AM Best

A.M. Best Places Rating of Travelers PC Pool and Debt Ratings of St. Paul Travelers Under Review with Negative Implications

Karen A. Horvath
(908) 439-2200, ext. 5371

Daniel J. Ryan
(908) 439-2200, ext. 5325

W. Dolson Smith
(908) 439-2200, ext. 5379
Public Relations
Jim Peavy
(908) 439-2200, ext. 5644

Rachelle Striegel
(908) 439-2200, ext. 5378


OLDWICK, N.J. - JANUARY 31, 2005 12:00 AM (EST)
A.M. Best Co. has placed the financial strength rating of A+ (Superior) of Travelers Property Casualty Pool (Travelers PC Pool) (Hartford, CT) under review with negative implications. Additionally, A.M. Best has placed the debt ratings of "a-" on senior debt, "bbb+" on subordinated debt, "bbb" on trust preferred securities, "bbb" on preferred stock and AMB-1 on commercial paper of The St. Paul Travelers Companies, Inc. (St. Paul Travelers) [NYSE: STA] (St. Paul, MN) and its subsidiaries under review with negative implications. Concurrently, A.M. Best has affirmed the financial strength rating of A (Excellent) of the St. Paul Companies (St. Paul, MN). The rating outlook is stable.

These rating actions follow the fourth quarter earnings announcement by St. Paul Travelers, which includes an increase in prior year loss reserves totaling $868 million (pretax) resulting in weaker than expected earnings for the year, as well as less than anticipated holding company liquidity. St. Paul Travelers reported after-tax operating income after the effects of these charges of $307 million for the fourth quarter and $983 million for the full year.

The reserve increase reported by St. Paul Travelers largely stems from the completion of an internal annual asbestos reserve review that resulted in a reserve charge of $922 million, along with an $84 million charge for environmental reserves (collectively A&E). The St. Paul Companies' A&E reserve increase was $576 million, while Travelers PC Pool's was $430 million. The A&E charges were partly offset by $140 million of favorable prior year reserve development in personal lines. In the fourth quarter, St. Paul Travelers also reported $180 million of favorable development in current year reserves resulting from favorable claim activity in commercial and personal lines business, offset by $113 million additional net reserves for catastrophe losses related to the third quarter hurricanes.

As part of its strategic review of its businesses, management also disclosed that it is exploring strategic alternatives for divesting its 79% equity ownership of Nuveen Investments, Inc. (Nuveen), a publicly traded company that has a total market capitalization of approximately $3.5 billion. The potential divestiture of its investment in Nuveen would result in a significant increase in St. Paul Travelers' holding company liquidity, operating company capital and tangible net worth and a significant reduction in goodwill and intangible assets. This transaction would provide the St. Paul Companies with a sizable capital cushion to diffuse the impact of further adverse loss reserve development on capitalization, should it occur, reduce the potential need for further capital support from Travelers PC Pool and enable dividends from the Travelers PC Pool to build holding company liquidity. Travelers PC Pool's and St. Paul Travelers' ratings have been placed under review with negative implications, pending the close of this transaction.

Despite the substantial reserve charge, the affirmation of the St. Paul Companies' rating considers the explicit support provided in the form of additional capital to the St. Paul Companies by the Travelers PC Pool since the merger, as well as the expectation of continued support in the future.

The $576 million pretax A&E reserve increase required by the St. Paul Companies in the fourth quarter of 2004, combined with its $1.625 billion second quarter charge, substantially exceeded A.M. Best's expectations as did the degree and need for Travelers PC Pool to financially support the St. Paul Companies since the consummation of the merger. A.M. Best believes that based on the reserve development that has occurred in recent periods, there is potential for further adverse reserve development.

While currently rated separately, considerable enhancement is afforded to the St. Paul Companies' rating given Travelers PC Pool's continued financial support, its strategic role and its importance to the overall organization. Conversely, charges at the St. Paul Companies have weakened the rating of its affiliate, Travelers PC Pool, which has been called upon to fund the reserve charges at the St. Paul Companies. Consequently, Travelers PC Pool dividended approximately 75% of its net earnings in 2004 to recapitalize the St. Paul Companies and service the greater combined holding company's cash needs. Furthermore, St. Paul Travelers has been unable to reduce its outstanding borrowings and build holding company liquidity as it had prudently planned to do following the consummation of the merger.

Although Travelers PC Pool's earnings prospects remain strong in 2005, substantial dividends are anticipated to be paid in order to enhance holding company liquidity. Travelers PC Pool's dividend capacity, while sizable, is not sufficient to meet these objectives and fund future recapitalization needs at the St. Paul Companies, should they emerge. This view will be substantially mitigated by the successful completion of the Nuveen divestiture. Overall risk-adjusted capitalization of Travelers PC Pool remains supportive of its current rating despite the financial support provided to the St. Paul Companies in 2004. However, the capital drag has placed downward pressure on Travelers PC Pool's rating.

St. Paul Travelers ranks second in the United States in commercial lines, as well as in personal lines agency companies. St. Paul Travelers' ability to cross-sell complementary products should enhance its position within the commercial lines market at a time when pricing in the industry is leveling off and growth is expected to soften. Expense savings are also expected to be realized through 2005.

For a complete list of The St. Paul Travelers Companies, Inc.'s financial strength and debt ratings, please visit St Paul Travelers.

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