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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