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TheStreet Open House

For Those With Stomach, Travelers Could Have Legs

It's no toaster oven, but later this month Citigroup (C) will give a gift to all its stockholders: shares of Travelers Property Casualty (TAP.A).

The shares could prove hard to hold at first as the dilution shakes out their initial recipients. But for investors who can afford to be patient, it might be worthwhile to put these particular handouts in storage.

LIFO

The distribution of some 670 million shares of Travelers' stock on Aug. 20 will complete Citigroup's spinoff of the Connecticut-based insurer, which began in March with a monster $3.5 billion initial public offering. Citigroup will be left with just a 10% equity stake in Travelers, a company it spent $2.4 billion on two years ago to convert into a wholly owned subsidiary.

Citigroup stockholders, depending on the number of shares they own in the nation's biggest financial services firm, either will get a tax-free distribution of Travelers stock or a taxable cash payment. The distribution to the bank's stockholders includes shares of a new class of common stock that Travelers intends to register for trading later this month.

Using the bank's formula for allocating shares, an investor who owns 100 shares of Citigroup stock will receive about 4.32 shares of the insurer's existing class A stock and 8.89 shares of the soon-to-be issued class B stock. But because Citigroup doesn't plan to issue any fractional shares, anything less than a full share of either Travelers A or B common stock will be automatically converted into a cash payment.

Moved Up

The Travelers giveaway, coming at a time when Citigroup's own stock has fallen 33% since mid-May, looks a bit like an early Christmas present for the bank's beleaguered investors. It originally had been thought that the spinoff wouldn't be completed until later this year.

But with Travelers stock doing its own swan dive since re-emerging as an independent company, Citigroup investors are probably wondering whether they are getting a diamond in the rough or a lump of coal from Citigroup Chairman and CEO Sanford Weill.

Travelers stock, trading around $14, is down 24% from its $18.50 offering price and is off 33% from its $21.05 high-water mark. Indeed, with the overall stock market sinking -- notwithstanding Tuesday's strong rally -- it's awfully tempting for Citigroup investors to take their Travelers shares and cash out.

Yet with Travelers' stock trading at a discount to most other big commercial insurers, there's a decent chance it could be trading a good deal higher several months from now. That's especially true because the commercial insurance business is just beginning to see the fruits from some big rate hikes it's been charging customers in the aftermath of the Sept. 11 terror attacks.

Back to Earth

"We thought it was priced high at the IPO," says Timothy Ghriskey, president of Ghriskey Capital, a Connecticut hedge fund, which took a pass on the stock back in March. "But it's attractively valued now. We like the industry. There is pricing power in the industry."

Right now, Travelers stock trades at a rather middling price/earnings ratio of 9.6, based on actual operating earnings for the first half of the year and analyst estimates for the second half of 2002, according to Thomson Financial First Call. The insurer, with a market capitalization of just over $13 billion, trades at roughly 1.4 times its book value -- the value of a company's assets less depreciation -- according to First Call.

Indeed, those are much cheaper valuations than those of any of Travelers' main competitors. The industry leader, American International Group (AIG), trades at a comparable 2002 PE multiple of 17 and at 3 times its book value. Shares of Chubb (CB), another major commercial insurer, trade at a forward P/E of 13 and change hands at a price that's 1.7 times the insurer's book value.

There are some good reasons why Travelers' stock trades at a discount to its peers. First, it has been selling off in anticipation that after the distribution of shares, there will be a mad rush to the exits by Citi stockholders. Second, Travelers faces greater potential liability in some multimillion-dollar asbestos lawsuits than other property and casualty firms.

Travelers' asbestos problems largely stem from its acquisition of Aetna's old property and casualty business, which had been a big underwriter of policies to companies that manufactured and used asbestos products. Even though Travelers has set aside $800 million in reserves to cover payouts on asbestos claims, and although Citigroup is also absorbing some of Travelers obligations, Wall Street is unnerved by the firm's inability to put a ceiling on its potential liability.

"I think we need more clarity on the legal issues, but that won't come for a while," says Michael Paisan, an insurance analyst with Williams Capital. "This is going to be an issue for many years."

However, with the selloff in Travelers stock since the IPO, Paisan says much of the uncertainty about the insurer's asbestos liability is factored into the share price. That's why he continues to recommend the stock to investors. (Paisan doesn't own any shares in Travelers, but Williams was a co-manager on the insurer's IPO.)

Given the current market climate, it's likely that Travelers stock will fall in the days immediately following the distribution, as many investors opt to sell. But for Citi investors with patience and a stomach for volatility, Travelers may be one freebie worth holding on to.

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