Capital Holding Corporation

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Capital Holding Corporation

680 Fourth Avenue
Louisville, Kentucky 40232
U.S.A.
(502) 560-2000
Fax: (502) 581-0632

Public Company Incorporated: 1904 as Commonwealth Life Insurance Company
Employees: 7,900
Assets: $14.97 billion
Stock Exchanges: New York Pacific

Capital Holding Corporation is a major provider of insurance and other financial services in the United States, Europe, and the Far East. The firm’s predecessor and now its largest subsidiary, Commonwealth Life Insurance Company, traces its heritage back to the turn of the century, when the company sold its first life insurance policy to one of its own employees. It was restructured under the present name in 1969 in order to make it easier for the firm to grow through the acquisition of other companies. The company offers health, life, property, and casualty insurance through a combination of personal sales and direct marketing and also provides consumer banking and investment services. The company is one of the ten largest stockholder-owned life insurance companies in the United States.

When founded in 1904, Commonwealth was intended to serve as a catalyst to economic development in Kentucky and as a means to keep both business and capital within state borders. To emphasize this connection, the firm was named after the Commonwealth of Kentucky. It also adopted the state’s motto, “United We Stand, Divided We Fall,” and its seal. Two of the company’s founders figured prominently in its early years. Colonel Joshua D. Powers, the firm’s first president, was a lawyer, a state legislator, and founder of several corporations. Darwin W. Johnson joined the company as secretary-treasurer after working for several years in the tobacco business.

Initially, Commonwealth sold insurance only in Kentucky, specializing in ordinary life insurance and also inexpensive coverage for low-income workers. This latter type of insurance policy was called industrial, or weekly premium debit, insurance because the insurance agent collected the premiums in person, every week. Although these premiums were often paid in the form of chickens, eggs, or produce, the company’s fortunes grew rapidly, leading to expansion into other states, including Alabama. Because of the concentration of blue-collar workers, urban areas offered the most lucrative marketing opportunities.

Over the next 20 years, Commonwealth’s business experienced both peaks and valleys. Between 1914 and 1918, its life insurance sales increased, although death losses from World War I and an influenza epidemic depressed overall financial results. The postwar recession of 1921 did not affect the company’s growing prosperity, which continued during the rest of the decade. The company sustained major losses due to the Great Depression, but rebounded by 1935 as a result of the intensified efforts of its field sales force.

During this period, the company was led by Darwin Johnson, who had succeeded an ailing Joshua Powers as president in 1922. Johnson’s death in 1936 touched off a power struggle on the board of directors that ended in the election of Homer Ward Batson as the company’s next president. When Batson took over, the company was experiencing serious financial problems. Although it appeared on the surface that the company was doing well, many of its loans were not guaranteed with sufficient collateral and others had little chance of ever being repaid. In addition, the company’s practice of paying liberal dividends to shareholders, even during the Depression years, resulted in a critical shortage of funds. Batson immediately implemented a series of measures intended to increase the company’s capital and place it on stronger financial footing. All officers were required to take a salary reduction; unnecessary lights were to be turned off, and clerks were expected to use pencils until they were too short to be held comfortably. The consolidation of several field offices, elimination of problem policies, and suspension of dividend payments for 1938 contributed to the company’s economic recovery.

Not all of Batson’s initiatives proceeded as smoothly. In 1936, he sent form letters to the recipients of several small loans to request full payment. One of these borrowers was James E. Dunne, the publisher of Dunne’s Insurance Reports. In response, Dunne proceeded to circulate a scathing assessment of Commonwealth’s financial condition among the subscribers of Dunne’s Insurance Reports. He subsequently attempted to oust Batson as president and ruin the company. Commonwealth’s management eventually ran a series of advertisements in local newspapers to restore public confidence in the company.

Dunne’s allegations of mismanagement and insolvency later were brought before a Jefferson County grand jury, but the company successfully defended itself against the charges. However, to provide stronger control over Commonwealth’s future financial operations, the state’s insurance commissioner required the company to submit all loan applications for over $20,000 to both the insurance commission of Kentucky and that of the state in which the loan was to be made.

