St. Paul Reports Huge Asbestos Charge

In second-quarter 2001, the company reported net income of $104.1 million, or 47 cents per share.

For this second quarter, operating losses, excluding the realized investment losses, totaled $193.8 million, or 95 cents per share, including the asbestos settlement. Excluding the impact of the settlement, operating losses were $186.4 million, or 84 cents per share.

During a conference call this morning, Chairman and Chief Executive Jay Fishman addressed two issues of concern to analysts?the pending initial public offering of Platinum Underwriters Holdings and possible rating agency actions.

Earlier this year, St. Paul announced its intention to sell the ongoing reinsurance business of St. Paul Re to Platinum Underwriters, once Platinum completed an initial public offering.

"We will continue to be focused on the execution of the IPO and we will do so as soon as market conditions allow," Mr. Fishman said.

"Strategically, it is absolutely the right thing for us to operate the reinsurance sector in a different way than we do now. It should not be a wholly-owned U.S.-based subsidiary of our company," he said.

"It is important that we execute on that strategy so that we can turn our attention and our resources to areas where they are far better served," he said.

On the issue of ratings, Mr. Fishman said, "we have as our goal to have improved ratings over time," noting that the company was nearing conclusion of its discussions with various rating agencies.

"I think it's quite obvious that capital actions are going to be a part of our future. We are still fussing with how much and what the timing of that will be," he said.

"I do want to make it clear that we do not believe that any capital actions that we would consider would interfere with our goal of meeting or exceeding a 15 percent return-on-equity," he said.

Mr. Fishman emphasized that rating agency activities are a secondary concern for the company. Capital-raising initiatives will be pursued first and foremost to bolster the company's financial position, he said.

"I'm motivated more by the financial strength position of this company than I am directly about the ratings," he said. "I do think that is a derivative concern.

"Our motivation has to be to protect the policyholders and the creditors of the company?and allow the ratings to follow on in that context," he said.

"We are a company that has suffered a series of shocks over the last six months and that has had an impact on our financial position, " he added.

Mr. Fishman said management thinks it appropriate to go to the capital markets to replace lost capital. He noted that St. Paul would also seek capital to support future operations as well.

Responding to a question about a second-quarter $100 million addition to reserves for the health care business that St. Paul is running off, Mr. Fishman characterized the addition as simply a "fine-tuning adjustment" to a business reserve base that now totals $2.4 billion. He noted the addition didn't indicate the company saw anything that would suggest there could be a problem in running off the book.

Mr. Fishman said he was also pleased by the fact that the St. Paul had changed its profile with its agency distribution force, which he believes characterizes companies as either "new business companies or rate companies."

As of late last year, "we wanted to make sure we were taking our foot off the pedal on the new business front" and sending the message to the distribution force that the company was shifting its focus away from volume and market share gains and into rate.

He noted that new business numbers across the company's whole book had dropped down to the low-20 percent range from high-20s previously. "We're comfortable with that," he said. Declining new business levels are "very much part of our plan and are consistent with an execution strategy of improving profitability," he said.

During the quarter, net premiums written increased 21.2 percent for St. Paul's core book of business, which excludes lines that are now in runoff.

Including such runoff business, overall premiums declined 3.5 percent to $1.8 billion.

The company's second-quarter combined ratio was 132.3, including the impact of the Western MacArthur asbestos settlement. A footnote to the earnings report suggests that the settlement added more than 40 points to the second-quarter combined ratio.

According to Mr. Fishman, through six months, the combined ratio would have been 92, excluding the impact of the settlement.