American Premier Underwriters, Inc.
American Premier Underwriters, Inc.
Incorporated: 1846 as Pennsylvania Central Railroad Company
Sales: $1.8 billion
Stock Exchanges: Boston Midwest New York Pittsburgh Pacific
SICs: 6331 Fire, Marine and Casualty Insurance
Although property and casualty insurance company American Premier Underwriters, Inc. adopted its current focus over the past few years, the company has a history of over 150 years that reflects the development of the national transportation and commerce industries. In the nineteenth century, the company gained renown as the Pennsylvania Central Railroad Company. Developing into a highly diversified conglomerate, the company was known as The Penn Central Corporation from 1978 through March 1994, when it dropped its well known rail-related name in favor of a title that more accurately described its business activities in the 1990s—property and casualty insurance.
The Pennsylvania Railroad Company and the New York Central Railroad, which merged in 1968 to form the Penn Central Transportation Company, were the two largest railroads in the United States and traced their histories to the early 1800s. The Pennsylvania Railroad, or “Pennsy,” as it became known, had first linked the Atlantic seaboard with the tributaries of the Mississippi River system in the 1850s. During this time, Pennsy grew so powerful that it called itself “the Standard Railroad of the World.”
The Pennsylvania Railroad Company was incorporated by the Commonwealth of Pennsylvania in 1846 with a capitalization of $10 million. Formed by a group of Philadelphia businessmen and politicians who hoped to link the City of Brotherly Love to the bustling commerce of the West, the railroad paid a dividend in 1848, the first of an uninterrupted series that lasted until the Pennsylvania Railroad was absorbed into Penn Central in 1968.
Pennsy’s principal investors were primarily involved in industries that would benefit from the railroad, and none devoted their full attention to the Pennsy. The company’s first president, Samuel Vaughn Merrick, had no specialized knowledge of railroads, and he soon hired J. Edgar Thomson, a chief engineer with 20 years of railroad experience, who was known as one of the nation’s leading railroad experts. Thomson soon proved so valuable and knowledgeable that he could virtually run the railroad without his superiors. Merrick resigned in 1849, and after continued conflicts with new president William Patterson, Thomson led a successful coup in 1852 that culminated in his election as chairperson and president. That year, the Pennsy completed its initial 30-mile line from Harrisburg to Pittsburgh.
Thomson quickly set out to realize his ambitious plans for the Pennsy. After legislation was passed permitting the purchase of interests in other railroads, Thomson acquired stakes in four small, struggling lines in Ohio and Indiana. In 1857, he completed three years of negotiations to purchase Pennsylvania’s Main Line railroad for $7.5 million in bonds, making the Pennsy the state’s premier rail system. During his 20-year tenure at the Pennsylvania Railroad, Thomson increased the railroad’s trackage from 350 to over 1,000 miles and its gross revenues from $2 million to over $22 million annually. By the onset of the Civil War, the Pennsylvania Railroad had expanded from Pittsburgh through Fort Wayne and on to Chicago, with access to virtually all of southern Ohio, Indiana, and Illinois.
In 1872, Thomson created The Pennsylvania Company, a holding company organized to manage the system, which by this time extended along the East Coast from Jersey City to Washington, D.C., went as far west as St. Louis, and featured northern destinations in New York and Mackinac City in Michigan’s upper peninsula. That year, the respected railroader died at the age of 66 and was replaced by a close ally, Thomas Scott, formerly senior vice-president of the Pennsy. Scott managed the railroad during an eight-year period during which stockholder concerns about overextension prevented further expansion westward.
During this time, the Pennsy’s future partner, New York Central, was also gaining prominence. New York Central was created from the 1853 consolidation of ten separate short lines under the direction of merchant-financier-manufacturer Erastus Corning. Unlike the Pennsy, however, the New York Central had a rocky start; Corning regarded the railroad as an extension of his own businesses, and his self-interest stunted the railroad’s early development.
