720 East Wisconsin Avenue
The ambition of Northwestern has been less to be large than to be safe; its aim is to rank first in benefits to policyowners rather than first in size. Valuing quality above quantity, it has preferred to secure its business under certain salutary restrictions and limitations rather than to write a much larger business at the possible sacrifice of those valuable points which have made Northwestern preeminently the policyowner's company.
Northwestern Mutual Life Insurance Company (NML)--the ninth largest U.S. life insurance company in 2000 as ranked by revenues--offers life, disability, and long-term care insurance as well as a variety of annuities and other accumulation products. NML, a rarity among the largest American insurance companies, was chartered west of Philadelphia. Until the 1980s, it remained a specialty company, issuing only individual life insurance policies. NML then shifted from a product- to market-driven company, although its emphasis would remain largely on its traditional individual life policies. Conservative risk management in both investment and underwriting, characteristic of the company since its founding, has made NML a consistent leader in total life insurance dividends paid to policyholders and in policy renewals. The purchase of investment management and advisory firm Frank Russell Co. in 1999, complemented and strengthened its business lines while giving the 144-year-old company a global presence.
Push Westward: 1850s-60s
NML began as the entrepreneurial vision of "General" John C. Johnston, of Catskill, New York, who earned his rank as head of the local state militia. In 1850, at age 68, Johnston and his son moved to New York City, where they became agents in the employ of the Mutual Life Insurance Company of New York. Within three years of their arrival, the Johnstons were operating the company's most successful agency.
In 1854, at age 72, General Johnston sold his interest in the company and moved with his grandson, John H. Johnston, to a 3,000-acre farm near Janesville, Wisconsin. He soon determined that the area would benefit from low-cost, mutual life insurance. Consequently, with a petition signed by 36 of the area's leading citizens as the first board of trustees, the state legislature chartered the Mutual Life Insurance Company of the State of Wisconsin on March 2, 1857. Explicitly modeled on the New York company, it was to be headquartered in Janesville and to limit its investments to mortgages on Wisconsin real estate and government bonds. Its first policy contracts were issued on November 25, 1858. Johnston never served as president but was a general agent.
When many of the original trustees left the company, their places were taken by men from Milwaukee, Wisconsin, anxious to obtain control of the company. Following the legislature's revocation of the provision requiring a Janesville headquarters, the trustees voted on March 7, 1859, to move the company to Milwaukee. Johnston had lost control of the company and terminated his association as an agent on March 11, 1859.
The Milwaukee group elected as president Samuel S. Daggett, formerly of the Milwaukee Mutual Fire Insurance Company. The company's only full-time employee was the secretary, Amherst W. Kellogg. Since trustees met quarterly and the officers were part-time, the trustees established an executive committee of five trustees in June 1859, including the president and vice-president as ex officio members. This step marked the beginning of the committee system which, despite some recent modifications, became the most conspicuous feature of the company's managerial organization.
Like any fledgling insurance company, there was a need to increase sales, and a sales force was established under a general agency system. In 1859, when the first out-of-state contract was made in Minnesota's St. Paul-Minneapolis area, the company began to expand beyond Wisconsin. In 1860, the first out-of-state local agency was appointed, in Iowa. By 1867, the company had expanded its mortgage holdings beyond Wisconsin, although its principal holdings were still Wisconsin, primarily Milwaukee, real estate. To reflect the fact that the company was becoming a regional institution, it changed its name in 1865 to the North-western Mutual Life Insurance Company. At that time, "Northwest" described the states now in the Midwest. When Samuel Daggett died in 1868, the company he helped nurture had passed through its formative years.
Power Struggle, Then Stability: 1870s-90s
The search for a successor to Daggett led to the most serious power struggle in NML's history. The pivotal figure was Heber Smith, the superintendent of agents. By collecting proxies from the policyholders, Smith helped elect Lester Sexton as the new president in 1869. When Sexton died after two months in office, John H. Van Dyke, a young lawyer, was elected to replace him. Smith, who was elected vice-president, believed that individuals seeking loans had to purchase policies. The issue was trusteeship, whether funds should be invested on a criterion other than that of obtaining the highest yield consistent with safety. After the Panic of 1873, the board of trustees wanted to exercise its judgment over loans, and in 1874, Henry L. Palmer, a lawyer and one of the original group of Milwaukee investors, was elected president. Palmer would remain president for 34 years.
