found the price of coverage too
high and therefore surrendered
their coverage. Equally problematic was the fact that insurers had
total control, with no disclosure
or supervision, regarding the
amount of dividends paid. As a
result, the dividends tended to be
much lower than the companies’
original illustrations. Finally, the
funds set aside to pay these deferred dividends typically were
classified as surplus rather than
as a liability, which also enabled
and encouraged a company to
spend the money in ways not directly benefiting policyholders.
The Equitable was a leading
promoter of tontine and semi-tontine policies. According to
Hendrick, it also compensated
its executives exceptionally well.
In addition to their salaries, for
example, the top Equitable executives received an annual share of
the company’s surplus: 2. 5 percent to Hyde, 0.5 percent to James
Alexander (the company president), and 0.5 percent to George
W. Phillips (the chief actuary).
Hendrick’s articles exposed many of these financial issues
at the Equitable. But the issue that inspired the most public
fascination and outrage may have been a lavish party thrown by
James H. Hyde, the son of the company’s founder, who gained
control of the company when his father died in 1899.
James Hyde was more of a socialite than a businessman. He
was far more interested in fancy dress and driving horse-drawn
carriages around New York than in managing the affairs of an
insurance company. On Jan. 31, 1905, Hyde threw a lavish ball
in New York that reportedly cost more than $100,000—a staggering sum in those days. According to a later account by Walter
Lord, the party began at 11 p.m. and continued until dawn. The
theme was the court of Louis XV, and the guests were costumed
accordingly. Highlights included a ballroom decorated in the
manner of Versailles with hundreds of rosebushes and other
lavish flowers, an operetta featuring the leading singer in Paris,
a ballet recital by Metropolitan Opera dancers accompanied by
the Met’s 40-piece orchestra, and an exceptionally decadent
dinner served at 3 a.m.
The magnificent ball was widely covered in newspapers
around the country. According to the Chicago Tribune, for example, “The eighteenth century ball given by James H. Hyde . . .
altogether eclipsed in picturesque and entertaining qualities any
entertainment, public or private, New York has known for years.”
The business world, however,
was less star-struck than the general public, and accusations soon
arose that much of the cost may
have come from company funds.
The New York Insurance
Department quickly began an investigation of the company and
uncovered a series of operating
and investment practices that it
deemed were designed to benefit company insiders rather than
policyholders. The department’s
investigating committee recommended in late May 1905 that
both Hyde and Alexander be removed from their positions and
that the company be mutualized.
The committee’s language
was blunt. “A cancer can not be
cured by treating the symptoms.
Complete mutualization, to be
paid for at a price only commensurate with its dividends is, in my
opinion, the only sure measure of
relief,” wrote the superintendent
in his final report.
The Armstrong Investigation
The events at the Equitable inspired the New York legislature
to undertake a much broader investigation of the life insurance
industry in New York. The investigation was headed by William
Armstrong, a state senator, and was known as the Armstrong Investigation. The general counsel for the investigation was Charles
Evans Hughes, who later served as governor of New York, secretary of state, and chief justice of the Supreme Court. He also ran
unsuccessfully for president in 1916.
The legislature’s charge to Armstrong’s committee was to
examine a wide range of life insurance matters, including ownership, cost of insurance, company expenses, investments, and
other items. No criminal charges would come out of the investigation, but the committee was asked to recommend changes to
life insurance laws and regulations.
The committee conducted its work through a series of
public hearings, focusing on the affairs of the Big Three insurers—New York Life, Mutual Life, and Equitable—as well as a
few smaller players including Metropolitan Life (then a writer
primarily of industrial insurance), the Prudential, and Mutual Reserve Life. Richard McCurdy, the president of Mutual
Life, gave particularly prominent testimony and was criticized
heavily for appointing numerous family members to high-level
positions at the company and for earning excessive levels of
compensation.
