St. Paul Cos. Monday agreed to buy larger rival Travelers Property Casualty Corp. for about $17 billion in stock, creating the second largest commercial property insurer in the country.
The new company will have an unmatched presence in nearly half of all U.S. states, with more than $100 billion in assets and $15.6 billion in combined premiums and only American International Group Inc. will be larger.
St. Paul will retain the corporate headquarters and its top executive, Jay Fishman, will serve as CEO, while Travelers will gain a slight control of the combined company’s board and hold the chairman’s position for the next two years.
“We’re taking this opportunity to create really an extraordinary company which exceeds the opportunities we’d have on our own,” Fishman said in a conference call with analysts and investors. “I can’t think of any company that brings the breadth of the product of these two companies.
The transaction represents one of the the largest P&C insurance industry mergers since Citigroup Inc. bought Travelers in 1998 for $38.6 billion, heralding a new era of financial consolidation and ending decades-old federal regulations prohibiting banks and insurance company mergers.
Citigroup eventually spun Travelers off to shareholders amid a downturn in the industry, but still owns nearly 10 percent of the Hartford, Connecticut-based company shares.
Under the terms of the transaction, Travelers will receive 0.4334 shares of St. Paul stock for each of its shares. That values Travelers at $15.94 per share, based on Friday closing prices, below the Friday closes of $16.03 for its Class A shares and $16.06 for Class B shares.
The combined company, to be known as St. Paul Travelers Cos, will remain based in St. Paul’s current headquarters in St. Paul, Minnesota, Fishman, 51, St. Paul’s chairman and chief executive, will serve as CEO.
Travelers, based in Hartford, Connecticut, will hold 12 seats on the combined company’s 23-person board and its chairman, Robert Lipp, will serve as executive chairman until Jan. 1, 2006 before ceding his post to Fishman.
St. Paul said the merger would add significantly to its earnings by an undisclosed amount under purchase accounting rules. It expects to earn about $150 million in additional income by 2006 from new revenue generated by cross-selling the companies products and achieve cost savings of $225 million by the same period.
The company anticipates taking a $350 million restructuring charge when the deal closes, expected during the second quarter of next year. But Fishman said that charge did not include any adjustments to either companies’ reserves against asbestos claims.
Merger activity in the P&C space has been held in check in recent years primarily by fears over growing asbestos claims against U.S. companies. Both Fishman and Lipp said their companies conducted extensive due diligence on the other’s books and were comfortable with the exposure to additional asbestos claims going forward.
The combined company is expected to pay 88 cents of annual dividends. St. Paul said it expects to pay a special dividend before closing so that its shareholders receive $1.16 per share, the company’s current annual dividend, in 2004.
Citigroup Global Markets and Lehman Brothers Inc. advised Travelers on the transaction. Goldman Sachs & Co. and Merrill Lynch & Co. advised St. Paul.