After Moody’s and Standard and Poor’s, A.M. Best Co. announced that it has made several adjustments to the ratings of Travelers and The St. Paul as a result of their recent merger.
Best said it has downgraded the financial strength rating to “A+” (Superior) from “A++” (Superior) of Travelers Property Casualty Pool (Travelers PC Pool), has removed them from under review and assigned a stable outlook. At the same time Best affirmed the financial strength rating of “A” (Excellent) of the St. Paul Companies, removed them from under review and assigned a positive outlook.
Best also said it has “downgraded the debt ratings to “a” from “aa-“on senior and to “a-” from “a+” on subordinated notes issued by Travelers Property Casualty Corp. (Travelers) and Travelers Insurance Group Holdings, Inc.,” removed them from under review and assigned stable outlooks.
In addition Best has upgraded the debt ratings to “a” from “bbb+” on senior, to “a-” from “bbb” on subordinated, to “bbb+” from “bbb-“on trust preferred securities, to “bbb+” from “bbb-“on preferred stock and to AMB-1 from AMB-2 on the commercial paper program of the former The St. Paul Companies, Inc. (St. Paul), now known as The St. Paul Travelers Companies, Inc. These ratings have also been removed from under review and assigned stable outlooks.
“The rating action on the Travelers PC Pool reflects its parent’s merging with a lower-rated and more financially leveraged organization,” said Best. “Despite Travelers’ strengths, the merger creates an organization with an overall increased risk profile with greater uncertainty as compared with Travelers, particularly with regard to reserve adequacy and earnings stability. Although Travelers’ ratings have been downgraded, its highly disciplined underwriting and risk management and conservative investment management should result in continued superior operating performance and capitalization.”
Concerning St. Paul’s ratings, Best said it recognized “its merging with a higher-rated and less financially leveraged organization.” The rating agency noted that, although it “continues to be concerned by the size and uncertainty associated with St. Paul’s run-off businesses, as well as the adverse prior year loss reserve development reported from several of its core business segments, management’s proactive and effective strategic actions undertaken since late 2001 have substantially improved the group’s underwriting and operating performance on continuing lines of business and its prospects going forward.”
Commenting on the new organization, Best noted that it “possesses significant market share, ranking second in the United States in commercial lines as well as in personal lines agency companies. A.M. Best expects the combined companies to benefit from cross-selling opportunities through the ability to offer complementary products, with Travelers being particularly strong in general commercial lines and St. Paul in specialty commercial lines. The merger also results in greater geographic spread and diversification of business, with Travelers’ presence being particularly strong in the Northeast and East Coast and St. Paul in the Midwest and South. Furthermore, the merger should afford significant expense savings potential through integration.”
Best noted, however, that these positive factors are somewhat offset by “the challenges and risks of integrating the groups in terms of operations, systems and personnel.” The rating agency expressed confidence in the ability of the management of both companies to achieve the transition smoothly, noting that they have “significant experience in this regard, having previously been involved in the successful merger of several other large insurance organizations.”
Best also noted a potential problem affecting insurance agents, as the “concentrations of Travelers and St. Paul business within agencies may be a concern to those agencies preferring to produce business for a more diversified group of carriers.”
In other respects, Best said it was maintaining separate ratings on each company for the present, but has equalized their respective ratings. It indicated it “expects that the financial strength ratings of the individual pools will converge over time as the operations are integrated.”
Best added that “Based on proforma capitalization at December 31, 2003, financial leverage for the combined companies totaled 25 percent (including hybrid securities), which is five points higher than Travelers on a stand-alone basis and 15 points lower than St. Paul’s significant leverage. Coming into the merger, Travelers’ cash flow needs were quite manageable, while St. Paul’s interest expense and shareholder dividends required subsidiary dividends close to or equal to subsidiary earnings capabilities.
“Over the next several years, A.M. Best expects that financial leverage will be reduced toward the 20 percent level. The larger capital base of the combined companies, coupled with the expected earnings and dividend capability of the operating companies, should allow greater support of the financial leverage and cash flow needs.”
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