The agents were not left voiceless. An association of agents had been created in 1868, but was inactive for several years. It was revived in 1877 and served as a forum unique to the life insurance industry at which field agents discussed problems of mutual interest and maintained communication with the home office. A year later the company hired salaried loan agents, effectively separating the selling of insurance from the lending of funds. In 1887 the finance committee was established to focus exclusively on financial and investment questions. It was created to ease the burden on the executive committee, but its membership duplicated most of the important personnel.
In 1881 NML created the insurance and agency committee with general responsibility for all phases of the insurance program. From that point until the turn of the 20th century, the life insurance industry was one of the fastest growing industries in the United States. Many new types of contracts were introduced by companies aggressively competing for sales. NML approached most of these new developments with its traditional conservatism. NML established an inquiry department in 1878 to cope with a problem inherent in insurance sales, "moral hazard," namely, that persons most likely to submit claims would be those most likely to demand policies. Health examinations and character checks were required for each applicant. The company restricted itself only to the "healthiest" regions of the country, those that did not have high mortality rates. By 1907, the company's sales agencies were closely integrated with Northwestern's overall management policies. Management also attempted to be more responsive to the policyholders by establishing a policyholders examining committee in 1907 which annually evaluated everything from the company's accounting practices to managerial performance.
Industry Under Scrutiny: 1900s
The growth of sales and development of new types of policies led to abuses in the industry. The 1905 Armstrong Committee investigation in New York, aimed at the three largest companies in that state, provoked a similar investigation by the Wisconsin legislature aimed at NML. While the Armstrong hearings discovered considerable concentration of control at the top, NML was found to have a relatively large group of self-perpetuating managers.
The rivalries that existed between the heads of the New York companies led to such practices as twisting (use of misrepresentation to have someone end one life insurance policy and buy another) and rebating (return of part of a premium payment) in the attempt to increase sales. Even though NML condemned and canceled agents found guilty of these practices, the legislature found examples. Similarly, the Armstrong investigation strongly criticized deferred dividend policies. NML dropped these policies before that investigation was underway, but the Wisconsin legislature echoed the New York findings.
Lastly, the Armstrong investigation was concerned that the sales of the New York companies were too large to be absorbed by the mortgage market. On the other hand, the Wisconsin legislature found NML's conservative financial policies to be excellent. What was disappointing to the legislature was the relatively small portion of the company's portfolio invested in its home state. The largest state for investment was Illinois, where the growing Chicago real estate market absorbed over a third of the company's loans until 1907, and a quarter of the loans thereafter.
The Wisconsin investigation led to an attempt to legislate the principle of trusteeship that NML tried to follow. Many of the unworkable laws were repealed or amended in 1915. NML came through this difficult period relatively unscathed because of the three principles its president, Henry Palmer, instilled into the corporate character: conservative underwriting standards, simplicity of operation, and conservative investments.
Business Climate in Flux: 1910s-20s
When Palmer stepped down in 1908, he had established a managerial succession that made George C. Markham the obvious choice. In the wake of the Armstrong investigation, insurance markets began to change. Group insurance and disability and double indemnity clauses were started at this time, but NML's management refused to adopt any of these innovations. Markham's administration was not market-oriented; it was preoccupied with investment problems. Many disability clauses were later proved unsound. In 1909, the company took the lead in the new field of business life insurance for partners and for key personnel. Nevertheless, agent dissatisfaction developed because the company would not enter new areas such as disability and group insurance. NML found itself developing into a specialty company by limiting its policies to individual life insurance.
When NML moved to Milwaukee, it occupied offices near the corner of Broadway and Wisconsin. It had outgrown several offices since then, but its new ones were never more than a block away. In 1910, it purchased a city block at the east end of Wisconsin, four blocks away. True to its conservatism, NML built a "Roman temple" in an age of skyscrapers. When the new building was occupied in 1914, the company became more compartmentalized. The sense of personalism that had characterized the days when executive and clerk worked side-by-side were gone. The fact that the new cafeteria offered free lunch on a daily basis was little compensation.
During World War I, NML followed the practice of the insurance industry in adding a "war-risk" clause to policies, resulting in increased premium costs for servicemen. At the same time, the federal government provided life insurance policies to men in service.
