Growing Rich - Arabictrader.com

KIRK KAZANJIAN
An investment Davis made in a tiny company in the 1970s further
drove home the lesson about what unforeseen liability can do to a
business, especially in the insurance industry. “I purchased this relatively
new issue of a small regional property and casualty insurer,”
he reveals. “Arthur Andersen and Price Waterhouse had audited the
books. The stock came out on Veterans’ Day for $6 a share. I remember
this, because the bank was closed but I came in to work just so I could
go to lunch and hear management talk. My impression was that it
was a pretty low quality company, but it was a new issue that was
cheap on reported earnings, so I thought why not take a chance and
buy it. Boy, did I learn a lesson! Everything was fine at first, and the
stock made new highs by February. Within three months, it had
jumped almost 30 percent and was trading at $8. I felt pretty good.
Then an item came across the Dow Jones news wire. It read: ‘Security
America of Chicago, or whatever this thing was called, has announced
that trading in the stock has been suspended.’ The company had uncovered
some reserve deficiencies from a discontinued line of business
that wiped out its equity. Trading in the stock never resumed and the
company eventually declared bankruptcy. So this stock went from
hitting a new high to bankruptcy almost instantly. That’s the ultimate
risk with an insurance company.”
There’s a modern-day sequel to this story. In the 1960s, Chubb acquired
California insurer Pacific Indemnity, which had written a
general liability policy for Fiberboard. “It wrote the policy for only
two years in the 1950s, but Fiberboard had an asbestos plant,” Davis
notes. “Remember, Chubb didn’t even write this. It was Pacific Indemnity.
I think they collected all of $30,000 in premiums for it. Then
Fiberboard got sued, and between Chubb and CNA, they have paid
out some $1 billion in damages during the 1990s. All of this for a
$30,000 premium on a policy that had been discontinued for more
than 35 years. Yet Chubb was still found liable and had to pay the
claim. The difference between the first example and the second is that
Chubb had a conservative balance sheet. The company had grown
dramatically and successfully and was able to pay that claim without
really missing a heartbeat.”
SAFETY IN NUMBERS
Even getting to know management couldn’t have alerted you to
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