1900-1909: THE ERA OF OPTIMISM

'The Lincoln' insurance company built on foundation of failed pyramid scheme

By LYNNE McKENNA FRAZIER of The News-Sentinel

Buying life insurance was more akin to gambling than making a conservative investment in the early 1900s.

The industry was little regulated and populated by scam artists who operated companies like Ponzi schemes, using new policyholders' premiums to repay earlier buyers.

That was the background of the Fraternal Assurance Society of America, which, despite its national-sounding name, was a very local, allegedly nonprofit insurance organization founded in Fort Wayne in 1902.

Wilbur Wynant, the founder of the insurance plan, already had founded nine other companies before coming to Fort Wayne with his latest venture, which was little more than a pyramid scheme.

Like all pyramids, this one didn't take long to collapse.

But in this case, the directors decided to salvage the enterprise. On May 29, 1905, they drew up articles of incorporation for Lincoln National Life Insurance Co.

The new company was established as a legal reserve insurer, meaning enough money would be available to repay policyholders.

Lincoln paid, in essence, a bounty to lure its first president, Arthur F. Hall. His compensation was tied to the company reaching $1 million in insurance in force by 1907 and $53 million by 1921.

That sort of compensation package was criticized then by insurance reformers, but seems similar to CEOs being required to hit target stock prices or profit targets today.

Hall was responsible for getting permission from Abraham Lincoln's only surviving son, Robert Lincoln, for the company to use the president's image. In 1909 Lincoln declared its first dividend — 5 percent of its earnings.

Lincoln Life thrived and did not join the multitude of small insurance companies that failed or were acquired because of the strength of its sales force and willingness to innovate. In 1910 it latched onto a new mathematical practice — actuarial science.

Actuaries determine how much in premiums a company has to charge to recover its costs on a policy by calculating average life spans.

Actuarial tables, as they were developed, could take into account a whole range of variables, such as age, height, weight and health. That way a company knows how much less to charge a 25-year-old than a 55-year-old for the same coverage.

Longtime Lincoln CEO Ian Rolland, who joined the company as an actuary, joked that actuaries were accountants without the sense of humor.

But the dreary science allowed insurance companies to accurately measure the risk in writing policies. That later would give investors confidence in buying stock in those companies.

Lincoln Life in 1910 was a long way from becoming a national financial powerhouse.