The End of the “Wausau Story”
The above cartoon is one I submitted a couple of years ago for inclusion in the monthly
newsletter published by Jerry Sheibl for the Golden Kiwanis Club of Wausau. The club
numbered about ninety or so retirees from the Wausau area and some thirty or more of its
members came from the ranks of the Wausau Insurance Companies. When the Liberty
Mutual Insurance Company “took over” Wausau Insurance there was a substantial
reduction in the latter’s staff and their present headquarters buildings began showing
signs of less and less occupancy – there were rumors of the buildings, or some major part
of them, soon being available for other purposes. Since the ranks of the Golden K were
continually increasing through an influx of early Wausau Insurance retirees and its
current meeting quarters could become inadequate, I thought the sign in the cartoon was a
distinct possibility.
Some who see this cartoon may be critical of my taking a light attitude toward a sad and
serious subject; and I would agree with them. But then there is the cold, hard fact that the
establishment depicted is not what it used to be. It is the poor semblance of an avatar of
something preceding it, no longer occupied by the soul that we were so enamored of –
now occupied by strangers, for the most part.
Once upon a time a small company in a small town in north central Wisconsin started an
advertising campaign that used as its central theme “The Wausau Story”. Many Wausau
people were involved in originating and perpetuating this campaign. Some were Wausau
Insurance employees in their art, advertising and public relations departments. People
like Robert Gunderson, Mike O’Malley, Roger Drayna, Pat Bowers, and Digby Whitman.
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Some of the local advertising organizations were helpful; and then there was that little
outfit from Madison Avenue in New York City by the name of the J.Walter Thompson
Agency through which the company became one of the earliest advertisers on the new
“60 Minutes” program at the time. Combining wonderful scenery, humor, interesting
copy and true sincerity, the campaign was a huge success and “Wausau” became a
household word across the country. One of the company’s advertisements said, “The
fishing’s good near Wausau. It’s only a stone’s throw to where the deer run. Once in a
while, they say a lynx comes down from the north” - and that still holds true today.
Another made the comment, “winter in Wausau is interesting” and that also is still true.
Emphasized in many was the work ethic of the Wisconsinites and how this had been
spread throughout the company so that we were “Good people to do business with.”
Many T.V. watchers learned how to spell the name. It helped cause the company to grow
at an impressive rate until it was rated as one of the premier companies in its milieu, the
commercial casualty insurance industry.
The company and its “Wausau Story” played a significant part in the city’s history.
Unfortunately the passage of time has dimmed the memories of its citizens. Young
people think its some insurance company up there near the hospital. I talked to a young
married couple recently and, although residents since birth, they did not know that the
City Hall used to be our home office. They thought the building on North Third Ave. was
the original office and weren’t aware we had built the conference center nor knew any of
the fascinating history of “The Depot.” This is understandable since what had been a
vibrant, active part of the community no longer exists, at least not in the measure that we
old folk remembered it
This is the end of that story.
In my lifetime I have been blessed by being part of four wonderful and, to some extent,
unique organizations. My country that I, as an immigrant, probably appreciate much
more than those who are born here, is one. My family clan - wife, children,
grandchildren, in-laws and other extensions is one. The United States Marine Corps as
the finest military group in the world is another. And Employers Mutual Liability
Insurance Company of Wausau was the fourth. The Corps and the Clan are thriving
while the country, at times, seems to be struggling. Employers Mutuals as it was known
by many of us, now better known as the Wausau Insurance Company Group, is deceased.
Oh, the name is still there and you can find it in the yellow pages and in the marketing
media of the insurance industry but what now carries that name is lacking of the essence
that made up this great organization.
The recollections that follow are my opinion on why what so many of us loved about the
“Wausau Story” is now ended. I am sure there are those who read this that will disagree
with some of its parts and maybe even the whole. So be it. My opinion won’t be
changed. Corrections of details may be acceptable but there will be no apologies
forthcoming for the fact that my little gray cells at this advanced age are not functioning
as they used to.
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On a red, granite hillside west of Wausau sits the concrete remnants of what we knew as
Wausau Insurance. If there is a heaven for deceased corporations I’m certain Wausau
Insurance is happily conducting a thriving business there while letting time diminish the
agony of its death.
Employers Mutual Liability Insurance Company of Wisconsin, A Mutual Company, was
founded on September 1, 1911 as an insurance company to provide Workers
Compensation insurance to Wisconsin industry on the advent of the passage of the first
Workers Compensation law in the country. Its first office was housed over a local tavern
of which the small city of Wausau has many – outnumbering even its churches of which
it also has many. In the late 40s it built a three story office building downtown which it
gave to the city in the late 60s for their use as our city hall - and that is what it still is
today. Replacing it was a beautiful three building complex on the side of a granite based
hill at the edge of the city fronted by a pond and two fountains. It’s the first of these
buildings that’s depicted in the cartoon. It is not unusual to see deer nosing around the
property even to this day. The Wausau area that’s sits astride the Wisconsin River is an
outdoor Mecca – winter and summer. It also built a large training center which contained
motel facilities, an auditorium, a Fire Safety lab, a media studio and many other training
facilities. Nearby it constructed a replica of one of Wausau’s train depots and used it as
an entertainment center. Another large building was occupied on the city’s west side. The
company was the city’s largest employer.
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At the time of its demise in 1985, it had grown to a group of companies with over three
billion in assets and operating on an international basis as the Wausau Insurance Group.
There are many ways in which a large corporation can fail. They range from poor
management, lack of market knowledge, over- expansion, to loss of public trust, and the
list goes on. This essay is my attempt to explain why I think Wausau failed. I must
admit that I don’t know all the financial details of its final demise, even though I was one
of its executives. There are only a handful of people that do.
Employers Mutuals, or E.M., as we old timers called it was a wonderful company
populated by great people. It was a vibrant company, growing steadily over the years but
in spite of its growth, always managing to maintain a “small town” ambiance. Its
employees completely understood and advanced the company’s unchanging philosophy
as stated by one of its first presidents and displayed in all its offices, “The Most
Important Person in this Office is the Policyholder.” And, from the first president to its
last one, it always maintained an open door policy. Any employee or any customer could
talk to its president. As it expanded throughout the country it carried those qualities with
it. You could walk into a sales office in Des Moines, a claim office in Philadelphia or a
regional office in San Francisco and instantly feel at home – subject to the same attention
and courtesy as you would get in its home office in Wausau. Talk to any of its retirees
today and they will all, without exception, tell you they loved working there and miss it.
So, what happened? Why couldn’t all these hard working, dedicated people prevent the
company from failing? As can be expected, there wasn’t a single cause – or a simple
one. But it is my opinion that one of the primary causes for its failing was an underlying
cancer that took root deep in its financial structure, one brought about by an unfortunately
wrong business decision made by its officers in the late forties, shortly after the end of
the war.
World War II had been good to the company. Its reputation for excellent service,
especially in Workers Compensation insurance, enabled it to rapidly grow by
competitively pricing numerous contracts for government work. As a consequence, this
small, mid-western company found itself insuring and servicing very large government
contractors in wartime construction, munitions manufacture, aircraft building and many
other government supported activities. After the war, E.M. played a significant role in
enabling the insurance industry to develop and put in place a large insurance program to
insure the property and liability exposures of nuclear energy providers in response to
President Eisenhower’s “Atoms for Peace” program.
In the years following the war the company rapidly grew and became nationally known in
the large commercial insurance business. Sometime in the late thirties or early forties the
company had made a major shift in its marketing concept. Until then it had been a
“direct writing” company, that is, one that got its customers through an employed sales
force. These sales persons were expertly trained to solicit medium and large commercial
accounts, first through sales offices in the mid-western states and later across the country.
Its managers discovered, however, that trying to obtain business exclusively through its
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own sales force was difficult to do in the larger cities where insurance brokers were in
control of most of the accounts that fit into the category the company was competing for.
Therefore, I believe starting in New York City; they began entering into contracts with
the larger brokers. - such firms as Marsh & Mc Lennan, Alexander & Alexander and
Johnson & Higgins. Known as the “Alphabet Brokers”, because of their being referred to
as M&M, A&A and J&H; these producers found Wausau a good source for their clients.
