July 11, 2005 Vol. 17, No. 10 Reliance, Arthur Levitt, 1969 Senate Hearings

SM SCHIFFThe world’s most dangerous’ insuranceS publication July 11, 2005 Volume 17 • Number 10 INSURANCE OBSERVER Reliance, Arthur Levitt, 1969 Senate Hearings Bonfire of the Conglomerateurs he Boeing 727-100 is a fine plane. It measures 133 feet long with a 108-foot wingspan, Tsports a distinctive “T tail,” and is powered by three rear-mounted Pratt & Whitney engines. It cruises at 570 miles per hour, has a range of 3,110 miles, and can seat 131 passengers. The Boeing 727 owned by Reliance Insurance Company differed from the standard 727 that transported billions of passengers around the world: it was equipped with five bedrooms and other lavish amenities. Saul Steinberg, Reliance’s former chairman and CEO, was notorious for his high-living ways, but it wasn’t until Reliance achieved insolvency and became a ward of the state that Steinberg’s extrav- agant travel habits irked Diane Koken, Pennsylvania’s insurance commissioner. In 2002, in her capacity as liquidator of Reliance Insurance Company, she sued Steinberg and many of Reliance’s directors Reliance Insurance Company honcho Saul Steinberg in 1993 and officers, alleging that they breached Reliance for his personal use of the plane and it was no secret that he had been their fiduciary duty and acted in a reckless and helicopter, and that he did not, in milking Reliance Insurance Company for and negligent manner that cost Reliance public reports, properly disclose the value decades. From 1986 to 1999, for example, about $500 million or so. of his personal use. under the watchful eye of the The lawsuit exposed Koken as a Obviously, Reliance didn’t need a Pennsylvania Insurance Department, killjoy. She complained, for example, that Boeing 727 and Sikorsky helicopter, but Reliance Insurance paid $2 billion in div- between 1997 and 1999 more than half Steinberg’s use—or abuse—of them is not idends to its parent company. The money the use of Reliance’s 727 was for personal what caused the company’s failure. was used to service Reliance Group’s debt trips taken by Steinberg and his brother Koken’s lawsuit also raised the issues of and to pay dividends to its shareholders Robert. (They flew, among other places, bogus tax payments, dividends, loans, im- (Steinberg owned most of the shares). to China, Spain and Greece, and to golf proper accounting and reserving, improper The Pennsylvania Insurance outings in Florida, Puerto Rico, Hawaii disclosure, and other means that Steinberg Department had decades to intervene and and Mexico.) She also carped about allegedly used to siphon money from preserve Reliance’s solvency, but did not Steinberg’s use of Reliance’s Sikorsky Reliance Insurance Company to its parent do so. Reliance, which is now about $3 bil- S76-B helicopter for trips from Manhattan company, Reliance Group Holdings. lion in the hole, is in the long process of to his country house eighty-five miles We won’t ask why the Pennsylvania being liquidated. As for the merits of away in Quogue. Department didn’t notice these alleged Koken’s case against Steinberg, they will Koken’s primary objections to misdeeds before Reliance went bust. remain subject to debate. Earlier this year Steinberg’s air travel were that he did not Steinberg, after all, was well known as an the insurance department settled with properly reimburse or compensate overcompensated, high-rolling speculator, Steinberg. Reliance’s D&O carriers SCHIFF’S INSURANCE OBSERVER • 300 CENTRAL PARK WEST, NEW YORK, NY 10024 • (212) 724-2000 • DAVID@INSURANCEO BSERVER. COM agreed to pay $85 million and Steinberg of favor because investors didn’t think nesses,” and “eliminate a single industry’s did not admit any wronging. But he did they were earning respectable returns on temptation to overexpand at the wrong agree that for the next fifteen years he will capital; at the same time, fire and casualty time.” Little wanted to acquire reason- not serve as an officer or director of any companies had much more capital than ably sized companies with broad product insurance company doing business in they needed to operate their businesses. lines and long-range potential. He wanted Pennsylvania, nor will he hold a control- In August 1967, Ed Netter, a 34-year- to buy companies in which the managers ling interest in any such company. old insurance analyst with Carter, Berlind were “young, competent, [and] hungry.” & Weill, published a research report, Over the years, Textron bought di- n May 1968, Leasco Data Processing “The Financial Services Holding verse businesses including Bell Equipment Corp., Saul Steinberg’s Company,” which calculated Reliance’s Helicopter, Franklin Life, E-Z Go (golf Isix-year-old leasing company, which “capital redundancy” (or “surplus sur- carts), General Cement, Schaefer (pens), had $75 million of assets, announced that plus”) to be $80 million. That meant that and Speidel (watch bands). Although it wanted to take over Reliance Insurance