William D. Van Dyke, whose father had been president in the 1870s, replaced Markham in 1919. Van Dyke, a lawyer, was an investment specialist, an important talent during the 13 years he served as president. By 1919, NML was the sixth largest U.S. life insurance company and the leading farm mortgage lender among life companies. Since farm conditions were poor in the 1920s, the company began to explore other possibilities. NML led the field in the move toward larger loans, and, after 1925, increased its urban loans. In spite of a decline in the value of its large holdings of railroad securities and its hesitancy to invest in the expanding utility field, NML's rate of earnings was superior to that of other life companies.
During the 1920s the companies with the greatest sales growth were those with two or more lines of contracts, such as group and ordinary life or life and health insurance. NML made only modest changes in policy contracts and investment plans, and continued to grow. Its expanding operations required the construction of an addition to the home office in 1932.
The absence of diversification led to agent unhappiness. While the sales department was in the vanguard of the industry in preparing agents to sell to the needs of prospects, there was little effective coordination between the underwriting and sales departments. Michael Cleary, vice-president since 1919, moved to improve the company's relations with agents.
Economic Depression and Warfare: 1930s-40s
With the Great Depression in 1929, the problems facing the company's investment and operations policies became as grave as those facing the underwriting and marketing programs. Shortly after the stock market crash, NML acquired a large amount of real estate due to foreclosures on farms and railroads.
As the Depression worsened, policyholders began to demand cash. In response to the outflow of funds, NML made several changes to make its products more marketable. In 1933, women were accepted as risks for the first time in 58 years, but they were limited to half the insurance a man could purchase. Age limits were generally lowered, and a new family-income plan was adopted.
Van Dyke died in 1932, and the company was without a president for four months until Michael Cleary was selected. Cleary's good relations with those in the field soon expanded to include those in the home office. He helped maintain morale during a difficult time for the life insurance industry. The need for additional personnel to help with these tasks meant that the agency force increased between 1929 and 1933.
In 1938 the federal government began another investigation of the insurance industry. The Temporary National Economic Committee called numerous executives to Washington, then echoed many of the complaints of the Armstrong Committee. NML emerged with an enhanced reputation for corporate ethics, service to its policyholders, and honesty in its policies and practices.
With the advent of World War II, the war-risk clause was added to policies sold after October 1940. The clause went into effect two weeks after the bombing of Pearl Harbor on December 7, 1941.
Michael Cleary suffered a fatal heart attack in 1947 and was replaced by Edmund Fitzgerald, who had first joined NML in 1932 as a part-time employee. Fitzgerald's name would later be borne by one of the company's largest and most famous investments, the freighter that sank in Lake Superior in 1975.
Falling Behind: 1950s-60s
Home office expenses rose to double premium income between 1946 and 1954. Under Fitzgerald, an administrative restructuring with additional specialized service and research functions was completed by 1955. NML began to computerize its operations in the late 1950s, cutting costs, improving service, and delaying the need for a new building. Fitzgerald needed to increase the yield on NML's portfolio. In 1933 NML had the second largest mortgage account among the major firms; it was the second lowest by 1947. NML had the smallest stocks and bonds portfolio in 1933, and the third largest by 1947. By 1955, the company ranked fifth in mortgage holdings, and its holdings of private securities had increased relative to the public bonds it purchased during World War II.
By not diversifying, NML had not kept up with its rivals, and its relative position within the industry was falling. The decision to remain an individual, select-risk insurer, however, was made to maximize safety. NML attempted to meet the market conditions of the postwar era with the same methods which had proved successful in the past. The agency system was improved. A "short course" for agents had been introduced in 1935, and sophisticated agent training commenced following the war. More advanced training was left to various Chartered Life Underwriter (CLU) programs, and NML had the highest proportion of CLUs on its staff of all the major companies. The designation, Chartered Life Underwriter, was granted by the American College of Life Underwriters to individuals who had successfully completed the college's battery of courses on economics and insurance. Recruitment was difficult in the postwar years. Although agent income was high due to postwar prosperity, alternative employments outside the life insurance industry provided a great deal of competition.
Fitzgerald led the company into a greater involvement with national organizations and national issues, ending the company's historical isolation. NML became more involved in its home city, Milwaukee. When Fitzgerald retired in 1958, his successors, Donald Slichter, who became president that year, and Robert Dineen, who followed him in 1965, continued on the path of stable growth and selective change.