Further expansion opened the doors to well-established independent brokers located in
other cities, many of which later were swallowed up by the ABCs. The company’s
service expertise was recognized in all its operations from rapid and efficient policy
production, financial flexibility in structuring premium plans, a nationally recognized
safety engineering staff and a fair and highly efficient claims force. Its safety engineers
were the first in the insurance industry to establish a “lab” for researching and developing
safety practices for the company’s insureds. Some in the marketplace referred to Wausau
as the “Cadillac” of the P-C (Property and Casualty) industry.
At the time, there existed a strong belief that a single company could not effectively do
its business both as a direct writer and broker producer. The two forms of companies
were in competition and conflicts of seemingly insurmountable difficulty would not
permit such a mixture. The company decided to prove the industry wrong and it
succeeded.
However, in retrospect and in my opinion, this was a management error. There are many
in the company or among its retirees who do not agree with me but let the reader keep
this in mind. An account produced by a salesman whose only source for coverage is with
his company in essence belongs to the company. The salesperson is an “agent” of the
company’s and therefore represents the company in this contractual relationship – not the
insured. However, by providing superior service and competitive pricing, strong loyalties
develop between the company and its customers. An account that is produced by a
broker belonged to the broker. The broker has many sources from which he can obtain
the insurance products required by his customers. He does not represent the insurance
company but rather, as they so often point out, represents the insured. As long as things
are going well this is not a major problem, but should one of his sources fall out of favor
for whatever reason, the broker can switch his customer to another company with little
difficulty. This was not the management mistake I alluded to before but it exacerbated
the difficulties that were to develop.
By the mid-eighties fifty percent of Wausau’s premium income came from brokerproduced business. At this point it’s interesting to note that the Liberty Mutual Insurance
Company, which had its beginning under similar circumstances as Wausau, was also a
direct writer and stuck to that method of marketing with great determination. Indeed,
although they would never admit it, they did write some large brokerage accounts but the
great bulk of their business remained under their direct sales control. They still operate
this way except that now they use Wausau as one of their major broker business entities
and the mix is now 30% direct sales and the remainder through brokers.
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At about the same time that the decision was made to do business with brokers and enter
the major cities on both coasts, the company made an even more important decision, one
that ultimately had dire results.
When I started in the insurance business in NYC I first worked for a prestigious ocean
marine brokerage firm. My job was as a “gofer” in their claim department. I had to learn
their organization very thoroughly in order to find the files and documents their claim
adjustors demanded. In the process I became fascinated with the intricacies of the
insurance business, especially with their underwriting function. An ocean marine
underwriter was an awesome individual. Surrounded by assistants he made what seemed
to me were difficult and momentous decisions throughout the day involving vessels and
cargoes around the world. I was very impressed, explored the possibilities of becoming
an underwriter and learned it would require a long, laborious effort with many years of
apprenticeship before arriving at a level where an income might show signs of
approaching the level I’d set for myself. I, and my friends at college, had determined that
this measure of success was an annual salary of $ 10,000.
Youthful impatience caused me to look elsewhere. My school had recently established
an employment office in the city to help its graduates and, on contacting them; I found
there was an insurance company looking for underwriting trainees. More interesting yet,
the company’s NY office was located in the same building as the school’s placement
office. A quick elevator ride to another floor found me at the door of Employers Mutual
Liability Insurance Company of Wisconsin, A Mutual Company.
Due to its rapid expansion Employers Mutuals was in a hiring mode and a number of
recent college graduates were being hired to learn the business and become underwriters.
To start with we were quickly trained in all aspects of insurance rating. This, together
with night classes at the Insurance Institute of N.Y., had us doing simple underwriting
duties and, in a couple of years, I struggled through the organizational structure of a
Wausau regional office becoming a rater, then rating supervisor and finally a junior
underwriter.
Our direct sales and brokerage underwriting was separate and I found myself assigned to
the latter. One of the brokers I handled was the Wanvig Insurance Agency. They were
also in the same building. Their office was small and the business I had to handle for
them didn’t amount to much. Yet our management staff in the office appeared to kowtow
to their frequent demands. By this time I had become used to the hectic, and often
vitriolic, behavior of the typical N.Y. broker but the Wanvig Agency was exceptionally
obnoxious. Everything had to be handled immediately and the slightest delay brought
abuse from Wanvig himself or his secretary. Early in my relationship with them I
returned a call to Wanvig but got his secretary. I told her I was returning Mr. Wanvig’s
call and she brusquely reminded me that it was “Colonel” Wanvig and that was the only
way he was to be addressed. I said, “O.K. please tell the Colonel that Second Lieutenant
Klein has returned his call.” Needless to say, our relations did not improve.
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One day some papers crossed my desk that had nothing to do with my regular business
with Wanvig but consisted of copies of correspondence between the broker and our home
office and which referred to “the medical society” and “the doctor’s account”. My
curiosity aroused, I looked through the files in our branch records department and, lo and
behold, found a couple of file drawers filled with applications and policies written to
doctors who were members of the N.Y. Medical Society. We were insuring countless
doctors for limits of liability as high as one million dollars and premiums as low as $ 150
annually. A little more digging revealed that these policies were underwritten at the
broker’s office and processed by our home office for issuance. Also, many contained
applications for doctors who, even from the little I knew at that time, still made it pretty
evident that they were not the best of the crop. Some I wouldn’t have wanted to go to for
medical help.
In my studies to become a casualty and property underwriter I had learned that there were
two very important concepts to adhere to. The first was to never insure a burning
building. In other words if the risk you’re presented with has already caused a loss or is
in the process of doing so, under no conditions should you insure it – a pretty obvious
point. The other was, never lend your pen to another. This meant that an insurance
company would take an unacceptable risk if it permitted someone other than its own
underwriters to accept and issue coverage without approval by the company. I was
shocked. We had given our pen to a broker to write medical malpractice insurance for
any member of the N.Y. Medical Society.
I went to my boss, Bill Miller, the underwriting manger of our office and laid my
concerns in front of him. Mr. Miller was a stern taskmaster and had all our junior
underwriters scared to death of him, including me. With what I didn’t realize was an
amused glint in his eyes he curtly told me that our office really had nothing to do with
this arrangement and, if I wanted to find out more about it, I had his permission for me to
call Al Papenfuss, the Vice President of Underwriting in Wausau.
Well, very junior underwriters never, ever called Vice Presidents and it took a number of
days for me to get the courage to do so but I finally did only to be told by Mr. Pappenfuss
in a very polite manner that the malpractice insurance program had nothing to do with
our New York regional operation and that I should, in not quite these words, keep my
nose out of it. I reported this conversation to Mr. Miller and he then gave me a little
history of the program.
After the war when E.M. started expanding and had opened the NYC office, the Wanvig
Agency approached the company and offered us to take over this book of business. The
decision to do so was made by our Vice President of Claims at the time, Ben Kuechle,
and the company’s secretary. I had been told that the underwriting department, in the
person of Al Papenfuss, did not play a role in accepting the proposal. Wanvig’s enticing
argument was that the program would develop into a cash machine for the company.
Premiums would be collected for years, rapidly building in size and adding to the
company’s surplus account as they earned interest without being offset by losses of any
significance. He told our people that malpractice suits were virtually impossible to win
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by plaintiffs because they needed doctors as expert witnesses to testify on their behalf and
it was a well known fact that no doctor would ever testify against another. As a matter of
fact there was some truth to this and our executives bought it. One condition of the
program was that Wanvig’s office would do all the selection of the eligible insureds, i.e.,
we had to give him our pen.
Unbeknown to me I had discovered the source of the insidious cancer in the heart of our
financial structure that was to grow to fatal proportions.
In the fifties and through to the mid-sixties the company did exceedingly well. Business
boomed, we opened many more regional and service offices and even had the temerity to
take over a failing New York company, The Hudson Mohawk Insurance Company in
Albany New York principally because the N. Y. State Insurance Department asked us to.
Hudson Mohawk specialized in insuring logging and lumbering in the state, a very
hazardous business but one we had experience with in Wisconsin. Because of inadequate
safety engineering and claim services the company’s resources had been depleted and the
insurance department was looking for someone to bail them out.
I had managed to grow with the company working in regional offices, including Albany
NY and Kansas City, MO until 1960 when I was transferred to the home office in
Wausau and started on a series of job assignments that kept me there until 1985, the year
of my retirement. The 60s were good for the insurance industry and the company.