The New York Central began to realize greater success after the presidency was assumed by Cornelius Vanderbilt in 1867. Known as the Commodore, Vanderbilt was an esteemed speculator and one of the wealthiest men in the United States. Using his own railroad holdings to close off the New York Central’s vital link to New York City, Vanderbilt forced the Central’s stock prices down. He then took advantage of the low stock price, purchasing 87 percent of the stock and capturing the presidency. After Vanderbilt’s death in 1877, son William Vanderbilt assumed the presidency, overseeing expansion in the form of several important acquisitions, including that of the Nickel Plate Railroad in 1882. During this period, financier J.P. Morgan earned a seat on the board of New York Central and soon became a key figure in American railroading. William Vanderbilt resigned in 1883 and selected James Rutter as his successor. When Rutter died suddenly two years later, a younger Cornelius Vanderbilt assumed the presidency. Chauncey M. Depew, a lawyer and lobbyist, replaced Vanderbilt in 1899 and served until his death in 1928.
Neither the New York Central nor the Pennsy expanded its routes substantially in the early years of the twentieth century, in spite of the unremitting shift of economic power from the East Coast to the West and South. Due to government regulation and mutual agreement, the two railroads had largely curtailed their previously cutthroat competition. At this time, the New York Central had almost twice as much trackage as the Pennsy, while the latter moved more freight and people. New York Central controlled almost every important anthracite coal carrier in the region, and the Pennsy dominated bituminous coal commerce.
The Pennsy reached the apex of its power during the presidency of Alexander Johnston Cassatt (brother of painter Mary Cassatt), who succeeded Frank Thomson after his death in 1899. Trained as an architectural engineer, Cassatt concentrated on enhancing the railroad’s capacity for transporting people and goods. Within seven years, he invested almost $500 million in improvements and additions, including the quadrupling of the trackage between New York City and Altoona, Pennsylvania. Cassatt’s greatest accomplishment, however, was extending the railway directly into Manhattan. Before 1910, New York bound passengers ended their rail trip on the Pennsy at Jersey City, where they transferred to ferries for the trip across the Hudson River to New York City. In 1900, the Pennsy purchased control of the Long Island Railroad and undertook construction of an underground railway from New Jersey under the Hudson River to a terminal in New York City and under the East River to Long Island. Construction of this costly, complicated project commenced in 1904, and the first trains arrived in New York’s Pennsylvania Station in 1910.
From the 1860s until World War I, the rail industry held a virtual monopoly on ground transport, and the Pennsy and New York Central dominated transportation in the East, where industry was central and freight and passenger traffic was greatest. To link Chicago and New York, both railroads built luxurious, first-class lines, the opulence of which symbolized their dominance in the industry.
However, for most American railroads the advent World War I meant high labor and maintenance costs and artificially low rates, which forced them to borrow to maintain lines and order new rolling stock. During the global conflict, the federal government assumed control of all railroads in the country to coordinate them for the war effort. These events precipitated a shake out in the rail industry after the government relinquished control.
Moreover, beginning in the 1920s, the establishment of highways and the trucking industry began to challenge the railroads’ monopoly on inland transportation. Despite technological advancements in electric and diesel locomotion, rail transportation had several disadvantages in competition with trucking. For example, railroads were forced to maintain large, expensive freight yards in all major cities, and were less flexible than the trucking industry. To offset its losses, the Pennsy began to purchase passenger bus companies in the late 1920s, taking an equity position in the Motor Transit Corporation (which became the Greyhound Corporation and adding 8,000 route miles to the eastern bus line. The railroad also made its services more versatile through the acquisition of several trucking companies during this time.
The diversion of traffic from rail to road accelerated in the 1930s. Although gasoline and rubber shortages during World War II temporarily reversed this trend, the use of trucks and buses continued to increase in the post-war era. Nevertheless, in the 1950s the Pennsylvania Railroad was America’s largest transportation business, as its more than 10,000 miles of tracks linked New York City, Chicago, and St. Louis, three of the nation’s largest commercial centers. In 1956, Fortune magazine noted that the railroad’s assets totaled over $3 billion, significantly more than the second largest transportation company, the New York Central, whose assets topped $2.5 billion. Only three of Fortune’s 500 largest industrial corporations reported more assets than the Pennsy.
