Shopping Shares : Cash-Strapped Raider Seeking to Sell Stake in Insurer

For the last 20 years, Saul Steinberg made his name and a $600 million fortune on Wall Street by bullying corporations with takeover threats. Typically, he would buy a sizable chunk of a company and then terrorize its management until they bought his shares back at high prices. Walt Disney Productions in Burbank was one of his victims in 1984.

But nowadays, it’s Steinberg who analysts say is taking a beating. Financial analysts suggest that Steinberg’s New York investment company, Reliance Group Holdings, needs to raise cash and has begun a selling spree of its holdings, which includes a major stake in the Woodland Hills-based Zenith National Insurance Corp.

In a recent filing with the Securities and Exchange Commission, Reliance revealed that it has hired the brokerage house of Shearson Lehman Bros. to shop around its 30.8% stake in Zenith, which at current stock prices is worth about $135 million.

Zenith, which specializes in writing worker’s compensation insurance, has made quite a comeback since Steinberg and Reliance first bought its stock in 1981, when Zenith made $13.6 million on $104 million in revenue, while its stock was trading at $9.21 (adjusted for stock splits and a dividend).

Since then, Zenith’s profits have almost quadrupled and today the company is the nation’s 82nd largest property and casualty insurer, according to A.M. Best Co., a New Jersey insurance data firm. For the three months ended March 31, the company continued its improved performance, reporting its net income rose 5% to $12.6 million, or 65 cents a share, while revenue was up 12% to $119.6 million.

‘I Don’t Know’

The architect of Zenith’s turnaround is Stanley Zax, the company’s chairman and president since 1977. Zax said of Steinberg’s latest plans: “I don’t know why he is doing what he is doing.”

Steinberg, 48, and two other Reliance executives sit on Zenith’s eight-member board of directors. Asked if the sale of so much stock would alter Zenith’s management, Zax said: “I’m not concerned.”

But analysts think they know one reason why Steinberg is selling his Zenith holdings. Since 1983, Steinberg has sunk $250 million and a lot of his time into Frank B. Hall Consulting Co., a New York insurance brokerage that is trying to rebound from its disastrous attempts at diversification. Analysts think Steinberg is selling Zenith to have more cash on hand to feed into Hall.

“Hall’s financial failure would have severe ramifications for Reliance,” said an analyst close to Steinberg. “It’s in his best interest to put as much capital into Frank B. Hall as he can to keep it going.”

Reliance itself has also been on the skids, partly because of its stake in Hall. Its stock, which was sold to the public at $10 per share in 1986, closed Monday at $5.75 per share. For the quarter ended March 31, Reliance reported its net income fell 54% to $14 million from $30 million a year earlier.

Steinberg was unavailable for comment.

But analysts suggest Steinberg is willing to sell his Zenith holdings because he wasn’t given the kind of control in Zenith he’s accustomed to with his other holdings. California’s insurance commissioner limited Reliance’s voting rights to 28.7% of Zenith’s outstanding shares, even though Reliance owns 30.8% of the stock.

“If Steinberg thought because he has a large equity position that he could exert substantial influence over Zax and the operation of the company, such was not the case,” said Gerald Haims, a vice president with Seidler Amdec Securities in Los Angeles. “Zax is his own man.”

Joanne Morrissey, president of Firemark Consultants, a New Jersey insurance research firm, said Steinberg may have met his match in Zax. “They’re very similar in demeanor and ability,” said Morrissey. “I couldn’t picture Stan Zax sitting back and saying, ‘Yes, Mr. Steinberg, whatever you say.’ ”

Bought CalFarm

While Steinberg might not have had as much power as he wanted at Zenith, he apparently believes the company’s performance will enable him to sell his stock at a premium price. Those close to Steinberg say he is asking at least $28 a share for Zenith, which would bring him almost $170 million. On Monday, Zenith’s stock closed at $22.625 per share.

It was under Zax’s leadership that Zenith gradually turned around. In 1985, the company bought CalFarm Insurance Co. when the insurer was in insolvency. CalFarm Insurance has since turned profitable, writing health, life, property and casualty insurance for farmers in California. CalFarm, as well as Zenith’s other operations, have a reputation in the industry for thoroughness. Its inspectors, Morrissey said, are especially thorough during their visits to business sites before the company agrees to write any coverage.

It seems to have paid off. Zenith has impressed analysts with its combined ratio, an insurance industry yardstick that measures an insurer’s performance. The combined ratio takes into account how much money a company receives in insurance premiums and compares it with the amount of money it pays out in expenses and insurance claims.

Ratios above 100% indicate the company is losing money on its insurance operations; below 100% means the company is making money. Most insurance companies must rely on their outside investment income to turn an overall profit.

But for the quarter ended in March, Zenith’s combined ratio was an impressive 96.7%. For all of 1987 it was 97.9%.

“The investors who have been in this company from the onset are people who believed in Zax and what he could do for the company. He has more control than what appears in the proxy statement,” analyst Haims said.

Zax, however, said any talk of a power struggle with Steinberg is nonsense. “Saul has been one of the best partners in the history of the world for the last eight years,” he said. “We’ve never had any discussion about control.”

ZENITH NATIONAL INSURANCE AT A GLANCE

Zenith National Insurance specializes in workers’ compensation insurance. The Woodland Hills-based company has 1,250 employees and 19.4 million shares of common stock outstanding.