Washington National Corporation

1911–1966

Through its two primary operating companies, Washington National Insurance Company and United Presidential Life Insurance Company, Washington National Corporation operates as an insurance holding company involved in marketing and underwriting life insurance, annuities, and health insurance for individuals and groups. After undergoing several years of extensive restructuring during the late 1980s and early 1990s, Washington National was poised to compete in the volatile market for individual and group health insurance, banking on its more than 60 years of experience as an underwriter of accident and health insurance to guide it through one of the most turbulent, yet potentially lucrative, periods in the health insurance industry's history.

The first link in the chain of events that led to Washington National's formation was the establishment of Washington Life and Accident Insurance Company of Chicago in 1911. This company, the earliest predecessor to Washington National, was organized as an assessment insurance organization, or an insurer with the authority to assess or charge its policyholders for losses the company incurs, rather than being restricted to a fixed premium for a specific type of insurance coverage. Assessment companies, occasionally referred to as stipulated premium companies, were relatively common during the 19th and early 20th centuries, but many later exited the business, a course Washington Life and Accident Insurance Company of Chicago took in 1923 when it was reorganized and incorporated as Washington Fidelity National Insurance Company. When this latter company was incorporated, it merged with two insurance companies, Fidelity Life & Accident Insurance Company of Louisville and United States National Life & Casualty Company, although the merger transaction was not completed until three years later, in 1926.

In 1931, Washington Fidelity National Insurance Company, the insurance concern created in 1923, changed its name to Washington National Insurance Company (WNIC), a name the company would keep for the rest of the century. Thirty-seven years after adopting its new and permanent name, WNIC formed Washington National Corporation as a holding company, but during the intervening years, WNIC developed into an insurance company specializing in group accident and health insurance. WNIC entered the group accident and health insurance market, which comprised insurers writing accident and health insurance to groups of people sharing common characteristics, in 1930, when the company began writing loss of time insurance for teachers. In the years leading up to the formation of Washington National by WNIC, WNIC's stake in group accident and health insurance for teachers remained substantial, accounting for roughly 25 percent of the company's group accident and health business, the largest segment of WNIC's insurance business.

As WNIC's accident and health insurance business grew, taking on other groups of policyholders in addition to teachers, the company grew in other areas as well, acquiring Des Moines, Iowa-based Great Western Insurance Company in 1938 and Chicago, Illinois-based Hercules Life Insurance Company the following year. In conjunction with the acquisition of Hercules Life, WNIC also assumed the insurance business formerly belonging to National Life Insurance Company, which operated as a separate operation from WNIC until 1948.

By the mid-1960s, WNIC was one of the 25 largest insurance underwriters in the country, writing a full-line of life and accident and health insurance. Assets in 1966 totaled $437 million, capital funds amounted to $101 million, and insurance in force equalled $3.2 billion, figures that had doubled during the previous decade. The company by this point conducted business in every state except Hawaii, Alaska, and New York, employing a sales force nearly 4,000 strong. With two-thirds of the company's business derived from accident and health premiums and the remaining third generated by life insurance business, WNIC occupied an enviable position in the insurance industry, boasting a 35-year record of never registering an underwriting loss. Dramatic changes were in the offing, however, not because WNIC's operations required significant readjustment--the company's market position was sound--but because of the substantial benefits a corporate reorganization would engender. The reorganization that ensued led to the formation of Washington National Corporation.

Assets in 1966 totaled $437 million, capital funds amounted to $101 million, and insurance in force equalled $3.2 billion, figures that had doubled during the previous decade.

1967–1970

During the late 1960s, the trend among insurance companies was to form holding companies, a corporate maneuver that then permitted insurance companies to diversify--something WNIC's chairman at the time, G. Preston Kendall, wanted to pursue. Preston, whose father, George Kendall, and uncle, Harry Kendall, had founded WNIC, announced in late 1967 that WNIC was organizing a holding company to enable WNIC's diversification into variable annuities (policies that provide income payments of varying amounts depending on the earnings of the investments supporting the annuity). Washington National Corporation was incorporated early the following year as a holding company to acquire all of the outstanding stock of WNIC through a share-for-share exchange, marking the beginning of Washington National's existence and ushering in a period of dramatic growth for WNIC and its new holding company.

