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The Once and Future C&F - Xerox, the Accidental Savior
• Westchester (1992 NWP of $300 million) — a wholesale commercial umbrella, excess casualty and specialty property company based in Atlanta. • Constitution Reinsurance Corp. (1992 NWP of $400 million), a New York–based treaty and facultative reinsurer, not really affected by restructuring. • Viking Insurance of Wisconsin (1992 NWP of $200 million), a non- standard personal automobile insurer, not affected by restructuring. From a financial engineering perspective, Xerox had done a masterful job of keeping C&F from requiring capital infusions (with the notable exception of a $200-million capital contribution in 1985, when L.W. Biegler hit the wall). To get the reorganization to work, they needed to put money in — but they now had some hope of getting the companies sold and getting that money back. Talegen had a net loss of $779 million in 1992 and required a capital infusion of $200 million. In 1993, Talegen needed another support package of $535 million. In 1994, Jay and his Talegen team came up with the idea for Ridge Re: a reinsurance company to backstop the reserves (up to 85% of $1.25 billion) of the individual companies. It was this final piece that really increased the curb appeal of the balance sheets for sale. The plan worked. In 1995, Xerox sold Constitution Re to Exor American for $421 million. Viking was sold to Guaranty National for $103 million. Then came the big news that Kohlberg Kravis Roberts (KKR) had agreed to sponsor a management buy-out (MBO) of the remaining companies for $2.7 billion. After all the work to split C&F into bite-sized nuggets, the company was going to be sold as a whole.
I was a junior member of the “M” in the MBO. Jay came to Chicago to explain the deal. He was going to give each of the MBO participants some money to put into the deal and encouraged us to add in whatever else we had. He gave each of us a spreadsheet model to show us how it worked. I looked at the spreadsheet — and then went back into the boardroom where he was waiting. Jay was standing on the table blowing smoke into a vent. (Smoking had recently been banned in Chicago office buildings.) He asked what I thought; I thanked him for the money and told him I was happy to roll it into the deal. He asked about other money; I told him that I was 29 and didn’t have any other money. He asked me where the other people were; I said they probably had more scenarios to run. He chortled. At the conclusion of the KKR deal, Xerox’s foray into insurance would just about break even, which is actually better than I expected when I started researching the topic. Of course, in 1983, Xerox could have bought 30-year Treasury bonds paying 11%. Or they could have pulled a Forrest Gump and bought Apple stock. (Actually, in January 1983, Apple’s market cap was $1.3 billion — less than what Xerox paid for C&F — so they could have bought the whole thing!) Reading the Xerox 1995 annual report would have led you to believe the KKR deal was done. But it did not work out. KKR wanted to renegotiate the price after a re-look at the reserves for California construction defect claims (which were starting to be an issue industry-wide) — and Xerox did not go for it. Consequently, each of the remaining insurance companies was back on the auction block.
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