In the Spotlight

News & Features
A Turnaround for the St. Paul Companies
By Mark Zdechlik
August 24, 2000
Click for audio RealAudio 3.0

After a major restructuring, one of the nation's largest insurance companies, The St. Paul Companies, appears to be on much firmer ground now than it was just a couple of years ago. Analysts say the St. Paul got out of personal insurance at the right time and that the company is poised to take advantage of the improving commercial insurance market.

MINNESOTA'S OLDEST CORPORATION has been in the news a lot over the past couple of years and much of the attention has focused on the St. Paul Companies' woes: low premiums, heavy competition, and job cuts. Now the company's decision to focus exclusively on commercial insurance is paying off.

Moments before sitting down for an interview, St. Paul Companies CEO Douglas Leatherdale happily punched up the insurance company's current stock price on a computer screen. The share price now is more than double what it was just a few months ago.

"I am very pleased with the way the stock has been acting. We are finally beginning to get the recognition from Wall Street that we have made some positive and significant changes in this company," Leatherdale said.

The past couple of years have been a time a of transition for the St. Paul Companies. It started with Leatherdale's decision to buck the industry trend by raising premium prices.

"Two years ago we made the decision - just about two years ago - right now that we simply couldn't tolerate any longer the decline in prices that were going on in the property causality insurance industry and I made a speech to analysts and to our people that, in effect, enough is enough - we a are simply not going to write business at prices that do not enable us to have a fair change of earning a profit."

Other major commerical insurance providers also raised rates, signaling the beginning of an end to the bloodletting the had brought premiums down so low.

Leatherdale also concluded it was time for the St. Paul Companies to zero in on its main business - selling commercial insurance products. Earlier this year, the company sold its last personal insurance operation which dealt in non-standard auto coverage. It followed the previous year's sale of the St. Paul Companies' home and auto insurance divisions.

"That was a very key decision. We had been, in a minor way, insuring automobiles and homes in this part of the world and other parts of the United States for many year. Quite frankly, we were a very small player. We had not been very profitable. It was increasingly a commodity business which meant that the low cost producer was the one who got the business and I don't like those kind of businesses."

Shedding the personal insurance lines and trimming corporate expenses meant thousands of employees would no longer be needed. 1,700 went to Met Life, which bought most of the St. Paul Companies' Auto and Home businesses. 900 followed the non standard auto insurance division, which Prudential bought earlier this year.

Another 2,000 nationwide were laid off, 700 of them from the ranks of the downtown St. Paul corporate headquarters work force.

In 1999, the year of the cuts, the St. Paul Companies' net income jumped to $834 million - an 837 percent increase from the previous year. The turnaround goes deeper than one time gains resulting from the sale of the St. Paul's personal insurance lines. Analysts, as polled by "First Call", expect the company will do even better this year and they're predicting better yet results in 2001.

"I think he's done an excellent job in reshaping the company. I think you have to give Doug Leatherdale quite a bit of credit," Micheal Smith said.

Smith is an insurance industry analyst with Bear Steans. He says the St. Paul Companies got out of personal insurance just as premiums for that type of insurance began to decline. At the same time prices for commercial insurance, which had been plummeting for several years, began to recover. Smith says the St. Paul Companies is nicely positioned to take advantage of continued improvements in the commercial market. That's why, Smith says, the company's stock is as strong as it is.

"I think he's done an excellent job in reshaping the company. I think you have to give Doug Leatherdale quite a bit of credit"

- Michael Smith, analyst
"What we have now are investors that are beginning to adjust upward their peak earnings expectations from 2002 and 2003 and they are really pricing the stocks against that. What you are going to see over the next year as premium growth begins to accelerate is the price earnings multiples of these stocks expanding rather dramatically."

A year ago there was considerable speculation: struggling with a low stock price and in the midst of restructuring, the St. Paul Companies was a ripe takeover target. With the stock trading as high as it is now a takeover would cost a lot more. Still analysts don't rule out that possibility nor does CEO Douglas Leatherdale. Leatherdale does says he hopes the company will remain independent but that's up to shareholders, eight of ten of which are large institutional investors.

Leatherdale is optimistic more good times lie ahead for his company. He sees particular opportunity in international markets laregly because of the spread of American-style litigation.

"What's happening outside the United States is people continue to sue each other with increasing frequency and that creates a need for liability products and that's where we are and the kinds of businesses we want to be in," Leatherdale said.