A.M. Best Affirms St. Paul International ‘A’ Rating

October 13, 2003

A.M. Best Co. announced that it has affirmed the financial strength rating of A (Excellent) of the U.K.-based St. Paul International Insurance Company Limited, with a stable outlook.

“The rating reflects the company’s strategic importance to its ultimate parent, The St. Paul Companies Inc.-currently rated A (Excellent)-its very good risk-adjusted capitalisation, improved underwriting performance and excellent business profile,” said Best. “Furthermore, the rating reflects the explicit support provided by a parental guarantee. An offsetting factor is the potential exposure to the run off of discontinued business lines.”

The bulletin noted that “although St. Paul International is a relatively small part of the total St. Paul group, it is fully integrated into the parent’s overall strategy writing a U.K. and Irish book that fits the group’s strategic aims and direction.” Best added, “this strategically important status will be predicated on the company achieving the parent group’s performance expectations. This appears to be supported by current and expected future progress in underwriting performance.”

Best also noted the steps the company had taken to increase its risk-adjusted capitalisation. “The main drivers were the divestment of equities and the reduction in premium volumes (due to increased selectivity and withdrawal from certain business lines and markets),” it said. “Risk-adjusted capitalisation was further improved through an increase in retained earnings of GBP 45.8 million (USD 76.6 million) for the year and the reduction of the retained loss reserves to GBP 42.1 million (USD 70.4 million). A.M. Best expects further growth in shareholders’ funds through the retention of earnings in 2003 and going forward.”

The improved underwriting performance has come as a result of recent restructuring and a renewed focus on core business, which “has led to a significant improvement in underwriting performance in 2002 (with a reduction in the combined ratio of 28.7 percentage points to 107.8%). A.M. Best expects a further reduction in the combined ratio in 2003 closer to 100%, as discontinued lines are run off.”

The rating agency also indicated that the international unit “benefits from the globally recognised St. Paul brand and reputation. The company has secured a significant market share in its core customer-based business lines, which include solicitors’ professional indemnity, transport, the public sector, automotive and technology.”

Best said it expects “continued stable investment returns (five-year average investment yield of 8% after net realised and unrealised gains) and improved underwriting performance will contribute to a return on equity (ROE) of over 20% in 2003.”

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