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INDUSTRY CEOS EARN 14.5% CASH PAY RISE

Posted On: Aug. 30, 1998 12:00 AM CST

Battling a soft market, insurers and reinsurers want shrewd strategic thinkers whose innovation can lead to stellar financial performance. And what a price they are willing to pay.

Hardly a week in the business world can pass without an announcement of a major merger or acquisition. The insurance industry is no exception, and the chief executive officers who mastermind these corporate unions are heftily rewarded, compensation consultants say, though insurers and reinsurers pay their CEOs comparably to other financial services companies.

Average CEO cash compensation for 1997 was $1,486,028, a figure that escalated 14.5%, nearly double the 7.3% increase in 1996, according to a Business Insurance survey of 44 insurers and reinsurers. CEO pay has fluctuated between marginal and impressive increases for the past few years, reaching a recent pinnacle in 1995 when the average pay swelled 23.0% from 1994 figures (BI, Sept. 2, 1996).

Overall, CEOs in 34 companies saw a jump in their total cash compensation. Thirty-five of the 44 insurers and reinsurers experienced a revenue increase, and 38 saw net income grow.

All three of the highest-compensated CEOs have recently orchestrated mergers and acquisitions or hinted at upcoming deals, according to the survey, which examined company annual reports and proxy statements.

With a salary of $1,025,000 in 1997, accompanied by a $6,168,034 bonus, Sanford I. Weill, chairman and CEO of New York-based Travelers Group Inc., ranks as the most highly compensated CEO. Mr. Weill's total cash compensation increased 18.3% over 1996 figures.

Travelers' mission, as stated in its annual report, bases its growth strategy on strategic acquisitions. For example, Mr. Weill appeared in the spotlight this April after announcing a proposed $70 billion merger with Citicorp, which focused attention on the issue of insurer/bank partnerships (BI, April 13). In November 1997, Travelers merged its securities broker unit, Smith Barney, with investment bank Salomon Inc.

Travelers Group's total revenues grew 16.0% in 1997 to $37.6 billion. Net income also rose to $3.10 billion from $2.95 billion, a 5.3% increase.

In November 1997, Travelers' stock split three-for-two, which as of Aug. 21, makes Mr. Weill's 14,778,491 beneficially owned shares worth $551,385,499.

BI's calculation of the market value of shares held excludes exercisable stock options, 401(k) and pension plan options.

Saul P. Steinberg, chairman and CEO of Reliance Group Holdings Inc., assumes the second-highest compensated insurer/reinsurer CEO slot from American International Group Inc.'s Chairman and CEO Maurice R. Greenberg. Mr. Steinberg's salary remained steady at $1.8 million in 1997, but his bonus of $3.5 million climbed 73.9% from $2.0 million in 1996.

Reliance Group Holdings Inc.'s 1997 total revenues were $3.42 billion, up 11.4% from $3.09 billion the year before. Net income, however, grew an astounding 375.9%, due, in part, to an aftertax gain following the sale of common stock of Prometheus Funding Corp., to $229.4 million from $48.2 million in 1996.

AIG's Mr. Greenberg is the third-most highly compensated CEO in 1997 among insurers and reinsurers. His salary remained constant at $1.0 million, but his total cash compensation rose 12.0%, due to a bonus of nearly $3.7 million in 1997 compared with a $3.2 million bonus a year earlier.

In the company's 1997 annual report, Mr. Greenberg outlined that while internal growth is a constant goal, New York-based AIG made three strategic acquisitions in 1997 and '98. Two involved global growth in Latin America and Thailand. The third acquisition, of SELIC Holdings Ltd., occurred early in 1998 and gave AIG the leverage to move excess lines insurer Starr Excess Liability Insurance Co. Ltd. into the U.S. market. Starr Excess Liability is a subsidiary of SELIC Holdings. Despite a failed bid to acquire American Bankers Insurance Group earlier this year, AIG's buying spree continued with the recent acquisition of SunAmerica Inc., a Los Angeles-based financial services company (BI, Aug. 24).

AIG's gross revenues in 1997 increased 9.5% from the prior year to $30.60 billion. Net income also rose by 15.0%, to $3.33 billion from $2.90 billion the year before.

Efforts to build shareholder value often point to a business strategy that involves pursuit of M&A activity. But when CEOs hold a large percentage of the shares, they may also reap the rewards of a successful transaction.

"The CEO can be handsomely rewarded for selling the company if they have sizable stock options," said Brooks Chamberlin, managing director and head of the global insurance recruiting practice for Korn/Ferry International, a New York-based executive recruiting firm.

But, depending on the success of the merger or acquisition, the rewards can taper off, said Brent Longnecker, national practice director for Deloitte & Touche L.L.P. in Houston. "You might have initial pop (after the announcement of a merger or acquisition) with everyone getting rewarded. . .(but) where your company goes over the long term can impact your stock and overall net worth" as a CEO.