Business continued to grow and the company prospered. A unique thing about the
Property and Casualty insurance industry at that time was its exemption from anti-trust
laws. I don’t remember when this came about but some years before, Congress had
passed the McCarren-Ferguson Act that gave us that protection. Apparently there had
been a suit against one or more companies alleging that we were setting prices in concert.
We were, but for some very good reasons. The industry was able to convince Congress
to exempt us, our argument being that insurance companies rely on statistics of accidents
and resulting claim experience. These statistics were not reliable for an individual
company to determine its rates. It was necessary for the companies to pool their statistics
to get much greater claim and expense data in order to attempt forecasting rates for future
use. Since no single company could accomplish this by itself “Bureaus” were formed to
which all the companies reported their statistics. These Bureaus were by class of
business, by company type and sometimes by state or region.
The Workers Compensation Rating Bureau compiled data and calculated rates for that
line of insurance. The Mutual Insurance Rating Bureau did the same for Casualty
coverage but restricted to Mutual Companies. For the stock insurance companies there
was the National Bureau to do the same, etc. To simplify the regulation of these
activities individual state insurance departments looked to these bureaus to submit rates
for their approval, which relieved everyone else having to do this on a company-tocompany basis. The effect was that, except for a couple of maverick companies that
didn’t want to play this game, we were a tightly self-regulated industry.
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Since prices were fixed, the companies’ marketing efforts had to rely on other methods
than pricing alone. Claim service, engineering service, policyholder service – these
became important in acquiring and keeping good policyholders. There were a few unique
pricing devices that could be used to circumvent some of the pricing restriction. The
mutual companies had dividends they could pay to their customers because the customers
“owned” the companies. The dividend paying ability of a company and its history of
such rebates to the customer became an extremely important pricing advantage to these
companies. Dividends were paid at the end of the policy term and were ostensibly a
reflection of the good results obtained in a particular line of insurance. E.M had an
enviable record and relied heavily on this device. We were not about to eliminate or
reduce a dividend. Doing so would anger a policyholder who had been told that at the
end of the policy term they would earn 10% or 15% or some other amount even though
we had told them we could not guarantee a dividend.
Needless to say, the large stock insurance companies fretted under this apparent price
advantage and constantly sought means to combat this practice. In the meantime, E.M,
willing to live with modest profits, with its excellent service and dividend paying
tradition did extremely well under these circumstances. Life was good.
I don’t remembered when it happened, possibly in the late sixties or early seventies the
McCarran-Ferguson Bill came under attack. It began to appear that there was a
possibility of its repeal. Preempting such a disaster that would have eliminated all data
pooling I believe it was the Illinois Insurance Department that started the dominos falling
by demanding that the bureaus change their rate making practices and no longer produce
the final rates. Bureaus were to collect only claim data and produce “pure” rates based
on accident history alone. If a company wanted to add additional components for
expenses and profits that was their prerogative. Most of the states jumped on this
bandwagon and suddenly rate stability, as we had known it, was over for most of the
Property and Casualty lines of insurance with Workers Compensation remaining an
exception in most states.
This led to really vicious competition between the companies. Companies could
manipulate their pricing practice with much greater freedom – a boon for their customers.
Unfortunately prices were driven down so far that they began to be inadequate for taking
care of the losses that were being sustained.
At the same time that this was happening, a few other things impacted the industry and
our company – things that were less than helpful. Wausau had established itself as a
company that could handle difficult commercial exposures. A leader in safety
engineering, we had been successful in coping with the emergence of silicosis claims in
our Workers Compensation product. This confidence led us into offering WC and
liability insurance to ever more hazardous industries. We became experts in oil field
drilling, long haul trucking, aviation and aircraft building, large construction projects
including dams, tower erection, etc. Concomitant with this the plaintiff’s bar discovered
that insurers had deep pockets and juries were finding it easier to feel sorry for any poor
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individual who had been hurt even though liability on the part of the one doing the
hurting might be questionable.
Up till now, product liability insurance had never been a problem. In fact, losses were so
few and far between that the premium charged for this coverage was often minute
compared to the rest of a commercial buyer’s insurance program. Considering what was
happening, the industry then did a very stupid thing, at least considered from an
underwriter’s viewpoint. The large stock insurance companies under pressure by the
national brokers created a new liability insurance environment by simply changing one
word in the then current liability policies. They changed the word “accident” to
“occurrence”.
This may not mean much to the lay reader but to the legal community it had a
tremendous effect on insurance claims. While in the past an insurance company could
always require that there had been an accident that caused the damage, now the question
of what caused the damage was up in the air. An example at the time known as the “dead
elephant case” might illustrate this better. If a circus parade was passing down main
street and an elephant dropped dead directly in front of the entrance to a store causing it
to lose business because its patrons could not access the premises, was there now
coverage under a liability policy? An insurer might argue that there had been no accident
but now the lawyer for the store could say, maybe not from the standpoint of the circus
but certainly from the standpoint of the storeowner and, in any event, this happenstance
was an “occurrence” and should be covered.
Product liability insurance losses began to mount with leaps and bounds. The industry
was ill prepared for this revolution in claim activity and Wausau was no exception. Over
a period of a few years we were hit with some of the largest losses incurred in the
company’s history. Silos that caused millions of dollars in losses to farmers in California
because they had not been adequately designed to store silage in that state’s weather
environment, collapsed dams and impoundments, manufacturers of children’s pajamas
using flammable materials, exploding car batteries, siding manufactured for homes that
was deteriorating - throw in a few hurricanes and tornadoes and a drop in the Dow and it
brought the industry close to a state of panic.
Now, a few words to explain as simply as possible the make-up of a property and
casualty insurance company’s finances. I hope I don’t bore the reader too much but it’s
important to know what makes a company tick for you to understand what can happen to
it to bring it to its knees.
First, the company gets its income from premiums paid by its policyholders and then uses
these to offset two major expenses - its operating expenses and its payment for the losses
submitted to it. If a company collects $ 100 in premium and pays out $60 dollars in
losses it’s said to have a 60% loss ration. If its operating expenses are 30% then it has a
combined ratio of 90% and the remainder can be considered profit. Unfortunately things
aren’t that simple. A company’s claim losses must include not only those that it paid but
also those that have been reported to it but not yet paid. Then, by requirement of the state
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insurance department’s actuaries, it must also determine a factor for “incurred but not
reported” losses, that is, losses that might be expected for the book of business written by
the company that year as determined by past statistical data. Isn’t that great? The
company is required to set aside funds to pay for losses it might incur in the future for the
business written today. We used to say that our actuaries help steer the company car by
looking out the rear window and telling us which way to turn.
But insurance underwriters aren’t completely stupid. They’ve listened to their financial
advisors who have pointed out that all that money the company is holding in reserve for
claims incurred but not yet paid and claims not yet incurred can be invested and earn
capital gains and interest. True, as long as the stock markets hold and interest rates hold.
To complicate matters, a company’s financial strength is measured by the amount of
surplus that is required to cover its ongoing claim payments. The surplus is an actuarial
produced figure based on the loss reserves the company has had to set aside for each
outstanding claim together with the amounts paid on claims already closed. A measure of
that strength is the “Premium to Surplus” ratio. If this ratio is big it means that the
premiums the company is currently putting on its books is substantially smaller than its
surplus and the company is financially sound because it has more than adequate funds
available to take care of the losses that can be expected from its policyholders. Through
the early seventies loss ratios, combined ratios and surplus ratios began to change
dramatically for the worse and by 1973 the industry was facing one of its first great
crises. Combined ratios began exceeding 100%, often as high as 125% or more.
E.M. was no exception to this dilemma, but it had another very disturbing emerging
problem. By gosh, doctors were beginning to testify against doctors. Suits for
malpractice against doctors and hospital began to skyrocket. Unfortunately, during the
intervening years Wausau had expanded that line of insurance considerably. In addition
to the N.Y. Medical Society, we insured the N.Y Hospital Association, the New Jersey
Medical Society, the Wisconsin Hospital Association and a number of other state
malpractice programs.
Not only was the number of claims increasing but also their values were rapidly growing
bigger. Our eyes were opened when a N.Y. doctor who had probably paid us a few
hundred dollars in premium amputated a man’s wrong leg, necessitating the amputation
of both legs. I believe that may have been our first million-dollar malpractice settlement.