Washington National spent the next decade taking full advantage of its classification as a holding company by branching out into other fields in the insurance business. By either forming subsidiary companies or acquiring companies, the newly formed holding company broadened the scope of its operations and evolved into a well-rounded insurance entity. The first step toward the company's decade-long diversification was taken in early 1969, slightly more than a year after Washington National was incorporated, when Washington National announced its intentions to acquire Anchor Corporation, one of the largest and oldest mutual fund organizations in the world, and its life insurance subsidiary, Anchor National Life Insurance Company. The acquisition of Anchor, the largest mutual manager ever absorbed by an insurance company, aped another insurance industry trend of the period that saw a rash of affiliations between mutual fund companies and insurance companies, as insurance carriers fought to keep pace with each other in the race toward diversification. Later that year, Washington National added another subsidiary company to its corporate umbrella when it formed Washington National Equity Company as a broker-dealer to enable the sale of mutual funds and variable annuities by the holding company's sales force. Along with its equity company, the holding company formed Washington National Corporation Development Company to engage in equity-related real estate investments.

The following year, in 1970, Washington National acquired Washington National Trust Company, a non-banking trust company that added trust services to Washington National's growing list of business lines. By the time this deal was concluded, however, Washington National was in the midst of dealing with a potentially debilitating problem that required the concerted attention of the company's management and temporarily halted the formation and acquisition of additional subsidiaries.

The company's unblemished record of underwriting accident and health insurance without a loss came to an end in 1969, when a rise in hospitalization costs and an increase in the number of accident and health insurance claims impaired Washington National's ability to generate profits, making for disappointing losses in 1969 and 1970. The losses incurred by the company during the two-year slide, however, reflected deeper-rooted problems than an unexpected increase in accident and health claims and the sudden escalation of hospitalization costs, both of which were typical occurrences in the insurance industry. Instead, the losses were attributable to the manner in which Washington National salespeople were compensated, a system that was based on the volume of group business written by a salesperson, rather than on the profitability of business written. Accordingly, salespeople could generate more business and get paid more money if they offered the lowest premiums possible, and they could retain that business if they avoided raising premiums for existing business. For the customer and the salesperson this system of remuneration had its obvious advantages, but for the company itself the focus on volume rather than profitability sent its earnings into a tailspin and sent the company's management scurrying to correct the problem in 1970.

To ameliorate Washington National's future profitability, the company's management adjusted the company's rate structure to reflect the rising cost of hospital care and established new premium rates to protect it from continued cost increases. A profit center accounting system was established to determine the profitability of each of the company's lines of business, insurance premiums were adjusted according to specific geographic areas and, perhaps most importantly, the company's compensation system was amended to reward profitability of business written and not volume. With these changes, and the concurrent rise of a new generation of corporate managers, Washington National was able to arrest the retrogressive slide its earnings had experienced in 1969 and 1970 and return to the more robust financial performance characterizing its past.

1965–1986

Once headed in the right direction, the company resumed its diversification efforts, forming Anchor National Financial Services in 1971, which was created to market a full range of financial services, including mutual funds, life, accident and health insurance, as well as trust services, to Anchor Corporation clients. The following year, Washington National acquired Nathan Hale Life Insurance Company of New York, later renaming it Washington National Life Insurance Company of New York. The purchase of Nathan Hale Life extended Washington National's geographic presence into the New York state market, one of the few places where none of the holding company's subsidiaries were involved. Despite the number of subsidiaries Washington National had either formed or acquired since being established in 1969, WNIC continued to be the primary engine driving Washington National's growth, accounting for 85 percent of the holding company's revenues, earnings, and total assets. The importance of WNIC to Washington National's existence would increase as the 1970s progressed and Washington National began divesting properties instead of acquiring them.

