An actuary/CEO dons a historian’s cap to tell his company’s story.
An insurance company’s story is a history lesson. The company’s highs and lows reflect the risks people face and the financial vicissitudes of any era.
CAS Fellow Marc Adee outlines what can be learned from one company, Crum & Forster, in “The Once and Future C&F,” a brief but frank account of a company that is profitable now but underwent wrenching times, particularly in the late 20th century. Adee has been chief executive officer of the company since 2014. The free book can be viewed at https://www.cfins.com/freebook.
Adee’s book is intended for the insurance veteran. He dedicates the book to “everyone who has engaged in a spirited discussion over a half point on their booked loss ratio.” He assumes the reader has a deep understanding of insurer finances, discussing statutory surplus and marking bonds to market on the very first page. The assumption lets Adee focus on narrative without getting bogged down in terminology, but it may prove too deep for a casual reader.
Crum & Forster traces its roots to the 1822 founding of the North River Insurance Company, the name derived from the Dutch name for New York’s Hudson River. Founder Richard Whiley was a Revolutionary era captain whose service on Governors Island put him into contact with New York’s financial lords.
Whiley created a robust company in the nascent fire insurance market through strict underwriting. All buildings had to be inspected in advance, and the company wrote no building higher than the tallest ladders around — 80 feet.
Over the decades, standards remained high. The company grew as New York City did. It benefited in no small part from insurance regulations that required out-of-state insurers to have operations in the state.
Those regulations presented North River’s secretary, Frederick Crum, and city underwriter, John Forster, an opportunity. Their firm acted, in essence, as the management team of any out-of-state insurer that would hire them. The company’s chief clerk, James Ackerman, joined them.
It was a complicated relationship between the old insurer and the new underwriting shop. The three men seem to have remained at North River as they placed business through Crum & Forster. North River appears to have known and tacitly approved of their work.
By 1910 Crum & Forster was managing more than two dozen out-of-state companies.
“While no single company was large,” Adee writes, “together they proved formidable.” They were known as the mosquito fleet.
The agency used its profits to, across seven decades, take control of the fleet, including North River. World War I-era patriotism led United States Fire Insurance Company to become the flagship. Some others were merged out of existence. The enterprise expanded nationwide.
Depending on your perspective, the unusual structure had either a feature or a bug: Crum & Forster could post a profit, but individual companies could struggle. Shareholders in the individual companies could be poorly served.
Legendary investor Ben Graham made North River an object lesson in a 1940s lecture. He noted the company “has been satisfactory to the people running the business, to its agents and to its policyholders. Whether it is now satisfactory to the stockholders I don’t think has ever been asked, and I don’t think such questions are asked in any one of these companies.”
Adee, as a successor CEO, deserves credit for highlighting Graham’s harsh assessment. Indeed, it would be hard to tell the tale from here without a warts-and-all approach.
The company evolved with America’s postwar prosperity. It added a suite of standard and specialty lines to its property coverage as the nation leaned hard into the theory that well-apportioned liabilities minimize negligence and create a safer world.
That idea took a pounding with the asbestos and liability crises of the 1970s and 1980s, crippling the right side of insurance balance sheets. Inflation, meanwhile, buffeted assets.
There were other problems. The industry itself had yet to develop the modern understanding of capital allocation and enterprise risk management.
Adee chronicles his predecessors’ pain. In 1974, the company was writing $800 million against $200 million statutory surplus. (The modern leverage ratio is closer to 1:1.)
Worse, under statutory accounting standards of the time, all bonds were carried at amortized cost. By that standard, C&F’s bonds were booked at $112 million above market value …
… aaaand liabilities were understated. C&F and the rest of the industry did not understand the billions eventually needed to fund asbestos and other ultralong liabilities.
“Quite a few insurance companies were technically insolvent,” he writes, “and C&F was one of them.”
He scolds Crum & Forster management of the day — not for falling into the problem, but for “not embracing the reality of the situation” and trying to solve it.
The company stumbled onwards until it was purchased in the early 1980s by Xerox, a company that made copier machines. Today, Xerox is better known for inventing the interface that became Apple’s desktop but failing to realize the billions the invention was worth.
The purchase reflected another late-century business trend: the rise of the conglomerate. The thinking: A competent manager could run any business. They just needed the proper suite of reports to monitor things.
This was the thinking that put a phone company, a hotel chain and the maker of Wonder Bread into the same company, ITT. It also put auto executive Robert McNamara in charge of the execution of the Vietnam War. Results were similar for both cases.
Xerox was a similarly bad fit with Crum & Forster, though the conglomerate fared better than most. It helped mend the balance sheet. It shaped C&F’s insurance dabblings into a fleet of core companies, then sold them, until one remained — the namesake franchise — “a clunker,” Adee writes, of random bits that didn’t fit with the other sell-offs.
Few conglomerates remain. The best known is Warren Buffett’s Berkshire Hathaway. Buffett is a value investor. He finds corporate diamonds that might have lost their shine but are well-run. He lets the management do their job.
If you search online for “Canadian Warren Buffett,” you’ll come across Prem Watsa. Starting in 1985, Watsa took over a small Canadian trucking insurer and bought lusterless insurers, and using the same decentralized approach has grown the book value of his company, Fairfax Holding, by an astonishing 18.4% per year. In 1998, Fairfax offered $680 million for Crum & Forster.
Crum & Forster struggled through what became known as the Seven Lean Years but developed a few core competencies (New York property and small package, reinsurance, excess and surplus). These were the “acorns . . . that were starting to grow” when Adee became CEO in 2014. His contributions, he writes, have been to mold a culture that makes people want to work for the organization and to restructure the company.
He spiffed up the physical plant (he found 37 buckets around the Morristown office “collecting brown ceiling water”) and built a culture of trust — “that the company would do what it promised” and that “the things that we promised to do would deliver results.”
He mimicked Fairfax’s decentralized structure, moving authority away from the corporate teams and into the individual business units. As Adee puts it, “What better way to open up career paths for high performers than having autonomous divisions for them to run?”
Results have been strong, with combined ratios under 100 for nine years through 2023 (the latest year available when the book was published) on premium growth over 150%.
Adee’s slender work is a pleasant enough diversion, of greatest interest to his employees, but with ideas most insurance pros can ponder.
This reviewer’s nits: He frames his early chapters around imaginary conversations that try to capture the spirit of, say, post-Revolutionary America or Gilded Age New York. These will appeal to some readers, but not all. And I would have enjoyed more discussion of underwriting strategies. Too often adjectives like “conservative” or “scary” described guidelines but the narrative lacked the detail to see what made them conservative or scary.
But with this book Adee had a different goal.
“Crum was very representative of companies through the two centuries of our history,” Adee told Lori Chordas of AM Best TV late last year — in particular the Xerox-Fairfax era. It took 20 years to recover from those problems, he told Chordas, and another 20 to forget them.
“I’ve written this book for the next generation, so they don’t have to go through that.”
Jim Lynch, FCAS, MAAA, is retired from his position as chief actuary at Triple-I and has his own consulting firm.