But that was only the tip of the iceberg.
I think it was in 1973 that, one morning, the officers and department managers at our
home office were asked to attend a special meeting with the president in one of our
trainee classrooms. Mr. Schlueter, the president, asked the head of our actuarial
department to explain our current financial status. As he put his figures on the
blackboard my stomach began to sink. When he was done we looked at the results in
disbelief. Wausau Insurance was, for all practical purposes, broke! Our rapidly
worsening malpractice experience had overwhelmed all of the loss ratios of all our other
business, business that in itself was not doing well because of the intense price
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competition. Our combined ratio was well over 100% and our premium to surplus ratio
was zilch.
What to do? Fortunately Mr. Schlueter was a competent and dedicated manager. He told
us we would have to tighten our belts. Expenses had to be reduced, staffs cut, salaries
held at present levels and we had to underwrite the hell out of all our business.
Staff reductions were accomplished as humanely as possible. Initially Mr. Schlueter
asked every department to cut their staff by ten percent. Those that were obvious nonperformers were quickly dropped but that was much less than 10%. Then we encouraged
early retirements and stopped replacing people who were leaving for one reason or
another anyway. Transferring some employees to other departments who had achieved
better than a ten percent reduction was another method used. There were no golden
parachutes or fancy buy-outs. Over a period of two to three years we were able to reduce
and hold the line on staffing.
First and foremost we cancelled all our malpractice business. Then we tackled other
hazardous occupations. We stopped insuring oil producers, chemical manufacturers,
drug companies, truckers – and many other categories. Our pricing on all other business
had to be brought to more acceptable levels and, although we did not stop paying
dividends entirely, there were reductions in some dividend levels. Much of this had the
initial effect of worsening our financial picture. With premiums dropping and the
estimates for surplus requirements increasing our ratios were getting worse day by day.
That created a second dilemma – the reaction of the state insurance departments and that
of a company in N.Y called A.M. Best & Co. The latter is an insurance “rating”
organization. Like Morgenstar for funds and Barrons for bonds, A.M. Best rates
insurance companies on their financial strength. Ratings can go from A+, the highest, to
F or, worse yet, “Unrated”. Anything under an A- is a red flag and brokers and their
large commercial buyers will avoid such a company. Our rating started to drop and we
naturally were very concerned as were various insurance departments. By now we had
over 25% of our business produced by brokers and, since they had no loyalty to the
company and had many other markets to go to, they could easily take their business
elsewhere which would have a domino effect on our premium income. Our direct sales
produced business was not as severely affected with the salesman restricted to the use of
only our company and with long time insureds wanting to stay with us. It was interesting
to discover that even some of the large commercial accounts controlled by brokers
elected to stick with us because of our service capabilities.
We started getting requests from insurance departments for supporting financial data.
The most insistent and demanding was the N.Y. Department. Fortunately, Mr. Schlueter
had maintained good relationships with the people at Bests and especially with the
Commissioner and staff of the Wisconsin Insurance Department. Numerous visits to
both by him together with some imaginative financial documentation kept them satisfied
as to our ability to weather the storm. The same did not hold true for the N.Y.
Department – they were getting more obnoxious as time went on until, one day, the
12
Wisconsin Commissioner wrote to the N.Y. Commissioner and, in no uncertain terms,
told him to bug off and leave us alone. It worked, and we got enough of a respite to get
all our lifesaving activities accomplished and, in three years, we were out of the woods –
we thought.
Those three years were the hardest I worked in my career with the company. They were
not fun but everyone pitched in and did what was necessary. I remember telling someone
that I never saw a smiling face in the office during that entire time.
Even though we were now out of the malpractice business, that didn’t mean we were no
longer getting claims. Claims had been increasing regularly and, worse yet, their costs
had escalated immensely. A claim for a million dollars was no longer the exception but
became the rule. Acts of malpractice committed before our cancellations still had to be
paid. And then our dear lawyer friends in N.Y. found a whole new way to get at our
supposedly “deep pockets”. The statute of limitations at that time for a malpractice claim
was, I believe seven years. However that statute would not begin to run until a person
had reached their age of majority. Lawyers started looking into old hospital record for
infant brain damage events and finding them. If a baby had been born in, say, 1960, and
had brain damage, the allegation was that the doctor caused it and suit could be brought
as late as in 1985, seven years after the individual’s eighteenth birthday. Such a claim
was automatically reserved for one million, an amount we would have to set aside and
not use for any other purpose – and these claims were rolling in by the hundreds. Of
course we didn’t lose them all and many closed out for lesser amounts while others cost
considerably more but it was still a severe strain on our financial health.
I think it was during that time that the managers of the company created an “upstream”
holding company. It is often advantageous for a company to set up subsidiary companies
for various purposes. We had found that life insurance tied in well with our group health
products; more so than did our casualty business and it would help us to form a separate
life insurance company. However, being a mutual company made it difficult for us to
restructure our organization into subsidiary companies. A stock company, the Wausau
Service Company, was formed the stock of which was owned by the mutual company.
That stock company could, in turn, create and own other stock companies and Wausau
Life was thereby created. Having put in place the means to easily form and own other
companies made expansion via that route only too tempting in later years.
The crisis seemed to lessen in the mid -seventies and it looked like we were back on
track. Mr. Schlueter had pulled the company through the worst period of its history. He
had also caused the board to install a rule of mandatory retirement for all employees,
including the president, at age 65. When that time came around it appeared that the board
was having some trouble deciding on a new president. Mr. Schlueter had been a taciturn
man and hard taskmaster. Although it was difficult for many of us to establish a close
relationship with him we greatly respected him. Not only for the effort he’d put forth in
saving the company but also for the many things he’d accomplished in terms of
additional benefits for its employees. He had, by far, done more for the employees than
any previous CEO.
13
I especially wondered what was going to happen because of being so enamored of the
underwriting function and what I felt was the important part it played in an insurance
company. I found it difficult to understand why none of the past three presidents had
come from the ranks of the underwriters. Mr. Burhop had been in marketing, Mr.
Schweitzer had been General Counsel and Mr. Schlueter had been Vice President of
Safety Engineering. Consequently it came as a surprise when the Board announced the
new president would be T.A.Duckworth, the head of our human resources department.
To be sure, T.A. (he had no first name) was a very intelligent and well-educated guy and
was, without question, one of the best-liked officers in the company. But, having started
as a lawyer in our claim department, he had no underwriting experience. Soft spoken and
a thorough gentleman, I had my doubts that he could maneuver readily in the rough and
tumble of insurance competition.
As was not unusual – I was proven wrong. Like Truman, he seemed to rise to the
occasion and did an admirable job for the few years he was at the helm. Of course he had
a strong staff to advise and help him – I included.
The company continued to prosper under T.A. although malpractice was an ever existent
and underlying problem. Then, as 1977 approached and T.A. was approaching retirement
age, the question of succession arose again. Although we had a number of good senior
officers poised for the next step rumors of the Board’s intentions were rampant. One of
the more disturbing was that they had formed a search committee and were looking
outside the company – an unbelievable possibility – we had always promoted from
within.
One day I received a strange order. I don’t remember whom it came from. At the time I
was a Senior Vice President of underwriting and the company’s chief underwriter. I was
asked to go to Milwaukee but not to tell anyone in the office why I was going. I should
stay at the Pfister Hotel, and be prepared to meet with some of the board members. My
wife and I drove down and checked in the night before and, in the morning; I went to the
assigned meeting room. It had a waiting room in which I found Jerry Viste, another of
our Senior Vice-Presidents. I didn’t know Jerry well other than that he was an MBA
from Harvard and was in charge of all our actuarial, statistical and computer operations.
In this role he had done some terrific things with automating the company in fact leading
the industry in computer rating and policy writing facilities.
We exchanged pleasantries and then he was called into the meeting room. After a half an
hour or so he came out not saying anything and I was asked to come in. In the room
were, I believe, four of the members of the company’s Board of Directors. The only one
I remember was Earl Swanson, the chairman of Anderson Windows. Sitting in a line
before me they asked for a brief rundown of my career and then if I had any thoughts on
who should be the next president of the company. I was dumbfounded – honored to be
sure, but not able to understand why they were asking me when they had so many other
sources to go to. It was obvious that I was in front of the rumored “search committee”.
