New Rules for a Different Road

Speaker Name: James R. Ridley
Speaker Title: Chairman of the Board of Directors
Speaker Company: Integon Corporation

To begin, let me tell you a little about our company--Integon. We are an insurance holding company. Our home office is in Winston-Salem and we have subsidiaries located in Atlanta and in Portland, Oregon. In our group are seven insurance companies and the country's largest marketing company specializing in providing insurance, annuities and other related products through financial institutions.

We are in the property and casualty business, the life and annuity business and private mortgage insurance. I speak on behalf of my associates when I tell you that we are proud of our company and we are proud to be in the insurance industry.

Ours is an industry that delivers dollars to people when those dollars are most needed. It is really that simple. When there is a catastrophe of some kind--tornadoes in Raleigh or a terrible automobile collision--we can't make people whole, but we can mend the financial problems that are connected.

A personal illustration might underscore the importance of that linkage. The husband of my father's sister died when their two children were in grammar school. Through the miracle of life insurance, which proved to be a substantial part of the family's assets, one boy went to Duke and to Johns Hopkins Medical School. The other graduated from Vanderbilt and went on to the Vanderbilt Law School. So if you ask us if we're proud of our business, I can tell you that we most seriously are.

While we must deal everyday with the results of death and accident, I must tell you that we are not a somber group of people. We enjoy what we do. To give you a flavor of the source of some of that enjoyment, Id like to share a few excerpts from property and casualty claims files:

  • "I pulled away from the side of the road, glanced at my mother-in-law, and headed over the embankment."
  • "The pedestrian had no idea which direction to go so I ran over him."
  • "The guy was all over the road and I had to swerve a number of times before I hit him."
  • "I was on the way to the doctor with rear end trouble when my universal joint gave way, causing me to have an accident."

While the focus of my remarks will be about corporate life today, about financial services and Integon, I want to begin with a different tact from the one you will learn in the classroom.

I would observe from the outset that a corporation--a business--is similar to a complex living organism such as the human body. They are each affected by external and internal forces and are characterized at any given point in time by stability and liability, by transience and permanence, by constancy and flux.

Change is inevitable. Accepting that is the job of management in today's business--to influence both the speed and the direction of change by constantly assessing the environment and by setting and adjusting courses of action.

Change has always been with us. What has shifted has been the speed and directions of change in the past decade. This is a different, less predictable time that requires new rules for business management.

I have been in the insurance business since 1950. I try to forget the first 29 years I was in the business and apply the lessons I've learned this decade. In those first almost-three decades, things were fairly predictable in the insurance industry. Interest rates were steady, the rate of inflation was constant and low and the work force was plenteous and available on a long-term basis. There was limited government interference and expansion could be accomplished through geography and looking at new markets.

By contrast, the past ten years have been a period of unpredictable change, not only for the insurance industry, but for the entire financial services industry. We have seen deregulation open the door to expansion in banks, savings and loan associations and securities firms. At the same time we have seen failures increase at an alarming rate.

As I went through my periodicals this week, I noted the following items from The Wall Street Journal: First Boston, a securities firm, plans to layoff 200 employees this week; the Fed was forced to make funds available to Lincoln Savings and Loan Association in Irvine, California; some major debtor-nations are falling increasingly behind on their loan payments to U.S. banks; and the third largest bank in Alaska--with assets of $803 million--is in the final states of failure.

That is change, and it is alarming. But it is with us and we need to recognize it.

Even FHA is threatened--the institution that for so many years has insured homeowners so lenders could lend money to borrowers. This weeks Barrons carried the headline: "Is FHA in trouble?" As you read the article, you learn that Barrons says it is. Now, that is particularly scary to me since we are in the private mortgage guaranty insurance business and compete with FHA. With all of the resources at FHA's disposal, if it is in trouble, believe me when I say I am worried.

Unlike banking and securities firms, the insurance industry is not protected by FSLIC or FDIC. In North Carolina, as in 43 sister states, we have what is called a guaranty association. That simply means that if an insurance company goes bankrupt and cannot satisfy its policyholder's obligations, the other insurance companies doing business in the state will step in and make those policyholders whole. Nobody is going to lose money because an insurance company goes bankrupt in this state. We like that. Unfortunately, however, North Carolina has not yet joined the other 43 states in recognizing the value of that important service because a tax offset for contributions to the guaranty association has not been allowed. Insurance companies must pay for competitors failures!

