Vive L'equitable Companies?Larry Light
Is the Equitable next to die? That was a real fear in 1991, the insurance industry's year of sheer gothic horror, as one big carrier after another collapsed. At New York-based giant Equitable Cos., harrowing losses from ill-advised 1980s forays into real estate and junk bonds were bleeding the grand old insurer's capital dry. Policyholders were bailing out. So were agents.
Then in July, 1991, Equitable Chairman and Chief Executive Richard H. Jenrette, an unassuming bald fellow with a pixieish smile, stepped before the cameras with dapper Claude Bebear, head of French insurance behemoth Groupe Axa. In his pleasant North Carolina drawl, Jenrette announced a lifesaving $1 billion Axa investment in the Equitable.
Someone asked Jenrette, brought in just a year before to turn around the company, who would run it now.
After a playful glance at Bebear, Jenrette said: "Moi."
Dick Jenrette has pulled the 134-year-old Equitable back from the abyss, displaying a deft mix of political cunning, financial savvy, and strategic vision. After three straight years of crushing losses, the nation's third-largest insurer, with 3.4 million policyholders, is actually expected to turn a profit for 1993's first quarter. Plain old good luck has helped: Surging capital markets have benefited the Equitable's investment subsidiaries mightily. But Wall Street veteran Jenrette deserves kudos for cutting costs, dumping troublesome businesses, restructuring rotten assets, and--most important--luring fresh capital. Indeed, the Gallic connection, which Jenrette forged and has maintained despite periodic strains, is the key to its recovery.
SUCKING WOUND. Axa, whose 49% ownership of the company gives it effective control, is an occasionally overbearing presence in the Equitable's 50-story Manhattan tower. But Jenrette's diplomatic skills have kept the French happy while smoothing over tension that their sometimes high-handed ways have provoked among Equitable executives. Bebear has enough trust in Jenrette to allow him a lot of freedom.
The Equitable, though, isn't out of harm's way. It is still suffering from some debilitating weaknesses that could undo what Jenrette has achieved. The Equitable's real estate quandary, while significantly improved, remains a giant sucking wound. It can't unload its ailing disability-insurance business, which lost $55 million last year. Further, the Equitable is inordinately dependent on fat profits from its investment units, Alliance Capital Management Corp. and Donaldson, Lufkin & Jenrette Securities Corp., which Jenrette co-founded. A severe bear market could wreck the Equitable's bottom line again. And although Jenrette is not required to step down when he turns 65 next April, odds are Axa will want to install a younger successor before too long. Wall Street analysts expect it to be an American. Still, the succession could set off another round of discord, for much of the Equitable's progress stems from the unusually close personal chemistry between Jenrette and Bebear.
The soft-spoken Jenrette, elevated to CEO in a 1990 boardroom coup that he contends he had nothing to do with, is a master at ingratiation. A true Southern gentleman, he goes out of his way to shower courtesies on the lowliest subordinate. His ever-present grin and self-effacing charm easily disarm others. Says Dan W. Lufkin, a former business partner: "He speaks a Southern-fried French that sends the French into gales of laughter." But it has worked.
`BEAUTIFUL, RUNDOWN.' Jenrette, an architecture lover and historic preservationist, likens his efforts at the Equitable to the 12 old houses he has painstakingly bought and restored, ranging from a Hudson Valley mansion to a sugar plantation in Saint Croix. "This fine old company needed work, like a beautiful, rundown house," he says.
Beneath Jenrette's retiring manner is a bold, risk-taking nature that he first showed in his Wall Street days. He defied the Street's hidebound, privately held white-shoe firms by launching upstart DLJ and later taking it public--things that simply weren't done. After scoring the Axa money, he took the almost-heretical step last year of converting the Equitable (assets: $78 billion) from mutual to stock ownership. Mutuals, the most prevalent format among life-insurance companies, are technically owned by their policyholders, but in practice management has free rein. Stock outfits must answer to pesky analysts and shareholders. The upside is they have access to public markets. Last summer, Jenrette raised an additional $450 million in an initial public offering of common stock. And in April, he raked in $800 million more from a convertible preferred issue.
Yet Axa's pot of francs is what Jenrette holds most dear. He has turned the full force of his winning personality on cultivating Bebear, with whom he has a good bit in common. Both men built businesses from the ground up. In 1959, when Jenrette co-founded DLJ, it was the first major investment-firm startup since the Depression. Axa was a tiny insurer when Bebear assumed its helm in 1974.
