St. Paul Intercompany Pool Outlook Neg

Moody’s Investors Service changed the outlook on the ratings for the legacy St. Paul intercompany pool to negative from positive. The outlook for St. Paul, TPCC, and TIGHI and the legacy Travelers intercompany pool and the Gulf intercompany pool remains stable. The outlook change was prompted by St. Paul Travelers’ announcement that it would take $1.6 billion in reserve adjustments at the legacy St. Paul companies to both conform the accounting policies of St. Paul to be more consistent with the overall group, as well as strengthen its loss reserves for prior accident years. This charge follows approximately $100 million in pre-tax reserve charges taken during first quarter 2004. Moody’s expects that management will recapitalize the St. Paul companies with existing statutory dividend capacity from the Travelers. Still, these charges are substantial with regard to the St. Paul intercompany pool and fall outside of Moody’s range of expectations. The negative outlook reflects the potential for further adverse development, including asbestos and environmental and other run-off liabilities at the St. Paul, coupled with concerns about the underwriting risk profile and earnings capacity of the St. Paul intercompany pool vis-à-vis St. Paul Travelers as a whole.

At the same time, Moody’s affirmed the long-term debt ratings (A3), financial strength ratings and stable outlook on the entities excluding the St. Paul intercompany pool citing the group’s conservative capitalization, relatively modest financial leverage, adequate liquidity, and the strength of its largest pool, the Travelers intercompany pool. In addition, the market presence of the combined organization coupled with the expected expense savings should support future earnings in the medium term of approximately $3 billion. Moody’s also expects that core operating earnings will increase at the predicted pace leading to statutory surplus growth while further adverse reserve development remains modest (less than 5 percent of those carried reserves).

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