The insurance industry is regulated by the states rather than by the federal government, which regulates most businesses. The McCarran-Ferguson Act, that provides for state regulation of insurance, also provides the industry protection against certain anti-trust claims. Unlike Senator Metzenbaum of Ohio, who annually introduces legislation to repeal those protections and add a new federal layer of regulation, we believe the logic supporting state regulation and those protections is sound.

Insurance companies must be free to exchange information in order to appropriately assess risks and set rates. Because insurance depends on the Law of Large Numbers, this information is critical to companies understanding of the specific risks and their ability to establish rate structures that reflect those risks. This is particularly true with new, smaller companies that do not have large enough blocks of business to allow them to rely on their own claims experience.

Today, with well over 2,400 life insurance companies operating in the United States and property and casualty companies numbering over 6,000, challenge to the industry's McCarran-Ferguson protections, based on its effect on competition, seems wrong-minded. In fact, one of our most serious problems is competition.

The main reason insurance companies run into financial trouble is the tendency to "buy" market share through unreasonably high commissions or rates that do not adequately account for the risk and the company's operating costs.

The clearest example, in my opinion, of excessive competition was the situation that created the so-called liability insurance crisis. You, no doubt, remember the headlines claiming that people couldn't buy insurance. The story behind the headlines was that companies had fought so hard and so long for market share and had underpriced their products so long that they simply ran out of resources. To survive, companies had to raise their rates sharply and, in some cases, they had to withdraw from markets. While these actions appeared to be anti-competitive to some, the fact is that years of excessive competition had taken its toll on company reserves and adjustments had to be made.

Closer to home, we have experienced a great deal of change at Integon. In 1969, we were 50 years old. We formed Integon Corporation as an upstream insurance holding company, changed Security Life and Trust Company's name to Integon Life Insurance Corporation and recast its role as the holding company's life operations flagship. That was a fundamental change, the first of many that have influenced our company during the intervening two decades.

In the decade of the 1970s, we expanded and acquired a company in Topeka, Kansas. We introduced functional, then profit center types of organizations, to respond to the times. We made steady progress, achieved good growth in sales, insurance in force and profits. Staffing was roughly 70 percent clerical and administrative and 30 percent technical and managerial. By contrast, these staffing percentages have almost reversed as we approach 1990.

Changes in Integon's ownership have mirrored shifts in the overall economy over time. We were publicly owned and traded on the New York Stock Exchange until 1981. At that time, Ashland Oil, which wanted to diversify its oil and chemical interests, acquired the company. As the keystone of Ashland's planned expansion into financial services, Integon was given capital and encouraged to grow. And we grew in both size and profitability.

With changes in Ashland's leadership came changes in strategic direction which first led to retrenchment and some contraction in our operations and ultimately resulted in Ashland's return to its core oil and chemical businesses and the decision to sell Integon. We were for sale for a year and a half, though we continued to run our businesses.

Since January 1986, Integon has functioned with both private and public ownership, first as a private holding of a real estate investment organization and then as a public corporation with the real estate organization holding a majority interest. Negotiations are now underway to return Integon to private ownership, following the near financial collapse of our majority owner.

During the interval spanning 1986 to the present time, change in direction has been rapid and radical. Following the sale by Ashland, Integon was again encouraged to grow and expand its operations as a part of a larger strategy to position our new owner as a major competitor in the financial services marketplace. Tax law changes, which became effective one year later, depressed the real estate market and resulted in the scrapping of those strategic plans and, ultimately, their decision last year to sell their stake in our company.

Change has affected not only our organizational structure, but also how we do business. In the 1980s, we saw the first mention of Acquired Immunodeficiency Syndrome (AIDS). By the 1990s, the forecast is that ten percent of life and health claims paid by insurance companies will be from this deadly disease that was not identified as we entered this decade and that even today we do not fully understand.

Life insurance products have gone through revolutionary change in response to economic as well as competitive pressures. Integon was one of the early companies to offer what is called universal life insurance. It gives market rates of return on life insurance cash values and unprecedented flexibility in how premiums might be paid. The profit margins are a fraction of what they were on products we sold in years past.

Universal life insurance was our response, not only to competition, but to the changes in the financial market as a whole. The very high interest rates at the beginning of the 1980s were a great concern to us because our traditional life insurance products had fixed interest rates, by contract.

