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

However, A.M. Best Company, in downgrading St. Paul's strength rating to A (Excellent) from A-plus (Superior) said it was concerned about the possible impact on company reserves from Enron claims and various runoff obligations.

A.M. Best said it had lowered the company's senior debt rating to "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," and said the rating outlook is stable.

St. Paul, in announcing the asbestos agreement, said Western MacArthur entities and Western Asbestos will file voluntary petitions under Chapter 11 of the Bankruptcy Code to channel claims to a trust.

Whether or not the bankruptcy plan is approved, St. Paul said it will pay $175 million to compensate those holding judgments against its subsidiaries.

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

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

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

The rating firm said there is the potential for additional reserve charges in one or more of these discontinued business segments in 2002 or 2003, particularly for healthcare, where industrywide loss costs have accelerated and "surety exposure to Enron may result in additional charges."

Despite these problems, A.M. Best said it continues to consider St. Paul's capitalization as strong, and noted a favorable operating profit and combined ratio in the first quarter as well as continued price increases.

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

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

That situation, related to St. Paul's malpractice insurance business, involved charges of unlawful business practices, unauthorized policy modifications, payment of commissions to unlicensed agents, and unlawful policy cancellations and non-renewals, including failure to return unearned premium payments.

Ms. Wood said that St. Paul had not pulled out of just the Nevada malpractice market. "We're leaving the entire country. We lost nearly a billion in 2001," she said, adding that the company understands it is difficult for the physicians involved, "but we couldn't sustain those type of losses. We can't sustain that level of unprofitability."