St. Paul Travelers Reserve Risk Seen

St. Paul Travelers Reserve Risk Seen

NU Online News Service, June 23, 2:42 p.m. EDT?A major investment banking firm has lowered its investment opinion for The St. Paul Travelers Companies Inc., citing a number of concerns including an imminent reserve risk.[@@]

The New York-based Morgan Stanley announced this morning that the firm is downgrading the St. Paul, Minn.-based insurance giant to "Underweight" from "Equal-weight" and offered four reasons for its downgrade decision.

First, Morgan Stanley stated that, in its view, The St. Paul Travelers' reserve risk is "perhaps larger and more imminent than expectations."

Currently, the investment firm is including in its 2004 fourth-quarter estimate for The St. Paul Travelers a reserve charge of $650 million pretax, or 65 cents per share.

Morgan Stanley stated that "a provision for environmental strengthening" is a large portion of the charge forecast. Still, the firm acknowledged that it's not in the business of making predictions and that the firm's current forecast could prove to be erroneous.

"Clearly, this is a highly subjective number," the firm said. "We could be directionally correct, but may miss the order of magnitude."

Another reason for The St. Paul Travelers downgrade, Morgan Stanley said, is the insurer's lower leverage to specialty classes of business where margins are still expanding.

"We see better near-term upside elsewhere," Morgan Stanley observed in its downgrade announcement. "We prefer commercial insurers with less reserve risk and more leverage to specialty classes of business. The Chubb Corporation and ACE Limited are examples."

Morgan Stanley also cited two other reasons for its downgrade of The St. Paul Travelers. It said the company would garner few gains from tort reforms and has an unsatisfactory financial picture compared to other companies in the sector.

Regarding the tort reform, Morgan Stanley analyst William Wilt explained that The St. Paul Travelers doesn't stand to benefit as much as some other insurers from positive changes in the tort system.

"Our perspective has been that companies likely to benefit the most from tort reforms are those that are in professional liability classes of business, particularly medical malpractice and other broad specialty lines of business," Mr. Wilt said.

For The St. Paul Travelers, he said, the bulk of the business is in lines such as workers' compensation, personal auto or commercial auto. "Those lines are heavily regulated or are just not subject to the uncertainties of the tort system, so they won't see as much benefit from tort reforms."

Morgan Stanley also said that, in its view, the stock prices of the property-casualty insurance group as a whole could also under-perform compared to broader industries, because of factors including falling premium rates and underwriting margins that are already approaching peak levels.