Mr. Frank said he suspects that St. Paul was motivated to take a conservative approach partly to “clear the decks” so it can merge with Travelers Property Casualty Corp. with a clean slate. St. Paul said the merger remains on track to close during 2004s second quarter.

However, Standard & Poor's Ratings Services warned that despite St. Pauls move, the insurers reserves might still be as much as 5 percent deficient. S&P changed St. Pauls CreditWatch status to “CreditWatch Developing” from “CreditWatch Positive.” The new status will affect the “triple-B-plus” counterparty credit and debt ratings on The St. Paul Companies Inc., as well as the “A-plus” counterparty credit and financial strength ratings on St. Pauls insurer subsidiaries.

These ratings were first put on the S&P CreditWatch list last November when the plans to merge with Travelers Property Casualty Corp. were announced. The outlook on ratings before being placed on CreditWatch was negative, which reflected S&P's concerns about St. Pauls reserve adequacy for discontinued health care and reinsurance operations.

S&P credit analyst John Iten explained that his firm still has concerns about the adequacy of St. Pauls loss reserves associated with runoff operations, reserves for business written in the soft market years of 1998-to-2001, and asbestos exposure.

“Based on analysis of carried reserves as of year-end 2002, Standard & Poor's has concluded that carried reserves might still be three percent to five percent deficient following this charge,” said S&P, which is also keeping an eye on the potential for future losses in St. Pauls surety operations. St. Pauls ratings are expected to remain on “CreditWatch Developing” until the merger with Travelers is completed.

St. Paul said its 2003 fourth-quarter net profit fell 79 percent to $52 million on a year-to-year basis because of the $228 million charge. However, the insurers ongoing business continued to perform well during the quarter, with net written premiums of $1.86 billionup 25 percent from a year ago. For all of 2003, St. Pauls net income tripled to $661 million.

Meanwhile, Travelers swung to profitability for its 2003 fourth quarter, posting $488.7 million in net income, even after taking a charge for non-asbestos-related, prior-year reserve development of $203.5 million. In 2002s fourth quarter, the insurer posted a loss of $793 million after taking a massive $1.3 billion charge to boost asbestos reserves.

Travelers net written premiums for the 2003 fourth quarter grew 11 percent to $3.389 billion, thanks to strong growth in both commercial and personal lines. For the year, net written premiums rose 10.5 percent to $13.2 billion. Full-year 2003 net income came in at $1.696 billion, compared to a loss of $27 million for 2002.

However, New York-based investment bank Fox-Pitt, Kelton speculates that Travelers might soon take another asbestos charge in the $1 billion range. The carrier has not commented on Fox-Pitt report.

Travelers last remaining large asbestos exposures come from ACandS Inc., an insulation installer which filed for bankruptcy. As Travelers and St. Paul work their way toward closing their merger in the middle of 2004, Travelers “may fess up” to this exposure, according to analysts at Fox-Pitt.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 30, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.