The Once and Future C&F MARC ADEE
To everyone who has ever engaged in a spirited discussion over half a point on their booked loss ratio…
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Contents
Invocation ................................................................................................................ 5
Letter from the CEO................................................................................................ 6
Introduction: Cost of Goods Sold, Unknown ......................................................... 7
Chapter 1: Captain Whiley’s Enterprise................................................................ 11
Chapter 2: Building an Empire.............................................................................. 23
Chapter 3: The Go-Go Years ................................................................................. 35
Chapter 4: Xerox the Accidental Savior ................................................................ 47
Chapter 5: Fair and Friendly ................................................................................. 59
Chapter 6: C&F Now .............................................................................................. 69
Epilogue: Looking Ahead ........................................................................................ 81
Appendix: Fairfax Guiding Principles .................................................................. 84
Appendix: Select Sources ....................................................................................... 85
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Invocation
Telling this story tempts the Fates I ask forgiveness from those who came before They wrestled with Chaos — but could not know if they won or lost I will join their ranks soon enough. I invoke Fortuna to look kindly upon those here today When the rearview mirror of history turns toward us Read this cautionary tale about a great company that lost its way And is walking the long road to redemption.
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LETTER FROM THE CEO
I enjoy reading corporate histories. Even poorly written or unrecognizably revisionist ones contain some kernel of truth. One common denominator is that they are written when management is feeling great about the business. When I started as CEO of Crum & Forster, I found a history of the company that had been cobbled together in 1985. It is painful to read because, unlike the writer, I know what happened next. It is so positive concerning the business plan and hopeful for the future — but the wheels were about to come flying off as years of go-go growth, price competition, galloping inflation, value-destroying acquisitions, loose controls and a lack of underwriting discipline were about to collide with the impending liability crisis. The C&F story is that of a once-great company that lost its way and was given another chance or two — and has been on the long and continuing road to reclaiming its greatness. It is a cautionary tale, as well as a redemption story. There are heroes and villains — mostly inadvertent — as well as builders and destroyers. There are opportunities seized and advantages squandered.
As I am writing this, C&F wrapped up a record year - 2023 was our 10th year of growth and underwriting profitability. Just like the anonymous writer of the 1985 history, I am very positive about our business plan and hopeful for the future. I am also hoping that we have learned our lessons from the past. My affiliation with C&F goes back 30 years — back to when I worked as an actuary for one of their divisions during the Xerox era. I hope that my love for the company, its people and the business of insurance comes through - even when I am describing the historical trials and tribulations. Thank you for your interest as you read this — and for your help as we take C&F to the next level!
Marc Adee CEO, Crum & Forster
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INTRODUCTION Cost of Goods Sold, Unknown
I nsurance is a tough business. One of the first things you learn when you start out is that insurance is different from other businesses in that you do not truly know the cost of goods sold when you are pricing your product. What they might not tell you (and “they” might not fully appreciate) is that you can have a whole career without knowing if you are a good underwriter or not. Actually, if you are a really bad underwriter, you probably know; it is those of us who see ourselves as good who will have to wait to find out. Don’t believe me? Let’s pick a date that will be relevant to our story: December 31, 1981. Back then, inflation was galloping and interest rates were skyrocketing. Insurance companies were competing on the basis of cash-flow underwriting, intentionally writing business at an underwriting loss with the idea that they would make up the difference in investment income. By today’s standard, the 1981 results looked ugly — even if management at the time felt they were doing just fine. I pick 1981 to illustrate the fine line between the knowable and unknowable aspects of the cost of goods sold. Assuming management teams were playing it straight, they knew the published underwriting results were not good.
Less knowable was that, by 1981, most of the business associated with latent asbestos and environmental pollution claims had already been written. The die had been cast. The insureds did what they did and the insurance companies wrote the policies — the damage had been done. But the plaintiffs and their lawyers had not yet organized, and the insurance industry had no idea of the magnitude of the problem. So insurance companies were still happily cutting each other’s throats to write long-tailed casualty business at a 115 combined ratio to enjoy the investment income on the float. Let’s look at some math. The industry statutory surplus at the end of 1981 was $75 billion. Technically, if we marked the bond portfolios to market (back then, bonds were held at amortized cost), most industry players would have needed to recapitalize. Then we throw in asbestos and environmental losses that are estimated at $200 billion and counting — and the insurance industry was triple bankrupt. That’s before we even factor in uncollectible reinsurance, product liability or the medical malpractice crisis. With that in mind, if we go back to the 1960s and 1970s — two decades for the entire commercial lines industry — the combined ratio for this period
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was north of 200 rather than the booked, already awful, 110. The fact that this is not common knowledge speaks to our industry’s ability to bury its mistakes. Well-meaning, well-trained management teams — captains of the insurance industry — could, and did, end their careers with the attendant honors without realizing that they blew up the business. So you may ask: Could they have known? Surely, that couldn’t happen today, right? How can anyone function in a business with that much uncertainty? How can any company still be standing from before that time? Ahh! I’m happy you asked. Now we can begin our story.
