Stephen W. Lilienthal, CPCU, Executive Vice President-U.S. Insurance Operations, Douglas W. Leatherdale, Chairman and Chief Executive Officer, James E. Gustafson, President and Chief Operating Officer, Bruce W. Martin, Vice President-Corporate Marketing.
Time was when a well-known name and a long history could carry an insurer through a plague of market troubles. Those days are gone, and with them have fled many firmly held assumptions about the value of name and longevity in the insurance business. One insurer that's learned this lesson well is The St. Paul Companies. Chartered in 1853, before its Minnesota domicile had even become a state, The St. Paul earned a reputation for caution and conservatism that contributed significantly to its stature in the marketplace. Today, almost 150 years later, those traits are still valuable commodities; but they've become just one element in a new approach that focuses on securing a top spot for The St. Paul in targeted segments of a tough and unforgiving market.
In this article we'll talk with top executives of The St. Paul about the paradigm shift that's now driving this old-line insurer's efforts to define itself in a vastly altered insurance landscape. Contributing information are Chairman and Chief Executive Officer Douglas Leatherdale; President and Chief Operating Officer James Gustafson; Stephen Lilienthal, executive vice president for U.S. operations; and Bruce Martin, vice president of corporate marketing.
In today's complex and demanding market, standing still is not an option--and St. Paul's top management has done anything but. In recent years the insurer has undertaken a series of major strategic initiatives that we'll examine in this article, chief among which are the acquisition of USF&G, the sale of the combined organization's personal lines business, announcement of the sale of its nonstandard auto business, a top-down realignment of its underwriting operation, an aggressive expansion into overseas markets, and a carefully focused campaign to define and communicate The St. Paul brand.
USF&G: The challenge of change
St. Paul's acquisition of USF&G, completed in the spring of 1998, was a hot topic among industry watchers. Many could appreciate the strategic advantages but wondered about the cultural fit between the historically conservative St. Paul and the aggressive, go-get-'em USF&G. Combining the organizations involved a massive restructuring and substantial downsizing. It also required a Herculean effort to find common ground between two strikingly different styles of management. The exercise inevitably gave rise to a measure of conflict and dissent; as the dust began to settle, however, the survivors moved toward acceptance of the new reality and the challenges and opportunities it offered.
"USF&G was a unique opportunity for us," Leatherdale says. "It had been turned around from near bankruptcy to a good mid-sized company. It was obvious to me that it would have to be sold. It fit well with us for several reasons. We needed to be larger, and USF&G's specialties supported our focus. Its books of business were compatible with ours, and it enhanced our geographic presence in the Southeast and the deep South. Their products and business units made sense in terms of our objectives; they had good people, and the price was right. From this perspective, it was a fairly natural combination."
After the merger, what happened to the disparate cultures of the two entities? "Both companies lost their old identities by way of the merger," responds Stephen Lilienthal, executive vice president of the Commercial Lines Group and a veteran of USF&G. "From a strategic, operational, and cultural standpoint, this was a true merger. Our operations were complementary. Both companies had a specialty orientation and took similar approaches to underwriting, loss control, and claims. Both companies had a strong work ethic and a deep commitment to the independent agency system." Although acknowledging that the insurers had dissimilarities, Lilienthal observes, "The differences were more of form or style than of substance. One company was more inclined to move fast, whereas the other was more analytical and tended to initiate changes incrementally. We're proud of the fact that these two large, complex companies were able to combine forces quickly and come out with a smoothly operating organization."
The acquisition of USF&G moved St. Paul well up the ladder of top-tier players, from 16th largest property/casualty insurer in 1997 to 11th largest in 1998 based on net written premium. It became the nation's fourth largest commercial lines underwriter. In 1999 The St. Paul reported total revenue of $7.5 billion and total premiums of $5.1 billion. It now ranks 171st on the Fortune 500 list. What's more, the addition of USF&G's substantial surety portfolio elevated St. Paul to the enviable status of the world's largest surety underwriter. "Our surety operations were complementary, and now we lead the world," Leatherdale says. "Our surety operation is growing rapidly, and it's very profitable. Thanks to the booming economy and the growth of construction, there's a great demand for surety bonds. It's one of the few areas of the insurance business that's performing well today."