Competition forced NML to introduce products which it had resisted for years. In 1956 it took on some substandard risks; these risks occurred in a population less healthy than those included in the actuarial calculations for insurance premiums. Since substandard risks were excluded from the calculations for normal premiums, persons in the less-healthy group had to pay an additional premium. The company's version of double indemnity was introduced in 1959. Another area pursued was the pension trust business. Initiated by agents in 1938, these trusts involved large numbers of individual policies for employees of corporations. Such trusts were costly to service, cumbersome to administer, difficult to protect from the competition, and similar to group insurance. Eventually, this business was lost because of the company's refusal to rewrite them as a single group policy. On the other hand, the insurance service account introduced to the industry in 1962 was a particularly effective innovation. Customers with multiple policies could remit a monthly payment covering all policies rather than receive an annual bill for each policy.
Waking Up: 1970s-80s
In 1967, Francis Ferguson was elected president of "the sleeping giant," as the company was described in the industry, "the most stubbornly traditional of the top ten" companies, according to John Gunda's The Quiet Company. A corporate reorganization from vertical to horizontal was accomplished by 1968, with departments realigned by groups. Ferguson introduced the concept of strategic planning, which, in the 1980s, turned NML from a product- to a market-driven company. He introduced extra ordinary life in 1968, which replaced whole life as the company's most popular product within a year, because it helped counter the negative effect of inflation on whole life policies. As the Depression-era employees began to give way to those from the baby-boom generation, a desire to grow and to innovate was felt within the company. Growth bonuses were introduced as an incentive to agency growth, and, finally, NML decided to market its products more aggressively. It purchased a share of the commercial time on the broadcasts of the 1972 Olympic games and introduced its corporate slogan, "The Quiet Company." The giant had awakened.
The company's investments also became more visible, particularly the Edmund Fitzgerald. Other notable investments included major real estate ventures and energy exploration. An addition to the home office, Northwestern Mutual Place, was completed in 1981.
In 1980, Ferguson became chairman of the board, and Donald Schuenke was elected president. Together they presided over a transformation of NML. The company, shifting from its historic specialist role, began to diversify. All previous product innovations had been risk-based on individual lives. In 1982, NML made its initial move in the direction of group and health insurance by acquiring the Standard of America Life Insurance Company. That same year, non-annuity investment products and fee-based services were added when NML acquired Robert W. Baird & Company, Wisconsin's largest investment-banking organization.
The 1980s brought a number of challenges for insurance companies in general. The federal government, contemplating a tax on the cash value of life insurance policies, prompted insurers to spend more time and money fighting such proposals. Interest rates climbed, in the early 1980s, reducing the appeal of their fixed return policies. In addition, the nation was hit by the AIDS crisis and its related costs and controversies.
Even as the 1980s brought significant change, much remained familiar, including free lunches in the company's cafeteria, a tradition since 1915. Despite diversification, NML's primary attention remained largely on its traditional individual life policies. "The Quiet Company," NML's corporate slogan, emphasized that it put the policyholder first: it ranked first in dividend performance more often between 1940 and 1990 than any other company.
The belief in the equal treatment of all policyholders, fiscal conservatism, an insistence on efficiency, and the adherence to excellence continued to guide NML as competitors launched newer, flashier products. A case in point was universal life, a product offered in response to plummeting whole-life sales during the early 1980s interest rate hike. NML refused to offer it, believing long-term the product was not in the best interest of customers or the company. "Though Northwestern Mutual agents were eaten alive by the competition, they held tight for almost six years before the company released a new product that could compete with universal life without sacrificing the company's values," wrote Leslie Werstein Hann for Best's Review. Some universal life sellers were later sued when the product did not perform as promised.
By the end of the decade, NML's policyholders numbered more than two million. Its $28.5 billion in assets ranked it as the nation's tenth largest life insurance company, with over $200 billion insurance in force, 7,000 agents associated with over 100 general agencies, and almost 300 district agencies representing the company in every state of the union. Investment operations were conducted out of the home office and 13 real estate investment field offices located throughout the country. Donald Schuenke became chairman, and James Ericson was elected NML's 15th president in 1989.
