St. Paul: We Can Handle Asbestos Hit

By Daniel Hays

NU Online News Service, June 4, 1:59 p.m.EST?St. Paul Companies believes that its "capital positionremains strong" despite a rating downgrade yesterday, following theannouncement of a nearly $1 billion asbestos settlement, a companyrepresentative said today.

The company's settlement "in no way hampers our ability toconduct business," said Mark Hamel, speaking for the St. Paul,Minn.-based property-casualty insurer.

Referring to the agreement to settle asbestos claims against itssubsidiary USF&G Company by policyholders Western MacArthur andWestern Asbestos, Mr. Hamel said, "we're talking a settlement costof $975 million. When you net out reinsurance recoverables andapplication of reserves, you're talking about a $380 million chargeto earnings this quarter."

However, A.M. Best Company, in downgrading St. Paul's strengthrating to A (Excellent) from A-plus (Superior) said it wasconcerned about the possible impact on company reserves from Enronclaims and various runoff obligations.

A.M. Best said it had lowered the company's senior debt ratingto "A-minus" from "A," subordinated debt to "BBB-plus" from"A-minus," and preferred securities to "BBB-plus" from "A-minus."It reaffirmed St. Paul's commercial paper rating of "AMB-1," andsaid the rating outlook is stable.

St. Paul, in announcing the asbestos agreement, said WesternMacArthur entities and Western Asbestos will file voluntarypetitions under Chapter 11 of the Bankruptcy Code to channel claimsto a trust.

Whether or not the bankruptcy plan is approved, St. Paul said itwill pay $175 million to compensate those holding judgments againstits subsidiaries.

St. Paul said its reserves for asbestos and environmentalliabilities as of March 31 were $852 million of its total netreserves of $15 billion.

Oldwick, N.J.-based A.M. Best said it anticipates that a portionof the settlement will be offset by an estimated $100 million to$150 million of after-tax gains from the previously announcedspinoff of St. Paul's reinsurance operations, planned for themiddle of this year.

A.M. Best said it believes there are significant ongoinguncertainties relating to the reserves established for St. Paul'srunoff business segments, specifically global healthcare,reinsurance and international operations.

The rating firm said there is the potential for additionalreserve charges in one or more of these discontinued businesssegments in 2002 or 2003, particularly for healthcare, whereindustrywide loss costs have accelerated and "surety exposure toEnron may result in additional charges."

Despite these problems, A.M. Best said it continues to considerSt. Paul's capitalization as strong, and noted a favorableoperating profit and combined ratio in the first quarter as well ascontinued price increases.

Next year, A.M. Best said the St. Paul holding company will bedependent on its insurance subsidiaries to upstream dividends,creating a potential conflict with maintaining adequate surpluslevels--particularly if policy counts increase or run-off reservesdevelop adversely.

On another corporate front, a second company representative,Andrea Wood, said that the St. Paul planned to cooperate with theNevada governor's office and the state's insurance division, and to"respond to allegations" in a complaint filed in Nevada lastweek.

That situation, related to St. Paul's malpractice insurancebusiness, involved charges of unlawful business practices,unauthorized policy modifications, payment of commissions tounlicensed agents, and unlawful policy cancellations andnon-renewals, including failure to return unearned premiumpayments.

Ms. Wood said that St. Paul had not pulled out of just theNevada malpractice market. "We're leaving the entire country. Welost nearly a billion in 2001," she said, adding that the companyunderstands it is difficult for the physicians involved, "but wecouldn't sustain those type of losses. We can't sustain that levelof unprofitability."