American Express Unit Slashes Costs, Makes Turnaround : Fireman’s Fund Uses Ax to Reach Safety

American Express Co., which last month reported an 18% increase in 1984 earnings of $610 million, credited its once-flagging property-casualty insurance arm, Fireman’s Fund Insurance Cos., for having made “substantial progress” in responding to the unit’s $242-million loss recorded in 1983.

In contrast, American Express’ insurance division reported net income of $43 million in 1984. Earnings by the fast-growing life-insurance operation offset the property-casualty business’ modest $7-million loss.

The 1983 disaster cost American Express its 36th straight year of ever-higher earnings, and the company responded by dispatching President Sanford I. Weill and the head of the successful travel-card business, William M. McCormick, to clean house in Novato, Calif., where Fireman’s Fund has its headquarters. The pair quickly laid off nearly 1,200 employees, cut layers of management and brought in new data-processing systems to reduce the 122-year-old company’s tradition-bloated overhead.

Bigger Than Imagined

“I thought the task was sizable,” McCormick said in an interview, “but it was even bigger than I imagined. But we’re no longer the (industry’s) high-cost producer; we’re right in the middle of the pack.”

Cost-cutting sliced 4.4 points off Fireman’s cost ratio--a measure of how much it spends in overhead alone to write $100 of insurance--trimming it from $36.6 in 1983 to $32.20. And the company’s burgeoning claims rate declined modestly in 1984.

McCormick predicted that Fireman’s Fund’s effort to regain its former stature as an industry leader will take three to five years. “I see light at the end of the tunnel,” he quipped, “it’s just that the tunnel is so long. . . . “

Recent analyses by Paine Webber Mitchell Hutchins, E. F. Hutton Group Inc. and Smith Barney, Harris Upham & Co. place Fireman’s Fund ahead of the industry in emerging from a six-year downer in the cyclical business of property-casualty insurance. “It now appears that the . . . 1983 problem may have been a blessing in disguise (for the company),” Paine Webber noted, “because it motivated management early on to take steps that now seem to be stabilizing the property-casualty underwriting operation.

“In contrast, most other property-casualty companies we research are still experiencing significant increases in claims frequency.”