Xerox to Pump Cash Into Its Insurance Unit : $200-Million Infusion to Depress Parent’s Net
Xerox Corp. said Thursday that it will pump $200 million into its sagging property-casualty insurance unit, Crum & Forster, and that the cash infusion and other related actions will reduce by $160 million Xerox’s earnings for the third quarter ended Sept. 30.
Additionally, Xerox said it would “phase out” a Crum & Forster subsidiary in San Francisco that sells surety and financial-guarantee insurance.
The news came less than three years after Xerox enthusiastically plunged into the insurance business by acquiring Crum & Forster, one of the nation’s largest property-casualty insurers, in a deal valued at $1.6 billion. At the time, Xerox President David T. Kearns said: “In our view, financial services is one of the few businesses with growth potential as exciting as our own information industry.”
Already in Trouble
But the property-casualty insurance business then was already three years into a down cycle inspired in large part by cutthroat pricing on premiums, in quest of new cash to invest at a time of double-digit interest rates. For a time, high returns generated enough investment income to offset growing insurance losses from the newly expanded business. But while interest rates have since dropped, insurance losses have continued at record levels, and the industry generally has been unable to get the genie back into the bottle.
Xerox’s plight echoes actions taken two years ago by another giant corporation, American Express. Forced to inject $230 million into a faltering insurance subsidiary, Fireman’s Fund Insurance, American Express saw its earnings drop for the first time in 35 years. Its contributions to Fireman’s now total about $430 million, and the parent is offering the public a 49% stake in its wholly owned insurance subsidiary.
Positive Result
In a statement issued Thursday at Xerox headquarters in Stamford, Conn., Kearns said the capital infusion will put Crum & Forster on a “firm footing” and enable it to shore up the reserves at its L. W. Biegler subsidiary in Chicago to meet anticipated claims. The Biegler unit specializes in excess and surplus insurance, which provides coverage for catastrophic, hard-to-insure and one-of-a-kind risks.
Kearns said Crum & Forster also will phase out the surety and financial-guarantee insurance operations conducted by a San Francisco-based subsidiary, Industrial Indemnity Financial Corp. These lines of business no longer look profitable, he explained, adding: “Crum & Forster has better uses for its capital in its base commercial lines than in writing additional financial guarantee business.” However, existing contracts will be honored, he said.
