The Equitable Life Assurance Society of the United States
The Equitable Life Assurance Society of the United States
Assets: $61.77 billion
Known for decades as one of the largest life insurance companies in the nation, The Equitable Life Assurance Society of the United States can describe itself today as a diversified financial services company. Besides its traditional insurance operations, Equitable also is involved heavily in real estate development and, thanks to its 1985 acquisition of Donaldson, Lufkin & Jenrette, in securities brokerage.
Equitable was started in Manhattan in 1859 when Henry Baldwin Hyde, an ambitious young cashier for the giant Mutual Life Insurance Company of New York, left that firm to found his own. Life insurance ran in Hyde’s family; his father was one of Mutual’s top salesmen and would sell many policies for Equitable. Hyde organized his new firm as a joint-stock company, enlisting his friends to help sell shares. William Alexander, a lawyer and minor politician whom Hyde knew through their mutual association with the First Presbyterian Church of New York, was chosen as the firm’s first president, with Hyde running its day-to-day affairs through the office of vice-president.
Equitable got off to a good start, selling 769 policies worth a total of more than $2.6 million in its first year. Business boomed during the Civil War, as the ravages of armed conflict impressed upon many the wisdom of insuring their lives. In 1865, the last year of the war, the firm had $27.6 million worth of coverage in force. Equitable had begun selling policies overseas almost immediately after its founding. It had an agent in Southeast Asia as early as 1860, and over the next two decades it established its presence elsewhere in the Far East, in Europe, the Middle East, South America, and Canada.
William Alexander died in 1874 and was succeeded by Henry Baldwin Hyde. Business continued to skyrocket during Hyde’s active stewardship, and in 1886 Equitable surpassed Mutual to become the largest life insurance company in the world. That year, it sold $111.5 million worth of policies, giving it a total of $411.8 million of coverage in force. During those boom year, the firm could boast of having among its directors Ulysses S. Grant and financier John Jacob Astor.
Henry Hyde retired in 1898 and died the next year. He was succeeded by his close friend James Alexander, nephew of William Alexander; Hyde’s son James Hazen Hyde became vice president. Besides sharing their family affiliations with Equitable, both were men of culture and devoted Europhiles. They both spent much of their time in Paris, and, not coincidentally, the firm intensified its French operations in the first few years of the new century. Both men, however, also set into motion events that presented Equitable with its first major crisis.
It started in January 1905, when James Hyde threw a lavish coming-out party for his niece. It was covered heavily in the society pages and rumors circulated through the press that it had been paid for with company funds. The resulting controversy, aggravated by a power struggle between Hyde and Alexander over the role of Alexander’s son in the firm, led the directors to commission an internal review of its management practices. The report, presented in May, found sloppy management and financial irregularities on the part of Equitable officers and lax oversight by its directors, and recommended immediate and radical reorganization. Given these findings, Hyde had little choice but to sell his substantial holdings in the firm. He found a buyer in financier Thomas Ryan, who persuaded the directors to elect his associate Paul Morton, who had been secretary of the navy under Theodore Roosevelt, as chairman. Ryan then got George Westing-house, former President Grover Cleveland, and New York Appeals Court Judge Morgan O’Brien to act as trustees and administer Ryan’s share of the firm.
Paul Morton’s first acts as chairman of Equitable were to secure the resignations of all of its officers, including Alexander and Hyde, and appoint himself president. His presence helped restore public confidence in Equitable, but his reign lasted only five years; he died suddenly in 1911 and was succeeded by retired judge William Day. During Day’s tenure, Equitable amended its charter and became a mutual company—that is, one in which the policyholders and not the shareholders have the right to elect its directors. Proposals for mutualization had surfaced as part of the fallout from the scandals of 1905; the idea was later taken up by J. P. Morgan, who bought Thomas Ryan’s shares in 1909, and it was finally pressed home by industrialist Coleman DuPont, who bought the shares in turn from Morgan’s estate in 1915.
World War I did not affect Equitable very much, except to inspire it to invest heavily in war bonds. The influenza epidemic of 1918, however, cost the firm about $8 million in death claims. After the war, the economic disruption in Europe, combined with generally higher mortality rates abroad and laws and tax rates that the firm considered to be onerous, inspired Equitable to discontinue all foreign operations. The process was a drawn-out one, but by 1925 the firm was selling only a few policies outside the United States.
