Mixed Ratings For St. Paul, Travelers $16 B Merger

By Michael Ha

NU Online News Service, Nov. 17, 11:31 a.m.EST?The St. Paul Companies Inc. and Travelers PropertyCasualty Corp. said they have agreed to merge and form a newcompany called The St. Paul Travelers Companies--in a $16.01billion deal that would create the second largest U.S. commercialinsurer

Ratings announcements from major ratings agencies quicklyfollowed: Oldwick, N.J.-based A.M. Best said this morning it hasplaced financial strength and debt ratings of Travelers underreview with "negative" implications while placing ratings of TheSt. Paul Companies under review with "positive" implications.

Additionally, Fitch Ratings in New York has placed the"double-A" insurer financial strength ratings of members of theTravelers and the "A" senior debt and long-term issuer ratings ofTravelers Insurance Group Holdings on Rating Watch "negative"status. It also placed its "triple-B-plus" long-term senior debtrating of The St. Paul Companies on the Rating Watch "positive"status.

Moody's Investors Service, also in New York, has confirmed thelong-term and short-term ratings of The St. Paul Companies andsubsidiaries. It has also confirmed insurance financial strengthratings of Travelers rated subsidiaries, but placed long-term debtratings of Travelers and Travelers Insurance Group Holdings Inc. onreview for possible downgrade.

While the companies called the transaction "a merger of equals",The St. Paul will be, in effect, the buyer in this tax-free,stock-swap deal, worth some $16.01 billion. Under the agreement,each holder of Travelers' common stock will get 0.4334 of a St.Paul share for each Travelers share they hold.

The newly merged company will have some $107 billion worth ofassets, along with total capital of $26 billion and net writtenpremiums of $20 billion.

The two companies also said the St. Paul group will remain as aMinnesota corporation and will have its corporate headquarters inSt. Paul.

Looking at various business units, the company's specialtyinsurance lines--to be called St. Paul Specialty--will also bebased in St. Paul, while St. Paul's current international businesswill continue to be headquartered in London. Meanwhile, commercialand personal lines of the new company will be based out ofHartford, Conn., and will be combined under the Travelersbrand.

The transaction, the two insurers noted, has been approved bythe companies' boards, but is still subject to approval byshareholders and regulators. The companies said they expect tocomplete the transaction by the second quarter of 2004.

"What this represents is potentially the largestproperty-casualty insurance deal in years. Majormergers-and-acquisitions activities in this industry went intohibernation about four year ago," said Robert Hartwig, chiefeconomist and vice president of the Insurance Information Institutein New York.

He observed that there have been very few mergers of anysubstantial size in the p-c business for years now, although therehas been some increase on the life side recently.

"That's because there continue to be fears over what sort ofliabilities an insurer that's been around a long time might havethat could emerge after an acquisition," he said. "Many insurershad unpleasant experiences with acquisitions in 1990s for thisreason."

The announcement itself was a bit surprising because the mergerdiscussion was kept under wraps, Mr. Hartwig also said. But headded it wasn't that unexpected that those two companies would beinvolved in a deal, noting that Jay Fishman, chief executive at TheSt. Paul, has a long history with Travelers.

"He's transformed The St. Paul Companies into something that isreminiscent of the way Travelers operates," he said. "He had yearsof management experience at Travelers?so it's not surprising thatyou see, of all the deals that could be done, that this is the oneout of the gate."