A.M. Best Affirms Lloyd's

A.M. Best Co. affirmed the "A-" rating of the Lloyd's market and has removed the "under review" status of the rating, which was applied in the aftermath of the terrorist attacks in the U.S. on Sept. 11, collectively referred to as the WTC losses.

A.M. Best affirmed the rating because it believes the capital supporting underwriting in 2002 will increase, the impact of WTC on the Central Fund is containable, and there is stability in Lloyd's estimate of the market's gross loss. Two billion U.S. dollars have successfully been transferred to Lloyd's trust funds in the U.S., and A.M. Best believes the market's WTC reinsurance recoveries will be widely spread among high quality reinsurers.

Offsetting factors include the absolute size of Lloyd's WTC loss and some uncertainty over future development of the loss; the market's dependence on a high level of reinsurance recoveries; and poor open year performance.

A.M. Best believes Lloyd's is likely to trade successfully through the recent period of losses, including the WTC loss in September, and that the market will be in a strong position to take advantage of the favorable pricing environment anticipated for 2002. It also believes, assuming normal loss experience, the market will produce a healthy return on capital employed for the year.

A.M. Best expects central assets available to meet unpaid cash calls to be higher at the end of 2002 than at the end 2001 and that maintenance of the Central Fund at a minimum of the pre-WTC level— including insurance protection—will be an ongoing feature of the market.

S&P Downgrades Travelers P/C Corp.

Standard & Poor's lowered its senior debt and preferred stock ratings on Travelers Property Casualty Corp. from "A+" and "A-" to "A-"and "BBB," respectively. At the same time, S&P affirmed its "AA-" counterparty credit rating and financial strength rating (FSR) on the members of the Travelers Property Casualty Pool. The outlook is stable.

The rating actions reflect the announcement by Citigroup Inc. that it intends to spin-off its Travelers property/casualty operations in 2002. The prior senior debt and preferred stock ratings on Travelers Property Casualty Corp. had reflected the benefits inherent in being a member of Citigroup, including material financial flexibility. The ratings adjustments reflect standard rating notching between the holding company and its regulated operating insurance companies on a stand-alone basis.

The ratings on Citigroup and its other units will not be affected by the spin-off of the property/casualty insurance business. The spin-off is a strategic move for a company that wants to focus on high-growth and higher-return businesses. The property/casualty operations accounted for only about 8 percent of Citigroup's earnings. Although they added meaningfully to diversification because of their low correlation with banking businesses, they did not yield many opportunities for synergies.

The St. Paul's Affirmed

A.M. Best Co. affirmed the "A+" FSR of The St. Paul Companies' property/casualty subsidiaries and lowered the company's long-term debt ratings.

Senior debt has been lowered from "a+" to "a;" subordinated debt from "a" to "a," and preferred securities from "a" to "a-." The company's commercial paper rating of "AMB-1" has been affirmed. All ratings have been removed from under review.

The action follows A.M. Best's review of the group's capitalization in the wake of losses from the Sept. 11 terrorist attacks and its announcement to record a $900 million pretax charge in the fourth quarter 2001. A.M. Best has also reviewed the group's loss reserves, particularly in the problematic health-care book, and initiatives to reduce volatility in earnings and dependence on stop-loss reinsurance resulting from the strategic review of operations by the group's new CEO, Jay S. Fishman.

As a result of this comprehensive strategic and financial review, the group has announced a significant restructuring of its business, primarily in the global health care, international and reinsurance segments. Management believes these businesses either do not offer attractive returns for the long term or subject The St. Paul's results to undesirable earnings volatility. The health-care, reinsurance and international businesses will either be re-underwritten, sold or run off in order to secure a foundation on which to build a leaner, more focused company. A.M. Best believes these initiatives will lead to substantially improved profitability and capitalization for the group in 2002 and 2003.

The strategic repositioning of the group should enable it to redirect valuable capital resources toward its profitable core commercial and specialty-lines operations, where it can leverage its underwriting skills in pursuit of business with higher risk-adjusted returns. As a result of the hardening property/casualty markets, pricing trends remain highly favorable in the majority of The St. Paul's specialty and commercial property/casualty business segments.

The affirmation of The St. Paul's financial strength rating was heavily influenced by the organization's strong capital levels that withstood A.M. Best's stress testing of reserve adequacy and underwriting results. Management projects significant decreases in reserve levels resulting from the proposed business initiatives, which will require lower capital levels in 2002. In addition, St. Paul's long history of adequate reserves and balance-sheet integrity is expected to continue under the company's new leadership.

Mercury Assigned 'AA' Ratings

Standard & Poor's assigned "AA" counterparty credit and financial strength ratings to Mercury Casualty Co., Mercury Insurance Co., and California Automobile Insurance Co. (collectively referred to as Mercury), which are the insurance operations of Mercury General Corp. The outlook is stable.

Major rating factors included:

• Extremely strong operating history—Since its founding by CEO George Joseph in 1961, Mercury has never experienced an unprofitable year. The combined ratio has been at or near the top of S&P's interactively rated peer group for at least the past five years and control of losses has been the group's forte.
• Capital—Combined capitalization is about twice the "AAA" floor of S&P's capital model. Mercury has provided its parent some dividends for a modest holding-company stock buyback program, but S&P expects capital ratios to remain broadly at these levels as long as the current CEO is in place.
• Management—Management is undergoing a transition. A new president and chief financial officer were promoted from the ranks of management in October 2001. The management team is, on the whole, deep and experienced. Joseph is expected to remain active as CEO.
• Strategy—Mercury's strong strategy is founded on an extremely strong commitment to independent agents, including variable compensation that encourages them to produce their best business for the company and compensation levels that are high for the industry.