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The Once and Future C&F - The Go-Go Years
I n 1974, C&F showed an underwriting loss of $44 million on $798 million of net written premium — for a combined ratio around 105. By way of explanation as to why the underwriting results were so bad, the annual report includes a lot of discussion about competition, inflation and regulation — in other words, blaming the “market.” It is interesting that Russell seemed willing to decrease the rate of growth but not outright shrink businesses deemed unlikely to make an underwriting profit. (For the record, using the excuse “the market made me do it” would not go over well at the modern C&F!) The annual report reads like a company that was, until recently, an agency — and now found itself answering for the balance sheet. (In the prior structure, they would have reported good results for the agency — and the insurance group of companies would have taken one for the home team.) Whoever wrote these state-of-the-market descriptions, by line of business, was grumpy — and inadvertently funny: Auto: “As the year ended, our experience continued to worsen slowly.” (How does it worsen slowly?) Fire: “The somber business climate and attendant increases in arson may affect these classes adversely.” (That’s almost poetic.) Casualty: “This class includes a broad range of third-party coverages that are strongly influenced by sometimes frivolous consumer actions and extreme judgments against businesses and professionals. These coverages have been losers for the industry over the last decade and 1974 saw a continuation of this discouraging history with another record loss. The considerable investment income derived from long-lived loss reserves provides little solace to companies contending with an aggregate combined ratio estimated at 117 percent.” (But knowing all this, we decided for aggressive growth.)
foot on the gas. While I doubt he fully realized the extent of the problems, he seems to have ignored major warning signs along the way. Russell’s time as CEO started out nicely, with C&F showing underwriting profits between 1971 and 1973. In fact, 1971 and 1972 were the best underwriting years in the company’s history. Then came 1974 — where a deeper dive will provide useful perspective. “Certainly 1974 was a trying year,” commented Russell in C&F’s 1974 Annual Report. “Inflation, recession, the slow market crash, and hundreds of catastrophes combined to give the industry one of the worst years ever. We believe that Crum & Forster weathered the storm in relatively good shape.” If that’s true, I would hate to see the other guys. Let’s start with the balance sheet. The company was overly concentrated in stocks (of course, they were even more concentrated in stocks before the crash) and long-dated bonds (30% of the bonds were in the 10-to-20-year maturity range and 41% were over 20 years). Stockholders’ equity dropped from $392 million to $295 million (statutory surplus was down to $217 million) during the year, mainly because “the super-bearish stock market hurt us badly.” If you take the financials at face value, writing $800 million of net premium on $200 million of statutory surplus is aggressive — even though, as Russell wrote, “this is an acceptable risk ratio for your Company in view of the quality of C&F’s assets and the character of its property and casualty insurance writings.” The accounting standards of the day called for bonds to be carried at amortized cost instead of being marked to market. C&F disclosed that the market value of the bond portfolio was $112 million less than the carried value, putting further pressure on the company’s capital position. (On the bright side, accounting for goodwill as an asset was not yet a thing.)
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