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ST. PAUL-Travelers Property Casualty Corp. and St. Paul Cos. agreed to a $16.2-billion merger to form the second- largest US commercial insurer, and one of the largest property casualty insurers in the world.

Together, the companies will be the fifth largest property casualty insurer, according to AM Best. The new company will be called St. Paul Travelers Cos. and will be headquartered in here. The commercial lines will remain based in Hartford, CT, while the specialty lines will be based in St. Paul. Travelers’ investors will receive 0.4334 shares in the combined company for each share they own, will own 64% of the new company.

The new company will have total assets of $107 billion, shareholders’ equity of $20 billion, total capital of $26 billion and net written premiums of $20 billion. The company will rank No. 2 in domestic commercial lines, No. 2 in agent distributed personal lines, and will be one of the top three commercial insurers in 42 states and the District of Columbia, according to direct written premium data compiled by AM Best.

Only AIG–American International Group–will be larger than the combined company in business insurance premiums.

Jay Fishman, St Paul’s CEO, will assume that role with the combined company. Fishman’s former Citigroup Inc. colleague, Travelers chief executive Robert Lipp, will be executive chairman of the combined company until Jan. 1, 2006, when Fishman will become chairman.

“This transaction represents a unique and compelling opportunity to create one of the nation’s largest and strongest property and casualty insurers, with enhanced prospects for strong and consistent earnings growth,” Fishman says.

The board will consist of 12 directors from Travelers and 11 from St. Paul, all of them outside directors except for Lipp and Fishman.

The two companies expect to be able to cut costs by $225 million over the next two years.

The combined company is expected to pay dividends at the annual rate of $0.88 per share. In addition, the St. Paul expects to pay a special dividend to its shareholders prior to the closing, so that in 2004, shareholders of the St. Paul will receive dividends amounting to the St. Paul’s current indicated annual rate of $1.16 per share.

The transaction, which requires the approval by the shareholders of both companies and regulators, is expected to close in the second quarter of 2004.

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