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 In 
 
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 THE INVESTMENTS OF LIFE 
 INSURANCE COMPANIES 
 
1 
 
 LIBRARY 
 
 University of California. 
 
 Class 
 
THE INVESTMENTS OF 
 
 LIFE INSURANCE 
 
 COMPANIES 
 
 BY 
 LESTER W. ZARTMAN, Ph.D. 
 
 Instructor in Insurance, Yale University 
 
 WNWERSJT 
 
 alif* 
 
 NEW YORK 
 
 HENRY HOLT AND COMPANY 
 1907 
 
r ^ 
 
 V 
 
 GtNtHAL 
 
 Copyright, 1906, 
 
 BY 
 
 HENRY HOLT AND COMPANY 
 
 Published December, 1906 
 
PREFACE. 
 
 The subject of this book was chosen in 1903 at a time 
 when insurance questions did not command much public 
 attention. Since then has appeared the present almost 
 feverish interest in problems of insurance. There had 
 long been, however, in insurance circles rumors that the 
 funds of certain life companies were being improperly 
 used. It was therefore one purpose among many others 
 in making this study to investigate these rumors. 
 
 Before the work was completed, such an inquiry was 
 rendered largely unnecessary by the official investigation 
 by a committee of the New York Legislature. Conse- 
 quently in the present book little emphasis is laid upon 
 that phase of the subject, and we have been enabled to 
 devote a larger part of our attention to the more congenial 
 task of tracing the beneficent influences which life insur- 
 ance accumulations have exercised upon the economic 
 development of the country and the relation of those 
 accumulations to social welfare. 
 
 The calculations employed in chapter three are so 
 laborious and intricate that errors may quite possibly 
 have crept in ; for the computation of these rates by the 
 method adopted required a repetition of the process of 
 finding one annual rate as described on page seventy-two 
 
 iii 
 
 164163 
 
iv PREFACE. 
 
 some five thousand times. Great care has been taken, 
 however, to verify the calculations. 
 
 For much aid in the preparation of the statistical tables 
 and in the gathering of data, I am indebted to my wife. 
 I am also under obligations to Professor Irving Fisher of 
 Yale University, who has read the manuscript and to 
 whose criticisms and suggestions much of the work in its 
 final form is due, and to Professors David Kinley and 
 Maurice H. Robinson of the University of Illinois, who 
 in the early stages of the work rendered me much assist- 
 ance. 
 
 Finally, I wish to express my thanks to the Faculty of 
 the Department of Political Economy in Yale University 
 for permission to incorporate in this book its prototype, 
 my thesis for the degree of Doctor of Philosophy. 
 
 Lester W. Zartman. 
 New Haven, Conn., November, 1906. 
 
CONTENTS. 
 
 CHAPTER PAGK 
 
 I. Introduction 1 
 
 II. The Character op the Investments 9 
 
 III. Investment Earnings 55 
 
 IV. The Cost op Investments 112 
 
 V. Failures of Life Insurance Companies 127 
 
 VI. Legal Regulation 146 
 
 VII. Control of the Assets 190 
 
 VIII. Taxation of Insurance Funds 213 
 
 IX. Social Effect of the Accumulation of Insurance 
 
 Assets 234 
 
 Index 255 
 
UN!' Y I 
 
 THE INVESTMENTS OF 
 LIFE INSURANCE COMPANIES. 
 
 CHAPTER L 
 
 INTRODUCTION. 
 
 Life insurance has come to occupy an important 
 place in our economic development. This has come 
 about only in recent times. Just as there are men liv- 
 ing who have witnessed the great development of rail- 
 road transportation, there are men who have seen life 
 insurance begin with a few companies and reach the 
 commanding position of the present day. True it is 
 that before the Revolutionary War, a small band of 
 clergymen organised a company for the purpose of 
 paying death benefits, a company still existing, but it 
 was not at that time conducted on the principle of the 
 present day companies, nor did it fill an important 
 place in the life of that time. During the colonial 
 period and up to 1800, there was some life insurance 
 business done, but it was carried on by individual 
 underwriters and the number of policies written was 
 exceedingly small. 
 
 1 
 
2 INTRODUCTION. 
 
 After 1800 companies began to be organised to carry 
 on the business of life insurance. Up to 1835, no com- 
 pany was organised and succeeded which had for its sole 
 purpose the insuring of lives, but three important trust 
 companies of the present day were incorporated be- 
 tween 1812 and 1833 which had the power among 
 others of insuring lives. All three for some time did do 
 a small life insurance business. In addition to these 
 three trust and insurance companies combined, a num- 
 ber of the more prominent fire insurance companies 
 did some writing of life insurance. However, all 
 the companies were proprietary companies organised 
 chiefly for other purposes than life insurance and so 
 far as they influenced life insurance history in this 
 country did little more than to prove definitely that 
 insurance of lives could be carried out as a business 
 proposition. The thirty-five years following 1800 can 
 best be designated as the experimental period in the 
 business in the United States. 
 
 The year 1835 has been selected as marking the 
 beginning of a new epoch in life insurance history, for 
 in that year the first company proposing to do business 
 on a mutual basis was incorporated. On April 1, 1835 
 the New England Mutual was incorporated, and though 
 it did not commence business until several years later, 
 it is the oldest mutual company doing a regular in- 
 surance business. In 1841 the company which later 
 
INTRODUCTION. 3 
 
 became the New York Life was incorporated, and in 
 the following year the Mutual Life was organised. Be- 
 fore 1850, eight more companies were started on a 
 permanent basis, making eleven companies doing a life 
 insurance business at that date, the permanency of 
 whose foundation is evidenced by the fact that all of 
 them are in active competition at the present time. 
 
 Life insurance was thus firmly established in this 
 country by 1850. Successful companies had been or- 
 ganised and for the next twenty years the business 
 grew by leaps and bounds. The one million dollars of 
 assets possessed by the few companies at the end of 
 1843 doubled oftener than once in four years, amount- 
 ing in 1867 to one hundred and twenty-four million 
 dollars. Part of this great growth was unhealthy. 
 From 1860 to 1870 life insurance had been fostered by 
 the speculative fever then prevalent and by the unset- 
 tled condition of the country in general. Like in all 
 other lines of business at that time, a period of depres- 
 sion ensued, and the life insurance business did not 
 prosper any from 1870 to 1880. After 1880 a steady 
 growth set in which continuing has placed the United 
 States far in the lead of the nations in regard to life 
 insurance interests. Possessing nine hundred millions 
 worth of assets in 1892, the companies had more than 
 doubled that amount by the end of the century, and at 
 the present time the combined assets of the life insur- 
 
4 INTRODUCTION. 
 
 ance companies in this country are valued at nearly 
 three billion dollars. 
 
 These figures indicate the important position that 
 life insurance has come to fill in the United States dur- 
 ing the last half century. Great companies have grown 
 up with large assets which have exercised a tremendous 
 influence upon the country's development. The life in- 
 surance companies have been agencies by means of 
 which large sums of capital have been saved, and this 
 capital once in the possession of the companies has been 
 invested in mortgages on farms and on city realty, in 
 the securities of railroads and of banks, has been loaned 
 to individuals on collateral security and in other ways 
 been placed at interest. Hence, must life insurance be 
 considered not only as a great social factor because of 
 the system of indemnity it affords, but also from the 
 standpoint of the saving of capital which it has effected. 
 
 All these beneficial results have not been accom- 
 plished without some loss. There have been failures 
 of insurance companies, more failures than successes, 
 though the influence of such failures cannot be com- 
 pared with the influence of the companies that have suc- 
 ceeded. Other companies have been mismanaged, and 
 because people on account of the peculiar nature of life 
 insurance are not able to protect themselves, the states 
 have been forced into much activity in regard to insur- 
 ance affairs. Legislatures have found it necessary to 
 
INTRODUCTION. 5 
 
 throw many restrictions around the business in order 
 that justice might be done to the purchasers of in- 
 surance. 
 
 The immense assets which the companies have ac- 
 cumulated have offered a tempting field for taxation. 
 With uniformily bad tax laws in general, coupled with 
 a lack of knowledge of life insurance in particular, the 
 various states have levied direct and indirect taxes up- 
 on the life insurance assets which in many cases have 
 been unjust and have hindered the development of the 
 business. Thus confronted with the problems of regu- 
 lating the insurance business and at the same time of 
 taxing it, legislatures have spent much time during the 
 last half -century on insurance matters. 
 
 In the following chapters, company management, 
 legal regulation, taxation and kindred questions will be 
 studied so far as they are concerned with the assets and 
 their investment. The material for such a study is 
 found in scattered sources. There is no considerable 
 body of literature treating of the insurance business, 
 if we except that dealing with its theoretical side. 
 The actuarial branch of the business has been worked 
 out so fully that little remains to be done, but concerning 
 the practical problems confronting the business, only 
 within a few years has anything been written in book 
 form. The official state reports of the condition of the 
 companies are by far the best source of information con- 
 
6 INTRODUCTION. 
 
 concerning certain phases of the business. The greatest 
 trouble with them is that companies have misrepre- 
 sented their real condition to the state officials year 
 after year without apparent detection, but even so, for 
 a history of the investments the state reports are in- 
 valuable. 
 
 Outside of the state reports, there is the insurance 
 press as a source of material. In the files of the in- 
 surance papers and magazines can be found much data 
 on almost any insurance question. This is especially 
 true of the early history of the business, for at that 
 time the insurance papers possessed more of the char- 
 acteristics of technical publications than they do at 
 present. The papers have increased greatly in number, 
 but in the multiplication of numbers and the change 
 from monthly publications to weeklies, they have be- 
 come merely newspapers devoted to the interests of 
 agents and contain little of general or permanent in- 
 terest. Throughout the history of the business there 
 have been certain exceptions to this criticism, and in 
 the files of some of the publications and in the trans- 
 actions of various actuarial societies, the material for 
 the following chapters has been gathered. 
 
 Just a word as to the importance of life insurance 
 history. Insurance is a business which should last as 
 long as men die during the productive years of their 
 life. It is a business which once started cannot sud- 
 
INTRODUCTION. 7 
 
 denly be dropped with justice to the whole body which 
 has entered into the relation involved in insurance con- 
 tracts. Therefore, the history of it should be studied 
 so that in the future the mistakes of the past might be 
 avoided. The success of a company cannot be measured 
 by its accomplishments during the lifetime of one man, 
 unless that success be built on a foundation which shall 
 stand the test of generations. If information of the 
 past were complete, most valuable and trustworthy con- 
 clusions might be drawn as to the causes which lead 
 to the prosperity or the decline of individual life offices 
 and doubtless many mistakes in management and regu- 
 lation could be avoided. 
 
 With the emphasising of one point in life insurance 
 history this introductory chapter will end. There is a 
 wide-spread feeling that the revelations which have been 
 made in New York during the summer of 1905 will 
 prove such an object lesson to company managers and 
 to policy-holders that the business for years will be 
 run in a much better way. This feeling is not justified 
 by a study of history. Revelations have been made be- 
 fore concerning insurance companies which were just 
 as scandalous as those made during the past summer. 
 The result was a change in management just as there 
 has been changes in managements recently, and the 
 public was led to believe that the newly-managed con- 
 pany would be conducted on a high standard of effi- 
 
8 INTRODUCTION. 
 
 ciency. In some cases this has been done. In others, 
 the management has become just as false to the interests 
 of the policy-holders as was the previous management. 
 Therefore, there is no real justification for the feeling 
 of security which now seems to exist. The old manage- 
 ments have been revealed in their misdeeds and forced 
 out of the companies, new officials have been put in with 
 many proclamations of future good service. With all 
 due regard for the character of these particular individ- 
 uals it should be said that the same dangers are likely 
 to arise again. There are still stock companies in which 
 the policy-holders have no control whatever, it remains 
 to be seen whether under revised laws the policy-holders 
 are going to exercise any real control over their com- 
 panies, and whether any system can be devised that will 
 change the apathetic attitude which the insuring public 
 has always taken towards insurance management save 
 at the time of some great agitation. Periodical investi- 
 gations and temporary reforms will be the rule so long 
 as policy-holders do not exercise an active control in 
 company affairs. 
 
CHAPTER II. 
 
 THE CHARACTER OF THE INVESTMENTS. 
 
 To find suitable investments for the funds which 
 have come under their control has been a serious under- 
 taking for the officials of level premium companies from 
 the inauguration of that system of life insurance. In 
 the early days of the larger companies and of new com- 
 panies of to-day, the great problem has been to get in- 
 surance in force. That problem has been solved with 
 signal success, and, as a result, the funds which must 
 be accumulated at compound interest have grown rap- 
 idly. As the assets have increased in amount until 
 they have reached a value of millions and even hun- 
 dreds of millions of dollars the investment side of the 
 business has become one of almost supreme importance. 
 Because of the gigantic size of the assets great skill is 
 demanded for their proper investment. 
 
 One condition must always be met by all level prem- 
 ium companies, both large and small; the assets must 
 be invested in such a way that at all times they will 
 have a market value equal at least to the reserve upon 
 the policies. This is required by law. More than this 
 
 9 
 
10 THE CHARACTER OF THE INVESTMENTS. 
 
 is demanded by the policy-holders. Few of these have 
 been content in the past with the assets earning simply 
 the minimum rate of interest. The higher the rate of 
 interest earned, the larger will be the dividends declared 
 to the participating policy-holders. Therefore, the of- 
 ficials in charge of the assets have been required to in- 
 vest the funds not only so as to keep them at a certain 
 market value, but to make them earn as high a rate of 
 interest as possible. Confronted by this double prob- 
 lem, investment managers of different companies have 
 solved it in different ways. 
 
 Not only have the managers of different companies 
 solved the investment problem in different ways, but 
 those of the same company have seen fit to change the 
 character of their investments from year to year. It is 
 the purpose of the present chapter to study these dif- 
 ferences in the character of the assets both from the 
 standpoint of differences between the companies and 
 more especially of differences between the showing of 
 the years. 
 
 To go back in the history of the companies as far 
 as possible takes us back to the time when there were no 
 state insurance departments. The information which 
 the official reports now give must be secured for the 
 early years from the reports issued by the companies 
 themselves. Analysing some of these reports to see of 
 what the assets at that time consisted, we find that the 
 
THE CHARACTER OF THE INVESTMENTS. \\ 
 
 Connecticut Mutual and the Mutual Benefit, two of the 
 large companies of the fifties, had in 1851 fifty-six per 
 cent, of their assets consisting of premium notes. This 
 percentage of notes shows well the manner in which life 
 insurance was then conducted. A considerable portion 
 of the premium was received in the shape of a note 
 given by the policy-holder and bearing interest. As 
 this portion of the premiums came to the companies al- 
 ready invested, we can pass over this asset quickly and 
 see how that portion of the premium which came to 
 the companies in cash was invested. Of the net in- 
 vested assets of these two large companies fifty-nine 
 per cent, was invested in loans on real estate. 1 Half 
 of the remaining invested assets consisted of city bonds 
 and bank stocks, and half of cash. At the end of 1854, 
 the New England, the Manhattan, the United States, 
 the ISTew York, and the Mutual Benefit had two-thirds 
 of their net invested assets consisting of mortgage loans. 
 The decade of the fifties was one of particularly 
 sound growth in the new business of life insurance 
 which had in the decades just preceding proven its pos- 
 sibilities. This is shown by the decreasing percentage 
 which premium notes formed of the total assets. We 
 have seen how the two large companies earlier in the 
 decade had three-fifths of their assets in premium notes. 
 
 1 See the Assurance Magazine, Volume III, 1853, pages 45 and 
 53. 
 
12 THE CHARACTER OF THE INVESTMENTS. 
 
 In 1855, these two with five others had premium notes 
 not averaging more than a quarter of their total assets. 
 The invested assets were getting in better shape. Of 
 these seven companies, eighty-five per cent, of their 
 total invested assets consisted of mortgage loans. The 
 remaining fifteen per cent, was composed of a few state 
 and city bonds, and a little necessary cash. None pos- 
 sessed any real estate at all. 
 
 In 1858, the four big companies at that time, the 
 Mutual of New York, the Mutual Benefit, the Con- 
 necticut Mutual, and the New York had only twenty- 
 one per cent, of total assets consisting of premium 
 notes. The largest company, the Mutual, was taking 
 no notes at all. Eighty-eight per cent, of the remain- 
 ing assets were invested in mortgage loans. Two of 
 these companies did possess some real estate by the 
 end of this year. 
 
 The foregoing percentages indicate in general the 
 character of the assets during the period 1850-59. The 
 premium note during the early part of the decade 
 formed a large percentage of the assets, but it had -de- 
 creased. Mortgage loans were the popular invest- 
 ment. The striking characteristic of the period is the 
 almost entire absence of corporation securities. To be 
 ^ sure, several companies owned bank stocks, but the pro- 
 portion they formed of the total assets was small. 
 
 There was likewise an almost entire absence of pub- 
 
THE CHARACTER OF THE INVESTMENTS. 13 
 
 lie securities, some state and city securities alone being f/ 
 found among the assets. The four large companies, 
 already pointed out, with nearly thirteen million dol- 
 lars of assets possessed only three hundred and ten 
 thousand dollars worth of such securities. The New 
 England Mutual owned some manufacturing corpora- 
 tion stocks and bonds, and some railroad securities, and 
 in the later years of the decade, the Connecticut Mutual 
 invested in some railroad securities. Beyond this, such 
 investments had scarcely extended. 
 
 Fortunately the period after 1859 is capable of 
 more extended treatment. The information concerning 
 the assets is much more complete. In that year, the 
 New York Insurance Department was established and 
 immediately began the policy of publishing annually 
 with great detail the assets belonging to companies 
 doing business in that state. Massachusetts was doing 
 much the same thing. Other states soon adopted the 
 plan and from these various reports the following tables 
 have been compiled for twenty-nine companies. So 
 far as possible statistics go back to 1860, but all of 
 these twenty-nine largest companies of the present time 
 were not existing in 1860, and some existing were 
 doing business in states which did not require annual 
 reports. The statistics are for the calendar years 1860, 
 1870, etc., taking the conditions on December 31 of 
 each year. 
 
14 THE CHARACTER OF THE INVESTMENTS. 
 DISTRIBUTION OF TOTAL ASSETS. 
 
 Kind of Assets. 
 
 1860 
 
 1870 
 
 1880 
 
 1890 
 
 1900 
 
 Cash Items 
 
 2.4 
 
 3.1 
 
 1.4 
 
 6.9 
 
 20.5 
 
 .0 
 
 20.5 
 
 59.2 
 
 2.7 
 
 1.6 
 
 3.1 
 
 4.3 
 
 5.3 
 
 1.2 
 
 10.8 
 
 21.5 
 
 .1 
 
 21.6 
 
 44.4 
 
 3.5 
 
 1.2 
 
 9.1 
 
 4.5 
 
 1.0 
 
 1.5 
 
 7.0 
 
 5.2 
 
 .1 
 
 5.3 
 
 38.6 
 
 12.4 
 
 5.7 
 
 8.7 
 
 .0 
 
 .3 
 
 14.3 
 
 23.4 
 
 4.7 
 
 .0 
 
 .0 
 
 4.7 
 
 .4 
 
 1.0 
 
 .1 
 
 .0 
 
 1.5 
 
 6.2 
 
 4.2 
 
 1.7 
 
 .9 
 
 6.8 
 
 1.2 
 
 1.6 
 
 2.8 
 
 41.0 
 
 10.4 
 
 4.6 
 
 .9 
 
 1.2 
 
 .5 
 
 6.6 
 
 9.2 
 
 21.2 
 
 .6 
 
 .4 
 
 22.4 
 
 2.3 
 
 1.2 
 
 .1 
 
 .4 
 
 4.0 
 
 26.2 
 
 4.3 
 
 Deferred and Outstanding Pre- 
 miums 
 
 1.7 
 
 Accrued Interest 
 
 .9 
 
 Total Uninvested Assets. 
 Premium Notes 
 
 6.9 
 .9 
 
 Policy Loans 
 
 3.7 
 
 T^otal Notes and Loans . . . 
 Mortgage Loans 
 
 4.6 
 
 28.8 
 
 Real Estate 
 
 9.0 
 
 Collateral Loans 
 
 4.3 
 
 U.S. Bonds 
 
 .4 
 
 Foreign Public Bonds 
 
 3.4 
 
 State Bonds 
 
 .6 
 2.2 
 5.9 
 
 .8 
 
 1.5 
 
 5.5 
 16.1 
 
 1.2 
 .0 
 .2 
 
 1.4 
 .4 
 
 1.1 
 .0 
 .0 
 
 1.5 
 
 2.9 
 
 .6 
 
 County and Municipal Bonds . . 
 
 Total Public Bonds 
 
 Railroad Bonds 
 
 4.2 
 8.6 
 
 28.8 
 
 Light and Water Bonds 
 
 1.7 
 
 Miscellaneous Bonds 
 
 .1 
 
 .9 
 
 IT 
 
 1.6 
 .1 
 .1 
 
 2.3 
 
 3.2 
 
 1.7 
 
 Railroad Stocks 
 
 32.2 
 2.5 
 
 Bank and Trust Co. Stock 
 
 Light and Water Co. Stock. . . . 
 Miscellaneous Stock 
 
 2.7 
 .1 
 .2 
 
 Total Stock 
 
 Total Corporation Bonds 
 and Stocks 
 
 5.5 
 37.7 
 
 
 
 We have for the purpose of this study selected 
 twenty-nine companies. Of these twenty-nine there 
 are sixteen whose asset history is given in official re- 
 ports as far back as 1860. These companies were be- 
 coming important financial institutions at the beginning 
 of the Civil War period, having total assets of some 
 twenty-three million dollars. 
 
 In the above table those items coming first might be 
 
THE CHARACTER OF THE INVESTMENTS. 15 
 
 designated as uninvested assets. One of the most im- 
 portant items, cash, will be considered at length, not 
 because of the proportion which the amount so desig- 
 nated forms of the total assets, but because it is the as- 
 set which has been mismanaged to a great extent. Total 
 assets of twenty-three millions in 1860 divided by six- 
 teen gave small average assets. Each company had to 
 have some cash, and with assets thus scattered, we would 
 expect to find cash forming a high percentage of the 
 assets. As assets increased in size, and individual com- 
 panies came to possess more than did all in 1860, we 
 would further expect to find the proportion of cash de- 
 creasing. The table does show a considerable propor- 
 tion of cash for the first decade, but instead of decreas- 
 ing, that proportion had nearly doubled by 1870, and 
 since then despite the great increase in the assets the 
 proportion of cash has remained practically constant. 
 
 In theory, this cash asset consists, first, of the actual 
 cash kept in the office which is needed by the company 
 for its daily transactions such as death claims, pre- 
 miums paid at home office, and similar expenses and in- 
 come, the outcome of each day's business. Of course 
 this amount brings in no revenue. Again the amount of 
 money needed by a company for many of its current 
 expenses may be deposited in a bank subject to check. 
 These bank balances bring in some return. The third 
 item of such cash assets consists of money awaiting in- 
 
16 THE CHARACTER OF THE INVESTMENTS. 
 
 vestment. It is not possible to invest the premium re- 
 serves as soon as they come to the company, nor would 
 it always be wise to do so. The loan market is not 
 favourable at all times. If the company keeps the cash 
 for a while, it may be able to make an investment with 
 a higher interest return. Instead of keeping the cash 
 in its own vaults, it is usually deposited in banks and 
 trust companies which are willing to pay something 
 for the temporary use of it. 
 
 Thus, daily business needs and idle funds awaiting 
 investment require cash items. This is the explanation 
 of such amounts. The policy is justifiable on the 
 ground that by making deposits the interests of the 
 policy-holders are best served. However, the theoretical 
 explanation of such assets differs widely from the actual 
 practice of a number of companies. If deposits are 
 made of idle funds awaiting a more favourable oppor- 
 tunity for investment, and for this purpose alone, there 
 ought to be years in which the deposits were large and 
 others in which they were small. If the individual 
 companies are examined, this condition will be found 
 to exist in the majority of companies, but there are 
 some whose amounts of cash deposited in banks and 
 trust companies have not formed less than six, ten and 
 even fifteen per cent, of their total assets, not for a 
 single year or two years, but for even twenty consecu- 
 tive years. Such large deposits cannot be explained on 
 
THE CHARACTER OF THE INVESTMENTS. 17 
 
 the ground that they consist of funds awaiting invest- 
 ment. Therefore other reasons must be sought in ex- 
 planation of this item. 
 
 It is sometimes argued that deposits are made in 
 order that the insurance funds may be invested in se- 
 curities not allowed by law. The legal regulations re- 
 stricting the insurance companies, it is further argued, 
 have confined them so narrowly that to get a better re- 
 turn on the assets, these are deposited in a trust com- 
 pany which is not hampered in its investments. On 
 this ground the deposits could be justified. Legal regu- 
 lation of investments has gone too far in this country, 
 and if a management sees that it can obtain a higher 
 rate of return through the agency of the trust company 
 it is justified from the policy-holder's standpoint. The 
 trust company does invest sometimes in undertakings 
 involving considerable risk, but such risk is ordinarily 
 compensated for by higher interest earnings. This jus- 
 tification of the deposits in trust companies is based on 
 the idea that the insurance company receives the higher 
 interest earnings, the reward for the greater risk in- 
 volved. However, so far as can be learned the perma- 
 nent deposits in the trust companies have not received 
 as high a rate of interest as have the invested assets 
 of the company making such deposits, and thus the in- 
 surance company has not been rewarded for its risk 
 nor for its violation, in spirit at least, of the law. 
 
18 THE CHARACTER OF THE INVESTMENTS. 
 
 However, it is argued that if the insurance company 
 owns considerable stock in the trust company, it 
 benefits through the higher dividends on that stock due 
 to the insurance deposits. This would be true if the 
 insurance company owned all the stock of the trust 
 company, but when it owns only a portion of the stock, 
 it is scarcely good business to place large deposits in 
 a corporation in order that that corporation may pay 
 high dividends on capital stock of which only a part 
 is owned by the depositor who contributes the money 
 which brings the large dividends. 
 
 The reason of the large steady cash deposits of cer- 
 tain of seven or eight companies can be explained on 
 no other ground than the close affiliation existing in too 
 many cases between the officials of the insurance com- 
 panies with the banking or trust institutions. Officials 
 of insurance companies have been financially interested 
 in outside institutions and have used the money of the 
 insurance companies to make these other enterprises suc- 
 cessful. The other institution has been usually a trust 
 company, but banks have been used for securing the 
 same end. In some cases the officials of the trust com- 
 pany are officials of the insurance company, in other 
 cases in addition to this interest, the insurance officials 
 have been personal owners of considerable amounts of 
 the capital stock of the institution which they have 
 favoured with the deposit of funds under their care. 
 
THE CHARACTER OF THE INVESTMENTS. 19 
 
 It would be impossible to determine how large a . 
 percentage the cash deposits ought to form of the total 
 assets. If the statement of the real object of such de- 
 posits is correct, the percentage would be a fluctuating 
 one. In times of high prices for securities considerable 
 deposits could fitly be made which would be almost 
 entirely withdrawn when prices of securities became 
 lower. There are companies which have not reported 
 cash assets in excess of two per cent, of total assets for 
 many years, and the rate of investment earnings of 
 these companies have been higher than of those com- 
 panies with large deposits. However, that amount 
 should be left to the officials despite the demand now 
 for legal regulation of the amount. Undoubtedly the 
 policy-holders have suffered because of the large de- 
 posits of certain companies, not because of any inherent 
 defect in the use of deposits by the insurance companies, 
 but because some managers have misused a legal privi- 
 lege. Here is an admirable example of the difficulty 
 encountered in the legal regulation of investments. 
 The right to make deposits in banks and trust com- 
 panies is a valuable one ; when used by managers with 
 the purpose of getting the best returns possible to the 
 participating policy-holders, it is of considerable im- 
 portance. Managers not so actuated have used the 
 privilege to secure pecuniary gains for themselves or 
 their friends. 
 
20 THE CHARACTER OF THE INVESTMENTS. 
 
 The other uninvested assets require but little at- 
 tention. Deferred and outstanding premiums formed 
 too large a proportion of the assets in 1860, and with 
 the great increase in business and in the formation of 
 new companies which took place in the later sixties, 
 there were companies which could not be declared sol- 
 vent without counting in the amounts of deferred and 
 outstanding premiums. In 1869, of all the companies 
 reporting to the New York department, ten per cent, of 
 their assets consisted of the doubtful sort, deferred and 
 outstanding premiums. 1 In 1870, there were seventy- 
 one companies doing business in New York, and of 
 these there were twenty-three in the perilous position 
 of not possessing interest-bearing securities equal to the 
 reserve upon their outstanding policies. 2 
 
 Such companies were ill-prepared to enter into the 
 
 long and severe business depression which ensued. A 
 
 number of the companies which had carried large 
 
 amounts of deferred and outstanding premiums failed. 
 
 Most of the others rapidly reduced their amounts and 
 
 since 1870, deferred and outstanding premiums have 
 
 not formed a large proportion of the total assets. One 
 
 company alone in 1900 carried an amount of this form 
 
 of assets sufficient to denote a marked weakness from 
 
 the asset standpoint. 
 
 1 T. B. Macaulay, Transactions of the Actuarial Society, 
 Volume VIII, Number 9, page 29. 
 8 Insurance Journal, Volume VIII, page 481. 
 
THE CHARACTER OF THE INVESTMENTS. 21 
 
 Accrued interest has not formed any considerable 
 percentage of the total assets at any time. With the 
 change in the character of the assets from mortgage 
 loans to bonds with the result of more frequent interest 
 payments, the amount of accrued interest and rents has 
 decreased. As a result we would find that the total un- 
 invested assets would form a small proportion of the 
 total assets were it not for the persistent policy of sev- 
 eral companies to keep large cash deposits. 
 
 Premium notes as an insurance asset possess interest 
 largely from a historical standpoint. For thirty years 
 after the successful organisation of life insurance com- 
 panies in the United States, the plan was generally 
 adopted of allowing the insured to pay a part of his 
 premium with an interest-bearing note. By 1869, the 
 climax of one of the periods in life insurance history, 
 nearly one-third of the assets of the companies consisted 
 of premium notes. It is not necessary to consider at 
 length the premium note as an asset. It came to the in- 
 vestment department of the companies from the in- 
 surance side of the business. As an asset, premium 
 notes are valuable only as they cancel liabilities. This I 
 they can do so long as the notes of one individual do not 
 exceed the reserve value of his policy. The premium 
 note modifies the insurance contract so as to get the 
 most insurance for the least money. For all essential 
 purposes, a premium note policy is a natural premium 
 
22 THE CHARACTER OF THE INVESTMENTS. 
 
 policy. Just as the natural premium system has proven 
 unpopular, so the note system, when the public came to 
 understand it, fell largely into disuse. The change in 
 the character of insurance hastened the change from 
 premium notes to an all-cash basis. In the sixties, en- 
 dowment policies began to be written in large numbers 
 for the first time. The premium note system which 
 was not popular with full payment life policies became 
 absurd when applied to endowment and limited life 
 policies. In 1870, one-third of the companies doing 
 business in Massachusetts were receiving no new pre- 
 mium notes. 1 Several of the others had reduced the 
 maximum credit for which notes were allowed from 
 fifty to forty per cent, of the premiums. 
 
 The objection to the premium note system is well 
 illustrated by the experience of the seventies. The 
 premium note policies lapsed in great numbers, and as 
 a result of this and the determination of a number of 
 the companies to abandon the plan, the percentage that 
 such notes formed of the total assets was reduced from 
 twenty-one in 1870 to five in 1880. The premium note 
 system has not been entirely abandoned, but the com- 
 panies using it have reduced the amount of credit given, 
 so that save in the case of two or three companies, 
 premium notes at present form an inconsiderable pro- 
 portion of total assets. 
 
 1 Massachusetts Insurance Report, 1870, p. XI. 
 
*~~THE CHARACTER OF THE INVESTMENTS. 23 
 
 Closely related to premium notes are policy loans. 
 In 1860, only one of the companies under survey re- 
 ported such an asset. Ten years later, nine companies 
 were making policy loans, only one however, having 
 enough of such loans to form any considerable propor- 
 tion of its total assets. In 1880, two more companies 
 reported policy loans, but the percentage of total assets 
 was still small. By 1890, the plan of making loans 
 with the policies as security began to be popular. 
 Twenty companies had adopted the practise of making 
 such loans. In the fierce competition to secure large 
 amounts of insurance which took place during the nine- 
 ties every company of the twenty-nine, save two, 
 granted the privilege to policy-holders of making loans 
 from their policy reserves. With most companies, a 
 provision began to be inserted in the policy contracts 
 concerning such loans. Policy-holders have taken ad- 
 vantage of the privilege granted them, and in 1900 
 policy loans formed nearly four per cent, of the total 
 assets of the companies, and in 1904 more than seven 
 per cent. 
 
 The point to be remembered about policy loans is that, 
 like premium notes, they are an asset not sought by the 
 men in charge of the assets, but come to the companies 
 through conditions expressed in the policy. Therefore 
 the amount which such loans will form depends upon 
 conditions not under the control of the investment man- 
 
24 THE CHARACTER OF THE INVESTMENTS. 
 
 ager. As a result the question has been raised whether 
 this provision in every policy for loans will not some- 
 time cause trouble to the companies. It has been sug- 
 gested that during a financial depression this provision 
 will be taken advantage of by so many policy-holders 
 that companies might be embarrassed for cash. With 
 their assets tied up in long time securities, and the 
 market for such depressed, such a situation would be 
 serious. However, companies which had a provision for 
 loans in their policies during the nineties did not suffer 
 any serious increase in the demand for policy loans. 
 English companies have been making such loans for 
 half a century without experiencing the difficulty which 
 has been suggested. 1 The rate of interest charged for , 
 policy loans should not be stipulated in the policy. So ' 
 far during the history of such loans such a course has 
 seemed wise in view of the constantly decreasing rate of 
 interest. The rate of interest may change, and with a 
 rate stipulated in the policy near to the market rate, or 
 under, the amount of such loans might increase too 
 much. 
 
 As an investment, the security of policy loans is un- 
 questioned. Likewise the rate of interest has been good, 
 for the companies have placed it higher than the rate 
 which they have been earning on their other assets. 
 
 1 See Assurance Magazine 1858, Volume VII, page 251, and the 
 Insurance Spectator 1893, Volume 51, page 268. 
 
THE CHARACTER OF THE INVESTMENTS. 25 
 
 The serious objection to such loans lies in the fact that 
 they, like premium notes. modify the insurance contract. 
 The interest upon the loan added to the yearly pre- 
 mium for insurance makes the annual payment burden- 
 some. Default of premium therefore is more likely to 
 occur. As this is an objection from the insurance stand- 
 point, not from the investment point of view, it can 
 well be passed over. Policy loans ought not to absorb 
 a much larger proportion of the assets 'than at present. 
 Policy-holders will learn that by borrowing their re- 
 serves, they defeat the purpose of their insurance and 
 will not want such loans. 
 
 So far the assets which have been considered have 
 been of a peculiar character. Cash, deferred premiums, 
 accrued interest, premium notes, and policy loans do 
 not come to the company through any plan of the invest- 
 ment department. With the assets now to be con- 
 sidered, the proportion which they form of the total 
 assets is in a large degree the result of definite action 
 on the part of those in charge of the assets of the com- 
 panies. 
 
