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.
www.MoAF.org | Winter 2016 | FINANCIAL HISTORY 25