Chairman and CEO Douglas Leatherdale and Vice President-Corporate Marketing Bruce Martin build company-wide support for The St. Paul's branding initiative.
Defining core markets
Once the USF&G transaction was completed, "Our next step was to focus on being strictly a commercial lines insurer," Leatherdale says. To that end, in the fall of 1999 St. Paul sold its entire personal lines portfolio, worth some $1.25 billion in written premium, to MetLife Auto & Home, a unit of Metropolitan Life. The 1,700 St. Paul employees who serviced that business moved to MetLife. It's significant that the transaction was supported by both of the major independent agent associations: the Independent Insurance Agents of America and the National Association of Professional Insurance Agents. Both groups based their approval on the fact that, after the sale, the business would continue to be handled by independent agents.
In January of this year, St. Paul announced a definitive agreement to sell its $245 million nonstandard auto business, which operates as St. Paul Specialty Auto, to Prudential Insurance. The transaction is expected to close in the second quarter of this year.
St. Paul's decision to exit the personal lines business was "fairly easy," Leatherdale says. "As the market has been evolving, we now see four or five firms controlling 50% of the business, with thousands of companies competing for the other 50%. With $1.25 billion in volume, we didn't have the size required to compete in the top tier." What's more, he observes, "The business continues to change; increasingly personal lines is becoming a commodity, and that's giving rise to a change in distribution methodology. To continue in that business, we would need three or four distribution channels. We think banks will play an increasing role, as well as the Internet and direct sales. Some companies may use all of these distribution systems. We didn't see ourselves as a major player, and we welcomed the opportunity to sell our personal lines book to a good buyer for a good price."
Long known for its expertise in the challenging medical professional liability market, St. Paul will continue to focus on that segment while building volume in other carefully selected niches of the commercial lines market. "St. Paul has always been a specialty niche player," Leatherdale points out. "Some big companies are good generalists, but they differ in size and scope from St. Paul. We started to specialize in medical malpractice in the early 1970s, and in the 1980s we began to target other specialties. Now we're market leaders in technology, construction, surety, community banks, ocean marine, and medical malpractice. We understand the dynamics of achieving market dominance through specialty business units." Late last December, the St. Paul announced a definitive agreement to acquire MMI Companies, Inc., an international risk services company that serves the health care industry. The combination creates the largest global integrated provider of insurance and risk management services for the health care industry.
Going global
Like other insurers of its rank, St. Paul was quick to recognize the need to become a power in the global marketplace. "Over the last 10 years we've built a substantial book of international business," Leatherdale notes. "A key initiative is to make that operation a global entity, so we can, for example, sell medical professional liability coverage not just in the United States but in South Africa, the United Kingdom, South America, and the European countries. The strength of our combined organization allows us to manage specialties on a truly global basis." St. Paul International currently has offices in 14 countries outside the United States that produced $480 million in commercial lines premium volume in 1999. St. Paul Re, the company's reinsurance underwriter, has offices in 16 countries and posted 1999 net written premium of $965 million.
Another major growth area for St. Paul is alternative risk management. "There's continued growth in demand for alternative risk products, in both direct and reinsurance operations," Leatherdale comments. "Our goal is to build a center of excellence with knowledgeable people. A lot of business comes to St. Paul this way, and alternative risk is a key part of our global strategy."