With this incident behind it, Commonwealth turned its attention to the marketplace. It found that its existing industrial insurance benefits were no longer competitive and the methods by which premiums had been calculated were out of date. A revitalized product line introduced in 1941 boosted sales force morale and increased insurance sales.

That same year, the board of directors elected Morton Boyd as president and Batson became honorary chairman. Boyd focused on expanding Commonwealth’s insurance business through the agency sales force.

The onset of World War II restricted the availability of many goods and provided few alternatives for consumer spending. High employment levels increased the demand for life insurance, spending considered helpful to the war effort because of its anti-inflationary effects. With customer demand higher than ever, Commonwealth’s sales force had difficulty covering the market because it competed with the military for manpower and supplies such as gasoline. The war also affected the nature of the company’s insurance policies. New issues written by Commonwealth and other insurers excluded members of the military from receiving death benefits. Policyholders who had purchased insurance prior to entering the military were allowed to retain their coverage. This procedure cost the company a significant amount of money in wartime mortality claims. When the war ended, the company concentrated on improving sales efficiency and quality through better recruitment and training of agents. Blue collar unemployment drove the weekly premium insurance business down, but sales of ordinary insurance picked up the slack.

The company continued to grow during the rest of the 1940s. The insurance business was becoming increasingly competitive, with many firms using the success of a particular product in one state as a springboard to marketing in another location. Commonwealth watched with more than a casual interest as one of its competitors in Alabama, Liberty National Life Insurance Company, successfully marketed burial insurance policies that also provided for the funeral service to be handled by a funeral home owned by the company. In order to counteract a likely expansion of this program into Kentucky, Commonwealth designed a similar product based on a standard weekly premium policy. The Kentucky Funeral Directors’ Association was contracted to handle the funeral arrangements so that Commonwealth did not have to directly enter the funeral business. The product was an instant success, with some agents writing as many as 100 policies in the first week.

Growth continued in the 1950s with only a minor disruption caused by the Korean War. Commonwealth embarked upon a program of aggressive expansion beyond Kentucky. In 1952, it developed a new concept in life insurance that enabled policyholders to pay their premiums through regular automatic withdrawals from their checking accounts. Although the company met with some initial resistance from bankers, other insurers become enamored with the simplicity of the concept. Their decisions to introduce similar versions of Commonwealth’s Bank-O-Matic program eventually persuaded reluctant bank executives to lend their support.

By 1954, the Korean War had given way to a recession that forced Commonwealth to curtail its ambitious expansion plans and focus instead on maintaining its field sales force. When agent turnover started to increase in response to a drop in sales, the company invested heavily in recruitment and training of new sales personnel. As the economy recovered, competition in the life insurance market intensified and Commonwealth introduced a new family coverage policy.

In 1958, Boyd became chairman and was succeeded as president and chief executive by William H. Abell, who had previously served the company as general counsel and a member of the board. Under his leadership, the branch-agency system was restructured into a more efficient and unified organization, improvements were made in agents’ retirement benefits, and several product innovations were launched.

As Commonwealth entered the 1960s, it became evident that weekly premium insurance was no longer a viable product. Social Security and increased wages for middle-class workers decreased need for the burial insurance benefits that had made the weekly premium concept so popular. The gradual loss of business in this area compelled Commonwealth to investigate new avenues of growth. In addition, competing life insurance companies that offered health and accident coverage were able to offer customers a more complete selection of insurance products, enabling them to attract sales personnel. Commonwealth initially considered entering the health and accident field, but, when it appeared that the federal government would be heavily guiding the nation’s health-care system, the company shifted its focus to automobile, fire, and casualty insurance.

The company originally intended to enter this market via acquisition, but ultimately developed the business internally as a subsidiary. By mid-1962, a pilot operation based in Louisville, Kentucky, began selling residential fire and homeowners insurance and individual automobile policies. Problems arose, ranging from computer billing errors to underwriting mistakes, and the new operation barely broke even. However, Commonwealth gradually expanded its new-products market beyond Kentucky.