The 1920s were boom years for Equitable, as they were for the nation as a whole. In 1929 the firm booked more than $1 billion worth of new policies and had $6.8 billion worth of coverage in force. William Day retired in 1927, citing ill health, and was succeeded by Thomas Parkinson, who would see Equitable through the Great Depression and World War II. During the Depression, the firm suffered a steady decline in business. It also filled its investment portfolio with government bonds, since other kinds of securities were hard to find and risky when they could be found. Because of its investments in mortgages, Equitable also came into possession of a number of farms during this time as borrowers defaulted. It sold most of these properties during World War II, once food and land prices began to turn up again.
World War II had little effect on Equitable. As it had during World War I, the firm authorized a policy rider that restricted coverage against death in war or aviation mishaps. The sudden splurge in government borrowing that sustained the U.S. war effort and the consequent low yields to be had from government bonds did prompt a change in Equitable’s investment policy. In 1942 the firm took its first plunge into large-scale housing development, building a series of apartment complexes in Brooklyn. It followed this in 1946 with another series of apartment buildings in the Bronx.
Parkinson stepped down as president and chief executive officer in 1953 and was succeeded by Ray Murphy, who also became chairman in 1956. The next year, he relinquished the CEO’s job to James Oates Jr. a lawyer and one-time utilities executive. In 1959 Equitable marked its centennial with a gala celebration at New York’s Madison Square Garden. At the end of its first hundred years, the firm had nearly $10 billion worth of assets and $34.4 billion of insurance in force, making it one of the largest insurance companies of any kind in the nation. Ironically, that year also saw the death of James Hazen Hyde, who had been living in Paris in self-imposed exile since selling his share of the firm.
Under Oates’s stewardship, Equitable became known during the 1960s as an insurance company with a social conscience Beginning in 1962, the firm began a job-training program for school dropouts in New York in an attempt to address the problem of hardcore minority unemployment. The idea originated with Oates, who was serving on President Kennedy’s Committee on Youth Employment at the time. In 1968 Equitable pledged $60 million to an industry-wide drive to finance the rehabilitation of housing units in urban slums. The firm also invested in Columbia, Maryland, a city developed during the late 1960s on the “new town” model, an urban planning concept intended to create self-sufficient communities of manageable size.
Oates retired in 1969 and was succeeded by J. Henry Smith, who had first given thought to entering the insurance business during his senior year in college, after chatting with an Equitable salesman who had sold a policy to his father. Equitable began to diversify during Smith’s tenure. In 1973 it acquired Informatics, a California-based computer systems company. The next year, it entered the field of property and casualty insurance when it acquired Houston General Insurance, Traders & General Insurance, and Associated Employers General Agency from an insurance holding company, W.R. Berkeley. Smith retired in 1975 and was succeeded by Coy Eklund, and the trend toward diversification continued. In 1976 Equitable joined with Newmont Mining Company, The Williams Companies, Fluor Corporation, and Bechtel to form a consortium that bought Peabody Coal Company from Kennecott Copper. That same year, the firm joined an industrywide move toward investing heavily in real estate, when it acquired 17 buildings as part of the self-liquidation of Tishman Realty and Construction. In 1977 it acquired six hotels from Marriott, bringing the total worth of its real estate holdings to more than $1.3 billion.
Equitable was gradually metamorphosing into a fully diversified financial services company. Two developments that occured later in the decade, however, threatened to block that progress. A minor controversy swirled around the firm in 1975 when the Department of Justice filed a conflict-of-interest suit against Eklund over his directorship of Chase Manhattan Bank, out of concern that he might be tempted to give Chase Manhattan preferential treatment in investing Equitable premiums. Eklund finally resolved the dispute in 1978 when he announced that he would not seek re-election to his bank post. In 1979 the firm was forced to lay off 550 employees because of sharply rising labor costs and increased competition from young, up-and-coming competitors. The move, which came despite a record earnings year in 1978, was a radical departure from the firm’s long tradition of loyalty to its employees and dealt a serious blow to staff morale. Lower productivity, unionization, and discrimination suits all loomed.