Underwriting realignment
In October of last year, The St. Paul announced a top-down reorganization of its primary underwriting operations. A key aim of the restructuring, President and Chief Operating Officer James Gustafson explains, was to improve access for the insurer's 7,000 independent agents and brokers. As head of U.S. underwriting operations, Gustafson says, he was receiving disturbing messages from producers that gaining access to the insurer's products and services was difficult, time consuming, and frustrating. "Agents and brokers were saying, 'We like your products and your people, but getting access to them is really difficult.' One agent told me he had had to deal with 34 separate underwriters in seven different states," he notes wryly. To streamline the delivery of its products and services, The St. Paul realigned its primary insurance underwriting operations into three organizational components: Global Specialty Products, U.S. Operations, and International Operations.
The Global Specialty Products unit has worldwide responsibility for product development, strategic planning, pricing, and risk selection for the insurer's specialty products: surety, medical services, ocean marine, technology, financial and professional services, public service, oil and gas, and excess and surplus lines.
The distribution management of all commercial and specialty products was consolidated into two units: U.S. Operations and International Operations. Formerly, individual underwriting operations had responsibility for both product development and sales and service. Global Specialty Products and U.S. and International Operations now share profit/loss responsibilities for the various product lines.
"The reorganization makes things simpler for our agents," Gustafson observes. "Instead of having to deal with what once seemed like separate companies, an agent can go to one source in the United States for domestic, foreign, and international business. We're taking the best practices from each of these areas and bringing them together to offer producers the highest levels of product development and technical expertise."
Focus on commercial lines
As mentioned earlier, a key factor in The St. Paul's decision to exit the personal lines business was its desire to become strictly a commercial lines insurer, targeting carefully selected niche markets where it could develop profitable business. Executive Vice President Stephen Lilienthal has overall responsibility for the sale and distribution of all commercial lines and specialty products in the United States and also is in charge of field operations. St. Paul's commercial lines portfolio encompasses small and mid-market business as well as specialty products such as construction and accounts for some $2.5 billion in written premium, or 40% of St. Paul's total volume. We asked Lilienthal to outline the characteristics of each of these segments with respect to products, underwriting, and service.
"Our small business accounts are relatively homogeneous risks that require a less customized approach in terms of risk management, claims, and loss control," he explains. "We seek accounts in classes where products and services are fairly standard and that lend themselves to automation and low-touch or no-touch underwriting." Examples of such commodity-type risks, Lilienthal says, are small retailers and real estate brokerages, as well as light manufacturers and contractors.
--Stephen Lilienthal
In contrast, he says, St. Paul's mid-market risks require differentiated products and more complex loss and claim services, and involve a higher transaction volume than small business accounts. Targeted businesses in the middle market segment include heavier manufacturers, larger real estate operations, schools and other nonprofit entities, and recreational facilities such as country clubs and golf courses.
In the specialty products arena, Lilienthal points out, St. Paul has achieved #1, #2, or #3 market leadership in construction, technology, financial institutions, public entities, and surety bonding. Other targeted groups are manufacturing, service industries, special property, national programs, and transportation.
In considering whether to enter additional commercial lines markets, he says, "We look for new opportunities with profit potential; that's vital to our continued growth. We also strive to achieve a balance between standard and specialty business."
St. Paul's focus on profitable business is paying off, Lilienthal observes. "Pricing firmed slowly and steadily throughout 1999. Prices increased an average of 7.8% on all standard commercial lines during the fourth quarter alone." He characterizes commercial lines capacity and competition today as "erratic, with no geographic focus," and notes, "As we shed business, it's still finding a home. Our retention and new business levels were steady throughout 1999. We're seeing improved pricing and terms on renewal business, and the business we're losing is performing worse. We've withdrawn sharply from some segments; we shed $150 million of mid-market business in 1999 and $250 million in 1998."
Underwriting trends: the winds of change
Over the past three decades, Stephen Lilienthal has acquired both depth and breadth of experience in executive underwriting positions at leading U.S. property/casualty insurers. We asked him to identify some of the major changes in commercial lines underwriting philosophy and strategy he has observed over the span of his career. "I've seen a sharper focus on underwriting emerge during my 28 years in the industry," he responds. "I've also observed a shift toward a more financial orientation in terms of what is and is not a good business to be in." Further, he cites "a broader approach to distribution and increased use of multi-channeling." Yet another key trend, Lilienthal remarks, is the influence of technology on insurance operations. "Technology has become a major driver of our business. Information today is more sophisticated and more readily available. That allows us to be more analytical and to take a more integrated view of risk exposures and risk financing. What we're now seeing is a blend of traditional property/casualty underwriting with newer risk financing techniques."
