St. Paul Travelers Looks to Bring Top Line in Commercial Up as it Unveils Q3 Report

October 28, 2004

The St. Paul Travelers Cos. Inc. (NYSE:STA) has reported net income of $340 million for the third quarter ended Sept. 30, 2004, or $0.51 per basic share and $0.50 per diluted share, compared to $426 million, or $0.98 per basic and diluted share, in the prior year quarter. Net income for the current quarter included $402 million of after-tax catastrophe losses, compared to $83 million of after-tax catastrophe losses in the prior year quarter.

The company reported operating income of $372 million for the current quarter, or $0.56 per basic share and $0.54 per diluted share, compared to $442 million, or $1.02 per basic share and $1.01 per diluted share, in the prior year quarter. Excluding catastrophe losses, operating income for the current quarter was $774 million, or $1.16 per basic share and $1.12 per diluted share, compared to $525 million, or $1.21 per basic and $1.20 per diluted share, in the prior year quarter. Operating income excludes net realized investment gains (losses).

Highlights for the current quarter

* Return on equity of 6.7 percent, which was negatively impacted by 7.8 points from catastrophe losses.
* Net written premiums of $5.050 billion, up 50 percent from the prior year quarter and down 5 percent on a pro forma combined basis from the prior year quarter.
* GAAP combined ratio of 103.8 percent, which included 11.6 points for catastrophe losses.
* Continued strong growth in the Personal segment, with net written premiums up 16 percent and operating income up 44 percent from the prior year quarter, despite an increase of $32 million after-tax for catastrophe losses between the two periods.
* Investment income of $514 million, up 5 percent, and average invested assets of $62 billion, up 3 percent, from the second quarter 2004.
* Favorable decision in ACandS asbestos litigation in which the U.S. District Court for the Eastern District of Pennsylvania denied ACandS’s motion to vacate the previously announced arbitration award granted to Travelers and dismissed a related pending lawsuit by ACandS against Travelers asserting that each asbestos bodily injury claim is subject to a separate occurrence limit (appeal pending). The impact of these rulings will be considered along with other information in the Company’s annual review of asbestos reserves, which will be completed in the fourth quarter of 2004.

Jay Fishman, president and CEO of St. Paul Travelers, said, “While we are satisfied with the current operating results of our business, achieving operating income of $774 million excluding catastrophe losses, our top line in Commercial is behind prior year levels. We have analyzed our business flow by market, product, region and agent. Our results demonstrate that we are maintaining our existing business at historically strong levels and at attractive margins. However, the new business we are currently writing is less than the prior year combined level. We believe this is principally due to the increasingly competitive marketplace for new business, the impact of new business premiums from 2003 renewal rights transactions and our agents continuing to adjust their new business levels with us as we integrate to a common underwriting platform.

“Our Personal segment operations continue to show strong top and bottom line growth as we move forward with our pricing segmentation initiatives. Within Specialty, we are continuing to grow in areas such as Technology, Public Sector and Ocean Marine and are being more selective in areas that are not meeting our return hurdles, such as Construction and personal lines at Lloyd’s.”

Net written premiums increased 50 percent to $5.050 billion from the prior year quarter. The increase was due to the inclusion of St. Paul’s net written premiums in the current quarter. Net written premiums decreased 5 percent from the prior year quarter on a pro forma combined basis primarily due to lower new business in the Company’s Commercial and Specialty segments and the planned non-renewal of certain commercial property and construction risks and a personal lines creditor insurance facility underwritten at Lloyd’s.

The underwriting component of operating income, or underwriting gain (loss), decreased from a gain of $105 million after-tax ($135 million pre-tax) in the prior year quarter, which did not include the results of St. Paul, to a loss of $155 million after-tax ($240 million pre-tax) in the current year quarter.

The decrease was primarily due to after-tax charges of $402 million ($612 million pre-tax) for catastrophe losses and $51 million ($78 million pre-tax) for prior year reserve development for the current quarter compared to an after-tax charge of $83 million ($128 million pre-tax) for catastrophe losses and an after-tax benefit of $9 million ($14 million pre-tax) for favorable prior year reserve development in the prior year quarter.

The current quarter catastrophe losses were primarily related to Hurricanes Charley, Frances, Ivan and Jeanne, which made landfall in the southeast United States during the quarter. The prior year quarter catastrophe losses were primarily related to Hurricane Isabel.

Net investment income was $514 million after-tax ($667 million pre-tax), compared to $347 million after-tax ($458 million pre-tax) in the prior year quarter. The increase primarily resulted from the inclusion of St. Paul’s investment results in the current quarter. In addition, increased net investment income resulting from strong operating cash flows was partially offset by lower average yields on fixed income securities and lower returns on alternative investments.

The GAAP combined ratio of 103.8 percent increased by 9.1 points from the prior year quarter primarily due to the effect of higher catastrophe losses. The consolidated GAAP combined ratio included the impact of 11.6 points for catastrophe losses in the current quarter as compared to 4.1 points in the prior year quarter.

Year-to-Date consolidated results

For the first nine months of 2004, St. Paul Travelers reported net income of $652 million, or $1.10 per basic share and $1.09 per diluted share, compared to $1.207 billion, or $2.78 per basic share and $2.76 per diluted share, in the prior year period.