To deal with these threats to its financial performance while maintaining its position as the nation’s third-largest life insurance company, Equitable pursued an apparently paradoxical course of divestiture on the one hand and expansion and diversification on the other. In 1980 it sold Houston General Insurance to Japanese giant Tokio Marine and Fire; it also sold its Toronto-based subsidiary Heritage Life Assurance to Unicorp Financial, a Canadian insurance holding company. In 1981 it sold Equitable General Insurance to GEICO Corporation.
On the other hand, Equitable continued its push into real estate. In 1982 it bought Equitable Life Mortgage Realty Trust, the real estate investment trust (REIT) that it managed. Buying REITs was widely considered to be a cheap way of acquiring large pools of property. The firm also announced plans to build a new headquarters skyscraper in Manhattan despite softening demand for office space. Equitable’s real estate development activity was given additional impetus by a 1983 change in New York state insurance law allowing insurance companies to engage in almost any financial service other than banking. That year, it acquired Kravco, a Pennsylvania-based shopping center developer, and 50% of Continental Companies, a Miami-based hotel developer. In 1984 it bought 19 shopping centers from Iowa-based General Growth Properties. This last move gave the firm more than 100 shopping center properties and brought the total worth of its real estate assets to $21 billion.
Equitable took fullest advantage of the more liberal laws under which it could operate; in 1985, it acquired an 89% interest in the prominent Wall Street securities firm Donaldson, Lufkin & Jenrette (DLJ). Under the terms of the merger, DLJ founder, chairman, and CEO Richard Jenrette became vice chairman of Equitable. Two years later, he became chairman upon the retirement of Robert F. Froehlke. Jenrette’s rapid promotion reflected the increasing importance of investment and other non-insurance operations to Equitable and to insurance companies in general at a time when people were buying life insurance for investment purposes at least as much as for protection.
Equitable also continued to divest in the late 1980s. In 1987 the firm sold Equitable Life Leasing to mortgage banker Lomas & Nettleton. In 1988 it sold National Integrity Life Insurance and Integrity Life Insurance to Australia-based National Mutual Life Assurance of Australasia. Equitable had not yet done a sufficient job of cutting costs and improving financial performance to suit the firm’s directors. John Carter, who succeeded Coy Eklund as CEO in 1984, retired in 1990 amidst this displeas re at the relatively young age of 55, and was replaced by Richard Jenrette. Chief financial officer Glen Gettier also resigned and was replaced by Thomas Kirwan, previously chief financial officer of the firm’s insurance operations.
In December 1990, Equitable announced its intention to proceed with the development of a plan to demutualize. Equitable would be the first major life insurance company to explore the use of New York State’s new demutualization law, which took effect in 1988, as a means of increasing its capital base. The formal demutualization plan must first be approved by Equitable’s board and requires the approval of the New York State Insurance Department and certain classes of policyholders. It is a lengthy and complex process that requires a year to 18 months to be implemented.
In making the announcement, Jenrette stated that the decision to seek new capital is part of a three-step program to strengthen Equitable. The first step was a reduction in Equitable’s annual operating expenses by more than $150 million, a program carried out earlier in the year. The second step was to strengthen management, most notably through the addition of Joseph Melone as president. Equitable hoped that Melone’s background as head of Prudential’s field operations would complement Jenrette’s financial background.
Equitable Variable Life Insurance Company; The Equitable of Colorado, Inc.; Equico Securities, Inc.; Equitable Seimei Hoken (Japan); Traditional Equinet Business Corporation of New York; Pension Financial Management Group; Equitable Alliance Capital Management Corporation; Donaldson, Lufkin & Jenrette, Inc.; Equico Capital Corporation; Equitable Capital Management Corporation; Equitable Real Estate Investment Management, Inc.; Equitable Agri-Business, Inc.
Burley, R. Carlyle, The Equitable Life Assurance Society of the United States: 1859–1964, New York, Appleton-Century-Crofts, 1964; “Why Equitable Life Looks Good But Feels Bad,” Business Week, March 26, 1979.