Over the past few years, stock options have been the favored means of top executive compensation, consultants say. The trend moved away from emphasis on cash compensation because shareholders were tired of seeing CEOs line their pockets with overzealous salaries and bonuses, Mr. Longnecker said.

Shareholder groups that believe "stock is king" and the realization that they were in the middle of a bull market were the catalysts for the move toward granting options tied to financial performance, he said. But now that the companies have had sizable payouts, other compensation methods, such as restricted stock, could be favored.

Even for many CEOs who don't own more than 5% of company stock, the trend toward rewarding with stock options rather than just the traditional salary and bonus has paid off generously.

"The news isn't in the cash compensation award as much as it is in the stock," said Paul Gavejian, a principal and compensation consultant with Buck Consultants Inc. in Stamford, Conn. "Companies are throwing big piles of stock to reward CEOs for finding or executing the merger or making their company a player in the M&A market."

Mr. Chamberlin noted that by using stock options as a major form of CEO compensation, the industry may be prolonging the effects of the soft market by focusing on short-term gains -- encouraging more M&A activity, forcing more mutuals to look at demutualization, and nurturing an environment conducive for smaller start-up companies, especially in the reinsurance arena.

"More and more decision-making in the property and casualty industry will be on a quarter-to-quarter basis or a year-to-year basis, rather than a long-term basis," he said. In the quest for business, insurers and reinsurers may take on risks that could involve a loss in the long run but would add desirable capital in the short term, such as long-tailed exposures.

Warren E. Buffett's 1997 cash compensation of $100,000 makes him the lowest-paid CEO in the survey. However, Berkshire Hathaway's top executive is a prime example of how much emphasis is placed on employee stock compensation within many publicly traded corporations. Mr. Buffett owns 474,998 shares, or 39.7%, of Berkshire stock, which as of Aug. 21 had a market value of $32,917,361,400.

In addition to Mr. Buffett, seven other of the 44 insurer and reinsurer CEOs beneficially own more than 5% of their company's common stock, the BI survey shows. They are: Merton J. Segal, 35.8% of Meadowbrook Insurance Group Inc.; Saul P. Steinberg, 32.1% of Reliance Group Holdings; William R. Berkley, 13.3% of W.R. Berkley Corp.; James A. McIntyre, 11.5% of Fremont General Corp.; Stephen L. Way, 9.6% of HCC Insurance Holdings Inc.; Jon W. Rotenstreich, 7.7% of TIG Holdings Inc.; and James N. Stanard, 5.2% of RenaissanceRe Holdings Ltd.

While aggressive growth strategies account for some of the substantial cash compensation among insurer and reinsurer CEOs, one trend that continues to affect compensation plans is the aligning of pay with performance, said Larry Daniels, a compensation consultant at Milliman & Robertson Inc. in Seattle. The tightening of this relationship has benefits in the short and long term, and the larger the corporation, the more responsibility the CEO has to bear.

"If an executive is going to be paid handsomely, it is expected that others (in the company) will benefit as well," he said.

No matter how top executives are compensated, either with cash compensation or with stock options, "they are benefiting from mergers and acquisitions, provided the market puts a premium on it," said Richard Furniss, vp and director of the insurance compensation consulting practice of Towers Perrin in New York.

Three CEOs saw their cash compensation increase drastically in 1997. Gordon W. Kreh, president, CEO and director of HSB Group Inc., was rewarded 91.4% more cash compensation for helping the corporation exceed its financial goals. American General Corp. Chairman and CEO Robert M. Devlin took home 87.9% more in 1997 due to improved company performance and his assumption of the role of chairman.

Financial performance, common stock price and leadership ability factored into Orion Capital Corp.'s decision to raise Chairman and CEO W. Marston Becker's cash compensation by 69.2%, according to the company's proxy statement. Orion's common stock split two-for-one on July 7, 1997, making Mr. Becker's beneficially owned shares worth $924,474.

Mr. Devlin is one of nine CEOs whose pay increased despite a downturn in corporate revenue or profit. Nine corporations paid their CEOs less despite having solid revenue and net income growth.

Only one CEO, Aetna Inc.'s Richard L. Huber, experienced a significant drop in total cash compensation in 1997. According to Aetna's proxy statement, Mr. Huber's salary increased, but he elected to trade his performance-based bonus for stock options.

Because of retirements, a decision to go private and two mergers, a direct comparison with last year's CEO list is not possible. Zurich Reinsurance Centre Holdings Inc. was delisted from the New York Stock Exchange after ZRC's parent company took the unit private. USF&G Corp. was acquired by The St. Paul Cos. Inc., and Mid Ocean Ltd. merged with EXEL Ltd. Three new companies -- HCC Insurance Holdings, MMI Cos. Inc. and Markel Corp. -- have been added to the survey, and three new executives have been appointed to the position of CEO.