Nevertheless, the financial security of the Pennsy and New York Central during this time began to weaken. Robert Young, a leader of the Chesapeake and Ohio Railroad, had begun amassing shares in the New York Central in preparation for a takeover in 1946 and was rebuffed two years later by the Interstate Commerce Commission (ICC), which was wary of railroad monopoly. In 1954, Young made a second, more blatant overture: after garnering 15 percent of the New York Central’s equity, he launched a dramatic proxy fight with then-chairperson William White. White and Young launched campaigns—complete with slogans, buttons, and public appearances—for control of the railroad, and Young won the contest by more than a million proxies.
The new, relatively inexperienced chairperson brought in Alfred Perlman as president to help modernize and automate operations and develop the company’s freight transport system. Upon accepting the position, Perlman found that the New York Central was close to bankruptcy, having invested $264 million in its passenger services from 1946 to 1957 and losing $500 million in the process. Perlman immediately undertook cost-cutting measures, firing 25,000 employees between 1954 and 1957, selling $9 million in real estate in 1955 alone, and investing as little as possible in passenger services. Despite Perlman’s efforts, however, stock declined to its 1946 price of $15.
The Pennsy was also struggling. Although its freight business was profitable—it brought in a record $787 million in 1953— its passenger service faced several challenges. The strong demand for rush-hour rail service into large cities forced the Pennsy to maintain large pools of equipment and a substantial labor force to service a limited number of passengers between 6:00 and 9:30 a.m. and 4:30 and 7:00 p.m. Led by chairperson James Symes, the Pennsy tried to achieve economies by trimming its less profitable lines as much as the ICC would allow. Still, operating revenues declined from over $1 billion in 1953 to $844 million in 1958, and dividends were slashed from $1.25 per share in 1947 to $.25 in 1958.
Leading railroaders petitioned Washington for help, claiming that the taxes they paid supported competitive forms of transportation such as state and federal highway systems, waterways, airlines and airports, and public bus and truck terminals. The Transportation Act of 1958 offered government loans to struggling railroads, but by this time, rail leaders had arrived at their own solution, and cautious merger talks began.
During this time, Symes and Robert Young initiated merger negotiations between the Pennsylvania and New York Central railroads, but several factors and factions stood in the way of the merger. The ICC, the U.S. Justice Department, congressional anti-monopolists, executives of other eastern railroads, and the trucking interests all contested the alliance. Merger talks continued for over a decade, often hindered further by poor relations between New York Central’s Perlman (who entered the negotiations after Young’s suicide) and Symes and his 1963 successor, Stuart Saunders, of the Pennsy.
In the meantime—using the nearly 100-year-old Pennsylvania Company as an investment vehicle—Saunders began to diversify the Pennsylvania Railroad. During his first two years as company chairperson, he spent over $200 million developing or purchasing real estate (including part of Madison Square Garden), coal and salt mines, the Buckeye Pipe Line Company (the eighth-largest processor of crude oil in the United States), and amusement parks. He also recouped $65 million on the 1965 sale of most of the Long Island Railroad to New York’s Metropolitan Commuter Transportation Authority.
The ICC approved the merger of the New York Central and Pennsylvania railroads in March 1965. The U.S. Supreme Court finally ruled in its favor early in 1968, and the alliance was formalized in February of that year. The Pennsy clearly dominated from the onset: Saunders assumed the chair, Perlman became vice-chairperson, and the company’s first annual report traced the company’s history to 1846, the date of the Pennsy’s charter.
The company that emerged from this amalgamation, Penn Central Transportation, operated one-third of America’s passenger trains and three-fourths of all long-haul services, totaling over 20,000 route miles in 16 states, two Canadian provinces, and the District of Columbia. However, the company’s new stature also brought problems. A staff of 94,000 consumed 59 percent of the company’s revenues, and Penn Central racked up a $49 million deficit in 1969 and lost $83.4 million in the first quarter of 1970 alone. Facing long-term loan payments of nearly $200 million that would soon be due, Saunders sought the help of the Nixon Administration. When Congress declined to honor loan assurances offered by the Department of Defense, Penn Central’s board of directors fired Saunders, Perlman, and other top officials in June 1970. Later that month, Penn Central filed for reorganization under Section 77 of the Bankruptcy Act, which enabled continued operations rather than liquidation of the corporation. Penn Central was followed into bankruptcy by six other northeastern railroads.