 It was seen that during the decade 1850-60 mortgage 
 loans formed the bulk of the assets. In view of the 
 changes which have later taken place in the character 
 of the assets, it is claimed that mortgages were the only 
 outlet for the funds, that corporation securities were too 
 scarce to absorb much insurance capital at that time. 
 
26 THE CHARACTER OF THE INVESTMENTS. 
 
 It is true that corporation securities were scarce at that 
 time compared with the present, but it must be remem- 
 bered that the funds to be invested were extremely small 
 compared with the present. The fifteen companies 
 which we are considering did not have two billion dol- 
 lars to invest in 1860, they had less than a million dol- 
 lars apiece to place at interest. 
 
 With small assets in 1860, the officials of the com- 
 panies invested their funds in mortgage loans. The 
 table of totals shows that fifty-nine per cent, of the total 
 assets were so invested at the end of the decade of the 
 fifties. If only that part of the assets is considered 
 which we have designated as invested assets it will be 
 found that more than four-fifths of that amount con- 
 sisted of mortgage loans. By 1864, the value of the 
 mortgages held by companies doing business in New 
 York had absolutely decreased two million dollars, de- 
 spite the increase in the amount of total assets during 
 the intervening four years. Mortgages in that year 
 formed less than half the percentage of invested assets 
 that they did in 1860. The reason for this remarkable 
 change in the character of the assets lies in the Civil 
 War. The United States debt increasing so enormously, 
 and the greenback issues deranging prices, the govern- 
 ment bonds could be purchased at a price which yielded 
 a rate of interest in paper as high as ten per cent. The 
 companies put practically all their available funds into 
 
THE CHARACTER OF THE INVESTMENTS. 27 
 
 the purchase of the public securities. The investments 
 in government bonds rose with the premium on gold 
 and declined with the disappearance of that premium. 
 
 Interest had been rising before the Civil War. Dur- 
 ing the war it rose rapidly not only on government 
 loans, but on all loans. When the premium on gold 
 began to decrease, and the interest in paper on such 
 securities fell, the insurance companies again sought 
 mortgages on real estate for the investment of the re- 
 serves. Before the outbreak of the war the development 
 of the Middle West had demanded large sums of capi- 
 tal, the rate of interest offered for capital was high, but 
 Eastern capital was suspicious. Connecticut had not 
 restricted her companies in regard to investments in 
 mortgages, and by 1862 several Connecticut companies 
 had considerable loans in Ohio and Illinois. 1 The 
 Union Mutual likewise was loaning money on Illinois 
 real estate. The New York companies not only were 
 forbidden by state law to loan in the West, but in every 
 state except New York. This New York statute caused 
 much discussion both in the East and in the West. 
 However, whether through loans in the East or in the 
 West, mortgage loans increased in proportion to total 
 assets after 1864. 
 
 Mortgage loans continued to increase both absolutely 
 and relatively. So far the companies had found no 
 
 1 New York Insurance Report, 1863. 
 
28 THE CHARACTER OF THE INVESTMENTS. 
 
 outlet for their funds so suitable as loans on real estate 
 when government bonds were not to be had at a low 
 price. For the companies as a whole this relative in- 
 crease in mortgage loans continued until 1875, the ab- 
 solute increase continued one year later, and then mort- 
 gages not only declined relatively but in absolute 
 amount. It was nine years after 1876 before the life 
 insurance companies again possessed as many mortgage 
 loans as they did in that year. 
 
 The New York companies first began to decrease the 
 amount of their mortgage loans. In 1875, the Equi- 
 table had seventeen million dollars invested in real estate 
 loans, in 1880 it had nine million. The New York 
 Life dropped from seventeen millions in 1875 to four- 
 teen millions in 1878. The Mutual, the early big com- 
 pany, which had almost from its incorporation placed 
 all its available funds in mortgage loans, decreased its 
 holding of such assets seven million dollars during 
 these Hive years. In fact during the last half of the 
 decade of the seventies every New York company ex- 
 cept the Washington decreased the amount of its loans 
 on real estate security. 
 
 The cause of this change in the character of the 
 assets lay in the depreciation in real estate values 
 which set in with especial violence in New York during 
 1874, 1875 and 1876. Before the panic of 1873, there 
 had been much speculation in land values especially in 
 
THE CHARACTER OF THE INVESTMENTS. 29 
 
 New York City. When the depression in values came 
 on values decreased to such an extent that a considerable 
 part of the property mortgaged could not be sold for 
 the fifty per cent, of its former value, the percentage 
 to which the companies had loaned upon it. 1 Fore- 
 closure was avoided as much as possible, but much 
 real estate came into the possession of the companies. 
 
 The companies of states which were allowed to invest 
 in mortgages outside of their own home state did not 
 suffer so quickly from the depression in values as did 
 New York companies which were restricted to New 
 York. The Connecticut companies continued to in- 
 crease the amount of their mortgage loans during the 
 period 1874-76 when the depression was the most severe 
 in New York. The Aetna, the Connecticut Mutual and 
 the Phoenix increased their mortgage loans through 
 1875, 1876, and 1877. However, as the depression in 
 values spread each one was forced to foreclose mort- 
 gages to a greater or less extent, and each of these three 
 companies possessed smaller amounts of mortgage loans 
 in 1880 than they did in 1877. The Aetna which had 
 placed a great part of its loans on small amounts on 
 farm property did not suffer much, but the Connecticut 
 Mutual which had loaned large amounts on city property 
 had quite a different experience. In 1877 the company 
 
 1 The Insurance Spectator, 1876, Volume 17, page 585. 
 
30 THE CHARACTER OF THE INVESTMENTS. 
 
 had sixty per cent, of its assets invested in mortgage 
 loans, a large part of which had been made in the West. 
 It was charged at that time that many of these loans 
 had been made without regard for the safety of the 
 company. 1 At any rate the company was forced to 
 begin foreclosing mortgages upon a large scale in 1879, 
 a process which continued until it became the possessor 
 of thirteen million dollars worth of real estate obtained 
 through foreclosure. It had iive millions in Chicago, 
 three millions in St. Louis, and nearly two millions in 
 Detroit. 
 
 The Union Mutual which had loaned a large percent- 
 age of its assets in the West likewise was forced to 
 foreclose a large percentage of its mortgage loans. In 
 1875, it had five and one-half million dollars worth of 
 mortgage loans, in 1880 it had only one and one-half 
 million dollars worth. At the close of the latter year 
 it owned one and one half million dollars worth of real 
 estate in Illinois alone. 
 
 The table of totals shows that mortgage loans in 1880 
 formed but thirty-eight per cent of the total assets, 
 whereas in 1860 they had formed fifty-nine per cent. 
 The cause for this change has been stated. It is the 
 history of this period to which investors often point as 
 illustrating the weakness of loans on real estate as an 
 
 1 Insurance Monitor 1880, page 36. 
 
THE CHARACTER OF THE INVESTMENTS. 31 
 
 asset. Some companies did fail because they had loaned 
 rashly on real estate, but they were badly managed in 
 other respects. The companies which survived had one 
 lesson pointed out to them. The actual loss on the 
 foreclosed property was not large to those companies 
 which kept the real estate until the revival in business 
 set in, but the loss to the companies in other ways from 
 foreclosure was great. The depreciation in securities 
 as good as United States bonds was' greater probably 
 than the depreciation in land values, but the companies 
 owning marketable securities knew exactly what the 
 value of such securities were and the public could find 
 out. The companies which had obtained a large 
 amount of real estate could only estimate its value, for 
 much of it had scarcely a market price, and the public 
 could not learn what the value was. Hence, there was 
 a loss of prestige to certain companies, and the criticism 
 which followed was extremely severe. 
 
 Foreclosure of mortgage loans ceased almost entirely 
 after 1881. Later they began to absorb a larger pro- 
 portion of the accumulated assets. Since then the total 
 amount of such loans has increased steadily, but in com- 
 parison with the increase in total assets the mortgage 
 loans have declined in importance. At the present time 
 mortgage loans form barely more than one-fourth of the 
 total assets. With individual companies the decline in 
 percentage of such assets is still more striking. With 
 
32 THE CHARACTER OF THE INVESTMENTS. 
 
 some companies in 1904 the percentage which loans 
 on real estate formed of the total assets was under 
 fifteen per cent. 
 
 The cause for the extreme relative decline which has 
 taken place in mortgage loans since 1890 is hard to 
 explain. There has been a decline in the earning rate 
 of such loans, but it has not been enough to justify the 
 change from mortgage loans as the greatest asset to a 
 lower position among the assets. Mortgages run for 
 short periods, and with a decline in the interest rate 
 they are paid off. After 1890 the rate of interest de- 
 clined sharply, and as a result most of the companies 
 seem to have been animated with a desire to get the 
 funds under their control invested in long time securi- 
 ties. Other causes for the change will develop in the 
 study of the other investments. 
 
 Real estate absolutely owned by the insurance com- 
 panies may be divided into two classes. One class con- 
 sists of real estate obtained through foreclosure, the 
 other of that purchased and improved by the companies 
 for business purposes, namely for home offices. The 
 first class has never composed a large part of the assets 
 save at the close of the seventies through causes which 
 have already been discussed. In 1880, as a result of 
 the foreclosed mortgages, real estate formed more than 
 twelve per cent, of the assets. Not a few companies 
 had a fifth or more of their assets tied up in real estate. 
 
THE CHARACTER OF THE INVESTMENTS. 33 
 
 Since 1880, there has been no period of general fore- 
 closure of mortgages. 
 
 In the late sixties, several companies were erecting 
 home office buildings. For advertising purposes, these 
 buildings were made showy and expensive. From that 
 time until the present practically every life insurance 
 company, no matter how meager its assets, and how 
 necessary it has been that those assets should be in- 
 vested with the greatest care, has deemed it necessary 
 for its success that it should erect an office building. 
 Each new building must be larger and more costly than 
 the preceding ones. Those companies which have had 
 other weak elements in their management have been 
 ruined by the heavy burden of a costly home office, and 
 in a number of cases these magnificent buildings stand 
 not as monuments of strength, but rather as tombstones 
 to departed companies. Most of the companies which 
 built the home offices were strong enough to afford the 
 heavy expenses entailed in most cases by such buildings. 
 Probably one hundred and twenty-five million dollars 
 are invested today in home office structures or branch 
 offices, which from the investment point of view is a 
 failure. It is the money placed on such buildings that 
 has kept real estate up to such a large proportion of the 
 assets. This policy of erecting expensive offices is not 
 common to all corporations. Several years ago the 
 banks started to follow the example of the insurance 
 3 
 
34 THE CHARACTER OF THE INVESTMENTS. 
 
 companies, but experience soon taught them that bank- 
 ing was one business and the handling of real estate 
 another. Outside of the metropolitan newspaper offices, 
 few corporations, other than insurance, have invested 
 so heavily in offices when the real needs of the business 
 required but little. It is necessary to state in this con- 
 nection that two-thirds of the real estate owned by the 
 twenty-nine largest companies is in the possession of 
 five of them. 
 
 Collateral loans formed a small percentage of the 
 total assets until 1880. By reference to the table, it 
 will be seen that nearly six per cent, of the assets of 
 that year were in the shape of temporary loans upon 
 collateral security. However, this was not the result 
 of any general action of the companies, for of the 
 twenty-four million dollars of collateral loans in 1880, 
 fifteen millions were held by two New York companies, 
 and nineteen millions by four companies of that State. 
 
 The cause for such large loans on collateral by the 
 New York companies was ascribed to the law limiting 
 mortgage loans to New York, but since the repeal of 
 that law, collateral loans have continued to form a con- 
 siderable portion of the assets of some companies in 
 that State. In 1890, the Manhattan reported forty per 
 cent, of its assets as consisting of collateral loans. In 
 1900, two New York companies had thirty-seven mil- 
 lion dollars so invested, or more than one-half of the 
 
THE CHARACTER OF THE INVESTMENTS. 35 
 
 total of collateral loans held by all companies. How- 
 ever, some companies in other states have at the present 
 time a larger proportion of their assets so invested than 
 do most of the New York companies. Just why the 
 companies should take up such loans which are properly 
 the function of a commercial bank is difficult to under- 
 stand. The rate Of interest realized upon such loans 
 is low, they require a great deal of attention which 
 could well be directed in other channels, and there is 
 no need of ready money calling for such investments on 
 the part of the life insurance corporations. 
 
 United States bonds need but little discussion in a 
 study of the assets. Only for a brief period did they 
 form any considerable portion of the total assets. The 
 insurance funds were not large during the Civil War 
 period, but it is remarkable how suddenly the invest- 
 ments were changed from mortgage loans to United 
 States bonds. With the disappearance of the premium 
 on gold, the government bonds owned by the insurance 
 companies decreased. The severe depression of the 
 seventies so alarmed the companies that they purchased 
 considerable amounts of such bonds, despite the fact 
 that the government was refunding them at a lower 
 rate of interest. At the close of 1880 the companies 
 owned twice the amount of government bonds that 
 they did in 1870. For reasons generally known, since 
 1880, United States bonds have been getting scarcer 
 
36 THE CHARACTER OF THE INVESTMENTS. 
 
 and higher priced, and the insurance companies have 
 disposed of such bonds until, at the present time, 
 government bonds are scarcely more than a temporary 
 investment for funds awaiting investment. 
 
 Under the title of foreign public bonds there has 
 been included bonds of foreign governments, bonds of 
 cities in foreign countries, and corporation bonds 
 guaranteed by the government of the foreign countries. 
 Such an item was not found among the assets of United 
 States companies until about 1880. At the end of 
 that year, the Travelers' owned something like forty- 
 seven thousand dollars of Montreal bonds. By 1890, 
 nine companies possessed some amount of foreign pub- 
 lic bonds, and these included securities guaranteed by 
 European governments. The appearance of these 
 foreign bonds among the assets of United States com- 
 panies does not indicate that they found it necessary 
 to go abroad for remunerative investments. Some of 
 the Canadian bonds probably have been purchased as 
 an investment, but the most of these and practically 
 all of those of other countries have been purchased as a 
 result of the requirement of foreign governments that 
 the reserves upon policies written in those countries 
 shall be invested in securities of that country. Several 
 companies began to do a large foreign business during 
 the eighties. This business has increased until at 
 present several companies have large holdings of 
 
THE CHARACTER OF THE INVESTMENTS. 37 
 
 foreign public bonds. The Germania in 1900 had fif- 
 teen per cent, of its assets invested in foreign securities, 
 the New York Life had ten per cent. The objection to 
 such investments, aside from the fact that the European 
 bonds usually bear a low rate of interest, lies in the 
 further requirement by the foreign government that the 
 securities be also deposited in those countries. The 
 scattering of assets, not only of bonds, but of real estate, 
 in various countries is a bad plan. 1*0 secure the best 
 management of the assets, their control should be con- 
 centrated in the home office. 
 
 For a time in the history of the country state bonds 
 existed in large amounts. This was during the period 
 1825 to 1840, when the states conceived and carried 
 out to a considerable extent large systems of internal 
 improvements. Then came the crisis of 1837, followed 
 by state bankruptcy and repudiation of debts. Since 
 1840, twelve states have dishonored debts to a total 
 amount of three hundred million dollars. From the 
 same date state activity requiring large sums of capital 
 has almost ceased. When in 1850-60, state bonds could 
 have been purchased by the insurance companies, they 
 were not desired; since that decade the bonds of states 
 with a good record for paying have been too scarce to 
 offer much outlet for investments. 
 
 As the states gave up internal improvements, the 
 counties and cities increased their activities. Counties 
 
38 THE CHARACTER OF THE INVESTMENTS. 
 
 made large bond issues to subsidize railroads, and mun- 
 icipalities did the same. This created large debts for 
 these governments, and the insurance companies bought 
 many bonds. In 1880 nearly one-seventh of the total 
 assets were invested in such securities. Then like the 
 states, the counties and cities began to repudiate their 
 debts on a large scale. Over one hundred cities in Illi- 
 nois 1 alone endeavored to avoid payment of their 
 bonds, more than ninety in Missouri attempted the 
 same policy, and in some states, there was almost unan- 
 imous action on the part of the municipalities in at- 
 tempting to dishonor their obligations. 
 
 As a result, the insurance companies decreased abso- 
 lutely their holdings of municipal securities from 1880 
 to 1890. Since then there has been an enormous in- 
 crease in the debts of municipalities, but the security 
 of such bonds has increased even more rapidly. This 
 has caused these bonds to be sought by investors who 
 are satisfied with a low rate of interest so long as the 
 security is good, and given them a price in many cases 
 prohibitive to insurance companies. Though the in- 
 surance companies possess more municipal securities 
 than ever before, the percentage which they form of 
 total assets has diminished. 
 / So far, the great changes which have been noted in 
 the character of the assets have been large relative de- 
 
 1 Insurance Monitor, 1884, page 510. 
 
THE CHARACTER OF THE INVESTMENTS. 39 
 
 creases in premium notes, in mortgage loans, and since 
 1880 a decrease in public securities. Corporation se- 
 curities on the other hand have absorbed a rapidly in- 
 creasing proportion of the assets. From less than one 
 per cent, of twenty million dollars of assets in 1860 in- 
 vested in corporation bonds, the percentage has grown 
 in 1900 to thirty-two per cent, of nearly two billion 
 dollars worth of assets. Of these corporation bonds, 
 railroad securities form by far the' largest amount. 
 There were plenty of railroad securities in 1860, a 
 great deal more in proportion to the insurance assets 
 than at the present time. 1 However, only six com- 
 panies had such an asset at all. In 1870, three more 
 companies owned railroad bonds, but it was not until 
 after 1880 that insurance companies began to invest 
 large amounts in railroad bonds. During the early 
 period railroad securities were not considered safe 
 enough for insurance companies. Railroads had 
 scarcely passed through the experimental period of their 
 development when they fell into speculative control. 
 Men obtained control of them simply to exploit them 
 and wreck them for their own pecuniary gain. Thou- 
 sands of dollars of savings invested in railroad secur- 
 ities were lost. During this period the insurance com- 
 
 1 The report of the Secretary of the Treasury in 1857 gives 
 the capital and indebtedness of the railroads for that year as 
 $900,000,000. 
 
 if 
 
40 THE CHARACTER OF THE INVESTMENTS. 
 
 panies avoided railroad bonds and stocks. Better days 
 came to the railroads, their bonds became high-priced 
 securities, and the life companies have purchased them 
 until now they are the largest asset which they pos- 
 sess. 
 
 Within the last two decades bonds of gas, electric and 
 water companies have been purchased to some extent. 
 Gas company and water company bonds form the larg- 
 est part of the twenty-nine millions so invested. There 
 is a similar amount consisting of miscellaneous bonds 
 of telephone and telegraph companies, and a very few 
 bonds of manufacturing concerns. 
 
 The investment in corporation stock is one of the 
 most interesting of the assets. This interest comes not 
 from the proportion which such securities form of the 
 total assets, but because of the results which follow from 
 the ownership of stock. Railroad stock has increased 
 slowly as an asset. The objections which applied to 
 railroad bonds for many years, applied to the stock with 
 still greater force. To-day many railroad stocks are 
 better investments than numerous railroad bonds. 
 
 Of other stocks, those of banks are the only ones 
 held to any considerable extent by insurance companies. 
 In 1860, it was the New England companies which 
 held practically all the bank stock then owned. Only 
 one New York company, the New York Life, owned 
 any at all. The relative amount decreased until 1880, 
 
THE CHARACTER OF THE INVESTMENTS. 4J 
 
 but in the last decade the holdings of bank stock have 
 increased rapidly. 
 
 There are serious objections to stock ownership by 
 life companies. The stockholders of a corporation are 
 responsible for the management of that corporation. 
 Every stockholder is part owner, thus, in buying stock, 
 the insurance company becomes more than the trustee 
 of funds, it must enter to some degree into the active 
 work of control. If the amount of stock which is pur- 
 chased be but a small part of the total capital stock of 
 the corporation issuing it, the responsibility which the 
 insurance company assumes is slight, and may be under- 
 taken for the sake of the gain which may accrue from 
 such ownership. However, when so much stock is 
 owned of one corporation that to protect the interest of 
 the policy-holders the insurance company's officials must 
 become directors and even officials in other concerns, the 
 result is disastrous to efficient management of the insur- 
 ance company. To avoid this result several states have 
 prohibited their companies from holding stock of other 
 corporations. 
 
 There are other objections t o stock investments. 
 Under the present state laws, it is almost vitally neces- 
 sary that the companies maintain assets equal at all 
 times to the reserve value of their policies. The fluct- 
 uating character of stock values is well known. There- 
 fore if an insurance company is to own such stock, it 
 
42 THE CHARACTER OF THE INVESTMENTS. 
 
 is necessary for it to have a large surplus, and large 
 surpluses are undesirable, because they lead to ex- 
 travagances. If the states would change the laws re- 
 garding the valuation of the assets, stock might be pur- 
 chased to a greater extent. The valuation legally 
 adopted by most of the states takes the selling price on 
 December thirty-first as the value of the assets. This 
 has made stock holding dangerous as well as leading to 
 other troubles. Massachusetts tried the plan of valuing 
 the assets according to the interest value method. The 
 value of each security was arrived at by capitalizing 
 the income from that security on a four per cent, basis. 
 The plan was not just and has been abandoned. Some 
 average valuation method is needed. The period over 
 which the average extends ought to be of five years or 
 even more. This would equalize values and prevent 
 that alternate shrinkage and expansion of the surplus 
 of companies which is objectionable. In truth, it 
 would enable the companies to get along with a small 
 surplus, for by taking a five-year average valuation, 
 the dangers due to sudden fluctuations would be 
 avoided. Such a change in the law is to be hoped for, 
 as it would make possible a smaller surplus; and if a 
 company were ably and honestly managed, would enable 
 it to invest in securities which bring in a higher in- 
 terest return than those now owned. 
 
 This concludes the general survey of the assets. The 
 
THE CHARACTER OF THE INVESTMENTS. 43 
 
 tendencies toward different classes of investments dur- 
 ing certain periods have been pointed out, and the main 
 reasons external to the companies indicated which ex- 
 plain these tendencies. Similar tables computed foi 
 the individual companies show that the changes have 
 not been universally made. The personal element has 
 entered largely in the character of the assets which a 
 company purchases. Thus, such variations are found 
 as eighty per cent, of assets in mortgages in one com- 
 pany, and ten per cent, in another. One company has 
 forty-five per cent, of its assets in corporation bonds, 
 another has none. To explain these differences one 
 would need to consider the personnel of the individual 
 management, for in general, the same opportunities are 
 open at the present time to all the companies. Com- 
 panies located in the same city vary widely. Neither 
 is the variation due to size alone, for although the three 
 largest companies show the same tendencies, the next 
 two largest have assets composed mostly of different 
 assets from the three largest. One company laid great 
 stress on having mostly all its assets invested in mort- 
 gage loans, until a change in the management caused 
 other securities to be preferred. These personal ele- 
 ments have not been discussed. The object of the chap- 
 ter has been to point out the causes of the general move- 
 ments. 
 
 In this connection it is interesting to see what are 
 
 OF 
 
 
44 
 
 THE CHARACTER OF THE INVESTMENTS. 
 
 the assets of companies located in other countries under 
 different conditions as to industrial development and 
 laws. The following table shows the character of 
 Canadian companies' investments. 
 
 TABLE SHOWING THE ASSETS OF CANADIAN 
 COMPANIES. 
 
 Kind of Assets. 
 
 1877 
 
 1882 
 
 1887 
 
 1892 
 
 1896 
 
 1901 
 
 Real Estate 
 
 4.6 
 22.9 
 51.1 
 
 1.0 
 
 9.5 
 
 10.9 
 
 4.9 
 26.9 
 44.1 
 
 3.5 
 
 8.5 
 12.0 
 
 3.8 
 
 38.8 
 29.6 
 
 8.8 
 
 8.0 
 10.9 
 
 7.9 
 43.3 
 24.1 
 
 8.6 
 
 8.7 
 7.3 
 
 37.3 
 
 26.8 
 
 7.2 
 
 10.5 
 
 
 Mortgage Loans 
 
 28.8 
 
 Bonds and Stocks 
 
 Collateral Loans 
 
 40.9 
 5.9 
 
 Policy Loans and Pre- 
 mium Notes 
 
 9.7 
 
 Uninvested Assets 
 
 
 At the present time the table shows that the Cana- 
 dian companies have practically the same percentage 
 of their assets invested in loans on real estate as have 
 the United States companies. Bonds and stocks form 
 a somewhat larger percentage, having increased rapidly 
 during the last ten years as an opening for the invest- 
 ment of insurance funds. This sudden increase has not 
 been due alone to the growing popularity of corporation 
 bonds and stocks as investments, but has been largely 
 the result of a change in the Canadian law regulating 
 the investments of insurance companies which was 
 passed soon after 1800. The Canadian legislators have 
 not selected always the same classes of investments for 
 
THE CHARACTER OF THE INVESTMENTS. 
 
 45 
 
 the companies under their control as have the States, 
 but in general character, insurance legislation in Can- 
 ada in regard to limiting the investment field has been 
 modeled more or less after the legislation in this 
 country. 
 
 The fact that Canada is so near to the United States 
 and has been influenced so much by her close contact 
 does not give the same interest to her companies' ex- 
 perience as is felt in the experience of the Australasian 
 companies. Australia, far away from other influences, 
 has followed English custom much more than has 
 Canada. Especially is this true in the freedom of 
 investment which she has allowed her companies. The 
 following table shows how companies in that country 
 have distributed their assets. 
 
 TABLE SHOWING DISTRIBUTION OF THE ASSETS OF 
 AUSTRALASIAN COMPANIES.* 
 
 Class. 
 
 1885 
 
 1890 
 
 1895 
 
 1900 
 
 1902 
 
 Real Estate 
 
 9.7 
 56.0 
 13.3 
 
 1.1 
 
 1.4 
 11.6 
 
 6.9 
 
 10.5 
 
 55.9 
 
 7.9 
 
 .7 
 
 .7 
 
 16.3 
 
 7.0 
 
 11.4 
 
 48.5 
 
 9.7 
 
 .7 
 
 .3 
 
 20.2 
 
 9.2 
 
 10.6 
 
 47.5 
 
 15.9 
 
 .3 
 
 .2 
 
 18.2 
 
 7.3 
 
 9.6 
 
 Mortgages 
 
 48.0 
 
 Governm't and Municipal Bonds 
 Shares 
 
 19.3 
 .3 
 
 Loans on Personal Security 
 
 Policy Loans 
 
 .1 
 17.1 
 
 Uninvested 
 
 5.6 
 
 
 
 1 Taken from the Transactions of the Faculty of Actuaries, 
 Volume 11, Part IV, page 120. 
 
46 THE CHARACTER OF THE INVESTMENTS. 
 
 The most interesting fact about the investments of 
 the Australasian companies is the extremely small pro- 
 portion which corporation securities form of the total 
 assets. The cause lies in the governmental ownership 
 of railroads and of other undertakings in that country 
 which in the United States are left to private enterprise. 
 The result of this governmental activity is of interest 
 to company managers in this country in view of the agi- 
 tation at present for municipal ownership of public 
 utilities and in some quarters for ownership of the rail- 
 roads. Officials of insurance companies have at times 
 raised a note of alarm against such a procedure in the 
 belief that it would lessen too much their field of profit- 
 able investment. There is very little cause to worry on 
 that score. If the cities undertake to own the public 
 utilities, and the Federal and State governments the 
 railroads, the investment field will not be narrowed. As 
 in Australia, the investment securities will still exist as 
 municipal, state and government bonds. 
 
 In other respects, the distribution of assets of the 
 Austraslian companies are of interest. The companies 
 there have succeeded in keeping practically half of their 
 assets in mortgage loans, the proportion of these of the 
 total decreasing but little in twenty years. Policy loans 
 likewise have made up a percentage of the total assets 
 higher than in any other country. 
 
 Turning now to the countries of Europe, it is found 
 
THE CHARACTER OF THE INVESTMENTS. 
 
 47 
 
 that England, the first country in which systematic life 
 insurance was developed, has in the main allowed her 
 companies to invest their assets without legal restric- 
 tion. This gives an importance to the statistics of Eng- 
 lish companies which they otherwise would not possess. 
 Since 1872, the assets have been distributed among the 
 various classes of investments as follows : 
 
 TABLE SHOWING DISTRIBUTION OF -THE ASSETS OF 
 ENGLISH COMPANIES. 1 
 
 Kind of Assets. 
 
 Mortgages 
 
 Loans on Rates and Rent 
 Charges 
 
 Policy Loans 
 
 British Government Se- 
 curities 
 
 Colonial Government 
 Securities 
 
 Foreign Government 
 Securities 
 
 Railway and other De- 
 bentures 
 
 Shares and Stocks 
 
 Land and House Prop- 
 erty 
 
 Life Interests 
 
 Loans on Personal Se- 
 curity 
 
 Cash, etc 
 
 1872 
 
 1880 
 
 1885 
 
 1890 
 
 1895 
 
 48.2 
 
 46.2 
 
 43.8 
 
 40.4 
 
 37.2 
 
 10.5 
 5.0 
 
 4.6 
 13.9 
 
 4.7 
 12.5 
 
 4.6 
 11.0 
 
 4.7 
 9.9 
 
 7.7 
 
 3.4 
 
 2.8 
 
 2.9 
 
 2.2 
 
 5.0 
 
 4.0 
 
 6.2 
 
 6.6 
 
 7.5 
 
 1.2 
 
 2.7 
 
 2.3 
 
 1.8 
 
 2.0 
 
 9.8 
 2.6 
 
 7.9 
 4.2 
 
 7.3 
 6.1 
 
 9.7 
 6.7 
 
 12.8 
 
 7.2 
 
 4.4 
 1.6 
 
 3.4 
 
 1.8 
 
 5.5 
 1.9 
 
 6.2 
 
 1.8 
 
 6.8 
 2.1 
 
 1.7 
 2.9 
 
 1.2 
 6.7 
 
 .8 
 6.1 
 
 .6 
 7.6 
 
 .7 
 6.9 
 
 1902 
 
 28.4 
 
 4.8 
 
 8.7 
 
 2.4 
 
 6.5 
 
 3.5 
 
 17.6 
 12.1 
 
 8.0 
 
 2.7 
 
 .5 
 
 4.8 
 
 1 This table has been compiled from tables given by Mr. A. G. 
 McKenzie, Journal of the Institute of Actuaries, Volume 29, 
 page 193, and from the Transactions of the Faculty of Actuaries, 
 Volume 2, Part V, page 110. 
 
48 THE CHARACTER OF THE INVESTMENTS. 
 
 The table shows that the English companies have 
 since 1870 invested approximately the same percentage 
 of their assets in mortgage loans as have the companies 
 in this country. If only the cash assets of companies in 
 both countries were considered, it would be seen that 
 the falling off in relative amounts of mortgage loans 
 would be the greatest in the United States. That this 
 should be true is remarkable. Since 1870, England has 
 suffered a decline in agricultural land values amount- 
 ing to millions of dollars, thus narrowing the field for 
 mortgage loans. In the United States, on the other 
 hand, land values of all kinds have risen greatly, giving 
 a field for mortgage loans much broader than in 1870. 
 That our companies have not loaned a larger proportion 
 of their assets on real estate can only be explained by a 
 lack of desire on the part of their managers for such 
 investments. 
 
 The experience of the English companies with policy 
 loans shows that such assets will not probably increase 
 much more in the United States. English companies 
 have been making such loans since 1850, and though 
 they increased rapidly, both relatively and absolutely, 
 until 1880, since then the percentage which such loans 
 form of the total assets has declined. 
 
 The relatively large amount of cash held by English 
 companies is due to no small extent to the fact that the 
 companies have been able to secure a higher rate of in- 
 
THE CHARACTER OF THE INVESTMENTS. 
 
 49 
 
 terest by placing deposits in colonial or foreign banks 
 than they could by investing it in the securities on the 
 market at home. 
 
 In general, English companies have had their assets 
 more scattered than have companies of the United 
 States. A low rate of interest at home has induced for- 
 eign and colonial investments until now nearly one- 
 fifth of the assets are invested outside of the United 
 Kingdom. 
 
 On the continent of Europe, life insurance has only 
 developed in two countries to any considerable extent. 
 These are Germany and France. The appended table 
 shows the distribution of the assets of German com- 
 panies. 
 
 TABLE SHOWING DISTRIBUTION OF THE ASSETS OF 
 GERMAN COMPANIES. 1 
 
 Kind of Assets. 
 
 Mortgages 
 
 Real Estate 
 
 Bonds and Stocks 
 Collateral Loans. . 
 
 Policy Loans 
 
 Cash 
 
 Other Credits 
 
 1876 
 
 1889 
 
 60.4 
 
 71.3 
 
 2.1 
 
 2.8 
 
 5.0 
 
 4.8 
 
 3.2 
 
 .3 
 
 3.3 
 
 5.1 
 
 .9 
 
 .8 
 
 25.1 
 
 14.9 
 
 1903 
 
 79.5 
 2.0 
 2.7 
 .0 
 6.1 
 1.9 
 7.8 
 
 1 The statistics for 1876 are taken from the Spectator, 1879, 
 Volume 22, page 164. Those for 1889 from the Spectator, 1890, 
 Volume 45, page 4. For 1903 from the Jahrbuch fur das Ver- 
 sicherungsvvesen in Deutsches Reiche, 1905, pages 7 and 8. 
 
 4 
 
50 THE CHARACTER OF THE INVESTMENTS. 
 
 The proportion which mortgages form of the total 
 assets of the German companies shows what can be 
 done in that investment field. With sixty per cent, of 
 their accumulations invested in loans on real estate as 
 security in 1876, in 1903 they had increased the per- 
 centage to nearly four-fifths of the total assets. There 
 is one large company in the United States which is 
 popularly spoken of in insurance circles as having all 
 its funds invested in mortgage loans, yet this individual 
 company does not have as large a proportion of its assets 
 so invested as do all the German companies averaged 
 together. In other respects, the German statistics are 
 worthy of careful consideration. Of objectionable as- 
 sets, such as real estate absolutely owned, collateral 
 loans and cash, the German companies possess mini- 
 mum amounts. 
 
 The other continental country in which there has 
 been some considerable development of life insurance is 
 France. If England is known as the country where 
 the state has adopted a laissez faire policy towards 
 the insurance companies, France should be known as 
 the country in which the opposite policy has predomi- 
 nated. In no other country have the life insurance 
 companies been so restricted in the matter of their in- 
 vestments as in France. This gives to the following 
 table an unusual interest. 
 
THE CHARACTER OF THE INVESTMENTS. 
 
 51 
 
 TABLE SHOWING DISTRIBUTION OF ASSETS OF FRENCH 
 COMPANIES. 1 
 
 Kind of Assets. 
 
 Heritable Property 
 
 French Government Securities 
 French Securities Guaranteed. 
 
 Foreign Stocks and Bonds 
 
 Policy Loans 
 
 Mortgage Loans 
 
 Cash 
 
 Other Assets 
 
 1878 
 
 1884 
 
 17.2 
 
 26 o 
 
 31.3 
 
 18.0 
 
 22.2 
 
 39.4 
 
 .0 
 
 1.6 
 
 1.5 
 
 2.5 
 
 .1 
 
 2.8 
 
 .1 
 
 .9 
 
 27.5. 
 
