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Travelers doesn't fit Citigroup umbrella

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NEW YORK-Citigroup Inc.'s planned divestiture of Travelers Property Casualty Corp. sends a strong signal that the much-hyped convergence of the financial services industry may have failed to recognize essential differences between banking and property/casualty underwriting, analysts say.

In addition, as an independent entity, Hartford, Conn.-based Travelers Property Casualty Corp. is likely better positioned to grow by acquisition, they say.

Last week, New York-based Citigroup announced plans to spin off Travelers P/C, which is the sixth-largest U.S. property/casualty underwriter, based on 2000 net written premiums of $9.9 billion. Citigroup plans to sell up to 20% of Travelers P/C in an initial public offering during the first quarter of 2002 and then spin off the remaining shares to Citigroup's shareholders in a tax-free transaction.

Citigroup will retain Travelers Life & Annuity Co. and will maintain a relationship with Travelers P/C in the distribution of homeowners and automobile insurance policies. Citigroup also will provide investment advisory services to Travelers P/C.

Robert I. Lipp, who oversaw the integration of Aetna Life & Casualty Co.'s property/casualty operations into Travelers in 1996, will resume his position as chairman and chief executive officer of Travelers P/C.

By spinning off its property/casualty insurance business, Citigroup can focus on higher-growth financial services business and a new "open architecture" business strategy that allows the company to distribute its products through other insurance companies, Citigroup executives said.

During a conference call to analysts last week, Sanford I. Weill, the chairman and CEO of Citigroup, said that, given the state of the property/casualty insurance market-including rising prices-it made sense to sell a portion of Travelers P/C and use the proceeds to grow Citigroup's other businesses.

"We think, and we can't emphasize this enough, that the power of profitability is moving away from...manufacturing to distribution," Mr. Weill said, referring to insurance underwriting. "So we think we can make profits from distributing products, and by having an open architecture, we will be better positioned" to do that, he said.

Mr. Weill also said Travelers P/C "can do more on its own than it would have made sense as a part of Citigroup."

Overall, industry observers say the divestiture has long been a likely move for Citigroup, whose products never melded well with property/casualty underwriting.

The $70 billion merger of Travelers Group and Citicorp into Citigroup Inc. in 1998 is considered a watershed event in the financial services industry, which had been inching toward greater convergence of its sectors. The merger was seen as a catalyst for enactment a year later of the Gramm-Leach-Bliley Financial Services Modernization Act, which opened the doors to broad convergence by lowering Depression-era barriers between the banking, securities and insurance industries.

But, as Citigroup learned, property/casualty underwriting does not yield the same returns as do other financial services and is a markedly different business from banking, securities, and life and annuity business.

"It's a move that I've been waiting for them to make," said Adam Klauber, a managing director with Cochran, Caronia Securities L.L.C. in Chicago. "The one part of Citigroup's empire that didn't make sense was property/casualty."

Citigroup has based its business on being a higher-growth financial services organization, Mr. Klauber added. "That type of organization needs minimum organic growth of 10% to 12% over a long period of time. The P/C business, especially a large commercial P/C business, over cycles is just not going to have 10% organic growth."

"This was the most obvious example of a bank owning an insurance company, and if the synergies were very compelling, my sense is they may not have done this," said Jay Cohen, first vp at Merrill Lynch & Co. in New York, referring to the planned divestiture.

Citigroup's experience is a reminder to financial services organizations that property/casualty underwriting is not a transactional business like credit card and securities transactions, said John W. Wicher, principal at insurance investment bank John Wicher & Associates Inc. in San Francisco. "The fact is, P/C business is not a transaction business; it's comprised of a number of activities. I don't think financial services organizations fully understand that," Mr. Wicher said.

Barbara Stewart, president of Stewart Economics in Atlanta, said, "I think any kind of P/C convergence with other financial services companies will probably be strictly on a brokerage basis....They're looking to collect fees and commissions."

Analysts also say that Citigroup's move may fuel further consolidation in the property/casualty industry.

Although Citigroup executives would not discuss Travelers P/C's strategy until registration statements are made with the Securities and Exchange Commission, Mr. Lipp noted in a statement that the planned "spinoff positions Travelers Property Casualty to participate independently in the accelerating consolidation of the insurance industry."

Diane Glossman, a bank analyst with UBS Warburg in New York, said, "This is a very sizable part of the U.S. P/C business, and by being a separate entity, it enhances the potential that this company will be a much more acquisitive company."

"It will give them much better expansion-and especially consolidation-potential," agreed Mr. Klauber of Cochran, Caronia. "Longer term, especially in the large P/C market, you have to be a good consolidator to be effective," he said.

Upon news of the spinoff, Oldwick, N.J.-based A.M. Best Co. affirmed its A++ financial strength rating of the Travelers P/C pool.

Standard & Poor's Corp. lowered its senior debt and preferred stock ratings on Travelers P/C Corp. to A- and BBB, respectively. It affirmed its AA- counterparty credit and financial strength ratings on the members of the Travelers P/C pool.