Description

Unique opportunity to own a company with pricing power while getting an asset management business for nothing. St. Paul Companies (SPC) is trading around $28.50 per share is one of the oldest insurance organizations in the United States, providing commercial property-liability insurance and nonlife reinsurance products and services worldwide. Commercial insurance premiums in particular are rising across nearly all business lines and regions. Such increases are primarily due to last year’s attacks. SPC’s earnings should continue to strengthen in this new environment. SPC’s second quarter provided evidence that the underwriting results are beginning to show sound earnings improvements (price were up 25% in the Q -- once of the few areas with strong pricing). The company can make $3.50 to $4.00 next year (7x to 8x earnings, or about 1x book value) while expecting to make 14% ROE. The company also has a presence in the asset management industry through there nearly 80% majority ownership of The John Nuveen Company (ticker: JNC). As a management company, they oversee the operations and provide JNC with capital, management and administrative services.


WHAT YOU ARE GETTING FOR FREE

Asset Management -- The John Nuveen Company (JNC - $24). According to the latest filings JNC's assets under management totaled $68.5 billion, consisting of $32.0 billion of exchange-traded funds, $24.7 billion of managed accounts, and $11.8 billion of mutual funds. Municipal securities accounted for approximately 70% of the underlying managed assets. JNC's principal businesses are asset management and the development, marketing and distribution of investment products and services for the affluent, high-net-worth and institutional market segments. JNC distributes its investment products and services, including mutual funds (open-end funds), exchange-traded funds (closed-end funds), defined portfolios and individual managed accounts to the affluent and high-net-worth market segments through unaffiliated intermediary firms, broker-dealers, commercial banks, affiliates of insurance providers, financial planners, accountants, consultants and investment advisors. JNC also provides investment products and services to institutional markets. JNC’s primary business activities generate three principal sources of revenue: (1) ongoing advisory fees earned on assets under management, including individually managed accounts, mutual funds and exchange-traded funds; (2) distribution revenues earned upon the sale of certain investment products; and (3) fees earned on certain institutional accounts based on the performance of such accounts. JNC's operations are organized around nine subsidiaries, including JNC Investments and six investment advisory subsidiaries. Nuveen Investments provides investment product distribution and related services for JNC’s managed funds and defined portfolios. Three others provide investment management services for and administer the business affairs of the JNC managed funds and two provide investment management services for individually managed accounts, and one of which also acts as sub-adviser and portfolio manager for a mutual funds. Symphony, acquired in July 2001 for a total cost of approximately $208 million, provides managed accounts and investment funds designed to reduce risk through market-neutral and other strategies in several equity and fixed-income asset classes for institutional investors. The other two subsidiaries are not registered broker-dealers or investment advisors.


POTENTIAL IPO of REINSURANCE BUSINESS … DOWN THE ROAD

Reinsurance Business (Platinum Underwriters). This summer the company postponed the proposed IPO of Platinum due to market conditions. The plan was to raise $850 million by issuing 40 million shares on Platinum for around $21 per share. The reinsurance business has a book value range between $18 to $22. The Reinsurance segment, which generated $1.7 billion of net written premium volume in 2001, which underwrites traditional treaty and facultative reinsurance for property, liability, ocean marine, surety, health and certain specialty classes of coverages. Platinum also underwrites certain types of "non-traditional" reinsurance, which combines elements of traditional underwriting risk with financial risk protection to meet specific financial objectives of corporate customers. Platinum underwrites traditional reinsurance for leading property, liability and other non-life insurance companies worldwide, with clients in North America, Latin America, the Caribbean, Europe, Australia and the Asia-Pacific region. SPC plans to narrow the product offerings and geographic presence of their reinsurance operations. They are continuing to review the role of our reinsurance operations in our long-term corporate strategy. According to the most recent data published by the Reinsurance Association of America, Platinum’s written premium volume through the first nine months of ranked it as the 5th-largest reinsurer in the United States. According to data published by Standard & Poor's, St. Paul Re was ranked as the 14th-largest reinsurance group in the world, based on 2000 written premiums.


THE CORE BUSINESSES

SPC’s core business includes Specialty Commercial, Commercial Lines Group, Surety and Construction, Health Care, Lloyd's and Other; and has a combined book value of $23. The Specialty Commercial segment consists of 11 business centers that SPC have designated specialty commercial operations because each provides dedicated underwriting, claim and risk control services that require specialized expertise, and each business center focuses exclusively on the respective customer group that it serves. During the last Q in this segment, net premiums grew 24.5%. The operations produced an 87% combined ratio versus 93% last year. The growth in this business segment was primarily driven by rate increases - which are expected to continue. These business centers, which collectively generated $2.1 billion of net written premiums in 2001, are as follows: "Technology" offers a comprehensive portfolio of specialty products and services to companies involved in telecommunications, information technology, medical technology, biotechnology, and electronics manufacturing. "Financial and Professional" Services provides coverages for financial institutions, including property, liability, professional liability and management liability coverages. This business center also provides financial products coverages for corporations and nonprofit organizations, and errors and omissions coverages for a variety of professionals such as lawyers, insurance agents, real estate agents and appraisers. "Public Sector Services" markets insurance products and services, including professional liability coverages, to cities, counties, townships and special governmental districts. "Discover Re" underwrites primary insurance and reinsurance and provides related services to self-insured companies and insurance pools, in addition to ceding to and reinsuring captive insurers, all within the alternative risk transfer market. Through alternative risk transfer, a company self-insures, or insures through a captive insurer, the portion of its own losses which are predictable and purchases insurance for the less predictable, high-severity losses that could have a major financial impact on the company. "Catastrophe Risk" underwrites property coverages for major U.S. corporations and personal property coverages in certain states exposed to earthquakes and hurricanes. "Ocean Marine" provides a variety of property-liability insurance coverage internationally for ocean and inland waterways traffic, including cargo and hull property protection. "Umbrella/Excess & Surplus Lines" underwrites umbrella and excess liability coverages, as well as property and liability insurance for high-risk classes of business and unique, sometimes one-of-a kind risks that standard insurance markets generally avoid. "Oil & Gas" provides specialized insurance products for customers involved in the exploration and production of oil and gas, including operators, drillers and oil servicing contractors. "Transportation" offers a broad range of coverage options for the trucking industry. "National Programs" underwrites comprehensive insurance programs that are national in scope. The "International Specialty" business center is comprised of specialty insurance business in several foreign countries that is managed on a regional basis.

