STILL FLYING AND NAILED TO THE MAST
Chapter Ten: Years Of Change
In 1943, Charles Page, who had begun his insurance career forty-one years earlier as the Fireman's Fund's only college-trained office boy, retired at the age of sixty-five and took the place of Mr. Levison as chairman of the Board. Until then, Levison had kept regular hours, but now, at eighty-one, he gave up his office for good. He served on as a director until his death in 1947, seventy-one years after he had taken his first job as a boy of fourteen.
When Hannah came west permanently in 1938 in anticipation of Cairns' retirement, he was a long way from Boston. But as Al Cupid, a staunch member of the old home office cadre, put it, "It took Charlie Hannah exactly two weeks to get over the three strikes he had against him when he arrived."
Hannah was a much-loved man. He may not have been the most aggressive and decisive president the Company ever had, but if this can be considered a shortcoming, he more than made up for it in personal warmth. The old-timers in Boston will tell you of the difficulty he had in expressing his condolence when a death occurred in the family of a staff member. So empathic was his nature that tears would well in his eyes as he spoke.
Hannah barely had time to get settled in the president's chair when the Supreme Court handed down a decision that was to produce an effect on the insurance industry as deep and far-reaching as Teddy Roosevelt's trust busting had on other segments of American business forty years before.
The decision was made in the case of the United States V. Southeastern Underwriters Association, et al. Of all the regional organizations of stock insurance companies in operation at the time, none of the others had grown quite so powerful as the SEUA. The members, and they will freely admit it today, had a throttle hold on Southern insurance like nothing ever seen. The Association set rates to its liking, and by one means and another almost eliminated competition. By their acts, the members defined the words "restraint of trade."
One day the management of Rich's Department Store in Atlanta indicated that they intended to switch their insurance from the stock companies, which were banded together in the SEUA, to the mutual companies. The word "mutual" was anathema to the stock companies. For scores of years they had done battle with the mutuals, and organizations like the SEUA were prime weapons in the conflict.
The SEUA was so entrenched and so conditioned to privilege that one of its more excitable members drew up a petition proclaiming a boycott of Rich's by Association members. Russell Michael, manager of the Southern Department at the time, refused to sign it for the Fireman's Fund, as did every other responsible member, but it was too late.
In the litigation to follow, the business of insurance was declared to be, for the first time and for all time to come, interstate commerce and thereby subject to anti-trust legislation. The Court's decision marked the beginning of the end of the old and relatively easy days for the stock companies.
Everything the industry had done in the previous seventy-five years bad been predicated on an earlier Supreme Court decision (Paul v. Virginia) which held that insurance policies were not items of commerce. Naturally, there was a great deal of confusion and fear following the SEUA verdict, and before the uproar settled, Congress out of necessity had passed a law giving the industry almost three years free of federal harassment in which to work out "suitable" regulatory laws with the states. What "suitable" meant was not and to this day has not been defined.
The stock companies, including the Fireman's Fund, formed the "All-Industry Committee" which met with the National Association of Insurance Commissioners to propose a model bill the states might adopt.
The term "old-line capital stock company" applies to the Fireman's Fund if it applies to any, but as an outgrowth of the "All-Industry Bill" there arose a divergence of opinion that left the Fireman's Fund something of an independent in the eyes of the others.
Hannah set the basic policy against the All-Industry Bill, but it fell to the lot of Crafts to point out repeatedly and forcibly the mistakes in this legislation. Even as late as 1962 he could be heard saying:
"The All-Industry rating statute was conceived in iniquity for it bound the hands of the old-line capital stock companies and left the door open not only for the participating underwriters but for the newcomers who could pick and choose their business..."
Crafts' position was based solely on the belief that "all insurers, be they stock, mutual, or reciprocal, deserve equal treatment and opportunity." Many of the companies today agree that in their fear of federal control they built into the bill certain provisions that would come back to hurt them, but Crafts was almost alone then.
Tragically, Hannah lived only a little more than two years after taking the Company reins, and the full responsibility of meeting the challenge of those troubled years fell prematurely on the shoulders of Crafts.
Late in 1945, Hannah's wife, who had suffered for years from high blood pressure, died. After her passing Hannah was never the same. Prior to her death, he had put off a gall-bladder operation. Weary and jaundiced, he entered the hospital in January of 1946. He died following the operation; why, no one knows for certain. The doctors considered the operation a success, but Hannah responded neither to medicine nor to the pleas of his friends to find the will to live.
