Lawsuits challenging the registration statement in connection with the merger that created St. Paul Travelers Cos. Inc. should have little long-term impact, analysts say, but do highlight a credibility problem for the company.
In the latest of eight lawsuits, the New York specialist law firm Zwerling, Schachter & Zwerling said Monday that it is representing shareholders in a class action alleging that St. Paul Travelers’ registration statement was materially false or misleading because it failed to disclose significant disparities between the accounting and actuarial methods of St. Paul Cos. and Travelers Property Casualty Corp.
Reconciling the discrepancy with Travelers’ stricter accounting and actuarial numbers forced the post-merger company to increase its reserves by $1.6 billion. And this caused it to report a $275 million second-quarter loss.
The latest lawsuit alleges that “defendants knew that these reserve increases were necessary but failed to inform Travelers shareholders in advance of the merger.” Former Travelers shareholders have lost more than $2 billion of equity value since the April 1 merger, it is alleged.
The plaintiff, Jane Raisfeld, is a former holder of Travelers Class A and Class B common stock who acquired shares of St. Paul Travelers in connection with the merger. All eight suits are on behalf of individual investors, and they are expected to be combined this fall.
Joan Palm, a spokeswoman for St. Paul Travelers, said the company is still examining the lawsuits but believes they are without merit and will defend against them vigorously.
Jeff Burg, a vice president and senior analyst at Moody’s Investors Service, said the latest class action does not surprise him and he does not expect a quick settlement. The insurer must have seen this coming, he said, and it needs to focus on the actions that prompted the lawsuits.
“The shareholder lawsuit will have little effect, but they should examine their actions that led up to the lawsuit,” Mr. Burg said.
Paul Newsome, an analyst at A.G. Edwards, said he is not expecting the insurer’s legal problems to have long-term ramifications. The larger picture, he agreed, is what led up to these allegations.
St. Paul Travelers needs to prove to its investors that the merger made sense, Mr. Newsome said.
After the company released its second-quarter results early this month, Mr. Newsome said, “What was supposed to be a merger of equals has turned out to be an acquisition by Travelers at a big premium.” The former Travelers shareholders see the merger as a negative, he said. St. Paul’s former shareholders see a “stronger balance sheet absorbing the $1.6 billion charge,” however, he said.
The former St. Paul Cos. “went through a shareholder lawsuit, and nothing came of it in the end,” Mr. Newsome noted.
The class action suggests that the Travelers securities holders approved the merger because of the defendant’s misleading registration statement.
St. Paul Travelers announced July 23 that it would increase its reserves by $1.625 billion after a review of St. Paul’s business. It delayed the release of its second-quarter results, pending guidance from the Securities and Exchange Commission on how to account for the addition to reserves. Under one scenario, the company would report up to $800 million of profit for the quarter; under another, it said it would have a loss of up to $300 million.
On Aug. 5, the insurer said the required reserve adjustment would be $1.637 billion, which produced a net loss of $275 million, or $310 million on an operating basis.
Jay Fishman, St. Paul Travelers’ chief executive officer, offered no details in a conference call Aug. 5 on what had required the increase in reserves, and he took an upbeat view of the company’s first post-merger quarter. Mr. Newsome said at the time that this failed to clarify the company’s current financial situation. Mr. Fishman did not respond to a message requesting comment for this article.
Bob Schachter of Zwerling, Schachter & Zwerling said additional lawsuits will most likely be filed in the next couple of weeks and that it is premature to guess when the cases might be settled.
“We’re a long way off from any result,” said Mr. Schachter, adding that no action would occur before October or November when the lawsuits will be consolidated.
