32 Years of American Annuity Experience: Part 5.2 of Calculating Gifts

32 Years of American Annuity Experience: Part 5.2 of Calculating Gifts

George A. Huggins and the Conference on Annuities, 1927-1959
Article posted in Charitable Gift Annuity on 2 March 2016| comments
audience: National Publication, Ron Brown | last updated: 9 March 2016
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Ron Brown continues his in depth exploration of Gift Annuity history discussing the abuses in the American life insurance industry, regulatory reforms by New York State, and how today's design of planned gift programs was shaped by public policy decisions in the early 1900's.

By: Ronald A. Brown

II.  Public Policies on Gift Annuities: The New York

     Insurance Law of 1925

Our national policies regarding the charitable nature of gift annuities were shaped by events in New York in 1925, the year that the American Bible Society hired George Huggins to conduct a general audit of its gift annuity program.  Later that year, as the New York State legislature was amending its Insurance Law, Gilbert Darlington of the Bible Society invited Huggins to join a small coalition of nonprofit organizations to make the case that charitable gift annuities were essentially different from annuity investments sold by commercial firms. 

Darlington opened his presentation at the first Conference on Annuities in 1927 by telling the story of nonprofits lobbying the New York legislature.[1]  He told the story again in 1952 to make the point that the Committee on Gift Annuities was founded to defend the differences between charitable gifts that return a life annuity and commercial investments:

By having this statement included in the Insurance Law of New York State, the right of religious and charitable organizations to issue annuities was recognized and approved.[2]    

Concerned that this important historical context might be lost or forgotten, Darlington quoted the exemption statement for nonprofit organizations in the New York Insurance Law of 1925 so it would be preserved in the conference record:  

Annuity contracts issued by charitable, religious, missionary, educational or philanthropic non-stock corporations conducted without profit where such corporation maintains a reserve fund to carry out such contracts at least equal to its contract liabilities calculated in accordance with the provisions of Sections 84 and 85 of this Chapter.

The one requirement for nonprofits under the Insurance Law of 1925 – a very important requirement – was that they must comply with New York’s actuarial methods for calculating the “contract liabilities” of their gift annuities.  From 1925 on, nonprofits issuing gift annuities in New York have been required by law to apply standardized actuarial principles to measure the financial obligations involved with their payment rates and the average mortality of their annuitants, and to prove they are maintaining a reserve fund adequate to meet their obligations.      

State regulation of gift annuities in New York was held up as a model by the Committee on Gift Annuities.  The Principal Actuary from the Insurance Department of the State of New York made keynote presentations at the sixth Conference on Annuities in 1939, the seventh conference in 1941, and the tenth in 1959.  New York was the only state invited to play a leading role on the conference agendas.  In his report announcing a new actuarial basis for gift annuity rates in 1927, Huggins assumed a 4.5% rate of return, the return assumption mandated by New York to calculate the value of commercial annuity contracts.  The mortality table he selected for the first gift annuity rate table was “the standard in the State of New York and many other states” for commercial annuities.

Why did New York become America’s most influential regulator of charitable gift annuities?  The American Bible Society was headquartered in lower Manhattan, the Committee on Gift Annuities was based there, and eight of the first ten Conferences on Annuities were held in New York City[3]; but location alone does not explain New York’s leading role.  Understanding why requires some historical context about America’s financial services.         

In the early 1900s, life insurance companies controlled far larger financial assets than did banks at the time, and they were exercising their economic power:

At the beginning of the twentieth century, the largest American financial institutions were not banks, which today have aggregate assets far exceeding any other type of financial institution, but insurance companies.  Insurers were larger than banks by not just a hair; the largest insurance companies were twice as large and were already moving into adjacent financial areas.  They were underwriting securities.  They were buying bank stock and controlling large banks.  They were assembling securities portfolios with the power to control other companies.[4]

