Financial History Issue 116 (Winter 2016) | Page 27

MOLDED by COMPETITION The Guardian, Quite Another Quiet Mutual By Robert E. Wright Readers of a certain age will remember television commercials for “The Quiet Company,” life insurer Northwestern Mutual, one of about a dozen large mutual insurers that quietly dominated the US life insurance industry for most of the 20th century. Many were swept up in the demutualization wave that struck that industry in the 1990s, but some — including Northwestern, TIAACREF, New York Life and Massachusetts Mutual — remain wholly mutual, i.e., completely owned by their policyholders. With general account assets of about $40 billion, less than half that of the mutual behemoths just referenced, Guardian Life Insurance Company of America (hereafter, Germania or Guardian) also avoided the demutualization wave. Headquartered on Hanover Square, just blocks south of Wall Street and within sight of Delmonico’s, the restaurant where it held its first organizational meeting in March 1860, Guardian quietly (usually) continues to do what it has (almost) always done, dutifully serve its policyholders. In the 19th century, mutual cooperation was capitalism’s ingenious response to socialism. If you do not like some aspect of the world, America’s business leaders essentially told socialists, anarchists and sundry other radicals, don’t upend everything in bloody revolution; rather, work to fix the specific problems you perceive. If you think grocers charge too much, form a food co-operative. If workers are vulnerable to unemployment, help them to save by starting a mutual savings bank. If members of a particular ethnic group cannot buy life insurance at reasonable rates due to discrimination or other reasons, create a life insurer that specializes in insuring them. Guardian Life Insurance Company building. That is precisely what the founders of Guardian, which began its corporate existence as Germania Life Insurance Company, did in 1860. Technically, Germania was a hybrid corporation, a mix between a joint stock company owned by stockholders and a mutual owned by its policyholders, because New York state law on the eve of the Civil War forbade the formation of pure mutuals. Germania, however, always behaved like a mutual. It never increased its equity capitalization above the $200,000 it initially raised and, following a change in state law, a failed but frightening hostile takeover attempt and the seizure of its shares owned by German citizens during the Great War, it mutualized in 1925 by buying almost all of its outstanding shares for $150 apiece. (Complete demutualization had to wait until early 1946 due to a tussle with the estate of a deceased stockholder.) As its name suggested, Germania specialized in selling life insurance policies and annuity products to Germans, initially those residing in the United States — from New York to St. Louis to San Francisco — and soon after to those in other nations as well, including Germany itself, especially after its dramatic 1871 unification. Many of Germania’s founders had been revolutionaries during an earlier German unification effort, in 1848, but America’s liberal business climate transformed them into pillars of the business community on two continents. Germania’s life insurance policies and annuities protected the incomes of its policyholders and their families by providing a death benefit if the “breadwinner” died too early, before the end of his (and later her) productive years, and a yearly payment if the breadwinner died too late, after s/he could no longer work. That is commonplace today, but in the 19th century, before computers and finely-tuned actuarial tables, it was high finance. Like other mutual insurers, Germania sold “participating” policies that paid “dividends” (rebates on premiums) when mortality and policy lapse rates, investment income and/or expenses proved better than assumed. That way, policyholders shared in the profits when longevity increased, office technologies became more efficient or investment returns increased, while adverse developments did not threaten the solvency of mutual insurers nearly as quickly as they brought down joint stock insurers and banks. The company simply reduced dividends, for example, when death claims unexpectedly doubled due to the 1918-19 influenza epidemic and when the Great Depression increased disability claims to unexpected levels and wreaked havoc with its mortgage portfolio.  |  Winter 2016  |  FINANCIAL HISTORY  25