 8.8 
 
 25.3 
 
 13.4 
 
 29.8 
 
 10.8 
 
 3.3 
 
 6.4 
 
 .3 
 
 10.6 
 
 French companies have a large proportion of their 
 assets in real estate and small amounts in real estate 
 loans. For a number of years the French laws pro- 
 hibited the life insurance companies from loaning on 
 real estate. Likewise, the government narrowly limited 
 the investment field in other directions. Kestricted in 
 the investment field to low-earning securities, the 
 French companies found it necessary to turn their at- 
 tention to an asset which has been a drug for the life 
 insurance companies in nearly all parts of the world, 
 and especially in the United States, namely, real estate 
 absolutely owned by them. The results in earning 
 power show the difference between an investment in real 
 estate for the sake of the earnings and an investment 
 made for advertising purposes. American and French 
 
 1 The statistics for 1878 are from the Insurance Spectator, 1879, 
 Volume 22, page 565. For 1884 and 1898 from the Transactions 
 of the Actuarial Society of Edinburgh, Volume 4, page 508. 
 
52 THE CHARACTER OF THE INVESTMENTS. 
 
 companies have both invested in Paris real estate, the 
 American investment has shown little or no net return, 
 but the Trench companies have had a favorable ex- 
 perience with their real estate possessions. The re- 
 strictions against mortgage loans have now been re- 
 moved, and mortgage loans are beginning to form a con- 
 siderable proportion of the assets of the French com- 
 panies. The other regulations concerning the invest- 
 ments have also been broadened, allowing freer 
 scope to the company managers, so that the character of 
 the French assets is changing rapidly. 
 
 Having completed our study of the character of the 
 assets what conclusions are to be drawn ? Very few so 
 far as the results of this chapter indicate, for the value 
 of an asset depends not only upon the safety of the 
 principal, but also upon the rate of interest, and this 
 latter we have not yet determined. 
 
 Anticipating somewhat, we can conclude with much 
 certainty that some companies do not have as large a 
 proportion of their assets invested in mortgage loans 
 as they should. These loans do not possess all the 
 merits sometimes ascribed to them, but they do possess 
 certain characteristics which make them a good in- 
 vestment for a considerable portion of the funds. Of 
 all the assets having a value little subject to fluctuations, 
 mortgage loans are unexcelled. The net rate of interest 
 will be found to be equal to that of other securities, in 
 
THE CHARACTER OF THE INVESTMENTS. 53 
 
 most instances greater. However, it is not urged that 
 even for the sake of the higher return which can be 
 secured from such loans that mortgages should form 
 anything like nearly all the invested assets. We have 
 seen that companies with too much of their assets in 
 mortgages suffered severely during periods of extreme 
 depression. With large assets, it would be a heavy 
 burden upon an investment department to loan and 
 supervise so large a proportion as was once loaned on 
 real estate, and mortgages not carefully supervised are 
 risky investments, but the investment department 
 should not be relieved too much. As yet, the labor ex- 
 pended in pursuing a policy of real estate loaning has 
 been well repaid. 
 
 That it is possible to invest large assets in mort- 
 gages is shown by the experiences of the German com- 
 panies. Even English companies with rural land 
 values gone to pieces have a larger proportion of their 
 assets invested in mortgages than do the companies in 
 the United States. 1 
 
 Under present conditions, the amount which securi- 
 ties dealt in on the exchanges form of the total assets 
 must at least be regulated by the surplus of the com- 
 panies. The depression in values in 1891 and 1892 and 
 
 1 For a discussion of the possibilities of mortgage loans see 
 Dawson's " The Business of Life Insurance," Chapters XXVII 
 and XXVIII. 
 
54 THE CHARACTER OF THE INVESTMENTS. 
 
 again in 1903 is sufficient to show that with the methods 
 now in vogue of valuing such securities, they must not 
 form a large proportion of the assets unless the com- 
 panies possess a considerable surplus. The limitations 
 on other assets, such as cash, real estate, collateral loans, 
 have been already discussed. 
 
 Having seen of what the assets of life insurance com- 
 panies consist and how these assets have changed in 
 character from decade to decade, our next step will be 
 to find out what has been the earning power of these 
 various investments. A study of this will be made in 
 the following chapter. 
 
CHAPTER III. 
 
 INVESTMENT EARNINGS. 
 
 The rate of interest is one of the most vital problems 
 in the insurance world. When life insurance was first 
 introduced in the United States term policies were the 
 kind mostly written. With these the rate of interest 
 is not an important factor. Then came life payment 
 policies, and the cost of such policies is affected ma- 
 terially by the rate of interest. Finally with the advent 
 of endowment policies, and with the development of 
 modified forms of endowments, such as bond policies, 
 and others involving a large element of investment, the 
 rate of interest is one of the most important factors de- 
 termining the cost of such policies. Because of the 
 popularity of such policies and because of the great 
 growth of the assets to be invested at some rate of in- 
 terest, what that rate is, is of much significance to the 
 insurance world. 
 
 Before level premium policies can be written some 
 rate of interest must be assumed at which that portion 
 of the premium which is reserved will accumulate. Be- 
 fore the establishment of state insurance departments, 
 
 55 
 
56 INVESTMENT EARNINGS. 
 
 and even after, the companies were allowed to assume 
 any rate of interest in computing their premiums. 
 When the state departments were organized for the 
 purpose of supervising the companies, some test of solv- 
 ency had to be decided upon. To know the assets meant 
 nothing unless the liabilities were also determined. To 
 determine the liabilities, a rate of interest must be as- 
 sumed, and of the New York companies incorporated 
 under the general law of 1849 none, except the Globe, 
 had restricted itself in any way as to a standard of 
 interest. Most of the companies had themselves as- 
 sumed a conservative rate, but certain managers, san- 
 guine of the future, had based their premiums on the 
 assumption that the assets would earn six per cent. 
 
 Massachusetts under the leadership of her brilliant 
 commissioner, Elizur Wright, in 1857, enacted that 
 four per cent, should be used as a basis for computing 
 the liabilities of a company. Georgia two years later 
 made the same rate the legal standard for companies 
 doing business in that State. 1 Until after the Civil 
 War these were the only States which had adopted a 
 legal basis for finding the liabilities of the life com- 
 panies. 
 
 However, the rate specified by the Massachusetts law 
 was becoming the one generally adopted by the com- 
 panies of other states, otherwise they could not trans- 
 1 Act of December 12, 1859, Section 4. 
 
INVESTMENT EARNINGS, 57 
 
 act business in Massachusetts. In 1862 there were 
 seventeen American companies writing insurance in 
 New York. Of these, eleven assumed that their assets 
 would earn four per cent., three a rate of five per cent., 
 and one six per cent., and one did not state in its an- 
 nual report what rate it did assume. 1 The Civil War 
 brought a higher rate of interest, and new companies 
 were formed whose managements chose the higher rates. 
 The confusion in standards adopted by the various com- 
 panies led New York to enact a law providing for a 
 legal rate. A five per cent, standard was adopted in 
 18 6 6. 2 Two years later, in the hope of securing uni- 
 formity of standards, New York lowered the legal rate 
 to four and one-half per cent, with the expectation that 
 Massachusetts would raise her standard rate to that per 
 cent., 3 but Massachusetts maintained the four per cent, 
 basis. 
 
 The troubles which began to disturb the insurance 
 world during the late sixties brought a number of laws 
 providing for legal standard rates of interest. Wis- 
 consin in 1870 established a four and one-half per cent. 
 basis. 4 Other states enacted similar laws. Thus in 
 1873, Massachusetts, Maine, Connecticut, New Hamp- 
 shire, and Illinois had the four per cent, standard rate, 
 
 1 New York Insurance Report, 1863, Page 643. 
 
 9 Act of April 24, 1866. 
 
 8 Insurance Times, August 1869. 
 
 * Act of March 14. 1870, Section 10. 
 
58 INVESTMENT EARNINGS. 
 
 while fifteen others had a four and one-half per cent. 
 basis, 1 and Texas and Pennsylvania allowed stock life 
 insurance companies the liberal rate of six per cent, in 
 calculating their liabilities. 
 
 These legal standard rates of interest are important, 
 because they show what was then thought to be the rate 
 of interest which could be expected for half a century 
 in advance. As is evident, the discussion at that time 
 was entirely as to whether a four and one-half per cent, 
 standard should be adopted or a four per cent, standard. 
 There was a movement during the hard times of the 
 seventies on the part of a number of states to a four 
 per cent, basis, but there were few who believed that 
 any lower standard rate than four would be needed for 
 years to come. The insurance world was not a little 
 startled when, in 1882, the Connecticut Mutual an- 
 nounced that its new business would be done on a three 
 per cent, basis. In the same year, the Massachusetts 
 Commissioner of Insurance likewise raised the question 
 of a lower interest basis. New York still had the four 
 and one-half per cent, standard, but the lower actual 
 earnings led to the adoption of a four per cent, standard 
 in 1884. 
 
 There was not a great deal more heard of a lower in- 
 terest basis until after 1830. The companies with the 
 exception of the Connecticut Mutual were on a four 
 1 Connecticut Insurance Report, 1874, Page XLII. 
 
INVESTMENT EARNINGS. 59 
 
 per cent, basis, and a number of states still allowed the 
 five per cent, standard. In 1892, the United States 
 Life voluntarily went on a three per cent, basis for new 
 business. Soon after the feeling that some reduction 
 in the assumed rate was necessary became widespread. 1 
 The insurance commissioners in their annual convention 
 of 1893 urged the general adoption of a three per cent, 
 standard, and in 1894, the legislatures of two states 
 considered the advisability of such a rate. In IS 9 6, 
 three companies adopted three per cent, for new busi- 
 ness, and the discussion was no longer whether the four 
 per cent, rate should be lowered, but whether it should 
 be lowered to three and one-half, or to three per cent. 
 
 The companies began changing the rate rapidly. 
 With the larger and older companies the three per cent, 
 standard was usually adopted. Massachusetts was the 
 first state to go below four per cent., adopting a three 
 and one-half per cent, basis in 1899. 
 
 Connecticut and E"ew York have since enacted simi- 
 lar laws. In general the other states are on a four per 
 cent, basis. In 1903, eight states still retained the four 
 and one-half per cent, standard, but changes are being 
 made to lower rates. 
 
 The legal basis was fixed at a conservative rate forty 
 years ago when the states first began establishing a test 
 for solvency. The rate selected was far under the 
 1 Laws of 1884, Chapter 341. 
 
60 INVESTMENT EARNINGS. 
 
 actual rate earned by the assets. Yet, despite the con- 
 servative rate adopted, the states have had to twice 
 change the rate to a lower one, and the companies like- 
 wise are assuming a rate averaging fully one and one- 
 half per cent, lower than in the sixties. It is unneces- 
 sary to state that these changes in the assumed rate 
 have been due to a serious decline in the rate of interest 
 actually earned by the companies. 
 
 If we study the rate of interest in the United States 
 from the period of the Civil War, we shall find that 
 there has been one tendency through the whole period, 
 the movement toward lower rates. Much discussion in 
 insurance circles has been based on the showing of this 
 period. The conclusion has been that the tendency of 
 interest is to decline, and investments, especially dur- 
 ing the past fifteen years, have been made on the as- 
 sumption that the rate of interest for a long time was to 
 continue to decline. It is a mistake to base conclusions 
 on a study of the period since the Civil War and of 
 this period alone. Valid conclusions must be based on 
 a wider study. 
 
 There is a belief widely prevalent that the rate of 
 interest has been high throughout the history of the 
 United States until recent years, and that there has 
 been a gradual decline to what is known as the present 
 low rate. This is not exactly true. It is a fact that in 
 general the rate of interest in the United States has 
 
INVESTMENT EARNINGS. 61 
 
 been higher than in Europe, especially in England, but, 
 relatively speaking, the rate was not steadily high dur- 
 ing the early history of the country, nor has there been 
 a gradual decline. The real situation is that the rate 
 has been a fluctuating one. During colonial times six 
 per cent was altogether a common rate of interest. Be- 
 fore the Revolutionary War loans could be secured on 
 desirable mortgages in JSTew York, State at five per 
 cent., which cannot be considered as a high rate on 
 mortgage loans, for many borrowers are paying more 
 even now. 
 
 Passing over several decades after the Revolutionary 
 War, because statistics of the rate of interesx are not 
 available, we find that during the thirties the rate of 
 interest fluctuated rapidly. In 1836 an extremely high 
 point was touched. During the severe depression fol- 
 lowing the crisis of 1837-9 the rate went as low as 
 four per cent, on many loans, the ordinary rate fluctuat- 
 ing around six per cent. From 1840 to 1860 the best 
 state and government bonds sold on a five per cent, 
 basis. It was a period during which the country was 
 expanding rapidly, much new land was being settled, 
 and the rate of interest on mortgage loans was higher 
 than on the best state bonds, and there were great di- 
 vergencies in various portions of the country. How- 
 ever, enough has been given to show that before 1860 
 the rate was not steadily high, that a rate of five per 
 
62 INVESTMENT EARNINGS. 
 
 cent, was not uncommon and even four per cent, inter- 
 est was known. 
 
 Unfortunately we do not possess the statistics of a 
 mass of assets such as are represented by the life com- 
 panies' investments before 1850. There are savings 
 banks statistics, and these are valuable, though repre- 
 senting a more restricted character of securities than 
 the insurance companies have purchased. A deposit 
 made with the Salem Savings Bank in 1823 accumu- 
 lated until 1871 at the rate of five and nine-tenths per 
 cent, above all cost. 1 The Society of Savings of Hart- 
 ford accumulated a deposit from 1825 to 1871 at the 
 rate of five and six-tenths per cent. The Savings Bank 
 of Newport received a deposit of thirty dollars in 
 1827, and accumulated it at the rate of five and three- 
 tenths per cent, above all charges. These statistics show 
 that for such investments as the savings banks were al- 
 lowed to make, the rate of interest for fifty years was 
 probably under six per cent. 
 
 From 1850 to 1860, the statistics of the income and 
 assets of a number of life insurance companies are 
 available. In the following table, the companies and 
 the rates realized by them during certain years are 
 given. 2 
 
 1 The Insurance Monitor, 1882, Page 239. 
 
 2 This table is compiled from statistics given in William 
 Barnes' condensed edition of the New York Insurnnce Reports 
 for the yeais after the general incorporation act was passed iu 
 
INVESTMENT EARNINGS. 
 
 63 
 
 
 1850 
 
 1851 
 
 1852 
 
 1853 
 
 18541855 
 
 1856 
 
 1857 
 
 5.3 
 6.6 
 5.8 
 6.9 
 5.7 
 7.2 
 5.8 
 
 1858 
 
 6.5 
 6.3 
 5.9 
 6.4 
 5.5 
 3.6 
 3\6 
 
 1859 
 
 
 
 
 
 
 
 6.5 
 6.6 
 5.7 
 
 4.8 
 5.5 
 3.8 
 6.0 
 
 6.6 
 
 6.8 
 5.8 
 6.6 
 5.4 
 5.4 
 5.8 
 
 6 4 
 
 Manhattan 
 
 Mutual Benefit 
 
 Mutual Life 
 
 5.1 
 
 5.6 
 5.3 
 
 3.2 
 5.5 
 
 2.4 
 5.6 
 
 5.7 
 5.7 
 5.0 
 6.0 
 7.1 
 5.8 
 
 6.0 
 6.0 
 6.2 
 
 New England 
 
 New York Life 
 
 United States 
 
 6.0 
 
 5.3 
 i'.i 
 
 6.3 
 '9.3 
 
 5.9 
 
 7.2 
 4.5 
 
 5.8 
 5.4 
 5.9 
 
 For these seven companies, the table gives fifty-six 
 annual rates of interest. Of these fifty-six annual rates, 
 thirty-four are below six per cent., five rates are exactly 
 six per cent, and only seventeen are above six per cent. 
 Nine rates are as low as five per cent, or lower, and only 
 four are above seven per cent. These statistics are of 
 a period when the companies were small, but they show 
 in a general way that the rate of interest for the decade 
 1850-60 was below six per cent. 
 
 Since 1860 the data for finding the rate of earnings 
 secured by the life companies on their investments is 
 more abundant. We have already noticed that the 
 New York Department of Insurance began to issue re- 
 ports in 1860. As well as giving the assets, these re- 
 ports have given in some detail the income produced by 
 certain large classes of the assets. From these reports, 
 and from those of other states when the New York 
 reports did not contain the information, a number of 
 
 1849 till 1859 when the insurance department was established and 
 began issuing annual reports. 
 
64 INVESTMENT EARNINGS. 
 
 tables have been compiled to show the investment earn- 
 ings of twenty-nine companies. These twenty-nine were 
 chosen because they were the ones which had over five 
 million dollars of assets on December 31, 1903. 1 In 
 these tables the asset history has been given from 1860 
 whenever possible. In the case of some companies they 
 did not exist at that time, others were not doing busi- 
 ness in a state which published annual reports. In all 
 cases, the tables go back as far as possible. 
 
 As the method adopted in finding the rate of invest- 
 ment earnings in these tables has never been used in 
 the numerous tables of the rate of interest earned by 
 life insurance companies which have been published, 
 an extended explanation will be given of it. In taking 
 the amount of assets to use as a basis for computing the 
 annual rate of earnings, mean market value has been 
 chosen. The mean for the year is taken because the 
 companies report the amount of assets on hand at the 
 end of the year. This is not the same amount which 
 they had twelve months earlier. In almost all cases 
 there has been a considerable increase, and this in- 
 crease has been bearing interest only a part of the year. 
 Hence to be right the mean amount must be used as a 
 basis. 
 
 1 The Mutual Reserve had five million dollars of assets at this 
 time, but as it had been recently changed from an assessment 
 to a level premium company, it is not included. Since 1903, one 
 other company has passed the live million mark in assets. 
 
INVESTMENT EARNINGS. 65 
 
 But taking a mean involves some choice of several 
 values of the assets. There is no general agreement 
 as to the value of assets. There is cost value, book 
 value, and market value. Which one should be used ? 
 Cost value may be immediately rejected, for with it 
 no rate of any real significance can be secured. Sup- 
 pose that a hundred dollar bond payable in twenty 
 years and bearing interest at five per cent, is purchased 
 at a cost of one hundred and twenty-five dollars. Now 
 by taking cost value of this bond, the rate of earning 
 power for nineteen years would be four per cent., and 
 for the twentieth year there would be an outgo of 
 twenty-one dollars due to the paying off of the bond at 
 face value, while the cost was twenty-five dollars more. 
 The real annual earning power then of the bond was 
 not four but three and twenty-nine hundredths per cent. 
 Now as few bonds are actually purchased at face value, 
 and since taking cost value as a basis does not take into 
 consideration the loss or gain due to the difference be- 
 tween the face value and the actual cost of the bond 
 it can be immediately rejected. 
 
 Neither can book value be used. Book value is the 
 result of an actuarial computation showing the value a 
 bond possesses each year if a steady income is to be re- 
 ceived from it from the time of purchase till maturity. 
 The rate of income found on such a basis simply shows 
 what the company expected to receive when it purchased 
 5 
 
66 INVESTMENT EARNINGS. 
 
 the bond, and book values of the assets would give us a 
 rate which would be a rate compounded of the rates 
 which were expected forty years ago, thirty-nine years 
 ago, thirty-eight years ago, etc., until the present. It 
 can be readily seen that such a rate would not mean any- 
 thing. Besides there are two large classes of assets 
 which have no book value in the same sense as book 
 value is used of bonds. These classes are stocks and 
 real estate. Thus book value is unavailable in finding 
 what has been the actual rate of investment earnings 
 from year to year. 
 
 Market value of the assets remains, and it is this 
 value which has been used as the basis for computing 
 the rate of investment earnings. By using it as a basis, 
 the actual rate of each year can be obtained. This is 
 true, however, only as we include other items in our 
 income account than mere interest receipts. These 
 items are items of investment fluctuation. To show 
 this, let us take a concrete example. Suppose a com- 
 pany this year buys a Hve per cent, bond at par. The 
 cost and book value of that bond would remain at 
 100. Suppose a year hence the market value of that 
 bond is 125, what is the rate of earning power of that 
 bond ? The company could sell that bond for twenty- 
 five plus ^.ve dollars accrued interest more than it gave. 
 Thus the earning power of that bond during the year 
 would have actually been thirty per cent. 
 
INVESTMENT EARNINGS. 67 
 
 If it be objected to this plan that companies do not 
 sell their assets, but keep them to maturity, it may be 
 replied that stocks and real estate do not have any per- 
 iod of maturity. Furthermore, companies do sell their 
 securities and reap the benefits from an increase in 
 market value over book or cost value. But if they did 
 not, and if they did not own any stocks or real estate, 
 the validity of the method used would not be touched. 
 The purpose of the method is to discover what the 
 actual earning rate of the assets has been for each year. 
 If a company has bought poor bonds and these bonds 
 have depreciated in value, it is universally recognized 
 that this depreciation should be taken account of in the 
 earning rate. Vice versa, if the management has been 
 far-sighted, or fortunate enough to secure appreciating 
 securities, the appreciation should be considered as an 
 earning and ascribed to the year in which it occurred. 
 
 In the following tables the investment fluctuation has 
 been found through a set of separate tables. One side 
 of these tables contained the positive items of fluctua- 
 tion, namely, gain in market value, gain from sale or 
 maturity of the assets, and gain from profit and loss. 
 The negative elements are composed of loss in market 
 value, loss from sale or maturity, loss from adjustment 
 of book value, and loss from profit and loss. The posi- 
 tive items have been added together and the negative 
 items added. If the positive items or the gain exceeded 
 
68 INVESTMENT EARNINGS. 
 
 the negative items or the losses, the difference has been 
 added to the interest receipts for the year. If the nega- 
 tive items were in excess, the difference has been sub- 
 tracted from the interest receipts to get the total earn- 
 ing power. These items of investment fluctuation have 
 been found in the following manner. Market value over 
 book value of the assets is reported each year. By tak- 
 ing the market value over book value at the beginning 
 of the year, and at the end of the year, the gain or de- 
 crease can be found for each year. 
 
 Likewise a company which has bonds with a market 
 value above book value may sell the bonds and realize 
 a gain from the sale, or it may sell the bonds at a value 
 less than book value, in which case it would realize 
 a loss. Few dispute the correctness of the plan of 
 counting in such gains or losses as these in finding the 
 earning rate of the assets. In the same manner the 
 company may realize a gain or a loss from the maturity 
 of the assets. If a bond is carried at a book value below 
 par, and, maturing, is paid at par, the company realizes 
 a gain. If carried above par, the maturing of the loan 
 causes a loss. In this way is explained the gain and 
 loss from the sale or maturity of the assets. 
 
 A gain or a loss from adjustment of book value must 
 be considered. We have said that market value above 
 book value was included in the earnings. ISTow if the 
 change in the book value were not considered, a com- 
 
INVESTMENT EARNINGS. 69 
 
 pany could by changing their book values make market 
 values anything they might choose. By decreasing the 
 book value the excess of market value is increased. 
 Therefore in finding the real investment earnings this 
 change in book value is taken into the account. It is 
 possible to have a gain from the adjustment of book 
 value, but this has happened so infrequently that it has 
 been included under gain from increase in market val- 
 ues. 
 
 The profit and loss amounts have been the hardest 
 to handle. It is perfectly evident that such amounts 
 could arise from the insurance side of the business, and 
 in many cases it is impossible from the report to dis- 
 cover whether they should be considered in the in- 
 vestment account or not. When discovered as arising 
 from the insurance side they have not been included 
 in the investment fluctuations. Much care has been 
 exercised in regard to this item, but doubtless mistakes 
 have been made, for often profit and loss has been re- 
 ported without any indication as to where it arose. 
 
 This brings us to consideration of the amount entitled 
 " interest earned but not received." Interest earned 
 but not received for any year is the difference between 
 the accrued interest at the beginning of the year, and the 
 amount accrued at the end of the year. The difference 
 may be positive or negative. This item must be con- 
 sidered if the real earning rate is to be found, as a 
 
70 INVESTMENT EARNINGS. 
 
 glance at the amounts of such accrued interest will show. 
 Interest receipts need no explanation. The amounts 
 under this heading are the actual amounts received as 
 interest and rents during the year, no matter where it 
 was earned. The total earning power is simply the 
 algebraic sum of the amounts in the three preceding 
 columns. 
 
 The tables simply give the rate of earning power. 
 The term, " rate of earning power," has been used to 
 distinguish the rate here found from those which are 
 commonly called rates of interest. In getting this Tate 
 the formula 
 
 a + a e 
 
 2 .2 
 
 has been used when X is the rate sought, e is the in- 
 vestment earnings, a is the assets at the beginning of the 
 
 , a+a' 
 
 year, and a is the assets at the end of the year. g 
 
 corresponds to the amount entitled mean market value. 
 The reason for subtracting half of the interest earn- 
 ings from the mean assets is as follows. Let us assume 
 that the interest is paid annually, and that the interest 
 payments are evenly distributed throughout the year. 
 It is evident that under these assumptions the value of 
 the assets, which value includes accrued interest, is 
 greater than the value of the assets bearing interest. 
 
INVESTMENT EARNINGS. 71 
 
 Take any point of time during the year. Some of the 
 securities have just received their interest payments, 
 others are about to receive theirs, while others are mid- 
 way between the two periods. Take a bond for instance 
 bearing four per cent, interest, payable July 1. On 
 July 2 the value of the bond is 100. During the year 
 its value slowly rises until by the end of next June its 
 value is 104. The mean value during the year is 102. 
 This value could be taken as the basis of computing the 
 interest rate and a rate found. By general agreement, 
 however, the principal at the beginning of the year is 
 taken as the basis for finding the rate of income. There- 
 fore, from the mean value must be taken one-half the 
 earnings to find the basis for computing the rate of earn- 
 ings for the year. 
 
 This formula has long been known, 1 but it has never 
 been used in obtaining the rates of interest which have 
 been published as the rates earned by insurance assets. 
 This formula and the manner of finding the earning 
 power of the assets have, we believe, never been used 
 until the following tables were constructed. In order 
 that the method may be fully understood, a typical 
 example will be given. 
 
 1 Emory McClintock gives* an extended explanation of this 
 formula in The Insurance Times for January, 1875. See also 
 W. D. Whiting, The Insurance Spectator, Volume 47, Page 248, 
 and Walter C. Wright, The Insurance Spectator, Volume 46, 
 Page 215. 
 
Y2 INVESTMENT EARNINGS. 
 
 REPORT OF A LIFE INSURANCE COMPANY. 
 
 Market value of Assets Decem- 
 ber 31, 1903 $52,416,000 
 
 Market value of Assets Decem- 
 ber 31, 1904 56,228,000 
 
 Mean market value for year 1904 $ 54,322,000 
 
 Market value over book value, 
 
 December 31 , 1903 $ 315,000 
 
 31,1904 585,000 
 
 Increase in market value $ 270,000 
 
 Profits from sale of bonds 221.000 
 
 Profit and loss 5,000 
 
 Total investment gain $ 496,000 
 
 Loss from sale of real estate $ 46,000 
 
 Loss from adjustment of book value. . 92,000 
 
 Total investment losses $ 138,000 
 
 Investment fluctuation, 1904 + 358,000 
 
 Accrued interest, 
 
 December 31, 1903 $ 380,000 
 
 31,1904 280,000 
 
 Accrued interest 1904 $ 100,000 
 
 Interest receipts 1904 2,456,000 
 
 $358,000 + $2,456,000 - $100,000 = $2,714,000 total investment 
 earnings. 
 
 Kate of earnings= pS5 |^ 5ps . =5. 1 per cent. 
 
 In computing the rates found in the following tables, 
 no account has been taken of the investment expenses 
 neither on total assets nor in the rate on separate classes 
 of investments. When the investment expenses are con- 
 sidered, it will be found that they in many cases 
 
INVESTMENT EARNINGS. 73 
 
 materially reduce the gross rates which have here been 
 calculated. However, because of the difficulty con- 
 nected in computing such costs of investing it has been 
 thought best to deal with them in a separate chapter. 
 
 The first tables given are those showing the rate of 
 earnings on total assets. 
 
n 
 
 INVESTMENT EARNINGS. 
 
 EARNING RATE OF TOTAL ASSETS. 
 
 u 
 08 
 
 03 
 
 a 
 B 
 
 6 
 u 
 
 1 
 
 $ 
 
 1 
 
 43 
 
 3 
 .2 
 
 a s 
 2 
 
 f 
 
 1 
 
 '3 
 
 i 
 '3 
 
 OS 
 
 a 
 
 c 
 
 
 
 M 
 o 
 o 
 
 
 
 r-l 1 
 
 a 
 S 
 
 OS 
 
 a 
 
 cS 
 
 a 
 
 w 08 
 3 3 
 to 3 
 
 8 M 
 
 i 
 it 
 
 * 
 
 < 
 
 o 
 
 w 
 
 O 
 
 W 
 
 "5 
 
 n 
 
 m 
 
 * 
 
 1860 
 
 
 4.5 
 2.4 
 
 6.9 
 
 7.2 
 
 0.7 
 1.1 
 
 
 
 
 5.4 
 
 5.8 
 
 2.1 
 3.5 
 
 
 1861 
 
 ST 
 
 "7.'5' 
 
 
 
 1862 
 
 
 5.7 
 
 7.0 
 
 9.2 
 
 13.8 
 
 7.9 
 
 
 9.0 
 
 4.1 
 
 
 1863 
 
 
 5.4 
 
 12.0 
 
 7.8 
 
 8.3 
 
 8.9 
 
 '*2.0' 
 
 6.5 
 
 7.6 
 
 
 1864 
 
 6.7* 
 
 10.1 
 
 11.9 
 
 6.7 
 
 5.7 
 
 11.2 
 
 20.0 
 
 8.0 
 
 5.1 
 
 
 1865 
 
 6.7 
 
 5.2 
 
 4.9 
 
 6.4 
 
 4.6 
 
 6.2 
 
 11.1 
 
 5.3 
 
 3.3 
 
 
 1866 
 
 2.9 
 
 8.7 
 
 8.0 
 
 6.3 
 
 6.6 
 
 9.5 
 
 8.4 
 
 8.0 
 
 9.4 
 
 
 1867 
 
 7.4 
 
 6.9 
 
 6.6 
 
 5.6 
 
 6.2 
 
 6.8 
 
 9.5 
 
 7.1 
 
 6.0 
 
 
 1868 
 
 7.4 
 
 6.2 
 
 7.0 
 
 6.6 
 
 8.8 
 
 6.4 
 
 9.2 
 
 6.7 
 
 6.8 
 
 
 1869 
 
 8.8 
 
 5.6 
 
 7.3 
 
 6.1 
 
 7.6 
 
 6.8 
 
 9.0 
 
 7.1 
 
 7.8 
 
 "V.5 
 
 1870 
 
 6.3 
 
 7.4 
 
 5.5 
 
 6.1 
 
 6.0 
 
 5.5 
 
 3.2 
 
 6.0 
 
 5.6 
 
 2.1 
 
 1871 
 
 7.4 
 
 3.6 
 
 7.0 
 
 6.1 
 
 6.5 
 
 6.6 
 
 3.2 
 
 6.5 
 
 7.1 
 
 4.2 
 
 1872 
 
 8.5 
 
 6.6 
 
 6.3 
 
 6.2 
 
 6.2 
 
 6.6 
 
 6.0 
 
 6.8 
 
 6.6 
 
 6.3 
 
 1873 
 
 7.9 
 
 6.8 
 
 6.8 
 
 6.6 
 
 6.5 
 
 6.3 
 
 5.3 
 
 6.5 
 
 6.1 
 
 5.0 
 
 1874 
 
 7.4 
 
 7.5 
 
 7.3 
 
 7.0 
 
 7.0 
 
 6.7 
 
 7.2 
 
 7.0 
 
 6.8 
 
 6.2 
 
 1875 
 
 7.7 
 
 4.7 
 
 8.1 
 
 5.8 
 
 6.2 
 
 6.7 
 
 6.7 
 
 6.8 
 
 6.9 
 
 5.3 
 
 1876 
 
 7.6 
 
 6.2 
 
 7.1 
 
 5.7 
 
 6.0 
 
 6.4 
 
 6.6 
 
 5.8 
 
 6.4 
 
 5.4 
 
 1877 
 
 6.8 
 
 3.3 
 
 6.8 
 
 4.6 
 
 4.2 
 
 6.6 
 
 6.4 
 
 6.0 
 
 0.1 
 
 5.8 
 
 1878 
 
 7.0 
 
 5.3 
 
 5.7 
 
 4.9 
 
 4.2 
 
 5.7 
 
 6.4 
 
 4.1 
 
 4.8 
 
 6.7 
 
 1879 
 
 6.7 
 
 5.6 
 
 6.3 
 
 5.8 
 
 5.4 
 
 5.7 
 
 6.3 
 
 6.1 
 
 7.3 
 
 8.1 
 
 1880 
 
 6.5 
 
 5.7 
 
 6.3 
 
 8.1 
 
 6.2 
 
 6.2 
 
 6.4 
 
 6.9 
 
 7.8 
 
 7.5 
 
 1881 
 
 6.2 
 
 6.0 
 
 5.9 
 
 5.6 
 
 4.1 
 
 4.8 
 
 5.4 
 
 6.0 
 
 5.9 
 
 6.1 
 
 1882 
 
 5.8 
 
 6.4 
 
 5.5 
 
 5.4 
 
 5.4 
 
 4.9 
 
 5.1 
 
 6.1 
 
 5.7 
 
 7.2 
 
 1883 
 
 5.9 
 
 5.7 
 
 5.8 
 
 5.5 
 
 5.5 
 
 7.0 
 
 5.8 
 
 6.5 
 
 5.6 
 
 3.1 
 
 1884 
 
 5.5 
 
 4.5 
 
 5.1 
 
 4.9 
 
 5.1 
 
 5.5 
 
 5.5 
 
 5.0 
 
 0.4 
 
 3.8 
 
 1885 
 
 5.9 
 
 5.0 
 
 6.3 
 
 8.0 
 
 6.3 
 
 4.9 
 
 6.8 
 
 5.1 
 
 2.8 
 
 5.1 
 
 1886 
 
 5.4 
 
 5.7 
 
 5.9 
 
 6.4 
 
 5.4 
 
 5.8 
 
 6.1 
 
 5.4 
 
 5.8 
 
 4.3 
 
 1887 
 
 5.3 
 
 4.7 
 
 5.3 
 
 4.9 
 
 5.3 
 
 4.6 
 
 5.6 
 
 5.0 
 
 6.0 
 
 4.9 
 
 1888 
 
 5.5 
 
 4.7 
 
 4.9 
 
 4.9 
 
 5.0 
 
 4.6 
 
 5.4 
 
 4.9 
 
 4.9 
 
 4.8 
 
 1889 
 
 5.4 
 
 4.8 
 
 5.0 
 
 5.2 
 
 5.0 
 
 4.6 
 
 4.5 
 
 4.2 
 
 4.9 
 
 5.8 
 
 1890 
 
 5.1 
 
 4.9 
 
 6.4 
 
 3.5 
 
 4.2 
 
 6.2 
 
 4.6 
 
 5.3 
 
 4.6 
 
 5.4 
 
 1891 
 
 5.2 
 
 5.1 
 
 5.9 
 
 6.1 
 
 5.8 
 
 5.2 
 
 4.9 
 
 6.2 
 
 5.3 
 
 5.6 
 
 1892 
 
 5.3 
 
 4.8 
 
 5.9 
 
 4.7 
 
 5.0 
 
 6.3 
 
 5.0 
 
 5.0 
 
 5.1 
 
 5.7 
 
 1893 
 
 5.1 
 
 5.1 
 
 4.8 
 
 2.3 
 
 3.9 
 
 4.1 
 
 6.1 
 
 4.6 
 
 4.0 
 
 4.4 
 
 1894 
 
 5.3 
 
 4.8 
 
 5.8 
 
 8.6 
 
 5.2 
 
 2.7 
 
 5.3 
 
 5.9 
 
 5.6 
 
 5.7 
 
 1895 
 
 5.2 
 
 5.1 
 
 5.4 
 
 4.6 
 
 5.0 
 
 3.5 
 
 5.3 
 
 6.2 
 
 4.5 
 
 4.2 
 
 1896 
 
 5.3 
 
 5.0 
 
 5.1 
 
 4.1 
 
 4.9 
 
 2.1 
 
 3.8 
 
 5.0 
 
 4.2 
 
 4.3 
 
 1897 
 
 5.7 
 
 5.0 
 
 5.5 
 
 5.1 
 
 5.5 
 
 4.9 
 
 5.7 
 
 6.0 
 
 4.1 
 
 4.7 
 
 1898 
 
 5.5 
 
 5.0 
 
 5.3 
 
 6.1 
 
 5.1 
 
 5.3 
 
 6.1 
 
 5.2 
 
 5.9 
 
 5.5 
 
 1899 
 
 5.1 
 
 4.8 
 
 4.6 
 
 5.1 
 
 4.6 
 
 4.8 
 
 4.8 
 
 4.7 
 
 4.5 
 
 5.3 
 
 1900 
 
 4.9 
 
 4.7 
 
 5.3 
 
 3.2 
 
 4.9 
 
 5.2 
 
 5.1 
 
 5.8 
 
 5.0 
 
 5.0 
 
 1901 
 
 5.1 
 
 5.3 
 
 4.6 
 
 4.8 
 
 5.2 
 
 5.3 
 
 4.8 
 
 5.8 
 
 4.5 
 
 5.6 
 
 1902 
 
 4.7 
 
 4.9 
 
 3.8 
 
 4.3 
 
 6.6 
 
 5.0 
 
 4.4 
 
 5.1 
 
 3.9 
 
 3.7 
 
 1903 
 
 3.9 
 
 3.9 
 
 3.2 
 
 3.2 
 
 4.5 
 
 2.8 
 
 4.1 
 
 4.9 
 
 3.4 
 
 2.5 
 
 1904 
 
 5.1 
 
 5.3 
 
 5.5 
 
 5.3 
 
 4.7 
 
 6.3 
 
 5.3 
 
 5.8 
 
 5.4 
 
 6.5 
 
INVESTMENT EARNINGS. 
 EARNING RATE OF TOTAL ASSETS. 
 