* * *
(Facing page) First page of first policy register of the North River Insurance Company.
Founding of the North River Insurance Co. , Captain Richard Whiley and the North River Insurance Co. founders. Future CEO Peter Warner in his role as office boy seen in background.
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The Once and Future C&F - Captain Whiley’s Enterprise
CHAPTER 1 Captain Whiley’s Enterprise
T he Tontine Coffee House, situated at the corner of Wall Street and Water Street, was the center of trade in New York City. It gave birth to the New York Stock Exchange. It was also a place to exchange ideas — including ideas about insurance. Imagine this (fictional) meeting during which Richard Whiley tries to raise capital from prominent local business executives (and actual North River investors) William Adee and George Bush.
Adee: The club thinks this one is going to be different. Bush: Hmm. Insurance is so boring. Adee: I don’t know about that. Have you ever met Whiley? I doubt anyone ever called him boring. Bush: When would I have met him? Adee: He used to be a big deal in the Army — he built up Governors Island. He’s a bit of a tough guy. I heard he was raised in the wild. Bush: Oh yes, I remember him now. This isn’t going to be like that thing with the pirates, is it? Adee: What is with you and the pirates? Let it go. Bush: Whatever. When did the Tontine get so crowded?
Bush: Have you ever made money investing in an insurance company? Adee: Never. I get three dividends and then the whole city burns down — taking my money with it.
Bush: So why are we meeting with this guy?
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Adee: I like it this way – they bid up our best coffee. I think most of this bunch are hooked on the stuff – I know I am. Anyway, I am sure they will find us a spot upstairs. [Looks up.] Oh wait, that’s him. Captain Whiley. Whiley: Mr. Adee. Adee: Hey, how’s it going? This is Mr. Bush. Let’s get a table. [They settle into their seats.] Bush: How long have you been back in the city? Whiley: Just a few months. It is good to be back. It is amazing how much the city has grown — there must be more than 100,000 people here now. Adee: It might even be a few more than that. More people show up every day. New York is really bursting at the seams. I was just reminding George that the last time you lived here you were in the Army. Whiley: I kind of miss it. In the Army, people have to do what you tell them. Not so much at home. Bush: I recall a rumor that you fought at the Battle of Fallen Timbers under “Mad Anthony” Wayne.
Whiley: No one called him that – unless they were looking to get flogged. Adee: But you were there? Whiley: It was four years of brutal preparation followed by forty minutes of chaos – a long time ago. I don’t really like to talk about it. Bush: But you stayed in the army for a while? Whiley: Twenty years. Mostly on the frontier – I spent a lot of time at Fort Mackinac before coming east. Bush: Where is that? Whiley: Michigan – we were protecting the fur trade. And then I moved here to Fort Jay which was kind of a mess so we demolished it and built Fort Columbus. We were concerned that the British might make a run at New York so we also fortified the Battery and Bedloe’s Island. I met most of my investor group during that time – a lot of them did business with the Army. Bush: So when did you retire from the army? Whiley: About 11 years ago. It was time. That is a young man’s game.
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Adee: What have you been doing to keep busy since then? Whiley: Doing those things that are difficult to do when you are in the military. Raising a family. I have six children — so far. Adee: And now you are starting an insurance company. Where did that come from? Whiley: I was thinking, “What’s next?” Talking to people to see what they really needed — that might overlap my experience. Since I did a lot of construction in the army, I have a good sense of what makes for a solid building. By the way, that’s your auction house across the street, right? Adee: Adee-Timpson is mine — my brother has David Adee across the street. Whiley: It looks pretty solid. How do you feel about your insurance on it? Adee: Not great. I’m pretty sure that I have more assets than the insurance company. Whiley: There you go. I have the same problem — and other people feel the same way. I think there is a big
Names, including William Adee and George Bush, from log of North River Insurance Company founding investors, 1822.
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market for a different kind of insurance company right now. And look at all the construction around here: the demand is only going to go up. Bush: What does it mean to be a different kind of insurance company? Whiley: To start, we are going to raise capital up front. Most of the other companies have capital commitments that they try to collect after they need it — which doesn’t always work out. We will have the money before we need it. But I think the real difference is going to be how we select the buildings that we insure. We will inspect each building to make sure it is up to our standards. We will avoid the really tall buildings — they seem like a bad idea. I also have a plan to spread the risk around the city — so that one fire can’t take down the whole company. That has been a sore point for others. Adee: That makes sense. Whiley: Finally, we plan to charge the appropriate amount for the risk. One common problem with insurance companies is that they do not cover their costs even without having a big fire. Our approach may be more expensive — but I believe people will pay for quality. We are building the North River Insurance Company for the long term.
