The St Paul Travelers is to increase its reserves by an additional $1.63bn in the second quarter as the newly merged company adopts the accounting and actuarial methods of St Paul.
Depending on how the reserving is accounted for in the company's financial statements, The St Paul Travelers said it would report a net loss of between $275m and $300m.
The company said it was currently seeking advice from the Securities and Exchange Commission (SEC) as to whether the reserving should be reported in its second quarter income statement, which would lead to the company reporting a loss of that size.
However, if the SEC advises that the reserving charge should be reported in the company's opening balance sheet, the St Paul Travelers said it would report net income for the second quarter of between $775m and $800m.
Second quarter 2004 operating income would be in the range of $740m to $765m.
The SEC could recommend a third alternative with some of the additional reserving reported in the balance sheet, and some in its second quarter income statement.
Under any of the three alternatives, the company said it would not seek to raise additional capital.
The accounting and actuarial adjustments will result in increases of $375m in surety reserves, $500m in construction reserves and $295m in reserves for uncollectible reinsurance and amounts due from policyholders and co-surety participants, for a total of $1.17bn.
This will be further increased by an additional $455m: $250m from the net strengthening of reserves due to the financial condition of a construction contractor; $155m because of a change in reinsurance recoverables due to commutation of specific reinsurance arrangements; and by $50m, reflecting the net increase in other claims and claim adjustment expense reserves.
St. Paul Travelers chief executive Jay Fishman, said: “This second quarter is the first period in which St Paul Travelers has operated as a combined firm and is reporting as one entity.
“From an operating perspective, we are off to an excellent start. We are very pleased with our agents' reactions to the transaction, and continue to see new opportunities from our broader offering of products and services.
In addition, we have identified the specific actions that we plan to take that will allow us to meet our previously disclosed cost savings estimate of $350m.”