14
I’ve made many mistakes in my life but probably one of the worst occurred at that
moment. Remember that I was intimidated, nervous and overly convinced that an
insurance expert should run an insurance company. So I blurted out, “I don’t know who
you should look for but I can tell you this, in my opinion, whoever it is should be an
insurance person – an underwriter. We are facing difficult times so don’t pick anyone
with other backgrounds.”
Then I got a second shock. They asked me if I had any aspirations to be president. After
some self –searching I told them that, if asked, I would not turn it down but had concerns
over my capabilities at this stage. They wanted to know why and I explained that,
although I felt totally comfortable in my knowledge of insurance underwriting, I was
uncomfortable with matters of high finance. I thought I was recognizing my own
limitations but really hadn’t given a thought to how such expertise might just as well be
attained either by self-study or by good staff assistance. Be that as it may I certainly
didn’t have my wits about me that day and I knew the die had been cast as far as my
chances were concerned.
Then they asked me if there were anyone else in the company I thought would make a
good president. Here I had no hesitation but quickly replied that, as far as I was
concerned, the one most capable would be Harold Bliss. Harold had come up through the
underwriting ranks and, at this time, was Vice President of our Group Health and Life
insurance operations. He’d started as a casualty underwriter and attained the prestigious
designation of Chartered Property and Casualty Underwriter (CPCU). Then, after
diligent and long study, he’d gone on to get his Chartered Life Underwriter designation
(CLU), which was, in my estimation, a tremendous accomplishment. On top of that, he
was a wonderful co-worker and very well liked manager. On the drive home I told Jane
that I thought Harold had it in the bag. Hah!
Not long after that T.A. called the managers of the company to a meeting at which he
announced that the Board had selected an Executive Vice President. His name was John
Schoneman and he had formerly been Executive Vice-President of the Atlantic Mutual
Insurance Company in N.Y.C. It was obvious that he was to be our new President when
T.A. retired.
There was dead silence in the room and I could see a number of shocked expressions.
The unthinkable had occurred - the Board had brought in an outsider. It made all of us
feel that we were considered inadequate for the job. I didn’t care because I already felt
that way but it was obvious there were quite a few in the room who felt otherwise
Now, the question was – who and what is a John Schoneman? The first thing I did on
returning to my office was to call a friend of mine who worked for Atlantic Mutual and
asked him. He told me that John was a very knowledgeable insurance underwriter and I
would enjoy working for him. A few days later John arrived in Wausau and was
introduce to us by T.A.
15
Atlantic Mutual was a solid “old line” property and casualty insurance company. John
had started there as a fire inspector and then become a property insurance underwriter.
Although heavily committed to property insurance, he had an excellent working
knowledge of the casualty lines. Through his career at that company he had risen to the
position of Executive Vice-President for Underwriting. At the time the Atlantic had
divided their top management into two major functions – marketing and underwriting
with John filling the latter slot and another individual, whose name I believe was John
Markowski, as Executive Vice- President of Marketing. A strong rivalry had developed
between the two and it was touch and go as to who would eventually succeed to the
presidency. The story we got was that John had tried to get his Board to take a position
on his being the one chosen, in fact giving them an ultimatum and, when they failed to do
so, he offered his resignation. If it was a threat, it backfired on him because they
accepted the resignation – an interesting forerunner to what was to happen later.
John took over the reins of our company with relish and aplomb. I don’t ever remember
him being shy with his opinions or hesitant with decisions. A fairly large guy, he had a
gregarious and charming personality. He made everyone feel comfortable and it soon
became evident that we were going to be able to keep our open and friendly relationship
with our employees. He liked walking through the offices talking to everyone from the
lowliest clerk on up. His office was always open and he made himself accessible to
everyone – employee, policyholder and the press. He carried forward the core value of
the company in recognizing the importance of our customers and established a rule that
all complaints had to be answered the day received by an officer of the function
complained about. Such answer need not necessarily give a final opinion but should, at
the least, give an immediate acknowledgement and a promise of a detailed response in as
short a time as possible. This concept was carried forward to our phone system. A
“cascade’ procedure was established and followed whereby, any call to the President
would be given to him and, if he was not available, the next highest ranking officer would
get it and so on own down the ladder.
A very religious and family oriented person, he insisted on high moral standards.
Improper behavior of officers and employees was not to be tolerated. When hanky-panky
behavior was uncovered, John meted out swift justice. He summarily fired one of our
officers and that individual’s secretary when it was discovered they were having an affair.
Another had acted with a certain degree of indiscretion, at least in John’s eyes. Most of
us did not think it was all that bad; simply a case of bad judgement, but John decided that
he should be given early retirement and it was up to me to so notify him, giving me one
of the worst days of my career.
After about a year of getting thoroughly acquainted with the company and its staff, John
began to flex his muscles. T.A. stepped down as President and John took over. First he
started expanding the company’s operations through acquisitions and the formation of
new entities. T.A. had remained as Chairman and ultimately retired and remained a
director emeritus while John became Chairman. John retained his CEO designation and
Jerry Viste became President and COO.
16
During Clyde Schlueter’s tenure Wausau’s home office staff had been drastically
reorganized from a traditionally “functional” structure to a “product management” one
which was all the rage at the time. Instead of vertical responsibility for the core
insurance functions of underwriting, sales, claim and engineering, the staff had been
formed into product teams – Workers Compensation, General Liability, Automobile,
Group Accident and Health, etc. Each team was staffed with representatives of all
functions and headed by an officer who had come from any one of the functions.
Most of us did not think this was a good idea and a certain degree of confusion was never
overcome. Fortunately, with only a few exceptions, the people involved were reasonable
and dedicated and tried hard to make things work so the company continued to function
O.K.
John reorganized the HO staff back to a functionally oriented structure. At the top, John
had himself appointed as Chairman and Chief Executive Officer, Jerry Viste as President
and Chief Operating Officer and the basic insurance operations were divided into two
major divisions. The Executive Vice President for Field Operations, Lowell Tornow,
was responsible for all of the company’s insurance activities in the regional and branch
offices. The Executive Vice President for Insurance Operations, I, was responsible for
the Property and Casualty insurance functions, that is, underwriting, sales, claim, safety
and health engineering, audit, and reinsurance. Other departments such as legal, finance
and accounting, actuarial, public relations, the Life Company, etc. reported to either Jerry
or John.
We were again a traditionally structured company but what was interesting was that John
had thereby created the same structure that he’d had difficulty with at Atlantic Mutual.
Lowell’s ultimate objective was to control the marketing aspect of the company and mine
the underwriting. There was one big difference. Lowell and I were good friends and
complemented each other. Lowell had expressed desire at one time to be president of the
company but with John’s young age he knew that could not be a possibility so there was
absolutely no friction or competition between the two of us as had been the case at John’s
former company.
Lowell’s selection for his position highlighted another of John’s attributes. John did not
surround himself with “Yes” men. He wanted a staff that would question and challenge
and, of all of us, Lowell was the one to fill that role very well. In fact I believe he’d
come to John’s attention in that manner when, as the Detroit regional manager, Lowell
had severely criticized some of John’s propositions during the course of a regional
management meeting.
Then came the first acquisition. After John had studied and become familiar with the
company’s financial structure he became fascinated with the amount of “leverage” our
premium income could generate on our surplus and was convinced that, in some respects,
we were a “cash cow”. To some extent this was true. Our bread and butter product,
Workers Compensation, had until then produced good results. This was not necessarily
from the profit one might expected from that product - a P&C company does not,
contrary to a layperson’s opinion, earn a great deal of profit. During the rate regulation
17
days a profit of 2 ½ to 5 % was considered more than adequate and when rate regulation
went out the window, competition drove that profit margin even lower. Its interest
earnings and capital gains from investments were another matter. Under the conservative
guidance of our chief financial officer, Jim Lundberg, Wausau had done remarkably well.
So, appearing to have a lot of extra money available, John bought the Volkswagon
Insurance Company with headquarters in St. Louis. Volkswagon had established this
company after the war when the auto manufacturer attempted entering the U.S. market
only to run into a reluctance of our insurers to provide insurance on their vehicles. To
overcome this they established their own company and promptly insured all their dealers
and their customers. With a restricted customer base, this did not work well and they
tried expanding into other markets. This too did not work and they soon found
themselves in trouble and looked around for someone to bail them out. They found us.