Bush: Why call it “North River”? Whiley: Between my time on Governors Island and my place near Poughkeepsie, I have developed a lot of respect for the mighty North River. So are you in? Adee: How much are you putting up? Whiley: $5,000. Adee: I’ll do $500. How about you, George? Bush: I’ll go $250. Whiley: Done. Thank you. But no discounts on your insurance! Waitress: Can I get you gentlemen anything else? All: Coffee!
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L ike a lot of us, Richard Whiley’s path into the insurance business was not a straight line. He was born in London in 1767 and came to the U.S. in the 1780s — and then things got interesting. The first permanent settlement in Ohio (which was considered “the Northwest” back then) was established in 1781 1 . There was a lot of friction between the settlers and the Indigenous Americans. The US Army at the time was small, but they sent 2,000 soldiers to Ohio to protect the settlers. In 1790, the army was defeated by the locals — with support from the British and Canadians — near what would later become Fort Wayne, Indiana (named after Anthony Wayne). In response, the US government rushed to undertake a second military expedition. They also got their hats handed to them. President Washington and Congress were not interested in losing another conflict, so they thought hard about who to put in charge. They picked one of the few remaining Revolutionary War leaders capable of service — affectionately known as “Mad Anthony” Wayne. General Wayne agreed to take the command, but stipulated that he would not go into action until his soldiers were trained and ready. A description of the recruits (many of whom deserted on the way to the Pittsburgh training camp) is very unflattering — not quite “The Dirty Dozen” but implying that they were mainly otherwise headed to jail. By early 1793, Wayne had transformed his rag-tag recruits into a disciplined army in “Band of Brothers” fashion (if you want, you could now mentally picture a frontier training montage). Richard Whiley was an enlisted dragoon (horse-mounted infantry) in General Wayne’s army. This “Legion of the US” moved into position to protect the settlers, but then waited as Congress was negotiating with the tribal leaders to see if they could find a peaceful outcome. In the meantime, Wayne — an engineer by training — put his troops to work building Fort
Recovery. In the spring of 1794, the Legion was joined by volunteer mounted riflemen from Kentucky (including William Clark of Lewis and Clark fame, who wrote an account of his time on this campaign). In the summer, the tribes gathered to attack the fort and were fended off. About a month later, the army moved into action. In 11 days, they marched 76 miles in a careful and disciplined fashion through dense forest. They constructed a 210-foot bridge across a swamp. They built another base of operations and named it Fort Defiance. Shortly thereafter, the army found the amassed Indigenous forces encamped in thick woods near a British fort. Wayne sent a messenger with a final peace offering, which was rejected. The Battle of Fallen Timbers only lasted 40 minutes, but essentially ended the 10-year Northwest Indian War, driving the British out of the Northwest and laying the foundation for America’s western expansion. It sounds like a rough way to live. The army was underfunded, so the soldiers were living in the woods for years with limited food and clothing, building lodging as they went — all under the constant threat of attack. Even so, military life seemed to agree with Richard Whiley, who in 1796 was appointed a lieutenant in the Artillerists and Engineers and followed Major Henry Burbeck to Fort Mackinac. A few years later, Whiley was put in charge of a reduced force at Fort Mackinac. Around this time, British Lieutenant George Landmann described Whiley as “a young, fair, beardless personage, on good terms with himself and placed great reliance for his military dignity on the length of his boots and the thickness of his queue” — which sounds a little judgmental - but does tend to match the only picture we have of Whiley.
1. For some of the details of this chapter, I have relied on history books. These sources, and others, are cited in the appendix.
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By 1803, Captain Whiley moved to take over as commanding officer of Fort Jay and then Fort Columbus on Governors Island. His duties on Governors Island included building fortifications around the New York harbor, where he connected with many of New York City’s business luminaries. He resigned his commission in 1811 and raised a large family on the Hudson River near Poughkeepsie (on property later occupied by FDR). During his absence, the War of 1812 started and ended - the Erie Canal was more than halfway finished - and New York City was ready to grow exponentially. To do so, it needed insurance. I n 1822, there were only nine insurance companies operating in New York City. Regulations at the time had a protectionist bent. Foreign companies were not allowed to operate in New York and out-of-state companies were taxed heavily for the privilege of doing so. Captain Whiley met resistance in getting approval for North River, as the regulators felt there were already too many insurance companies (they encouraged him to open a bank instead). Many early insurance companies were started by merchants. They were not really underwriters — they just needed insurance protection for their own businesses. Whiley’s backers needed coverage, but they also sensed the potential in the budding New York City insurance market. Whiley, the entrepreneur, looked at the city, population 135,000, and had the insight that it was going to grow and that its new residents would have to live and work in new buildings — and those buildings would need fire insurance. In addition to entrepreneurial spirit and insight, Whiley had connections. He met with a group of influential New York City citizens and was able to raise $350,000 (roughly $9.4 million today) in cash to capitalize The North
Portrait of Captain Richard Whiley.