The life insurance industry was heavily concentrated in New York City.  In 1906, the admitted assets (i.e., legally required reserves) of life insurance companies domiciled in New York State represented 58.1% of all U.S. life insurance company reserve assets, but that understates the influence of New York.  When one adds the assets of out-of-state life insurance companies licensed to do business in New York, and thus subject to New York laws, the total represented 97.5% of the assets of all U.S. legal reserve life insurance companies.[5]  New York law required out-of-state insurance companies to comply with its investment restrictions:

Since its investment laws have consistently been among the strictest in the United States, its laws have had a more important influence than the laws of any other state in marking out the areas in which life insurance funds may be invested.[6]

In the year 1905 the “Big Three” life insurance companies were all headquartered in New York City.  The value of their admitted assets had grown by 500% in 20 years.[7]  They dwarfed the assets of commercial banks[8]:

Company Name                     January 1, 1885            January 1, 1905

Mutual                                     $103,583,301                 $440,978,371

Equitable                                 $  57,548,716                 $412,438,381

New York Life                          $  58,941,739                 $390,660,260

Without disclosing their financial positions, some life insurance companies were secretly acquiring banks and other companies, actively managing them, and manipulating financial operations for their own self-interest.  A series of sensational stories in the national media about “the manipulation of insurance company investment funds through subsidiary trust companies” by the Equitable, at the time “the most conspicuous institution in the whole world of insurance and finance,”[9] outraged many policy-owners and stockholders.     

Widespread abuses of economic and political power by other large American life insurance companies were uncovered (and reported nationwide in newspapers and magazines) during the Armstrong investigation conducted by a New York committee in 1905.  Reform-minded legislators were particularly focused on preventing life insurance firms from extending their control over other financial services.

New York enacted laws in 1906 that prohibited life insurance companies from investing in common stock[10], not because of investment risk, but because buying common stock had been the insurance industry’s preferred means for acquiring and manipulating other businesses.[11]  Legal sanctions against investing their reserve funds in common stocks had the unintentional but very welcome benefit of protecting the life insurance industry from the worst effects of the stock market crash in 1929 and the Great Depression.[12]

The threat of punitive legislation after the Armstrong investigation led to voluntary national reforms that restored consumer confidence in the business of insurance.  Life insurance firms around the country came together in 1906 for self-regulation through the American Life Convention.  Model legislation developed by the Convention was circulated among the states.  The Armstrong hearings demanded the attention of all state insurance commissioners; there was a wide range of legislative responses.[13]    

Restoration of public confidence in the conduct of companies issuing annuities enabled strong growth in the sale of commercial annuities during the Great Depression.[14]  Life insurance company revenue from annuity premium payments rose from $92 million in 1929 to $491 million in 1935, as investors sought to protect their principal while receiving a steady income.[15]  Today the sale of individual annuities by life insurance companies is a very big business: individual annuity premiums in 2013 totaled $180 billion and the value of reserve funds held by life insurance companies for their individual annuity contracts was $2 trillion.[16]

The New York Insurance Law of 1925 formalized a legal distinction between commercial annuities and charitable gift annuities, but for the rest of the U.S. the law’s initial direct impact was limited.  Donors, their advisors, and charities issuing annuities in the 1920s had to make decisions in the face of important public policy uncertainties, such as whether and how a wide range of state and Federal laws, judicial rulings, and administrative regulations on commercial financial products applied to gift annuities issued by nonprofit organizations. 

Huggins understood that his insurance business model for gift annuities had profound public policy implications that would have to be worked out.  An effective national plan must provide a responsible, transparent process for rate-setting and consumer protection that public officials could use to address inevitable questions involving income and estate taxes, the adequacy and risk exposure of reserve accounts, the accuracy of marketing claims, the soundness of legal contracts, and other policy issues familiar to commercial insurance companies. 

