St. Paul-Travelers Marriage Seen As Exception, Not Trend

The transaction, as widely reported, is a tax-free merger where each Travelers common-stock holder will get 0.4334 of a St. Paul share for each Travelers share, with The St. Pauls becoming the "surviving stock." The deal is worth at least $16.01 billion in market value.

At the top of the combined giant will be The St. Paul Chief Executive Jay Fishman. Mr. Fishman will become The St. Paul Travelers chief executive, while Robert Lipp, chairman and chief executive officer at Travelers, will serve as the new companys executive chairman until the end of 2005. Mr. Fishman is then expected to take on the additional title of chairman afterwards.

The merger, management teams pointed out, will create "an extraordinary company"–a "go-to national market company" for their agents and their policyholders.

The transaction already has the nod from board directors of the two companies and is now waiting for approval from shareholders and regulators. The deal is expected to close by the second quarter of 2004.

Some preliminary figures offer a glimpse of whats to come:

The St. Paul Travelers Companies will be the second-largest U.S. insurer in commercial lines with a 7.6 percent national market share, second only to the New York-based American International Group, which commands 8.8 percent. The St. Paul, based in St. Paul, Minn., and Travelers, in Hartford, Conn., project $15.6 billion for total commercial-lines net written premium combined for 2003.

The St. Paul Travelers Companies would also have the second-biggest market share for personal lines agency writers, with 6.8 percent, second only to Progressive, which has 13.1 percent. Geographically, The St. Paul Travelers will be the biggest commercial-lines carrier in 22 states, when calculated by direct premiums written for The St. Paul and Travelers last year.

Speaking on a conference call for analysts last week, both Mr. Fishman and Mr. Lipp put forth their best arguments and rationale for their companies marriage.

The initial discussion for the possibility of merger, management explained, started last June. "Jay and I had short conversations in June of this year, which eventually led to [this announcement]," said Mr. Lipp.

"We're taking this opportunity to create really an extraordinary company that has opportunities and prospects that exceed what either of us could accomplish on our own," Mr. Fishman added. "The fit of these two companies is really quite extraordinary," he said. "We are convinced, absolutely convinced, that we are far better together than either company would be alone."

Both sides would contribute their own strength to the marriage, Mr. Fishman explained, noting that Travelers, with $6.2 billion net written premiums for total general commercial lines, is more than twice the size of what The St. Paul brings in that arena, while his St. Paul brings $4.5 billion in net written premiums by specialty commercial lines, compared to some $1.9 billion from Travelers.

"I can't think of any company that brings the breadth of the product of these two institutions with the market size that's resulted. So it really is a real powerhouse," Mr. Fishman told analysts.

Another benefit for the two companies, of course, for getting married is the expense savings that would come from living under one household. Mr. Fishman disclosed a $350 million estimate of expense savings on a pre-tax basis, $225 million after tax, over the next three years. He said the controllable expenses of both companies, which exclude commissions, total some $3.8 billion, so the $350 million projected savings represent some 7-to-9 percent.

Mr. Fishman also forecast that revenue synergies, from cross-marketing or cross-selling opportunities, would create a net revenue gain of some $750 million in the next three years after the merger. "Opportunities where either Travelers or St. Paul has a particular strength in an agency and the ability to bring products that otherwise really wasn't available at the same level will create a revenue opportunity for us that doesn't exist for either company on its own."

Both sides also assured that they have done "quite thorough and substantial" due-diligence on their merger partners. Responding to an analyst question, Mr. Lipp noted that Travelers has done "a very good due diligence review" on The St. Paul for issues such as asbestos reserve additions. "The same people that were involved in our ground-up study did that due diligence part on St. Paul," he told analysts. "We're very comfortable that the people that are so familiar with our own situation were able to do our due diligence." (Travelers had said last January that it has increased its asbestos reserves by $2.45 billion after reviewing the company's asbestos study.)

After the conference call, a number of analysts who listened in on the comments from Mr. Fishman and Mr. Lipp told National Underwriter that one major reason that The St. Paul and Travelers were able to pull off a transaction of this magnitude can be summed up in two words: Jay Fishman.

They said that it is Mr. Fishmans background as the head of Travelers and his ongoing friendship with Robert Lipp, the current Travelers chief executive, that offered each side enough comfort level about their balance sheets and the likelihood of a successful integration, as well as any prior-year concerns.

