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Adventures at the Frontier of Corporate Governance: Part IV, Conference Call

|Includes: Fremont Michigan Ins (FMMH)

(Continued from Part III)

That evening, I thought about the events of the day. Although I was insulted that Dick hadn’t brought Skip and Kent, I wanted to give him the benefit of the doubt. Maybe it had been an honest oversight. So, I resolved to stay overnight in Detroit and give Dick a call in the morning to give him another chance to keep his word.

The next day, Dick and I spoke on the phone, and I related how my family and I do business on a handshake and that relationships are based, at their core, on trust. I said that I wanted to give him another chance to keep his word, saying that I believed he had made an honest oversight the day before. I suggested that he send Kent and Skip to meet with me in Detroit.

Dick quickly disabused me of the notion that it was an oversight. He said that it was an almost three hour drive to Detroit, and that it would be a real inconvenience for Skip and Kent. I was so offended.

I said, “Dick, I took the whole day, flying up from Florida, then driving two and half hours from Detroit for this meeting, with the clear expectation that Kent and Skip would be present. If I knew that you were going to break your word, I would have never gotten on the plane in Florida. I even spoke to Kevin Kaastra as I was getting on the plane, and he did not mention anything about Skip and Kent not coming to the meeting. After I spent the whole day traveling, for you to say that a three hour drive for them is an inconvenience—an inconvenience that they would never have been subjected to had you brought them in the first place—that is just totally insulting. However, I am prepared to meet them half-way between Detroit and Grand Rapids as a gesture of good will. Relationships are based upon trust. If you don’t keep your word, how am I supposed to trust you? Do I need a written contract from you every time we arrange a meeting?”

Dick was unmoved by my call for fair treatment. He unequivocally said no to meeting half-way. Maybe we could do a conference call today with Kent and Skip, he suggested. I told him I wasn’t happy about it (why did I need to fly up from Florida for a conference call?), but if that’s all he was willing to do, I would take it. Some hours later, Skip, Dick, Kent, and I were on the phone together.

Conference Call with Skip, Dick, Kent, and me

As before, in the interest of brevity, I will summarize the main issues by importance, not chronological order, leaving out the myriad tangents the meeting deteriorated into.


I asked Kent and Skip the same question I had posed to Dick and Kevin:

I asked them if they could give me one example of a leveraged financial institution growing a business line in the face of losses and that turning out well. To make it even easier, I said they could give me any example from the past 100 years.

Kent and Skip both said they couldn’t think of one. When I pointed out the foolhardiness of them pursuing a strategy which they could think of no example of ever working, Kent brought up a local firm which had grown a line as a loss leader, but when challenged, conceded that it wasn’t really an example, since Fremont’s stated goal was to make underwriting profits.


Early in the conversation, Kent discussed that Fremont had very aggressive (I think he meant conservative) enterprise risk management. Much later in the the call, I challenged that assertion. First, I asked for his calculation of Fremont’s premium to surplus ratio. After some back and forth with Skip over different methodologies, he said their ratio was at 1.74. I said to him that 1.74 was totally unacceptable.

As COO, how could he ever allow this to occur when personal lines, which accounted for the vast majority of Fremont’s net premiums earned, were losing money? He hemmed and hawwed, then went on the attack. He asked what I thought the premium to surplus ratio should be. Should it be at 1? I told Kent that when Fremont was losing money in major lines, that the premium to surplus ratio should never be approaching 2. I gave him a clear guideline demanded by conservative risk control. When the company is making very low combined ratios, perhaps the premium to surplus ratio can rise a little, but it should never get to 2. When the combined ratio was suffering in major lines, conservative risk control demanded that the premium to surplus ratio drop, perhaps towards 1.5, or even lower.

Then Kent said something which absolutely terrified me. He said the premium to surplus ratio was nowhere near 2.

When faced with this type of illogic, it is always key to allow the other person to define the boundaries of reality, rather then tell him that I believe he is nuts. I humored Kent. OK, Kent, what number, in your mind, is getting close to 2? He replied that 1.8 would be getting close to 2.

