Page - 42
The Once and Future C&F - The Go-Go Years
Commercial Multiple Peril: “In retrospect, it should have been clear that, with most companies trying to increase market share, CMP rates were often cut excessively. We and others warned of irresponsible pricing two years ago, but there was a strong incentive to hold desirable accounts to avoid adverse selection, which can affect results for years.” (So we grew it anyway — to avoid, you know, adverse selection.) Homeowners: “The class has generally been a loser.” (Who uses the word loser — multiple times — to describe their business in an annual report?) C&F paid dividends like nothing was wrong. It reported that return to stockholders’ equity was just under 8%; while technically true that net income was about 8% of stockholders’ equity, it didn’t include the giant drop in stockholders’ equity due to the stock market crash. Management’s only nod to the wobbly financial position is that they stacked the capital of the insurance companies (to count the capital of the subsidiary companies twice for statutory purposes) and pooled the results across companies (to normalize the premium-to-surplus ratio and underwriting results across all the legal entities and thus deflect regulatory attention on any given legal entity). The stock market reacted unfavorably, with C&F stock trading down to $12 in the fourth quarter of 1974 (compared to stated book value per share of $23) — although that could also have been a function of the overall stock market downturn. Turning the modern lens on the C&F of 1974 — and realizing that this is tempting the fates, because you never know who might do that to us 50 years from now — you would say that they had some serious issues. But the annual report does not portray a company that is mobilizing for a big turnaround. So the big question: Did management at that time even recognize the
problem? Is it possible that they were feeling good about their performance — propped up by the accounting, actuarial and regulatory standards of the day — or by their financial position relative to the market? The starting quote from the 1975 annual report would indicate that they were not embracing the reality of the situation: “When we closed the books on 1974, all of us thought the bottom of the down cycle had surely been reached, but we were dead wrong! Underwriting losses sustained by the property-liability insurance industry, and the Crum & Forster Insurance Companies, actually increased during 1975. It was the worst underwriting year in history. However, Crum & Forster operated profitably and finished 1975 stronger, both financially and organizationally, than when we started.” That would be a very optimistic take on the state of the company.
Details of ads from the C&F archives.
Made with FlippingBook Digital Proposal Creator