Major Restructuring Set at Fireman’s Fund : Portion of Assets to Be Sold; Weill Resigns as President of Insurer’s Parent, American Express
American Express said Tuesday that it will reorganize its ailing Fireman’s Fund Insurance subsidiary and sell a portion of it in a public offering that analysts said could raise as much as $600 million.
Separately, the giant financial-services company said that Sanford I. Weill has resigned as its president, effective Aug. 1. He has been in the position since 1981, when American Express acquired Shearson Loeb Rhoades, the brokerage firm that he headed. He will be succeeded by Louis V. Gerstner Jr., currently chairman of the executive committee.
Weill, 52, who apparently found it difficult to establish a niche for himself after joining American Express, will serve as a “consultant” to James D. Robinson III, the company’s chairman and chief executive.
“I am looking forward to doing my own thing again,” Weill said in a prepared statement. He could not be reached for further comment.
In a telephone interview, Robinson said the parting was amicable. “He and I are good friends,” he said. “He built Shearson and brought it here to American Express, and he’s contributed a lot during his time here.”
Novato, Calif.-based Fireman’s Fund, which suffered huge pretax losses in 1983 and 1984, has begun to recover after a harsh, 18-month overhaul by Weill and another American Express executive, William M. McCormick, who was installed as chief executive of Fireman’s Fund in December, 1983. The company acquired the 122-year-old insurer in 1968.
Under the plan announced Tuesday, Fireman’s Fund will be reorganized exclusively as a property and casualty insurer. Then, sometime in the third quarter of this year, American Express is expected to make a public offering of Fireman’s Fund shares.
Analysts say the company could reap as much as $600 million by selling up to a 50% stake in Fireman’s Fund, which will be operated as an independent public company with its own management.
Robinson, citing regulatory restrictions, declined to say how much of Fireman’s Fund that the company hopes to sell or what it expects to reap from the sale. As for use of the proceeds, he said, “the options are plentiful.”
As part of the restructuring, American Express will absorb the company’s life insurance business, which analysts say will produce $45 million to $50 million of the insurer’s projected $75-million after-tax profit this year.
In trading Tuesday, American Express was the fifth most-active stock on the New York Stock Exchange, rising 12.5 cents to $48.375 on turnover of 1.7 million shares.
Some resolution of the parent’s relationship with Fireman’s Fund had been expected on Wall Street for months, since the property and casualty insurance business nationwide began recovering after heavy underwriting losses in 1983 and 1984.
“They’ve said to us many times that the (property and casualty insurance business) doesn’t really fit with the rest of their businesses,” said Lawrence W. Eckenfelder, a securities analyst with Dean Witter Reynolds in San Francisco.
Problems Began in 1982
Fireman’s Fund has been rumored for months to be for sale, with bidders including Allianz Insurance of Munich, a large West German insurer that is reportedly anxious to break into the U.S. market. Such a step would appear to be forestalled by the restructuring.
“We concluded that life insurance does strategically fit with the rest of our business,” Robinson said. “But the property and casualty business--while it may be a good business, albeit a cyclical one--never would be a strategic fit for American Express,” whose principal businesses are investment, banking and travel services.
Fireman’s Fund’s problems began in 1982, when American Express made a bid to sharply expand the insurer’s market share. That move led to price cutting on the premium side and a loosening of its underwriting standards, and underwriting losses quickly followed.
Fireman’s Fund’s after-tax profits fell to $30 million in 1983 (a pretax loss of $242 million) from $244 million the year before ($220 million pretax), and American Express was forced to shore up the unit with a contribution of $230 million to the insurer’s reserves.
Last year, the unit’s after-tax profit rose slightly to $42.8 million (a pretax loss of $114 million), but American Express had to add another $200 million to its capital.
With premiums rising and underwriting tightening throughout the property and casualty industry, Wall Street analysts expect results at Fireman’s Fund to continue improving at least through 1988, when the most optimistic seers are forecasting after-tax profits of as much as $400 million.
One of Weill’s last significant acts at American Express was an attempt to lead a leveraged buy-out of Fireman’s Fund. Robinson said Weill presented the proposal to the American Express board at the end of May, but directors rejected it both because its price was considered too low and the company believed that it could raise more money in a public offering later.
Robinson declined to say how much Weill’s group offered for Fireman’s Fund.
Weill joined American Express when it purchased Shearson, the brokerage that he created through a series of mergers over 17 years, for about $1 billion. Although Weill and Robinson have repeatedly assured the public of their mutual friendship, Wall Street observers have been on the lookout for signs of conflict between the two men.
They note that Robinson has apparently managed to deprive Weill of any significant operating or executive duties at American Express. Weill’s brokerage firm, renamed Shearson/American Express, was placed under the control of Weill’s one-time deputy, Peter Cohen, who subsequently pursued and acquired the investment house of Lehman Bros. to add to the securities unit. The unit is now named Shearson Lehman Bros.
Weill masterminded the purchase last year of Investors Diversified Services, a Minneapolis-based financial-services company with marketing strength in the Midwest, for $773 million. But American Express hired an outsider, Harvey Golub of the management consulting firm of McKinsey & Co., as IDS’ president and chief executive.
Weill has been disposing of much of the 605,000-share stake in American Express that he acquired with the sale of Shearson in 1981. In January, Weill sold 150,000 shares for $6.1 million, leaving him with less than 155,000 shares. There has since been speculation that he disposed of more shares earlier this month.
Robinson downplayed reports that Weill had effectively been “frozen out” of operating responsibilities at American Express, citing Weill’s assignment in December, 1983, to turn around Fireman’s Fund.
“In its darkest hour, he helped it get on its feet,” he said. “I can assure you we all seem to find plenty to do around here.” FIREMAN’S FUND INSURANCE AT A GLANCE Founded in 1863 by a San Francisco sea captain, Fireman’s Fund sells property, liability, life, accident and health insurance through 10,000 independent agents. It has been hurt in recent years by huge losses in property-casualty underwriting. In millions
1984 1983 1982 Revenue $4,025 $3,784 $3,356 Pretax income (loss) ($114) ($242) $220
Income breakdown In millions Property-liability lines
1982 $211 1983 -$252 1984 -$194
Life and other lines
1982 $9 1983 $10 1984 $80