Travelers And St. Paul -- Under One Big Umbrella

Still Ho-Hum On The Street
When Travelers Property Casualty (TAPA ) agreed on Nov. 17 to merge with St. Paul, also an insurer, the Street reaction to the all-stock deal was blah. The stock sagged -- from 16 to 14 -- and rebounded to 16, when some pros took a second look. "The merger will create the second-largest commercial insurer in the U.S. Only AIG (AIG ) is larger," says Robert Lyon, president of Institutional Capital, which holds a 4% stake in its $12 billion portfolio.

He figures the combined St. Paul Travelers will grab a wider slice of the weak insurance business. The deal, notes Lyon, unites teams with "good chemistry," that worked together at Citigroup (C ) under Sandy Weill. St. Paul CEO Jay Fishman ran Travelers from 1998 to 2001, when it was part of Citigroup. The latter spun off Travelers in 2002. On its own, Travelers is cheap, at eight times 2004 estimated earnings of $2 a share, says Lyon. It could hit 20 before the deal closes in June, he adds. Paul Newsome of A.G. Edwards, who rates both Travelers and St. Paul a buy, calls them "disciplined insurers" with strong track records of making money even in a weak market. In the deal, each Traveler share will acquire 0.4334 share of St. Paul, now trading at 38. Newsome figures St. Paul Travelers will earn $4.31 a share (pro-forma basis) in 2003 and will be worth 42 in a year.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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