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In the wake of the “Terminator” taking the helm as California’s new governor, Travelers Property Casualty Corp. and The St. Paul Companies Inc. announced plans to merge forming the nation’s second largest commercial lines insurance company. The combined company, to be called The St. Paul Travelers Companies, will be second only to American International Group in the commercial lines market, and second to Progressive for agency-distributed personal lines products. Overall, the merger will create the number one agency-based insurer in the nation, according to A.M. Best rankings.

The two industry giants touted the deal as a “merger of equals.” The board of directors of both companies agreed to the tax-free, stock-for-stock merger valued at $16.4 billion. The St. Paul Travelers Companies expects to have total assets of $107 billion, and combined net written premiums of $20 billion. The transaction is subject to approvals, but is expected to close in the second quarter of 2004.

“This transaction brings together two companies with similar performance-based cultures and highly complementary product offerings and geographic reach,” said Robert Lipp, chairman and CEO of Travelers.

Jay S. Fishman, 51, chairman and CEO of The St. Paul, will serve as CEO of the combined company. Lipp, 65, will serve as the new company’s executive chairman until Jan. 1, 2006, at which time it is anticipated that Fishman will become chairman as well as CEO.

St. Paul Travelers will hold its corporate headquarters in Saint Paul, Minn. The specialty lines division, which includes Gulf Insurance Group, will be known as St. Paul Specialty, and will be based in Saint Paul as well. The St. Paul’s international business will continue to be based in London.

The company’s commercial lines and personal lines business will be consolidated under the Travelers brand and based in Hartford, Conn.

Inevitably, operational downsizing is just around the corner, but both Fishman and Lipp stated that they do not know the extent of consolidation efforts. Travelers’ workforce consists of 20,000 employees, while St. Paul employs another 10,000.

“Obviously there will be consolidation opportunities,” Fishman said. Both Lipp and Fishman have said they expect to save approximately $350 million in pre-tax expenses over the next few years from consolidation efforts.

“One of the reasons for any merger is operational efficiencies,” said Joseph Annotti, vice president of public affairs for the National Association of Independent Insurers. “You don’t need two back rooms; whether it’s immediate or if it happens six months or a year later, that’s one of the things you want to get out of a merger.”

With reinsurance costs on the rise, investment incomes on the decline and enormous claims costs hampering the bottom line, perhaps St. Paul Travelers deal will launch the next wave of merger frenzies.

“In other financial services industries, there has clearly been a trend towards more consolidation,” Lipp said. “In the property casualty business that trend has really not occurred at the extent as it has in other industries; but it is inevitable.

“I think the ability to be on the front-end of that power curve and to be able to choose a partner that is culturally similar, rather than potentially having two companies come together scrambling to keep up with that curve, was highly desirable.”

The announcement came as a complete surprise to industry fellows even though Lipp and Fishman said discussions have been underway since June 2003.

“It happened so quickly, no one knew about it including Travelers’ employees that we talked to,” said Scott Hauge, president of CAL Insurance & Associates, an independent agency located in San Francisco, Calif. “Everything seems to be up in the air on how they will actually merge the two companies.”

Hauge, whose agency writes about $2 million in premium through Travelers, foresees possible benefits to agents, but is also concerned about a change in the company’s strategies.

“When you have two companies of this size merge together, you have to wonder, what is going to be their marketing strategy in the future? Will they be looking at working with only larger agents?” But on the positive side, Hauge noted there might be opportunities to access quality markets through St. Paul. “That’s the upside. St. Paul brings some specialty markets that Travelers doesn’t have. There very well could be a real benefit for us.”

Even so, Hauge said carrier mergers present challenges when planning for the future. “With all the mergers and acquisitions, it makes it really difficult to plan,” Hauge said. “Who knows whether that company is going to be taken over or what’s going to happen.”

For now, it’s business as usual for agents, brokers and the staff at both Travelers and The St. Paul.

Topics Mergers & Acquisitions