Crafts, who had become a close friend of Hannah's over the years, voiced the belief of many who had known him: "If it can be said that a man dies of a broken heart, then it was surely true of Charlie Hannah."
The words announcing his death in the Record were full of feeling:
"The greatest tribute that can be paid to any man after his death is that he is genuinely mourned in the hearts of those with whom he mingled in his every-day life. That such sorrow exists at the passing of Mr. Hannah is undeniably true today..."
"To his eternal credit he never lost the common touch. It might even be said that as his responsibilities increased, his concept of the widening opportunities of human helpfulness accompanying such responsibility kept pace with progress."
One long-time employee summed up the general feeling much more succinctly with the observation, "The only thing wrong with Charlie Hannah was that he died too soon."
Crafts, who when elected to the presidency was only forty-six, carried on the battle against the All-Industry Bill but, with the notable exception of California, most of the states adopted all or part of the onerous provisions he had railed against. The "California Bill," which passed in 1947, was a triumph for Crafts, not only because he was partly responsible for it, but because it has proved his stand was correct from the beginning.
In the years between 1946 and 1954, the Company's annual premium income jumped from $67,000,000 to $191,000,000. All but three of those years showed substantial underwriting profits. But 1954 was in a class of its own. In many ways it was one of the most interesting and successful years in the Company's history. Among other things, the net profit hit an all-time high - $18,000,000 before taxes. And this despite hurricanes Carol, Edna, and Hazel.
Aside from financial success, the year was marked by an unusual number of aggressive steps initiated by Crafts to expand operations and introduce new forms of insurance.
The biggest step of all was taken on January 12, 1954, when Crafts and Arthur O. Dietz, president of the powerful C.I.T. Financial Corporation, announced that the Fireman's Fund had purchased the National Surety Corporation from the C.I.T.
The news hit the street like a thunderclap. Although the purchase price was not given at the time, it was obviously one of the largest transactions of its kind ever made. A few industry leaders privately felt that the purchase might have been a bit ambitious, but in general, the reaction was one of respect with a touch of awe in face of the company's appetite.
Most of the negotiations were handled through an intermediary, Dudley Cates, who in earlier years had been very active in the affairs of the National Surety. Dietz and Crafts admired him personally, not only for his business acumen, but for his courage in meeting a great handicap. Twelve years before, surgeons had removed his cancer-ridden larynx, and from that time he had spoken only with the aid of a clarinet-like reed.
Shortly after he approached Crafts with National Surety's proposal, Cates discovered a malignancy in his hip. Advised by his doctors that this time there would be no cure, Cates entered the Presbyterian Hospital in upper Manhattan, and with the help of round-the-clock nursing and strong sedation carried on negotiations from his bed.
Crafts and Dietz found themselves a million dollars apart. Dietz had transferred $10,000,000 from the National Surety to another corporation within the C.I.T. complex and wanted $20,000,000 for what remained. Crafts was not willing to pay more than $19,000,000.
In a personal recollection, Crafts later wrote, "...every question that was put forth by Fireman's Fund or C.I.T. was answered without hesitation by Cates for he had studied the facts and figures and he could support the contention of either side. His problem was how to bring them together. He realized that time was not on his side and that something must be done quickly if his family were to benefit from his efforts."
Knowing that he had but days to live, Cates called Crafts to the hospital to again review National Surety's value to Fireman's Fund. Cates talked of many things - of business and family and eternity - and when Crafts said good-by, he felt he would never see his friend again.
The following morning, Dietz called him to say that if the Fireman's Fund would pay Cates' fee as intermediary, he would reduce his price $1,000,000. Crafts immediately agreed and then called Cates to determine if a reasonable fee could be negotiated. Before he could say more than "Hello, Dudley," Cates announced, "Whether you have reached agreement or not, I have decided to reduce my fee." It was obvious that Dietz had told Cates of his decision on price.
In the conversation that followed, all important details of the transaction were resolved. Fireman's Fund bought the National Surety for $19,200,000.
Crafts closed his story of the purchase with these words, "Who got the best of the transaction? What difference does it make?
"Dudley Cates passed away not long thereafter."
Less than three weeks after the announcement of the acquisition, Company directors authorized a twenty per cent stock dividend and an increase in the cash dividend which together amounted to a thirty-five per cent increase in yield on the stock.
At the same time, Crafts announced the Company would offer more than 600,000 new shares to the public at $57 per share - one of the largest offerings in insurance history. The sale went off without a hitch, and when it was over the Company treasury was fatter than it had been before the National Surety purchase.
While financiers were having their day, the underwriters were preparing news of their own.