Aggressive expansion into other states proved to be more difficult than originally anticipated because the company’s contacts, particularly among local bankers, were not as strong as in its home state. It was at this time, however, that Commonwealth was offered the opportunity to acquire the Indiana-based Empire Life and Accident Insurance Company. Empire’s chairman sought the merger to resolve an ongoing conflict between two of its executives who were also his sons-in-law. The companies joined forces on October 31, 1963, under the Commonwealth banner. This development gave Commonwealth a stronger position in Indiana, and added a significant number of black customers to its rolls. Since its early years, when advertising stressed that Commonwealth wrote “white lives only,” Commonwealth had served only the white market. Kentucky funeral parlors were still segregated at this time, so with the Empire merger, the company was forced to begin handling black burial business in Kentucky, resulting in the formation of the Kentucky Bonded Funeral Company.

The state of Florida was identified as the company’s next site for expansion. Commonwealth management believed that by targeting a southern state, the company would meet with less sales resistance than it had faced in Indiana. Florida was also especially attractive due to its projected growth in population and economy.

Commonwealth continued to experience problems in hiring additional general agents due to a lack of attractive sales incentives and a narrow product line. By the late 1960s, the Vietnam War had made this situation even worse. Despite a healthy economy, which enhanced the market potential for insurance, the lack of available staff to cover sales territories placed the company’s expansion strategy on indefinite hold. This situation became more critical as the war intensified and the costs of developing the Florida market increased. Attempts to acquire other companies proved fruitless, since most candidates were reluctant to be part of Commonwealth.

After much consideration, the company embarked upon a plan to form a holding company. At first, this holding company would consist of the existing Commonwealth organization but, in time, would serve as an umbrella for acquired subsidiaries that would be permitted to operate autonomously. The new organization was incorporated in Delaware in 1969 as Capital Holding Corporation, a name which was felt to be appropriate regardless of the type of business the company purchased. William Abell, Commonwealth’s president since 1958, assumed the same position in the holding company and became chairman after the 1969 acquisitions of National Trust Life Insurance Company and Peoples Life Insurance Company. The following year, Capital purchased First National Life Insurance Company. The operations and sales force of this New Orleans, Louisiana-based organization were later integrated with those of Commonwealth, paving the way for the company’s entry into the Louisiana market.

Capital’s gradual growth through acquisition created opportunities and provided the necessary resources to expand its product line and improve its competitive standing. It also benefited from such socioeconomic factors as the baby boom of the 1970s, a growing young adult market, and the increasing availability of disposable income. However, the company suffered from weak management and a conservative board of directors that remained fixated on the outmoded method of selling life insurance door-to-door. By the latter half of the decade, Commonwealth instituted a training program to help its agents increase their return on collection calls by converting these customers into buyers of new insurance products.

Several new products were also introduced. One of these policies, the Capitalizer, represented a major departure from the company’s traditional philosophy. Until this point, Commonwealth had sold policies with set premiums and had assumed the risk of changing interest and mortality rates and expenses. In contrast, the Capitalizer offered an adjustable premium that would vary according to future profits or losses in the company’s investments or changes in its mortality experience. This feature enhanced the company’s ability to compete with mutual funds, which had recently become popular.

Thomas C. Simons, who was hired away from another insurance company to become the company’s chief executive officer in 1978, set out to make major changes in Commonwealth’s marketing strategy. He believed that the company’s strength was its ability to sell products to the middle-income bracket of the market. His goal was to find new ways to reach this market before larger insurers did.

In 1981, Capital acquired National Liberty Corporation, a holding company that sold health insurance to middle-class consumers by direct mail, telephone solicitation, and television commercials. In addition to providing Capital with a business that fit its existing operations, National Liberty offered an efficient marketing system with the capability to improve both sales productivity and customer service.

