When we stopped by to visit with USLICO President Leslie P. Schultz about a year ago, his life insurance company was celebrating several milestones in its corporate life.
After acquiring six companies in 11 years, United Services Life had moved into the circle of companies with $1 billion in assets. And to get ready to play in this larger arena, United Services Life had brought its operations under a holding company called USLICO.
The company also had split its stock 3-for-2 in an effort to increase its "float" -- the amount of stock available for trading. USLICO hoped to attract more interest from investors -- especially the large institutions.
Since then, a lot has happened at USLICO, as we found out when we checked in with Schultz again last week. Schultz now is head of a company with $1.6 billion in assets -- and almost $500 million a year in revenue. The leap forward comes from USLICO's decision to take over International Bank of Washington (IB), which really is not a bank but an investment company that owned 35.7 percent of USLICO. As part of the merger, George Olmsted, the longtime head of IB, retired at the age of 85, closing a colorful chapter in Washington business history.
After the merger, Olmsted was left with 9.5 percent of USLICO's stock, or 1.07 million shares, worth almost $29 million at the current market price.
Schultz later was elected chairman of the IB board, and Charles V. Giuffra, president of United Services Life, was elected president of IB.
USLICO, which spent $201 million to acquire IB, inherited an unusual collection of businesses, including manufacturing operations, property and casualty companies, overseas banks, real-estate interests and a Liberian maritime operation.
But it won't stay this way for long.
"Our main objective will be to slim down and streamline International Bank," Schultz said. "We do not intend to be diverted from our main goal . . . which is writing and selling life insurance and annuities."
Investments in the industrial companies will be liquidated first, Schultz said. The first to go will be Globe Industries of Chicago, which manufactures sound control products for automobiles. Globe management has offered to buy the company for $23.5 million, and the offer has been accepted. The sale of Kliklok Corp. of Decatur, Ga., a firm that makes packaging machinery systems, is expected to bring about $30 million, Schultz said.
Overall, Schultz expects to raise about $100 million from the sale of assets this year and will use the money to pay off about $46 million in IB debt and other debts USLICO picked up during the acquisition.
Schultz also is going to move USLICO out of the real-estate business. The Olmsted building at 1701 Pennsylvania Ave. NW will be sold if the price is right. It's on the books for $40 million but is likely to bring more because of its location near the White House. Schultz noted that a Toronto life insurance company recently paid a record $1,256 a square foot for two parcels of land adjacent to USLICO's offices.
Schultz also may sell the Clarendon building being built at the Clarendon Metro station in Arlington at a cost of $35 million to $40 million. "We're not in the real-estate business," he said.
The key problem Schultz faces is what to do about IB's property and casualty business. This includes Hawkeye-Security Insurance Co., United Security Insurance Co. and Western States Insurance Co., which write automobile and fire and casualty insurance. "The business has been going through very severe problems. They've had, by far, the biggest losses in International Bank," Schultz said.
IB reported a loss from continuing operations of $8 million during the first nine months of 1985, compared with a loss of $7.1 million for the same period of 1984. One reason for the loss was the poor showing of the property-casualty division, which reported underwriting losses of $28.5 million for the first three quarters of 1985, compared with a loss of $27.3 million for the same period of 1984.
"The only good that I can say about it at this time is that it appears the business has bottomed out . . . and that the recovery is under way," said Schultz. "We're not going to be put them up for sale right away because obviously it's got to be made profitable or you're not going to realize much out of it." Schultz said he hopes the companies can break even in 1986.
Schultz said that the overseas banks will require some study. They have assets of $650 million and are located in Luxembourg, Belgium, Liberia, Hong Kong, Jamaica, Lebanon and Grand Cayman, British West Indies. "There may be some reason for us to retain some of them but we haven't made any decisions yet," he said.
The cornerstone of USLICO, United Services Life, is a 47-year-old company that sells life insurance to U.S. military personnel. As a result, United Services Life operates in Europe, where there is a heavy U.S. military presence. USLICO has a field representative in Brussels, headquarters for NATO. Thus, Schultz said, it may be useful for USLICO to keep the bank in Belgium.
The profit picture at the overseas banks is "spotty," Schultz said. "Some of them are very good, some are mediocre, some are no good." The banks that are doing well are in Belgium, Luxembourg and the Cayman Islands. However, the Hong Kong bank is losing money, Schultz said, and the weak economy in Jamaica is causing problems for the Kingston bank. The bank in Beirut, once a strong earner, still is operating but in weakened condition because of the turmoil there.
The Liberian maritime operation will continue, Schultz said. IB's overseas bank in Liberia has been designated by the Liberian government as its agent for running Liberia's maritime operation. Because Liberia has made it easy to register ships under their flag, the Liberian merchant marine now is the largest in the world in terms of gross registered tonnage. The operation has contributed about $4 million a year to IB.
The merger between USLICO and IB was accomplished in a two-part deal. First, USLICO bought a block of IB stock held by Aegon N.V., a Netherlands insurance company, at a cost of $57.4 million, or $11.50 a share.
Then USLICO tendered for the rest of IB stock, offering to exchange 0.637 of a share of USLICO stock for each share of IB stock. This made the swap worth an average of $15.20 a share for IB shareholders when the offer was made. The value later rose to $16.75 because USLICO shares had increased in price. The cost to USLICO was $144 million.
Once the merger was completed, USLICO issued $35 million in 8 percent convertible subordinated debentures, a bond that can be converted to shares of USLICO stock at a price of $31.35. The conversion price was set at 20 percent above the $26.13 share price. The bonds sold out, and the underwriter, First Boston Corp., took "a green shoe" -- meaning it could sell 15 percent more debentures than planned.
The final tally for the sale was almost $40.2 million, $39.250 million of which USLICO got after commissions.
It may be some time before the shape of the new USLICO becomes completely clear. Elizabeth C. Malone, a security analyst at Alex. Brown & Sons, Baltimore, said that the complicated nature of the merger had made it difficult to judge the true value of the company and, at this point, she has rated the stock a "hold." That could change, she said, when the financial picture is more defined.
Even so, Malone believes USLICO will earn $2.25 a share for 1985, compared with $2.07 for 1985, adjusted for a stock split. Earnings in 1986 should reach $2.55 a share, she estimates. USLICO, which has 11.4 million shares outstanding, closed Friday at $27 a share.
Despite the cost of the merger, Schultz expects that USLICO will end 1986 without any debt except for the convertible debentures. And he predicts that despite flat earnings, USLICO will maintain its track record on dividends, which have increased an average of 15.4 percent every year for the last 10 years.