Operating income for the first nine months was $676 million, or $1.14 per basic share and $1.13 per diluted share, compared to $1.212 billion, or $2.79 per basic share and $2.78 per diluted share, in the prior year period. Net income and operating income in the current period included after-tax charges of $1.012 billion for prior year reserve development, $431 million for catastrophe losses and $26 million for merger related restructuring costs, compared to $106 million for prior year reserve development, $199 million for catastrophe losses and no restructuring costs in the prior year period.

Commercial segment financial results

For the third quarter of 2004, the Commercial segment reported operating income of $260 million, compared to $328 million in the prior year quarter, which did not include the results of St. Paul. The impact of catastrophe losses in the current quarter was $184 million after-tax ($284 million pre-tax), compared to $23 million after-tax ($35 million pre-tax) in the prior year quarter.

Also impacting the current quarter operating income was a net after-tax charge of $34 million ($50 million pre-tax) for prior year reserve development, compared to an after-tax charge of $16 million ($24 million pre-tax) in the prior year quarter. The Commercial GAAP combined ratio was 105.4 percent in the current quarter as compared to 93.6 percent in the prior year quarter. Catastrophe losses for the current quarter impacted the GAAP combined ratio by 12.2 points compared to 2.2 points for the prior year quarter.

Pro forma combined net written premiums for the Commercial segment decreased by $387 million (16 percent) from the prior year quarter to $2.070 billion and by $267 million (12 percent) to $1.957 billion for core large, medium and small commercial businesses. The decreases were due to lower new business, the impact of higher premium flow in 2003 associated with the Kemper renewal rights transaction and the planned non-renewal of certain commercial property risks. Retention rates remained strong and consistent with prior quarters while renewal price changes continued to moderate to the low-single digit levels.

Pro forma combined net written premiums for non-core Commercial, which includes the results of Gulf and other run-off operations, decreased by $120 million (52 percent) from the prior year quarter, due to the planned non-renewal of written premiums for these businesses and $32 million of Gulf net written premiums transferred to the Financial and Professional Services line within Domestic Specialty.

Specialty segment financial results

For the third quarter 2004, the Specialty segment reported operating income of $2 million compared to $51 million in the prior year quarter, which did not include the results of St. Paul. The impact of catastrophe losses in the current quarter was $126 million after-tax ($186 million pre-tax), compared to no impact in the prior year quarter.

Also impacting the current quarter operating income was a net after-tax charge of $42 million ($65 million pre-tax) related to prior year reserve development, compared to no prior year reserve development in the prior year quarter. The Specialty GAAP combined ratio was 110.5 percent in the current quarter as compared to 90.4 percent in the prior year quarter. Catastrophe losses for the quarter impacted the GAAP combined ratio by 12.3 points, compared to no impact in the prior year quarter.

Pro forma combined net written premiums decreased by $103 million (7 percent) to $1.408 billion from the prior year quarter. Pro forma combined net written premiums for Domestic Specialty decreased by $46 million (4 percent) to $1.176 billion from the prior year quarter. The decrease was predominately due to disciplined underwriting in Construction, which resulted in a decrease of $48 million of net written premiums. Domestic Specialty retention rates remained strong and were consistent with prior quarters, and renewal price changes continued to moderate to the mid-single digit levels.

Pro forma combined net written premiums for International Specialty, which includes operations in the United Kingdom, Ireland and Canada and business written through Lloyd’s, decreased by $57 million (20 percent) to $232 million from the prior year quarter, primarily due to the non-renewal of a personal lines creditor insurance facility underwritten at Lloyd’s. Excluding Lloyd’s, International Specialty retention levels remained strong and renewal price changes continued to moderate to the low-single digit levels.

Personal segment financial results

For the third quarter 2004, the Personal segment reported operating income of $127 million, compared to $88 million in the prior year quarter. This increase of 44 percent was primarily due to growth in business volumes in all lines, the continued favorable rate environment and the benefit of declining current accident year non-catastrophe related property claim frequency, partially offset by increased catastrophe losses.

The current quarter results included $92 million after-tax ($142 million pre-tax) of catastrophe losses and an after-tax benefit of $25 million ($37 million pre-tax) from favorable prior year reserve development. This compares to an after-tax charge of $60 million ($92 million pre-tax) for catastrophe losses and an after-tax benefit of $25 million ($38 million pre-tax) for favorable prior year reserve development in the prior year quarter. The Personal GAAP combined ratio was 94.0 percent in the current quarter as compared to 97.3 percent in the prior year quarter. Catastrophe losses for the quarter impacted the GAAP combined ratio by 9.9 points compared to 7.5 points for the prior year quarter.

Third quarter net written premiums increased by $216 million (16 percent) compared to the prior year quarter due to strong organic growth, new business premiums from the Royal & SunAlliance renewal rights transaction, strong retention and continued increases in premium rates in both the Automobile and the Homeowners and Other lines of business.

Automobile net written premiums increased by 11 percent to $884 million compared to the prior year quarter. Policies in force rose for the 14th consecutive quarter, increasing by 11 percent from the prior year quarter, while renewal price changes remained in the mid-single digits.

Homeowners and Other net written premiums increased in the current quarter by 23 percent to $688 million from the prior year quarter. Policies in force rose for the ninth consecutive quarter, increasing by 14 percent from the prior year quarter, while renewal price changes remained in the high single digits.

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