 75 
 
 
 <& 5 
 
 
 4& 
 
 *1 
 
 08 
 
 1 
 
 1 
 
 M 
 
 u 
 
 o 
 
 a 
 
 E 
 
 
 
 
 
 M 
 
 c3 
 
 0! 
 
 &c5 
 
 5 3 
 
 .28 
 
 "S3 
 
 3 s 
 
 13 
 1 
 
 "ex 
 
 I 
 
 m 
 
 Is 
 
 e5 
 1 
 
 a 
 
 c 
 a 
 
 '3 
 
 
 si 
 
 >* 
 
 s 
 
 X 
 
 N 
 
 fc 
 
 fc 
 
 fc 
 
 55 
 
 
 
 Ph 
 
 
 
 1860 
 
 ... . 
 
 6.8 
 5.7 
 
 7.7 
 
 6.1 
 5.8 
 6.5 
 
 5.6 
 2.9 
 
 8.6 
 
 5.6 
 4.9 
 3.4 
 
 5.0 
 4.6 
 
 8.2 
 
 
 
 
 5.0 
 
 1861 
 
 
 
 
 3.7 
 
 1862 
 
 "5.1' 
 
 
 
 6.3 
 
 1863 
 
 
 9.7 
 10.7 
 3.6 
 8.0 
 7.5 
 3.4 
 7.1 
 
 7.5 
 
 7.1 
 5.6 
 7.0 
 6.6 
 6.7 
 6.8 
 
 7.8 
 9.2 
 4.7 
 9.1 
 7.6 
 8.6 
 9.7 
 
 7.1 
 4.6 
 3.9 
 9.6 
 5.2 
 4.7 
 8.2 
 
 7.2 
 8.7 
 5.4 
 5.6 
 8.0 
 8.0 
 6.3 
 
 7.0 
 8.1 
 8.6 
 .7 
 4.6 
 5.5 
 6.4 
 
 
 
 5.7 
 
 1864 
 
 
 
 11.6 
 
 1865 
 
 
 
 6.8 
 
 1866 
 
 
 
 8.6 
 
 1867 
 
 
 
 8.9 
 
 1868 
 
 
 
 6.7 
 
 1869 
 
 ' 9.7* 
 
 "3.6" 
 
 7.5 
 
 1870 
 
 .... 
 
 6.0 
 
 6.3 
 
 6.3 
 
 4.2 
 
 4.4 
 
 8.1 
 
 7.0 
 
 6.2 
 
 5.9 
 
 1871 
 
 7.1 
 
 6.2 
 
 6.8 
 
 8.2 
 
 7.4 
 
 7.2 
 
 7.8 
 
 10.5 
 
 5.8 
 
 7.0 
 
 1872 
 
 7.0 
 
 6.8 
 
 6.2 
 
 6.6 
 
 5.8 
 
 6.8 
 
 7.9 
 
 10.2 
 
 6.3 
 
 6.6 
 
 1873 
 
 7.6 
 
 6.7 
 
 6.9 
 
 8.5 
 
 5.7 
 
 6.9 
 
 8.3 
 
 8.2 
 
 6.4 
 
 7.1 
 
 1874 
 
 7.0 
 
 6.8 
 
 6.7 
 
 6.9 
 
 7.0 
 
 6.3 
 
 8.4 
 
 10.2 
 
 6.0 
 
 7.8 
 
 1875 
 
 7.5 
 
 6.8 
 
 6.9 
 
 7.0 
 
 7.6 
 
 7.2 
 
 8.7 
 
 10.3 
 
 10.1 
 
 6.2 
 
 1876 
 
 7.0 
 
 5.6 
 
 7.9 
 
 6.4 
 
 5.7 
 
 5.8 
 
 7.8 
 
 8.1 
 
 6.1 
 
 7.3 
 
 1877 
 
 7.7 
 
 5.3 
 
 5.4 
 
 2.7 
 
 6.0 
 
 3.9 
 
 7.6 
 
 9.6 
 
 4.3 
 
 6.1 
 
 1878 
 
 7.8 
 
 6.8 
 
 6.0 
 
 4.4 
 
 7.4 
 
 4.9 
 
 6.8 
 
 9.3 
 
 6.4 
 
 5.3 
 
 1879 
 
 7.8 
 
 5.2 
 
 4.9 
 
 5.3 
 
 6.2 
 
 6.0 
 
 7.4 
 
 5.1 
 
 6.9 
 
 4.6 
 
 1880 
 
 7.5 
 
 6.6 
 
 4.4 
 
 6.1 
 
 3.0 
 
 8.4 
 
 5.7 
 
 5.7 
 
 7.3 
 
 6.9 
 
 1881 
 
 7.2 
 
 5.9 
 
 3.6 
 
 5.3 
 
 5.9 
 
 6.1 
 
 5.9 
 
 8.5 
 
 6.0 
 
 6.1 
 
 1882 
 
 6.3 
 
 5.4 
 
 4.2 
 
 5.4 
 
 4.9 
 
 5.4 
 
 5.8 
 
 5.7 
 
 5.7 
 
 6.6 
 
 1883 
 
 6.1 
 
 5.7 
 
 4.9 
 
 5.2 
 
 5.9 
 
 5.6 
 
 6.1 
 
 6.1 
 
 5.6 
 
 6.2 
 
 1884 
 
 6.7 
 
 4.5 
 
 4.1 
 
 6.0 
 
 5.5 
 
 3.9 
 
 5.5 
 
 6.2 
 
 4.4 
 
 5.8 
 
 1885 
 
 6.6 
 
 7.2 
 
 4.7 
 
 5.3 
 
 6.7 
 
 8.1 
 
 5.9 
 
 6.6 
 
 6.7 
 
 6.1 
 
 1886 
 
 5.4 
 
 5.3 
 
 5.3 
 
 3.9 
 
 5.3 
 
 5.7 
 
 5.6 
 
 6.2 
 
 6.7 
 
 6.0 
 
 1887 
 
 6.1 
 
 4.5 
 
 5.2 
 
 6.0 
 
 3.4 
 
 4.2 
 
 5.4 
 
 6.7 
 
 5.4 
 
 5.5 
 
 1888 
 
 5.9 
 
 6.0 
 
 5.2 
 
 8.4 
 
 5.4 
 
 5.5 
 
 5.9 
 
 7.5 
 
 5.6 
 
 5.8 
 
 1889 
 
 6.0 
 
 3.4 
 
 5.1 
 
 5.7 
 
 5.5 
 
 5.1 
 
 6.3 
 
 7.0 
 
 5.8 
 
 6.3 
 
 1890 
 
 6.0 
 
 5.4 
 
 5.0 
 
 4.9 
 
 3.4 
 
 3.4 
 
 5.8 
 
 5.9 
 
 6.7 
 
 5.1 
 
 1891 
 
 5.8 
 
 3.8 
 
 5.4 
 
 5.5 
 
 5.5 
 
 4.2 
 
 5.1 
 
 6.0 
 
 5.7 
 
 5.7 
 
 1892 
 
 5.4 
 
 6.1 
 
 5.4 
 
 5.8 
 
 5.2 
 
 5.5 
 
 5.7 
 
 6.2 
 
 5.6 
 
 5.9 
 
 1893 
 
 5.3 
 
 4.5 
 
 4.9 
 
 4.7 
 
 2.5 
 
 4.4 
 
 5.7 
 
 5.2 
 
 3.8 
 
 5.8 
 
 1894 
 
 5.2 
 
 6.9 
 
 5.4 
 
 5.1 
 
 6.2 
 
 4.3 
 
 5.4 
 
 5.0 
 
 4.6 
 
 5.5 
 
 1895 
 
 5.2 
 
 8.9 
 
 5.4 
 
 5.1 
 
 4.8 
 
 4.7 
 
 5.7 
 
 4.6 
 
 6.2 
 
 5.2 
 
 1896 
 
 5.3 
 
 1.7 
 
 4.1 
 
 4.5 
 
 4.4 
 
 4.5 
 
 5.3 
 
 5.0 
 
 5.9 
 
 4.9 
 
 1897 
 
 5.4 
 
 5.1 
 
 5.4 
 
 3.8 
 
 5.4 
 
 4.6 
 
 5.3 
 
 5.8 
 
 5.9 
 
 5.0 
 
 1898 
 
 5.3 
 
 6.3 
 
 5.3 
 
 4.0 
 
 5.5 
 
 4.8 
 
 5.6 
 
 5.7 
 
 5.8 
 
 6.7 
 
 1899 
 
 58 
 
 6.3 
 
 5.1 
 
 4.0 
 
 5.1 
 
 5.1 
 
 4.6 
 
 5.3 
 
 5.4 
 
 6.1 
 
 1900 
 
 5.4 
 
 5.1 
 
 5.2 
 
 4.4 
 
 4.7 
 
 4.9 
 
 5.0 
 
 5.0 
 
 5.5 
 
 6.3 
 
 1901 
 
 5.4 
 
 5.5 
 
 4.8 
 
 4.2 
 
 4.9 
 
 4.2 
 
 4.5 
 
 0.7 
 
 5.1 
 
 5.5 
 
 1902 
 
 5.1 
 
 4.5 
 
 3.9 
 
 4.7 
 
 4.2 
 
 4.3 
 
 4.0 
 
 6.0 
 
 4.5 
 
 5.0 
 
 1903 5.1 
 
 2.3 
 
 4.4 
 
 4.5 
 
 3.4 
 
 3.1 
 
 4.0 
 
 7.1 
 
 4.4 
 
 5.1 
 
 1904 
 
 5.1 
 
 6.7 
 
 5.1 
 
 4.6 
 
 5.1 
 
 4.2 
 
 5.7 
 
 5.0 
 
 5.6 
 
 5.2 
 
76 
 
 INVESTMENT EARNINGS. 
 EARNING RATE OF TOTAL ASSETS. 
 
 
 4*0 
 
 * w 
 
 "3 
 
 
 
 
 
 
 
 c 
 
 a s 
 
 <D C8-U> 
 
 If 
 M 
 
 3 
 
 4 
 
 E 
 
 
 
 > 
 a 
 
 
 
 E 
 
 o 
 5 
 
 si 
 
 05 
 
 a 
 
 , o 
 
 * 
 
 
 
 fi 
 
 
 
 m 
 
 H 
 
 t> 
 
 p 
 
 U 
 
 1860 
 
 
 
 
 6.3 
 7.1 
 
 5.8 
 5.6 
 8.1 
 7.7 
 7.8 
 8.8 
 7.0 
 9.0 
 6.2 
 17.1 
 1.1 
 7.8 
 8.6 
 3.7 
 5.5 
 
 
 
 
 6.7 
 5.9 
 5.3 
 8.6 
 
 11.2 
 6.2 
 
 10.7 
 9.8 
 5.2 
 5.3 
 9.2 
 6.8 
 5.8 
 6.7 
 7.2 
 6.5 
 7.2 
 
 "7.0 
 
 8.8 
 9.3 
 14.8 
 1.1 
 7.2 
 6.4 
 8.6 
 6.0 
 3.8 
 6.1 
 5.5 
 6.1 
 7.0 
 5.7 
 7.8 
 
 1861 
 
 
 
 
 
 
 
 1862 
 
 
 
 
 
 
 
 1863 
 
 
 
 
 
 
 
 1864 
 
 
 
 
 
 
 6.1 
 3.7 
 5.6 
 6.1 
 5.5 
 7.1 
 6.2 
 6.6 
 7.4 
 7.7 
 8.2 
 8.0 
 4.5 
 
 1865 
 
 
 
 
 
 
 1866 
 
 9.7 
 3.0 
 4.5 
 7.1 
 4.8 
 2.6 
 2.4 
 4.3 
 5.1 
 7.3 
 3.6 
 
 
 
 
 
 
 
 1867 
 
 
 
 1868 
 
 
 
 18.0 
 
 7.8 
 7.8 
 7.7 
 8.0 
 8.3 
 
 3.5 
 5.3 
 4.5 
 4.7 
 6.7 
 5.1 
 7.4 
 6.1 
 7.1 
 
 1869 
 
 
 
 1870 
 
 
 
 1871 
 
 
 
 1872 
 
 
 
 1873 
 
 
 
 1874 
 
 
 
 1875 
 
 
 
 1876 
 
 1.5 
 
 
 1877 
 
 3.4 
 
 0.8 
 
 
 5.0 
 
 3.3 
 
 6.7 
 
 6.4 
 
 6.1 
 
 5.2 
 
 1878 
 
 6.0 
 
 2.6 
 
 
 4.0 
 
 2.9 
 
 4.0 
 
 3.7 
 
 5.6 
 
 4.6 
 
 1879 
 
 5.7 
 
 2.3 
 
 
 6.8 
 
 4.6 
 
 7.8 
 
 4.6 
 
 5.6 
 
 5.7 
 
 1880 
 
 4.9 
 
 25.8 
 
 2.2 
 
 7.9 
 
 5.2 
 
 7.6 
 
 4.9 
 
 7.3 
 
 6.3 
 
 1881 
 
 4.8 
 
 4.6 
 
 2.4 
 
 6.9 
 
 5.7 
 
 6.9 
 
 4.0 
 
 5.3 
 
 5.8 
 
 1882 
 
 6.9 
 
 4.7 
 
 4.0 
 
 2.9 
 
 3.1 
 
 6.3 
 
 5.6 
 
 5.3 
 
 6.3 
 
 1883 
 
 4.8 
 
 0.7 
 
 5.3 
 
 4.5 
 
 5.1 
 
 7.4 
 
 3.2 
 
 5.5 
 
 4.9 
 
 1884 
 
 3.7 
 
 3.8 
 
 
 5.0 
 
 3.0 
 
 6.6 
 
 2.2 
 
 4.6 
 
 4.7 
 
 1885 
 
 5.7 
 
 4.2 
 
 4.8 
 
 6.4 
 
 4.2 
 
 5.7 
 
 3.8 
 
 8.3 
 
 5.5 
 
 1886 
 
 5.8 
 
 3.3 
 
 
 4.1 
 
 6.4 
 
 6.2 
 
 4.9 
 
 5.0 
 
 5.1 
 
 1887 
 
 4.4 
 
 3.1 
 
 4.2 
 
 4.9 
 
 4.3 
 
 6.0 
 
 3.7 
 
 3.6 
 
 5.0 
 
 1888 
 
 5.2 
 
 4.9 
 
 4.6 
 
 5.4 
 
 5.1 
 
 6.2 
 
 4.6 
 
 4.9 
 
 5.4 
 
 1889 
 
 4.8 
 
 4.6 
 
 5.0 
 
 4.6 
 
 4.1 
 
 6.0 
 
 4.4 
 
 5.1 
 
 4.8 
 
 1890 
 
 3.5 
 
 3.9 
 
 4.3 
 
 4.9 
 
 4.0 
 
 6.7 
 
 5.1 
 
 5.5 
 
 4.8 
 
 1891 
 
 5.1 
 
 2.8 
 
 5.1 
 
 5.2 
 
 5.3 
 
 6.2 
 
 4.9 
 
 5.1 
 
 4.8 
 
 1892 
 
 4.8 
 
 4.3 
 
 4.8 
 
 5.5 
 
 5.2 
 
 6.8 
 
 4.7 
 
 4.8 
 
 4.8 
 
 1893 
 
 2.9 
 
 1.3 
 
 5.2 
 
 4.1 
 
 2.3 
 
 6.9 
 
 2.4 
 
 3.6 
 
 4.3 
 
 1894 
 
 5.6 
 
 8.3 
 
 5.3 
 
 5.4 
 
 7.3 
 
 6.7 
 
 5.4 
 
 5.3 
 
 4.7 
 
 1895 
 
 4.9 
 
 3.0 
 
 4.8 
 
 4.9 
 
 4.9 
 
 7.0 
 
 4.9 
 
 4.9 
 
 4.3 
 
 1896 
 
 4.5 
 
 4.1 
 
 5.2 
 
 4.3 
 
 7.6 
 
 6.7 
 
 3.8 
 
 5.3 
 
 4.6 
 
 1897 
 
 5.9 
 
 6.7 
 
 5.7 
 
 4.6 
 
 5.4 
 
 6.6 
 
 5.2 
 
 5.3 
 
 4.4 
 
 1898 
 
 7.1 
 
 4.4 
 
 5.9 
 
 5.6 
 
 6.8 
 
 6.5 
 
 5.3 
 
 6.0 
 
 5.1 
 
 1899 
 
 5.0 
 
 6.6 
 
 4.5 
 
 5.3 
 
 5.5 
 
 6.5 
 
 5.3 
 
 5.2 
 
 7.5 
 
 1900 
 
 4.5 
 
 5.5 
 
 6.2 
 
 5.4 
 
 6.0 
 
 6.2 
 
 5.0 
 
 5.1 
 
 4.7 
 
 1901 
 
 3.3 
 
 10.7 
 
 3.0 
 
 5.2 
 
 5.4 
 
 6.4 
 
 5.2 
 
 4.6 
 
 5.0 
 
 1902 
 
 4.4 
 
 10.1 
 
 5.3 
 
 4.3 
 
 4.2 
 
 6.4 
 
 4.9 
 
 5.4 
 
 5.3 
 
 1903 
 
 2.3 
 
 8 1 
 
 3.3 
 
 4.0 
 
 3.5 
 
 6.5 
 
 2.8 
 
 4.7 
 
 5.9 
 
 1904 
 
 6.0 
 
 9.5 
 
 4.8 
 
 5.2 
 
 5.4 
 
 6.5 
 
 4.9 
 
 6.8 
 
 3.7 
 
INVESTMENT EARNINGS. 77 
 
 The figures tell their own story, but it may be well 
 to summarize some of the leading facts contained in 
 the tables. The companies started out with an average 
 earning rate of about six per cent., the rate which we 
 have already seen they were making during the decade 
 just ended. Six made more than six per cent, in 1860, 
 and seven made less. One of those making less actually 
 had a negative rate, a phenomenon which is possible 
 with the method which we have adopted of finding the 
 rate of earning power. In this particular case the nega- 
 tive rate was due to a depreciation in the value of bonds 
 which that company possessed. 
 
 There was a decrease in the earnings of 1861 com- 
 pared with the preceding year. Eleven companies had 
 a lower rate. With some of the companies the decrease 
 continued through 1863. This decline in earnings was 
 due to the effect of the war in depressing the price of 
 the securities which the companies possessed. The year 
 1863 produced a rapid advance in the earning power 
 of the assets. The investments were being turned in 
 the direction of the high interest-bearing government 
 bonds. In the following year, the highest earning rate 
 was reached which most of the companies ever experi- 
 enced. With large investments in government bonds, 
 with the interest paid in gold, which was greatly appre- 
 ciated in value, the rate made in paper money was 
 high. The premium on gold formed a source of con- 
 
78 INVESTMENT EARNINGS. 
 
 siderable revenue to the companies for some time. Be- 
 sides getting it as interest on the government bonds, 
 policies had been written on a gold basis, and as the lia- 
 bility on such policies was a remote one the companies 
 sold the gold, realizing a considerable gain. 
 
 The decade of the sixties as a whole shows rates 
 which are the highest that the insurance companies 
 have secured. Eleven of the annual rates found in the 
 above tables exceed ten per cent. ; seventeen are between 
 nine and ten per cent. ; twenty-four between eight and 
 nine; thirty-three between seven and eight; and forty 
 between six and seven per cent. Thus, one hundred and 
 twenty-five annual earning rates out of one hundred 
 and ninety possible cases were six per cent, or above. 
 
 The decade of the seventies is widely known as a 
 period of extreme business depression. All values were 
 severely tested. Those companies which did not have 
 their assets in good shape felt the hard times keenly. 
 Most of them failed. Those which lived through the 
 crisis made a remarkable showing for the period in in- 
 vestment earnings. For all the companies from 1870- 
 79, inclusive, there are only four instances in which the 
 losses from investments were serious enough to produce 
 a negative rate of interest for the year. But the earn- 
 ing rate decreased. In this decade only six times did 
 the rate go above ten per cent. The Pacific Mutual in 
 a part of the country not yet in close economic contact 
 
INVESTMENT EARNINGS. 79 
 
 with the rest of the country did not feel the effects of 
 the depression, and during four years of the decade 
 earned more than ten per cent, on its assets. Two other 
 companies made more than ten per cent, for a single 
 year, but as this was followed in each instance by a 
 negative rate, it shows that real high earning power did 
 not exist. The investments fluctuated in value rapidly 
 during the decade. One year shows a gain in market 
 values, the next a loss. In general the years 1870-71 
 show decreases, while 1878-89 show decided increases 
 in the market value of the assets. 
 
 While about the same proportion of the annual rates 
 from 1870-79 are above six per cent., as in the previous 
 decade, a much smaller proportion are below seven per 
 cent. The earning rate during the last part of the de- 
 cade of the sixties averaged seven per cent., or more. 
 The decade of the seventies does not show an average 
 rate above six and one half per cent. 
 
 After 1880, the decline in the earning rate began in 
 earnest. Before this in the seventies three companies 
 had gone through the entire decade without a rate under 
 six per cent., and two-thirds of the rates were above six 
 per cent. In the eighties not a single company main- 
 tained a level of six per cent, unbroken, and there were 
 three companies which r.ever earned six per cent, dur- 
 ing even a year. Between five and six per cent, became 
 the prevailing rate. Two hundred and six out of the 
 
80 INVESTMENT EARNINGS. 
 
 two hundred and ninety rates are below six per cent. 
 In the sixties, nearly one-half the rates had been above 
 seven per cent. In this decade twenty years later not 
 one-fifteenth of the annual earning rates were above 
 seven per cent. This shows in a forceful manner how 
 earnings were decreasing. One thing tended to keep 
 the rate high. As the current market rate of interest 
 fell, the long-time securities which the companies pos- 
 sessed appreciated in value, compensating the decline in 
 the market rate of interest. The slight financial de- 
 pression in 1884 set a new low record. Twenty-four of 
 the twenty-nine companies lost that year from a de- 
 crease in market values, seven made less than four per 
 cent, on their assets, twelve under four and one-half 
 per cent., and twenty-four made under five and one- 
 half per cent. 
 
 The rapid decline in the earning rate continued in 
 the next decade. Ten per cent, earnings were a thing 
 of the past, save in isolated cases. Six per cent., the rate 
 which at one time had been considered as a minimum 
 rate of interest, almost a certain one for all time, was 
 not reached but thirty-six times during the decade of 
 the nineties. Ten of these rates were made by a single 
 company, leaving twenty-six rates of six per cent, to be 
 made by twenty-eight companies in ten years. In fact, 
 only two other companies maintained an earning rate 
 of five per cent, throughout the entire decade. One 
 
. UNIVERSITY I 
 
 V. OF / 
 
 X^lT^R^*^ INVESTMENT EARNINGS. 81 
 
 hundred and seven rates out of two hundred and ninety 
 were below five per cent. In general, the rates were low- 
 // eat during 1893 and 1894. In the latter part of the 
 decade a revival in business brought a steady apprecia- 
 tion in the value of securities. Beginning with 1896, 
 and continuing for five or six years large gains were 
 made from increases in market values. The year 1900 
 shows depreciation in values, a temporary check to the 
 upward movement which went on again during 1901 
 and 1902, to be followed by a severe depression in 
 market values during 1903. During the final year in- 
 cluded in the tables great gains from investment fluctua- 
 tion were made. In that year every one of the twenty- 
 nine companies save two made a higher earning rate 
 than they made in the previous year. In the five years 
 since 1900, inclusive, one-sixth of the annual rates have 
 been below four per cent, and one-half have been below 
 five per cent. Eighteen companies never made six per 
 cent, once, and only one company again made six per 
 cent, throughout the ^ve years. 
 
 This completes the study of the rates earned by total 
 assets. Five and one-half decades have been covered. 
 In summarizing, we see that the rates from 1850 to 
 1859 averaged somewhat below six per cent. During 
 the sixties the rate rose rapidly until more than a 
 seven per cent, earning rate was prevailing, and eight 
 
 to twelve per cent was not uncommon. Since that 
 6 
 
82 INVESTMENT EARNINGS. 
 
 time the earning rate has declined more or less unstead- 
 ily, but nevertheless surely downward. The early 
 seventies had a six and one-half per cent, earning, the 
 latter part of the decade was characterized by a six per 
 cent. rate. Five and one-half per cent, was a fair 
 average for the eighties and five for the nineties. Since 
 1900 four and one-half per cent, has been common, 
 though there have been sharp fluctuations. 
 
 Of almost equal interest to the rate of earning power 
 of the total assets is the rate earned by particular classes 
 of assets. It is unfortunate that the state reports do 
 not give the income account of each class of securities 
 designated in the previous chapter. However, the re- 
 ports do itemize the income coming from large classes 
 of assets. The income from real estate, mortgages, 
 bonds, and stocks has been returned, divided under these 
 heads almost from the start. From the previous chap- 
 ter what sort of securities go to make up the bonds and 
 stocks of each company may be seen. Tables will now 
 be given compiled in the same manner as the ones just 
 given for total assets which show the earning rate of 
 real estate, mortgage loans, and bonds and stocks. 
 
 The real estate asset will be discussed first. As was 
 said earlier, no taxes, no cost of repairs, no cost of in- 
 vestment or expense has been considered in finding out 
 what the earning power of real estate has been. In the 
 following tables the same companies are included as 
 were embraced in the preceding tables. 
 
INVESTMENT EARNINGS. 83 
 
 EARNING RATE OF REAL ESTATE. 
 
 
 
 6 
 
 3 . 
 
 a 
 
 d 
 
 
 
 a 
 1 
 
 
 a 
 
 08 
 
 
 
 .Jj 
 
 Ss 
 
 A 
 
 a 
 
 
 o 
 
 jj 
 
 la 
 
 
 
 4 
 
 2 
 
 Kg 
 
 1 
 
 03 
 
 i 
 
 
 
 6 
 
 n 
 
 03 
 
 CS^S 
 
 6o 
 
 u 
 c8 
 
 a 
 
 M 
 
 2 ^ 
 2S 
 
 3 
 
 a 1 
 
 6 
 o 
 
 a <a 
 
 a 
 
 OJ 
 
 
 
 >* 
 
 < 
 
 ff 
 
 O 
 
 m 
 
 
 
 W 
 
 -5 
 
 m 
 
 m 
 
 8 
 
 1860 
 
 
 
 
 
 
 
 
 1.8 
 1.0 
 
 16.7 
 9.1 
 9.1 
 9.1 
 9.1 
 
 
 1861 
 
 
 
 
 
 
 
 
 
 1862 
 
 
 
 
 
 
 
 
 
 1863 
 
 
 
 7.3 
 3.3 
 
 
 
 
 
 2.1 
 0.0 
 
 
 1864 
 
 
 
 ... 
 
 .... 
 
 . .. 
 
 ...... 
 
 
 1865 
 
 
 
 5.1 
 5.4 
 7.4 
 6.0 
 4.5 
 0.6 
 
 
 
 
 
 
 18.2 
 0.0 
 4.0 
 5.3 
 7.4 
 6.4 
 5.6 
 
 
 1866 
 
 
 10.0 
 1.8 
 3.6 
 4.0 
 4.5 
 4.9 
 
 6.8 
 3.9 
 0.6 
 
 
 
 
 0.0 
 
 
 1867 
 
 
 
 . 
 
 
 1868 
 
 
 
 
 
 
 1869 
 
 
 
 
 
 . 
 
 1870 
 
 4.9 
 5.3 
 
 
 
 
 
 
 1871 
 
 
 1.2 
 
 .... 
 
 .... 
 
 
 1872 
 
 
 4.9 
 5.0 
 
 1.0 
 
 1.5 
 
 4.3 
 5.2 
 
 
 2.4 
 3.5 
 
 
 
 5.0 
 0.0 
 
 
 1873 
 
 
 - 
 
 
 1874 
 
 
 4.5 
 4.5 
 4.1 
 
 2.8 
 3.0 
 
 3.5 
 4.2 
 5.9 
 
 9.1 
 1.9 
 
 2.8 
 3.9 
 3.4 
 
 
 
 2.0 
 3.2 
 
 2.7 
 
 
 1875 
 
 
 
 
 1876 
 
 8.3 
 
 
 8.9 
 
 1877 
 
 
 6.2 
 
 
 
 
 
 
 1.2 
 
 1.0 
 
 9.9 
 
 1878 
 
 
 2.1 
 
 2.6 
 
 4.7 
 
 4.7 
 
 ...... 
 
 2.8 
 
 2.3 
 
 8.4 
 
 13.9 
 
 1879 
 
 
 2.8 
 
 2.0 
 
 4-7 
 
 3.0 
 
 
 4.5 
 
 3.3 
 
 7.2 
 
 14.7 
 
 1880 
 
 
 3.4 
 
 2.7 
 
 4.4 
 
 7.5 
 
 6.5 
 
 4.4 
 
 3.9 
 
 10.4 
 
 7.1 
 
 1881 
 
 
 2.8 
 
 3.6 
 
 5.4 
 
 4.3 
 
 1.1 
 
 3.6 
 
 1.2 
 
 5.6 
 
 17.1 
 
 1882 
 
 
 3.7 
 
 6.5 
 
 4.8 
 
 3.6 
 
 1.8 
 
 4.8 
 
 6.4 
 
 6.3 
 
 14.0 
 
 1883 
 
 
 
 1.9 
 
 4.4 
 
 4.9 
 
 4.8 
 
 1.2 
 
 3.8 
 
 5.4 
 
 7.1 
 
 0.5 
 
 1884 
 
 
 3.0 
 
 4.5 
 
 4.6 
 
 6.2 
 
 1.3 
 
 3.3 
 
 5.9 
 
 13.2 
 
 6.8 
 
 1885 
 
 
 4.1 
 
 4.7 
 
 4.6 
 
 6.2 
 
 0.4 
 
 3.3 
 
 6.7 
 
 9.1 
 
 6.1 
 
 1886 
 
 *.. 
 
 4.8 
 
 4.0 
 
 3.3 
 
 9.6 
 
 0.5 
 
 3.3 
 
 8.4 
 
 5.9 
 
 6.3 
 
 1887 
 
 
 5.2 
 
 4.1 
 
 2.4 
 
 13.1 
 
 3.7 
 
 27.1 
 
 9.4 
 
 8.8 
 
 3.1 
 
 1888 
 
 
 4.1 
 
 2.3 
 
 2.7 
 
 4.1 
 
 4.4 
 
 5.3 
 
 1.6 
 
 3.5 
 
 3.9 
 
 1889 
 
 2.0 
 
 3.5 
 
 1.0 
 
 3.4 
 
 4.0 
 
 5.4 
 
 4.2 
 
 2.0 
 
 0.7 
 
 6.0 
 
 1890 
 
 3.6 
 
 4.2 
 
 4.2 
 
 3.2 
 
 3.1 
 
 5.5 
 
 0.2 
 
 33.1 
 
 4.5 
 
 2.8 
 
 1891 
 
 3.6 
 
 4.4 
 
 4.6 
 
 3.9 
 
 4.2 
 
 5.5 
 
 1.7 
 
 23.1 
 
 3.9 
 
 2.3 
 
 1892 
 
 2.4 
 
 4.5 
 
 4.4 
 
 6.3 
 
 4.7 
 
 40.2 
 
 6.4 
 
 5.1 
 
 8.4 
 
 1.6 
 
 1893 
 
 2.8 
 
 3.8 
 
 2.4 
 
 3.5 
 
 5.8 
 
 3.3 
 
 4.3 
 
 1.4 
 
 5.4 
 
 1.8 
 
 1894 
 
 6.3 
 
 2.4 
 
 4.0 
 
 4.2 
 
 6.4 
 
 2.9 
 
 7.6 
 
 6.4 
 
 0.0 
 
 6.9 
 
 1895 
 
 7.3 
 
 7.2 
 
 3.6 
 
 4.0 
 
 6.0 
 
 4.2 
 
 7.3 
 
 8.4 
 
 3.6 
 
 3.4 
 
 1896 
 
 5.9 
 
 3.6 
 
 3.2 
 
 4.5 
 
 6.3 
 
 5.6 
 
 5.4 
 
 7.4 
 
 3.3 
 
 4.2 
 
 1897 
 
 8.5 
 
 4.5 
 
 3.3 
 
 4.6 
 
 6.1 
 
 5.1 
 
 7.3 
 
 5.6 
 
 4.4 
 
 1.0 
 
 1898 
 
 13.9 
 
 4.8 
 
 3.0 
 
 5.0 
 
 5.8 
 
 5.5 
 
 7.4 
 
 5.0 
 
 5.2 
 
 4.9 
 
 1899 
 
 10.8 
 
 5.3 
 
 4.1 
 
 5.4 
 
 6.2 
 
 3.0 
 
 8.2 
 
 4.0 
 
 4.5 
 
 5.1 
 
 1900 
 
 10.0 
 
 6.1 
 
 3.3 
 
 5.5 
 
 6.6 
 
 4.9 
 
 8.6 
 
 5.6 
 
 7.4 
 
 4.7 
 
 1901 
 
 9.7 
 
 6.4 
 
 3.8 
 
 5.3 
 
 4.2 
 
 5.6 
 
 8.9 
 
 9.3 
 
 5.7 
 
 5.6 
 
 1902 
 
 7.2 
 
 6.3 
 
 4.0 
 
 5.1 
 
 8.0 
 
 6.0 
 
 8.4 
 
 6.2 
 
 4.5 
 
 5.3 
 
 1903 
 
 7.4 
 
 7.4 
 
 4.7 
 
 5.2 
 
 8.4 
 
 6.1 
 
 7.5 
 
 5.2 
 
 3.9 
 
 5.3 
 
 1904 
 
 6.9 
 
 7.6 
 
 5.0 
 
 3.8 
 
 7.6 
 
 4.7 
 
 5.8 
 
 7.0 
 
 3.9 
 
 3.7 
 
84: INVESTMENT EARNINGS. 
 