John met with all of us and laid the proposition out. There were some that had mixed
emotions but, for the most part, we recognized it as a good fit.
I don’t remember what we paid for the company, less than 200 million comes to mind,
but we got a well-organized, personal lines insurance company that had a high degree of
expertise in direct mail marketing. Wausau had a small book of personal lines business,
homeowners and automobile, about 35 million in annual premiums. We placed no
marketing emphasis on it and it therefore consisted of two components, the insurance
provided to our own employees and their friends and neighbors and that which we had to
provide to customers forced on us by large commercial insureds. If the president of
Rockwell International for example, whose corporation we insured for all their
commercial coverage to the tune of a million or more in premium a year, happened to
have an eighteen year old son who drove a Corvette who could not get coverage
elsewhere, who do you think ended up insuring him? You got it. We had bunches of that
kind and, as a consequence, the loss ratio for this book had a tradition of being horrible.
Finally we had another outlet and the newly named Wausau Underwriters Insurance
Company (formerly Volkswagon Insurance Co.) was the answer.
For the first few years those in our company who did not think this purchase was wise
appeared to have their conclusion validated. Wausau Underwriters did not seem to be
able to break out of the red. John had established two requirements of us. One was that
the company was not to be gutted, as is often the case with an acquisition, but that we
were to make maximum use of their experience while molding their staff into the Wausau
personality. The other was that its president with all his administrative responsibility
reported to John directly while I was held responsible for its operating results. Again, a
little awkward, but it seemed to work because of the people involved. It therefore
probably took longer than it should have to bring the company around but, every year,
things looked better. There is no question in my mind that we were close to achieving
success when the bad times began. At the time Wausau was taken over by Nationwide,
Wausau Underwriters was sold and then changed owners a few more times and is
currently operating, very successfully, as the personal lines division of the Great
American Insurance Company.
18
The next acquisition was American Marine Underwriters in Miami. A small ocean
marine brokerage house; it was owned by an individual that had been a friend of John’s
in past years. They too needed financial help and John considered them a good addition
to our panoply of activities. This time more of our staff did not feel this was a good
thing. I was the exception. Having started in the ocean marine business, I was as
fascinated by the type of activity they engaged in as I knew John was. In this instance
also he retained administrative responsibility for them while they reported to our Property
Insurance Vice President for their operational results. They too stayed in the red for
many years and, I don’t believe ever really got out of it. The saving feature was that their
income was not all that significant and neither were their losses.
Both of these first acquisitions produced business that did not as a general result bring in
the kinds of large, multi-million dollar losses that our other property and casualty lines
did and were therefore never to my mind a serious threat to the company’s financial
condition.
Then came the establishment of Wausau International, Inc. But, before we get into that I
have to give a little history on what I think may have led John into going into that most
murky and hazardous insurance field - the Excess and Surplus Lines market. For many
years we had done a fair amount of business with an E&S broker in Chicago, Bowes &
Co. This relationship had started in the late forties between Al Papenfuss and Mr. Bowes
and had continued with the son Mickey Bowes. An E&S broker specializes in the
placement of difficult and extra hazardous risks. Insurance companies have need of their
services when they are faced with insuring a company that might have, as part of its
operation, a particularly risky portion. As an example, a large general contractor insured
for Workers Compensation and Liability insurance might have a small subsidiary that is
in the business of delivering explosives to other contractors. When insuring such a
concern, the insurance company might not want to take on that part of the operation so
they place its coverage separately in the E&S market, usually at higher premiums than
they could ordinarily charge.
While Mr. Schlueter was president, Mickey Bowes came to us with a request. As part of
his operation he had been underwriting and issuing fire insurance policies that insured
less than desirable personal and commercial properties in the Chicago area. The
company that he was using for that purpose had decided to no longer continue with that
program. Would we be interested? Here again was the question of giving someone else
our pen. However, after careful study of the program we found that it had been
profitable. More important, the underwriters at Bowes were experts in handling that class
of business, they had good reinsurance in place for it and losses had not only been few in
numbers but, when occurring, were limited to fixed amounts. We would not be faced
with the unknowns of large future liability claims. We agreed and Bowes started writing
their policies in our name. The program continued successfully and they and we were
happy with the results.
19
Some time during John’s second year at Wausau, he stormed into my office one morning
livid with fury. I had never seen him that mad. He wanted to know who had approved
letting a Chicago broker write fire policies in the name of Wausau Insurance. I didn’t
even try to explain that, during the course of briefing him on all our activities, the Bowes
connection had been described. In fact we had even visited them and John had been
impressed with their underwriting capabilities. Instead I got him cooled down by going
over the history of the arrangement and its continuing success. Then I discovered what
had his ire up. That morning the insurance press had announced the sale of Bowes and
Co. to a large London broker. This particular broker had had a run-in with John while he
was at Atlantic Mutual and John had promised himself he would never do business with
them again only to find they now owned a company that was using our name! Although
our business with the Bowes office continued for some time after, John never got over
that and I’m convinced it planted the idea for him to create our own E&S facility.
When he came to us with this idea I don’t think there was one of us on the staff that liked
it. We pointed out numerous problems. In addition to getting into an area in which we
had no experience, it would create conflicts of interest within the company. Working
through an outside broker kept these E&S placements at arm’s length. Now they would
be in our own house and we could foresee marketing and sales problems. Furthermore we
knew that his new facility would become involved in very high-risk business subject to
the potential of large losses and the need for great amounts of reinsurance. But John
showed another side of him, a certain stubbornness that had him go ahead anyway. He
hired a young E&S underwriter he had known in N.Y., Jim Hernandez, who established
the company and headquartered it in an office in San Francisco.
It soon became apparent that this young man was something of a prima donna, quite
different from what we were used to. He drove a BMW convertible, selected the most
expensive office space in downtown Frisco and furnished it as though he were president
of General Motors. Our San Francisco regional manger was so upset when he first
visited that office that he prohibited any of his regional employees to see it. None of this
seemed to bother John all that much because Hernandez had him convinced that this was
the way one had to operate in the volatile and high-flying E&S market. Unfortunately, a
few years after setting up the operation he became seriously ill and died. In the interim
his office had put in place a large number of contracts covering very hazardous
commercial exposures, including asbestos and pollution risks, and reinsured us in below
standard reinsurance companies – but more on that later.
There were some other acquisitions and expansions but these three were the largest in
scope.
Next came the building of the conference center and the depot, another successful effort
to put Wausau on the map as a major player in the insurance industry. From time to time
I couldn’t help but get the impression that he was sending a message to the Atlantic
Mutual, “See what I can do!”
20
At this point it might be in order to describe another side of John Schoneman that began
to show itself. Thirty-five miles south of Wausau, in Stevens Point, is located the Sentry
Insurance Co. Like Wausau, Sentry is a mutual company whose original name was
Hardware Mutuals and it had its beginnings along similar lines. It was quite a bit smaller
than Wausau and, at the time of Schoneman’s arrival, had a similarly charismatic leader
heading it. It’s Chairman, John Jonas, had made headlines by building a fantastic new
home office structure which appeared to float above the pine forests on the outskirts of
the city like a huge flying saucer. The complex contained a five-star gourmet restaurant
open to the public and a beautiful masters-class golf course. But he didn’t stop there. He
also had his company buy a number of non-insurance businesses including potato farms
and radio and TV stations. To cap this spectacular show, he had a hangar built at the
local airport and acquired a G2 jet, the largest non-commercial jet aircraft available at the
time.
These activities did not go unnoticed by Schoneman. John also decided we needed
corporate aircraft and leased two, a King Air propjet and a Cessna Citation 1 jet. To
service this small private airline a hangar together with offices and reception areas was
built at the Central Wisconsin Airport and a chief pilot and four pilots were added to the
company’s payroll.
The King Air was used as a shuttle, flying from Wausau to
Milwaukee and Chicago on a regularly scheduled basis and was available to all
employees for legitimate business purposes. In this manner it was a great boon to our
travel because of being able to make quicker and easier connections at those major
airports than having to rely on the local feeder airlines.
After one year the Citation was traded in for a later, Citation 2, and was used at the
discretion of the chairman and the president. Other officers could use also it if it was not
in use by a higher ranking one. It was quite common to accommodate other employees if
the jet happened to be going to a destination of theirs on a timely basis.