Commercial Lines Group. The Commercial Lines Group underwrites general liability and casualty, property, workers' compensation, commercial auto, inland marine, umbrella and excess liability, and package coverages in the United States. Net written premiums was off just 2% according to the latest filling – and rose 17.5% the previous quarter. This segment, which generated $1.6 billion of net written premiums in 2001, includes the following business centers: "Small Commercial" provides coverages to small businesses such as retailers, wholesalers, service companies, professional offices, manufacturers and contractors. "Middle Market Commercial" provides comprehensive property and liability insurance and risk management services for a wide variety of commercial manufacturing, distributing, retailing and property ownership enterprises where annual insurance costs range from $75,000 to $1 million. The "Large Accounts" business center serves larger commercial entities that are willing to share in their insurance risk through significant deductibles and self-insured retentions.

Surety and Construction. These operations, which accounted for $991 million of net written premium volume in 2001, are included in the same segment because of their shared customer based and executive management, as well as the similarity in expertise required to underwrite these coverages. Premiums in this segment grew 28%. SPC's Surety operation underwrites surety bonds, which are agreements under which one party, the surety, guarantees to another party, the owner or obligee, that a third party, the contractor or principal, will perform in accordance with contractual obligations. The "Contract Surety" business center specializes in providing bid, performance and payment bonds, domestically and internationally, to a broad spectrum of clients specializing in general contracting, highway and bridge construction, asphalt paving, underground and pipeline construction, manufacturing, civil and heavy engineering, and mechanical and electrical construction. The "Commercial Surety and Fidelity" business center offers license and permit bonds, court bonds, public official bonds and other miscellaneous bonds. SPC’s Construction operation provides traditional insurance, and financial and risk management solutions, to a broad range of contractors and owners of construction projects. According to data published by the Surety Association of America, our domestic Surety operations were the largest in North America based on 2000 net written premiums, accounting for approximately 11% of the domestic market.

Health Care. Health Care segment, which generated $770 million in net written premium volume in 2001, underwrites professional liability, property and general liability insurance throughout the entire healthcare delivery system. Products include coverages for healthcare professionals (physicians and surgeons, dental professionals and nurses); individual healthcare facilities (including hospitals, long-term care facilities and other facilities such as laboratories); and entire systems, such as hospital networks and managed care systems. SPC’s Health Care segment historically has been one of the leading medical liability insurers in the United States. Net written premium volume in this segment in 2002 is expected to total approximately $400 million, half of which is expected to result from reporting endorsements.

Lloyd's and Other. Lloyd's and Other business segment, which accounted for $608 million of net written premiums in 2001, consists of SCP's operations at Lloyd's, where SPC provide capital to five underwriting syndicates and own a managing agency; SPC’s participation in the insuring of the Lloyd's Central Fund, which is utilized if an individual member of Lloyd's were to be unable to pay its share of a syndicate's losses; and results from MMI's London-based insurance operation, Unionamerica, where the only new business SPC is underwriting is that which we are contractually obligated to underwrite through 2004 in two syndicates at Lloyd's.


MAJOR REORGANIZATION HAS BEEN UNDERWAY

SPC's management has been very busy lately reorganizing the company. For example, they announced a series of strategic actions designed to improve our profitability, summarized as follows: Exit, on a global basis, all business underwritten in their Health Care segment; narrow the product offerings and geographic presence of their reinsurance operations; no longer underwrite aviation or bond and credit reinsurance, or offer certain financial risk and capital markets reinsurance products; substantially reduce the North American reinsurance business they underwrite in London; focus reinsurance operation on certain coverages, including property catastrophe reinsurance, excess-of-loss casualty reinsurance, and marine and traditional finite reinsurance. In the operations at Lloyd's, are exiting most of our casualty insurance and reinsurance business, in addition to U.S. surplus lines and certain non-marine reinsurance lines of business. They are continuing to underwrite aviation, marine, financial and professional services, property insurance, kidnap and ransom, accident and health, creditor and other personal specialty products. They are exiting those countries where management have determined that it is unlikely they will achieve competitive scale, and they are pursuing the sale of certain of these international operations.


VALUATION

EPS (2003E): $3.50
P/E (2003E): 8x
Book value (core businesses): $23
P/B (core valuation, based on comps): 1.2x
Debt/Cap: 27%

Value of Core Businesses: $29
Value of JNC stake to SPC holders: $5 Free
Value of Platinum (potential IPO): $1 Free
TOTAL: $35

Catalyst

1. The potential IPO of Platinum which would allow the comp-any to separate Platinum from the core business due to their different risk profiles and because of the high cyclical nature of Platinum; With a yield of 4%, you are getting paid to wait.
2. Any improvement in the asset management business and at JNC in particular;
3. The success and completion of their reorganization plan