Into the 1990s
An investment made back in the mid-1980s began reaping rewards as the new decade began. In 1985, NML put $250 million into MGIC Investment Corp., a mortgage insurance company hit hard by defaults in the oil-producing states. The company continued to bleed over the next several years, and NML began to sweat a bit. Finally, in 1989, MGIC turned a profit, and two years later NML reduced its holdings to 68 percent from 95 percent through an eight million share stock offering. A second offering followed in 1992, and MGIC stock split two-for-one in 1993. MGIC's 1994 net income hit $159 million, and the business ranked second among mortgage insurers in terms of market share. By 1995 NML had pared its holdings down to 20 percent and planned to sell an additional 10 percent. Ultimately, the initial $250 million investment deal produced more than $1 billion for NML.
While the MGIC investment proved to be stellar, NML had some flies in the ointment. Disability income insurance, their worst-performing product, needed to be turned around. NML got caught up in a "benefits escalating arms race," according to William C. Koenig, an NML executive quoted in Best's Review. Moreover, the company had not kept close enough tabs on the costs related to the product line, thus compounding the problem. In 1998, NML revamped the department, raised prices, lowered benefit amounts, and tightened underwriting.
NML's experience with disability insurance prompted some operational changes when the company began developing a long-term care product in 1997. A separate subsidiary was formed and the administration of the product was outsourced, allowing NML to easily evaluate costs, react quickly to regulatory changes, and, if needed, fund growth through issuance of bonds.
On January 1, 1999, NML broadened its investment business with the purchase of Frank Russell Co., a privately owned Tacoma, Washington-based investment management and advisory firm. Frank Russell, operating in more than 30 countries, held approximately $40 billion in assets under management and provided consulting services for more than $1 trillion in client assets. Institutional investors held the 63-year-old company in high regard, and the Russell 2000 was the most widely used benchmark for small cap stocks. The sale, estimated to exceed $1 billion, was considered mutually beneficial. Frank Russell would retain a great deal of independence, while NML would gain a foothold internationally.
NML's reputation in its core insurance segment remained solid: named "Most Admired" in its industry for 16 years, according to Fortune magazine rankings. An important factor in the company's success was its sales force, considered among the best in the industry. While others in the insurance business had widened their distribution systems, NML stayed the course and emphasized sales force growth and development.
Hann wrote for Best's Review, "Northwestern Mutual's agents are among the most productive and financially successful in the life insurance industry." The agents--who, based on four-year retention rates, stayed with the company longer than average--received no company subsidies or base salaries but relied solely on commissions.
Stock-based ownership was another industry trend NML was loath to follow--mutual insurance companies Prudential, Metropolitan, and John Hancock were moving toward public ownership. Ericson, president and CEO, told Best's Review in 1999 that NML would remain a policyholder owned company unless regulatory requirements or taxation changes forced the move. With that in mind, NML had lobbied the state of Wisconsin to pass legislation allowing for mutual insurance companies to convert to a mutual holding company structure.
Growth on Tap for 2000 and Beyond
NML laid the groundwork for a trust company in 2000. True to form, NML continued to take measured steps as other insurance companies raced to expand their services. A loosening of federal regulations had prompted some insurance companies to move quickly into not only trust services but toward full banking capability. NML planned to market its trust services to its own affluent client base and through Frank Russell.
In May 2001, NML President Edward J. Zore stepped up as CEO. His ten-year plan for NML included doubling company assets to $200 billion and increasing personal life's market share to 10 percent from 7.5 percent. He projected Frank Russell Co.'s assets would grow to $400 billion from the current $66 billion.
Tragically, Zore and other insurance executives now had to factor in new scenarios as they made their projections for the future. Insurance companies were hard hit by the catastrophic events of September 11, 2001. NML was expected to process $150 million in life claims related to the destruction of New York's World Trade Center. NML, like other insurers, did not invoke war-risk exclusions, calling the events an act of terrorism. As the nation moved toward the conclusion of 2001, it was on high alert for additional attacks within its borders.
Principal Subsidiaries: Robert W. Baird & Company, Inc.; Northwestern Long Term Care Insurance Company; Frank Russell Company; Network Planning Advisors, L.L.C.; Northwestern Mutual Trust.
Principal Competitors: Prudential Insurance Corporation of America; New York Life Insurance Company; TIAA-CREF.