 EARNING RATE OF REAL ESTATE. 
 
 8 
 
 5 3 
 
 3 
 
 3 
 
 i 
 "3 a 
 
 3 
 
 
 a 
 o 
 
 
 
 a 
 
 I 
 
 u 
 O 
 
 g 
 
 B 
 
 At 
 f * 
 
 o 
 
 6 
 1 
 
 c 
 
 a 
 
 m 
 
 'a 
 
 tH 
 
 9 
 
 s 
 
 M 
 
 fc 
 
 fc 
 
 fc 
 
 fc 
 
 
 
 
 
 PL, 
 
 1860 
 
 
 
 1.4 
 1.2 
 
 
 
 6.2 
 3.8 
 
 
 
 
 
 1861 
 
 
 
 
 6.0 
 6.0 
 5.6 
 5.7 
 5.7 
 6.2 
 4.2 
 
 
 
 
 
 1862 
 
 
 
 
 
 
 
 1868 
 
 
 
 3.8 
 
 
 
 
 
 
 
 
 
 1864 
 
 
 
 
 1865 
 
 
 3.5 
 6.4 
 7.4 
 6.7 
 7.4 
 4.0 
 
 1.2 
 2.3 
 2.0 
 2.5 
 2.2 
 2.1 
 2.1 
 2.1 
 
 0.0 
 0.0 
 0.0 
 0.0 
 9.1 
 0.0 
 7.7 
 7.1 
 
 
 
 
 
 
 1866 
 
 
 
 
 
 
 1867 
 
 
 
 
 
 
 1868 
 
 
 
 
 
 
 1869 
 
 5.3 
 
 
 
 
 5.6 
 2.8 
 1.7 
 1.5 
 
 
 1870 
 
 
 0.7 
 2.9 
 3.2 
 
 
 
 1871 
 
 4.9 
 5.5 
 
 4.8 
 6.3 
 
 
 1872 
 
 
 4.6 
 
 
 1873 
 
 
 2.7 
 
 2.0 
 
 7.7 
 
 6.6 
 
 4.7 
 
 3.2 
 
 
 0.6 
 
 
 1874 
 
 
 1.7 
 1.6 
 
 1.9 
 1.5 
 
 7.1 
 5.9 
 
 3.5 
 2.4 
 
 4.7 
 3.4 
 
 3.0 
 2.0 
 
 
 
 
 1875 
 
 
 25.3 
 
 
 1876 
 
 
 1.8 
 
 0.8 
 
 5.9 
 
 3.4 
 
 2.7 
 
 1.4 
 
 
 4.1 
 
 0.6 
 
 1877 
 
 
 1.2 
 
 4.5 
 
 1.0 
 
 3.7 
 
 6.4 
 
 0.9 
 
 
 3.2 
 
 0.6 
 
 1878 
 
 
 1.2 
 
 0.3 
 
 1.5 
 
 4.3 
 
 1.8 
 
 0.6 
 
 7.0 
 
 1.3 
 
 2.0 
 
 1879 
 
 
 2.3 
 
 0.1 
 
 1.9 
 
 4.9 
 
 1.9 
 
 0.5 
 
 4.7 
 
 3.5 
 
 4.2 
 
 1880 
 
 
 2.9 
 
 0.1 
 
 3.6 
 
 5.0 
 
 7.1 
 
 0.4 
 
 0.0 
 
 1.4 
 
 6.7 
 
 1881 
 
 
 3.2 
 
 3.6 
 
 4.0 
 
 5.5 
 
 3.3 
 
 0.5 
 
 11.5 
 
 3.7 
 
 7.0 
 
 1882 
 
 
 3.1 
 
 2.2 
 
 4.0 
 
 5.3 
 
 3.1 
 
 0.5 
 
 4.0 
 
 3.8 
 
 5.6 
 
 1883 
 
 
 2.8 
 
 2.3 
 
 4.4 
 
 5.0 
 
 3.2 
 
 3.4 
 
 0.7 
 
 8.0 
 
 5.1 
 
 1884 
 
 
 2.7 
 
 2.3 
 
 4.0 
 
 5.0 
 
 2.4 
 
 3.1 
 
 0.8 
 
 0.7 
 
 6.2 
 
 1885 
 
 
 3.4 
 
 1.7 
 
 3.3 
 
 5.4 
 
 1.6 
 
 2.6 
 
 
 5.0 
 
 4.2 
 
 1886 
 
 
 3.7 
 
 1.2 
 
 3.7 
 
 5.3 
 
 1.2 
 
 3.2 
 
 
 4.0 
 
 4.4 
 
 1887 
 
 
 3.9 
 
 1.8 
 
 3.4 
 
 4.7 
 
 1.3 
 
 7.5 
 
 
 3.9 
 
 3.9 
 
 1888 
 
 
 3.5 
 
 1.5 
 
 4.2 
 
 5.0 
 
 1.1 
 
 5.0 
 
 1.6 
 
 4.3 
 
 3.8 
 
 1889 
 
 1.8 
 
 3.5 
 
 1.4 
 
 5.6 
 
 5.7 
 
 3.6 
 
 6.4 
 
 2.6 
 
 1.7 
 
 4.4 
 
 1890 
 
 
 5.2 
 
 1.1 
 
 4.0 
 
 5.7 
 
 2.5 
 
 6.0 
 
 0.6 
 
 1.6 
 
 4.2 
 
 1891 
 
 2.6 
 
 5.1 
 
 2.9 
 
 3.3 
 
 4.9 
 
 4.4 
 
 6.1 
 
 0.3 
 
 3.1 
 
 4.5 
 
 1892 
 
 3.0 
 
 4.9 
 
 4.3 
 
 2.7 
 
 5.0 
 
 4.8 
 
 6.0 
 
 0.9 
 
 3.4 
 
 4.0 
 
 1893 
 
 2.5 
 
 4.6 
 
 2.8 
 
 2.3 
 
 4.2 
 
 3.0 
 
 5.6 
 
 2.2 
 
 2.1 
 
 2.6 
 
 1894 
 
 2.7 
 
 4.4 
 
 3.9 
 
 2.1 
 
 4.2 
 
 4.8 
 
 6.7 
 
 2.0 
 
 3.8 
 
 3.7 
 
 1895 
 
 0.0 
 
 3.4 
 
 3.2 
 
 3.4 
 
 4.4 
 
 4.5 
 
 8.8 
 
 2.0 
 
 4.1 
 
 0.5 
 
 1896 
 
 0.6 
 
 2.7 
 
 -5.0 
 
 3.8 
 
 4.6 
 
 6.6 
 
 8.4 
 
 3.0 
 
 3.0 
 
 3.3 
 
 1897 
 
 -0.8 
 
 6.2 
 
 -0.2 
 
 4.0 
 
 5.0 
 
 4.5 
 
 8.8 
 
 3.8 
 
 4.5 
 
 3.5 
 
 1898 
 
 0.2 
 
 2.4 
 
 3.1 
 
 5.4 
 
 5.0 
 
 3.9 
 
 9.1 
 
 3.9 
 
 5.8 
 
 4.2 
 
 1899 
 
 4.0 
 
 5.6 
 
 5.2 
 
 6.0 
 
 5.4 
 
 5.4 
 
 9.2 
 
 2.0 
 
 6.4 
 
 4.9 
 
 1900 
 
 4.0 
 
 4.6 
 
 1.0 
 
 7.6 
 
 6.0 
 
 5.8 
 
 10.8 
 
 2.6 
 
 8.8 
 
 6 6 
 
 1901 
 
 7.0 
 
 4.5 
 
 6.5 
 
 7.2 
 
 7.7 
 
 6.3 
 
 10.9 
 
 -25.0 
 
 9.5 
 
 8.6 
 
 1902 
 
 5.0 
 
 4.7 
 
 6.6 
 
 7.5 
 
 7.6 
 
 7.6 
 
 10.7 
 
 4.5 
 
 7.1 
 
 9.5 
 
 1903 
 
 4.4 
 
 4.9 
 
 6.6 
 
 7.9 
 
 8.1 
 
 7.6 
 
 11.6 
 
 5.7 
 
 6.6 
 
 5.0 
 
 1904 
 
 4.5 
 
 4.8 
 
 5.6 8.0 
 
 8.2 
 
 7.5 
 
 10.2 
 
 5.0 
 
 1 7.0 
 
 5.6 
 
INVESTMENT EARNINGS. 
 EARNING RATE OF REAL ESTATE. 
 
 85 
 
 
 e+J 
 
 
 
 
 
 "3 
 
 "5 
 
 CO 
 
 a 
 
 
 1 
 
 - / 
 
 C o3 3 
 
 fa 
 
 
 .2 
 
 
 
 i 
 
 
 
 
 1 
 
 E 
 
 a 
 
 2 
 
 3 
 
 3 
 
 [3 
 
 i 
 'a 
 
 3 
 be 
 
 . a 
 si" 
 
 v> 
 
 eS 
 
 
 >* 
 
 Oh 
 
 
 
 
 
 CO 
 
 H 
 
 p 
 
 P 
 
 P 
 
 
 
 
 1860 
 
 
 
 
 
 
 
 
 
 
 
 1861 
 
 
 
 
 
 
 
 
 
 
 
 1862 
 
 
 
 
 
 
 
 
 
 
 
 1863 
 
 
 
 
 
 
 
 
 
 
 
 1864 
 
 
 
 
 
 
 
 
 
 
 
 1865 
 
 
 
 
 
 
 
 
 
 
 
 1866 
 
 
 
 
 
 
 
 
 
 
 
 1867 
 
 
 
 
 8.0 
 11.5 
 11.1 
 
 
 
 
 
 
 
 1868 
 
 
 
 
 
 
 
 
 
 
 1869 
 
 
 
 
 
 
 
 
 
 
 1870 
 
 7.1 
 
 
 
 
 
 
 
 
 
 1871 
 
 
 
 4.0 
 
 
 
 
 
 
 
 1872 
 
 
 
 
 
 
 
 
 
 
 1873 
 
 
 
 
 
 
 
 6.5 
 8.2 
 7.6 
 
 1.6 
 
 1.7 
 
 1.7 
 
 
 
 
 1874 
 
 
 
 
 
 1.4 
 1.2 
 
 0.7 
 
 1.1 
 
 .0 
 
 3.0 
 6.3 
 
 1.1 
 
 5.3 
 
 4.7 
 
 
 
 
 1875 
 
 0.9 
 4.6 
 2.8 
 0.9 
 
 
 
 6.3 
 
 
 
 
 1876 
 
 
 
 
 
 
 1877 
 
 
 
 
 
 
 
 1878 
 
 
 
 
 
 
 
 1879 
 
 
 
 
 1.8 
 6.5 
 
 2.4 
 
 
 1880 
 
 0.2 
 0.8 
 
 
 
 
 
 1881 
 
 
 
 
 
 1882 
 
 1.0 
 1.2 
 1.4 
 
 
 
 
 2.6 
 
 11.5 
 
 2.3 
 
 33.8 
 
 1.2 
 
 
 1883 
 
 
 
 
 
 1884 
 
 
 
 
 
 1885 
 
 1.9 
 1.7 
 
 
 
 
 5.5 
 
 3.8 
 
 2.9 
 
 5.7 
 
 1.6 
 
 
 1886 
 
 
 
 
 
 1887 
 
 1.4 
 
 
 4.0 
 
 1.4 
 
 0.5 
 
 3.2 
 
 1.4 
 
 3.0 
 
 3.8 
 
 
 1888 
 
 0.9 
 
 
 
 
 
 
 
 
 
 
 1889 
 
 0.1 
 
 
 9.0 
 
 1.7 
 
 12.3 
 
 2.1 
 
 1.3 
 
 3.8 
 
 3.4 
 
 
 1890 
 
 1.4 
 
 
 2.3 
 
 5.3 
 
 2.2 
 
 8.2 
 
 2.0 
 
 14.7 
 
 3.0 
 
 
 1891 
 
 2.1 
 
 
 .... 
 
 5.5 
 
 2.5 
 
 1.4 
 
 2.1 
 
 50.9 
 
 2.2 
 
 
 1892 
 
 1.4 
 
 14.7 
 
 
 5.8 
 
 3.0 
 
 5.5 
 
 2.1 
 
 0.0 
 
 2.2 
 
 
 1893 
 
 2.0 
 
 5.0 
 
 5.0 
 
 3.3 
 
 0.8 
 
 3.5 
 
 2.2 
 
 18.0 
 
 2.7 
 
 
 1894 
 
 1.5 
 
 10.9 
 
 5.5 
 
 6.5 
 
 14.8 
 
 2.7 
 
 3.0 
 
 1.8 
 
 1.7 
 
 
 1895 
 
 1.3 
 
 11.3 
 
 6.0 
 
 6.1 
 
 4.3 
 
 0.0 
 
 2.8 
 
 5.7 
 
 2.5 
 
 
 1896 
 
 1.1 
 
 10.3 
 
 6.4 
 
 1.4 
 
 
 
 
 
 
 
 1897 
 
 1.0 
 
 2.7 
 
 6.5 
 
 5.2 
 
 6.0 
 
 2.5 
 
 2.9 
 
 2.4 
 
 1.1 
 
 
 1898 
 
 1.4 
 
 14.4 
 
 
 6.2 
 
 4.2 
 
 3.2 
 
 2.9 
 
 5.1 
 
 4.0 
 
 
 1899 
 
 1.3 
 
 18.7 
 
 5.7 
 
 6.1 
 
 6.2 
 
 4.1 
 
 2.0 
 
 4.9 
 
 11.0 
 
 
 1900 
 
 2.2 
 
 13.8 
 
 
 
 
 
 
 
 
 
 1901 
 
 3.3 
 
 33.3 
 
 4.9 
 
 6.4 
 
 2.7 
 
 15.0 
 
 3.1 
 
 1.9 
 
 5.6 
 
 
 1902 
 
 4.1 
 
 20.3 
 
 7.2 
 
 7.0 
 
 
 11.7 
 
 4.2 
 
 9.6 
 
 5.9 
 
 
 1903 
 
 4.0 
 
 13.0 
 
 6.1 
 
 6.8 
 
 7.8 
 
 6.6 
 
 4.6 
 
 18.3 
 
 7.2 
 
 
 1904 
 
 1 3.7 
 
 16.2 
 
 2.9 
 
 7.6 
 
 8.8 
 
 12.8 
 
 4.9 
 
 12.2 
 
 1 2.4 
 
 
86 INVESTMENT EARNINGS. 
 
 The statistics show in general a fair average earning 
 rate on real estate during the sixties. In the seventies, 
 when the companies had become the possessors of large 
 amounts of property secured through foreclosure of 
 mortgage loans, the earning rate of real estate com- 
 pares unsatisfactorily with the rate made on total assets. 
 The very fact that foreclosure was necessary indicated 
 that the property so secured was not productive. In 
 numerous instances the companies suffered a loss in 
 market value so great that negative rates of earning 
 power are not uncommon during the decade of the 
 seventies and the one following. From 1870 to 1889 
 inclusive, one hundred and sixty-four times was the 
 earning rate of real estate under three per cent. The 
 early nineties did not bring any improvement in the 
 earning rate. In the entire decade of the nineties, 
 eighty-seven of the two hundred and ninety annual 
 earning rates were again below three per cent. 
 
 During the last ten years real estate has been making 
 a better gross rate steadily. Real estate, in common 
 with other things, has experienced a rise in price. This 
 has made a better earning power through a gain in 
 market values. Cities have been growing rapidly and 
 the real estate which the companies had obtained through 
 foreclosure of mortgages has been sold at such a price 
 that the companies have been enabled to make a gain 
 from the sale. The gross earning rate has risen 
 rapidly. Only ten rates for all the companies since 
 
INVESTMENT EARNINGS. 87 
 
 1900, inclusive, have been as low as three per cent. 
 
 When a comparison is made of the rate earned by 
 real estate with the rate earned by the total assets year 
 by year for each company, it will be seen that nearly 
 every company has suffered from holding real estate.. 
 If such a comparison be made, it is found that five 
 hundred and ninety-seven of the annual rates on real 
 estate are below the rates for the same years earned by; | 
 the total assets. Only three hundred and nineteen of 
 the real estate rates are higher than the total asset 
 earning rate. 
 
 So far in discussing the low rate earned by real 
 estate, reference has been made only to real estate 
 secured through foreclosure of mortgage loans as a 
 source of loss to the companies. Undoubtedly such 
 real estate has been a loss to the companies, but as such 
 it should be considered in connection with the rate 
 earned by mortgage loans. Most of the real estate 
 which has made up the large total of such an asset con- 
 sists of home office buildings and other buildings neces- 
 sary for the transaction of the business of the companies. 
 Real estate necessary for the business of the company 
 is the only real estate allowed by most of the states for 
 the companies to hold. However, under this permis- 
 sion, buildings, as we have already seen, have been 
 erected of which only a small part is used by the com- 
 pany. These buildings have in the main been erected 
 for advertising purposes. As such they may be success- 
 
gg Investment* earnings. 
 
 ful, but despite the liberal allowance of rent which the 
 company pays to itself for the nse of its own office 
 building, as an investment to secure good earning rates 
 these office buildings have been failures. The invest- 
 ment of capital in large office buildings is at best an 
 investment attended by unavoidable risk when those 
 buildings are erected with but one purpose in view, 
 namely, to get a good return on the investment. When 
 erected with a double purpose in view, the earning rate 
 of real estate given in the preceding tables is the re- 
 sult. What might be obtained from real estate invest- 
 ments if the companies were to enter upon a definite 
 policy in regard to them is not known. We have already 
 noticed in a previous chapter that the French com- 
 panies, when forced by circumstances to invest their 
 funds in real estate, did so very successfully from the 
 earning standpoint. Certainly companies in this 
 country would have invested with different results if 
 they had not had the advertising in view which a huge 
 and expensive building is thought to give them. 
 
 Of far more importance than the earning rate of 
 real estate is that of mortgage loans. Mortgages have 
 formed so large a proportion of the total assets, and 
 as an asset they have such a homogeneous character that 
 the rate of earning power realized on this asset is of 
 great interest. The following tables have been com- 
 piled in the same manner as the preceding ones and 
 again for the same companies. 
 
INVESTMENT EARNINGS. 
 EARNING RATE OF MORTGAGE LOANS. 
 
 u 
 
 1 
 
 e8 
 
 a 
 
 
 
 
 
 i 
 
 u 
 
 
 3 as 
 
 5 3 
 
 6 
 3 
 
 CO 
 
 '3 
 
 c 
 
 4 
 
 "3 
 
 1 
 
 e 
 
 
 
 a 
 
 
 
 M 
 
 8 
 
 g 
 
 a 
 
 e co 
 
 gw 
 
 
 1 
 
 9 
 
 to 
 a 
 
 CO 
 
 09 
 
 eo o& 
 
 a 
 . * 
 
 0. 
 
 >H 
 
 * 
 
 
 
 o 
 
 W 
 
 O 
 
 w 
 
 -j 
 
 R 
 
 m 
 
 M 
 
 1860 
 
 
 
 8.2 
 7.3 
 10.3 
 9.9 
 3.9 
 
 
 
 
 
 
 
 
 1861 
 
 
 
 "C 
 
 6.1 
 7.0 
 
 "8.7' 
 
 6.4 
 7.5 
 6.5 
 
 '8.'8' 
 6.7 
 5.5 
 9.5 
 
 
 
 
 
 1862 
 
 
 
 
 
 's.T 
 
 5.0 
 
 6.5 
 
 "e.o 
 
 7.0 
 
 
 1863 
 
 
 
 
 1864 
 
 
 "h'.o 
 
 
 1865 
 
 "8.6* 
 
 7.8 
 
 9.8 
 
 "e.i 
 
 10.0 
 
 4.2 
 
 
 7.5 
 
 5.8 
 
 
 1866 
 
 3.1 
 
 7.5 
 
 
 5.1 
 
 6.7 
 
 6.1 
 
 
 6.4 
 
 5.1 
 
 . . . . 
 
 1867 
 
 3.9 
 
 6.1 
 
 "8.5* 
 
 6.7 
 
 6.8 
 
 8.0 
 
 
 7.9 
 
 6.7 
 
 .... 
 
 1868 
 
 8.0 
 
 8.0 
 
 8.0 
 
 7.1 
 
 7.2 
 
 16.4 
 
 '*5.'3* 
 
 5.1 
 
 7.5 
 
 .... 
 
 1869 
 
 7.6 
 
 8.8 
 
 8.2 
 
 7.2 
 
 7.5 
 
 6.8 
 
 . . .. 
 
 6.8 
 
 7.1 
 
 
 1870 
 
 10.1 
 
 11.7 
 
 8.3 
 
 7.3 
 
 8.0 
 
 7.7 
 
 8.3 
 
 7.5 
 
 6.7 
 
 
 1871 
 
 8.9 
 
 9.9 
 
 7.5 
 
 
 
 7.0 
 
 
 
 7.1 
 
 8.5 
 
 6.9 
 
 .... 
 
 1872 
 
 11.6 
 
 7.3 
 
 6.8 
 
 ...... 
 
 7.2 
 
 ...... 
 
 11.9 
 
 8.3 
 
 8.9 
 
 .... 
 
 1873 
 
 12.2 
 10.3 
 
 7.5 
 7.5 
 
 8.2 
 7.8 
 
 
 7.3 
 
 7.0 
 
 
 12.2 
 3.7 
 
 8.0 
 
 8.7 
 
 
 
 1874 
 
 "lie 
 
 ... 
 
 1875 
 
 10.8 
 
 78 
 
 7.1 
 
 "6.9' 
 
 6.3 
 
 
 6.6 
 
 
 
 
 1876 
 
 9.7 
 
 8.5 
 
 8.6 
 
 7.2 
 
 7.6 
 
 
 7.9 
 
 7.3 
 
 8.7 
 
 7.2 
 
 1877 
 
 9.3 
 
 6 5 
 
 8.4 
 
 7.6 
 
 7.4 
 
 
 6.9 
 
 6.9 
 
 5.4 
 
 6.6 
 
 1878 
 
 9.0 
 
 6.7 
 
 7.4 
 
 6.8 
 
 7.0 
 
 
 
 7.1 
 
 5.7 
 
 6.3 
 
 6.7 
 
 1879 
 
 8.1 
 
 71 
 
 4.4 
 
 7.5 
 
 6.9 
 
 
 6.7 
 
 7.4 
 
 6.8 
 
 7.2 
 
 1880 
 
 8.0, 
 
 6.8 
 
 7.5 
 
 6.2 
 
 6.5 
 
 
 
 7.6 
 
 5.9 
 
 5.9 
 
 6.2 
 
 1881 
 
 7.7' 
 
 69 
 
 7.1 
 
 6.1 
 
 6.7 
 
 
 6.3 
 
 6.0 
 
 7.0 
 
 6.0 
 
 1882 
 
 7.0 
 
 6.7 
 
 6.6 
 
 6.0 
 
 6.3 
 
 
 5.9 
 
 4.2 
 
 7.3 
 
 6.4 
 
 1883 
 
 6.7 
 
 6.2 
 
 6.5 
 
 6.0 
 
 6.2 
 
 
 
 6.0 
 
 5.9 
 
 7.9 
 
 6.0 
 
 1884 
 
 6.7 
 
 5.1 
 
 6.4 
 
 6.6 
 
 6.2 
 
 
 
 5.8 
 
 6.0 
 
 7.1 
 
 5.5 
 
 1885 
 
 6.5 
 
 5.8 
 
 6.2 
 
 4.5 
 
 5.6 
 
 
 
 5.7 
 
 5.4 
 
 7.0 
 
 5.4 
 
 1886 
 
 6.4 
 
 6.5 
 
 6.2 
 
 5.1 
 
 5.3 
 
 
 5.9 
 
 5.1 
 
 9.1 
 
 5.1 
 
 1887 
 
 6.6 
 
 5.7 
 
 6.2 
 
 4.8 
 
 5.5 
 
 18.5 
 
 6.1 
 
 5.1 
 
 8.1 
 
 6.1 
 
 1888 
 
 6.6 
 
 5.7 
 
 6.1 
 
 7.3 
 
 5.3 
 
 15.6 
 
 6.0 
 
 5.1 
 
 7.7 
 
 5.6 
 
 1889 
 
 6.5 
 
 5.9 
 
 6.0 
 
 7.4 
 
 5.4 
 
 12.6 
 
 6.1 
 
 4.5 
 
 8.2 
 
 6.0 
 
 1890 
 
 6.3 
 
 6.0 
 
 6.1 
 
 8.1 
 
 5.3 
 
 11.4 
 
 6.2 
 
 5.1 
 
 7.9 
 
 5.6 
 
 1891 
 
 6.5 
 
 5.9 
 
 6.1 
 
 6.6 
 
 5.1 
 
 7.6 
 
 6.2 
 
 4.9 
 
 8.0 
 
 5.5 
 
 1892 
 
 6.3 
 
 5.9 
 
 6.0 
 
 4.3 
 
 5.1 
 
 7.2 
 
 6.1 
 
 5.1 
 
 7.7 
 
 5.6 
 
 1893 
 
 6.3 
 
 6.2 
 
 6.0 
 
 4.5 
 
 5.3 
 
 6.8 
 
 6.1 
 
 4.9 
 
 7.4 
 
 5.2 
 
 1894 
 
 6.4 
 
 5.7 
 
 6.0 
 
 4.9 
 
 5.1 
 
 6.2 
 
 5.3 
 
 5.1 
 
 7.7 
 
 5.3 
 
 1895 
 
 6.4 
 
 5.9 
 
 6.0 
 
 4.3 
 
 5.1 
 
 6.7 
 
 5.8 
 
 5.1 
 
 8.0 
 
 4.9 
 
 1896 
 
 6.2 
 
 5.7 
 
 6.1 
 
 4.9 
 
 5.1 
 
 6.3 
 
 5.7 
 
 5.1 
 
 7.5 
 
 5.1 
 
 1897 
 
 6.3 
 
 5.5 
 
 6.0 
 
 4.7 
 
 5.2 
 
 6.3 
 
 4.8 
 
 4.9 
 
 4.1 
 
 5.3 
 
 1898 
 
 6.8 
 
 5.1 
 
 5.8 
 
 5.2 
 
 5.1 
 
 5.5 
 
 5.3 
 
 5.3 
 
 5.1 
 
 5.2 
 
 1899 
 
 5.9 
 
 5.3 
 
 6.6 
 
 4.9 
 
 5.0 
 
 6.4 
 
 5.2 
 
 4.8 
 
 5.1 
 
 4.9 
 
 1900 
 
 5.7 
 
 4.8 
 
 5.7 
 
 4.6 
 
 5.2 
 
 5.5 
 
 5.4 
 
 4.8 
 
 5.1 
 
 5.3 
 
 1901 
 
 5.4 
 
 4.9 
 
 5.4 
 
 4.4 
 
 5.5 
 
 6.3 
 
 5.3 
 
 4.8 
 
 5.0 
 
 5.2 
 
 1902 
 
 5.1 
 
 4.9 
 
 5.3 
 
 4.6 
 
 4.9 
 
 6.5 
 
 5.6 
 
 4.9 
 
 4.7 
 
 5.2 
 
 1903 
 
 5.2 
 
 4.6 
 
 5.2 
 
 4.2 
 
 4.9 
 
 4.5 
 
 5.3 
 
 4.8 
 
 4.7 
 
 5.2 
 
 1904 
 
 5.4 
 
 5.1 
 
 1 5.0 
 
 4.4 
 
 4.8 
 
 4.6 
 
 5.2 
 
 4.8 
 
 4.8 
 
 5 2 
 
90 INVESTMENT EARNINGS. 
 
 EARNING RATE OF MORTGAGE LOANS. 
 
 
 ?1 
 
 
 
 e3 
 
 
 a 
 08 
 
 i 
 
 
 
 i 
 
 
 
 M 
 
 1 
 
 Si 5 
 
 2a 
 
 3 
 
 u 
 
 B 
 
 "eS 
 
 be 
 
 
 
 Cm 
 
 
 '5 
 
 d 
 
 | 
 
 8 
 
 H 
 
 9 
 
 m 
 
 m 
 
 fc 
 
 & 
 
 K 
 
 K 
 
 
 
 Ph 
 
 
 
 1860 
 
 
 
 8.6 
 6.7 
 7.9 
 
 7.2 
 6.4 
 7.7 
 6.7 
 7.3 
 
 9.0 
 8.0 
 6.3 
 8.7 
 9.0 
 8.3 
 7.5 
 8.0 
 8.6 
 9.4 
 
 6.5 
 6.1 
 6.3 
 5.6 
 5.1 
 5.3 
 6.4 
 8.0 
 4.5 
 
 6.8 
 
 7.1 
 5.7 
 10.4 
 6.7 
 6.2 
 7.7 
 5.4 
 7.0 
 7.5 
 7.0 
 
 
 
 
 
 1861 
 
 
 
 
 
 
 
 1862 
 
 
 ' 7*3" 
 4.1 
 6.5 
 7.3 
 9.8 
 
 
 
 
 
 1863 
 
 
 
 
 
 1864 
 
 
 
 
 7 8 
 
 1865 
 
 
 
 
 4 4 
 
 1866 
 
 
 
 
 
 1867 
 
 
 
 
 
 1868 
 
 7.2 
 
 8.1 
 
 
 
 
 1869 
 
 
 7.1 
 
 
 2.3 
 
 
 1870 
 
 
 7.3 
 
 8.4 
 
 10.0 
 
 
 7.0 
 
 8.5 
 
 
 8.6 
 
 12.2 
 
 1871 
 
 10.0 
 
 
 7.3 
 
 8.6 
 
 9.9 
 
 7.7 
 
 8.0 
 
 , , 
 
 5.8 
 
 
 1872 
 
 8.7 
 
 6.8 
 
 
 8.6 
 
 9.2 
 
 8.1 
 
 7.5 
 
 
 12.3 
 
 
 1873 
 
 11.1 
 
 6.9 
 
 
 8.2 
 
 2.4 
 
 8.1 
 
 8.6 
 
 ... 
 
 7.5 
 
 
 1874 
 
 9.4 
 
 7.2 
 
 
 7.4 
 
 9.2 
 
 
 
 9.3 
 
 
 
 6.6 
 
 
 1875 
 
 
 7.1 
 
 6.6 
 
 7.4 
 
 7.5 
 
 6.9 
 
 9.8 
 
 
 7.0 
 
 7.9 
 
 1876 
 
 
 7.0 
 
 6.6 
 
 7.2 
 
 6.8 
 
 6.9 
 
 9.8 
 
 
 7.2 
 
 8.7 
 
 1877 
 
 
 6.9 
 
 6.9 
 
 3.8 
 
 6.5 
 
 6.4 
 
 9.6 
 
 13.3 
 
 7.4 
 
 6.9 
 
 1878 
 
 
 6.6 
 
 6.4 
 
 6.8 
 
 5.7 
 
 6.3 
 
 9.1 
 
 9.4 
 
 6.6 
 
 7.2 
 
 1879 
 
 ii.i 
 
 6.9 
 
 7.0 
 
 6.1 
 
 6.1 
 
 6.5 
 
 9.3 
 
 11.8 
 
 6.5 
 
 5.5 
 
 1880 
 
 10.3 
 
 6.7 
 
 6.5 
 
 6.1 
 
 5.9 
 
 6.3 
 
 8.2 
 
 5.2 
 
 6.3 
 
 7.3 
 
 1881 
 
 9.4 
 
 6.6 
 
 6.7 
 
 4.7 
 
 5.3 
 
 5.7 
 
 7.5 
 
 85 
 
 6.1 
 
 7.3 
 
 1882 
 
 9.0 
 
 6.2 
 
 6.1 
 
 6.4 
 
 5.8 
 
 6.1 
 
 6.9 
 
 9.2 
 
 5.9 
 
 7.4 
 
 1883 
 
 7.8 
 
 6.0 
 
 5.6 
 
 6.3 
 
 5.2 
 
 6.1 
 
 6.5 
 
 8.2 
 
 5.6 
 
 7.2 
 
 1884 
 
 8.0 
 
 5.8 
 
 5.8 
 
 7.1 
 
 4.7 
 
 5.9 
 
 6.6 
 
 8.5 
 
 5.5 
 
 6.8 
 
 1885 
 
 7.6 
 
 5.8 
 
 6.3 
 
 6.9 
 
 5.2 
 
 5.5 
 
 6.4 
 
 9.3 
 
 5.7 
 
 6.9 
 
 1886 
 
 6.7 
 
 5.7 
 
 6.3 
 
 6.7 
 
 5.4 
 
 5.8 
 
 65 
 
 9.0 
 
 5.9 
 
 6.9 
 
 1887 
 
 7.4 
 
 5.5 
 
 6.4 
 
 6.9 
 
 5.2 
 
 5.2 
 
 6.1 
 
 9.1 
 
 6.2 
 
 6.9 
 
 1888 
 
 7.3 
 
 5.9 
 
 6.2 
 
 6.9 
 
 5.7 
 
 5.5 
 
 6.2 
 
 9.6 
 
 6.1 
 
 7.0 
 
 1889 
 
 7.2 
 
 4.0 
 
 6.2 
 
 6.9 
 
 5.9 
 
 6.0 
 
 6.4 
 
 9.0 
 
 6.2 
 
 7.2 
 
 1890 
 
 
 5.2 
 
 6.0 
 
 7.1 
 
 5.9 
 
 5.5 
 
 5.9 
 
 7.8 
 
 6.2 
 
 6.8 
 
 1891 
 
 6.2 
 
 5.5 
 
 6.0 
 
 6.3 
 
 5.7 
 
 5.5 
 
 5.8 
 
 8.4 
 
 6.2 
 
 6.9 
 
 1892 
 
 6.5 
 
 5.4 
 
 6.0 
 
 6.7 
 
 5.4 
 
 5.2 
 
 6.0 
 
 9.7 
 
 6.3 
 
 6.6 
 
 1893 
 
 6.5 
 
 4.6 
 
 5.6 
 
 5.8 
 
 5.7 
 
 5.7 
 
 5.8 
 
 7.9 
 
 6.2 
 
 6.6 
 
 1894 
 
 6.2 
 
 5.5 
 
 5.9 
 
 5.9 
 
 5.6 
 
 5.4 
 
 5.8 
 
 8.3 
 
 6.2 
 
 6.2 
 
 1895 
 
 6.1 
 
 5.5 
 
 6.2 
 
 6.1 
 
 4.9 
 
 5.0 
 
 5.7 
 
 7.0 
 
 6.1 
 
 6.3 
 
 1896 
 
 6.5 
 
 5.3 
 
 6.0 
 
 5.0 
 
 4.8 
 
 5.2 
 
 5.2 
 
 6.3 
 
 5.3 
 
 6.3 
 
 1897 
 
 6.6 
 
 5.2 
 
 5.9 
 
 2.4 
 
 4.2 
 
 4.9 
 
 5.5 
 
 6.6 
 
 5.7 
 
 6.5 
 
 1898 
 
 6.4 
 
 5.3 
 
 5.9 
 
 4.9 
 
 4,7 
 
 4.9 
 
 5.4 
 
 6.0 
 
 5.3 
 
 6.5 
 
 1899 
 
 6.0 
 
 5.0 
 
 5.7 
 
 4.2 
 
 4.4 
 
 4.8 
 
 5.0 
 
 5.5 
 
 5.4 
 
 6.2 
 
 1900 
 
 5.8 
 
 4.8 
 
 5.5 
 
 5.4 
 
 4.7 
 
 4.7 
 
 4.9 
 
 5.4 
 
 5.3 
 
 5.9 
 
 1901 
 
 5.6 
 
 4.7 
 
 5.1 
 
 4.8 
 
 4.3 
 
 4.5 
 
 4.8 
 
 5.4 
 
 5.4 
 
 5.8 
 
 1902 
 
 5.3 
 
 4.6 
 
 5.0 
 
 5.2 
 
 4.4 
 
 4.4 
 
 4.6 
 
 6.0 
 
 5.3 
 
 5.6 
 
 1903 
 
 5.3 
 
 4.6 
 
 5.1 
 
 5.4 
 
 4.2 
 
 4.3 
 
 4.6 
 
 5.2 
 
 5.2 
 
 5.5 
 
 1904 
 
 5.3 
 
 4.7 
 
 5.1 
 
 5.4 
 
 4.2 
 
 4.5 
 
 4.8 
 
 5.3 
 
 5.2 
 
 5.4 
 
INVESTMENT EARNINGS. 
 EARNING RATE OF MORTGAGE LOANS. 
 