The two insurance chieftains enjoy fine wines and together have toured Axa-owned vineyards near Bebear's chateau in Bordeaux. They both adore old buildings, and Jenrette has shown off his many holdings to his new friend. Jenrette says he knew they would hit it off when, during 1991 talks over the possible Axa investment in the Equitable, he visited Bebear's 18th century Paris townhouse. "It's got a hidden garden," Jenrette enthuses. "I felt I had a kindred spirit." To please Jenrette, Bebear recently had Axa buy a fine old beaux-arts bank building on Place de l'Opera that was the Equitable's Paris headquarters in the early 1900s. Bebear's 33-year-old son, Guillaume, has worked for DLJ for the past year as an investment banker.
The Equitable's woes, which brought Jenrette and Bebear onto the scene, stemmed from classic 1980s' overreaching. Under ebullient former salesman John B. Carter, the Equitable forayed willy-nilly in all directions, seeking to become a "financial supermarket," the catch phrase of the day. Carter bought DLJ in 1985 for $432 million and retained Jenrette as its head. To compete in the hot chase for the investment dollar, Carter's Equitable offered products such as guaranteed-investment contracts (GICs) that paid out up to 18% yearly. To make those lofty payouts, Carter backed them with high-return real estate and junk bonds.
Excluded from Carter's inner circle, Jenrette, a lifelong bachelor who was already extremely wealthy, thought about quitting. Suddenly in the late 1980s, real estate and junk tanked, leaving the Equitable scrambling to meet GIC and other expensive obligations. In 1990, the board booted out Carter and replaced him with the financially attuned Jen-rette. (Joseph L. Dionne, CEO of McGraw-Hill Inc., publisher of BUSINESS WEEK, was a director of the Equitable at the time--and still is. And this year, Jenrette joined the McGraw-Hill board.) He could have walked away and spared himself the world-class hassle. Says Jenrette, who earns $1.9 million yearly for his troubles: "I never wanted the job. But it's not in my nature to leave things in distress."
`REAL THUGS.' For Bebear, buying into the Equitable fulfills a dream of making Axa a global insurance powerhouse. Now the 14th-largest insurer in the world and No.2 in France, Axa failed in a 1989 bid to take over California's Farmers Group Inc., a property-casualty provider. Other big-leaguers interested in the Equitable, such as American International Group Inc., balked at the company's bum real estate assets. Not Axa, which was attracted by the high quality of many of the Equitable's properties. Axa is convinced that the U.S. insurer has strong earnings potential. "We have time," says Jean-Claude Damerval, head of Axa's international operations. "We can wait out a weak market." Axa also likes the Equitable's upscale clientele: Average policy size is $205,000, vs. a $46,000 industry average.
The sometimes rocky relations between senior Equitable and Axa executives were a real challenge to Jenrette's political skills, say people close to the company. Axa, which sets performance targets for the Equitable, regularly sends its executives across the Atlantic to check up on their U.S. counterparts. Known as "French shadows," some of these visitors have upset the Americans with harshly worded demands for information and coldly delivered criticism. "Bebear is a likable guy," says one Equitable officer, "but he's surrounded himself with real thugs."
GUESSING GAMES. Several Equitable executives, who requested anonymity, say the tension was worst right before the mid-1992 IPO. Buying interest was tepid, and Axa was afraid the deal might be aborted, harming its $1 billion investment. Indeed, the per-share offering price had to be reduced from $12 to $9. Jenrette, however, worked hard to convince the French that everything would work out. It is surely unfair, but a measure of how tense things got was that some Equitable folks actually blamed French shadows for the heart-attack death of Chief Financial Officer Thomas M. Kirwan, right before the IPO. "He was constantly second-guessed," says one Equitable executive. "On top of the IPO pressure, they drove him nuts."
A possible flare-up that Jenrette averted was a dispute over DLJ, according to several sources. They say Axa's Damerval pushed in late 1991 to sell off DLJ, or at least to deny it a $100 million capital infusion it sought from parent Equitable. Reason: Axa is disturbed by the cyclicity of the securities business. Jenrette, the sources say, went to Bebear and nailed down solid support for DLJ, his baby. Damerval and Jenrette deny that any of this occurred. Yet Damerval says: "We are insurers primarily, and DLJ is on the outskirts of our key priorities."
For the record, Bebear and Jenrette insist that no discord has occurred in the Franco-American partnership. "There are no problems," says Bebear. "It's not complicated to work with American people. They are multi-ethnic and open-minded, unlike the British, who are an island [nation]. We saved the company, but we are not trying to dominate it....The people in charge are good people who do their best." Jenrette says he "has seen no tensions," adding he is comforted because "Claude tells me he wants it to be perceived as an American company."
