Encino Insurer Pays Off After Mission Proves Impossible
Finding a good investment risk in insurance companies isn’t easy, even for a demibillionaire like Cincinnati investor Carl H. Lindner.
The financier has controlled two Southern California workers’ compensation insurance companies.
One of them, Mission Insurance Co. in Los Angeles, was declared insolvent in 1985 and is now being liquidated. Meanwhile, the other Lindner-controlled company, Republic American in Encino, continues humming along as one of the fastest-growing and most profitable of California’s 250 workers’ compensation insurers, ranking sixth with about 4% of the $5-billion California market.
It’s ‘His Jewel’
“This is one of the best investments he has made. This is his jewel,” said Republic American President Richard M. Haverland, who oversees Republic and 14 other insurance operations for Lindner.
A reputation for investment savvy is something that the reclusive Lindner has earned over the years. But his track record isn’t perfect. If Republic was one of his best investments, Mission has to be one of his worst.
Mission committed a classic business blunder from 1982 to 1984 when its management--before Lindner took control--strayed from the workers’ compensation business that had fueled its growth and dramatically increased its investment in the risky field of reinsurance.
Reinsurance companies, in effect, take on part of the risk of other insurance companies against bigger-than-expected losses. The problem was that plenty of competitors, including subsidiaries of major industrial companies and offshore insurers such as in the Cayman Islands, drove down prices and forced companies like Mission to take on bad risks.
Lindner’s family-owned American Financial Corp. started buying into the Mission Insurance Group parent company when it was a high-flying insurance operation in the late 1970s. By 1984 American Financial had raised its stake in Mission to 49.9%.
In early 1985, as Mission’s reinsurance problems became more clear, Lindner, a man with a reputation for salvaging sick enterprises, took control of Mission’s board of directors and became chairman, eventually pumping $75 million into Mission in an unsuccessful attempt to keep the company afloat.
American Financial’s investment in Mission, once worth about $200 million, has since been written down to zero. Indeed, when Mission’s negative net worth hit $169 million in 1985, it was put into conservatorship under direct control of the state Department of Insurance. Because of Mission’s problems, American Financial reported a $45.4-million loss in 1984, its first ever.
“He tried to give it mouth-to-mouth resuscitation, but the company was already gone,” said Joanne Morrissey, president of Firemark, an insurance and research firm in Morristown, N.J.
Unlike Mission, Republic is wisely sticking to one line of business, what it knows best: workers’ compensation.
Evidence Seen
The evidence shows on Republic’s profit-and-loss statement. Last year, its premiums earned, a figure similar to revenue, rose 54% to $191.5 million. And while many insurers in recent years actually lost money on their insurance business and had to rely on investments to make a profit, Republic turned a $21.6-million profit in 1986 from its insurance operations.
Republic also did well in its outside investments, so the company’s overall profit was up 133% in 1986 to $44.2 million. The year also marked 24 consecutive years of profitability for Republic.
All this is welcome news for Lindner, 67, a high school dropout whose wealth Forbes magazine pegs at $500 million. Lindner owns stakes in everything from the Cincinnati Reds baseball team to Penn Central. Just last week, a Lindner-controlled limited partnership bid $1.4 billion for Taft Broadcasting, a Cincinnati-based broadcasting and entertainment firm.
But the backbone of Lindner’s empire remains the insurance business. American Financial owns 32% of Republic, worth about $117 million at current stock prices. Republic is one of 26 insurance companies owned or controlled by American Financial, an investment giant with $7.3 billion in assets.
Lindner first acquired Republic in 1973 when he bought Great American Insurance Co., now a subsidiary of American Financial Corp.
Because of Republic’s hearty financial condition, early last year there were rumors that Lindner would use Republic’s cash to help bail out Mission. Instead, in July, Lindner spun off 68% of Republic and sold stock to the public at $17.50 a share, raising $238 million. Despite Republic American’s strong earnings, its stock has lagged as some Wall Street analysts have soured on insurance stocks. Republic closed at $15.875 Monday.
But analysts remain upbeat about Republic’s future. Herbert Goodfriend, an insurance analyst with Prudential-Bache Securities, noted that Republic’s recent push into Northern California, where one-third of its business is written, tends to be more profitable than in Southern California because it has to fight fewer lawsuits there.
Complex Business
Workers’ compensation, however, is anything but a simple business in California. Rates are set by the state’s insurance commissioner. And legal costs for defending against contested job-related injury claims have tripled in the last 10 years, industry executives claim.
But Republic is fussy about who it will and will not insure. For example, it will not insure farms that have workers living on the property because those workers must be insured against any injuries 24 hours a day. Another reason it shuns insuring farms is because it worries that workers exposed to pesticides may prove to be a time bomb for the insurance industry.
Republic is also a stickler about safety. Haverland mentioned a Southern California chemical company that made a product with lead in it. Some workers were showing traces of lead exposure. But Republic wouldn’t insure the company, he said, until it agreed to give monthly blood tests to workers and to transfer those with higher lead readings away from the manufacturing area.
To build customer loyalty, last year Republic also paid out 18.8% of its premiums earned in dividends to its customers, better than the 14.4% industry average, according to the California Workers’ Compensation Institute in San Francisco.
Other insurers use many of these same methods to keep workers’ compensation profits and revenue up, but, analysts said, Republic seems to do these little things a bit better than most. “They have one product and they do it extremely well,” said analyst Morrissey.
Haverland isn’t about to forget the Mission debacle. One mistake that Republic won’t commit, he said, is to jump into another new business. There is plenty of room to grow in workers’ compensation in California, he said. Indeed, managing that growth is what concerns him the most.
“I worry about keeping that edge. We’ve hung on to it, but as you grow, everybody’s job becomes more difficult,” he said. REPUBLIC AMERICAN CORP. AT A GLANCE Republic American Corp. is the holding company for Republic Indemnity Co. of America, one of California’s largest workers’ compensation insurance companies, and has 350 employees. The Encino-based company has 22.2 million shares of common stock, 32% of which are owned by American Financial Corp., based in Cincinnati.
