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The Once and Future C&F - Xerox, the Accidental Savior
showed that investor demand for diversification existed, the lack of expertise and an inability to execute successfully at many conglomerates resulted in quite a few “deworsifications.” The forays outside of their core competencies ended up being more likely to destroy shareholder value than create new avenues of growth. As part of this conglomeration trend, many industrial companies were diversifying into financial services, including Teledyne, ITT, General Electric and Ford, among others. For some of these companies, including Xerox, success with their equipment leasing business was the first taste of what “financial services” could do to boost earnings. Of course, along the spectrum of financial services, providing financing options for your own products is a long way from underwriting long-tail casualty insurance. T he honeymoon was short. Xerox put on a good face in the early going. Echoing Xerox’s issues with Japanese price competition in their core copier business, they soon blamed “the market” and competitor insurance companies involved in cash-flow underwriting. In the 1984 Xerox annual report, David Kearns noted that total income from continuing operations was “significantly impacted by a sharp drop in the results of the Company’s financial services businesses … due entirely to the results of C&F.” As Kearns explains, C&F had “a disappointing year due to the industry-wide problem caused by several years of grossly inadequate price levels” and therefore, Xerox was forced to “take decisive action to address problem areas at C&F.” The “decisive action” involved rate increases, tightened underwriting controls, reduced expenses and further automation of its recordkeeping processes.
Anyone with a background in insurance is going to read that last paragraph and shake their head. Those don’t sound like decisive actions! Unsurprisingly, the 1985 annual report was more stern: “We restructured operations at C&F to improve profitability.” This time Xerox took more decisive action, including reserve strengthening at L.W. Biegler (resulting in an after-tax charge of $164 million) and replenishing capital at C&F by $200 million. Then they put in place a new management team and strengthened the controls around the operation. Even if you understood the risks involved, the early 1980s were a tough time to buy an insurance company balance sheet. Xerox was focused on income and growth — and thus might have overlooked the risks lurking in the balance sheet. Exposures like asbestos and environmental clean-ups that were never considered when underwriting casualty and package business
started to produce claims. Inflation and increased litigation cut across all lines of business — retroactive to C&F’s first forays into casualty business — and made pricing policies and reserving for claim liabilities challenging. All of these forces were starting to show up at this time, precipitating the liability crisis that made the cover of Time magazine in March 1986. It would take the industry decades to fully wring these issues out of the system. Quite a few insurance companies were technically insolvent — and C&F was one of them.
Time magazine cover March, 1986.
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