Sanford I. Weill is one shrewd financier. In the '60s and '70s, he pieced together a handful of small brokerages into a franchise he sold for a record $930 million to American Express Co. in 1981. By the end of the '80s, he had taken over Primerica Corp. and built it into one of the nation's most profitable financial-services combines.
But the deal he unveiled on Sept. 21 may be his most challenging yet. Primerica is buying a 27% stake in Travelers Corp., which has fallen on hard times. Travelers is a huge, multiline insurer, offering life, health, and property coverage. True to form, Weill got in cheap, paying just $19 a share for 38 million shares, or less than half Travelers' stated book value. Wall Street quickly gave its approval, pushing the Hartford-based insurer's stock up 26% over its $17.50 close the day before Weill's move.
The enthusiasm may be premature. Real estate problems at Travelers continue to grow, and the amount of troubled real estate in its portfolio has increased 10% in the second quarter, to $5.2 billion, or fully a third of its total mortgage and real-estate holdings (table). And the company is still downsizing as it struggles to refocus its core personal- and commercial-insurance business. "I don't want to bet against Sandy, ever," says Dean Witter Reynolds Inc. analyst Michael A. Lewis. "But it's not a quick turnaround."
DISASTER BLITZ. True, Weill will get almost a 10% return on his money through Travelers' $1.60-a-share dividend. Still, given Travelers' woes, the dividend's current level is no sure thing. Weill is betting that the insurance industry is poised for a turn in the underwriting cycle. Intense price-cutting in property-casualty lines for the past five years has left many insurers with distressed balance sheets. Some observers think this year's record rash of disasters -- including an estimated $8 billion bill from Hurricane Andrew this summer -- will finally allow a round of price increases. Already, there are signs that in some lines, such as personal automobile insurance, premiums are rising and underwriting losses are decreasing. The turnaround in the personal lines helped Travelers earn $35 million in that business last year, compared with a $33 million loss in 1990.
The lure of Travelers' national business franchise is also attractive to Weill. In contrast with Primerica, which has built its franchise selling financial and insurance products to the middle class, Travelers is known for its success at providing group health and life insurance to large businesses. "It's one of the strongest names in the financial-services industry," says Weill.
Neither Weill nor Travelers Chairman and CEO Edward H. Budd will speculate on how the two companies might combine product lines. But it's certain that Weill, who used to head American Express' Fireman's Fund unit, now called AMEX Life Assurance, will have a big say in the Hartford giant's operations. The alliance calls for Weill to chair Travelers' finance committee, and the two CEOs will also head a management review of Travelers' operations. Primerica will have 4 seats on the 16-member Travelers board. "This alliance is about more than just capital," says Budd.
RATING REVIEW. Even so, Travelers needs all the capital it can get. The company will receive net cash of $722.5 million from the deal, on top of $675 million Travelers raised earlier this year in debt and equity offerings. Worries over its capital adequacy and lingering real-estate problems led the major credit-rating agencies to lower Travelers' ratings this year. Following the Primerica announcement, Moody's Investors Service said it would review the insurer's Baal rating for a possible upgrade.
The cash infusion will give Travelers added financial flexibility to ride out the real-estate recession. The company went on a lending binge of office buildings in the '80s, but many of those deals have soured, leaving Travelers with among the worst real-estate problems in the industry. "Nobody is saying real estate is going to turn around," says Weill. "But the company now has the capital to stay it through."
The Primerica deal is the latest in a long list of rebuilding moves undertaken by Budd in the past couple of years. A new management team was assembled, thousands of employees are being shed from the payroll, and Travelers is withdrawing from unprofitable markets, cutting almost half of its personal-and commercial-policy agents in the process. The changes are expected to reduce operating costs by $300 million in 1992.
Travelers' battered balance sheet could sorely use the boost since it may take years before underwriting margins improve and real estate turns around. It may also take years to see if Weill's winning streak remains unbroken.