I remember debating whether or not Integon should invest millions in this new product called universal life, which was untried and unproven. After extensive market research, I remember walking into the entrance foyer at Integon one day and hearing one of the janitors talk about the rate of return he was receiving on his money market fund. I decided it was time we got moving and we did. I am proud to say that Integon continues to be a leader in universal life insurance sales as well as one of the pioneering companies.

I am also happy to report that through it all--this decade of change--Integon has grown and prospered. We have moved employment from 884 to 1,521. The company's net worth has gone from $107 million to $161 million and our assets have increased from $575 million to over $1.4 billion.

I am reminded of a Washington, D.C., taxicab driver's response when a passenger questioned him about the inscription on the cornerstone of the Department of Archives that read, "What is past, is prologue." The cab driver's comment, "You ain't seen nothing yet," was as prophetic as it was cryptic.

The speed of change is increasing. There's growing buyer awareness and sophistication. Our product life-cycles have dropped from around ten years to about 18 months. Price wars exist in all forms in insurance.

Efficiency is the key to survival, which places new demands on people and technology. The insurance industry, and even the financial services industry, is well behind industrial companies in developing good cost analysis tools to measure productivity. We must catch up.

There are new working demographics. Increasing numbers of females are in today's marketplace resulting in a steady increase in two-income families. These trends change not only our perspective with respect to our work forces, but also the way we sell our insurance products and services.

At the same time we are also seeing changes in worker values toward an increasing emphasis on self, family and professional interests and away from the more traditional patterns that saw employees join companies and remain with those companies throughout their working careers.

The most vivid illustration of this shift for me comes from our own experience at Integon in developing the systems to support our universal life insurance products. Our search for professionals conversant in the types of programs necessary to process this complex product led us, overnight, to the national job marketplace. It was a marketplace that was filled with people seeking professional careers, with job experiences in one company preparing them for their next move.

I think I will sum up change and the challenge for the life insurance business by quoting from the current issue of one of our industry's leading publications, Best Insurance Management Reports.

Sustained growth and profits in the life and health industry today is taking management skills to the outer limits of a once-comfortable environment. Life and health insurers are faced with stiffer price competition, complex products without a profit history, volatile interest rates and uncertain tax structures that put intense pressure on earnings.

When I made a career decision in 1961, between career selling--as many of my associates have chosen--or to go into company management, I frankly did not anticipate the wrenching changes that have occurred. I thought being president of a major insurance company--that was my career objective--would be a nice, comfortable position. I am here to tell you that if you set your career goal to be president of an insurance company, don't make the mistake of thinking it is a nice, comfortable position.

As you look from where we are today to where we are headed, you will see that change is about the only thing that is predictable in the insurance and financial services business. Not the direction, not the speed, but just change itself.

Across the board, in people management and management of properties, yesterday's approaches will not meet tomorrow's needs. Long term is getting shorter every day. But while business strategies may change, I will leave you with three business management principles that I think have stood the test of time:

Find a market segment small enough to penetrate and then be able to defend it.

Know your competitor's strengths. Don't just look at your own strengths, compare them with the "big boys" in that market. Your attack should be launched at the leader's weakest positions and on as narrow a front as possible. For most companies, the luxury of offering a full line is one that only the industry giants can afford.

Finally, if your segment is under attack by a superior force, either through money resources or changes in technology, be prepared to run. A company that runs away does live to fight another day. Kenny Rogers song probably says it pretty well: "Know when to hold them, know when to fold them, know when to walk away, and know when to run."

We have enjoyed success at Integon over the past decade, but we have also run when we determined we were unable to compete effectively. We are out of commercial property and casualty insurance, where the big price wars have been. We sold a mutual fund. We closed a computer services company because of the explosion of micro-computers. We also sold our group life and health business because of its volatility and limited potential for profit for companies our size.

I am reminded of those famous lines, "One ship drives east, one drives west, by the self-same wind that blows. It is the set of the sail and not the gale that determines the way it goes."

In tomorrow's environment, as in today's, the winds of change are blowing some companies down the sands of time to oblivion. The same winds are blowing other companies toward unprecedented success. The difference is management's ability to sense the winds of change and to set the sail accordingly in order to achieve success.

You might think that Integon is ready for tomorrow, given our company's experience in dealing with change on an almost daily basis. I will close with this quote from Henry Kissinger, when he was Secretary of State, because I feel very much like he did when he said: "There cant be a crisis this week, my schedule is already full."