DECEMBER 31, 2001 VS. YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 Loss Ratio St. Paul Re's reported loss ratio in 2001 included a 42.6 percentage point detriment from losses incurred in the terrorist attack. The reported loss ratios in 2001, 2000 and 1999 also included benefits from the reinsurance treaties. Catastrophe losses totaled $880 million in 2001, of which $788 million was due to the September 11, 2001 terrorist attack. Most of the other $92 million of catastrophe losses were the result of a variety of storms throughout the year in the U.S. and the explosion of a chemical 176 183 manufacturing plant in Toulouse, France. In 2000 and 1999, catastrophe losses totaled $135 million and $143 million, respectively. Additional loss development arising from severe windstorms that struck portions of Europe in late 1999 and severe flooding in the United Kingdom drove the 2000 total. Major events contributing to the 1999 total included Hurricane Floyd, earthquakes in Taiwan and Turkey, and European windstorms. Expense Ratio St. Paul Re's reported expense ratio in 2001 included an 8.2 percentage point benefit resulting from a $91 million reduction in contingent commissions that had been accrued prior to September 11, 2001. The magnitude of losses from the terrorist attack resulted in the reversal of that accrual. The reported expense ratios in 2001, 2000 and 1999 included detriments from the reinsurance treaties. No underwriting expenses were ceded under the treaties; however, the expense ratios in all three years included the effects of written premiums ceded under the treaties. During 2000, St. Paul Re reduced its estimate of ultimate losses on certain non-traditional reinsurance business by $56 million, and made a corresponding increase in its estimate of reserves for contingent commissions by $66 million. Although these changes in estimate did not have a significant impact on underwriting results for the year, they did distort the components of the combined ratio in 2000. Excluding these changes, the loss ratio would have been 89.8%, and the expense ratio would have been 29.8% (both excluding the benefits of the reinsurance treaties). The following pages provide a more detailed discussion of results for the years ended December 2001, 2000 and 1999 and for the three month and six-month periods ended June 30, 2002 and 2001 produced by St. Paul Re's four business segments. To provide a more meaningful analysis of the underlying performance of St. Paul Re's business segments, the discussion of segment results excludes the impact of the September 11, 2001 terrorist attack in 2001 and the reinsurance treaties in all three years. The impact of the terrorist attack on individual segment results, and the impact of the reinsurance treaties was discussed earlier in this prospectus.