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The Once and Future C&F - Xerox, the Accidental Savior
moving away from you implies that your pricing assumptions for today’s business are still too low. Even if you did get the starting point right, how do you know that your pricing plan will keep up with spiraling economic inflation and the uncertain operation of social inflation? Not everyone in the market is dealing with the same historical issues. Some of your competitors have fresh capital and are selectively going after your business, so your ability to make necessary changes is not unlimited. Meanwhile, your workforce — then almost 10,000 employees — is getting frustrated with the restructurings. They do not see progress. Morale is at an all-time low. They can sense the death spiral. There are other places to work. Xerox saved you from bankruptcy (so far), but they are losing patience. Their original idea — that they were buying C&F to access inexpensive cash flow — is not working out at all: no dividends have been paid by C&F since the acquisition. None of which sounds promising for Xerox’s future adventures in P&C insurance. These are existential problems and call for more than incremental solutions. There is only so much restructuring and re-underwriting you can do. There are only so many ways to retool the pricing plans before you realize you have an “over-constrained” problem: You are trying to fit 10 pounds of something into a 5-pound bag. The people who got you into this situation are unlikely to get you out of it. What to do? T he first rule of turnarounds is that you have to admit you have a problem. C&F’s post-acquisition combined ratio for the 1980s was over 114, resulting in over $3 billion of underwriting losses. Through the magic of double-digit interest rates, Xerox offset poor underwriting results
New York Times headlines from 1982 to 1998.
F rom personal experience, turning an insurance company around is no picnic. Put yourself in the shoes of that C&F team. Claims for business that you wrote years ago are ballooning. This calls into question the capabilities of your underwriting team: Did they understand what they were signing you up for? It would also call into question your pricing actuaries’ ability to peer into the future: clearly you did not charge enough for the exposure. Your claims professionals are seeing new types of claims — in fact, whole new categories of claims — as well as new levels of complexity in the resolution process and unprecedented settlement values on those claims. Your actuarial process did not work at all — you thought your reserving actuaries were wildly conservative — but even they were wrong on the low side. Reinsurer partners who you relied on to cover their agreed-upon part of these claims are unwilling or unable to pay, as they are wrestling with the same problems you are having. These prior-year problems are pressuring your capital levels, but they also have implications on the business you are writing right now. The business you are writing today is already unprofitable; the fact that prior years are
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