 91 
 
 c 
 
 cj 
 01 
 
 -4J "d 
 
 B B . 
 <u - J. 
 
 B ti 
 gw 
 
 3 
 
 B 
 
 I 
 
 1 
 
 d 
 
 08 
 
 i 
 
 i 
 
 Jl 
 
 "3 
 
 03 
 
 aw 
 
 a 
 o 
 
 a 
 
 tc 
 
 . a 
 
 ST 
 
 1 
 
 
 i 
 
 
 
 Pm 
 
 PU 
 
 W 
 
 h 
 
 P 
 
 E> 
 
 & 
 
 
 
 
 1860 
 
 
 
 
 
 
 
 
 
 
 
 1861 
 
 
 
 
 
 
 
 
 
 7.7 
 7.7 
 6.0 
 8.7 
 8.0 
 7.0 
 7.3 
 6.7 
 7.0 
 7.1 
 6.8 
 6.8 
 7.2 
 6.7 
 6.7 
 6.4 
 6.8 
 4.6 
 5.7 
 
 
 1862 
 
 
 
 
 
 
 
 
 
 
 1863 
 
 
 
 
 
 
 
 
 
 
 1864 
 
 
 
 
 
 
 
 6.6 
 
 8.5 
 6.8 
 
 *7.'l" 
 7.0 
 6.9 
 
 6.4 
 
 
 1865 
 
 
 
 
 
 
 
 
 1866 
 
 
 
 
 
 
 
 
 1867 
 
 
 
 
 
 
 
 8.1 
 8.9 
 8.8 
 8.6 
 6.5 
 7.5 
 9.1 
 8.3 
 6.1 
 5.8 
 6.1 
 
 5.6 
 
 
 1868 
 
 
 
 
 
 
 
 
 1869 
 
 7.9 
 
 7.0 
 
 
 
 
 
 
 
 1870 
 
 
 
 
 
 
 
 1871 
 
 
 
 
 
 
 
 1872 
 
 
 
 
 
 
 
 
 1873 
 
 
 
 
 
 
 
 
 1874 
 
 
 
 
 
 9.8 
 
 9.0 
 
 10.4 
 
 7.9 
 
 7.1 
 
 "5.6* 
 
 8.8 
 7.8 
 
 8.2 
 
 
 1875 
 
 5.5 
 6.4 
 6.4 
 6.6 
 6.3 
 
 
 
 
 
 1876 
 
 
 
 
 
 1877 
 
 
 
 
 
 1878 
 
 
 
 
 
 1879 
 
 
 4.0 
 
 
 
 1880 
 
 5.5 
 
 9.1 
 
 5.0 
 
 
 7.4 
 
 8.7 
 
 
 5.4 
 
 6.0 
 
 
 1881 
 
 5.8 
 
 5.9 
 
 6.5 
 
 
 8.6 
 
 8.1 
 
 5.7 
 
 5.6 
 
 5.9 
 
 
 1882 
 
 4.5 
 
 5.9 
 
 6.2 
 
 
 8.3 
 
 7.5 
 
 5.8 
 
 5.8 
 
 5.9 
 
 
 1883 
 
 5.6 
 
 5.6 
 
 6.2 
 
 
 6.2 
 
 7.7 
 
 7.7 
 
 5.1 
 
 5.6 
 
 
 1884 
 
 5.8 
 
 5.3 
 
 5.2 
 
 
 8.3 
 
 7.2 
 
 9.1 
 
 5.3 
 
 5.7 
 
 
 1885 
 
 5.9 
 
 5.3 
 
 7.8 
 
 
 8.1 
 
 7.4 
 
 0.2 
 
 5.6 
 
 6.5 
 
 
 1886 
 
 6.1 
 
 
 
 
 
 
 5.2 
 
 5.0 
 
 5.7 
 
 
 1887 
 
 6.1 
 
 5.3 
 
 5.0 
 
 5.0 
 
 7.3 
 
 7.7 
 
 5.7 
 
 5.0 
 
 5.3 
 
 
 1888 
 
 6.2 
 
 
 
 
 
 
 
 4.8 
 
 5.4 
 
 
 1889 
 
 6.2 
 
 5.7 
 
 5.5 
 
 5.0 
 
 7.5 
 
 7.4 
 
 5.5 
 
 4.9 
 
 5.3 
 
 
 1890 
 
 6.2 
 
 
 
 
 
 
 6.3 
 
 4.9 
 
 5.1 
 
 
 1891 
 
 6.3 
 
 6.7 
 
 5.8 
 
 5.4 
 
 7.1 
 
 7.4 
 
 5.5 
 
 5.7 
 
 5.1 
 
 
 1892 
 
 6.4 
 
 5.3 
 
 5.7 
 
 5.4 
 
 6.6 
 
 
 5.3 
 
 5.2 
 
 5.2 
 
 
 1893 
 
 6.3 
 
 5.4 
 
 6.0 
 
 5.9 
 
 6.2 
 
 7.8 
 
 6.1 
 
 5.1 
 
 5.1 
 
 
 1894 
 
 6.6 
 
 6.2 
 
 6.0 
 
 4.7 
 
 6.6 
 
 7.7 
 
 5.6 
 
 5.1 
 
 5.2 
 
 
 1895 
 
 6.2 
 
 6.2 
 
 5.4 
 
 5.0 
 
 6.1 
 
 7.7 
 
 6.0 
 
 5.0 
 
 4.9 
 
 
 1896 
 
 5.3 
 
 5.9 
 
 5.5 
 
 5.1 
 
 5.4 
 
 7.6 
 
 6.2 
 
 5.1 
 
 5.1 
 
 
 1897 
 
 5.9 
 
 6.1 
 
 5.4 
 
 4.7 
 
 5.7 
 
 7.7 
 
 6.1 
 
 5.1 
 
 5.4 
 
 
 1898 
 
 5.8 
 
 5.8 
 
 5.5 
 
 5.0 
 
 6.4 
 
 7.1 
 
 6.2 
 
 4.9 
 
 5.7 
 
 
 1899 
 
 5.0 
 
 5.0 
 
 5.2 
 
 4.6 
 
 5.5 
 
 7.2 
 
 5.9 
 
 5.1 
 
 5.8 
 
 
 1900 
 
 4.7 
 
 
 
 
 
 
 6.2 
 
 5.3 
 
 5.1 
 
 
 1901 
 
 5.3 
 
 4.9 
 
 5.1 
 
 4.7 
 
 5.8 
 
 6.6 
 
 5.2 
 
 5.1 
 
 5.1 
 
 
 1902 
 
 5.6 
 
 
 5.0 
 
 4.5 
 
 
 6.8 
 
 5.1 
 
 5.0 
 
 5.1 
 
 
 1903 
 
 5.2 
 
 5.4 
 
 5.0 
 
 4.5 
 
 5.4 
 
 6.7 
 
 5.2 
 
 5.1 
 
 5.3 
 
 
 1904 
 
 5.8 
 
 
 5.1 
 
 4.5 
 
 5.4 
 
 6.6 
 
 5.3 
 
 5.1 
 
 6.0 
 
 
92 INVESTMENT EARNINGS. 
 
 If there is any objection to the rate of earning power 
 found for the total assets and for real estate, and as 
 will be found for bonds and stocks, because items of 
 investment fluctuation are included, that objection will 
 not apply to the rate found on mortgage loans. A mort- 
 gage is an investment by secured loan, and hence in 
 general has a fixed foreknown return, while real estate 
 and stocks are investments by purchase and actual 
 ownership of the property bought. This differentiates 
 mortgage loans from real estate and stocks. On the 
 other hand mortgages differ from bonds in that there 
 is no exchange where mortgages are bought and sold. 
 As a result the item of investment fluctuation is prac- 
 tically absent in regard to mortgages, and the rate of 
 earning power is the same as the rate of interest ob- 
 tained by the use of the same formula. 
 
 There are six companies whose mortgage investments 
 extend back to 1860. Four of these companies in that 
 year made more than eight per cent, on their mortgage 
 loans, one made seven per cent., and the other one six 
 and one-half per cent. This was a rate almost two 
 points higher than was realised by these companies on 
 their total assets, explaining to no small degree the 
 reason for the large proportion of the assets which mort- 
 gages then formed. High as the rate was at the begin- 
 ning of the decade it was increased until an annual rate 
 of even more than ten per cent, was earned on mort- 
 
INVESTMENT EARNINGS. 93 
 
 gage loans. As the rate of earning power on mortgage 
 loans is the interest rate, this ten per cent, earning 
 power means a ten per cent, interest rate. For a com- 
 pany to earn this rate on all its mortgage loans indi- 
 cates that a portion of them was earning a higher rate, 
 which indeed was true. The rate in the middle Western 
 States, Illinois and Iowa, was generally ten to twelve 
 per cent, during this decade 1 and even later. In the 
 seventies more of the insurance money was loaned in 
 the West, and the level of rates earned on mortgages was 
 above the high average of the sixties. In the decade, 
 1860-69, one-fourth of the rates earned by mortgages 
 were above eight per cent., in the following decade 
 one-third of the annual rates were above ten per cent. 
 In the previous decade, one-sixth of the annual rates 
 had been below six per cent., from 1870-79 scarcely 
 none were below that rate. 
 
 Conditions changed rapidly during the eighties. In 
 this decade, only one-tenth of the annual rates on 
 mortgage loans were above eight per cent., a striking 
 contrast to the one-third above ten per cent, ten years 
 earlier. The rates below six per cent, formed one-third 
 of the total number of annual rates. However, lower 
 levels were to be reached quickly. From 1890 to 1899 
 
 1 For the rate of interest in the West before 1860, see the report 
 of the committee on the interest rate to the Second Life Insur- 
 ance Convention, 1860, found in the United States Insurance 
 Gazette and Magazine. Volume XI, Page 214. 
 
94: INVESTMENT EARNINGS. 
 
 only six annual rates reached ten per cent., and nearly 
 two-thirds were now below six per cent. In the last 
 five years, no company has earned eight per cent, on 
 its mortgage loans, and only one, the Union Central, 
 has succeeded in earning steadily six per cent. Besides 
 this one company six per cent, on mortgage loans has 
 been made twice since 1900 by one company, and once 
 apiece by two other companies. Beyond these, all the 
 annual rates on mortgages have been below six per cent. 
 Thus, a rate of six per cent, is now realised nearly 
 so frequently as was a rate of ten per cent, thirty years 
 ago. The rate in fact has gone considerably below six 
 per cent. Since 1899 more than one-third of the annual 
 rates earned by mortgage loans have been below five per 
 cent. Eleven of the twenty-nine companies for several 
 years have made on mortgage loans little more than 
 an average rate of four and one-half per cent. 
 
 No item of loss has been considered in securing the 
 rates on mortgage loans. When a mortgage loan de- 
 preciates in value because of the inability of the bor- 
 rower to pay the interest, the company forecloses the 
 mortgage. If the property cannot be sold for more 
 than the amount of the mortgage, the company takes the 
 real estate as owner at a value equal to the amount of 
 the mortgage. If the company later sells the property 
 at a price equal to the amount of the mortgage plus the 
 accrued interest, there is no loss to be ascribed to any 
 
INVESTMENT EARNINGS. 95 
 
 asset. If the property is sold at a loss, the deficiency 
 is ascribed to real estate, when it really should be taken 
 account of in the mortgage account. The state reports 
 have never separated the two classes of real estate, so 
 that it is impossible to find out how much of the loss 
 from real estate should be considered as due to mortgage 
 loans. In 1902, the Insurance Spectator wrote letters 
 to thirty-two life companies in regard to their ex- 
 perience with foreclosed property. In general the an- 
 swers indicated that the losses have been small. The 
 Germania through its President replied that the com- 
 pany had loaned fifty-two millions on mortgages. Two 
 and three-quarter millions worth of real estate had been 
 acquired through foreclosure, one-half of which had been 
 sold with a net loss of only eleven thousand dollars. 
 The President of the Penn Mutual replied that there 
 had been enough profit upon foreclosed properties to 
 more than offset all losses. The experience of the Union 
 Central is of importance because of its large propor- 
 tion of mortgages to total assets, and because of the high 
 rate it is yet earning. President Pattison answered 
 that the Union Central had during thirty-five years 
 made mortgage loans to the extent of fifty million dol- 
 lars. The total loss upon realty obtained through fore- 
 closure had been less than one-tenth of one per cent. 
 In one state where four million dollars had been loaned 
 on real estate security in twenty years not a single 
 
96 INVESTMENT EARNINGS. 
 
 mortgage had been foreclosed, nor had the due and un- 
 paid interest at the end of any year exceeded two hun- 
 dred dollars. Other replies were more or less favorable. 
 The conclusion can be safely reached that with the ex- 
 ception of a few companies the rate which has been 
 found for mortgages in the preceding tables needs 
 little reduction on account of losses through foreclosure 
 of the loans. 
 
 We now come to the last class of assets of which 
 it is possible to find the rate of earning power. The 
 following tables give this rate for bonds and stocks. 
 
/ 
 
 
 INVESTMENT EARNINGS. 
 EARNING RATE OF BONDS AND STOCKS. 
 
 97 
 
 jj 
 
 d 
 a 
 
 d 
 
 1 
 
 u 
 
 3 
 
 "-3 oS 
 
 3 
 
 03 
 
 o 
 
 4 
 
 a 
 
 E 
 
 
 
 i 
 
 o 
 
 o 
 o 
 o 
 
 d 
 
 08 
 
 08 
 
 A 
 
 fl 
 
 1 
 
 "S"o5 
 
 3j,C 3 
 8 U S 
 
 d 
 
 OS 
 
 6% 
 is e. 
 
 >* 
 
 < 
 
 n 
 
 o 
 
 m 
 
 o 
 
 W 
 
 "3 
 
 s 
 
 S 
 
 X 
 
 1860 
 
 
 
 13.0 
 
 -1.9 
 
 
 
 
 
 
 
 1861 
 
 
 
 0.5 
 
 -3.2 
 
 -10.0 
 
 5.9 
 
 
 
 
 
 1862 
 
 
 
 3.2 
 
 18.0 
 18.1 
 
 14.8 
 12.3 
 
 27.8 
 17.2 
 12.3 
 
 24.2 
 14.7 
 20.3 
 
 
 
 
 
 1863 
 
 
 
 
 10.6 
 11.3 
 
 15.5 
 21.5 
 
 
 1864 
 
 8.7 
 
 11.7 
 
 
 1865 
 
 . . . 
 
 3.7 
 
 2.5 
 
 10.3 
 
 3.8 
 
 4.2 
 
 
 3.7 
 
 2.4 
 
 
 1866 
 
 
 
 
 
 
 
 
 
 
 
 1867 
 
 11.6 
 
 12.3 
 
 10.4 
 
 9.8 
 
 9.6 
 
 8.7 
 
 9.9 
 
 11.3 
 
 12.0 
 
 9.5 
 
 
 
 
 
 11.4 
 11.1 
 
 17.8 
 4.7 
 
 
 1868 
 
 13.3 
 
 10.9 
 
 4.9 
 
 8.7 
 
 12.8 
 
 6.3 
 
 
 
 
 1869 
 
 
 
 
 1870 
 
 7.2 
 
 
 
 1871 
 
 8.2 
 
 7.1 
 
 7.4 
 
 
 9.0 
 
 
 11.3 
 
 10.9 
 
 10.3 
 
 
 1872 
 
 3.1 
 
 6.4 
 
 3.1 
 
 
 5.8 
 
 
 5.5 
 
 6.3 
 
 8.0 
 
 
 1873 
 
 7.4 
 
 5.8 
 
 5.9 
 
 
 3.8 
 
 
 2.0 
 
 4.2 
 
 2.2 
 
 
 1874 
 
 7.9 
 
 9.5 
 
 8.0 
 
 
 11.6 
 
 
 7.0 
 
 7.6 
 
 4.2 
 
 
 1875 
 
 9.5 
 
 -3.4 
 
 12.3 
 
 2.5 
 
 4.0 
 
 . . . .. 
 
 5.0 
 
 10.4 
 
 2.9 
 
 9.7 
 
 1876 
 
 7.8 
 
 2.4 
 
 5.0 
 
 2.4 
 
 5.8 
 
 
 4.6 
 
 -0.8 
 
 0.2 
 
 4.4 
 
 1877 
 
 6.0 
 
 2.4 
 
 4.2 
 
 3.5 
 
 1.9 
 
 
 5.5 
 
 8.1 
 
 5.5 
 
 11.2 
 
 1878 
 
 7.9 
 
 7.1 
 
 5.7 
 
 5.8 
 
 5.5 
 
 
 4.3 
 
 -3.9 
 
 10.8 
 
 7.5 
 
 1879 
 
 7.3 
 
 5.3 
 
 6.2 
 
 6.9 
 
 5.1 
 
 ...... 
 
 7.6 
 
 8.8 
 
 16.9 
 
 9.2 
 
 1880 
 
 9.9 
 
 5.3 
 
 8.6 
 
 13.8 
 
 8.6 
 
 
 10.6 
 
 10.7 
 
 15.3 
 
 12.2 
 
 1881 
 
 7.0 
 
 7.0 
 
 6.3 
 
 4.0 
 
 6.3 
 
 
 3.0 
 
 6.9 
 
 8.0 
 
 3.1 
 
 1882 
 
 6.6 
 
 9.4 
 
 4.9 
 
 1.3 
 
 5.8 
 
 
 3.8 
 
 7.7 
 
 5.4 
 
 4.8 
 
 1883 
 
 5.4 
 
 6.1 
 
 5.1 
 
 5.3 
 
 5.8 
 
 
 6.1 
 
 7.3 
 
 4.5 
 
 3.0 
 
 1884 
 
 5.5 
 
 1.8 
 
 3.5 
 
 3.7 
 
 4.3 
 
 
 5.2 
 
 5.5 
 
 -0.3 
 
 0.5 
 
 1885 
 
 7.4 
 
 4.6 
 
 8.5 
 
 15.3 
 
 8.4 
 
 
 9.2 
 
 7.8 
 
 11.3 
 
 6.0 
 
 1886 
 
 6.0 
 
 5.9 
 
 7.2 
 
 10.7 
 
 6.6 
 
 
 7.1 
 
 7.0 
 
 6.3 
 
 3.8 
 
 1887 
 
 4.7 
 
 3.1 
 
 3.9 
 
 7.9 
 
 2.8 
 
 4.4 
 
 3.4 
 
 3.6 
 
 3.9 
 
 4.7 
 
 1888 
 
 6.1 
 
 4.3 
 
 
 
 
 
 
 
 
 
 1889 
 
 6.0 
 
 3.9 
 
 4.9 
 
 7.3 
 
 5.3 
 
 4.6 
 
 5.4 
 
 4.4 
 
 7.0 
 
 5.2 
 
 1890 
 
 4.9 
 
 3.0 
 
 3.8 
 
 3.7 
 
 2.7 
 
 6.7 
 
 4.4 
 
 2.9 
 
 4.5 
 
 1.9 
 
 1891 
 
 4.9 
 
 4.5 
 
 6.9 
 
 9.3 
 
 8.7 
 
 5.3 
 
 5.9 
 
 6.5 
 
 5.5 
 
 6.6 
 
 1892 
 
 5.3 
 
 3.5 
 
 7.3 
 
 7.2 
 
 5.4 
 
 8.1 
 
 3.7 
 
 7.1 
 
 5.4 
 
 5.3 
 
 1893 
 
 3.9 
 
 3.9 
 
 2.1 
 
 2.2 
 
 2.2 
 
 3.6 
 
 5.3 
 
 2.3 
 
 2.1 
 
 2.6 
 
 1894 
 
 5.1 
 
 3.7 
 
 7.1 
 
 2.9 
 
 7.5 
 
 6.2 
 
 4.7 
 
 7.6 
 
 7.6 
 
 6.0 
 
 1895 
 
 4.7 
 
 3.9 
 
 5.9 
 
 4.1 
 
 5.1 
 
 3.0 
 
 4.7 
 
 6.6 
 
 4.5 
 
 4.4 
 
 1896 
 
 4.5 
 
 4.7 
 
 4.5 
 
 3.6 
 
 2.8 
 
 3.0 
 
 3.0 
 
 2.8 
 
 3.0 
 
 4.1 
 
 1897 
 
 6.6 
 
 6.5 
 
 6.5 
 
 5.8 
 
 6.9 
 
 4.8 
 
 6.3 
 
 8.8 
 
 7.9 
 
 7.3 
 
 1898 
 
 7.0 
 
 6.6 
 
 5.7 
 
 7.6 
 
 5.3 
 
 5.8 
 
 6.7 
 
 6.7 
 
 7.5 
 
 7.0 
 
 1899 
 
 5.6 
 
 5.2 
 
 3.8 
 
 4.4 
 
 3.4 
 
 4.2 
 
 4.8 
 
 5.4 
 
 4.4 
 
 6.6 
 
 1900 
 
 5.5 
 
 5.2 
 
 6.4 
 
 .2.1 
 
 4.1 
 
 6.4 
 
 4.8 
 
 8.3 
 
 5.4 
 
 5.2 
 
 1901 
 
 6.4 
 
 6.6 
 
 4.6 
 
 5.1 
 
 6.3 
 
 6.4 
 
 4.8 
 
 5.5 
 
 3.7 
 
 7.1 
 
 1902 
 
 5.2 
 
 5.3 
 
 2.7 
 
 4.4 
 
 8.2 
 
 5.1 
 
 3.2 
 
 4.3 
 
 2.9 
 
 2.9 
 
 1903 
 
 3.0 
 
 2.3 
 
 0.7 
 
 2.2 
 
 3.2 
 
 0.2 
 
 2.9 
 
 1.3 
 
 1.7 
 
 0.2 
 
 1904 
 
 5.8 
 
 5.2 
 
 6.2 
 
 6.5 
 
 4.0 
 
 7.8 
 
 6.1 
 
 3.4 
 
 5.8 
 
 8.8 
 
98 INVESTMENT EARNINGS. 
 
 EARNING RATE OF BONDS AND STOCKS. 
 
 j 
 
 i 
 5 3 
 
 "3 
 
 3 
 
 g 
 
 i 
 
 a> 
 
 .2m 
 
 3 
 
 1 
 a 
 o 
 
 1 
 
 3 
 
 a 
 a 
 "5b 
 
 0)^ 
 
 M 
 E 
 
 o 
 
 J* 
 
 a 
 1 
 
 d 
 O 
 
 6 
 1 
 
 a 
 
 a 
 
 '3 
 8 
 
 h 
 
 9 
 
 i 
 
 M 
 
 fc 
 
 fc 
 
 fc 
 
 fc 
 
 
 
 
 
 
 
 1860 
 
 
 
 7.8 
 5.2 
 
 6.1 
 
 -8.1 
 
 17.1 
 
 8.4 
 12.6 
 
 3.3 
 
 5.8 
 5.8 
 8.7 
 14.2 
 2.1 
 1.1 
 
 1.7 
 
 -2.7 
 
 17.6 
 
 17.0 
 
 8.7 
 
 3.0 
 
 
 
 
 
 1861 
 
 
 
 
 
 
 
 1862 
 
 
 
 
 
 
 
 1863 
 
 
 12.3 
 
 15.3 
 
 -4.2 
 
 iiT 
 
 6.5 
 
 
 
 
 
 1864 
 
 
 
 
 19.4 
 
 1965 
 
 
 
 
 7.8 
 
 1866 
 
 
 
 
 
 1867 
 
 
 13.4 
 
 8.1 
 9.1 
 9.0 
 6.9 
 
 8.1 
 
 10.6 
 
 10.9 
 
 7.8 
 
 4.0 
 
 9.2 
 
 "'6.5 
 13.6 
 
 12.4 
 7.2 
 9.3 
 
 
 
 
 
 1868 
 
 
 
 
 
 1869 
 
 
 
 
 
 4.8 
 6.0 
 4.4 
 
 
 1870' 
 
 
 
 0.0 
 12.6 
 
 
 
 1871 
 
 6.9 
 
 
 
 1872 
 
 6.9 
 
 6.6 
 
 
 5.3 
 
 5.9 
 
 7.4 
 
 9.3 
 
 
 5.5 
 
 
 1873 
 
 6.9 
 
 6.2 
 
 
 9.3 
 
 5.4 
 
 7.1 
 
 6.5 
 
 
 6.5 
 
 
 1874 
 
 8.9 
 
 8.1 
 
 
 
 8.0 
 
 7.5 
 
 
 16.5 
 
 
 7.2 
 
 
 1875 
 
 
 11.6 
 
 7.9 
 
 7.1 
 
 9.6 
 
 10.1 
 
 -1.1 
 
 
 13.9 
 
 1.4 
 
 1876 
 
 
 -5.7 
 
 11.3 
 
 5.7 
 
 5.8 
 
 5.5 
 
 5.7 
 
 
 7.4 
 
 0.5 
 
 1877 
 
 
 3.8 
 
 4.5 
 
 1.7 
 
 6.4 
 
 3.5 
 
 -0.7 
 
 o'.b 
 
 2.2 
 
 4.0 
 
 1878 
 
 
 7.3 
 
 6.5 
 
 5.9 
 
 9.1 
 
 6.5 
 
 4.4 
 
 0.0 
 
 6.9 
 
 6.5 
 
 1879 
 
 8.3 
 
 4.4 
 
 7.7 
 
 6.4 
 
 6.8 
 
 7.4 
 
 7.1 
 
 0.0 
 
 10.1 
 
 11.4 
 
 1880 
 
 7.9 
 
 15.2 
 
 9.0 
 
 7.4 
 
 11.9 
 
 12.4 
 
 5.6 
 
 0.0 
 
 9.1 
 
 10.0 
 
 1881 
 
 6.2 
 
 8.6 
 
 5.1 
 
 6.1 
 
 6.3 
 
 7.0 
 
 4.8 
 
 0.0 
 
 7.3 
 
 6.3 
 
 1882 
 
 10.8 
 
 5.2 
 
 2.2 
 
 4.6 
 
 4.4 
 
 6.0 
 
 3.8 
 
 0.0 
 
 6.5 
 
 6.2 
 
 1883 
 
 1.1 
 
 7.1 
 
 2.6 
 
 56 
 
 4.8 
 
 6.2 
 
 5.2 
 
 0.0 
 
 5.9 
 
 5.6 
 
 1884 
 
 0.0 
 
 4.3 
 
 2.6 
 
 5.1 
 
 3.7 
 
 1.6 
 
 1.5 
 
 0.0 
 
 4.2 
 
 3.9 
 
 1885 
 
 
 11.2 
 
 4.0 
 
 5.1 
 
 8.2 
 
 11.7 
 
 1.9 
 
 16.7 
 
 8.0 
 
 6.4 
 
 1886 
 
 
 6.2 
 
 5.0 
 
 1.9 
 
 6.3 
 
 7.1 
 
 4.9 
 
 5.6 
 
 7.6 
 
 5.5 
 
 1887 
 
 
 3.9 
 
 3.8 
 
 5.5 
 
 1.4 
 
 4.7 
 
 4.4 
 
 6.1 
 
 5.7 
 
 5.0 
 
 1888 
 
 
 7.8 
 
 4.4 
 
 12.9 
 
 5.1 
 
 6.4 
 
 2.9 
 
 8.1 
 
 5.4 
 
 2.7 
 
 1889 
 
 50.0 
 
 1.5 
 
 4.0 
 
 5.3 
 
 5.3 
 
 5.8 
 
 8.3 
 
 6.7 
 
 5.7 
 
 6.2 
 
 1890 
 
 
 5.9 
 
 3.1 
 
 4.1 
 
 2.2 
 
 3.2 
 
 5.2 
 
 6.4 
 
 3.2 
 
 3.8 
 
 1891 
 
 100.0 
 
 5.2 
 
 5.0 
 
 5.4 
 
 5.2 
 
 4.2 
 
 4.4 
 
 7.3 
 
 6.7 
 
 4.7 
 
 1892 
 
 10.0 
 
 8.0 
 
 4.7 
 
 5.9 
 
 4.9 
 
 6.0 
 
 5.4 
 
 6.0 
 
 5.9 
 
 5.7 
 
 1893 
 
 5.0 
 
 2.9 
 
 3.9 
 
 4.6 
 
 1.1 
 
 4.2 
 
 5.0 
 
 5.5 
 
 11.0 
 
 4.5 
 
 1894 
 
 5.0 
 
 3.3 
 
 4.4 
 
 5.2 
 
 2.8 
 
 5.4 
 
 6.1 
 
 4.0 
 
 2.7 
 
 5.7 
 
 1895 
 
 5.0 
 
 3.4 
 
 5.0 
 
 5.1 
 
 5.1 
 
 5.4 
 
 3.4 
 
 7.7 
 
 11.4 
 
 4.8 
 
 1896 
 
 -10.0 
 
 5.0 
 
 3.9 
 
 4.5 
 
 4.2 
 
 5.4 
 
 4.0 
 
 7.5 
 
 1.2 
 
 5.5 
 
 1897 
 
 
 7.7 
 
 6.3 
 
 6.6 
 
 5.9 
 
 5.0 
 
 5.0 
 
 9.4 
 
 7.4 
 
 5.0 
 
 1898 
 
 1.0 
 
 8.8 
 
 5.4 
 
 5.3 
 
 6.4 
 
 6.5 
 
 5.8 
 
 8.0 
 
 7.3 
 
 6.1 
 
 1899 
 
 3.6 
 
 7.4 
 
 4.1 
 
 4.3 
 
 5.9 
 
 5.7 
 
 3.0 
 
 9.5 
 
 4.9 
 
 5.4 
 
 1900 
 
 8.3 
 
 5.7 
 
 6.5 
 
 2.8 
 
 4.9 
 
 5.5 
 
 4.9 
 
 8.4 
 
 5.9 
 
 6.5 
 
 1901 
 
 5.5 
 
 6.5 
 
 3.8 
 
 2.8 
 
 5.4 
 
 4.5 
 
 3.2 
 
 6.4 
 
 5.6 
 
 5.0 
 
 1002 
 
 1.8 
 
 4.7 
 
 2.6 
 
 3.6 
 
 3.7 
 
 4.2 
 
 2.3 
 
 5.6 
 
 4.8 
 
 2.4 
 
 1903 
 
 0.0 
 
 0.5 
 
 2.7 
 
 3.0 
 
 1.7 
 
 4.0 
 
 4.0 
 
 3.1 
 
 2.8 
 
 4.3 
 
 1904 
 
 7.1 
 
 8.5 
 
 5.6 
 
 3.3 
 
 5.0 
 
 4.2 
 
 6.7 
 
 5.0 
 
 6.8 
 
 5.6 
 
INVESTMENT EARNINGS. 
 EARNING RATE OF BONDS AND STOCKS. 
 
 99 
 
 '2 
 
 ill 
 
 3 
 
 E 
 
 Hi 
 
 3* 
 
 .s 
 
 T3 > 
 
 e 
 
 ]3 
 a 
 
 0> 
 
 
 
 3 
 E 
 
 6 
 
 Travelers'. 
 
