Mutually Beneficial: The Guardian and Life Insurance in America

Published by EH.NET (November 2005)

Robert E. Wright and George David Smith, Mutually Beneficial: The Guardian and Life Insurance in America. New York: New York University Press, 2004. xxii + 501 pp. $50 (cloth), ISBN: 0-8147-9397-5.

Reviewed for EH.NET by Richard H. Keehn, Department of Economics, University of Wisconsin-Parkside.

Robert Wright and George Smith (both at New York University Stern School of Business) have collaborated to write a history of Guardian Life Insurance Company of America, from its founding in 1860 (as the Germania Life Insurance of New York) into the twenty-first century. The authors believe that the history of life insurance is largely undeveloped save for vanity publications, and one aim of this book is to redress that oversight. As the book title indicates, they also want to use the focus on one company to illustrate the progress of life insurance in the American economy. As a framework for the study, the authors focus on net costs, which they define as a function of expenses, investment returns, and mortality experience. Wright was the main researcher and produced the first drafts. In addition to secondary sources, he relied heavily on the Guardian archives and interviews with retired and current company personnel.

Wright and Smith divide the study into chronological and topical sections. The “Introduction” presents a conceptual introduction to life insurance and the life insurance industry. Part I, four chapters organized chronologically, covers Germania/Guardian history and developments in the life insurance industry in the United States. Chapter 1 explores Germania’s origins and progress to 1914, the German roots of the founders, and the development of international business (primarily German) that accounted for 47% of total business by 1895. The German connection, explored in more detail in Chapter 2, caused serious problems with the beginning of World War I and one attempt to minimize these was the name change to Guardian in 1917. The subsequent withdrawal from international markets, especially Germany, was painful and stretched into the 1920s. Chapter 3 covers the 1920s and 30s, times of progress and trial for Guardian and the insurance industry. During these years, Guardian developed standardized distribution methods and reorganized into a partially mutual company. In the preface, the authors note that these chapters cover the same ground as Anita Rapone, The Guardian Life Insurance Company, 1860-1920: A History of German-American Enterprise (New York: New York University Press, 1987). Chapter 4 discusses the postwar era and emphasizes post-1960 problems associated with increasing competition, disintermediation, inflation, deregulation, and decentralization.

Parts II and III are organized topically. Part II, “Product Distribution and Expense Management,” consists of seven chapters. Chapters 5 and 6 focus on products and actuarial issues. While Guardian concentrated on whole life insurance, at different times between 1860 and 2000 it developed and offered a wide array of other insurance products, including term, group, disability, health, pensions, variable products, and reinsurance.

Wright and Smith emphasize that life insurance is sold, not bought, and Chapters 7 and 8 detail Guardian and industry advertising, marketing, and distribution methods. Over the years Guardian searched for the best means to market and distribute its products, faced problems in dealing with tensions between the field sales force and home office and, like many life companies, developed a hybrid system that provided incentives to agents while maintaining home office oversight.

Chapters 9 through 11 examine home and back office issues. Chapter 9 details personnel policies and the complications in compensating managers within a partially, then fully, mutual organization. Chapter 10 covers the management of administrative expenses, and factors influencing the ratio of cash expenses to cash receipts. Guardian struggled with having back office operations in increasingly expensive New York City, and used regionalization and decentralization to try to control expenses while providing better service to agents and policy holders. The Guardian’s gradual adoption of automation and computers suggest that it was a follower and not an industry leader in these areas. Chapter 11 discusses regulation and taxes. Insurance traditionally has been regulated at the state level so firms like Guardian that operate in several states face a somewhat complicated regulatory system. In the post war years, Guardian joined industry groups in trying to make regulations more industry friendly. Wright and Smith report on the changing burden of tax laws on mutual insurance companies and their policyholders as those laws were revised in the postwar era.

In addition to expense management and actuarial performance, Guardian and life insurance industry results are influenced by asset management and investment returns, covered in Section III. The Guardian’s share of industry assets, 2% in 1888, declined to 0.83% by 1920 and was about 0.5% in the 1990s. Guardian investment earnings averaged about 25% of revenue but problems arose whenever the figure dropped substantially below that. In the post-1945 period, Guardian tended to hold low cash reserves with a mortgage portfolio well above the industry average. Chapter 13, after a review of the individuals shaping the firm’s investment policy in the postwar years, covers Guardian’s use of private placements and “bottom up” credit analysis to increase investment returns while striving to maintain an acceptable level of risk. A move into common stocks topped off at 25% in 1999, leading to problems when the stock market subsequently declined.

Wright and Smith wrote Part IV, “Mutuality and Performance” (Chapter 14), to show how Guardian changed in the post-1945 era in response to changes in the external environment, but remained true to long term guiding principles. These included a commitment to mutuality, cost management, effective governance by management and board, adequate capital, and diversification only if policy holders benefited. They stress Guardian’s long-term focus on individual whole life and the goal of increasing policyholder value.

The discussion of the tensions between the field force and home office is an important contribution. Agents wanted low-cost insurance, good back office service, a wide product range, and easy underwriting standards to increase sales and commissions. The home office was interested in controlling expenses, maintaining high underwriting standards, and keeping a manageable product line. The material on operation within a niche ethnic life insurance market in the early days, and the heavy international component of total business up to World War I, are also useful. Investment performance and the risk-return tradeoff are generally well-covered.

Heavy reliance on internal records and interviews with former and active insiders provides useful information, but in places makes the book read like the vanity life insurance firm histories that the authors decry. They tend to take insider evaluation of Guardian performance at face value, sometimes with inadequate supporting evidence. The list of sources is extensive but relies heavily on internal sources. When discussing developments in the American economy, the authors provide very few references to the extensive literature on the subject.

Using the history of one firm to enlighten insurance industry developments is interesting but creates some confusion, lack of focus, and duplication. Dividing the book into chronological and topical sections means that topics covered in the later chapters were often discussed in the historical overview. Within the topical chapters the same material is often covered in two or more places, making for difficult reading. Wright and Smith emphasize the importance of the mutual way of thinking that supposedly dominated Guardian management throughout most if its history, but it was a stock company until partial mutualization in 1920, and did not become a true mutual organization until 1946.

Figures and tables present material on Guardian and the industry but several of the 29 figures are hard to interpret, a problem that a more readable format could have corrected. The figures cover different time periods, making evaluation of firm and industry long-term performance difficult. For example, life insurance in force for Guardian and the industry, asset allocation, mortgage investment, and growth of assets for Guardian and the industry are shown for benchmark years from the 1860s to 2000, but mortality experience is reported only for 1927 to 2000, Guardian’s relative investment performance for 1929 to 1995, lapse or surrender rates for Guardian versus the industry for 1920 to 1946, and Guardian’s share of life insurance in force for 1871-1889 and 1895-1918. Thirty-five tables provide additional information, but there is no long-term measurement of firm performance. The number of Guardian employees, payroll, and average payroll are shown for 1926-1937, but balance sheet and income and expense data for a long time span are not provided, making it difficult to evaluate the authors’ assertions about Guardian’s favorable long-term performance.

This book will be of most interest to former and current Guardian employees and insurance professionals. General readers with little background in financial institutions and markets may find the chronological history in the first section useful. The history of an important firm in the life insurance industry may be of interest to business and economic historians who focus on financial sector history, but excessive details on personalities, incomplete performance measures, and repetitive discussions will limit its usefulness for specialists.

Richard H. Keehn is an emeritus professor of economics at the University of Wisconsin-Parkside. His primary research areas are banking and business history with a special focus on Wisconsin banking and manufacturing development.