Fitch Lowers The St. Paul Cos. Ratings to ‘BBB+’

Fitch Ratings has lowered its long-term and senior debt ratings on The St. Paul Companies, Inc. (SPC) to ‘BBB+’ from ‘A-‘and its ratings on SPC’s trust preferred securities to ‘BBB’ from ‘BBB+’.

Fitch has concurrently affirmed its ‘F2′ rating on SPC’s commercial paper program. The Rating Outlook has been changed to Stable from Negative. Fitch’s rating actions follow SPC’s recent third quarter earnings release in which the company reported $75 million of adverse reserve development in Lloyds’ businesses that it had exited in late 2001.

Avoiding earnings disruptions from this and other business lines that SPC exited in 2001, particularly the medical mal-practice line, were key factors in the Negative Rating Outlook that Fitch had previously maintained on SPC. Fitch believes that going forward, SPC’s exited business lines may experience adverse reserve development similar in magnitude to that experienced in the third quarter 2002, but has reflected this exposure in its current ratings and outlook.

SPC’s core book of business has benefited from favorable market conditions and has performed well. Excluding the impact of a $585 million net of reinsurance pretax charge related to a second-quarter claim settlement, the company’s core lines’ GAAP basis combined ratio through the first nine months of 2002 was 93.3 percent and its core lines net premiums written increased 24 percent.

Going forward, Fitch estimates SPC’s near-term operating earnings-based interest and preferred dividend coverage in a range of 3-6 times (x). Fitch’s low end of this range includes earnings disruptions three-to-four times the magnitude of that SPC experienced in the third quarter 2002.

As a result, although Fitch feels coverage could approximate the low end of the range, Fitch believes that coverage in the middle to high-end of the range is more likely. Fitch estimates SPC’s equity-credit adjusted debt plus preferred capital securities to capital ratio at approximately 30 percent.

Although this is at the high end of Fitch’s rating tolerance for the current rating category, Fitch anticipates that SPC’s financial leverage will moderate going forward. Fitch continues to believe that SPC’s ratings reflect the company’s more narrowly focused and strong competitive position in the commercial lines market.

In addition, Fitch believes that successful completion of SPC’s pending
initial public offering of its reinsurance operation will remove a significant source of underwriting volatility from its operations.

Fitch also believes that SPC benefits from its approximate 78 percent ownership interest in The John Nuveen Company, a publicly traded investment management company that in recent years has consistently generated net earnings in the $75-$125 million range.