The first step was to scan the legal horizon to understand current policies.  In his report to a Conference on Financial and Fiduciary Matters in March 1927, Huggins said “I would like to see this committee investigate the existing insurance laws and departmental rulings as to their bearing on the issuance of these annuities.”[17]   

Huggins recommended a wide-ranging survey of the public policy landscape: “the laws and rulings pertaining to the income and inheritance taxes – both Federal and State, as they may apply to the principal of the annuity gifts or to the income received by the beneficiaries.”  More importantly, he advocated raising the voluntary standards of gift annuity programs to protect the interests of all concerned:

Personally, I favor constructive legislation, but I fear destructive legislation, and if we do not conduct the [annuity] business on the highest possible plane, with equitable returns to the donors and absolute protection as to their annuity payments, we are bound to have a reaction in the form of hostile and possibly destructive legislation.

No charitable organization whose success depends on appealing to donors for financial support would want its gift annuity program to be regulated as if their nonprofit was responsible for meeting the expectations of investors seeking to maximize their financial return.  Investment vehicles such as commercial bonds and annuities meet consumer demand with products constructed around a single bottom line, with no consideration given to the love of a charitable mission.[18]

The State of New York opened the door for Huggins’ actuarial solution to the central problem of gift annuity rate-setting.  It did so indirectly by imposing regulations on reserve investments for existing gift annuity contracts.  The New York Insurance Law of 1925 did not mandate a process for establishing gift annuity payment rates, but the higher the rates, the greater the amount that must be held in reserve.[19]  To comply with the law on gift annuity reserves, nonprofits would need to apply actuarial principles in rate-setting.

There is another aspect of the New York Insurance Law of 1925 that is important in the early history of the Conferences on Annuities: a well-intentioned attempt to re-direct gift annuity reserve fund asset allocation by using the law to compel gift annuity fund managers to behave more like life insurance fund managers.   

There was good reason for concern.  Freedom from legal and regulatory controls in the 1920s and 1930s let nonprofit organizations invest their gift annuity reserve accounts as they chose.  Unfortunately, many chose unwisely. 

Whether or not an investment strategy for charitable gift annuities is effective depends on what fund managers think they are investing, and why.  The prevailing “Annuity Bond” business model contributed to some of the mistakes.  Corporations issuing a bond will often pledge real estate or equipment as collateral to be liquidated in case of default.[20]  Pledging a building as collateral, or promising to use the revenue from student dormitories, is inadequate for a gift annuity reserve fund: nonprofit organizations are extremely unlikely to sell their buildings to make up a deficiency in annuity payments.[21]

The new actuarial model for gift annuities forced nonprofit organizations to rethink the business they were in.  Huggins and Darlington believed that charities had to stop acting as if gift annuities were like bonds that followed the rules of the credit investment markets, and start acting as if they were like life insurance, a highly-regulated consumer-based business with far different investment considerations. 

Darlington asserted at the 1927 Conference on Annuities that compliance with the New York Insurance Law meant investing gift annuity reserve funds in “proper securities” approved for life insurance reserves, though the law applied only to the valuation of gift annuity reserves, not the nonprofits’ choice of investments:

As long, therefore, as such a reserve is maintained in securities suitable for the investment of funds of life insurance companies of the State of New York a certificate of the Superintendent of Insurance is not necessary . . .  As long, therefore, as the groups mentioned [i.e., nonprofit charitable organizations] maintain their reserve funds in proper securities there is no fear of their being forced to submit to the full authority of the Superintendent of Insurance.[22]

Arthur Ryan, Darlington’s colleague at the American Bible Society, extended this guidance, asserting that every charity issuing annuities should invest its annuity reserves as required for life insurance companies operating in the state in which the nonprofit organization is incorporated:

It is the belief of your Committee that all funds received on the annuity basis should be invested in securities suitable for insurance companies operating in the state in which the institution is incorporated, and that the full 100% of these funds should be held in such investments until the death of the annuitant.[23]       