An early North River Insurance Company policy.
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River Insurance Company (Noortrivier was the early Dutch name for the Hudson). This was unusual for the time in that most insurance companies were capitalized with promissory notes instead of hard cash. The North River Insurance Company opened for business — at 192 Greenwich — on March 6, 1822. Captain Whiley became the first president at an annual salary of $1,200 (about $32,000 today). Back then, Peter Warner — who would go on to run North River years later — earned $800 ($21,000 today) a year as an office boy and received the added benefit of rent-free living in the room above the business, in return for sweeping the office every night. It required vision and courage to launch an intrinsically hazardous business, but Captain Whiley also had to attend to the practical realities of running a successful insurance company. Judging from his notes in the original policy registers and board meeting minutes, Whiley was deep in the details of his business — which is a good thing because 1822 might have been a simpler time in many ways, but not for a fire insurance business. By the modern standard, the properties in New York City back then were risky business. Frame buildings, in close quarters — with maybe a few corners cut during construction — were built to meet a newfound impulse for “taller and taller.” While gas was beginning to be used for illumination, most heat and light still involved oil or candles – and fire. Fire departments would often fight over who got to handle a particular fire. Competition between fire-fighting companies was intense and extinguishing the fire could be secondary to triumphing over a rival fire company. On occasion, the fire was allowed to rage while citizens brawled over possession of buckets. Captain Whiley took all of this in and instinctively established a set of conservative underwriting guidelines. He required a thorough inspection
of all buildings before agreeing to insure them. He would not insure any building over 80 feet — the height above which firefighting equipment could not help. This still left the issue as to how to price the business. Rates ranged from 22 cents per $100 for “buildings of brick or stone, covered with tile, slate or metal; the doors and windows of solid iron” all the way up to $1 for “buildings entirely of wood.” North River was a member of the Salamander Society (a predecessor to the New York Board of Fire Underwriters), whose goal was to get the members to adhere to published rates. That didn’t work out. Even so, Whiley kept to his conservative approach to building the business. As often happens in insurance, your model really gets tested when there is a big event — and for Whiley and North River, this underwriting test was the Great Fire of 1835. The fire occurred in the heart of the New York City business district on a night when the temperatures dropped to 18°F below zero, freezing the
Detail from an advertisement circa 1935 depicting the Great Fire of 1835. Companies referenced in the ad were U.S. Fire and The North River.
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fire hydrants and hoses. It took three days for volunteer fire departments to put out the blaze (blowing up buildings in the fire’s path to stop wind from spreading it further). Seven hundred buildings were destroyed causing $18 million of damage ($640 million today) — only $8 million of which was insured. Of the 26 insurance companies doing business in New York — nearly triple the number from 1822 — 23 of them were wiped out. The North River Insurance company not only survived but thrived, with the fire clearing out most of the competition. Convinced that his model worked, Whiley opposed moving closer to competitors on Wall Street and the resulting flow of business from walk-in customers. He wanted to maintain the unique character of the company and avoid any temptation to follow the crowd. This contrarian model would help North River ride out the Panic of 1837 (recession, depression, inflation) and another New York City conflagration in 1845. Whiley was happy managing a small, sound company that stuck with what they knew best. W hile Captain Whiley understood the underwriting and operational side of the business, he also understood that a great insurance company starts with great people. Consequently, when Whiley died on the job in 1847, his apprentice Peter Warner was well-prepared to take over as president. Warner had come a long way since his time as office boy and he knew the peril of fire. He came from a family of firefighters and was foreman of Engine Company No. 23. Warner was known to be an upright, kindly workaholic micromanager — described in company documents as a man of “strong personality and convictions and determined will, was ever open to argument, and ever courteous and kindly in his business as well as social relations.” During an astounding 63-year career with North River (uninterrupted by vacations), Warner carried on with Whiley’s conservative
Peter Warner.
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underwriting approach — guiding the company through the Civil War, the completion of the Transcontinental Railway and the Great Chicago Fire. However, the issue with striving for underwriting perfection in a competitive environment is that it can stunt a company’s growth prospects. On the passing of Peter Warner in 1896, North River’s board seriously considered putting the company into run-off. Waldo Hutchins, son of one of North River’s founding board members, was the main proponent for keeping the company’s doors open — and the board agreed by a narrow (10-9) margin that North River would continue forward. The Hutchins family would be associated with the company continuously from 1822 to 1969, making pivotal contributions along the way. So it may not be surprising that, a few years later, William E. Hutchins took over as president of North River at the tender age of 27. As the 19th century came to an end, North River had established itself not just as a sound business but also an early adopter of new technology, including electric lights, Burroughs adding machines, telephones and typewriters. Hutchins would take the company into the next century — and the next phase of its evolution. Could Captain Whiley have imagined that we would be talking about his new venture more than 200 years later? Probably not — but here we are. Whiley was a disciplined optimist. He saw an opportunity, developed a successful business plan to take advantage of that opportunity — and executed on the business plan. He surrounded himself with long-term people who would take his legacy far into the future. Captain Whiley’s enterprise survived when many others did not. * * *
William Hutchins.