"Had someone else been at The St. Paul and if Jay was still at Travelers, Jay and Bob Lipp would never even have had the opportunity to discuss this, you know? Because neither was actively looking to sell itself," according to Karen Horvath, an analyst at A.M. Best in Oldwick, N.J. "The relationship between Bob Lipp and Jay Fishman was a strong catalyst for the merger."

The relationship between the two executives goes back to their days together at Travelers and Citigroup. After Citigroup bought Travelers in 1993, Mr. Lipp became the insurers chief executive and Mr. Fishman was made its chief financial officer, and the two had worked together in acquiring the p-c business of Aetna Insurance.

Later, Mr. Fishman was promoted to chief executive and chairman for Travelers, as well as the chief operating officer for finance and risk at Citigroup, while Mr. Lipp moved on to a higher position within Citigroup. When Mr. Fishman resigned to become the chief executive of The St. Paul in 2001, taking with him a number of Travelers executives, Mr. Lipp was brought out of his retirement to run Travelers once again.

Ms. Horvath, when asked whether industry analysts were generally surprised by the announcement, said "I would have to say yes and no." The speculation of these two companies merging had already surfaced once before a couple of years ago, when Mr. Fishman went to The St. Paul. "And then a month or two later, Travelers announced the spin-off of Travelers from Citigroup, and a lot of analysts in the marketplace said, Oh, when is the merger of The St. Paul and Travelers going to happen?" she said. "Just given the relationship between Mr. Lipp and Mr. Fishman, many people had speculated about the merger even back then."

Ms. Horvath observed that most p-c carriers are still leery about mergers or acquisitions with other legal entities, "because of the concerns over reserve deficiencies. So this deal is kind of unusual."

This deal was possible, Ms. Horvath said, largely because Mr. Fishman knows both companies very well and the issues that are there. "Mr. Lipp has a lot of confidence in Jay Fishman because they had had a strong working relationship."

And this transaction represents the biggest deal Mr. Fishman has netted so far in his career, as well as a homecoming of sort, as one analyst said during the conference call last week.

"Jay, I guess you can go home again," quipped Ira Zuckerman, analyst at Fairfield, Conn.-based Nutmeg Securities, during the question-and-answer session, to which Mr. Fishman responded, "I am already home" at The St. Paul.

Mr. Fishman also emphasized to analysts that he and Mr. Lipp will be equal partners in this corporate matrimony, with neither one getting the upper hand. "I want to make it clear–Bob Lipp, while he is being described as the chairman, he is not a non-executive chairman," he said.

"Bob is going to be my partner and I'm going to be his partner. We're going to be working at this together with a full-scale commitment. Bob is full time and it should be clear to everyone that we're going to go at this together, and we've had this experience before," he said. "It was successful, and we're excited about the prospect of doing it again together and making it happen for the benefit of all shareholders."

Mr. Fishman also stressed that this transaction represents "a merger of equals" despite the technicality that The St. Pauls is the surviving stock, that The St. Paul gets the top billing in the new corporate name and that the headquarters for the combined giant will be in St. Paul, Minn.

In responding to a question by Jay Cohen, insurance analyst at Merrill Lynch in New York, who asked why the deals structure didnt go the other way, with the larger Travelers having the survivor stock, Mr. Fishman said "there were just a lot of technical and operational elements" and that "it actually really doesn't matter what structure you use, and this one simply met any number of technical aspects and made it easy to execute."

"It is indeed a merger of equals," he said. "If one actually goes back and does the arithmetic, what you'll find is that it was actually structured as a merger of equals with no premium conveyed to either party."

So far, reviews from industry watchers have been generally favorable. Alain Karaoglan, analyst at Deutsche Bank-North America, based in New York, told National Underwriter that The St. Paul Travelers "will have a larger breadth of products offered to agents and will be able to generate more revenues from these agents." And the combined company will boost the return-on-capital to a level that is "better than they could achieve on a standalone basis."

"If you believe in cost-savings and if you believe reserves are adequate going forward, then both sides are getting a good deal," Mr. Karaoglan said. But he also cautioned that "if we find out The St. Paul reserves are deficient, then its obviously not a good deal for Travelers shareholders, its a great deal for St. Paul shareholders. And if you find out that Travelers reserves are deficient, then the reverse might be true."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 21, 2003. Copyright 2003 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.