Ryan and Darlington went a step too far.  No one had identified a state with a legal requirement that nonprofit organizations must invest their gift annuity reserves as if they were life insurance reserves.[24]  Unfortunately, it was also a fact that most leaders of nonprofits issuing gift annuities had no idea what their state laws and regulations said about life insurance reserves, or whether the laws of their home states affected charitable gift annuities in any way.[25]   

At the second Conference on Annuities in 1928, George Sutherland walked back Ryan’s and Darlington’s investment advice, stating that “It is not necessary that these funds should be invested in securities which are legal for [life insurance] trustees in the states where such organization is incorporated.”  In fact, “a larger income can be secured if the [investment] committees do not limit themselves to legal investments.”[26]  

At the third Conference on Annuities in 1930, William T. Boult made a presentation entitled “Administration and Investment of Annuity Funds” that became very popular and was published as a separate issue in the Wise Public Giving series.[27]  Boult argued that gift annuity reserve investments should be “so sound that leading financiers and business men would commend them,” and “State Insurance Commissioners, who may possibly call upon us to submit lists of securities, will also be favorably impressed.”  After reciting the assets acceptable under the New York Insurance Law, Boult provides the prevailing wisdom of the Committee on Gift Annuities: “There can be no question that we are morally bound, and may some day be legally bound [my emphasis] in a similar way.”  

That day would arrive in June 1939 with the enactment of a new Insurance Law by the State of New York, which required nonprofit organizations that promoted gift annuities in the state to file annual reports on their segregated annuity reserve funds and to qualify for a certificate.  The New York Insurance Law of 1939 imposed the same investment restrictions on admitted assets for gift annuity reserve funds as for life insurance reserves.[28]  Charities issuing gift annuities in New York had a grace period until 1950 to conform their reserve fund investment strategies to the new actuarial business model.[29]  Charities issuing annuities in unregulated states remained free to invest their annuity reserves as they chose.

Even within the regulatory constraints of New York, investment managers had considerable autonomy in asset selection.  One could follow all the official rules and still make unfortunate investment choices.  Asset selection and investment strategies for gift annuity reserve funds were prime topics at conferences held during the Depression, when the value of “safe” investments such as mortgages and railroad bonds plummeted.

Exemption from most provisions of the New York Insurance law of 1925 was a major victory in the battle to protect the soul of charitable gift annuities.  Now that the leading regulator had recognized their special character, nonprofits had to behave accordingly, to distinguish their policies and practices from those of commercial annuity firms.  

Copyright Designation: This work is licensed under a Creative Commons copyright that allows the copying, distribution, and display of this material – and the ability to make derivative works based on it – if credit is given to the author and if those derivative works are distributed under a similar agreement.  This license is classified as an Attribution-Share Alike 3.0 Unported License.

Additional Installments:

5.1:   32 Years of American Annuity Experience - Introduction

5.3:   32 Years of American Annuity Experience - What Makes Annuities Charitable? A Residuum Target & A Consultant's Plan for the Gift Annuity "Business"


[1] Darlington, “Legislation and Taxation,” Annuity Agreements of Charitable Organizations (1927), pages 27-28.  Darlington also informed the 1927 conference that the State of California had enacted a law requiring charities issuing annuities to “establish and maintain a reserve fund based on McClintock’s Table of Mortality among Annuitants with interest at 3½%” and to “show the reasonably commensurate value of the benefits created.” 

[2] Darlington, “Taxation, Legislation, and Regulation,” Conference on Wills, Annuities, and Special Gifts, page 110.

[3] The third and fourth conferences were held in Atlantic City, New Jersey.

[4] Mark J. Roe, “Foundations of Corporate Finance: The 1906 Pacification of the Insurance Industry,” Columbia Law Review, Vol. 93, No. 3 (April 1993), page 639.  See http://www.jstor.org/stable/1123112

[5] Haughton Bell and Harold G. Fraine, “Legal Framework, Trends, and Developments in Investment Practices of Life Insurance Companies,” Law and Contemporary Problems (1952), page 46.

[6] Bell and Fraine, page 46.