C&F Through the Years - Captain Whiley’s Enterprise
Clockwise from top left, Captain Whiley’s calling card; detail of North River register from 1822; leather-bound register from 1913; North River Insurance Company sign.
The Early Architects : from left, John Forster (on phone), Frederick Crum (holding policy), James Ackerman (green eyeshade), William Hutchins (holding watch), and (in the picture above Hutchins) Peter Warner.
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The Once and Future C&F - Building an Empire
CHAPTER 2 Building an Empire
C aptain Whiley was correct about New York City’s growth potential. By 1896, New York City’s population had grown to over three million and the city was well on its way to staking its claim as a major hub for banking and trade. Captain Whiley’s conservative underwriting guidelines — which were continued under Peter Warner and William Hutchins — kept the company solvent and even profitable. But the modest growth trajectory — at least compared to the growth of the city around them — left at least a few North River employees thinking about their long-term career paths. Imagine North River Insurance Company employees Frederick Crum, John Forster and James Ackerman having lunch — shortly before making the momentous decision to strike out on their own. By this time, Frederick Crum was the gray-haired eminence of the group. At 48 years old, he had already worked at North River for 33 years and had been secretary of the company for 20 years. He had been the right-hand man for Peter Warner and was now doing the same for William Hutchins. John Forster was North River’s City Underwriter; now 30 years old, he had started in the insurance business at age 17. And James Ackerman, who had started with North River as a teenager, was now the company’s Chief Clerk.
Ackerman: The Waldorf. Fancy. Why did we come all the way up here? Forster: I’ve heard good things about their food. They have a salad that is supposed to be memorable. But really, I wanted to get away from the office — because I have something serious to discuss.
Crum: Which is what? Forster: I want more. Crum: Not this again! More what?
Forster: More than this. North River is just plodding along, doing the same thing. Where does that lead us?
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Crum: That same thing has worked for over 70 years. What’s your problem? Forster: There is a reason that the company has been around for 70 years when others failed — we are so conservative. The world has changed. If we want to keep up, we need to change too! Crum: So you have a better idea? Forster: I do. We start our own company. Ackerman: It takes capital to start an insurance company. Do you have money that you have been hiding? Forster: Ha ha. No, my idea is that we start a company to manage the business of other insurance companies that want to enter New York. Ackerman: What kind of company would let us manage their business? Forster: Believe me. They are out there. Everyone wants a piece of the New York market — but the regulators have made that difficult and cost prohibitive. Crum: Okay. I’m listening.
Forster: Think about all of the business that we decline right now. It’s not bad business — it just doesn’t fit our tight guidelines. Think of accounts we decline just because we are too concentrated in one area. It is still good business. The buildings that don’t quite pass our inspection — someone still insures them. Crum: Hmmm. Forster: With the city growing like this, there are not enough people around who can spell insurance, much less handle the volume of business that is coming. Crum: That’s true. Forster: That’s where we come in. We set up shop, market the business, underwrite the business, handle any claims, take care of the administration — all for a percentage of the premium. All the insurance company has to do is sit back and watch their income grow. Who wouldn’t sign up for that? Crum: I’m not sure. We are in the middle of a depression. Forster: It has to be over soon, right? Ackerman: We have good, solid jobs at North River. Do we have to give that up?
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Forster: Don’t you want more than that? Hutchins is doing better than any of us imagined – but he is still a young man – whose family is a major shareholder and influential with the board. He’s not going anywhere. We could have the best title: Owner. And this way we don’t have to raise money to capitalize an insurance company. Crum: You make a good point. What would we call it? Forster: I’m thinking Forster & Crum. Crum: Really? Forster: How about Crum & Forster?
Crum: That has a nice ring to it. Ackerman: What about me? Forster: Too many letters.
Ackerman: Oh, man! By the way, what’s up with this salad – it’s all celery. We should have gone to Delmonico’s. Crum: Just pick it out if you don’t like it. Forster: I don’t know. I kind of like this salad dressing – what do they call it? Mayonnaise.
Portrait of Frederick Crum.
