MOODY'S LOWERS RATINGS OF ST. PAUL COMPANIES, INC. (SENIOR TO A1) AND RAISES RATINGS OF USF&G CORPORATION (SENIOR TO A2). INSURANCE FINANCIAL STRENGTH RATINGS ALSO AFFECTED.
New York, 06-19-98 -- Moody's Investors Service has downgraded the rating of senior debt of The St. Paul Companies, Inc., to A1 from Aa3, and upgraded the rating of USF&G Corporation's senior debt from Baa2 to A2; other debt and preferred stock ratings within the groups were also changed. The insurance financial strength ratings of St. Paul's insurance subsidiaries were also downgraded, to Aa2 from Aa1, while United States Fidelity and Guaranty Insurance Company's financial strength rating was upgraded to A1, from A3. Moody's changed the insurance financial strength rating of Fidelity and Guaranty Life Insurance Company as well, to A3, from Baa1. USF&G Corporation was recently acquired by St. Paul. The Prime-1 rating on St. Paul's short-term debt obligations was not affected. These actions conclude rating reviews that were initiated following the January 1998 announcement of a definitive merger agreement between St. Paul and USF&G.
According to Moody's, today's ratings actions reflect the impact of the USF&G acquisition on St. Paul's capital structure and on its operations, as well as the enhanced level of support enjoyed by USF&G's creditors and policyholders as part of the St. Paul Group. While St. Paul remains well-capitalized following the merger, consolidated cash flow and interest coverage will be pressured by the addition of approximately $700 million of existing debt and capital securities obligations at USF&G Corporation and its subsidiaries. Moody's also stated that the acquisition and integration of USF&G's relatively weaker operating businesses adds incremental risk to St. Paul, as the company seeks to improve the focus and profitability of those operations. Moreover, Moody's noted that St. Paul's consolidated profitability in the near term may be pressured, both by acquisition-related costs and by the application of St. Paul's more conservative reserving approach to the assessment of USF&G's risk exposures.
The rating agency expanded on these comments, noting that the purchase of USF&G is consistent with St. Paul's long-term strategy of opportunistically purchasing entire companies or books of business, as the property & casualty industry consolidates globally. (Prior acquisitions include Economy Fire and Casualty, the Northbrook Companies and the renewal right's to CIGNA Re's book of business.) While USF&G appears to be a good strategic fit – given its complementary business lines and distribution system – St. Paul will face challenges related to integrating people, underwriting cultures and information systems. Additionally, revenue enhancement and expense savings goals may prove difficult to achieve, near-term, due to increasing competition in the P&C marketplace. Moody's noted, however, that the combined St. Paul/USF&G group would achieve a materially greater market position in personal lines, commercial lines and reinsurance in the USA and, to a lesser extent, internationally. Also, St. Paul's desire and ability to restructure USF&G's outstanding debt, and the likelihood of future reductions in financial leverage are viewed as positive credit factors.
In view of the possibility that United States Fidelity and Guaranty Insurance Company may benefit through future inclusion in St. Paul's property and casualty intercompany pool, Moody's stated that the outlook for its insurance financial strength rating was positive.
The following ratings have been downgraded:
The St. Paul Companies, Inc.-Senior unsecured debt to A1 from Aa3.
St. Paul Capital LLC-Preferred stock to "a1" from "aa3."
St. Paul Fire & Marine Insurance Company-Insurance financial strength to Aa2 from
St. Paul Medical Liability Insurance Company-Insurance financial strength to Aa2 from Aa1.
St. Paul Surplus Lines Insurance Company-Insurance financial strength to Aa2 from Aa1.
Athena Assurance Company-Insurance financial strength to Aa2 from Aa1.
The following ratings have been upgraded:
USF&G Corporation-Senior unsecured debt to A2 from Baa2.
USF&G Corporation-Senior unsecured debt shelf to (P) A2 from (P) Baa2.
USF&G Corporation-Subordinated debt to A3 from Baa3.
USF&G Corporation-Junior subordinated debt (Series A and B) to A3 from Ba1.
USF&G Corporation-Junior subordinated debt shelf to (P) A3 from (P) Ba1.
USF&G Capital I-Capital securities to "a2" from "baa3".
USF&G Capital II-Capital securities to "a2" from "baa3".
United States Fidelity and Guaranty Insurance Company-Insurance financial strength to A1 from A3.
Fidelity and Guaranty Life Insurance Company-Insurance financial strength to A3 from Baa1.
The St. Paul Companies, Inc. is a Minnesota-based publicly traded holding company for several P&C insurance, reinsurance and asset management subsidiaries, including the St. Paul Fire and Marine Insurance Company, St. Paul Re and The John Nuveen Company. USF&G Group became a wholly-owned subsidiary of The St. Paul Companies in a $3.7 billion tax-free exchange of stock which closed on April 24, 1998. As of March 31, 1998. St. Paul had investments of $15.1 billion, total assets of $21.1 billion, debt and equivalents of $861.7 million and total shareholders' equity of $4.8 billion.
visit Moody's website at www.moodys.com/insurance
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