Turning Alexander & Alexander

THE BALTIMORE SUN

Frank G. Zarb, international investment banker, former U.S. energy czar and onetime gas station attendant, looks back with a touch of fondness to his first job: wiping windshields and cleaning bathrooms.

That first job, fresh out of the Army, led Mr. Zarb to a position running employee training programs for the old Cities Service Oil Co. (now Citgo). And it taught him the value of mastering the basics.

"The dealers who checked your oil, who wiped your windshields and who had regularly clean facilities invariably did a better job [at selling oil] than those who didn't," said the soft-spoken 59-year-old. "That was a real learning experience."

Mr. Zarb, named in June as chairman and chief executive of Alexander & Alexander Services Inc., has rolled up his sleeves again to tackle perhaps the last challenge of his career: reversing the flagging fortunes of the world's second largest insurance broker. Based in New York, A&A; has more than $1.3 billion in sales, about 14,200 employees, and 80 offices around the world. In Owings Mills, it employs 526 people, who comprise most of the administrative staff and a large sales force.

A&A; is still the world's second largest insurance broker, but it reported only $27 million in profits last year.

Despite its size, second only to Marsh & McLennan Cos., Alexander has struggled lately, particularly with a decade-long fallout of a disastrous acquisition. It has suffered persistent losses and legal judgments that have sapped its financial strength and distracted top management. More importantly, according to Mr. Zarb and others, A&A; has allowed itself to ignore the changes transforming its industry.

"What happens to industries like this, and certainly we as a company are not exempt, is that you're fat and happy for a long time," Mr. Zarb recounted during an interview in Owings Mills. "And that was right through the '80s, because pretty much people needed insurance; they came to you for insurance and that was the end of the story.

"So the money rolled in without having to adjust to the real world outside of your own thinking."

The new reality at Alexander is a restructuring plan that will cut up to $100 million in annual expenses, Mr. Zarb has told analysts, and a still-undetermined number of jobs.

With a confidence-boosting $200 million investment from insurer American International Group Inc. this summer, Alexander's outlook has improved dramatically, analysts contend. But it still must negotiate a minefield of lawsuits, competitors who smell blood and a persistently soft insurance market.

"I think the prospects are upbeat," said Alex. Brown & Sons Inc. analyst Ira H. Malis. But "until we get past the expense cuts and really see what's behind their plans for raising revenues, we'll stay neutral on the stock."

Neutral is actually a step up. The company has staggered time and again from bruising liability and restructuring charges, many of them stemming from the 1982 purchase of the London-based insurance broker Alexander Howden.

The Howden deal, which Mr. Malis has called "the worst acquisition in history," gave Alexander entree to Europe and other international markets, but at a stiff cost. Legal and underwriting problems from Howden and its insurance subsidiary, Sphere Drake Insurance Group, still haunt the parent company, even seven years after Sphere Drake was sold.

Alexander lost a total of $100 million in 1991 and 1992, largely due to $225 million in restructuring charges. Last year the company managed to turn a $27 million profit, partly because extraordinary charges were limited to a $12 million hit to cover a restatement of earnings in Alexander's consulting group, which had inflated revenues for three years. This year the red ink returned in both the first and second quarters.

Employment is down to about 14,200, from 18,000 in 1987. The job count in Baltimore has fallen by about 100, from 625, in the same period.

In January Chairman and Chief Executive Tinsley H. Irvin announced his resignation, acknowledging the need for new blood.

Board member Robert E. Boni, named acting chairman, was handed a full plate: to shore up the balance sheet, stop the flow of red ink from Sphere Drake and find a successor to Mr. Irvin.

Over the next five months, Mr. Boni courted Maurice Greenberg, the well-respected chairman of AIG, about a capital infusion in the form of $200 million in convertible A&A; stock. But Mr. Greenberg wanted assurances that the company would take care of its Sphere Drake problems, and that Mr. Irvin's successor would have the skills to save Alexander.

Mr. Zarb, meanwhile, was hesitant to leave his job as vice chairman of the Travelers Inc., where he had just completed an impressive turnaround of securities firm Smith Barney Shearson.

For much of his career, Mr. Zarb had worked alongside Travelers Chairman Sanford I. Weill. Together they built Mr. Weill's first company, CBWL, into what would become Shearson Lehman Bros., and eventually Smith Barney Shearson.

