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Morgan Stanley boost for St Paul Travelers, but lawsuits undermine good news

After reporting a $1.6bn reserve charge and a $275mn second quarter net loss in its first interims as a combined entity, and amid growing doubts about the rationale behind its merger, US property casualty giant The St Paul Travelers Companies received a welcome boost last week (19 August) as it was upgraded by investment bank Morgan Stanley.

The news saw the group’s stock recover some of the 17 percent in value lost since the merger earlier this year, as its share price climbed by over 4 percent to $35.45 at one point.

In upgrading St Paul Travelers from underweight to equal-weight, Morgan Stanley said that investors’ concerns over reserve charges, premium growth stuttering in the face of integration distractions, falling margins, and the recent news of a shareholder class action lawsuit are already discounted in the share price.

Nevertheless, equity analyst William Wilt said estimates would be lowered for 2004 and 2005. Earnings for the current year will be hit by a third quarter 20 cents a share as a result of Hurricane Charley, and analysts expect a fourth quarter asbestos charge of $1bn, up from previous estimates of $300mn.

Morgan Stanley also expects further environmental reserves bolstering in 2005, in addition to the $205mn announced as part of the recent charge, and have factored in $500mn to their estimates.

The result is a fall in 2004 estimated earnings per share from $2.78 to $1.90, and from $4.90 to $4.38 a share for 2005.

Despite the estimated reserve charges, Wilt said he believed that St Paul Travelers would be strong enough to “weather another storm without incurring rating agency wrath or a potential capital raise”.

But Jay Gelb, an analyst at Prudential Equity Group, disagreed, suggesting that a “major rating agency” could place the insurer under review if its fourth quarter asbestos charge exceeded $500mn.

Meanwhile it has emerged that the company is facing a raft of class action lawsuits from former shareholders who say they were defrauded when St Paul and Travelers merged and that statements made prior to the merger were misleading.

One complaint filed by law firm of Schiffrin & Barroway on 17 August alleges failure to disclose: “(1) that the merger between St. Paul and Travelers was far from a ‘merger of equals’ and was more representative of a ‘bailout’ of St Paul; (2) that defendants knew and/or recklessly disregarded that fact that St Paul's insurance methodologies and practices with respect to those used to calculate reserves were less conservative that those of Travelers and if revealed, would impair the success of the merger; (3) that as a consequence of the forgoing, the Company's reserve reduction was materially insufficient; and (4), as such, St. Paul Travelers' earnings and assets were materially overstated at all relevant times.

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