The St. Paul FSR Lowered

A.M. Best Co. has downgraded the financial strength rating to “A” (Excellent) from “A+” (Superior) of The St. Paul Companies Inc.’s, St. Paul, Minn., p/c subsidiaries and its senior debt rating to “a-” from “a”, subordinated debt to “bbb+” from “a-” and preferred securities to “bbb+” from “a-“. The company’s commercial paper rating of AMB-1 has been affirmed. The rating outlook is stable.

This action follows St. Paul’s announcement that it has entered into an approximate $1 billion settlement agreement with its largest asbestos claimant, Western MacArthur, and takes into consideration A.M. Best’s review of the group’s earnings, cash flow and balance sheet strength.

St. Paul’s net loss with respect to the settlement is estimated to be approximately $380 million. Although this is a significant setback to earnings in 2002, a portion of this settlement is expected to be offset by an estimated $100 million to $150 million of after-tax gains from the previously announced spin-off of its reinsurance operations. Moreover, A.M. Best views this large settlement as an anomaly for St. Paul, which has historically insured small and middle market companies.

With regard to non-asbestos related exposures, A.M. Best believes there are significant ongoing uncertainties relating to the reserves established for St. Paul’s run-off business segments, specifically global healthcare, reinsurance and international operations. This action recognizes the size and volatility of these run-off segments relative to “core” operations, which are inconsistent with A.M. Best’s expectations for a Superior-rated organization. However, despite certain challenges, A.M. Best continues to consider St. Paul’s capitalization as strong. A.M. Best regards St. Paul’s continuing core operating segments as stable, well managed businesses that maintain a well-respected franchise.

Topics AM Best