Mission Insurance Group said Monday that its major shareholder, American Financial Corp., will provide $75 million in new working capital and reserves for the hard-pressed casualty and workers' compensation insurance subsidiaries of Los Angeles-based Mission.
However, the rescue operation will come at the expense of another Los Angeles insurer, Transport Insurance Co., which is owned by privately held American Financial and Great American Insurance Co., both of which are based in Cincinnati.
Under the complex financial arrangement, which is expected to begin implementation on Friday, the liabilities of Transport Indemnity, which mainly writes casualty insurance for trucking fleets, will be transferred to another American Financial subsidiary, Transport Insurance Co. of Dallas, while its assets go to Mission.
All four companies involved in Mission's rescue are part of the financial empire controlled by Cincinnati investor Carl H. Lindner, who also is a Mission director. Under the deal, American Financial, which now holds a 49.9% share of publicly held Mission Insurance's common stock, could raise its stake as high as 91.3%, at a price of $7.125 per share.
Mission's common stock closed in composite trading Monday on the New York Stock Exchange at $8, up 25 cents.
Mission's directors named Richard M. Haverland, executive vice president of American Financial, to join Lindner and a third American Financial executive on its 11-member board. Haverland replaces E. Richard DeRosa, who headed Mission until his retirement in November, 1983. DeRosa resigned his directorship, according to the announcement.
Commented Chairman Edward A. Smith: "This program was approved only after extensive consideration--by the company's financial adviser, Salomon Bros., and a committee of outside directors--of various possible avenues for additional capital which is essential if Mission is to continue to operate in the current environment and return to a profitable position."
Mission hired Salomon, a New York investment banking firm, last month after it reported a 1984 loss of more than $198 million, up from $15.4 million in 1983. It simultaneously announced without explanation the resignation of Louis F. Marioni as president and chief executive, replacing him with Ray D. Johnson Jr., who formerly headed Encino-based Republic Indemnity Co. of America, another Lindner-led company.
Mission attributed its dismal results to the six-year downturn experienced by the property-casualty insurance industry generally--a period marked by what became a vicious cycle of aggressive price-cutting in search of new income to finance increasing loss claims. As long as interest rates remain in the upper teens, investment income offset insurance losses. But the industry's underwriting loss totaled $21 billion last year, up from $13.3 billion in 1983, and investment income amounted to just $17.3 billion--not enough to make up for the underwriting loss.
Mission said it has raised its rates up to 200% in recent months in an effort to bring its insurance losses under control.
Group to Rescue
The $75-million increase in new capital and surplus is to come from a combination of an assumption of $158 million of Mission's liabilities by Great American, increasing capital by $37.5 million, and transfer to Mission of the stock of Transport Indemnity Co., which the company valued at $37.5 million.
In exchange, Mission is to give American Financial, Great American's parent, a subordinated note for $37.5 million bearing 13.5% interest and due in seven years, and a warrant for additional Mission stock, and will deliver cash and unspecified marketable securities it valued at $120.5 million. The note will be subordinated to Mission's other outstanding debt.
The virtual liquidation of Transport Indemnity to rescue Lindner's investment in Mission did not come as a complete surprise, according to key employees for the company, who agreed to discuss the situation on condition that they not be identified. About 15% of the company's 200 employees have already been let go, according to these sources.
On March 1, Transport Indemnity's president, Leland S. Thomas, sent a letter to "our producers and friends" announcing that the parents of Transport Indemnity and Transport Insurance Co. of Dallas had decided "to consolidate the operations of the two companies." The letter said that "all new and renewal business activity" was discontinued Feb. 22, and that its "current book of business" would expire at the end of its term.
Thomas declined to comment. Members of Transport Indemnity's underwriting staff expressed bitterness, however, at the manner in which the virtual liquidation took place.
"I think it's disgusting," said one employee still on the payroll. "We're being closed down to support another company. Doesn't American Financial owe something to the employees that made this company profitable?"