In 1951, the Company had issued its first SHO policy. SHO (which stood for Special Home Owners) was the first "all risk" dwelling policy offered in America. It was a forerunner of the familiar home-owner's policy in general use today. After extensive trials in California, the Company went nationwide with it in 1954, and the response might have been expected: the broad coverage of the SHO policy was adopted by the industry.
The health and accident field, which the Company got into sideways in the 1930's, remained little more than an accommodation for its agents until 1954, when it unveiled a brand-new group health plan.
Prior to that time, health plans offered specific amounts for each day in the hospital, each visit to the doctor, each operation, etc. The new plan, which was tried out within the Fireman's Fund for a year, is the now familiar blanket coverage, which reimburses all expenses, up to a specified limit, after a small deductible has been paid. The plan included "major medical" coverage, which is also a standard coverage today.
Following this, changes in workmen's compensation, auto, and "business interruption" underwriting were made to meet or beat the competition.
All in all, 1954 was a big year by any measure, and when the Insurance Field, a well-known insurance journal, named James F. Crafts "Insurance Man of the Year," it came as no great surprise. In the story which told of the award, Managing Editor Charles Thomas wrote:
"Our editorial board cited the 55-year-old West Coast executive as an outstanding example of progressive leadership, both in the direction of his own organization and in his contributions to the business as a whole.
"Crafts and the Fund, it seemed to us, symbolized the spirit and the tenor of 1954. It was a year of upheaval and challenge as the capital stock agency system faced up to the realities of multiple line underwriting and took cognizance of the deeper inroads of direct writers. It was a year that would be remembered more for its experimentalism than its orthodoxy, its competitive tensions rather than its complacency. But it was, nevertheless, a period marked generally by optimism and expansion. Throughout, Crafts and the San Francisco giant he masterminds were a vigorous and constructive voice."
However, Crafts himself sometimes felt, as he said in a 1953 speech, that his voice might "be that of one crying in the wilderness." Tucked away in the "Man of the Year" article is the statement, "He's been praised and at times - if not damned - certainly criticized." It was a frank statement of fact. Crafts has never been one to mince words, and although he is disarmingly soft-spoken, he has, in his own words, "stuck his neck out" to say what he believes. For example, Crafts was almost alone in predicting that the independent agents and the stock companies would have to streamline their methods if they were going to meet the growing competition from "direct" writers, who operate through paid employees rather than independents. The changes were necessary, they said, so that commissions could be lowered and the savings passed on to policyholders.
To advocate lower commissions at that time was in the eyes of many agents a mark of mental unbalance. Few of the other company heads would back Crafts publicly. Many did not agree and those who did were too afraid of retaliation to take a stand.
But it is a different story today. In the few intervening years, most of the leaders of the industry have come around to general agreement with these once radical views.
The years 1954 and 1956 have many things in common: the Company was managed by essentially the same people, the economy was in a general uptrend, inflation continued on in easy steps, and premium volume increased in a healthy manner. Looking from the outside, the man on the street would have been hard pressed to see any major differences. They were there, though.
In 1956, the Company suffered underwriting losses equal to almost twice what it lost in the 1906 fire. The industry as a whole was hit so badly that Crafts was prompted to say at a meeting of insurance brokers, "If this be a lesson in experience, let us rejoice that perhaps it will be the year 2006 before similar misfortune strikes again."
The reasons for the disastrous results were many, but high on the list was the fact that inflation had finally caught up with the industry with a vengeance. Both auto and fire losses were appalling, and most of the blame could be laid at the door of higher labor and material costs. Premium rates were based on past experience, not on current costs, and when one is forced to sell a product for less than it costs to produce, it is somewhat difficult to show a profit. Marine losses were likewise extraordinary. When the Andrea Doria went down off Nantucket, the world's underwriters suffered one of the greatest losses in marine history. That was also the year when two airliners collided over the Grand Canyon in the worst air disaster up to that time. Jury awards in liability cases continued to increase, as did the incidence of burglary and theft.
The only thing 1956 lacked was a storm to match those sweethearts of other years - Diane, Audrey, Donna, and Carla.
The Fireman's Fund was hit harder than most of the companies for several reasons. First, the company has through all the years of its existence followed a conservative approach in the matter of reserves. In 1956, large increases in both the loss and unearned premium reserves made the underwriting losses considerably bigger than they might have been under a less conservative policy.
To what extent the Company's troubles were complicated by the pains attending integration of operations with the National Surety will never be calculated, but there is no doubt that they had their effect. It should be noted that while combined premium income rose twenty per cent between 1956 and 1960, the number of employees dropped about twelve per cent over the same period.