Two more subsidiaries were formed after the acquisition of Nathan Hale Life--Washington National Trust Company, a non-banking trust company, in 1974, and Washington National Financial Services, Inc., a subsidiary created for insurance brokerage sales purposes, in 1977--but in 1978 the holding company reversed its direction, shedding one of its subsidiaries rather than adding one, when it sold Anchor Corporation. Anchor Corporation's life insurance subsidiary, Anchor National Life Insurance Company, was sold eight years later, in 1986, but its divestiture and the sale of Anchor Corporation did not reflect Washington National's strategy to downsize. Instead, during the span separating the sale of Anchor Corporation and the sale of Anchor National life, the holding company was setting the foundation for an acquisition that would be an integral contributor to its operations in the 1990s. During the late 1980s and into the 1990s, there were two chief operating companies that constituted the essence of Washington National; one was WNIC and the other was a company Washington National slowly began to acquire in 1981.

Founded in 1965, United Presidential Life Insurance Company initially sold whole life endowment policies, typically the most expensive type of life insurance sold, under which a policyholder receives the value of the policy if he or she survives the endowment period. The company did not begin to record its exponential growth until it switched to selling term insurance in the early 1970s. Term insurance, a cheaper alternative to endowment insurance that covers the policyholder for a limited, specified duration, became widely popular during the early 1970s and United Presidential Life benefitted accordingly. The company moved into the brokerage market in 1974, using independent agents instead of company employees to sell its policies and earned the reputation as a quick, reliable insurer, garnering business from larger insurance carriers because it issued policies more expeditiously.

The next milestone in United Presidential Life's growth occurred in 1981, when the company's core insurance product switched from term insurance to universal life insurance, a type of insurance under which premiums were flexible, protection was adjustable, and insurance company expenses and other charges were disclosed to the policyholder. Universal life insurance had been developed in the late 1970s and by 1981 had just been approved by governing insurance regulatory bodies, clearing all obstacles barring United Presidential Life's move into selling the newly developed insurance except one: The company needed additional capital. Washington National removed this last barrier in 1981, when it purchased 23.5 percent of United Presidential Life's unissued stock and thereby provided United Presidential Life with more than $3 million.

Once United Presidential Life began selling universal life insurance, success was immediate. The company's annualized new premium leapt from $800,000 to three million dollars and Washington National's stake in the company increased as well, rising to 30.3 percent by 1984, when Washington National was given 25 percent representation on United Presidential Life's board. At the time, United Presidential Life officials claimed Washington National was merely a silent partner, while Washington National officials stated the company's interest in United Presidential Life was solely for investment purposes, but three years later, Washington National, through WNIC, paid $19 a share for the 2.6 million United Presidential Life shares it did not already own, giving Washington National a new subsidiary company and one of the two primary operating companies that would carry the holding company into the 1990s.

1989–1993

As Washington National entered the 1990s, it stripped itself of one more subsidiary acquired during its acquisitive spree in the 1970s, selling Washington National Life Insurance Company of New York (formerly Nathan Hale Life Insurance Company of New York) to Columbian Mutual Life Insurance Company, based in Binghamton, New York. The divestiture of this subsidiary was made against the backdrop of declining revenues, as Washington National recorded successive decreases in its annual revenue between 1989 and 1992. The company's annual revenue total had flirted with the one billion dollar mark the year after the acquisition of United Presidential Life was completed, reaching $963.7 million, but by 1992 the company's revenues had slipped to $570.4 million. After divesting some unprofitable businesses, Washington National recorded a ten percent increase in revenues in 1993, when the holding company collected $628.5 million. Late that year, Washington National's Individual Health and Employee Benefits Division were combined into a single Health Division, as the company prepared to contend with impending nationwide health care reform.

As Washington National planned for the future, two business areas (later combined in 1993) were targeted to carry the company forward: individual health care and group employee benefits. With a focus on these two business segments, the company moved away from life insurance and annuities, gearing itself for a larger stake in the accident and health insurance field "outside of big cities in areas farther away from the major players," as the company's chairman related to Crain's Chicago Business. Much of the company's success in this volatile arena depended on its ability to respond to whatever legislative changes the country's health care industry underwent, the extent and manner of which remained undetermined as Washington National entered the mid-1990s.