 "5 
 
 Q oi 
 .20 
 
 a 
 
 "3 
 
 
 United 
 
 States. 
 
 d 
 
 
 
 "So 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 6.9 
 10.3 
 11.0 
 19.8 
 
 0.7 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 6.6 
 3.9 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 '12.6 
 
 
 7.7 
 13.6 
 9.7 
 3.6 
 8.4 
 5.3 
 7.0 
 9.7 
 4.9 
 10.5 
 4.5 
 4.6 
 7.8 
 
 5.2 
 
 10.8 
 6.7 
 -4.2 
 1.5 
 1.9 
 5.8 
 15.2 
 3.0 
 2.5 
 7.1 
 5.5 
 
 
 
 
 
 
 
 
 11.3 
 
 
 
 13.8 
 2.8 
 6.1 
 4.2 
 6.1 
 7.2 
 31.6 
 -3.7 
 4.7 
 5.5 
 7.0 
 
 5.8 
 8.8 
 6.8 
 7.1 
 6.9 
 
 
 
 
 
 
 
 14.1 
 
 
 
 
 
 
 
 
 ' 
 
 
 
 
 
 
 
 8.5 
 13.6 
 6.6 
 4.9 
 7.9 
 11.0 
 
 10.2 
 
 2.5 
 
 -20.8 
 
 0.0 
 
 12.5 
 
 
 
 
 -1.7 
 0.9 
 3.9 
 2.9 
 
 
 
 
 
 
 
 0.0 
 
 
 5.5 
 
 3.1 
 
 6.0 
 
 
 
 8.2 
 
 
 7.7 
 
 11.7 
 
 4.9 
 
 4.8 
 
 6.0 
 
 
 
 6.8 
 
 10.0 
 
 7.3 
 
 6.2 
 
 7.0 
 
 3.6 
 
 5.9 
 
 
 
 
 
 
 
 8.9 
 
 5.0 
 
 0.0 
 
 7.0 
 
 
 2.3 
 
 0.0 
 
 -3.3 
 
 6.7 
 
 2.0 
 
 1.4 
 
 6.2 
 
 2.0 
 
 
 0.0 
 
 0.0 
 
 4.9 
 
 3.8 
 
 5.3 
 
 6.4 
 
 5.1 
 
 3.9 
 
 
 10.4 
 
 11.1 
 
 7.6 
 
 10.4 
 
 6.9 
 
 6.3 
 
 3.1 
 
 4.4 
 
 
 7.1 
 
 -14.3 
 
 6.4 
 
 6.2 
 
 11.3 
 
 3.2 
 
 4.8 
 
 0.6 
 
 4.9 
 
 2.5 
 
 0.0 
 
 2.5 
 
 1.4 
 
 5.2 
 
 5.3 
 
 5.2 
 
 
 
 
 
 
 
 
 4.4 
 
 7.1 
 
 2.1 
 
 4.5 
 
 5.6 
 
 0.0 
 
 4.5 
 
 6.1 
 
 2.7 
 
 0.2 
 
 8.0 
 
 
 
 
 
 5.3 
 
 2.0 
 
 5.8 
 
 4.9 
 
 5.4 
 
 7.1 
 
 6.5 
 
 6.8 
 
 0.0 
 
 4.7 
 
 6.3 
 
 4.3 
 
 4.2 
 
 4.0 
 
 4.3 
 
 6.1 
 
 
 
 
 
 4.9 
 
 1.7 
 
 -1.1 
 
 5.5 
 
 3.7 
 
 8.0 
 
 5.1 
 
 2.2 
 
 1.2 
 
 2.2 
 
 5.8 
 
 11.9 
 
 5.9 
 
 5.7 
 
 5.2 
 
 23.5 
 
 9.5 
 
 7.2 
 
 2.7 
 
 4.4 
 
 -0.5 
 
 4.6 
 
 5.4 
 
 4.5 
 
 0.0 
 
 5.5 
 
 3.4 
 
 0.3 
 
 3.9 
 
 5.7 
 
 5.4 
 
 4.7 
 
 4.8 
 
 0.0 
 
 5.2 
 
 3.9 
 
 0.6 
 
 6.6 
 
 9.7 
 
 6.6 
 
 4.7 
 
 8.1 
 
 0.5 
 
 6.0 
 
 9.5 
 
 6.4 
 
 9.3 
 
 12.2 
 
 6.0 
 
 6.8 
 
 8.0 
 
 0.0 
 
 7.1 
 
 10.6 
 
 1.3 
 
 5.2 
 
 5.6 
 
 3.8 
 
 5.9 
 
 5.6 
 
 6.0 
 
 6.5 
 
 6.0 
 
 3.8 
 
 6.1 
 
 6.8 
 
 7.3 
 
 5.9 
 
 6.9 
 
 2.8 
 
 5.8 
 
 5.3 
 
 4.5 
 
 4.6 
 
 4.8 
 
 5.6 
 
 9.0 
 
 6.7 
 
 3.4 
 
 6.1 
 
 4.5 
 
 1.8 
 
 3.7 
 
 19.8 
 
 7.7 
 
 4.0 
 
 2.6 
 
 -3.4 
 
 5.3 
 
 4.5 
 
 0.5 
 
 -1.8 
 
 3.2 
 
 1.7 
 
 2.8 
 
 1.8 
 
 0.0 
 
 1.8 
 
 0.4 
 
 0.6 
 
 6.7 
 
 0.0 
 
 6.5 
 
 5.0 
 
 5.6 
 
 9.1 
 
 5.5 
 
 9.9 
 
 3.7 
 
100 INVESTMENT EARNINGS. 
 
 If the amount of the investment fluctuation for bonds 
 and stocks were given, it would show how sensitive 
 the value of these securities is to the business .condi- 
 tions in the country. For a period a company makes 
 a gain from increase in values and from the sale of 
 securities, "then for a year or more there are losses. The 
 gains from the fluctuation have exceeded the losses, for 
 the decreasing rate of* interest has caused the long-time 
 securities owned by the companies to appreciate. The 
 result is that the rate of earning power as found in the 
 tables on the average is higher when the investment 
 fluctuation is taken account of than it would be if the 
 fluctuation were neglected. Likewise the rate varies 
 widely from year to year when the investment fluctua- 
 tion is included. 
 
 From 1860-69 the companies whose record extends 
 back that far had annual earning rates on bonds and 
 stocks of over ten per cent, for nearly half the years. 
 A half of the remaining annual rates were above six 
 per cent., the remaining rates being under six per cent. 
 The earning power of bonds did not increase in the 
 seventies, as it did for mortgages. In this decade in- 
 stead of half the annual earning rates being above ten 
 per cent., as they were in the previous decade, few over 
 one-eighth of them were on that high level. Half of 
 the rates were between six and ten per cent., leaving 
 thirty-five per cent, below six per cemt. The eighties 
 
INVESTMENT EARNINGS. 101 
 
 show a more decided drop in the earning rate of bonds 
 and stocks. One-tenth of the rates were above ten per 
 cent., one-third were above six and under ten per cent., 
 and more than one-half of the annual rates were under 
 six per cent. From 1890-99 the rates above ten per 
 cent, were few and were the result of special conditions. 
 The earning rate of bonds and stocks was also falling 
 below six per cent., for now two-thirds of the annual 
 rates were below six per cent. The period since 1899 
 shows that the tendency to lower rates has been main- 
 tained by this class of assets that we are considering. 
 Without the great increase in market values which took 
 place in 1904, few companies would have earned a rate 
 of six per cent, for any year on the bonds and stocks 
 which they possessed. 
 
 Thus bonds and stocks have suffered a severe decline 
 in earning power since 1860. In spite of the surplus 
 of increase in market value over decreases in market 
 value which is true of the period as a whole the decline 
 in earning power has been marked. 
 
 There has been much discussion as to the advantage 
 of mortgage loans as an investment for life insurance 
 companies compared with bonds and stocks. From the 
 income producing standpoint mortgages so far have had 
 the advantage. If the rates realised by the individual 
 companies on these two classes of assets be compared 
 year by year, it will be found that during the decade 
 
102 INVESTMENT EARNINGS. 
 
 1860-69 bonds and stocks earned a higher annual rate 
 than did mortgage loans twice to the latter's once. In 
 the following decade the situation changed. Mortgages 
 earned a higher rate two times to the bonds and stocks' 
 higher rate once. This superior earning rate kept up 
 in the same proportion with remarkable steadiness dur- 
 ing three decades, 1870 to 1899, mortgages making the 
 higher rate two-thirds of the time. In the last five 
 years, bonds and stocks have gained, mortgage loans 
 have had a higher rate of earning power only four times 
 out of seven instead of two out of three times. Whether 
 this shows that bonds and stocks are gaining relatively 
 to mortgage loans is hard to decide. In this short per- 
 iod, there have been two years of remarkable increases 
 in market 'values, one in 1900 and again in 1904 caus- 
 ing a higher rate of earning power for bonds and stocks 
 during those two years. It does appear that mort- 
 gage loans are still yielding higher rates of income 
 than are bonds and stocks of the character possessed 
 by the insurance companies, though they have lost much 
 of the superiority which they possessed during the 
 seventies and the two following decades. 
 
 It is thus seen that there has been a serious decline 
 in the Tate of earning power of the assets belonging to 
 the life insurance companies in the United States. Of 
 course, this decline in the rate on the insurance assets 
 is simply a reflex of the general fall in the rate of in- 
 
INVESTMENT EARNINGS. 103 
 
 terest since the Civil War. Before discussing the causes 
 of this declining rate or of the increasing rate before the 
 War it will help us to see how far the phenomena in 
 the United States are connected with those of other 
 countries. We would expect Canada to have a similar 
 experience to that of ours, and so it is so far as we 
 have been able to gather the statistics. The rates earned 
 by the assets of Canadian companies since 1880 are as 
 follows : 
 
 Year. p. c. 
 
 Year. p. c. 
 
 Year. p. c. 
 
 1880 6. 8 1 
 
 18866.3 
 
 18925.5 
 
 18816.8 
 
 18876.6 
 
 18935.4 
 
 1882-6.2 
 
 18885.8 
 
 18945.4 
 
 18836.6 
 
 18895.7 
 
 18955.2 
 
 18846.1 
 
 18905.6 
 
 18964.7 
 
 18856.2 
 
 18915.6 
 
 18974.7 
 
 The Canadian companies have experienced quite the 
 same decline in the rate of earning power as have the 
 companies of the United Sates. The rate earned by the 
 total assets of Australian companies exhibits a similar 
 decline in the same period. At the end of five-year 
 periods, the rate has been. 1 
 
 Year. p. c. 
 
 Year. p. c. 
 
 Year. p. c. 
 
 18806.5 
 
 18906.0 
 
 19004.6 
 
 18856.2 
 
 18955.5 
 
 19024.6 
 
 The Government insurance department of New Zea- 
 land made an extremely low rate of interest on the as- 
 
 1 In these rates the profits from the sale of securities have been 
 included. The rates have been taken from a paper by Frank 
 Sanderson, Transactions of the Actuarial Society of Edinburgh, 
 Volume III, Page 178. 
 
104 INVESTMENT EARNINGS. 
 
 sets in 1870 and was able to raise this rate till 1891, 
 since which time there has been a decline from five 
 and four-tenths per cent, to four and four-tenths per 
 cent, in 1902. 
 
 So far we have been studying the rates earned by 
 companies in comparatively new countries. Turning to 
 the rates realised by English companies, they are of 
 great interest because England is a country which had 
 realised a high stage of industrial development some 
 three-quarters of a century ago. Statistics of English 
 companies are available for longer periods than are 
 those of other countries. In 1837 forty-six English 
 companies made an average rate of three and six-tenths 
 per cent. The Scottish offices made four and four- 
 tenths per cent, for the same year. 1 After 1837 the 
 statistics of the total assets of a number of companies 
 are not available for some years, but taking the rates 
 made by a representative Scottish office, the Scottish 
 National, somewhat of a gain in rates is noticeable. 
 These rates were 
 
 Five years 1845-15804.4 p. c. 
 " " 1860-18854.7 p. c. 
 
 Erom 1865 we have many statistics for the English 
 companies' assets, the rates made are as follows : 2 
 
 1 David Deuchar, Journal of the Institute of Actuaries, Volume 
 28, Page 450. 
 
 2 The rates for 1866-1869 inclusive are taken from a paper by 
 Mr. A. Hewat, Actuarial Society of Edinburgh, January, 1880. 
 
INVESTMENT EARNINGS. 
 
 105 
 
 Tear. p. c. 
 1866-4.52 
 18674.49 
 18684.46 
 18694.45 
 18704.27 
 18714.33 
 18724.30 
 18734.45 
 18744.52 
 18754.64 
 18764.43 
 18774.46 
 1878^-4.38 
 
 Year. p.c. 
 
 18794.53 
 
 18804.37 
 
 18814.29 
 
 18824.41 
 
 18834.23 
 
 18844.25 
 
 18854.25 
 
 18864.17 
 
 18874.20 
 
 18884.11 
 
 18894.02 
 
 18904.00 
 
 18914.16 
 
 Year. p. c. 
 
 18924.14 
 
 18934.09 
 
 18943.92 
 
 18953.96 
 
 18963.85 
 
 18973.83 
 
 18983.81 
 
 1899-3.77 
 
 19003.78 
 
 19013.71 
 
 19023.67 
 
 The rate realised in 1902 by the English companies 
 was still above that earned in 1837, but it was lower by 
 almost one per cent, than the rate of 1866. Between 
 1837 and 1866 the rate had increased, and the level of 
 1866 was maintained for twenty years. Since 1885 the 
 rate of income has been declining continuously. 
 
 The Gotha Mutual Life Insurance Company, one of 
 the largest in Germany in the decade 1829-39 made an 
 average rate of 3.94 per cent, on its mean assets. In 
 the following decade it made 3.71 per cent. During 
 the years 1852-6, the rate was 3.90, showing an upward 
 trend again. During 1874 the company made 4.83 per 
 
 The basis used is mean assets, no other refinements are used in the 
 method. From 1870 to 1896 inclusive the rates are taken from a 
 table compiled by Mr. Joseph Burns, Journal of the Institute of 
 Actuaries, Volume 34, Page 495. The rates are for the assets of 
 twelve leading companies, computed on mean assets and profit 
 and loss on investments have been included. The rates since 
 1896 are for the assets of all the companies and are computed by 
 the writer on mean assets, only interest earned being considered. 
 
106 INVESTMENT EARNINGS. 
 
 cent, on its assets showing a great increase over the 
 previous years. However, this was the highest rate 
 reached and in 1885 the annual rate had fallen to 4.22 
 per cent. Since which time the rate has further de- 
 clined to 3.87 per cent, in 1902. 
 
 Thus it is seen that there have been certain world- 
 wide movements in the rate of interest. For thirty 
 years approaching 1870 the tendency of the rates was 
 upward. In the preceding tables the rates were not 
 found for all the countries before 1870, but the ex- 
 amination of the interest rate realised by individual 
 companies will show that in general in old and in 
 new countries, there was this gradual upward tendency. 
 Since that time there has been a world-wide decline in 
 the rate. Therefore the decline in the rate earned by 
 American companies is not to be studied as an isolated 
 fact but in the light of the previous opposite tendency 
 and the universal movement. 
 
 It is not the purpose here to enter into an extended 
 discussion of the conditions determining the rate of 
 interest such as would be necessary if we were to under- 
 stand the fluctuations which have taken place in that 
 rate. The formulation of the agio theory of interest, 
 namely, that interest is the premium which is paid for 
 the use of present goods in preference over future goods 
 has aided much in explaining the changes in the rate 
 of that premium. Accepting the agio theory of in- 
 
INVESTMENT EARNINGS. 107 
 
 terest, some of the leading causes of the fluctuation 
 which we have already noticed will be indicated. 
 
 In the first place, the rate of interest is high when 
 men look hopefully to the future and low when the 
 future does not hold out such bright prospects. From 
 1846 to 1870 there is reason to believe that, except for 
 the slight shock of the crisis in 1857, men looked with 
 strong faith to what the future held forth. It was 
 a period in which the development of the North and 
 West went on apace. All sorts of investments were 
 made which did not pay at first, but which it was 
 trusted that the future would bring sufficient develop- 
 ment to make profitable. During the seventies, there 
 was one of the most severe and prolonged depressions 
 which the country has ever experienced. How far this 
 caused men to be more cautious of the future is not 
 known. Such effects cannot be measured, but there was 
 scarcely a business which did not suffer intensely dur- 
 ing that period, and certain it is that since then there 
 has been a more sane development in most businesses. 
 This is shown in our own field by the fact that there 
 are not as many life insurance companies in the United 
 States even now thirty-five years later as there were in 
 1870-1. However, it is merely a suggestion that the 
 rise and fall in the rate of interest has been to some de- 
 gree the result of this psychical change. 
 
 The Civil War destroyed a tremendous amount of 
 
108 INVESTMENT EARNINGS. 
 
 capital. Whatever lessens the amount of present capital 
 goods makes present skimping necessary to restore the 
 waste and get back the normal income after that waste is 
 repaired. Undoubtedly the war was one of the influ- 
 ences which made the rate of interest high in the United 
 States during the sixties. Not only was the rate in 
 this country affected, but as the burden of that war 
 was to an extent borne temporarily by other countries 
 through the purchase of American securities, it meant 
 a higher rate of interest the world over. Since the 
 Civil War until recently there have not been any very 
 destructive wars. Capital has increased rapidly, and 
 as a result the premium on the relatively abundant 
 present goods has become smaller. 
 
 Again it has been shown conclusively that there is 
 a close connection between prices and the rate of in- 
 terest. 1 With rising prices we find a high interest rate, 
 with falling prices a low rate of interest. It is well 
 known that the gold discoveries of 1848-50 in Cali- 
 fornia and Australia caused prices to rise in all coun- 
 tries. This general appreciation of commodities in 
 values may explain why insurance companies the world 
 over were enabled to increase the earning rate of their 
 assets after 1850 for twenty or twenty-five years. 
 Following the early seventies, there was a decline in 
 
 1 For a discussion of the important connection between price 
 and the interest rate see Prof. Fisher's " Appreciation and Inter- 
 est." Publication of the American Economic Association, 1896. 
 
INVESTMENT EARNINGS. 109 
 
 prices which lasted until the discoveries of gold in 
 Alaska and South Africa. Along with this decline in 
 the price level there came as a result a decline in the 
 interest rate. 
 
 There have been other elements entering into the 
 situation in the United States to cause a decline in the 
 rate of earnings. Since 1865, the United States has 
 become far more homogeneous. It is no longer possible 
 for the general rate of interest in one portion of the 
 country to be three to five per cent, higher than it is in 
 other portions of the country at the same time. Europe 
 has come to know American securities better, and with 
 this knowledge have come greater investments of Euro- 
 pean capital in the United States. This has tended to 
 keep the rate up in Europe, but the rate has fallen more 
 rapidly in the United States because of the influx of 
 foreign capital. 
 
 The all-important question remains, has the decline 
 in the rate of interest been arrested? There are some 
 indications that the low level has been reached. Large 
 amounts of gold are being added to the existing stock 
 each year, and prices have been rising steadily for some 
 years. It is not contended that a change in prices will 
 change the interest rate under all conditions. But if 
 prices continue to rise, and it looks as if they will, the 
 decline in the interest rate ought to be succeeded by 
 a rise. Much depends on how long prices continue 
 
HO INVESTMENT EARNINGS. 
 
 to rise and on how clearly investors realize the more 
 or less permanent change in the trend of the movement. 
 
 The price level is a condition over which the officials 
 of insurance companies have no control. There are con- 
 ditions, however, of which they should take advantage. 
 The decline in the rate of earnings since three decades 
 ago has been lessened by keeping a larger proportion 
 of the assets invested. Other methods to secure a good 
 rate have been adopted, and some of the companies have 
 succeeded in maintaining remarkably high rates of in- 
 terest. Of other companies it is doubtful whether all 
 that could be done to secure better rates has been ac- 
 complished. Some managements have directed their at- 
 tention mainly to getting new business as if the only 
 function of a life insurance company were to get in- 
 surance in force. Granting that such is its chief func- 
 tion, it should be the object, at least of a mutual com- 
 pany, to make its insurance cost the members the least 
 possible. Yet tremendous energies and large amounts 
 of money have been spent in securing new business and 
 comparatively little attention has been given to securing 
 the highest rates of earning on the assets. 
 
 It is not the intention to point out any securities 
 which a life company should select, nor indeed any class 
 of securities. It is a fact, as shown by the statistics of 
 this chapter, that some companies are earning, in some 
 cases, more than one per cent, more than are other com- 
 
INVESTMENT EARNINGS. HI 
 
 panies. When we examined the classes of assets in the 
 previous chapter, it was seen that some companies had 
 assets largely of one character, and other companies had 
 assets of a different class. Those which have large 
 mortgage holdings are on the whole making the best 
 rate of interest. It is not urged that all a company's 
 funds, or even a majority portion of them should be 
 invested in mortgage loans, for there are as we have 
 seen certain drawbacks to such loans. What is con- 
 tended for is that the managers of a company should 
 not be satisfied with the easy method of investing their 
 funds of buying the securities through a brokerage 
 firm. There is no doubt but that the investment of the 
 assets in certain bonds and stocks give the officers of 
 the company doing so a power in the financial world 
 which they would not possess if the funds were invested 
 in other ways, but it is hardly necessary to say that 
 from the policy-holders' standpoint such power is of 
 slight importance. What they desire is high earning 
 power. 
 
 If the earning rate of the assets is to be kept at the 
 height it should be, the investment department must be 
 conducted with the same energy that is evident in other 
 departments of the company. Good investments must 
 be sought with the same zeal that policy-holders are 
 sought after. Investments must be found which com- 
 bine a high element of safety with a high element of 
 earning power. 
 
CHAPTEK IV. 
 
 THE COST OF INVESTMENTS. 
 
 In the preceding chapter the rate of earning power 
 of various classes of assets was found. It was said 
 then that in finding the rates no allowance had been 
 made for any expenses connected with the investments, 
 nor for caring for them and collecting the interest after 
 they were made. But it is obvious that these expenses 
 should be considered in a study of the earning power 
 of the assets. We saw that some companies were mak- 
 ing a higher rate of earnings than were other com- 
 panies, and that certain classes of assets had on the 
 whole paid better than had other assets. The question 
 arises as to whether these higher rates may not be af- 
 fected by a higher cost of investment, thus neutralising 
 the good showing which certain companies and certain 
 classes of assets have made. It is the purpose of the 
 present chapter to study the investment costs. 
 
 There are serious difficulties in such a study. In 
 the first place, it is impossible for a company even if 
 it goes seriously to the task to find out what are its 
 investment expenses. What expenditures should be in- 
 cluded under investment costs ? Some very readily fall 
 
 112 
 
THE COST OF INVESTMENTS. 113 
 
 into the category. Such are taxes of real estate owned 
 by the company, repairs and other expenses connected 
 with the ownership of real estate and taxes on other 
 assets belonging to the company. If the company has 
 an investment department and officials and employees 
 in that department whose time is devoted exclusively or 
 practically so to the investment, to the collection of in- 
 terest and kindred duties regarding the assets, the ex- 
 penses of this department may als6 be readily classi- 
 fied as investment expenses. Again, companies have 
 investment agencies in various localities. These agen- 
 cies have nothing to do with getting insurance in force, 
 but are concerned only with the investment side of the 
 business. The cost of maintaining these agencies should 
 be included under investment expenses. Such expendi- 
 tures are easily classified, but what are we to do about 
 the division of the salaries of the executive officers 
 whose duties involve jurisdiction over all departments 
 of the company ? 
 
 The time was when the officials of a life insurance 
 company were chosen and paid large salaries because 
 of their ability to get insurance in force. Such men are 
 ever needed by a small company. Under this condition 
 the larger part of their salaries can be included under 
 the cost of getting business. However, when a company 
 becomes the possessor of as large assets as some control 
 today, the responsibility arising from the safe invest- 
 
 8 
 
 O-THE 
 
 f UNIVERSITY \ 
 
 ~ OF J 
 
114 THE COST OF INVESTMENTS. 
 
 ment of these assets at a satisfactory rate of interest is 
 so great that men with financial genius are required for 
 the highest offices of a company. Are the salaries of 
 such positions to be considered as investment costs? 
 The objection to so doing lies in the fact that no com- 
 pany has yet reached the point of possessing assets so 
 large that it has given up the competition for new busi- 
 ness. Rather the opposite tendency has prevailed. 
 With large assets, the pursuit of new business has been 
 pushed with vigor, and the managing of the agency 
 force has continued to make large demands upon the 
 executive officials of the companies. Therefore it is 
 impossible to say how much of certain large home office 
 expenses should be considered as investment costs. 
 
 Despite the impossibility of apportioning the expenses 
 of a life insurance company to investments on the 
 one hand and to insurance on the other, we find that 
 such an attempt has been made. In 1897, the Commis- 
 sioner of Insurance of Connecticut and those of several 
 other states compelled the companies to make a gain 
 and loss exhibit. This exhibit showed among other 
 facts the investment expenses of each company during 
 the preceding year. Since then, this exhibit has been 
 included in the annual reports of some state, so that for 
 the last nine years we do have certain statistics regard- 
 ing the expenses of the investments. In looking over 
 these statistics one is immediately struck with their 
 
THE COST OF INVESTMENTS. 115 
 
 incompleteness, and in many instances evident worth- 
 lessness as showing the real cost of making and caring 
 for the investments. A case in point is found in the ex- 
 hibits of the Equitable. No other investment expenses 
 other than taxes, repairs and other expenses connected 
 with, the real estate owned by the company is reported 
 for five years, then for one year a half million dollars 
 is reported as the investment expense. Then for the 
 next year, no such expense is reported. The exhibits 
 of the Aetna, Berkshire, John Hancock, and a half 
 dozen others show similar discrepancies regarding the 
 investment expenses. Thus twelve of the twenty-nine 
 companies which we are studying made reports which 
 for some of the years are on the face of them incorrect 
 as showing the total expense arising from the invest- 
 ments. 
 
 Inaccurate as the exhibits are known to be, it has 
 been considered worth while to compile the following 
 tables. With the expenses divided into three classes, 
 taxes on real estate, repairs on real estate, and other 
 investment expenses, it is possible to distinguish many 
 of the amounts which are too small. Besides with a 
 number of companies, the reports do show something. 
 In these tables, the material has been gathered from 
 the gain and loss exhibits given in the Connecticut In- 
 surance Eeports from 1896 to 1901 and for the last 
 three years from the Wisconsin and Minnesota reports, 
 
116 
 
 THE COST OF INVESTMENTS. 
 
 as the Connecticut reports no longer contain the gain 
 and loss exhibit. 
 
 It is impossible to get complete statistics for each 
 of the twenty-nine companies, as not all of them during 
 the nine years were doing business in a state which 
 required the gain and loss exhibit. 
 
 RATIO OF TOTAL INVESTMENT EXPENSES TO 
 TOTAL ASSETS. 
 
 
 
 
 3 
 
 
 
 
 M 
 
 a 
 
 
 
 u 
 
 08 
 
 A 
 a 
 
 
 i 
 
 09 
 
 M 
 
 E 
 
 '-3 e8 
 I* 
 
 
 
 i 
 
 *3 
 
 o 4 
 
 5 
 
 03 
 
 S 
 E 
 
 S 
 o 
 
 Q 
 
 O 
 O 
 
 a 
 a c8 
 
 |n 
 
 es 
 a 
 
 1 
 
 
 08 
 
 ill 
 
 8.2,2 
 
 a 
 
 08 
 
 is 9 
 
 h 
 
 < 
 
 n 
 
 o 
 
 W 
 
 O 
 
 H 
 
 *-> 
 
 M 
 
 M 
 
 
 
 1896 
 
 .58 
 
 .21 
 
 .62 
 
 .48 
 
 .41 
 
 .78 
 
 .91 
 
 .67 
 
 .28 
 
 .54 
 
 1897 
 
 .06 
 
 .20 
 
 .85 
 
 .37 
 
 .37 
 
 .49 
 
 .97 
 
 .58 
 
 .39 
 
 1.11 
 
 1898 
 
 .06 
 
 .30 
 
 .88 
 
 .31 
 
 .39 
 
 .51 
 
 .67 
 
 .52 
 
 .38 
 
 .42 
 
 1899 
 
 .09 
 
 .41 
 
 .74 
 
 .35 
 
 .51 
 
 .53 
 
 .55 
 
 .67 
 
 .36 
 
 .46 
 
 1900 
 
 .23 
 
 .38 
 
 .77 
 
 .31 
 
 .49 
 
 .55 
 
 .49 
 
 .75 
 
 .33 
 
 .59 
 
 1901 
 
 .17 
 
 .49 
 
 .77 
 
 .42 
 
 .48 
 
 .49 
 
 .46 
 
 .86 
 
 .30 
 
 .58 
 
 1902 
 
 .17 
 
 .... 
 
 .73 
 
 .27 
 
 .54 
 
 .71 
 
 .29 
 
 .84 
 
 .28 
 
 .51 
 
 1903 
 
 .16 
 
 
 .84 
 
 .29 
 
 .57 
 
 .68 
 
 .34 
 
 .92 
 
 .27 
 
 .54 
 
 1904 
 
 .15 
 
 
 .84 
 
 .28 
 
 .53 
 
 .55 
 
 . . .. 
 
 .91 
 
 .28 
 
 .51 
 
 RATIO OF TOTAL INVESTMENT EXPENSES TO 
 TOTAL ASSETS. 
 
 1 
 
 11 
 
 3S 
 
 3 
 
 
 8 
 
 3 
 
 "3 
 | 
 "3 
 
 a 
 
 03 
 
 fe c 
 
 E 
 
 o 
 
 S 
 1 
 
 1 
 
 a 
 a 
 
 M 
 
 'S 
 8 
 
 ^ 
 
 S 
 
 S 
 
 M 
 
 S5 
 
 55 
 
 fc 
 
 fc 
 
 Ph 
 
 & 
 
 Pi 
 
 1896 
 
 
 .45 
 
 .35 
 
 .36 
 
 .33 
 
 .22 
 
 .62 
 
 
 .60 
 
 .36 
 
 1897 
 
 
 .34 
 
 .53 
 
 .57 
 
 .30 
 
 .23 
 
 .32 
 
 
 .61 
 
 .33 
 
 1898 
 
 
 .33 
 
 .38 
 
 .99 
 
 .34 
 
 .24 
 
 .31 
 
 
 .98 
 
 .43 
 
 1899 
 
 
 .33 
 
 .42 
 
 .84 
 
 .33 
 
 .22 
 
 .35 
 
 
 .44 
 
 .56 
 
 1900 
 
 
 .35 
 
 .51 
 
 .80 
 
 .47 
 
 .29 
 
 .35 
 
 
 .97 
 
 .44 
 
 1901 
 
 
 .46 
 
 .50 
 
 .69 
 
 .44 
 
 .41 
 
 .28 
 
 
 .69 
 
 .34 
 
 1902 
 
 .49 
 
 .38 
 
 .51 
 
 .61 
 
 .44 
 
 .63 
 
 .25 
 
 .28 
 
 .67 
 
 .30 
 
 1903 
 
 .51 
 
 .36 
 
 .49 
 
 .49 
 
 .45 
 
 .36 
 
 .26 
 
 .75 
 
 .62 
 
 .26 
 
 1904 
 
 .49 
 
 .34 
 
 .49 
 
 .42 
 
 .44 
 
 .38 
 
 .22 
 
 .44 
 
 .61 
 
 .23 
 
THE COST OF INVESTMENTS. 
 
 RATIO OF TOTAL INVESTMENT EXPENSES TO 
 TOTAL ASSETS. 
 
 117 
 
 
 -w-g 
 
 
 "3 
 
 
 
 
 
 
 
 
 
 0) 
 
 a a . 
 
 2 a 
 
 a & 
 11 
 
 9 
 
 a 
 
 
 
 3 
 
 | 
 
 E 
 
 
 > 
 
 i 
 
 g 
 
 o a 
 
 1 
 
 fa 
 
 CO 
 
 as 
 
 aa2 
 
 if 
 
 
 H 
 
 a* 
 
 
 
 Pui 
 
 3 
 
 ^ 
 
 
 
 & 
 
 & 
 
 s 
 
 
 1896 
 
 .29 
 
 .66 
 
 1.76 
 
 .40 
 
 3.75 
 
 .61 
 
 
 .63 
 
 .13 
 
 
 1897 
 
 .33 
 
 .59 
 
 .55 
 
 .70 
 
 .68 
 
 .52 
 
 .31 
 
 .50 
 
 .44 
 
 
 1898 
 
 .31 
 
 .50 
 
 .53 
 
 .36 
 
 .87 
 
 .74 
 
 .28 
 
 .48 
 
 .44 
 
 
 1899 
 
 .20 
 
 .52 
 
 .57 
 
 .39 
 
 .59 
 
 .86 
 
 .25 
 
 .51 
 
 .61 
 
 
 1900 
 
 .27 
 
 .40 
 
 .74 
 
 .50 
 
 .70 
 
 .93 
 
 .33 
 
 .33 
 
 .68 
 
 
 1901 
 
 .21 
 
 .40 
 
 .82 
 
 .42 
 
 .70 
 
 .67 
 
 .84 
 
 .44 
 
 1.25 
 
 
 1902 
 
 .22 
 
 2.12 
 
 .76 
 
 .35 
 
 .77 
 
 .77 
 
 .38 
 
 .51 
 
 1.30 
 
 
 1903 
 
 
 2.55 
 
 .79 
 
 .36 
 
 .51 
 
 .58 
 
 .35 
 
 .54 
 
 1.02 
 
 
 1904 
 
 
 2.77 
 
 .53 
 
 
 .41 
 
 .59 
 
 .40 
 
 
 1.16 
 
 
 The tables show that the cost of caring for the invest- 
 ments should not be neglected in studying the earning 
 power of the assets. One company for one year had 
 an investment expense equal to more than three per cent, 
 of its mean assets for that year. Three of the rates per 
 cent, of cost to mean assets as shown by the tables were 
 between two and three per cent., six have been during 
 the nine years above one per cent, but below two, and 
 twenty-three of the annual expense rates have been 
 between three-quarters of one per cent, and one per cent. 
 The deduction of these amounts from the rate of earn- 
 ing power makes a serious change in that rate. In 
 fact the tables show that if the figures for those years 
 in which the companies reported no other investment 
 expense than that connected with real estate be thrown 
 out it is found that ninety-four of the annual rates of 
 investment expense have been above one-half of one per 
 
US THE COST OF IN VESTMENTS. 
 
 cent, and one hundred and two below one-half of one 
 per cent. In other words, from the rate of earnings for 
 the total assets found in the preceding chapter must be 
 subtracted at least one-half of one per cent, to get the 
 net earning rate. 
 
 An investment expense of five-tenths per cent, of the 
 investment is high. In seeking a cause for this large 
 cost a slight investigation is sufficient to show that with 
 most companies real estate absolutely owned by them 
 is responsible for a considerable portion of the total 
 investment expense. There are fifteen companies whose 
 investment expenses during the nine years have averaged 
 more than five-tenths per cent, of mean assets. If these 
 fifteen are examined as to the amounts of real estate 
 they own, it is found that ten of them own large 
 amounts, an amount in each case forming a larger per- 
 centage of their total assets than seven per cent, the 
 average for all the companies. Indeed every company, 
 except three, which had relatively large real estate hold- 
 ings during the period under study, has had an expense 
 ratio above five-tenths of one per cent. The close rela- 
 tion between large amounts of real estate and a high in- 
 vestment expense is thus seen. So important is this 
 relation that it has been thought best to make separate 
 tables showing the real estate expenses and then con- 
 sider the expenses attached to other classes of invest- 
 ments. 
 
THE COST OF INVESTMENTS. 
 
 119 
 
 RATIO OF TAXES, REPAIRS AND OTHER EXPENSES ON 
 REAL ESTATE TO MEAN AMOUNT OF REAL ESTATE. 
 
 
 1896 
 
 1900 
 
 1904 
 
 Aetna 
 
 '6.1 
 3.3 
 3.6 
 2.4 
 3.0 
 2.2 
 3.4 
 2.1 
 2.5 
 1.9 
 
 13.7 
 4.5 
 3.6 
 2.4 
 3.7 
 2.9 
 3.9 
 * 2.5 
 5.0 
 2.5 
 
 6.5 
 
 Berkshire 
 
 
 Connecticut Mutual 
 
 Equitable 
 
 4.0 
 2.5 
 
 Germania 
 
 4.3 
 
 Home 
 
 2.9 
 
 John Hancock 
 
 Manhattan 
 
 " "2.5 
 
 Massachusetts 
 
 2.1 
 
 Metropolitan 
 
 Michigan 
 
 2.8 
 5.3 
 
 Mutual Benefit 
 
 2.9 
 2.9 
 5.0 
 3.3 
 1.9 
 5.1 
 
 3.8 
 3.2 
 5.5 
 4.6 
 2.5 
 8.1 
 
 3.5 
 
 Mutual N. Y 
 
 National 
 
 New England 
 
 2.7 
 5.0 
 4.9 
 
 New York 
 
 3.1 
 
 
 7.5 
 
 Pacific 
 
 3.5 
 
 Penn 
 
 2.0 
 4.1 
 1.6 
 5.0 
 4.1 
 4.1 
 29.9 
 3.5 
 
 6.3 
 3.7 
 2.0 
 2.7 
 3.8 
 2.7 
 8.1 
 2.4 
 1.5 
 3.3 
 1.6 
 
 5.6 
 
 Phoenix 
 
 2.8 
 
 Provident Life and Trust 
 
 
 Provident Savings. .... 
 Prudential 
 
 7.7 
 3.5 
 
 State 
 
 
 Travelers' 
 
 14.2 
 
 Union Central 
 
 3.7 
 
 
 2.4 
 
 United States 
 
 1.9 
 1.6 
 
 
 Washington 
 
 2.8 
 
 
 
 We have already seen how unfavourably the gross 
 earnings from real estate compare with the earnings of 
 other classes of assets. It was pointed out in the study 
 of the gross earning power, how the rate from real es- 
 tate had increased during the last ten years, but when 
 
 1 Figures are for 1897. 
 
120 THE COST OF INVESTMENTS. 
 
 the deduction for expenses is made from the gross 
 earnings it is seen how very little real estate actually 
 returns in net income. In the preceding tables only 
 seven of the annual rates of expense to mean value of 
 real estate are below two per cent. Seventeen annual 
 rates are above five per cent., and the average during the 
 nine years for all the companies is nearly four per 
 cent, of the value for each year. So heavy is the ex- 
 pense connected with real estate such as life insurance 
 companies possess that in the three years selected for 
 the above table, the expenses exceeded the rents received 
 from the property twenty-two times. 
 
