USF&G; chief sees job half done

THE BALTIMORE SUN

When Norman P. Blake Jr., the energetic turnaround artist and Vince Lombardi sound-alike, came to town four years ago, nobody missed the meaning of the display he set up behind his desk: a pair of Japanese samurai swords.

The new chairman and chief executive's job was to save a dying USF&G; Corp.

From his 35th-floor office in the USF&G; Tower, he executed his mission with cold efficiency, excising irrelevant businesses, slashing the work force by more than 5,000 people and stopping the bleeding that threatened the life of the 94-year-old insurer. Just last week, in his latest cost-cutting move, Mr. Blake said the company will abandon its signature Inner Harbor headquarters for its suburban-like Mount Washington campus.

Mr. Blake has saved USF&G; from collapse, but he concedes that his job is only half done. He has yet to prove he can take a mediocre performer and, to borrow Mr. Blake's rhetoric, play the game to win.

"I sure haven't demonstrated an ability to grow the company yet," he said, "and I certainly don't want to leave here until I've been able to convince people that we're able to grow it responsibly, and bring value to the company."

The insurer's operating profits remain well below the industry average, and growth is still barely noticeable. Employment stands at about 6,500, almost 2,300 of whom are in the Baltimore area -- 767 in the Inner Harbor office tower, 1,265 at the Mount Washington campus and 265 at a facility in Owings Mills.

But USF&G;, which has started to hire and even acquire again, is only half its peak size in the mid-'80s, when it was one of Baltimore's most visible, powerful and philanthropic corporations. In terms of net written premiums, it is ranked 24th by A.M. Best Co., down from 13th in 1990.

Mr. Blake, who is 53, earned a reputation as a skilled financier at GE Capital Corp. and then enhanced it as a turnaround artist at Heller Financial Corp. in Chicago.

But the next three years may do more to shape the judgments on his career than any other project he has tackled.

The primary goal is at least a 15 percent return on the shareholders' equity, up from just under 10 percent in the first three quarters of last year. Mr. Blake said his game plan should get the company there in two or three years.

Unless he can quickly turn USF&G; into an earnings powerhouse, one whose stock is pricey enough to ward off potential suitors, Baltimore runs the risk of losing yet another major corporate headquarters.

"I am concerned -- I don't want this opportunity taken away from us," Mr. Blake said. With much of the cost-cutting "dirty work" done, the remaining work force far better trained than before, and $375 million in accumulated future tax write-offs, a takeover attempt can't be ruled out, he admitted.

"I just hope nobody gets too interested, that's all."

Mr. Blake will have plenty of other worries along the way to remaking the property-casualty insurer, best known to many as sponsor of the Sugar Bowl, including:

* Outdated computer systems that must be upgraded, to the tune of roughly $50 million during the next four years;

* A work force still partly shell-shocked from a downsizing that cut almost half the employees since 1991;

* A steadily diminishing demand for many of USF&G;'s traditional products;

* And most important, a prolonged down cycle in the intensely competitive insurance industry that has kept prices unusually low for more than seven years.

Skeptics still abound. "They're not big enough, strong enough to profit in a market like this," said Ira L. Zuckerman, an analyst with SBS Financial Group in Westport, Conn. "They're out of the woods," he added, "but whether they're home free, it's too early to say."

Finding the way out of the woods was a major undertaking.

In 1990 and 1991, USF&G; lost a combined $745 million, which amounted to more than half its shareholders' equity during that period. USF&G;'s stock fell from the mid-$30s in 1989 to a low of $5.75 in December 1991.

Mr. Blake was hired in November 1990 to save the company after Chairman Jack Moseley was forced out. He wasted no time in administering the bitter medicine. Aside from cutting employees and perks, such as the executive dining room, he severed business ties with about 1,400 of USF&G;'s least productive independent agents.

He cut almost all of the company's money-losing ventures, such as investment managers, oil and gas explorers and even a windmill farm, that had been picked up in a frenzy of acquisitions in the 1980s.