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F rederick Crum and John Forster might have been prototypical “boring” insurance guys, but boring is in the eye of the beholder. Three years after the Financial Panic of 1893 — in the middle of an economic depression — they saw their opportunity and went for it. To do anything entrepreneurial during a depression would have taken a fair measure of vision — and confidence. The opportunity sprang from New York’s protectionist regulations that required insurance companies to have physical operations in the state. This rule made sense from the customer’s perspective: if they had a claim or an issue with their insurance company, it would have made them feel more secure knowing that they could show up in the insurance company office to state their case (the ability to communicate with people in other states or countries would have been limited). At the same time, hometown companies were happy to limit the field of competition to locals. Crum and Forster recognized that there was an unmet demand, and that established insurance companies outside New York wanted to get in on the action — while partnering with people who knew what they were doing. Crum, Forster and Ackerman scraped together $501 ($19,000 today) in working capital and launched a partnership: Crum & Forster, “an agency with the purpose of managing the affairs of insurance companies in New York.” They opened for business at 95 William Street with a staff of 10 people. From the beginning, John Forster was C&F’s guiding spirit. He had arrived in New York City as a penniless Scottish immigrant, and at age 17 got a job as an office boy at Guardian Fire Insurance Company. Five years later, he took a position as clerk at North River, where he soon moved into underwriting. Then, as now, the insurance business promoted social mobility for someone like Forster — with an active mind and a commercial attitude, he quickly moved up the underwriting ranks.
Portrait of John Forster.
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Forster also kept an eye on the long game, surrounding himself with loyal supporters looking to grow the enterprise and continue with his business principles. J. Lester Parsons was one of those people who would carry Forster’s legacy forward — and adapt it to a rapidly changing society. Parsons began his career at age 15 with a job as an office boy for United States Fire Insurance Company (given that Warner, Forster and Parsons all started as office boys, it seems like it must have been a great way to start in the business!). Parsons later took a job as map clerk for North British & Mercantile — and in 1892, Marmaduke Holgate, North River’s City Division Underwriter, hired the 20-year-old Parsons as assistant underwriter. Parsons quickly established a reputation as one of the most astute fire underwriters in the business. In 1903, Parsons joined C&F, where he would become the architect of the company’s early and consistent growth. After a few years, Parsons asked for a raise but cash was tight, so he received a 20% share of the partnership instead. Either Parsons was a great negotiator or he was able to see a brighter future for C&F than the other four partners did! Parsons worked at C&F for 54 years — and his influence would be felt well beyond his retirement. In the early years, Crum & Forster also brought in key people including Henry Wyatt (1901), Harold Junker (1902), Alexander Ross (1912) and Thorin Grimson (1914) — each of whom would stay with the company more than 50 years. Together with Parsons, this Dream Team of close associates would lead the company well into the 1960s. Forster knew how to protect his legacy — and manage succession. Think about the company you could build with a team that stuck together for 50 years!
J. Lester Parsons.
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The Once and Future C&F - Building an Empire
C &F’s business model soon gained traction. Within a few years of C&F’s formation, they signed their first contract to manage the New York fire insurance business for Allemannia Fire Insurance Company of Pittsburgh. C&F placed risks on Allemannia that did not fit North River’s underwriting guidelines. The model definitely relied on a heavy element of trust — Allemannia had to trust that the business assigned to them was good, even though they knew that it fell out of North River’s appetite. Even so, other companies soon lined up for the same deal, including The Arhen & Munich Fire, The New York Fire, Peter Cooper Fire, Empire City Fire, Dutchess Fire, Nassau, Williamsburg City and United States Fire. In 1907, Crum & Forster transitioned from a partnership into a corporation, with paid-in capital of $100,000 ($3.3 million today). The authorized purpose of the company was to “represent insurance companies as agents” — which sounded straightforward, but the relationship between Crum & Forster and the companies that it managed was convoluted. That was especially true of the relationship between C&F and North River. Even now, it is not clear that C&F’s founding trio ever totally separated themselves from North River — which makes sense as they did launch the business during a depression, and conservative insurance types do tend to hedge their bets. William Hutchins, North River’s president, was the fourth partner in C&F, while Frederick Crum continued as secretary of North River, even after the formation of C&F. Years later, North River’s management team celebrated John Forster’s 25-year association with North River — which gives the impression he never left. Eventually, both Crum (in 1918) and Forster (in 1919) would hold the president’s title at North River. (Maybe seasoned insurance talent was in such short supply that holding multiple positions worked as a win-win back then?)