Harry W. Rhulen became president and CEO of Rock Hill, N.Y.-based Frontier Insurance Group Inc. in January 1998, following the illness and death of his father, former Frontier Chairman, President and CEO Walter A. Rhulen.

Mr. Huber was named CEO and president of Hartford, Conn.-based Aetna on July 28, 1997. He took on the additional title of chairman March 1 upon the retirement of former Chairman, President and CEO Ronald E. Compton.

Stephen J. Sills, president and CEO of Executive Risk Inc. of Simsbury, Conn., took over after the retirement of LeRoy A. Vander Putten from his position of chairman and CEO, in May 1997. The position of chairman is held by another Executive Risk executive, Robert H. Kulla merger with Citicorp, which focused attention on the issue of insurer/bank partnerships (BI, April 13). In November 1997, Travelers merged its securities broker unit, Smith Barney, with investment bank Salomon Inc.

Travelers Group's total revenues grew 16.0% in 1997 to $37.6 billion. Net income also rose to $3.10 billion from $2.95 billion, a 5.3% increase.

In November 1997, Travelers' stock split three-for-two, which as of Aug. 21, makes Mr. Weill's 14,778,491 beneficially owned shares worth $551,385,499.

BI's calculation of the market value of shares held excludes exercisable stock options, 401(k) and pension plan options.

Saul P. Steinberg, chairman and CEO of Reliance Group Holdings Inc., assumes the second-highest compensated insurer/reinsurer CEO slot from American International Group Inc.'s Chairman and CEO Maurice R. Greenberg. Mr. Steinberg's salary remained steady at $1.8 million in 1997, but his bonus of $3.5 million climbed 73.9% from $2.0 million in 1996.

Reliance Group Holdings Inc.'s 1997 total revenues were $3.42 billion, up 11.4% from $3.09 billion the year before. Net income, however, grew an astounding 375.9%, due, in part, to an aftertax gain following the sale of common stock of Prometheus Funding Corp., to $229.4 million from $48.2 million in 1996.

AIG's Mr. Greenberg is the third-most highly compensated CEO in 1997 among insurers and reinsurers. His salary remained constant at $1.0 million, but his total cash compensation rose 12.0%, due to a bonus of nearly $3.7 million in 1997 compared with a $3.2 million bonus a year earlier.

In the company's 1997 annual report, Mr. Greenberg outlined that while internal growth is a constant goal, New York-based AIG made three strategic acquisitions in 1997 and '98. Two involved global growth in Latin America and Thailand. The third acquisition, of SELIC Holdings Ltd., occurred early in 1998 and gave AIG the leverage to move excess lines insurer Starr Excess Liability Insurance Co. Ltd. into the U.S. market. Starr Excess Liability is a subsidiary of SELIC Holdings. Despite a failed bid to acquire American Bankers Insurance Group earlier this year, AIG's buying spree continued with the recent acquisition of SunAmerica Inc., a Los Angeles-based financial services company (BI, Aug. 24).

AIG's gross revenues in 1997 increased 9.5% from the prior year to $30.60 billion. Net income also rose by 15.0%, to $3.33 billion from $2.90 billion the year before.

Efforts to build shareholder value often point to a business strategy that involves pursuit of M&A activity. But when CEOs hold a large percentage of the shares, they may also reap the rewards of a successful transaction.

"The CEO can be handsomely rewarded for selling the company if they have sizable stock options," said Brooks Chamberlin, managing director and head of the global insurance recruiting practice for Korn/Ferry International, a New York-based executive recruiting firm.

But, depending on the success of the merger or acquisition, the rewards can taper off, said Brent Longnecker, national practice director for Deloitte & Touche L.L.P. in Houston. "You might have initial pop (after the announcement of a merger or acquisition) with everyone getting rewarded. . .(but) where your company goes over the long term can impact your stock and overall net worth" as a CEO.

Over the past few years, stock options have been the favored means of top executive compensation, consultants say. The trend moved away from emphasis on cash compensation because shareholders were tired of seeing CEOs line their pockets with overzealous salaries and bonuses, Mr. Longnecker said.

Shareholder groups that believe "stock is king" and the realization that they were in the middle of a bull market were the catalysts for the move toward granting options tied to financial performance, he said. But now that the companies have had sizable payouts, other compensation methods, such as restricted stock, could be favored.

Even for many CEOs who don't own more than 5% of company stock, the trend toward rewarding with stock options rather than just the traditional salary and bonus has paid off generously.