Axa, for now, has shown willingness to continue pumping money into the Equitable. And that's despite the French insurer's own financial ups and downs. In 1992, Axa suffered a 35% drop in earnings, to $301 million, a result of the recession in Europe. Nevertheless, it boasts $2.9 billion cash on hand, which buys a lot of flexibility. On Apr. 21, it bought almost half of the $800 million in convertible preferred stock that the Equitable floated. "We'll put more in if necessary," says Bebear. "The Equitable is a very good company that has had some problems....We are very happy with Dick."
For good reason. Before the French showed up, back in 1990 and early 1991 when the Equitable seemed doomed, Jenrette spent months successfully persuading veteran agents to stay. His capital-raising acumen was taxed to the limit in peddling the IPO to skeptical buyers. During the grueling 28-city IPO road show last summer, Jenrette talked so much he lost his voice.
Much of Jenrette's time has been spent repairing the Equitable's battered balance sheet. Take real estate. Since the Equitable has a well-deserved reputation as an ace property manager, he foreclosed on buildings he thought it could run better, such as the 1,500-room Westin Bonaventure hotel, the largest in downtown Los Angeles. And he has sold off some real estate where prices didn't dip so low that the company would take a beating, such as three office buildings recently in Washington. On top of that, Jenrette has expanded the Equitable's profitable business managing properties for pension funds and other third parties. Plus, he has gradually diminished the Equitable's junk-bond collection; it dropped from 8.5% of the investment portfolio in 1990 to 6% last year. The nefarious GICs are a problem that is curing itself: The last will expire in 1994.
SLICING FAT. Like any good turnaround artist, Jenrette has taken a scalpel to costs. He ended the home office's daily fresh-cut flowers and axed the fleet of 13 chauffeured limousines. Layoffs and attrition have sliced head count from 7,100 in 1989 to 5,200 now. The most vexing economy has been combining the 12 different major computer systems into four, which the company vows will happen by early 1996. Jenrette also has just merged its two money-management units, 55%-owned Alliance with wholly owned Equitable Capital Management Corp., which allowed him to lop the combined payroll by 8%, or 100 people. Plus, the merger beefs up the insurer's capital by $270 million because Equitable Capital, as part of publicly traded Alliance, now can be recorded at its full market value on the Equitable's books.
Another of Jenrette's money-saving moves was overhauling the lush compensation system for sales agents--without driving them away. The Equitable's popular universal-variable product, called Incentive Life, permitted policyholders to skip premiums even though agents were paid 50% of first-year premium income, whether collected or not. The company ate the shortfall. Incentive Life was yanked in May, 1992, and was replaced with two new policies, one requiring regular premium payments, the other motivating agents to get clients to pay up by postponing part of the commission until then.
No wonder the Equitable now is doing a lot better. Since the mid-1991 IPO, Equitable stock has more than doubled, to 20. That reversed its sagging capital, which bounced up by more than a third last year, to $2.2 billion. With the recent preferred sale, capital stands at just over $3 billion. Policy surrenders are down, along with agent defections. And sales of insurance and annuities are up again. "The issue for us is getting back the momentum after the troubles," says Joseph J. Melone, company president, whom Jenrette lured from No.1 Prudential Insurance Co. to oversee the sales side. Earnings are improving: 1991's teeth-cracking loss of $898 million narrowed to $128 million last year. Wall Street predicts black ink for 1993. Analyst Weston Hicks of Sanford C. Bernstein & Co. says 1993 earnings per share may hit $1, up from a 66 loss last year.
SHAKY PORTFOLIO. Nevertheless, no one argues that the Equitable is home free. With vacancy rates near record levels, commercial real estate remains a major weakness that won't go away soon. The Equitable is among the most exposed insurers to property problems, both from structures it owns directly (6.4% of invested assets at yearend 1992, vs. 3.3% for the entire insurance industry) and mortgages it issued (28.8%, vs. 19.7% for the industry). Almost half its mortgages are in the Northeast or on the West Coast, where the real estate recession is the worst and shows little sign of getting better for years to come. Its problem mortgage loans, 5.7% of its portfolio, are double the industry average.
More bad news: The Equitable's attempts to unload its red-ink-gushing disability business are floundering. Talks with UNUM Life Insurance Co. of America, the leader in disability coverage, broke off on Mar. 3. Equally vexing, the Equitable's expenses are still among the highest in the insurance realm (25.3% of the premium dollar, vs. 11.5% for the industry), partly the fault of maintaining the costly hodgepodge of computers.
Jenrette is the first to acknowledge that the company's remaining infirmities can undo all the progress he's made: "Things can always jump up and bite you." But credit Jenrette--with the help of his Parisian ami--for engineering an impressive rebound so far. "If an insurer the size of the Equitable had gone under, it would have been a national disaster," says Jenrette. Averting that will stand as this gentlemanly preservationist's lasting legacy.