St. Paul’s Debt on Watch Positive

Following the recently announced merger plans of The St. Paul Companies Inc. (SPC) and Travelers Property Casualty Corp., Fitch Ratings placed its “BBB+” long-term senior debt and “F2” commercial paper ratings of The St. Paul on rating watch positive.

Concurrent with the SPC rating actions, Fitch placed Travelers’ ratings, including Travelers “A” long-term senior debt rating, on watch negative, meaning the ratings could either remain the same or be lowered one notch. Fitch expects to upgrade SPC’s long-term debt rating to “A-” or “A” at the close of the merger, subject to further analysis. The merger will reportedly create the nation’s second largest commercial lines insurer and largest independent agency writer in the U.S.

Travelers utilizes less financial and operating leverage, and generates higher run-rate earnings levels, than SPC. As a result, Fitch believes that the merged company’s earnings-based interest coverage will be moderately higher than that currently generated by SPC. Fitch also believes that over time, the merged company will benefit from enhanced scale and efficiencies.

Due to SPC’s and Traveler’s large size and relative complexity, Fitch believes that this merger carries a significant amount of integration risk, which is mitigated somewhat by the management teams involved. Several members of SPC’s senior management team were members of Travelers’ senior management team before moving to SPC and Fitch believes that they have a good understanding of both companies’ operations and cultures. In addition, SPC has experience integrating operations, due to its 1998 merger with USF&G Corp. and its 1996 acquisition of Allstate’s commercial line companies.

One of Fitch’s key rating concerns for SPC has been the reserve adequacy of the company’s run-off lines of business, and the potentially dampening affect those run-off lines could have on the company’s earnings. Given the enhanced earnings profile and capital base of the merged company, Fitch would view this as less of an issue going forward should the merger be executed as planned.