Business Week turned its attention to the Fireman's Fund in July, 1957, on the occasion of the opening of the new home office at 3333 California Street, twenty-nine blocks west of the corner Staples had purchased ninety-one years earlier. The editors commented on the Company's 1956 misfortunes, then went on to say:
"There was some head wagging in the trade when the 1956 results were known. Insurance men remembered that the [Fireman's Fund] acquisition of National Surety Corporation in 1954 stirred talk - particularly in the East's traditional insurance centers - that the company was getting too big for its britches.
"But as 1957 went along, Fireman's Fund began to look better. In the first quarter of the year, it chalked up a net underwriting loss of $1.4 million. That was 74% less than it lost in first-quarter 1956. At the same time, 20 other large companies recorded a 57% increase in first-quarter losses.
"Now it appears that Fireman's Fund, through application of a conservative policy toward unearned premium reserves and loss reserves, elected to take its shellacking in 1956. Others may be facing the music this year, for the wave of angry hurricanes and tornadoes that cut broad paths of destruction in second-quarter 1957 had ominous overtones for companies that were slow to draw adequate reserves from their surplus funds. How they react may depend to some extent on what they learn from Fireman's Fund."
The story began in 1954, when Jack Perry, who is now inland marine manager in the Western Department, sat down to talk with a friend in the feed production business. At some point their conversation turned to the question of insuring feed companies, who financed chicken ranchers, against loss by what is called "flock impairment." Before the day was done, Perry had roughed out one of the most imaginative and potentially profitable coverages in the history of inland marine insurance.
In the first and only year the policy was offered, the Company collected almost $1,000,000 in premiums, and sound heads had visions of eventually reaching $25,000,000 in yearly premiums.
Without going into the intricacies of the matter, the plan had a flaw unseen by anyone in the business. The basis on which payment was to be made rested on a fixed price that had been pegged comfortably below that price which studies had shown to be the floor on broiler prices over the years. Therein lay the error, but who could have foreseen the still unbelievable collapse of the chicken market in 1956.
Under the policy, the Company promised to pay the difference between the fixed price and the price realized on an impaired flock. Most flocks are impaired to a small extent, which is to say they contain enough birds that are droopy, undersized, or otherwise undesirable to lower the value of the flock as a whole, but the coverage was designed to pay only for the badly impaired flocks. But when the bottom fell out of the market and the price of sound chickens fell below the price fixed in the policy, the Company paid losses exceeding $3,350,000, of which only $1,300,000 was covered by reinsurance.
Why the market collapsed is still not entirely clear, but it has been depressed ever since.
Western Department Manager Edward Lawson flew to San Francisco to brief home office executives on the debacle. The incident was not taken lightly then nor, for that matter, now, but the irrepressible Lawson couldn't refrain from adding just one touch of humor to the scene. At San Francisco International Airport on his way back to Chicago, just as he was about to enter the plane, he turned to wave good-by to men who had driven down to see him off. When they waved back, he began to flap his arms wildly up and down and crowed at the top of his lungs like a cock in the morn.
The word "chicken" is still bad medicine in Chicago, and the wise man will neither laugh nor smile when he uses it in the company of those who went through the plucking of 1956.
Almost lost in the hurried days after the SEUA decision of 1944, was a change in staff that took on considerable importance in the years to follow.
One summer day that year Fred H. Merrill, assistant vice-president of the Hawaiian Trust Company, received a cable from a friend in San Francisco, Robert F. Mulvany, which read, "Lewis Mansfield has resigned his job at Fireman's Fund. Understand they are looking."
In the fall of 1941, just before Merrill and his family left San Francisco for Honolulu, he had asked Mulvany to let him know if the job of managing the Fireman's Fund investment portfolio should open up. Merrill had worked in investment analysis since his graduation from Stanford in 1928 and had long recognized that the top position in his field on the West Coast was with the Fireman's Fund. Mansfield, who was the first professional the Company had ever employed in the increasingly important area of investment management, had resigned.
With the blessing of his boss in Honolulu, Merrill hitched a ride up to San Francisco on a Navy PBY for interviews with Hannah and the directors. In two weeks he had seen everyone but that old lion, A. P. Giannini, without whose approval neither Merrill nor anyone else could have the job.
Giannini had been held in Los Angeles on business, so an appointment of sorts was made there for the following Monday morning. Merrill had mentioned to his friend Russell Kent, a Bank of America executive, that he was flying south to see Giannini, and as a favor Kent called Los Angeles to put in a good word with his boss.