In the early days, C&F used some of their profit from the agency to buy shares in North River — but the profits were relatively modest. The C&F / North River relationship took on a new dimension in 1908 when a fire in Chelsea, Massachusetts, impaired North River’s surplus. In response, C&F sold its building at 95 William Street, leased it back, and used the proceeds to recapitalize North River. For a company whose stated objectives were “to produce, underwrite and process the insurance business of companies under its management in the most efficient and economical manner possible,” helping one of those companies recapitalize was really going above and beyond from a customer service perspective! Even so, that was the kind of creative, opportunistic approach you might expect from this C&F team — operating in a period before there was an established playbook. In fact, Forster’s idea of selling the building and leasing it back was one of the earliest instances of a sale-leaseback (maybe the first). Ultimately, C&F ended up owning 100% of North River. C&F’s close, clubby relationships extended to other partner companies as well. In 1906, two of the companies managed by C&F were struggling after the San Francisco earthquake. C&F voluntarily relinquished commissions due from the companies and continued to handle their business at a loss. C&F also helped replenish the capital of those companies by purchasing stock — an investment made possible by loans from the Hutchins family. When those companies were back up and running, the investments paid off — and C&F’s growing reputation as a supportive partner allowed the firm to attract many more partner companies. By 1910, C&F was managing 26 insurance companies — called their “mosquito fleet” because, while no single company was large, together they proved formidable. The structure required a large measure of mutual trust.
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The Once and Future C&F - Building an Empire
Allocating business to 26 different companies in a fair and responsible manner was a challenge — so over the next decade, C&F made a push for quality over quantity. They helped merge several of the companies, resulting in better protection for policyholders and more equitable returns for shareholders. As they were rolling up some of the smaller legal entities, C&F had to decide which names to keep and which names to merge out of existence. As much of this activity was happening with World War I raging in the background, C&F decided that the name United States Fire Insurance Company was more patriotic and distinguished than some of the others — which is one of the reasons United States Fire is C&F’s flagship company even today. WWI also brought opportunities: when foreign companies were banned from writing business in the US, C&F acquired International Insurance Company from Hamburg Assurance Company of Germany. The relationship between C&F and the insurance companies evolved right up until 1967, when C&F completed its program of acquiring majority ownership of the companies it managed and took on its modern holding company form.
Illustration from the C&F Annual Report, 1966.
The Ben Graham Lectures 1
To add a bit more color on C&F’s early organizational structure, here is an excerpt of a Q&A with legendary value investor Ben Graham, following a lecture he gave to his class at Columbia in the mid-1940s. (Prem Watsa — also a legendary value investor and founder of Fairfax — named his son Ben in honor of Graham):
QUESTION: “Why do companies like the American Reserve or even the North River stay in business, then?” GRAHAM: “The North River Company stays in business, of course, because it has been in existence for 126 years, and has built up a large business, which has increased over the years, which has been satisfactory to the people running the business, to its agents, and to its policyholders. Whether it is now satisfactory to the stockholders I don’t think has ever been asked, and I don’t think such questions are asked in any of these companies. I have read a number of reports of fire insurance companies to their stockholders. They consist generally of a one-page balance sheet and a few pages listing the securities owned. The question of how profitable is the business, is just not discussed. I suppose it would be ungentlemanly to raise the point. If I were a stockholder in an insurance company, I would like to know whether the business was profitable enough, and I would ask. But apparently the stockholders in the insurance companies don’t ask that question, to the extent of requiring that the figures be analyzed or presented in the annual reports. I am not in a position to tell you what happened in the last twenty years to every one of these companies. But I do know that in the fire group some companies have done very badly for twenty years; and a company like North River, which I believe is pretty representative, has started off doing very well and is finishing up in a situation which does not permit it to do really well for its stockholders. I don’t believe that this analysis would be subject to much change if you took other companies. You might find one or two exceptions, such as the St. Paul Fire and Marine. But they are extraordinarily few.”
QUESTION: “Isn’t the North River one of a group of companies?” GRAHAM: “Yes, it is operated by the Crum and Forster organization.” QUESTION: “They may have stuck the premiums in some of their other companies.”
GRAHAM: “That might be the reason. That is another interesting question that arises in the treatment of stockholders’ interest by insurance company managements. Many of the insurance companies are part of so-called “fleets” or groups of companies, and you find some very surprising things in those fleets. Some of the companies tend to be quite profitable, and others in the same group tend to be unprofitable. When you ask for an explanation, as I have done in one case, you may be a bit surprised at the kind of explanation you get. The thing that surprises me always is that the insurance people never talk in terms of what happens to the stockholder. They always talk in terms of what happens to the business as such. You can find many business reasons why Company A should be profitable and Company B should be unprofitable — but no reason that will satisfy the stockholder of Company B, in that case.” To underscore Graham’s comment on the paltry disclosures available to stockholders, consider C&F’s 1926 annual report 2 . Where’s the rest of it? That is the whole thing — even the back of it is blank. No income statement, no loss reserves, no IFRS, no year-over-year comparison, no disclosures. Imagine investing in companies back then with only this information — definitely an insiders’ game. The disclosures would not improve for a long time. Also, the divergence of interest between C&F and the insurance companies noted by Graham would lead to a long-running lawsuit from the minority shareholders in the insurance company legal entities, which would be resolved only when C&F bought them out in the late 1960s.