As we move into the new millennium, what traits does Lilienthal think will distinguish the winners from the losers in the property/casualty business? The winners, he says, will "have a clear strategy and financial focus; a balanced portfolio of products and services; be flexible and agile; weave technology into the fiber of the organization so they're prepared to move rapidly; use multiple distribution channels to control the cost of distribution; focus on their internal expense structure as customers increasingly question the value of what they pay for; and focus on the fundamentals. Underwriting has become a lost skill and one that must be rebuilt." At St. Paul, Lilienthal says, "We're proud of our company and our products and services. We believe the structural changes we've made in recent months give our agents and customers easier access to us and position us to be a leader in the industry."
The St. Paul brand
Given the fundamental changes that have been taking place at The St. Paul over the past few years, the insurer's top management recognized the need to establish a well-defined brand identity that would accurately and effectively communicate its new structure and focus. Leading the charge in the branding effort is Bruce Martin, vice president of corporate marketing, who joined The St. Paul three years ago after holding positions at Procter & Gamble, National Car Rental, GE Capital, and NextHealth.
What, actually, is a corporate brand? "It's a declaration of what a company is, what it wants to be, what it believes in," Martin responds. "It involves setting up a communication that explains to potential customers why they should put faith in our products. Branding is highly strategic from both a marketing and a corporate decision-making standpoint. You consider it every time you make a decision."
Establishing the St. Paul brand, Martin says, was a two-year process. "We started by conducting a significant amount of research, first to benchmark our position in the marketplace and learn what people thought of us, and second to identify what our target audience wanted in a property/casualty insurer. We then conducted qualitative research to clarify the meaning of our empirical data."
What did The St. Paul learn from its research? "There were no surprises," Martin observes. "The St. Paul traditionally has not been very vocal in the marketplace. We saw significant opportunities to improve our name recognition and association, and to boost 'top of mind' awareness with both existing and potential customers. We had low name recognition among non-customers, which was not good because our agents represent competing companies. Potential customers first have to figure out who St. Paul is vis a vis other insurers. Without an established, recognizable, meaningful brand, we were facing an uphill battle."
Using the research findings as a starting point, Martin spearheaded the development of a brand for St. Paul that focuses on perceived customer values like strength, trust, and stability. A print, television, and Internet advertising campaign directed to producers, customers, and investors uses compelling black and white photographic images and poses queries ("Is there an insurance company that understands how frightening a situation can be?" "Is there an insurance company that has consistently earned strong ratings?" "Is there an insurance company that has helped businesses recover from catastrophes for 146 years?" "Is there an insurance company that has paid dividends for 126 straight years?"). The response to each query is "Without question," followed by the St. Paul logotype.
Preliminary results show an "overwhelmingly positive" response to the advertising campaign, Martin remarks, particularly among agents and employees. "A sizable number of people have requested reprints of ads from our Web site. People are seeing the ads, responding positively, and getting the message. We're seeing a geometric increase in Web site activity, and we're experiencing a month-to-month increase of 50% in hits on our agent locator."
Adding it all up
Except for its name and location, The St. Paul in recent years has undergone just about as much change as an insurer can experience. With a major acquisition under its belt, a sharper focus on commercial and specialty commercial markets, a streamlined underwriting operation, a carefully constructed branding campaign, and an ongoing commitment to its nearly 8,000 independent agents, there's no question that St. Paul is truly "on the move." *
For more information:
The St. Paul Companies
385 Washington St.
St. Paul, MN 55102
(615) 310-7911
www.stpaul.com
©COPYRIGHT: The Rough Notes Magazine, 2000