Although greatly appreciated by those who were able to use this perk, there were mixed
feelings by many in the company. On the one hand they were proud to be able to show
their business acquaintances how far Wausau had advanced into the modern world, on the
other; they couldn’t help but wonder how we were able to afford this luxury. When you
are repeatedly told that this is not an extraordinary expense but rather, in many ways, is
saving the company money, how can one argue against it?
It so happened that a custom had been established over the years that had each of our
companies, entertaining the officers of the other once a year, taking turns. One year
Sentry would host a luncheon or dinner at their country club for our officers and the next
we would do the same. When the two Johns got into the act, these annual get-togethers
began to escalate in opulence. The ice sculptures at the buffet table got bigger and bigger
and the entrees more and more elaborate. What was going on? It started to become a
joke between the employees of the two companies – John was trying to outdo John. And
that led to mounting concern that we had a battle of egos in progress.
21
One of those who evidenced early concern was Lowell Tornow. He and I would have
friendly arguments about what was happening. I would defend John and note that he had
brought a huge breath of fresh air into the company and that it was an awakening lion.
Lowell would take the position that this was very well and good as long as we “kept our
eye on the bobber” and concentrated on our financial strength. But for a few years life
was very good indeed and neither of us foresaw the storm clouds that were gathering.
In the late seventies it became evident that the industry was embarking on another price
war and by the early eighties a “crisis” in the P-C industry again appeared imminent.
Competition had again begun to become vicious, as it had in the mid-seventies.
Competing markets were slashing premiums at an unprecedented rate. To make matters
worse, some ugly new types of losses were beginning to appear. Asbestos reared its ugly
head and pollution and the environment became concerns for corporate boards. One
additional thing had us particularly worried. Our bread and butter product, Workers
Compensation, was developing bad results across the country. This was a product that
produced a major portion of our income and had traditionally been a good profit maker
but that seemed to be changing.
In the fall of every year the company went through a great effort to establish next year’s
budget and develop a business plan. All departments were involved in this process that
took many weeks of laborious work. The results of this effort were presented to a general
management meeting in September and set out the behavior of the company for the next
year in all its aspects – marketing, expense control, advertising, pricing development,
product changes, etc.
As usual, this process had been gone through in 1982 and culminated in Lowell and I
pulling the plan together for presentation to the management. As we did this, we realized
that it would simply be impossible for the company to make a profit during 1983. When
all the data available to us was factored in, it was obvious we were going to have a
difficult year. At that September’s meeting which all the company officers and all
regional and department managers attended, Lowell and I gave our reports, which
concluded in our planning for a 3% loss.
When we were done John came to the podium and after a tense moment of silence he
suddenly announced that our plan was unacceptable. As far as he was concerned we
could scrap it and the new plan was that we would make a 3% profit in 1983 and that
terminated the meeting. Lowell didn’t say a word but I could tell that, like me, he was in
a state of shock. As we were walking back to our offices we looked at each other in
consternation. Lowell said, “How in the hell are we going to do that?” I hadn’t a clue.
Then he made a thoughtful observation. “You know, Ron, this is going to force us to do
some wrong things. It’s pointing us in the wrong direction. If we were planning for a
loss we could react accordingly and take the necessary steps to diminish future problems,
but now …. ?”
No matter how hard we tried to change John’s mind, he refused to budge and we went
into the next year with a wrongly skewed plan.
22
The competitive climate worsened and we began to have ever-greater difficulty in
maintaining our premium levels while at the same time dealing with a worsening loss
ration in most lines. I remember speaking to a meeting of our regional underwriting
mangers that fall asking them to “do what you have to in bringing pricing to competitive
levels so we can keep our good business and bring in some new but, for God’s sake, keep
our underwriting standards high. Don’t insure those risks that we know are going to
expose us to either a frequency or severity of loss.” The intentions were well meant but
the practicality of carrying them out was unrealistic. A competitor reported to a
newspaper reporter that Wausau had been “the leader in price-cutting” and had “collected
more premium income in relation to its surplus than most other companies.” I didn’t
agree with him on the first comment because, although we were pushing hard to retain
our business by meeting price competition and adding new business at unrealistically low
premiums, we sure were loosing a lot of good business to competitors who were also
using unrealistic pricing. On the second point he was, unfortunately correct and our
premium to surplus ratio was beginning to deteriorate.
Even though our Workers Compensation experience had also shown signs of worsening,
we were surprised to hear at the end of 1982 that our actuaries had recommended
reducing the reserves for that line by 30 million dollars. Both Lowell and I questioned
John about that action although we appreciated its beneficial effect on our year-end
figures. But we were assured that the reduction in reserves was warranted and I took that
as good news; that things were looking up.
As we went into 1983 our loss reserves, as determined by our actuaries, started to creep
up. In malpractice insurance alone, although we had canceled all this business in 1974
and had collected no premium for ten years, the claims submitted this year were reserved
at 35 million dollars. Month by month our loss ratios worsened and pressure for reserve
increases mounted. Part of that year’s loss was offset by the company taking 109 million
of excess money out of its pension fund after discontinuing the fund and buying annuities
to cover employee pensions. Even so, our year- end figures were a disaster, a loss of 204
million with a combined ratio of 138.7, bad enough for others to take note.
A.M. Best & Co. started looking at us, our brokers were beginning to ask questions and
inquiries from insurance departments began coming in. New York again was especially
interested in our status. I believe John visited Best & Co. a couple of times and started
having meetings with the Wisconsin insurance department. This, unfortunately, created a
new problem. For some reason or other John did not get along with the folks at Best and
we heard this development was not going to help us in maintaining a friendly relationship
with that company. Worse yet, he got in a squabble with one of the Wisconsin
department’s officials. I believe it was a woman who was deputy commissioner or some
such. In any event, they did not hit it off and we suddenly were faced with an
antagonistic department in our own state. The situation that had existed in 1975 was not
going to repeat itself. Best & Co. was unfriendly to us and our insurance department was
not going to protect us.
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As our ratings dropped, first to A then to B+, the brokers began moving their customers
elsewhere. Keep in mind that by then about 50% our premium was coming from broker
produced business. As premiums dropped our situation worsened but, even more
disastrous, was our continuing increase in loss reserves. With the premium to surplus
ratio worsening while our reserves seemed to be skyrocketing we were between a rock
and a hard place. We couldn’t understand what was happening. I used to sit in Jerry’s
office, next to him at the computer, while he kept reviewing the changes that were now
occurring on a daily and weekly basis and he too couldn’t quite believe what the figures
were showing. He kept telling me, “It has to bottom out and begin turning around.” It
didn’t! It seemed we were in a downward spiral that we were unable to stop. All the bad
effects were feeding off each other. The more we tried to compete with lowered prices
the more premiums fell while the surplus was being reduced at as fast a rate by the
alleged need for ever increasing loss reserves.
I remember at a special meeting of the board called in Milwaukee at the Pfister Hotel I
saw our chief actuary sitting in the anteroom to the meeting that evening waiting to be
called in and I asked him, “Ron, what the hell is happening to us. Did we have any
inkling that this was going to happen?” He didn’t answer me. What I had not known,
and I don’t believe Lowell Tornow and other company managers also were unaware of is
that in preceding years the company had taken a bad direction in how it established its
reserves. It was customary, when our actuaries calculated reserves each year, for them to
be subject to a minimum and maximum range. These ranges were established by the
“outside” actuaries who were contracted with by the company to review and sign off on
its reserves, as required by state insurance departments, in the same manner and for the
same purpose as an outside accountant reviews and approves the annual statements of a
corporation. It is now my understanding that someone responsible for determining the
final figures had, in almost every instance, selected the minimum level.
Who that
someone was I don’t know. It could have been some finance committee at the Board
level or possibly John Schoneman himself. Considering that the company was
financially weak, this was an inadvisable albeit legally acceptable, business decision.
As 1984 opened a major effort was made by John and the board to find a solution. There
were discussions of de-mutualizing, the process where a mutual company turns itself into
a stock company which would then have the advantage of selling stock to raise capital.