[7] Adapted from Douglass C. North, “Life Insurance and Investment Banking at the Time of the Armstrong Investigation of 1905-1906,” Journal of Economic History (Summer, 1954), page 211.  Cited by David Moss and Eugene Kintgen, “The Armstrong Investigation,” Harvard Business School Case 9-708-034, rev. January 14, 2009, Exhibit 3, page 16.

[8] The largest U.S. commercial bank (National City Bank, founded as the City Bank of New York and known today as Citibank) had $155 million in assets in 1900.  Roe, page 659.  National City Bank was a major supplier of cash for banks around the U.S. before the Federal Reserve was created in 1913.  Roger Lowenstein, America’s Bank: The Epic Struggle to Create the Federal Reserve (NY: Penguin Press, 2015), page 14.

[9] R. Carlyle Buley, The American Life Convention: A Study in the History of Life Insurance (NY: Appleton-Century-Crofts, Inc., 1953), Volume I, pages 199-200.

[10] “While the regulation of insurance companies covered many important aspects of the business, the most important regulation covered policy reserves and investments of domestic [that is, in-state] companies.”  Robert E. Schultz and Raymond G. Schultz, “The Regulation of Life Insurance Company Investments,” The Journal of Insurance, Vol. 27, No. 4 (December 1960), page 57.

[11] “Insurers were prohibited from making stock investments not so much because the investments were seen as too risky for them, but because the public feared the power and influence that insurers with such investments would have.”  Roe, “Foundations of Corporate Finance,” page 640.  The New York Insurance Code had been revised in 1892 to allow life insurance companies to invest in common stocks.  Morton Keller, The Life Insurance Enterprise (Cambridge, MA: Belknap Press of Harvard University Press, 1963), page 130.  

[12] Ben S. Bernanke has written that a major component of the financial collapse in 1930-1933 was “the loss of confidence in financial institutions, primarily commercial banks,” but that life insurance companies “managed to maintain something close to normal operations.”  “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” Essays on the Great Depression (Princeton: Princeton University Press, 2000), page 43.  “Only 20 out of 350 insurers (5.7 percent) went into receivership during the Great Depression.  Of those that failed, virtually all of the policyholder claims were still honored from solvent reinsurers.”  Cited in “Executive Summary,” Historical Evolution of Life Insurance (Center for Insurance Policy and Research, 2013), page 10.

[13] Buley reviews the states’ legislative activity in detail in The American Life Convention, pages 279ff.   Also see Bell and Fraine, “Legal Framework,” pages 46-48.

[14] “Although sales plummeted for a time in response to the new regulations, investor confidence was once again restored, eventually leading insurers back into a growth cycle in the early 20th century.”  “Executive Summary,” Historical Evolution of Life Insurance, page 9.

[15] Eugene N. White, Contributor, Table Cj727-732, “Life Insurance Company Income, by Type: 1854-1998,” Historical Statistics of the United States Millennial Edition Online, © 2015 Cambridge University Press, accessed January 14, 2015.  See: http://hsus.cambridge.org/HSUSWeb/table/printTable.do.  

[16] The numbers cited for individual annuity contracts do not include the far larger market for group pension and retirement plans, most of which are also annuity contracts.  Life Insurers Fact Book, 2014, American Council of Life Insurers, “Annuities” pages 74-75, accessed January 23, 2016.  See: https://www.acli.com/Tools/Industry%20Facts/Life%20Insurers%20Fact%20Book/Pages/RP14-012.aspx

[17] The motion approved by the Conference on Financial and Fiduciary Matters instructed its new Sub-committee on Annuities “to ascertain and advise as to the legislation in the United States and the various states regarding annuities.”  From 1925 to 1959, the burden of discovering, reporting on, and lobbying to improve Federal and state laws, regulations, and legal rulings affecting charitable gift annuities was taken on by Gilbert Darlington of the American Bible Society.  Darlington was a member of the Committee on Gift Annuities from 1928-1972, serving as its Chairman from 1939-1959 and as Honorary Chairman from 1960-1980.

