search, and il" he wants to buy an indi- INSURANCE

vidual stock, he uses E*Tyade: "They've

got lower commissions and stuff." That
fact, says discount broker Muriel
Siebert, "is pressuring all full-service
firms" to develop new roles.
UNAPOLOGETIC. These broader money-
management goals of Merrill go well IS YOUR BOnOM
beyond the aims of simple stock trading
that were at the core of the firm's busi-
ness when it came up with its "Bullish
on America" slogan in 1971. And they
do bear on Clough's work. "Today," he
LINE COVERED?
says, "as Americans age, we are older, Bold new insurance And that's just a start. Reliance plans
to expand coverage levels and sell the
retirement is a tittle closer, and in an policies protect companies policy to European companies within
environment like that, I think money six months. "Chief financial officers are
management is a much more complicat- against disappointing looking for ways to deliver to expecta-
ed event. For one thing, preservation of financial results tions," says Mario Vitale, president of
capital becomes more important." Reliance's casualty risk services divi-

J
Of course, it never hurts for gurus ust imagine: Neither rain nor sleet sion. "And investors love the idea be-
to hold a contrarian view. More con- nor collapsing sales could keep cause it means less surjirises."
ventional—and a better money-mak- your company from delivering its OFF THE SEESAW. With the property/ca-
er—has been the advice of such strate- projected earnings on time. No sualty business in a serious slump, in-
gists as Lehman's Jeffrey M. Applegate more investors outraged by nasty sur- surers are racing to take on risks that
and Gruntal & Co.'s Joseph Battipaglia, prises. The results are guaranteed be- few would have thought insurable. In-
who expect the economy, corporate cause your company simply bought an dustry giants like American Interna-
profits, and stocks to remain strong insurance policy that pays out when tional Group Inc. and broker Marsh &
this year Applauding Clough's consis- earnings fall short. McLennan Cos. have covered dozens of
tent logic and long-running correct bet WTiat sounds like a pipe dream is fast clients for everything from future movie
on bonds, Battipaglia notes the Mer- becoming reality, as insurers rush to receipts to a general business down-
rill model has nonetheless led Clough design bold new policies that protect turn. "We're seeing a lot more deals
astray on stocks. companies against bad financial results. where companies want a financial guar-
About all this, Clough seems little On Jan. 28, New York's Reliance Group, antee, not just a hedge on earnings
worried. He puts off a question about for one, launched a radical product risks," says Bob Partridge, a director
whether Menill brokers are impatient called Enterprise Earnings Protection at Standard & Poor's Corp.
with him as "silly stuff. AH they're look- Insurance that covers any operating Reliance and its competitors are go-
ing for from me is ideas." Ironically, the earnings shortfall due to events beyond ing iurther, aiming to insui'e a big chunk
firm's "focus list" of 15 U. S. stocks, in- management's control. Let's say a com- of actual cash flow. That, say propo-
cluding such names as E^fi^er and John- pany wanted a guaranteed $40 million in nents, could revolutionize corporate
son & Johnson, is up a solid 6% since annual profits. If it posted a $10 mil- strategy by making seesaw sales and
being issued in December. Clough has lion loss. Reliance could make up the earnings a thing of the past. "If you
suggested more aggressive moves over- difference, after a deductible. No need live in a volatile world, it might be
seas to exploit such beaten-down mar- to debate whether the poor results worth spending some money to take
kets as Korea and Japan, which dove- stemmed from blizzards or Brazil's eco- out the peaks and the valleys," reasons
tails with Merrill's rapid foreign nomic woes. Except for situations over Tobey Russ, president of AIG Risk Fi-
expansion. which management has control. Reliance nance. Buying into a company could be-
As for preferring bonds to stocks, would pay out up to $50 million. come like buying a Ti"easui-y bond with
Clough is unapologetic. "It's the best
spin on events we can come up with,"
he says. "We think it'll be a money- PROFIT PROTECTION
making strategy. And we'd argue it was Most insurers handle earthquakes and explosions. A few are going
in 1998. The 30-year TVeasury actually further: guaranteeing a company's sales and earnings.
outperformed the average mutual fund
rather handily," 18% vs. 14% in total BRITISH AEROSPACE The deal: $70 million policy to guarantee
return. He views the big, red-hot stocks, $3.7 billion in revenue from aircraft leasing until the end of 2013.
names such as Microsoft and Dell, dim-
ly. "Every mutual fund, every pension- HANSON The deal: A $275 million policy to provide $800 million in cover-
ñmd manager, they've all wedged them- age for environmental and roof-product liabilities of the former
selves into the same 15 stocks, and operations of Beazer. The reason-. To remove liabilities from the balance
they're kind of expensive," Clough says. sheet—and preferably hike Hanson's stock price.
"Will they stay expensive? Yeah."
HONEYWELL The deal; Blanket policy to insure foreign exchange exposure
Clough's cautious views may yet
along with other risks; may expand to include interest-rate hedges, weather,
prove sound. But that won't square it
any better with Merrill's old image. and commodity prices.
"The day that Merrill Lynch doesn't TORO The deal: $400,000 policy to cover up to $9.5 million in refunds
come across as optimistic and confident," for a snowfall-related promotion scheme; based on projected sales and
says chief marketer Mangano, "then we snowfalj._
probably all have a problem." DATA: BUSINESS WEEK
By Robert Barker