Along with his various stints on Wall Street, which included 10 years with Lazard Freres, Mr. Zarb served as an assistant labor secretary in the Nixon administration and later as President Ford's "energy czar."

But Mr. Zarb had never run his own show entirely, a chance offered by Alexander & Alexander. To give up the security of Travelers, though, he negotiated the right to walk away from A&A; with $12 million in his pocket if the company failed to find needed financing.

Mr. Boni handled the delicate negotiations. "I have three trains coming into the station, and they've all got to get there at the same time," he told fellow executive committee member Kenneth Black Jr.

The trains arrived in the predawn hours of June 7: Mr. Greenberg made his $200 million investment, Mr. Zarb came on board, and Mr. Boni secured reinsurance for the Sphere Drake liabilities (resulting in a $6 million second-quarter charge).

On the same day, the company cut its quarterly dividend by 90 percent, to 2.5 cents a share. Some of those savings will go to AIG, whose investment pays an 8 percent annual dividend.

Wall Street reacted that day by boosting Alexander's stock by $1.50 a share, to $17.875. It eventually climbed to a high of $20.75 last month before settling back below $20.

A&A;'s debt ratings, downgraded to below investment grade last year, are on watch for an upgrade, and the company's revolving line of credit has been restored.

Most of these items were resolved before Mr. Zarb came on board, making his job a lot easier. He did approve a plan to sell the company's U.S. personal lines business in August, which will raise $30 million, further shoring up the balance sheet.

Since his arrival, Mr. Zarb has recruited a new chief financial officer, Edward F. Kosnik, who helped salvage international contracting firm JWP Inc., and a new general counsel. And he named as chief administrative officer Elliot Cooperstone, Mr. Zarb's second-in-command at Smith Barney.

Much of the rebuilding of Alexander & Alexander is being mapped out from offices in the Owings Mills building. The newly created "Funding the Future" team is taking a critical look at all of the company's resources and expenditures.

"The question is, where are we spending money where we shouldn't be, and where do we need to spend it?" Mr. Zarb rTC explained. This team's proposals, including an undetermined number of job cuts, will be finished by the end of the year, and implemented throughout 1995.

On the revenue side, the company has begun to focus on new products and services needed to compete in a world where insurance has become more of a commodity, and clients demand a broader range of risk management tools.

"Risk management can involve fraud protection, it can involve the way you run your computers, it can involve simply the way you run your construction site," Mr. Zarb said. "As I look down the road in the future, we're probably going to see more of a combination of insurance products mixed with capital markets products."

Mr. Zarb's securities experience and his extensive contacts around the world should help open doors to the world's biggest clients, noted Mr. Malis, of Alex. Brown.

Analyst Joanne A. Smith, of Fox-Pitt, Kelton Inc. in New York, thinks A&A; can compete again if it stops trying to be "everything to everybody."

"Alex and Alex's biggest strength is the fact that they have particular market niches in specialty lines," she said, such as construction, aviation and marine, and certain reinsurance lines.

"You can compete against Marsh & McLennan but you need to have some kind of competitive edge," she added.

The company still faces tremendous hurdles, including legal claims of as much as $250 million resulting from the collapse of the Mutual Fire, Marine and Inland Insurance Co., whose receiver is blaming Alexander and several other brokers for writing poor risks at low cost. Mr. Boni has taken the job of managing all the company's litigation problems.

Further, moving forward means paddling upstream until the insurance industry turns around. Prices have risen in only two out of the last 15 years, Mr. Malis said. The economic recovery has failed to spark higher insurance prices.

But A&A;'s restructuring plan doesn't rely on a turn in prices, according to Mr. Zarb. In the end, he insisted, the company's fortunes depend on the attitudes of its people.

As a symbol of the new, leaner culture he hopes to introduce, Mr. Zarb has imported his "dirty dozen" tactic from Smith Barney: hand-written notes from the chairman to the company's 12 most profligate expense account abusers each month.

He plans to tie compensation of directors and top management more closely to the company's performance. And in a blow to Alexander's "fat and happy" past, Mr. Zarb has imposed a death sentence on the company's museum-quality executive suites in its Avenue of the Americas headquarters building. The top executives have moved next door, to offices that better reflect the hands-on attitude Mr. Zarb learned all those years ago at Citgo.

He smiled as he described with admiration the antique brass squeegee given to him by A&A;'s Minneapolis office. "As I said initially when I first got here, 'We all do windows.' "

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