But who would want to invest in a troubled company. And, anyway, it was much too late
to start that lengthy and complicated process. Bankers were called in and other searches
for an influx of capital were made. All was too little and too late. It was obvious to us
that the Board was panicking. Then John did something that mirrored what he’d done at
Atlantic, although, I’m sure, for a different reason. He offered his resignation at a board
meeting. I was sitting outside the meeting room when this occurred and watched as he
came out of the room. He was pale and with a tone of disbelief he told me they had
accepted his resignation!
Now began an unbelievably stressful and confusing time for all of our other managers
and me. Left at the helm was Jerry, Lowell and I. It quickly became obvious however
that none of us were going to be involved in what the board would do next. As best as I
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could tell, the people picked to look for a solution (which at that time appeared to be only
the possibility of another company taking us over) would be our chief accounting officer,
our chief actuary and a local businessman who was a board member. Their meetings
were behind closed doors which none of us were invited to. The day-to-day operation of
the company continued but we were not allowed any access to what was happening with
its financial condition.
Sometime in the middle of this process the board announced the appointment of a former
director of the company, who had been the CEO of a major Wisconsin Corporation
Insurance, as its new Chairman. He took over the operation of the company. I hadn’t
thought things could get worse from a daily operations standpoint, but they did. I’m sure
he was a shrewd and experienced manager but he had absolutely no knowledge of the
workings of an insurance company. Nothing we tried was acceptable. All decisions were
made on the spot and with little or no consideration for their effect on our business and
the company’s people. It wasn’t long after that Jerry Viste took early retirement and I
followed him almost immediately while Lowell stayed on because he was quite a bit
younger.
Not long after our departure the announcement was made that the Nationwide Mutual
Insurance Company was going to take over Wausau. They did this by giving our
company 250 million in “surplus notes” and replacing our board with one of their own.
Since they now “owned” the company they had, in effect, given themselves the 250
million. They must have thought it was a good deal – time would prove them wrong. It
should be noted that the press at the time and also later when Liberty Mutual took over
from Nationwide, kept referring to Wausau Insurance having been “bought”.
“Affiliation” is a better term for the relationship that was brought about. A mutual
insurance company cannot be bought because its policyholders own it. However it can
be controlled through a change in its Board of Directors as was accomplished by
Nationwide and then by Liberty.
At the time this all happened I was critical of the cabal that had maneuvered us into that
position. In retrospect I have to agree they were instrumental in “saving” the company.
Many employees retained their jobs and the company continues in operation but it is no
longer Wausau Insurance no matter what they may call it – that company is gone forever.
So, what can I conclude from all this and what “what if?” games can I play? Others may
disagree – so be it, but here are my thoughts:
With rate deregulation the insurance industry engaged in self-destructive competition
causing many companies to go to the brink. Many failed; Wausau was not alone in that
respect. Over 400 property-liability insurers failed during the period from 1984 – 1993.
(Wharton Institute study 2003). Wausau’s underlying financial condition was weakened
because of an extremely bad product consisting of years of malpractice coverage.
Wausau had also expanded into the brokerage arena having it loose control over half its
business. These things were in place before John Schoneman arrived.
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John’s expansion activities spread the assets of the company thin. But, except for the
Wausau International experiment, in and of themselves they were not significant enough
to create the terrible financial crisis the company had to deal with during 1984 and 85.
When the second down cycle started, the company was even further weakened. I don’t
know to this day if John simply didn’t understand our underlying financial weakness.
Had he done so, would he have made other, more reasonable decisions in choosing
reserve levels; or was he misled, possibly by other factors, to make the company look
better that it actually was?
What if the board had selected Jerry Viste or Harold Bliss instead of Schoneman? The
expansions into other businesses would likely not have occurred. Both Jerry and Harold
were brought up in the Wausau climate and I’m sure would have been much more
conservative. Our relations with the Wisconsin Insurance Dept. would have remained
favorable. Could we have survived the second cycle?
It is interesting to note that Sentry Insurance did. John Jonas retired and their new CEO
got rid of all the extraneous acquisitions, tightened the company’s belt and rode it out.
They had a very tough four or five years but they survived and retained their identity.
I’ve been told that, in the end, our all-time malpractice losses totaled one billion dollars.
I don’t have any information on our reserves or actuarial activities during the last couple
of years just before and immediately after Nationwide took over so it’s impossible for me
to say if we could have salvaged the company had things been done just a little
differently. However, what is scary is that, when Nationwide turned the company over to
Liberty they retained a large block of Wausau’s outstanding claims that had resulted from
discontinued operations. In fact, they took one of their subsidiaries, Nationwide
Indemnity Co., and assigned it the job of running off those claims which at that point
totaled 1.4 billion dollars, that’s right, billion. Included in this was $646 million in
asbestos and environmental claims alone.
I don’t know what the breakdown of these claims is. How much came from the Wausau
International fiasco? How much from our core business? I’ve been told another problem
was our reinsurance department. This department, although small in size, controlled a
sizable book of insurance resulting from, in earlier years, having entered into a number of
unprofitable reinsurance arrangements. Reinsurance is the insuring of the losses suffered
by other insurance companies and when the other companies got into trouble our
company was faced with large numbers of uncollectable reinsurance claims. Maybe
others who read this have the answer.
So, was John Schoneman responsible for the company’s demise? He certainly should
take the blame – he was the captain of the ship when it went down. Many years later I
wrote to a friend, “All of the former leaders of the company were interesting individuals,
each with their own unique approach to its captaincy, each different in manner and style,
strengths and weaknesses. But none was more charismatic than John Schoneman. He led
the company to its highest level of growth in national and international insurance activity
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– and to its lowest depth of financial downfall.” But I can’t believe he could have had
any idea this could happen if there hadn’t been some hidden, unrecognizable, cancer
gnawing away at the company’s health. The decisions made in the 40’s were the onset of
that cancer. No one recognized its dangers until it was too late. Wausau Insurance was
already in a weakened state when it went into battle against an influx of claims arising
from unexpected quarters and a viciously competitive industry. And that was the end of
its story.
Reinhold “Ron” Klein, Wausau, 2006
Acknowledgements:
A number of former Wausau Insurance employees have read this essay and some have
indicated corrections and made suggestions. This is to acknowledge their interest –they
include Les Baumer, Harold Bliss, Roger Drayna, Richard Gehrt, Tom Green, Roger
Hackbarth, Floyd Hallberg, John Jones, Jim Lundberg, Jay Maze, Jerome Scheibl, Oliver
Schultz and George Whaley. Most were home office employees but some were from the
company’s regional offices. The consensus has been general agreement with the historic
data and the basic concept. Some blamed the company’s demise to a greater degree on
John Schoneman, Some; in fact, feel he was entirely at fault while others continue to
puzzle with me over the financially related causes of the final downfall. Regardless of
the weight one could give to those whose opinions are at variance, I thank them all.
It is well, however, for the reader to keep in mind that all of them including myself are
getting along in years and the events described happened a long time ago. I remember
hearing Chuck Yeager, in his eighties at the time, telling Dr. Schuler who was also in his
eighties, during an interview at the Crystal Palace, “Keep in mind Doctor; the things I
remember ain’t necessarily what actually happened.”
After word (06/01/2010)
Since my last amendment of this paper I’ve had an update on the total losses that have
been settled on Wausau’s behalf. Malpractice losses appear to have topped out at one
billion while all others increased to one billion. These figures do not include another half
a billion in allocated and unallocated expenses. In my opinion without the malpractice
losses we could have survived the 80’s crisis. One day in January of 2009 Liberty Mutual
announced the elimination of the title “Wausau Insurance” from their organizational
chart. The day before all signage at the Wausau location showing this name had been
removed. The combined words of “Wausau” and “Insurance” no longer have eminence
but only historical significance.
I hold no rancor toward Liberty. They have the right to do what they wish to meet their
own goals. Certainly, when Wausau took over other companies, we did the same. Their
former name was eliminated and they were blended into the main body of our company.
From everything I’ve heard. Liberty has treated the remaining Wausau employees fairly
and even the old Wausau retirees; the latter benefiting from the same pension
improvements offered to Liberty retirees. I wish the Liberty Mutual organization well.
After, after word (10/12/2011)
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On April 27, 2011, 170 years after its birth on April 11, 1842, the Atlantic Mutual
Insurance Company, former employer of Mr. Schoneman, was forced into liquidation.
The cause of its failure – excessive Workers Compensation insurance claim losses!
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