St. Paul’s Strength Affirmed

A.M. Best Co. affirmed the financial strength rating of “A” (Excellent) of the St. Paul Cos. Inc.’s property/casualty subsidiaries. The outlook is stable.

The ratings reflect St. Paul’s strong capitalization, favorable and strengthening operating performance in its continuing lines of business and leading position as a general and specialty commercial lines underwriter. The ratings also recognize the benefits to be derived from management’s proactive and effective strategic actions undertaken since late 2001, including, exiting the group’s health care and traditional reinsurance businesses as well as restructuring and substantially reducing the scopes of its Lloyd’s and international businesses.

St. Paul has moved aggressively to expand its distribution based strategy, improve accountability and reduce both risk and volatility. As a result of the hardening of property/casualty markets, pricing remains highly favorable in the majority of St. Paul’s ongoing business segments as noted in its record first quarter 2003 results.

The ratings also acknowledge a $750 million capital infusion to the operating subsidiary in July 2002 following an $840 million public offering of common shares and equity units. Proceeds of the offering were primarily used to increase surplus, and coupled with the reserve run-off, capital is considered strong, as anticipated by A.M. Best when the Excellent financial strength rating was assigned in mid-2002.

St. Paul’s health care and certain international businesses have been in run-off since January 2002 due to their poor performance. Also in November 2002, the group sold its reinsurance operations (via initial public offering) whose business was transferred to a newly formed Bermuda-based reinsurer, Platinum Underwriters Holdings Ltd. In concurrence with the public offering, St. Paul became a minority owner in Platinum and retains all 2001 and prior reserves, which are currently in run-off.

The positive rating factors are partially offset by the relative size and uncertainty associated with St. Paul’s run-off business, as well as the adverse development reported from its core business. In 2002, St. Paul’s underwriting results were set back by $736 million of prior year loss reserve development, inclusive of a major asbestos settlement with Western MacArthur totaling $472 million pre-tax and additional reserve development in its surety, medical malpractice, workers’ compensation and commercial auto lines of business.

Given the volatility of St. Paul’s reserves—both run-off and ongoing businesses—the potential for additional reserve development remains. Despite St. Paul’s recent comprehensive bottom up analysis of its asbestos exposures, the general industry posture is still uncertain. A.M. Best believes that St. Paul continues to be susceptible to further emergence of asbestos and environmental claims.