1. This is a transcript of a lecture from the series Current Problems in Security Analysis presented by Benjamin Graham at the New York Institute of Finance from September 1946 to February 1947.” 2. See images of the C&F 1926 annual report on the facing page.
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The Once and Future C&F - Building an Empire
Inside, C&F Annual Report, 1926.
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The Once and Future C&F - Building an Empire
W hile the Roaring Twenties, the Great Depression and two world wars played out on the global stage, the Dream Team stuck to their knitting and managed C&F and the C&F group of companies as a conservative fire insurance enterprise. Even during the Great Depression, C&F did not lay off any employees — although they did reduce salaries for a while. C&F chose not to expand into new products, but they did expand geographically. Following the growth of the country, C&F established offices to the west, in Carson City, Nevada (1908), and to the south, in McKinney, Texas (1919). C&F’s Western Department was in New York City until 1912, when it was relocated all the way west — to Freeport, Illinois. By 1918, C&F had reached the actual West Coast with an office in San Francisco. The post-World War II prosperity came with many changes to society that would impact the insurance industry, including cars, planes, nuclear power, the Baby Boom and television. One of the more obscure innovations occurred in 1949 with the birth of the multiline insurance policy. Until then, insurance company regulations kept insurance companies in their respective lanes: property or casualty. The first multiline policy out of the gate was a homeowners multi-peril policy from the Insurance Company of North America. Since the big wave of new homeowners did not want to deal with five different insurance companies to get coverage, the multiline policy was a huge success. The demand for multiline coverage soon spread to commercial insurance. Also during this time, non-insurance companies were starting insurance companies to serve their customers. Using a lower cost exclusive agent system or direct in-store sales, farm bureaus and companies like Allstate (launched by retailer Sears in 1931 and named after its brand of car tires) were snapping up market share in the fast-growing automobile insurance
space. Companies like Allstate, State Farm and Nationwide had centralized operations for increased efficiency and pioneered the use of a newfangled technology: computers! Parsons could see the changes on the horizon — new risks, new categories of insurance, a new breed of competitors, new technology. The days of the mono-line insurance company were coming to an end. Not everyone with 60-plus years of experience would have embraced the need for change - but Parsons did. He knew that C&F needed to evolve to survive, and that to go in a new direction would require fresh thinking and new perspectives. But most of his key lieutenants had been around for decades. They had made C&F what it was today, but it would be difficult for them to see and implement the changes required to navigate the rapidly changing future. What to do? Parsons decided to go outside the company to usher in the next era of leadership; he even went outside the industry. But in the end, he kept it in the family — hiring his son-in-law, William Ridgway, Jr. * * *
J. Lester Parsons, relaxing.
C&F Through the Years - Building an Empire
Ads and ephemera from the C&F archives.
Page from the C&F Annual Report, 1970.
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The Once and Future C&F - The Go-Go Years
CHAPTER 3 The Go-Go Years
P icking a successor is tricky. You need someone you trust. You are trying to match the person to the company’s current situation, and then make sure they are capable of handling variations on the theme — good and bad — that arise in the future. Do you pick someone you have trained for years to follow exactly in your footsteps, someone who can preserve all that is sacred about what you have built? Does the company need an overhaul? If so, you should find someone who can make the necessary hard changes that you have not made (because they are of your own invention). Or perhaps you feel that you have taken the company to a great place — and now need someone who can take it to the next level. Lester Parsons made an interesting choice in Bill Ridgway. Ridgway was born in New Jersey, graduated from Princeton, was promoted to lieutenant commander in the Navy during World War II, and held a partnership in the Manhattan-based security analysis firm Ridgway, Newsome and Co. While he was not an insurance guy, he had an impressive background. It also helped that he was married to Parsons’s daughter. In 1950, Ridgway joined Crum & Forster as a financial VP. He took to insurance
quickly — and in what might be an all-time land speed record, Ridgway was made President and CEO by 1954. In Ridgway, Parsons found someone he trusted and who could take the company to the next level — but who, as both a company outsider and an industry outsider, would have the ability to see and implement the necessary changes. Additionally, Parsons maintained a seat at the table — even if that seat only ended up being at the family dinner table. When you take on the top job — especially if there is a mandate for change — a key qualification is a willingness to throw out the prior administration. No one who has ever thought about it should want to sit around and watch the new leader make decisions that counteract all they have built — or, in fact, make even small changes they disagree with. But it is difficult to just walk away. This meant that Ridgway had to have a hard conversation with several of the board members, including his father-in-law, the 83-year-old chairman of the board. Then it was time to shake things up — and move C&F beyond its origins in property insurance. There was a whole new world that needed insurance: casualty, surety, inland marine, automobile, workers’ compensation, aviation.
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