Realizing the importance of a massive rail system to many industries and travelers, the government worked to bolster Penn Central. In the hopes that eliminating passenger operations would help revive the railroads, the government developed the National Railroad Passenger Corporation (Amtrak) in 1971 to take over operation of the nation’s passenger trains. Still, all seven northeastern railroads would hobble through a recession, a destructive hurricane, and finally the oil crisis, until April 1976, when a new federally funded entity, the Consolidated Rail Corporation (Conrail) was created to assume their rail operations.
During this time, Penn Central’s board brought in a veteran railroader, William H. Moore, as president in September 1970. Moore first tackled lingering rivalries between Pennsy and Central employees, replacing old logos with a symbol for the new corporation, but, like his predecessors, he found deeper problems. After nursing Penn Central through four of its toughest years, Moore was unceremoniously replaced by trustee Jervis Langdon, Jr.
Penn Central began a new life with the assets accumulated primarily by Stewart Saunders, including the gas pipeline company, coal leases, valuable real estate and air rights over such parcels as New York City’s Grand Central Terminal. Then, in January 1981, the company received cash of $2.1 billion in compensation for its rail properties from the U.S. government and tax loss carry forwards of $2.2 billion. Penn Central used this cash to make several acquisitions, including Marathon Manufacturing, which made oil rigs; G.K. Technologies, an electronics company; Buckeye Gas Products, which dealt in propane gas; and Sprague Electric, a manufacturer of capacitors. Many of these acquisitions proved to be unprofitable. By 1982, American Financial Corp.’s Carl Lindner amassed enough stock in Penn Central to be elected to the company’s board, and in 1983, he became chairman.
In the mid-1980s, the company began narrowing its focus by selling certain of its operating assets, primarily Buckeye Pipe-Line and Buckeye Gas. By the spring of 1987, Lindner had assumed the additional role of chief executive officer, and Penn Central accelerated the sales of most of its earlier acquisitions, increasing its available cash to $ 1.1 billion and reducing its debt to five percent of capital.
In 1989, the company acquired its first insurance operation, Republic Indemnity Co. of America, a large writer of worker’s compensation insurance in California. In 1990, three non-standard auto insurance companies were acquired.
In the early 1990s, Lindner continued to refine Penn Central’s focus to profitable insurance businesses. General Cable Corp. was formed to control Penn Central’s primary manufacturing businesses and then was spun off to shareholders in 1992. Later that year, the company put its defense and industrial products units, including Vitro Corp. (a provider of systems and software engineering for the military) up for sale. Nine non-insurance business units and major assets were sold over an 18-month period beginning in 1992, providing about $330 million in sales proceeds. Penn Central’s 1993 revenues totaled $1.76 billion, a $338.4 million increase over the previous year. The divestitures of non-insurance businesses were virtually completed by the end of 1993, and culminated in the March 1994 name change to American Premier Underwriters, Inc. Upon announcing the name change, Carl Lindner III—who joined his father at the company as president and chief operating officer—remarked that the new name reflected the company’s sole focus on property and casuality insurance and that he hoped to expand American Premier Underwriters’ automobile insurance businesses through both internal growth and acquisition.
Republic Indemnity Company of America; Atlanta Casualty Company; Infinity Insurance Company; Windsor Insurance Company; Leader National Insurance Co.; Apparatus Division; Penn Central Real Estate Group.
Hartley, Scott, Conrail Volume 1: 1976-1982, Piscataway, New Jersey: Railpace Company, Inc., 1990.
Mitchell, Russell, “With Lindner in Charge, Penn Central Is on the Prowl,” Business Week, April 20, 1987, pp. 80-1.
Rudnitsky, Howard, “Gearing Down,” Forbes, December 1, 1986, pp. 176, 178.
Salsbury, Stephen, No Way to Run a Railroad: The Untold Story of the Penn Central Crisis, New York: McGraw-Hill Book Company, 1982.
Sobel, Robert, The Fallen Colossus, New York: Weybright and Talley, 1977.
Stern, Marilyn, “Glory Days,” Across the Board, October 1991, p. 41.
—April Dougal Gasbarre