And he revitalized the balance sheet by shrinking the quarterly dividend from 75 cents a share to a nickel, jettisoning most of the recession-wracked junk bonds and real estate in the investment portfolio, and raising hundreds of millions by selling preferred stock.

Retreating from losing states and agents and tightening up underwriting standards have helped the company reduce its loss ratio, or the percentage of each premium dollar that is paid out in claims, from 84.1 in 1991 to 73.7 as of Sept. 30.

In the first nine months of last year, partly on the strength of the tax write-offs, USF&G; earned $170 million on $2.4 billion in revenues. That followed a $165 million gain in 1993. Earnings for 1994 will be released Feb. 1.

Even the life insurance company, until recently a neglected stepchild of the parent operations, has turned profitable. Though still less than 10 percent of the property-casualty business, Fidelity & Guaranty Life Insurance Co. earned $9 million in operating profits through the third quarter last year.

Mr. Blake's management team and their strategy are winning praise from various quarters.

The company's stock, with 85 million shares outstanding, has outperformed the industry by 60 percent since the end of 1991, a full year after Mr. Blake arrived, and closed Friday at $15.125, off 37.5 cents, on the New York Stock Exchange.

And during the past month the insurer raised hopes further by announcing two small acquisitions, the first since 1989.

Some analysts are finally thumbs up on USF&G.; A consensus of Wall Street estimates predicts operating earnings will have grown to 92 cents in 1994 vs. 56 cents in 1993, and will reach $1.35 next year. Thursday the company said it expected 1994 operating earnings to be in line with expectations.

"Mr. Blake's detailed plans and focused leadership have brought discipline to an operation that was in disarray," wrote Elizabeth C. Malone, a Legg Mason Inc. analyst who rates the stock a buy. "We believe the investment community continues to underestimate USF&G;'s ability to succeed."

3-pronged effort

Success, if it comes, will stem from a three-section playbook: one for the high-volume but low-return personal lines; another for the increasingly competitive commercial middle market; and a third for the high-growth, high-return specialty lines of insurance.

Personal lines, including homeowner's and automobile insurance, account for about one-fourth of total premiums, but they've had the highest losses. The division has suffered from staff departures under the heavy hand of former Senior Vice President Richard J. Potter, according to current and former employees. Mr. Potter, who declined to comment, left last summer and works for an insurer in Pennsylvania.

He was replaced in October by James R. Lewis, 46, who spent 17 years with CIGNA Corp. before coming to Baltimore in 1992 to run the northeast region.

Mr. Lewis' success will depend largely on the use of automation to cut costs and increase standardization. By the end of this year the company hopes to have direct computer interfaces with half of 500 or so targeted agencies (out of a total 1,600 personal lines agencies that do business with USF&G;).

The company has been trying to trade quantity for quality. USF&G; still writes business in most of the country, but it is focusing on states in the Northeast and Southeast. "We realized that we can't be all things to all people," Mr. Lewis said.

Personal lines increasingly will be sold along with small business coverage, another product that offers reliable if only moderate profits -- in the range of a 10 percent to 12 percent return on equity.

"Those businesses right now are not profitable for us," Mr. Blake said. "They will be over the next two or three years."

For the middle market commercial lines -- companies that pay from $25,000 to $1 million in annual premiums -- the insurer is targeting three areas: service companies, manufacturers and contractors. It will offer proprietary products on a region-by-region basis, rather than trying to sell everything to everyone.

The division is run by Executive Vice President Glenn W. Anderson, a 42-year-old veteran of the Fireman's Fund Insurance Co. in Novato, Calif., who joined USF&G; two years ago.

Depending on automation

Like Mr. Lewis in personal lines, Mr. Anderson is depending on automation to give USF&G; an edge in underwriting the more obscure lines of business.

"We computer model the exposures in catastrophe zones, whether hurricane zones in the Southeast or earthquake zones in the West," he said. "We can get down to understanding the vulnerability of particular customers" in individual sections of town.

