Hartford Steam Boiler, Subs Upgraded

A.M. Best Co. upgraded the financial strength rating to "A++" (superior) from "A+" (superior) of Connecticut-based The Hartford Steam Boiler Inspection and Insurance Company and three subsidiaries--The Hartford Steam Boiler Inspection and Insurance Company of Connecticut, HSB Engineering Insurance Limited of London and The Boiler Inspection and Insurance Company of Canada, in Ontario.

The outlook is stable. The rating upgrade is based on positive factors that include HSB's unique franchise, level of capitalization, quality earnings--which have consistently outpaced the industry--and positive reserve position. Ownership by American International Group Inc. of New York, N.Y., is also a consideration. However, on a stand-alone basis, HSB meets the rating criteria for "A++" (superior)-rated companies.

The rating reflects surplus that surpasses the minimum required for the rating level, historically outstanding operating results and sustainable competitive advantages derived from the group's preeminent technical expertise, extensive loss control capabilities and database. HSB's reserves have proved redundant in recent years. Further, HSB's larger, more volatile power generation risks are being ceded 100 percent to AIG.

In addition to being the leading provider of specialty engineering property and boiler and machinery insurance in the United States, HSB has a solid worldwide reputation for its outstanding loss control and risk management services. These factors are further enhanced by the group's firmly entrenched position in the United States, its gradual expansion outside of North America and its large base of client insurance companies, which utilize its underwriting expertise, loss control and engineering services.

The rating also acknowledges HSB's favorable distribution strategy, high customer loyalty and persistency. Compared to the industry, HSB's expense ratio remains high; however, this expense burden stems from its heavy emphasis on loss prevention, failure analysis and other engineering services, which serve to contain losses and maintain HSB's exceptional loss ratio advantage.

Arch Affirmed, Outlook Positive

S&P revised its outlook on Arch Capital Group Ltd. to positive from stable, and affirmed its "BBB-" counterparty credit rating on Arch.

The outlook was revised to reflect Arch and its subsidiaries' substantially improved capital adequacy position relative to prior years, the group's moderating premium growth, and the expectation that Arch's strategy will remain prudent in a market that has already begun to soften. The ratings are based on the group's growing business franchise, very strong operating performance, very strong capital adequacy, and strong financial flexibility. These factors are offset by the companies' relatively short operating history and significant proportion of casualty writings that have not yet fully matured.

The group is expected to post modest growth in the low-single-digit range in 2005, reflecting management's continued underwriting discipline. Operating results are expected to remain strong. Assuming normal catastrophe losses, operating performance is expected to improve further in 2005, and capital adequacy is expected to remain very strong.

St. Paul Travelers Subs Affirmed

Standard & Poor's Ratings Services affirmed its "A+" counterparty credit and financial strength ratings on the members of the St. Paul Intercompany Pool, the members of the Travelers Intercompany Pool, Travelers Casualty and Surety Co. of America, and Travelers Casualty and Surety Co. of Europe Ltd.

S&P also affirmed its "BBB+/A-2" counterparty credit rating on St. Paul Travelers Cos. The outlook on all companies remains stable.

The affirmations follows St. Paul Travelers' announcement that it strengthened net reserves by $868 million on a pretax basis ($581 million after taxes) in fourth quarter 2004. The reserve strengthening follows the completion of a previously announced review of asbestos and environmental claims reserves. The pretax charge for asbestos and environment reserves was $1 billion, but this was partly offset by the release of $140 million of reserves in personal lines.

The latest charge means the company will report disappointing earnings for the third straight quarter. The company reported a second-quarter operating loss of $310 million after taking a $1.1 billion after-tax charge for reserves and other post-closing adjustments. Third-quarter operating income of $372 million was affected by hurricane losses of $402 million. Notwithstanding the current charge, St. Paul Travelers will report after-tax operating income of $307 million for the fourth quarter and about $1 billion for the full year. Capital adequacy as of year-end 2004 is projected to be modestly stronger than one-year prior, but remains somewhat low on a consolidated basis for the intercompany pools relative to the "A+" ratings.

The company also announced it was exploring strategic alternatives to divest 79 percent ownership of Nuveen Investments Inc., a third-party asset-management firm. Asset management is not one of St. Paul Travelers core business segments and consequently has been viewed by S&P as a nonstrategic investment. A sale of Nuveen would generate a significant amount of capital that could be used to strengthen the capital adequacy of the insurance operations.

The outlook is stable because S&P does not expect any significant reserve strengthening or other merger-related charges in 2005. S&P believes that the considerable earnings capacity of the organization will be more evident in 2005 and that the capital generated will lead to meaningful improvement in capital adequacy by year-end 2005.