Wow, in Kent’s mind, Fremont’s 1.74 is not close to 2, but 1.8 is getting close to 2. Interesting. And he’s COO of a public company.


Skip was possessed of similar powers of logic. After I argued that Fremont needed to stop growing any line which lost money over 12 months, for two years until the problem was successfully remedied, Skip whipped out his “long term” argument.

Skip argued that since insurance was cyclical, one needed to see five years of results in a line before knowing if strategy was right or wrong. Clearly, without five years of results, Fremont should not stop premium growth.

This was too much for me. I told Skip that the conclusion he was drawing from his point was logically asymmetric. If the company needed to see five years of results, before being sure a strategy was right or wrong, wouldn’t that also mean Fremont would need to see five years of profits before determining that it was prudent to grow personal lines? In any case, I told him he that he was out of touch if he thought shareholders would accept five years of losses. GEICO and Progressive didn’t need to lose money for five years in a line before realizing their strategy needed serious changes. Do we really need half a decade? In insurance, five years of losses can kill you.

Skip didn’t seem to have a clear answer.


I was struck by how emotional Skip seemed. At one point in the conference call, he started loudly calling me names and making strange accusations. He called me a “wordsmith” multiple times and claimed that I must have a lawyer on the line.

“DO YOU HAVE A LAWYER ON THE LINE?” he demanded to know. “It sounds like you have a lawyer on the line!”

“No Skip, I don’t have a lawyer on the line,” I replied. “I try to say things in way that is logical and would bring credit to my arguments anywhere. I have nothing to hide. Feel free to repeat anything I say, since everything I have said to you in this call, I say to everyone. I stand by everything I advocate for Fremont, both publicly and privately.”

Skip again called me a wordsmith. I had to ask him two or three times to please stop calling me names, and observed that, for him, our discussion seemed like an emotional issue, rather than a business issue.

I thought this was a teachable moment for Skip.

“Skip, it is very important for you to understand that people can have principled, sincere disagreements with you, which are based up on facts and company results. You don’t have the right to call me names and make ridiculous accusations, just because we disagree.”

[I can only imagine how Skip behaves when his colleagues disagree with him. Can Fremont truly have an open exchange of ideas and ways to improve the business, when Skip behaves in such a manner?

I hope Skip only makes personal attacks against me and never against other employees, but if this is a how he behaves with an investor who he has never met, I can only imagine how he would behave with subordinates and peers. I have never before personally heard such an unprofessional outburst from any other executive at a public company.]


Kent had a major concern. How would I propose reducing premiums without upsetting agents?

[Mea culpa here. His question was a bit more drawn out, and I interrupted him a couple of times, since I had laid out the exact turnaround plan in detail in writing two or three times. In addition, hadn’t Dick related anything about our meeting the day before?]

I asked Skip if he had read my blog, or any of my articles on [which I had emailed to him] where I laid out my plain multiple times point-by-point.

I replied, as I had the day before:

  1. Send executives to under performing agencies, asking them to cancel their contracts. Since Dick had admitted the day before that the vast majority of agents cancel their contracts when asked, it is a great solution, which no one could object to..

    The under performing agencies are gone, while the agents with good loss ratios are kept, bringing down the average loss ratio and not upsetting good agents.

  2. Then, do a sale and lease-back of the headquarters, thereby freeing up capital that can be used to expand to Indiana, where personal lines could be rationally priced.

This conference call ended on a funny note as well. As before, I felt that the executives did not have clear, logical answers for not accepting my plan to turn around Fremont’s personal lines.

After thanking them for their time, I encouraged them, as Charlie Munger once said, to “Think about it a little more, and I think you’ll agree with me, because you’re smart, and I’m right.”


Disclosure: Harry Long owns FMMH shares directly, through partnerships, and through trusts. To the best of his knowledge, certain of his family members own FMMH shares through partnerships and trusts. Such ownership may change at any time.