In this era of go-go growth, shrinking to greatness might seem a relic of recessionary times. But at The St. Paul Cos., competing in the rate-squeezed property/casualty insurance industry, downsizing has become a modern necessity. It has also led to a bevy of benefits: increased net income, a jump in return on equity, and even a substantially improved share price.

Leading the trimming charge has been Paul J. Liska, executive vice president and CFO of the $7.6 billion commercial insurer. Together with chairman and CEO Douglas Leatherdale and the heads of St. Paul’s numerous business lines, Liska crafted and has kept track of a plan to find substantial cost savings during the past few years. After several rounds of aggressive reductions and reorganizations, St. Paul’s annual expense line is now about $500 million lighter per year. Moreover, the efforts have resulted in a company that is more nimble than many in this highly competitive industry.

“Paul’s greatest asset is his first-class financial mind,” offers Leatherdale. “He understood which cost savings we could find, how to find them, and how to make sure we got them. Plus, he’s very action-oriented and doesn’t delay in getting things done decisively.” That decisiveness led to Liska being named the recipient of the 2000 CFO Excellence Award in the Cost Optimization category.

Keeping the Competitive Muscle

Much of Liska’s efforts revolved around St. Paul’s 1998 merger with USF&G Corp., a smaller specialty insurance company. The combined entity would naturally target redundant back-office operations and expenses, but Liska also wanted the company to walk away from bad lines of business- -those that weren’t very profitable, or individual clients with poor claim histories. “A lot of companies, including us, had added bad risks just to get the premium volume to support their system platforms [the investment in technology and people to support the customers and process claims],” says Liska. “With the USF&G combination, we felt we would have enough scale to be able to walk away from bad business, and we did.”

But while trimming exposure would help reduce loss expenses in the future, Liska knew he needed cost savings today if the merger was going to be viewed positively. “Insurance mergers, historically, hadn’t produced the synergies and cost savings they’d promised. We wanted to be the first that did,” he says.

The expense component of St. Paul’s cost of goods was 33.6 percent, and 70 percent of that was payroll. Any significant cuts were going to mean lost jobs, and potentially loss of morale and momentum. To lessen the impact on employees and the stock, the company moved quickly–but carefully. “I had to make sure we were not cutting into our competitive muscle,” recalls Liska.

The management structure was announced in a few weeks, after which the integration team got into the process of setting new goals for all the managers. Liska arranged for a large part of their incentive compensation to be tied to cost reduction goals, which varied with the manager’s level of responsibility and business group. The goals were also personalized to the department and business line, and anticipated premium growth.

As a result of this focus on making the right cuts, Liska went through two rounds of negotiations with managers to get to the combined total of $200 million. Then the firm was able to move ahead, tracking managers against their goals on a monthly basis and making adjustments as needed. “It wasn’t a case of whether or not you were going to hit the targets, only how fast. There was no room for slippage,” says Liska.

But as this round of cutbacks was implemented in 1998 and 1999, it became clear that the insurance industry was not going to improve anytime soon. That forced Liska and business-unit heads to reconsider the way St. Paul took in business and processed existing claims. Liska pushed the regional offices to consolidate from 13 to 4, and established shared processing centers to centralize certain tasks and make their cost structures more scalable with demand. The changes helped St. Paul find another $80 million in annual expense cuts.

Finally, as the company rolled into the second half of 1999, there was an opportunity for one last round of savings, with a target of $200 million. Half of the reductions would come from selling personal lines of business and specialty auto insurance to Metropolitan Auto & Home for $500 million, which made up 20 percent of the company’s premiums at the time. Liska was looking for at least 20 percent off the support and administrative budget, and with lingering tough business conditions, he wanted to see another $100 million cut from the support overhead.

Rethinking The Business

The problem, however, wasn’t as simple as cutting head count. “We were already fairly lean. We couldn’t just cut and expect to get everything done. We had to rethink our business processes and organization to find the savings,” explains Liska.

Liska and the business-unit heads, along with other senior executives, crafted a reorganization of the business units that created global staff functions that were then shared by multiple lines of business. Staffs in regulatory compliance, actuarial, and agency relationships were grouped together, allowing costs to be trimmed and best practices across business lines to be shared more easily. Liska felt it necessary to lead by example: while the rest of the company took 20 percent out of its budget, Liska pushed for a 24 percent reduction in his own departments.

“We found a lot of our cost savings through the use of technology, and by eliminating a wide array of reports and practices. We had to challenge ourselves to do only what’s necessary and forget the rest,” says Liska. He started writing “Do Not Prepare This for Me Again” on the cover of unneeded reports, such as a quarterly report on the market value of the company’s portfolios that was prepared by the tax department.

In the end, staff levels for the combined firms that are today The St. Paul Cos. were reduced from about 14,000 to 7,800, a reduction of nearly 45 percent. “It wasn’t easy, but we tried to ease the way for people by being very generous with severance, early retirement, and outplacement services,” says Liska.

Wall Street Pays Attention

The net result has not been lost on Wall Street. “The St. Paul’s merger with USF&G was one of the most successful mergers in the insurance industry,” says Merrill Lynch insurance stock analyst Jay Cohen. “One had the sense that [Liska] had a firm grasp of the progress they were making, and he knew when they had to step up and do more to stay competitive.”

Not that the overall market has been consistently kind to St. Paul–or many insurers, for that matter. In the first quarter of 2000, despite all the progress St. Paul had made, its stock sank to a low of $21.31 from its high-$20s-to-low-$30s trading range of 1999. Liska’s response? Accelerate the buyback of 13 million shares at an average price of $24.43- -an aggressive move for any company, and even more so within the insurance industry, says Cohen. “In an industry that tends to hoard capital, it was refreshing to see them returning it to shareholders that way,” he says. The company’s share price has more than doubled from its low, hitting nearly $50 a share at the end of August.

Liska is convinced the picture will only get brighter with the insurance industry finding some premium pricing power again, and St. Paul is positioned to leverage that top-line growth. Says Liska: “Many of our competitors are just now starting to go through the reorganization and system changes that we’ve already addressed.”