Turning Alexander & Alexander

October 02, 1994|By David Conn | David Conn,Sun Staff Writer

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.

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