"The news isn't in the cash compensation award as much as it is in the stock," said Paul Gavejian, a principal and compensation consultant with Buck Consultants Inc. in Stamford, Conn. "Companies are throwing big piles of stock to reward CEOs for finding or executing the merger or making their company a player in the M&A market."

Mr. Chamberlin noted that by using stock options as a major form of CEO compensation, the industry may be prolonging the effects of the soft market by focusing on short-term gains -- encouraging more M&A activity, forcing more mutuals to look at demutualization, and nurturing an environment conducive for smaller start-up companies, especially in the reinsurance arena.

"More and more decision-making in the property and casualty industry will be on a quarter-to-quarter basis or a year-to-year basis, rather than a long-term basis," he said. In the quest for business, insurers and reinsurers may take on risks that could involve a loss in the long run but would add desirable capital in the short term, such as long-tailed exposures.

Warren E. Buffett's 1997 cash compensation of $100,000 makes him the lowest-paid CEO in the survey. However, Berkshire Hathaway's top executive is a prime example of how much emphasis is placed on employee stock compensation within many publicly traded corporations. Mr. Buffett owns 474,998 shares, or 39.7%, of Berkshire stock, which as of Aug. 21 had a market value of $32,917,361,400.

In addition to Mr. Buffett, seven other of the 44 insurer and reinsurer CEOs beneficially own more than 5% of their company's common stock, the BI survey shows. They are: Merton J. Segal, 35.8% of Meadowbrook Insurance Group Inc.; Saul P. Steinberg, 32.1% of Reliance Group Holdings; William R. Berkley, 13.3% of W.R. Berkley Corp.; James A. McIntyre, 11.5% of Fremont General Corp.; Stephen L. Way, 9.6% of HCC Insurance Holdings Inc.; Jon W. Rotenstreich, 7.7% of TIG Holdings Inc.; and James N. Stanard, 5.2% of RenaissanceRe Holdings Ltd.

While aggressive growth strategies account for some of the substantial cash compensation among insurer and reinsurer CEOs, one trend that continues to affect compensation plans is the aligning of pay with performance, said Larry Daniels, a compensation consultant at Milliman & Robertson Inc. in Seattle. The tightening of this relationship has benefits in the short and long term, and the larger the corporation, the more responsibility the CEO has to bear.

"If an executive is going to be paid handsomely, it is expected that others (in the company) will benefit as well," he said.

No matter how top executives are compensated, either with cash compensation or with stock options, "they are benefiting from mergers and acquisitions, provided the market puts a premium on it," said Richard Furniss, vp and director of the insurance compensation consulting practice of Towers Perrin in New York.

Three CEOs saw their cash compensation increase drastically in 1997. Gordon W. Kreh, president, CEO and director of HSB Group Inc., was rewarded 91.4% more cash compensation for helping the corporation exceed its financial goals. American General Corp. Chairman and CEO Robert M. Devlin took home 87.9% more in 1997 due to improved company performance and his assumption of the role of chairman.

Financial performance, common stock price and leadership ability factored into Orion Capital Corp.'s decision to raise Chairman and CEO W. Marston Becker's cash compensation by 69.2%, according to the company's proxy statement. Orion's common stock split two-for-one on July 7, 1997, making Mr. Becker's beneficially owned shares worth $924,474.

Mr. Devlin is one of nine CEOs whose pay increased despite a downturn in corporate revenue or profit. Nine corporations paid their CEOs less despite having solid revenue and net income growth.

Only one CEO, Aetna Inc.'s Richard L. Huber, experienced a significant drop in total cash compensation in 1997. According to Aetna's proxy statement, Mr. Huber's salary increased, but he elected to trade his performance-based bonus for stock options.

Because of retirements, a decision to go private and two mergers, a direct comparison with last year's CEO list is not possible. Zurich Reinsurance Centre Holdings Inc. was delisted from the New York Stock Exchange after ZRC's parent company took the unit private. USF&G Corp. was acquired by The St. Paul Cos. Inc., and Mid Ocean Ltd. merged with EXEL Ltd. Three new companies -- HCC Insurance Holdings, MMI Cos. Inc. and Markel Corp. -- have been added to the survey, and three new executives have been appointed to the position of CEO.

Harry W. Rhulen became president and CEO of Rock Hill, N.Y.-based Frontier Insurance Group Inc. in January 1998, following the illness and death of his father, former Frontier Chairman, President and CEO Walter A. Rhulen.

Mr. Huber was named CEO and president of Hartford, Conn.-based Aetna on July 28, 1997. He took on the additional title of chairman March 1 upon the retirement of former Chairman, President and CEO Ronald E. Compton.

Stephen J. Sills, president and CEO of Executive Risk Inc. of Simsbury, Conn., took over after the retirement of LeRoy A. Vander Putten from his position of chairman and CEO, in May 1997. The position of chairman is held by another Executive Risk executive, Robert H. Kullas.