[18] For-profit enterprises organized around social impact (a “double bottom line”) appeared many years later.  See Investing for Social & Environmental Impact: A Design for Catalyzing an Emerging Industry published by Monitor Institute in 2009 at http://monitorinstitute.com/downloads/what-we-think/impact-investing/Impact_Investing.pdf

downloaded January 9, 2016.    

[19] New York’s principal actuary made this point explicit in 1939: “The requirement that the [gift] annuity rates shall be noncompetitive with those of life companies, does not appear in these exact words in the law.  What the statute does prescribe is that the rate of life income to be paid shall be so computed as to leave with the [charitable] corporation upon the annuitant’s death at least one half of the purchase money.”  Charles C. Dubuar, “The Regulation and Supervision of the Issuance of Annuity Agreements by a Charitable Society,” Annuity Agreements of Charitable Organizations (NY: Federal Council of the Churches of Christ in America, 1939), page 9.

[20] For a list of physical assets that are pledgeable in support of corporate bonds, see Fundamentals of Corporate Credit Analysis by Blaise Ganguin and John Bilardello (NY: McGraw-Hill, 2005), Table 8-3: Types of Collateral, page 225.

[21] At the second conference in 1928, George Sutherland warned that it is unacceptable to finance annuity payments from current operations or from “income-producing dormitories.”  “Investments,” Conditional Gifts Annuity Agreements (NY: Abbott Press & Mortimer-Walling, Inc., 1929), Wise Public Giving Series No. 31, page 37.  At the fourth conference in 1931, Ernest F. Hall reported that “It has been discovered that some organizations do not have sufficient reserve funds, and that what they have are so tied up that it would be impossible to realize on them in case of necessity.  Such is true of some colleges which have put their annuity gifts into campus buildings.”  Hall, “The Trend Toward Uniformity,” Rules, Regulations and Reserves in Using Annuity Agreements, page 9.

[22] Darlington, “Legislation and Taxation,” Annuity Agreements of Charitable Organizations (1927), pages 27-28.

[23] Ryan, “Administrative Policy,” Annuity Agreements of Charitable Organizations, page 26.

[24] Ryan himself admitted that “So far as the Committee was able to learn, no other states [other than New York and California] have legislation governing such annuities.”

[25] A 1930 survey of charities issuing annuities reported that only 2 of 20 charities were following legislation in their home state regarding gift annuities.  The Committee chair noted “The survey showed that a good many organizations are not familiar with the laws even of their own state governing reserves and the method by which those reserves must be determined.”  Ernest F. Hall, “Unfinished Tasks and Future Activities of the Committee,” Methods and Plans in Using Annuity Agreements (NY: The Sub-committee on Annuities . . . of the Federal Council of the Churches of Christ in America, 1931), Wise Public Giving Series No. 34, page 103.  

[26] George F. Sutherland, “Investments,” Conditional Gifts Annuity Agreements (NY: Abbott Press & Mortimer-Walling, Inc., 1929), Wise Public Giving Series No. 31, pages 37-38.

[27] Originally published in Methods and Plans in Using Annuity Agreements (1930), Wise Public Giving Series No. 34, pages 81-100; quotes are from pages 81-82.  Reissued as Administration and Investment of Annuity Funds, Wise Public Giving Series No. 35.

[28] “Annuity funds must be invested generally in the types of securities permitted domestic life companies . . .  The law does not allow a domestic life company to purchase common stocks.”  Dubuar, “The Regulation and Supervision of the Issuance of Annuity Agreements by a Charitable Society,” Annuity Agreements of Charitable Organizations, page 10.

[29] Charities issuing gift annuities in New York could maintain unqualified assets in their annuity reserve funds rather than sell them at a loss, but after January 1, 1940 they were not permitted to make new investments in assets that were not admitted in New York.

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