St. Paul Boosts Med-Mal Reserves; S&P Ponders Rating

January 28, 2004

The St. Paul Cos. announced that the company expects fourth-quarter net income of 19 cents to 21 cents per share and operating earnings per share of zero cents to 2 cents. In the quarter, the company recorded a charge of $350 million pretax or $228 million after-tax, equivalent to 98 cents per share, to increase reserves for its health-care business, which is in runoff. The St. Paul’s ongoing business continued to perform well in the fourth quarter, with net written premiums of $1.86 billion, up approximately 25 percent from fourth quarter 2002, and a statutory combined ratio of 89.5.

For full-year 2003, the company expects net income of $2.70 to $2.72 per share and operating earnings per share of $2.53 to $2.55. Ongoing business results for the year included net written premium growth of approximately 24 percent to $7.33 billion and a statutory combined ratio of 91.7.

In previous disclosures, the company indicated that it was continuing to monitor its medical malpractice reserves by tracking emergence of newly reported claims, development on known claims, and the observed case redundancy ratio (the amount by which claims are settled below case reserves), and that additional reserving actions may be necessary if the required redundancy ratio rose above 45 percent. In the fourth quarter, while development and emergence met expectations, the observed redundancy ratio indicated the need for a reserve action. As a result, the company has established reserves to significantly decrease required redundancy levels for the remaining duration of the health-care business runoff.

The announced merger of The St. Paul and Travelers remains on track to close in the second quarter of 2004.

Meanwhile, Standard & Poor’s Ratings Services said today that it revised its credit watch status on the “BBB+” counterparty credit and debt ratings on the St. Paul and its “A+” counterparty credit and financial strength ratings on its insurance company subsidiaries to credit watch developing from credit watch positive.

These ratings were placed on credit watch Nov. 17, 2003, following the company’s announcement that its board of directors had approved a plan to merge with Travelers Property Casualty Corp.
The decision followed St. Paul’s med-mal reserve charge. An analyst for S&P said that if the Travelers merger doesn’t go through, St. Paul’s rating might be lowered, but not by more than a notch.

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