B U S I N E S S WEEK / EEBRUARY 8 , 1 9 9 9 8 5
 Finance
With the insurance business in a serious slump,
companies are willing to take on new kind of risks
guarantees of safe returns. "You might much of its foreign-exchange exposure whethei' an insurance product does that
even insure share price," says Leslie with other risks under a blanket insur- more efficiently remains to be seen."
Rahl, a principal of Capital Market Risk ance policy with one deductible arranged That's not iJl that remains to be seen.
Advisors Inc. in New York. by AIG. By blending a broad range of Securities & Exchange Commission ofB-
Would this mean the end of volatility risks together, the company gets a dals ask how companies would disclose
as we know it? Not likely. Insurers them- cheaper overall premium and the flexi- the tenns of an insurance deal that aims
selves could get burned on bad bets. bility to include perils that might be to manage earnings. "We're concerned
Regulators also fret that policies might hard to insure on their own. Honey- about anything that tries to hide the true
hide a company's true health or be less well's director of global insurance risk financial state of a company," says one
than transparent in what SEC official.
they actually protect. While clients may be
And pretüctability has happy to hand over risk
a price. Insurance that to Reliance and other in-
aims to smooth out rev- surers, what about Re-
enue lows will likely cut liance's risks? Under its
into the highs. And new policy, the only rev-
while investors hate un- enue risks not covered
pleasant earnings sur- are accounting changes,
prises, they may also employee strikes, or oth-
balk at paying a hefty er perils that fall within
fee—or giving up poten- management control.
tial profits—to guaran- What constitutes "man-
tee steady results. Fur- agement control," of
ther, an insurer will course, is a fuzzy area in
keep providing coverage itself.
only if it keeps making Alsofiizzyis trying to
a profit—which means predict the volatility of
the company may come a client's earnings. Myles
out on the losing end of L. Strohl. CRO of Strohl
the stick. As Harris Systems Group Inc. in
Chomey, national direc- lung of Prussia, Pa.,
tor of KPMG Peat Mar- says the firm is using its
wick's insurance prac- expertise to "hopeñiUy
tice, puts it: "If expose the [company's]
management needs in- business risks," that de-
surance to get the right termine policy price. Re-
earnings per share, I liance's own exposure is
think you need to ques- hedged through a policy
tion management." with Swiss Reinsurance
SNOW JOB. Many com- America Corp. The least
panies, though, seem to risky Reliance candidates
like the idea of removing clouds of un- management, Tom Seuntjens, says the can pay as little as 5% of estimates to
certainty that linger over the bottom controls-technology manufacturer is now guard against a 20% fluctuation in oper-
line. British Aerospace PLC recently looking at insuiing against weather dis- ating earnings. "The bigger the risk, the
bought a special policy that guarantees ruptions, interest-rate bumps, and poor bigger the retention" or money a com-
its airci'aft-leasing business wiH gener- sales of new products under the same pany pays on claims, says Vitale. He
ate $3.7 billion in revenue over the next scheme. "We're trying to make our even plans a product aimed at compa-
15 years. Essentially taking a volatile earnings more predictable," says Seunt- nies setting up an ipo to "convince po-
business off the books, says spokesman jens. "We look at this as a great op- tential shareholders that they will meet
Jeremy Barnes, sent the company's share portunity to smooth out other areas of certain earnings projections."
price soaring. Toro Co. of Bloomington, risk It's a plus for everyone." In the end, though, the biggest gam-
Minn., tried to pump up snow-blower Yet Honeywell isn't ready to insure blers may be the insurers themselves.
sales this winter by offering refunds its entire balance sheet. It insured near- Michael Smith, an analyst with Bear,
based on inches of snow. Rather than ly all of its foreign sales income last year Stearns & Co., argues that, with the
risk the big payout that warm weather but still handlai another $1.1 billion more industry in a slump, insurers are racing
could bring, the manufacturer estimated through traditional capital-market in- to expand the definition of what's in-
its sales and bought a $400,000 insur- struments. Bill Kelly, a managing director surable and "that usually leads to un-
ance policy to fund up to $9.5 million in at J. P. Morgan & Co. in New York, ar- derwriting disasters." That could also
refunds. gues that banks have a long history of lead to messy lawsuits that ultimately
Honeywell Inc. in Minneapolis is tak- helping companies cope with such finan- put risk back in the hands of investors.
ing a broader approach. It is bundling cial risks, adding that "the question of By Diane Brady in New York
66 BUSINESS WEEK / FEBRUARY 8, 1999
Copyright of BusinessWeek is the property of Bloomberg, L.P. and its content may not be copied or emailed to
multiple sites or posted to a listserv without the copyright holder's express written permission. However, users
may print, download, or email articles for individual use.