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Rating Action:

MOODY'S DOWNGRADES ST. PAUL COMPANIES' RATINGS; INSURANCE FINANCIAL STRENGTH TO Aa3 AND SENIOR UNSECURED DEBT TO A2

12 Dec 2001
MOODY'S DOWNGRADES ST. PAUL COMPANIES' RATINGS; INSURANCE FINANCIAL STRENGTH TO Aa3 AND SENIOR UNSECURED DEBT TO A2 Moody's Investors Service has downgraded the ratings of St. Paul Companies, Inc. by one notch, concluding a review initiated on September 24 of this year. The insurance financial strength rating of St. Paul Fire and Marine and most of its rated affiliates has been moved to Aa3 from Aa2. The company's senior unsecured debt rating has been lowered to A2 from A1, while its subordinated debt ratings have been lowered to A3. Provisional ratings on the company's shelf filings follow the same structure at (P)A2, (P)A3, and (P)Baa1 for senior unsecured, subordinated, and preferred stock, respectively. Following this rating action, the outlook for the company's ratings is stable.

Commenting on its rating action, Moody's noted that the confluence of the losses from September 11 and the loss reserve and other charges that the company anticipates taking in the fourth quarter of this year, largely accounts for its rating action. Additional downward rating pressure, Moody's noted, resulted from the company's higher financial leverage profile after issuing approximately $575 million in capital securities earlier this fall. The rating agency noted that operational problem areas in a minority of the company's business units have overshadowed fundamental improvements and strengths in many of St. Paul's business segments. The deterioration in those segments has occurred over the past several years, and essentially came to a head in 2001 concurrent with the catastrophic loss on 9-11.

Looking ahead, Moody's commented that the strategic plan of St. Paul' new management should result in a faster improvement of earnings than the previous strategy and a less volatile earnings stream. Specifically, the company's plan to exit or dramatically reduce its exposure to the healthcare and international sectors should impact the company's bottom line quickly, subject to its ability to shed exposure at the rate that it anticipates. Additionally, reducing the scope and limits in the reinsurance sector should temper future earnings volatility. Nevertheless, Moody's noted that St. Paul's new, higher level of financial leverage coupled with its anticipated level of earnings are consistent with the ratings which result from this action.

Factors which could favorably influence the company's rating in the near to medium term include i) the successful implementation of the new strategic plan as manifested by strong operating earnings, ii) organic growth in capital and attendant decline in financial leverage, iii) an expectation of increased stability and quality of earnings as would come from a change in risk profile and strong reserving practices.

Alternatively, Moody's commented that factors which could adversely affect the rating include i) additional large losses as from further terrorist events, ii) a further increase in financial leverage in the absence of demonstrated success of the new strategic plan, or iii) lower than anticipated earnings as might result from continued drag of non-core lines of business or further adverse reserve development.

Moody's noted that two rating actions deviated from its description above. In the first case, Moody's confirmed the rating of American Continental Insurance Company (ACIC) at A1, but will maintain a developing outlook on the rating. The lower rating of ACIC reflects the substantial losses that it has incurred in the recent past as well as its runoff status and lack of explicit parental guarantee. However, Moody's does understand that this company is expected to be merged into St. Paul Fire and Marine sometime in 2002. The other action, a confirmation of United States Fidelity & Guaranty Company at A1, reflects that company's unconditional guarantee from St. Paul Fire and Marine. However, USF&G writes minimal premiums and most of its business is being transitioned to Fire and Marine and related St. Paul companies.

The following rating actions have been taken:

American Continental Insurance Company confirmed at A1;

Athena Assurance Company to Aa3 from Aa2;

St. Paul Fire and Marine Insurance Company to Aa3 from Aa2;

St. Paul Medical Liability Insurance Company to Aa3 from Aa2;

St. Paul Reinsurance Company Limited to Aa3 from Aa2;

St. Paul Surplus Lines Insurance Company to Aa3 from Aa2;

United States Fidelity & Guaranty Company confirmed at A1;

Senior Unsecured debt of St. Paul Companies, Inc. to A2 from A1;

Subordinated debt rating of St. Paul Companies including ratings of capital securities to A3 from A2;

Provisional ratings on the company's shelf filing moved to (P)A2, (P)A3, and (P)Baa1 for senior, subordinated and preferred stock, respectively.

The St. Paul Companies, Inc. is a Minnesota-based, publicly traded holding company for several P&C insurance, reinsurance and asset management subsidiaries. At September 30, 2001 St. Paul reported shareholder's equity of $6 billion, total revenues of $6.6 billion, and a net loss of $352 million.



No Related Data.
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