But these middle market lines -- about 40 percent of property/casualty revenues -- are rapidly becoming standardized products, like personal lines and small business, where price is paramount.

"The middle market will bob and weave a little bit, but it will not be the major area of growth going forward," Mr. Blake said.

That honor is reserved for specialty lines of business, such as reinsurance, surety, inland marine coverage and even nonstandard auto insurance, most of which can produce returns on equity of 15 percent to 25 percent.

To grow that area, USF&G; will rely on both new product development and acquisitions. Witness the two proposed mergers: Cleveland-based Victoria Financial Corp., which sells auto coverage to hard-to-insure drivers, and Discover Re Managers Inc., of Farmington, Conn., which provides coverage for the top levels of risk that companies can't afford to insure themselves.

Most of USF&G;'s products are sold through its 3,800-strong independent agent force. The company has withdrawn from Texas and Louisiana, states that suffer from high catastrophic losses. And it shed a reputation for blind loyalty to its agents by sloughing off about 30 percent of the least profitable ones, according to Gary C. Dunton, executive vice president for field operations.

$50 million upgrade

The lifeline that runs through all the strategic plans is plugged into USF&G;'s Mount Washington campus, where the information services division is based. Over the next four years, the company plans to spend about $50 million to upgrade its computer systems, major parts of which were designed almost 30 years ago.

The plan is to replace the antiquated mainframe technology with a nationwide network of personal computers, some "smarter" than others, and none entirely dependent on a big machine at the home office.

"If you asked the members of the executive management team what is the single factor other than human resources and capital that will most affect our performance over the next four years, unanimously I think the answer would be technology," said Thomas K. Lewis Jr., senior vice president for technology. Mr. Blake concurred.

A former chief of technology at the White House, Mr. Lewis left a growing software company he co-founded to move to Baltimore a year ago. His department's overhaul has been dubbed "Oklahoma" because it's such a big production.

"There is no one south of New York City that I know of that is doing the level of . . . development and the degree of sophistication that we are," Mr. Lewis said.

New technology aside, Mr. Zuckerman, the SBS Financial analyst, is unimpressed with USF&G;'s overall game plan. "Everybody's got the same strategy -- it's nothing new and exciting," he said. With competition high, and prices low, "unless there's a compelling reason, say one company's got a better [credit] rating than another -- the agent's going to go where the price is lower."

Mid-market competition

USF&G; isn't so much worried about competition from the insurance behemoths -- the CIGNAs, AIGs and Allstates of the world -- but rather the middle market experts, namely St. Paul Cos. and Chubb Corp., and the small regional firms, such as Cincinnati Financial Corp. and Erie Indemnity Co.

An even smaller upstart may prove to be an omen as USF&G; tries to work its regional insurer strategy of getting closer to its agents and customers. The Great River Insurance Co. of Meridian, Miss., a subsidiary of Connecticut-based W.R. Berkley Corp., was started more than a year ago by Carl Carver, who ran one of USF&G;'s two Mississippi branches until 1991 when they were consolidated. Mississippi has long produced the highest volume of any state for USF&G.;

Great River, though still tiny at $12.5 million in premiums last year, is taking new business away from other insurers, including USF&G.; Why? Because USF&G; consists of "people in Baltimore trying to write business in Mississippi," according to Richard Davis of the J.A. Terral Agency in Quitman. "And Mississippi, as you know, is a different world unto its own."

Upstarts like Great River are among a myriad of pressures on mid-sized companies such as USF&G.; Acquisitions have started reduce competition in the industry, but profit margins on most products remain thin. Insurers also are grappling with a seven-year period of unusually low prices, a spate of worldwide natural catastrophes and the rapid growth of self-insurance.

"At the high end of the spectrum, the insurance company is competing with its customer, because the customers are keeping more and more of their risk," said Alex. Brown Inc. analyst Ira H. Malis.

USF&G;'s fixed expenses are still relatively high, and the best way to offset that is with more premium volume. But without a rise in prices, Mr. Malis said, the company can't afford to bring in a lot more business.