Merrill arrived at 10 A.M., the appointed hour, asked the secretary to announce him, and waited to be ushered in. But before the girl reappeared he heard the old man roar from inside his office, "Confound those confounded idiots," or words to that effect, "I told them not to send him down here!"
Merrill stood still as Giannini strode through the door toward him.
"Well, young man, as long as you're here, come on in. Russ Kent called me last Friday, and anyone who's okay with Russ is okay with me."
"Now let me tell you something about this company you're going to work for."
Thus was hired the man who would ultimately lead the Company into its second century.
Shortly before noon on Friday June 15, 1962, the sparingly used intercom system which reaches every corner of 3333 California clicked on and a stillness fell over the buildings as the first words came through:
"May I have your attention please. This is Mr. Crafts speaking. Excuse me for interrupting your lunch hour, but I have a message of considerable importance for all of you.
It is with distinct pleasure and a considerable degree of pride that I advise you that the Board of Directors of Fireman's Fund Insurance Company, at their regular meeting just concluded, elected Mr. Fred H. Merrill president of the Company. As chairman of the board I will continue to be the chief executive officer. Mr. Merrill as president will be the Company's chief administrative officer. Executive Vice-President Niggeman will continue to have executive supervision over the Company's underwriting operations. "These changes were all made in accord with well-laid plans, looking toward the future growth and welfare of the Company. Our team of three senior executives will provide joint leadership, directing our every effort toward making Fireman's Fund the best company to hold a policy in, the best company to invest in and the best company to work for.
"We will meet these objectives with your continued help and assistance."
The announcement came as a surprise to everyone. Crafts was due for retirement under the old Company plan in 1964, but under a new policy instituted by Crafts himself, the successor to every important executive is eased into full responsibility prior to retirement of the senior man.
In his short talk, Crafts mentioned that he was remaining on as chief executive officer. In a sense, the switch created two new titles: Chairman of the Board/Chief Executive Officer and President/Chief Administrative Officer.
Meeting in the executive dining room for lunch with directors and officers following his election, Merrill told a story dear to his heart.
It seems that one day in 1947, Merrill's uncle, Will Homer, from Three Forks, Montana, happened to be in town and dropped into the office at 401 California to see his nephew for the first time since Merrill had come to the Fireman's Fund.
After they had talked awhile, Uncle Will said right out of the blue, "Fred, I wouldn't be surprised if you became president of the Fireman's Fund."
"Ridiculous," said Merrill. Analysts didn't become presidents of insurance companies in those days.
"No, sir, it's predestination," insisted Uncle Will, good Mormon he was, and went on to tell the story of his father, Merrill's maternal grandfather, who was also named Will.
The elder Will Homer, in addition to being rancher and horse trader, was the peace officer in Three Forks, Montana. Among his duties in the latter position was every so often to escort felons from Montana to San Quentin Prison just north of San Francisco. On one trip in the 1880's, having deposited his charges, he happened to be walking along California Street on an errand, when what should he spy but a sign in the Fireman's Fund window reading "Agents Wanted." An enterprising man like Grandfather Will was not the sort to be deterred by the fact that he didn't quite know what they wanted, so he walked in and introduced himself. Will Homer that day became the first Three Forks agent of the Fireman's Fund.
Now, among the advertising materials the Fireman's Fund sent its agents in those years was a generous supply of rulers of various lengths, all prominently stamped with the name of the Company. But not all of the Three Forks supply made its way into the hands of clients and prospects.
Well, the first hundred years are gone. What the next century will bring is anyone's guess. If all goes well and the Company continues to grow at the rate it has, it will find itself with assets in the year 2063 of something near seven hundred billion dollars. Impossible? Perhaps, but it was less than a hundred years ago that the Company counted in thousands where it now counts in millions.
The old days are gone, for better or worse, for the Fireman's Fund along with the rest of the nation. Those days were undoubtedly not quite so good as they seem today, but we were made to hold precious that which has passed beyond our power to regain. Most of the pain has been forgotten, and the joys and triumphs and the mistakes at which we can laugh endure.
That wise man of baseball, Satchel Paige, once said, "Don't look back. Something might be gaining on you." And his words seem more appropriate for our days than for those gone by. But they are not. Each age, each generation has been handed its share of difficulty. Only the details change.
The next hundred years will be richer for the Fireman's Fund by virtue of the first, and even old Satch would permit, one might hope, this long and affectionate glance at the past. May the record ever remain a source of pride.