Dividend for the Winner

It is rather unusual for a company to declare a $55-per-share dividend. When the payout is voted by a board filled with newcomers from another company that has just acquired control, eyebrows go up all around. Last week they were raised when Manhattan-based Great American Insurance Co. decided to dip into its $300 million surplus to distribute a total of about $171 million in securities. Reason: National General Corp., a Los Angeles-based moviemaker and would-be conglomerate, recently picked up 75% control of Great American Holding Corp., the fire and casualty insurance firm's parent holding company.

A raid by National General on the cash-rich treasury of Great American? That is how it looked, and the superintendent of the New York State insurance department promptly opened an inquiry into Great American's future ability to underwrite. Since insurance is a regulated industry, the state can exert considerable pressure and even liquidate a company as a last resort.

For National General, voting itself the fat dividend looked like a smart move. The company waged a bitter proxy fight to get its 75%, and has offered to buy the remaining 25% at $45 per share. Before the offer was made, the stock had been selling for about half that amount. Great American certainly looked ripe for plucking. It had been losing money on insurance for at least a decade, mainly because it concentrated on personal fire and casualty policies, a competitive area plagued by rising losses. Like many other hard-pressed insurance concerns, Great American concentrated on making profits in the stock market, where it accumulated a portfolio worth about $310 million--more than half its total assets of $567 million. "It's ridiculous to leave that much capital lying around when money is so expensive," says Eugene V. Klein, National General's chairman. "There are sounder uses to put it to."

Klein obviously has in mind using at least part of his dividend to finance some new mergers and acquisitions. Even with its surplus cut in half, Great American has more than the industrywide average of loss reserves in relation to its underwriting volume. "We did no milking," Klein insists. "We are staying in the insurance business. We paid about $500 million for the company, so obviously we aren't going to hurt ourselves. What many businessmen fail to keep in mind is that the proper utilization of capital is the cornerstone of U.S. industry." That, of course, is the standard justification for conglomerate corporations: their ability to make more productive use of assets than less aggressive and weaker managers. Quite logically, Gene Klein is proud of his $171 million dividend.

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