The recently announced niche acquisitions are one way to fight the softness in the rest of the market, he noted. "They're getting out of the plain vanilla parts of the property/casualty business, and getting into some specialty areas."

Important internal changes

The external challenges are no more important than the internal ones, especially energizing a work force still somewhat dazed from the restructuring. Headquarters staff alone was reduced by 28 percent, leaving the company with excess space in its downtown tower -- a prime factor leading to last week's announcement that it would consolidate offices in Mount Washington.

In such an atmosphere, even small bumps in the road can seem outsized. Employees have complained to Mr. Lewis, directly and indirectly, about his decision to hire a small team of software developers from the large computer consulting firm Tata Consultancy Services, of Bombay, India.

Some viewed it as another affront to the local work force, which has suffered from downsizing.

To be sure, for many the gloom has lifted.

"When I first came the mood was terror," said one headquarters employee who asked not to be identified. "What has struck me recently is that it is a productive business atmosphere. . . . People are doing things that you can only do when you're not living in constant fear of, 'Will I have a job?' "

And General Counsel John A. MacColl, the only senior executive to survive from the Moseley era, marvels at his current boss' deft touch with people. "I think there's a level of intimacy and familiarity with the employees that's a little unusual for large companies," said Mr. MacColl, who recently was put in charge of human resources, too. "I think he's a good mentor and a coach."

But if the samurai swords are collecting dust these days, USF&G;'s leaders seem to be struggling to evolve beyond the autocratic style that was needed for desperate times. One day last fall, for instance, Mr. Blake blew his stack when he saw people working out in the company's 18th-floor gym at 3 p.m., according to several accounts.

He promptly restricted the gym's hours to early morning, lunchtime and evening.

Mr. Blake confirmed the incident, but said his only goal was to abolish a mind-set that places managers and supervisors above clerical staff, who may exercise only during off-hours, as he does.

And what was Mr. Blake doing near the gym at 3? Visiting his barber, which "I don't think takes an hour and a half," he said. "It only takes 20 minutes or so. That's probably acceptable."

Lack of autonomy

More significantly, several current and former branch personnel have complained about the perceived lack of autonomy in the field. Some scoffed at the symbolic "CEO" plaques Mr. Blake delivered last year to the managers of all 30 full-service branches, who are overseen by five regional offices.

Even one manager who said he believes "the USF&G; is definitely on the rise," admitted the controls on underwriting "sometimes get frustrating."

"It's a balancing act," acknowledged Mr. Dunton, the animated 39-year-old who heads field operations. A former veteran of Aetna Life & Casualty Co. in Hartford, Conn., Mr. Dunton came to USF&G; in 1992 and is viewed by some as the leading candidate to succeed Mr. Blake. His job is to supervise and motivate the people in the branches and agencies.

"On the one hand you want your folks to be entrepreneurs, you want them to take measured sensible risks, you want to empower them . . .," Mr. Dunton said.

"On the other hand there are boundaries," he added, noting that with the volume of new products and new business lines, "you don't want to give them the opportunity to blow themselves out of the water."

Despite the praise Mr. Blake's management style wins from his top executives, it hasn't helped that fully half of the executive team he brought in has left since 1992, though not all were forced out.

"I don't think it's a good thing to happen," Mr. Blake said. "I think when people look at an organization . . . they like to see stability of management, and if they don't see stability of management it's a cause for concern."

But he added: "I'm not going to compromise having the right type of leadership for the company to go forward."

Mr. Blake himself is looking forward to at least four more years at USF&G;, the amount of time left on his employment contract, which included more than $4 million in compensation in 1993.

"But I don't want to leave this place until I'm satisfied that I've answered the question about growth," Mr. Blake insisted, "and I'm satisfied that the business is reaching the heights that I've aspired for it to reach.

"I think I would be giving up on myself and the people here if I were to leave prematurely" -- or, to coin a Blake-ism, before the final whistle blows.

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