One year later, Capital began selling insurance and other financial products at service centers within Kroger’s retail food stores, capitalizing on a growing consumer trend toward one-stop shopping, and setting the stage for similar future strategies.

In 1984, Capital purchased First Deposit Corporation from Parker Pen Corporation. This acquisition gave Capital the capability to market banking services through direct mail and also made it the owner of a small New Hampshire bank and a California-based thrift organization. That same year, Bank of America agreed to allow Capital to sell automobile, homeowners, and life insurance from specific bank branches in return for an office rental fee. However, by 1986, this venture still had not shown a profit and Capital terminated the project. Despite this setback, 1986 ended on a high note with the successful acquisition of Worldwide Underwriters Insurance Company, a direct-response marketer of automobile and homeowners insurance. In 1987, as it strengthened its hold on the moderate-income segment of the marketplace, the company sold its Georgia International Life Insurance Company subsidiary, which focused primarily on higher-income households.

Capital joined with four other insurance companies in 1988 to settle previous complaints lodged by Delaware’s insurance commissioner. The companies were accused of collecting higher life insurance premiums from blacks, reflecting differences in life expectancy between the black and white populations. Although the insurers claimed that they had not sold such policies in over 20 years and were unaware that race-based premiums were still being paid, they agreed to increase the death benefits for black beneficiaries who had overpaid on their policies.

Simons died in August 1988 and was succeeded as chairman and chief executive officer of Capital Holding by Irving W. Bailey II. He had been with the company for ten years and had most recently served as president and chief operating officer. Bailey continued his predecessor’s strategy of developing niche businesses, which, unlike life insurance, face little price competition. Under Simons, the company had introduced such products as burial policies for people with annual incomes under $15,000, life insurance policies for people making between $15,000 and $25,000, and insurance policies specifically developed for veterans.

Soon after Bailey took over, Capital Holding launched a new “living payout” policy that supplemented other life insurance plans. Capital would pay insured people with terminal illnesses one-half of the total face value of their primary policies while they were still living. Upon their deaths, Capital Holding would recoup this amount from the primary insurance company. In 1989, Capital purchased Southlife Holding Company, a Nashville, Tennessee-based insurer, to increase its market share in the home-service field.

By 1990, Capital Holding consisted of four major operating groups. The agency group markets life and health insurance to the company’s home-service customers in the eastern and southeastern United States through three regional subsidiaries: Commonwealth Life Insurance Company, Peoples Security Insurance Company, and Public Savings Insurance Company. The direct response group, consisting of National Liberty Corporation and Worldwide Insurance Group, markets life and health insurance through television and newspaper advertising, direct mail, and telephone sales. Investment services are handled through the company’s accumulation and investment group, and the banking unit operates a credit-card-based loan business through First Deposit Corporation and the First Deposit National Bank. The door-to-door method of selling insurance on which the company was built had given way to the use of more sophisticated marketing and sales techniques. Capital Holding Corporation faces the future with a connection to its past that provides the company with the direction it needs to remain competitive in the financial-services industry.

Principal Subsidiaries

ACI Financial Corporation; Capital Assignment Corporation; Capital Broadway Corporation; Capital Enterprise Insurance Company; Capital General Development Corporation; Capital Initiatives Corporation; Capital Landmark Insurance Company; Capital Real Estate Development Corporation; Commonwealth Life Insurance Company; C.U. Members Insurance Services, Incorporated; First Deposit Corporation; First Deposit Life Insurance Company; First Deposit National Bank; First Deposit Savings Bank; Insurance America Sales Agency; Kentucky Bonded Funeral Insurance Company; National Home Life Assurance Company; National Home Life Assurance Company of New York; National Liberty Corporation; National Liberty Life Insurance Company; National Liberty Marketing, Incorporated; National Standard Life Insurance Company; Peoples Security Life Insurance Company; Redding Financial Corporation; The Financial Group, Incorporated; Veterans Life Insurance Company; Worldwide Underwriters Insurance Company.