St. Paul Travelers Cos. Inc. said Thursday that its $275 million second-quarter net loss is entirely an artifact of the April 1 merger that created it out of St. Paul Cos. and Travelers Property Casualty Corp. and that in operating terms the company had a good quarter.
Chief executive officer Jay Fishman offered no details about the need to increase reserves by $1.6 billion so soon after the merger, and he was not asked about it during an earnings Webcast.
The merger has raised concerns among some analysts that St. Paul Cos. had weaker reserves than was understood.
Paul Newsome, an analyst at A.G. Edwards, said that Thursday's Webcast did not clarify the company's financial situation. Investors are "hoping management will admit the merger has not added any value," he said.
"What was supposed to be a merger of equals has turned out to be an acquisition by Travelers at a big premium," Mr. Newsome said, adding that Travelers shareholders see the merger as a negative while St. Paul's are more positive as they see a "stronger balance sheet absorbing the $1.6 billion charge."
Mr. Fishman stayed upbeat, though.
"We are off to a great start operationally," he said. "I am particularly pleased with how well the field and claims organizations have come together. Our commercial and specialty businesses have made significant progress in delivering a broader product offering, and our personal business has experienced outstanding growth and performance. The rate environment continues to be favorable."
Mr. Newsome accepted that, from an operational standpoint, the company "hasn't lost that much." Its shares dropped 3.2%, however, to $35.30, in afternoon trading.
Despite the loss, Mr. Fishman said, "this is a company that did $1 billion of new business in this quarter." He said he remains optimistic about growth.
Mr. Fishman said reserve adjustments cut into after-tax results by $1.05 billion and merger costs affected those results by $26 million.
St. Paul Travelers had delayed its earnings release last month, saying it was seeking guidance from the Securities and Exchange Commission on how to account for reserve adjustments it was making in connection with the merger. If the SEC advised that the $1.625 billion increase in loss allowances for uncollectible reinsurance be reflected in the second-quarter income statement, St. Paul said, it would report a net loss of $275 million to $300 million.
(The alternative was that the reserve adjustment be included in the opening balance sheet, in which case the insurer expected to report net income of $775 million to $800 million.)
The company said it will not raise additional capital in connection with the adjustment.
The second-quarter loss was 42 cents per share, compared to net income on a pro forma basis of $441 million, or $1.02 per basic share and $1.01 per diluted share the year earlier. The operating loss was $310 million, or 47 cents per share, compared to pro forma operating income of $431 million, or 99 cents per share, the year before.
St. Paul Travelers reported net income of $312 million for the first six months, or 56 cents per share, compared with $781 million, or $1.80 per basic share and $1.79 per diluted share, the year earlier.
Mr. Fishman said revenue rose 65%, to $6.18 billion, from the same time in 2003, when results only included Travelers.