if one could buy all of Reliance for $32 per Little was a wise man and a great busi- Company. A 150-year-old bastion of the share ($150 million), withdraw the redun- nessman, a good number of other con- Philadelphia establishment, Reliance had dant capital ($80 million), for a net in- glomerateurs were hucksters, promoters $750 million in assets and $250 million of vestment of $70 million one would own or speculators who merely glommed onto surplus. Its management didn’t want to be an old-line insurance company with $155 the lingo of the times. In A Random Walk acquired—especially not by a brash million in surplus. Down Wall Street, Burton Malkiel de- twenty-nine-year-old multimillionaire. Leasco, of course, didn’t have $150 scribes the jargon that conglomerateurs Leasco was a small company compared million, but it did have a wildly overval- used to bedazzle Wall Street in the 1960s: with Reliance, but its hot stock was sell- ued stock and was able to exchange its ing for about eighty times earnings. overvalued securities for undervalued They talked about market matrices, core (Leasco’s so-called “earnings”—which Reliance shares. Leasco’s acquisition of technology fulcrums, modular building blocks, and the nucleus theory of growth. No one from came to about $1.4 million—were not of Reliance can be viewed as an early inter- Wall Street really knew what the words meant, high quality, and several years later would section of insurance, conglomerates, and but they all got the nice, warm feeling of being turn to losses.) hostile takeovers, and was a milestone in in the technological mainstream. The Reliance Insurance Company, on insurance history and finance. Reliance Conglomerate managers also found a new the other hand, was the antithesis of a Insurance Company became the corner- way of describing the businesses they had bought. Their shipbuilding businesses became glamour stock. Among its failings was the stone of Steinberg’s fortune, although his “marine systems.” Zinc mining became the fact that it was extremely conservative mismanagement of the company would “space minerals division.” Steel fabrication and ultra-solvent. As a result, it was out of eventually result in the largest insurance plants became the “materials technology divi- favor and its shares were cheap, especially failure of all time. sion.” A lighting fixture or lock company be- in comparison with “go-go” stocks like came part of the “protective services division.” And if one of the “ungentlemanly” security an- Leasco. Like many other good-sized “fire f there was such a thing as the golden age alysts … had the nerve to ask how you can get and casualty” insurance companies, of conglomerates, it was the 1960s. Some 15 to 20 percent growth from a foundry or meat Reliance was something of a sitting duck. Ithat were then shaking up the scene packer, the typical conglomerate manager sug- At year end 1966, for example, its stock include City Investing, Gulf + Western, gested that his efficiency experts had isolated was $32—eight-and-one-half times earn- ITT, Litton, LTV, National General, millions of dollars of excess costs; that his mar- keting research staff had found several fresh, ings and 62% of book value. Its $150-mil- Northwest Industries, Norton Simon, uninhabited markets; and that the target of lion market cap was far below its $235- Rapid American, Teledyne, and Textron. tripling profit margins could be easily realized million book value. (Only Textron still exists as a public com- within two years. By traditional measurements, pany today.) Reliance was substantial and Leasco was Royal Little is generally considered The stocks of conglomerates were not. But since traditional measurements the father of the conglomerate concept. often bid up to silly levels on the dubious were of little interest to many investors in At fifty-two, after spending his career in premise that diversified companies are re- 1968, Leasco was able to take over the cyclical, low-margin textile industry, cession-proof and that “1+1=3” synergies Reliance for $4.4 million in cash and a he embarked on what he would later call can be achieved over and over again from package of convertible preferred stock the “concept of unrelated diversification,” acquisitions. Armed with richly valued and warrants (derisively referred to as transforming American Woolen, his strug- stocks, some conglomerates pursued “Chinese paper”). gling textile company, into the successful takeovers aggressively, troubling many Leasco’s acquisition of Reliance would conglomerate Textron. In his entertaining people. not have happened during a more rational autobiography, How to Lose $100,000,000 The 1960s conglomerateurs did not in- moment in financial history. In the mid- and Other Valuable Advice, Little stated that vent hostile takeovers. The first modern 1960s, data-processing companies, con- the goals of this strategy were to “elimi- “corporate raider” was Robert R.

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