 It is unfortunate that we cannot get as good an indi- 
 cation of the expenses attending the investment of other 
 classes of assets as we have here obtained for real estate. 
 It is harder to find such costs than it is to find the total 
 investment expenses of a company, and the extreme 
 difficulty in finding such expenses has been indicated. 
 The best that we can do in learning the expenses con- 
 nected with particular classes of assets is to find the ex- 
 pense for all assets excluding real estate and then see 
 if any relation can be traced between the expense ratio 
 of the companies and the specific classes of assets which 
 those companies largely possess. The following table 
 shows the rate per cent, of expenses to total assets, ex- 
 cluding in each item the real estate. 
 
THE COST OF INVESTMENTS. 
 
 121 
 
 PER CENT. OF INVESTMENT EXPENSES OTHER THAN 
 
 REAL ESTATE TO MEAN ASSETS MINUS 
 
 REAL ESTATE. 
 
 
 1896 
 
 1900 
 
 1904 
 
 Aetna 
 
 
 0.10 
 0.14 
 
 0.11 
 
 Connecticut Mutual 
 
 0.17 
 
 0.20 
 
 Equitable 
 
 0.04 
 
 Germania 
 
 
 
 0.16 
 
 Home 
 
 0.45 
 0.42 
 0.06 
 0.21 
 0.02 
 
 0.20 
 0.13 
 '0.16 
 0.23 
 0.16 
 
 0.28 
 
 John Hancock 
 
 Manhattan 
 
 0.14* 
 0.18 
 
 Massachusetts 
 
 0.23 
 
 Metropolitan 
 
 0.15 
 
 Michigan 
 
 0.26 
 
 Mutual Benefit 
 
 0.26 
 0.19 
 
 0.36 
 0.12 
 
 0.35 
 
 Mutual of New York 
 
 0.13 
 
 National 
 
 0.20 
 
 New England 
 
 
 
 0.13 
 
 New York 
 
 0.06 
 0.53 
 
 0.13 
 0.09 
 
 0.26 
 
 Northwestern 
 
 0.08 
 
 Pacific 
 
 0.23 
 
 
 0.50 
 
 0.61 
 0.23 
 0.13 
 
 0.37 
 
 Phoenix 
 
 0.13 
 
 Provident Life and Trust 
 
 Provident Savings 
 
 0.31 
 
 0.20 3 
 0.15 
 
 
 
 
 0.15 2 
 
 State 
 
 
 0.13 
 
 0.13 1 
 
 
 
 0.12 
 
 Union Central 
 
 0.51 
 0.44 
 0.44 
 
 0.87 
 0.08 
 0.08 
 0.18 
 
 0.55 
 
 
 0.14 
 
 United States 
 
 0.14 1 
 
 Washington 
 
 
 
 
 
 Ten of the companies in 1904 reported an investment 
 expense connected with mortgages, bonds, stocks, policy 
 loans, etc., all the assets except real estate, equal to one- 
 
 1 Business of 1903. 
 
 2 Business of 1901. 
 8 Business of 1903. 
 
122 THE COST OF INVESTMENTS. 
 
 fifth of one per cent, on the mean value of the assets. 
 Seventeen others reported a less percentage, in several 
 cases an amount so small that it does not represent the 
 real investment expense. We saw in an earlier chapter 
 that there are five companies which have practically 
 half or more of their assets invested in real estate loans. 
 The Union Central is one which has practically all its 
 assets in this form. The above table shows the Union 
 Central reporting the highest rate per cent, of invest- 
 ment expenses. The Mutual Benefit, the other large 
 company which has kept about one-half of its assets 
 invested in mortgage loans, stands third in the list of 
 investment expense. The Michigan Mutual stands 
 fourth. The average expense for the iive companies 
 having relatively large mortgage holdings is 0.38 of one 
 per cent. 
 
 There are eight companies which have more than one- 
 half of their assets invested in bonds and stocks. These 
 eight reported an average investment expense of 0.14 of 
 one per cent. This makes a difference of 0.22 of one 
 per cent, in the rate of investment expense between 
 those companies which as one extreme have mostly mort- 
 gages and those which have a large amount of bonds 
 and stocks. If we consider only two companies, the 
 Union Central with mor3 than eighty per cent, of its 
 assets in mortgage loans, and the New York Life with 
 more than seventy per cent, of its funds in bonds about 
 
THE COST OF INVESTMENTS. 123 
 
 the same difference in expense of investment will be 
 found as by taking the average of several companies. 
 Both of these companies in 1904 reported liberal 
 amounts as investment expenses. The difference for 
 that year in the rate of the two companies is twenty- 
 nine hundredths of one per cent. Roughly measured 
 then there is a difference of about one-quarter of one 
 per cent, in the expense of investing a large percentage 
 of the assets in real estate loans compared with the ex- 
 pense of similar large investments in bonds and stocks. 
 The expense of investing the other classes of assets 
 cannot even be roughly measured from the statistics 
 given in the official annual reports. Returning to the 
 total investment expense, we find that the twenty-nine 
 companies which we have been considering had as a 
 whole an expense for investments in 1904, a rate of 
 thirty-six hundredths of one per cent, of their total 
 mean assets of that year. In 1900, the companies trans- 
 acting business in Connecticut had an expense ratio of 
 forty-three hundredths of one per cent. In 1903, the 
 forty companies reporting to the Minnesota department 
 of insurance had an expense equal to forty-one hun- 
 dredths of one per cent, of total assets. As we pointed 
 out when examining the rates of the individual com- 
 panies forty-hundredths of one per cent, is a high in- 
 vestment expense ratio. Especially is this true, if, as 
 
124 THE COST OF INVESTMENTS. 
 
 has been stated/ the actual expenses involved in the 
 handling of the investments are in excess of the amounts 
 reported to the insurance departments to the extent of 
 at least one-quarter of one per cent. 
 
 We can get some idea of what is an economical in- 
 vestment expense ratio by a study of savings banks. At 
 the end of 1904 the savings banks in the State of New 
 York had assets amounting to one and one-fourth bil- 
 lion dollars. This amount was held by one hundred 
 and twenty-eight banks, and the salary expenses of these 
 institutions for all purposes amounted to only seventeen- 
 hundredths of one per cent, of the total assets. The en- 
 tire expense of the banks for salaries, taxes, etc., 
 amounted to twenty-nine hundredths of one per cent. 
 Even with this small ratio, these banks had forty-three 
 per cent, of their assets invested in mortgage loans, 
 thirty-four per cent, in public bonds, and only fourteen 
 per cent, in railroad bonds, the least expensive to 
 handle, and of which the insurance companies possess 
 so largely. 
 
 The savings banks in Massachusetts since 1884 have 
 not had an expense ratio outside of taxes for any year 
 greater than one-fourth of one per cent, of the total 
 assets held by them. The number of institutions has 
 averaged more than one hundred and eighty. Thus 
 
 1 D. H. Wells Transactions of the Actuarial Society of America 
 Volume 6, Pages 335-6. 
 
THE COST OF INVESTMENTS. 125 
 
 with average assets of less than two million dollars 
 at the beginning of the period and less than three and 
 one-half million at the present time, with forty per 
 cent, on the average invested in mortgage loans, these 
 institutions have been able to perform all the functions 
 of a savings bank, such as receiving deposits, investing 
 the assets, paying the dividends, all this with an ex- 
 pense ratio of about half the rate which the insurance 
 companies incur for investment expenses alone. 
 
 The low expense ratio of the savings banks can be 
 explained to some extent by the small amount of real 
 estate which they hold. We have seen that the insur- 
 ance companies with large assets have five per cent, at 
 least of their total funds tied up in real estate for busi- 
 ness purposes. The Massachusetts savings banks, de- 
 spite the larger number of them, and their smaller as- 
 sets, have less than one per cent, of their funds invested 
 in real estate for business purposes, and little more than 
 one-half of one per cent, more in real estate acquired 
 through foreclosure. 
 
 If the insurance companies could dispose of much of 
 their real estate, and thus lessen the expenses' connected 
 Avith it, the investment expense ratio would be lessened. 
 Outside of real estate, the insurance companies, so 
 far as the official reports indicate, have not a heavy 
 investment expense. In fact a higher expense might 
 be justified by a higher rate of earning power. The 
 
126 THE COST OF INVESTMENTS, 
 
 Union Central with an earning rate of over six per 
 cent, cannot be reproached for an investment expense of 
 one-half of one per cent. Doubtless, with other com- 
 panies, a larger expense for investment, if incurred 
 along different lines than at present, would be more than 
 made up by the higher rate of earning power which 
 could be secured. 
 
CHAPTEK V. 
 
 FAILURES OF LIFE INSURANCE COMPANIES. 
 
 r A study of life insurance companies which have 
 failed is of value in a study of the investments from 
 two points of view. In the first place, the history of 
 these companies offers many lessons to present man- 
 agements as to what investments should or should not 
 be made. In the second place, the legislator by study- 
 ing the investment history of the insolvent companies 
 of the past can learn how far a repetition of those fail- 
 ures can be avoided by legal regulations. 
 
 Insurance failures, as will be seen from a study of 
 the individual companies, have been only partly due to 
 the investment side of the business. ~No matter how 
 well the investments are made, if the company is reck- 
 less in its acceptance of risks which leads to a death 
 rate much greater than that expected from the mortality 
 table it will fail. Then too, a company is always ex- 
 posed to the dishonesty or mismanagement on the part 
 of the officials controlling the company. Mismanage- 
 ment often leads to a high expense to get new business, 
 exorbitant salaries and similar expenses which bring 
 
 127 
 
128 FAILURES OF LIFE INSURANCE COMPANIES. 
 
 the company to a condition of insolvency, and dishonest 
 officials may exploit the assets of the company they con- 
 trol for their own private advantage. Again invest- 
 ments may be reasonably well made, but a financial 
 crisis may upset values to such an extent that the assets 
 depreciate and become less than liabilities. So far as 
 failures have been due to excessive mortality, or to 
 a ruinous expense ratio, this chapter will not be par- 
 ticularly concerned, but where they have been due to 
 mismanagement of the assets, poor investments, or to 
 financial crises, some attention will be devoted to them. 
 
 Every life insurance company which commenced 
 business before 1840, with one exception, failed or 
 changed the character of its business. A number of the 
 companies which were chartered during that period did 
 scarcely more than organise and then wound up their 
 affairs. Those which changed the character of their 
 business subsequently paid off the few insurance claims 
 which they had assumed as the policies matured. A 
 few failed outright, but they had done so small a busi- 
 ness that barely a record of their names is left. Fail- 
 ures of life insurance companies numbered one in 1836, 
 two in 1840, one in 1848, and two again in the follow- 
 ing year. 1 
 
 In 1853, the Eagle Life and Health of Jersey City 
 
 1 The United States Insurance Gazette 1869, Volume XXX, 
 Page 21. 
 
FAILURES OF LIFE INSURANCE COMPANIES 129 
 
 failed. It had been organised in 1847 for the purpose 
 of writing health insurance, but frauds on the part of 
 the applicants became so numerous that the scheme was 
 abandoned. A few years later the Kentucky Mutual, 
 one of the first companies in the West, became insolv- 
 ent. This company offered insurance at rates only 
 three-fourths as high as the ordinary rates, and after six 
 years of experience, its deficiencies became so great that 
 it was compelled to wind up its business. 
 
 In 1857, occurred one of the most notable failures of 
 the day. The Ohio Life and Trust Company, chartered 
 twenty years earlier, had built up an extensive business 
 and had accumulated considerable assets. These had 
 been used largely in the construction of railroads which 
 was then going on rapidly. When the panic of 1857 set 
 in, the Ohio Life and Trust Company was almost the 
 first corporation to become insolvent. 
 
 During the next ten years, there were no failures 
 of life insurance companies worth mentioning. Then 
 came a period during which company after company 
 failed. In order to understand these numerous failures, 
 it is necessary to know something of the growth of life 
 insurance in the ten years preceding 1870. In the 
 forties, a few companies for the first time were estab- 
 lished on a firm basis. There were serious defects in 
 their methods of carrying on the business, but the com- 
 panies managed to live, and with experience the weak- 
 9 
 
130 FAILURES OF LIFE INSURANCE COMPANIES. 
 
 nesses were discovered and remedied. From 1850-60 
 a number more companies were organised. The possi- 
 bilities of the system had been proven and life insurance 
 became an established business. In this decade there 
 was a genuinely healthy growth. Able men were at- 
 tracted to the business, as is evidenced by the fact that 
 no less than twenty-one of the most prominent com- 
 panies of to-day were organised in the two decades 
 prior to 1861. 
 
 With the outbreak of the Civil War, there were grave 
 doubts among the managers of the companies as to its 
 effect upon their business. A large territory was cut off 
 from communication, and thousands of men were going 
 into a hazardous occupation. The result was not what 
 was expected. Life insurance business prospered as it 
 had never prospered before. Just why it suddenly be- 
 came so popular is a matter of much conjecture. In- 
 surance is an institution of real value, but it has never 
 forced its claims upon people so rapidly as it did for a 
 few years just before and immediately after the close of 
 the Civil War. However what may have been the cause 
 of the popularity of life insurance at that time, it made 
 the companies which were in the field exceedingly pros- 
 perous. 
 
 The result was exactly the same as has been found in 
 other lines of business in this country. ~No business 
 can show unwonted prosperity without attracting a flood 
 
FAILURES OF LIFE INSURANCE COMPANIES. 131 
 
 of competitors. This took place in life insurance dur- 
 ing the late sixties. Adventurers, speculators, and men 
 who had failed in other enterprises, seeing the success 
 of the score of companies already in the field, hastened 
 to form new ones. In the closing year of the Civil War 
 nine new companies were organised. In the following 
 year thirteen more were brought into the field, thus 
 almost doubling in the short space of two years the num- 
 ber of life insurance corporations. Still greater growth 
 came, no less than nineteen companies being organised 
 in 1867, and the record of that year was duplicated in 
 the next. The following year saw the end of the move- 
 ment, but not until eleven more companies had been 
 organised. 
 
 Thirty years earlier life insurance had been repre- 
 sented by one or two feeble companies. At the close of 
 1869, one hundred and ten were competing for busi- 
 ness. That is more companies than are existing in the 
 United States even to-day, although the business has 
 increased many fold. 
 
 Even if the country as a whole had not soon suffered 
 one of the most severe depressions it has ever exper- 
 ienced, there would probably have been trouble in the 
 life insurance business. The growth in the number 
 of companies had been too rapid, and too many of the 
 new companies were managed by incapable men. 
 Many of the companies had been brought into existence 
 
132 FAILURES OF LIFE INSURANCE COMPANIES. 
 
 for the sole purpose of furnishing lucrative positions to 
 the men who organised them. Most of the new man- 
 agers knew scarcely anything of the principles of life 
 insurance, and even in the cases where honest manage- 
 ment was desired, the business was often conducted un- 
 wisely. In some instances honesty was never intended, 
 and with these companies mismanagement was the rule. 
 The organisers, whether their intentions were honest 
 or fraudulent, secured for the new companies imposing 
 boards of directors and trustees made up of men promi- 
 nent in the financial or political world. These men 
 through solicitation allowed their names to be connected 
 with the new companies, but they took little interest in- 
 the management of them. 
 
 The results of the ignorance and mismanagement on 
 the part of the officials and the lack of interest on the 
 part of directing boards were soon forthcoming. In 
 1868, even while new companies were still being organ- 
 ised, three failed, one insured in another company 
 which subsequently failed, and one was closed at the 
 suit of the stockholders, and in 1870 these were fol- 
 lowed by seven more. There was a slight improvement 
 in 1871 when but two companies were forced out of 
 existence, but the disaster was but begun. In 1872, 
 thirteen companies failed or reinsured in companies 
 which failed. Thus before the financial depression 
 which affected all lines of business ha3 begun thirty 
 
FAILURES OF LIFE INSURANCE COMPANIES. 133 
 
 life insurance corporations had failed. When the gen- 
 eral hard times did set in, and failures in all lines of 
 business became frequent, the rate of insurance failures 
 was accelerated. In 1873 fourteen life companies were 
 placed in the hands of receivers, in 1874 four failed, 
 in 1875 nine, and in the succeeding year a similar 
 number became insolvent. Six companies went to the 
 wall in 1877, making a total of seventy-one life insur- 
 ance corporations which had failed in ten years. 
 
 The weaker companies had been weeded out and 
 failures became less frequent. The year 1878 recorded 
 but a single insolvent company, and 1879 and 1880 
 each had but two. Between 1880 and 1890 a few more 
 companies, rather prominent ones, failed mostly as a 
 result of conditions arising in the previous decade. 
 Since 1890 no company of any significance has become 
 insolvent. In all since the Civil War, a few over eighty 
 companies have gone out of existence through receiver- 
 ship proceedings, in addition to fourteen which have 
 passed out by the more creditable process of reinsurance 
 in companies which have survived. 
 
 It would be of little value to examine the history of 
 all of these companies which have failed. Many of them 
 were too small to have any importance individually, and 
 their history is tediously similar. Nearly all those com- 
 panies which were organised between 1865 and 1869 
 failed before 1875. Their history means little in a 
 
134 FAILURES OF LIFE INSURANCE COMPANIES. 
 
 study of investments, for most of them never accumu- 
 lated a million dollars of assets. Organised by specu- 
 lators and managed by incapable men, they did not fail 
 because of any epidemic among the policy-holders, or 
 because of a financial crisis, but because there was no 
 room for so many companies, and the weakest were 
 forced out of existence. The causes of the popularity 
 of insurance during the later war period had disap- 
 peared, the great profits from insuring had not material- 
 ised to the policy-holders, and the amount of insurance 
 in force began to decline with even some of the strong- 
 est companies as early as 1868. Hence it was not 
 strange that the young companies, mismanaged, with a 
 high expense ratio, and with salary lists rivaling the 
 larger companies became insolvent 
 
 The year 1875 marks the beginning of a number of 
 important failures. Certain companies with consider- 
 able assets had showed signs of weakness and with the 
 continued hard times began to become insolvent. In the 
 history of nearly every one of these larger failures, 
 something of interest from the investment standpoint 
 can be gained. 
 
 The first large company to succumb was the North 
 America Life of New York. In previous years the 
 officers of the company had loaned practically all its 
 funds on real estate security at what proved to be a 
 speculative valuation. This real estate was all located 
 
FAILURES OF LIFE INSURANCE COMPANIES. 135 
 
 in New York or adjacent to New York city, but this 
 did not prevent a depreciation in its value so great that 
 the North America had to foreclose its loans at such 
 a loss in value and in revenue as to cause its insolvency. 
 
 In October of the following year the Continental of 
 New York was closed at the suit of a stockholder. This 
 company had been organised in 1865 and had made a 
 rapid growth but one which had been dearly purchased. 
 This kept assets dangerously near to liabilities, and 
 when mismanagement of the investments brought its 
 certain results, the company was compelled to cease 
 business. Its particular investment ills were a costly 
 home office building, mortgage loans which had brought 
 in but one and one-half per cent, interest on the invest- 
 ment since 1871, collateral loans on the security of its 
 own stock, and wrong relations with banks which the 
 insurance company controlled. As a result, its assets, 
 which had been valued at six million dollars, shrunk to 
 two and one-half millions when subjected to the scrutiny 
 of the receiver. 
 
 In the same year, the Security Life and Annuity, also 
 of New York, was closed by the Attorney-General. In 
 this case failure was due almost entirely to the insur- 
 ance side of the business and not to the investments. 
 Eisks had been accepted which ought to have been re- 
 jected, new business ceased, outgo became larger than 
 income, and the company was forced to realise on its 
 
136 FAILURES OF LIFE INSURANCE COMPANIES. 
 
 assets at a time when such a transaction meant a ruin- 
 ous loss. 
 
 In 1877, the Universal became insolvent, being the 
 fourth large company in New York to fail within a few 
 years. Its failure was due to causes very similar to 
 those affecting the North America. In 1875, the 
 Universal reported four and one-half million dollars 
 of assets, two millions of which consisted of mortgage 
 loans, and no real estate whatever was owned. A year 
 and a half later it had only a million dollars in mort- 
 gages and real estate to more than a million dollars. In 
 eighteen months, the company had been forced to fore- 
 close more than one-half of its loans on real estate, and 
 the consequent loss marked the end of its career. 
 
 The New Jersey Mutual' s history offers an interest- 
 ing lesson to legislators believing in strict legal control 
 of the investments. The charter of this company, which 
 failed in 1877, limited its investments to mortgage 
 loans, United States, state and city bonds, a limitation 
 about as strict as could well be imposed. Yet its officers 
 easily evaded the law, lent the funds in violation of the 
 charter regulations, and exploited the company of its 
 assets about as rapidly as could have been done without 
 any legal regulations whatever. "Wrecking of life in- 
 surance companies had become a profitable undertak- 
 ing to shrewd and unprincipled men, and the freedom 
 allowed to the officers of the companies by quiescent 
 
FAILURES OF LIFE INSURANCE COMPANIES. 137 
 
 policy-holders and " dummy " boards of directors made 
 such wrecking easily possible in spite of the strictest 
 sort of legal regulations. 
 
 The failure of the Life Association of St. Louis 
 should be noticed, because the failure was ascribed to its 
 peculiar system of investment. There was a strong 
 demand forty years ago that reserves should be invested 
 in the state where they originated. The Life Associa- 
 tion, responding to this demand, organised state de- 
 partments of the company. Under this arrangement 
 each department was to invest the reserves on the 
 policies in each state within that state. The result was 
 that the assets were scattered in every state where the 
 company did business. The rate of interest income 
 for a while was exceedingly favourable, but the addi- 
 tional expense and trouble of managing the investments 
 was fatal to the plan. Collections of interest, fore- 
 closures and sales were difficult, and the home office 
 could not direct the investment policy as it should have 
 done. Insecure loans were made, and these, coupled 
 with other weaknesses in the company, produced in- 
 solvency. 
 
 It is not necessary to dwell long on the failure of the 
 Globe of New York in 1879. The failure of no other 
 company shows more clearly the disastrous effect of an 
 alliance between an insurance company and other cor- 
 porations where the insurance money is used to help 
 
138 FAILURES OF LIFE INSURANCE COMPANIES. 
 
 out the enterprise in which the other corporations are 
 engaged. The President of the Globe was the Presi- 
 dent of a railroad, and he loaned the money of the in- 
 surance company freely to his railroad corporation. 
 The railroad did not succeed and the insurance com- 
 pany was reduced to insolvency. 
 
 In the same way, the case of the Piedmont and the 
 Arlington, a Virginia corporation, can be passed over 
 rapidly. Like a number of the defunct New York 
 companies it had loaned extensively on real estate 
 which had later so depreciated in value as to cause the 
 failure of the insurance company. 
 
 The Knickerbocker Life, an old company as ages 
 then were, failed in the early eighties. Its failure was 
 due to the utterly reckless system of investment pursued 
 by the Vice-President of the company between 1865 
 and 1870. He loaned on unsecured notes and on unim- 
 proved real estate to such an extent that the company in 
 1880 had between three and four million dollars of real 
 estate obtained through foreclosure. When the com- 
 pany failed it had practically no other assets than the 
 poor real estate which had been obtained as a result of 
 the almost criminal policy of the management years be- 
 fore. 
 
 The next company to fail was one of such conse- 
 quence that it will be necessary to go more deeply into 
 its history than has been done in the case of other failed 
 
FAILURES OF LIFE INSURANCE COMPANIES. 139 
 
 companies. A more exhaustive treatment of this com- 
 pany is justifiable, for every investment manager should 
 know the history of the Charter Oak, the largest insur- 
 ance company which has ever failed in the United 
 States. ^7 
 
 The Charter Oak was organised in 1850, it passed 
 successfully through the difficult early years of a life 
 company, and up to 1875, as an insurance institution, 
 it had been entirely successful. Its death rate had been 
 low, its expenses had been below the average, and it had 
 accumulated assets amounting to thirteen and one-half 
 million dollars. Yet in ten years the Charter Oak was 
 a failure, and its liabilities were paid off at the rate of 
 fifteen cents on the dollar. 
 
 In seeking the causes of the failure of the Charter 
 Oak attention must be directed entirely to the invest- 
 ments, for it was through the mismanagement of these 
 that the company became insolvent. Before taking up 
 the particular causes of failure, it is well to note that 
 the charter provisions regulating the investments were 
 strict. Three-fourths of the funds had to be invested 
 either in loans on real estate worth double the amount 
 of the loan, or in bonds of ~New York, Boston, or of the 
 cities in Connecticut. The remaining fourth could be 
 loaned upon endorsed promissory notes having not more 
 than twelve months to run. 1 
 
 1 P. H. Woodward, Insurance in Connecticut, Page 82. 
 
140 FAILURES OF LIFE INSURANCE COMPANIES. 
 
 The first heavy blow struck the Charter Oak in 1875. 
 For some time the banking firm of Allen, Stephens and 
 Company of New York had been the depositaries of the 
 insurance company. Besides a special account which 
 the Charter Oak had with this banking firm, it kept a 
 cash deposit account as well. In 1874 the total deposit 
 in the New York bank by the Charter Oak amounted to 
 nearly a million dollars. Restricted by legal regula- 
 tions in its investment field, the Charter Oak was financ- 
 ing enterprises through the medium of a banking house. 
 In 1875 that banking house failed, owing the Charter 
 Oak its million dollars. 1 In the settlement of the bank's 
 affairs, the Charter Oak got some real estate, some mort- 
 gages, and some stock in a silver mining company in 
 Utah. Thus, was the valuable cash asset of the in- 
 surance company changed into unrealisable assets. 
 
 The Charter Oak might have stood the shock of the 
 bank failure if its other investments had been well 
 made, but they were not. Back in the sixties, the com- 
 pany had erected a magnificent home office building at 
 a cost of eight hundred thousand dollars. As an invest- 
 ment it was a mistake. It never paid the Charter Oak 
 any fair return upon the investment, and was later sold 
 to the Aetna at one-fourth its cost. 2 
 
 Other still more serious mistakes were made in the 
 
 1 Connecticut Insurance Report, 1875, Page 155. 
 9 The Insurance Monitor, 1888, Page 232. 
 
FAILURES OF LIFE INSURANCE COMPANIES. 141 
 
 management of the investments of the Charter Oak. 
 The President of the Charter Oak originated the pro- 
 ject of the Connecticut Valley Railroad and became its 
 President. The railroad was built and the money 
 which could not be secured by selling bonds and stocks 
 was borrowed of the Charter Oak on personal notes. 
 Later these were funded into second mortgage bonds of 
 the railroad. The railroad was not a success and could 
 not pay the interest on the bonds. Therefore to give 
 the railroad business, Charter Oak money was used in 
 building up a factory along the road and a summer 
 hotel at Say brook. However, the second mortgage 
 bonds still received no interest and the insurance com- 
 pany had only involved itself further by its efforts to 
 make the railroad pay. 
 
 Such repeated drains upon the resources of the Char- 
 ter Oak could not be withstood. From 1875 on, the 
 difficulties of the company increased. Vigorous at- 
 tempts were made to save it, but they led to worse en- 
 tanglements. The bonds of the railroad were ex- 
 changed for real estate in New York city. Likewise 
 eight hundred thousand dollars in mortgages besides the 
 mortgages on the manufacturing plant and four hun- 
 dred and fifty thousand dollars in cash were traded for 
 New York realty. 1 By these transactions half of the 
 Charter Oak assets were traded for real estate just be- 
 1 The Insurance Spectator, Volume 18, Page 29. 
 
142 FAILURES OF LIFE INSURANCE COMPANIES. 
 
 fore a heavy depreciation in the value of that asset took 
 place. As a result, the Charter Oak lost a million and 
 a half dollars in its trade for New York real estate, 
 and a further long step had been taken toward irrepar- 
 able insolvency. 
 
 Reorganisation of the Charter Oak took place several 
 times after the first difficulties in 1875. Finally a sup- 
 posedly strong man was put in control, but conditions be- 
 came worse. Confidence is a necessary stock-in-trade 
 of a life insurance company and the Charter Oak pos- 
 sessed none. Lapses and surrenders of policies went on 
 apace, an application for a receiver was made in 1885, 
 and a year later, as if the Charter Oak had not suf- 
 fered enough already, its President fled to Canada, a 
 defaulter to the amount of two million dollars. The 
 career of the Charter Oak was ended, and a prosperous 
 company had been sacrificed to private greed. 
 
 Since the Charter Oak failure two companies of some 
 importance have become insolvent. The Continental of 
 Hartford failed in 1887 as a result of fraudulent man- 
 agement, and in 1890 the American Life of Philadel- 
 phia was placed in the hands of a receiver. The history 
 of the latter company is of interest as illustrating the 
 danger to which the assets of a stock life insurance com- 
 pany are exposed. A syndicate obtained control of the 
 majority of the capital stock of the American, and in 
 
FAILURES OF LIFE INSURANCE COMPANIES. U3 
 
 two years succeeded in stripping it completely of all its 
 valuable assets. 
 
 This short sketch of a few of the failed life insur- 
 ance companies has not been given to indicate that there 
 are great risks attached to the business. It does show 
 that there is considerable uncertainty in organising a 
 new company, and losses to the men who have furnished 
 the capital have been heavy. The point is that policy- 
 holders have not suffered much. The losses to them 
 through the failure of companies in which they were 
 insured amount to something over thirty-five million 
 dollars. By losses to policy-holders is meant the differ- 
 ence between the actuarial net reserves upon their 
 policies and the sums which were really paid to them 
 when the companies were wound up. Thirty-five mil- 
 lions is not a small amount taken by itself, but it is 
 small when compared with the savings which have 
 been lost in other business enterprises, or when com- 
 pared with the total funds which have been accumu- 
 lated by life insurance companies. 
 
 It was said that from a study of the failures conclu- 
 sions of value to the investment manager and to the 
 legislator ought to be reached. What are the lessons 
 taught by the history of the different companies ? 
 
 One of the most significant facts gleaned from a 
 study of the failures is that it has been a mistake for 
 young companies or companies with small assets to in- 
 
144 FAILURES OF LIFE INSURANCE COMPANIES. 
 
 vest in an expensive home office building. It is almost 
 safe to say that whenever a company has made this in- 
 vestment it has suffered greatly from it. The Conti- 
 nental, the American Mutual, the St. Louis Life and 
 the Charter Oak are examples of companies on which 
 the burden of a costly home office rested heavily. At a 
 time when income from investments was needed badly 
 they had a large investment which was producing a 
 negative income. 
 
 Again, a lesson of value to all companies is that it 
 has been unsafe to have too large a proportion of the 
 funds invested in any one class of assets. Even mort- 
 gage loans, desirable as they usually have been from 
 an income point of view, should not be sought exclu- 
 sively. Six of the largest failing companies in New 
 York had at their last reports fourteen million dollars 
 invested in real estate and loans on real estate security. 
 Of this amount the receivers realised only thirty-one per 
 cent., showing a depreciation in the value of real estate 
 seemingly impossible. 
 
 Perhaps the most important fact for the investment 
 manager to note as a cause of past failures is that life 
 insurance funds cannot be used to help out otherwise 
 unsuccessful enterprises and still have regard for the 
 safety of the insurance interests. There has been in the 
 past, and to some extent at present, a lurking idea that 
 insurance accumulations could be used to finance under- 
 
FAILURES OF LIFE INSURANCE COMPANIES. 1^5 
 
 takings of which private capital might be afraid, and 
 that the officers could loan the insurance money to 
 themselves or to corporations in which they are in- 
 terested, or to their friends and still not endanger the 
 solvency of the company. It may be possible, but the 
 officers of the Globe, the Atlantic, the Knickerbocker, 
 the Charter Oak, and nearly every other company 
 which has failed, attempted such a use of the funds 
 which they controlled, with the result of bringing 
 ruin to themselves and disappointment to the policy- 
 holders. 
 
 The facts of this chapter that should be remembered 
 in the following discussion of legal regulation of the 
 investments and of company management are, first, 
 that after all, the great cause of failure has been dis- 
 honesty and fraud ; and second, that danger has not re- 
 sulted particularly from any one class of investments, 
 but that officers have used all investment openings to 
 loot the companies of their funds. Should legal regu- 
 lations restrict the companies in their investments to 
 mortgage loans and a few other securities ? The answer 
 is that just as many managers have used mortgage 
 loans in which to speculate with insurance funds as 
 have used any other investment opening. The fault 
 has been with the morals of the management, and the 
 remedy should be applied in that direction. 
 
 10 
 
CHAPTEK VI. 
 
 LEGAL REGULATION. 
 
 The first control which the states exercised over the 
 business of insurance was through the provisions in- 
 serted in the charters of the companies. For a long 
 period in our history all corporations, including in- 
 surance, were created by special acts of the legislatures 
 for each individual company, and such regulations 
 could be imposed as the legislators might see fit. The 
 insurance companies chartered in this way were sub- 
 ject to the laws regulating corporations in general, but 
 there were no distinctively insurance laws until 1807. 1 
 In that year the Massachusetts Legislature passed a 
 resolution requiring corporations engaged in writing in- 
 surance to render an account of their affairs to the next 
 General Court. The same State in 1818 enacted that 
 all insurance companies thereafter incorporated were 
 to publish annually certain details of their business, 
 and whenever so directed by the Legislature were to 
 make statements of their affairs to that body and sub- 
 mit to oath concerning such statements. In 1828, the 
 
 1 John A. McCall, The Insurance Times, 1902, Pages 363-4. 
 146 
 
LEGAL REGULATION. 147 
 
 New York Legislature enacted that all moneyed cor- 
 porations afterward created were to make annual re- 
 ports to the State Comptroller. Thus, curiously enough, 
 these first attempts at regulation of the business of in- 
 surance by the states nearly a hundred years ago were 
 directed to securing publicity. The movement thus be- 
 gun is still going on, with much yet to be achieved. 
 
 Massachusetts passed unimportant acts relating to 
 insurance in 1836, 1837, 1838, and in 1844. In 1852 
 an important measure was passed. The act of 1818 
 had secured to the Legislature a knowledge of the 
 affairs of the companies incorporated in Massachusetts, 
 but there were many companies from other states and 
 even from abroad doing business in that Common- 
 wealth. Something ought to be known of their condi- 
 tion. To secure this knowledge the State Secretary, 
 Treasurer and the Auditor were constituted a board of 
 insurance commissioners, with authority to examine the 
 returns made by foreign companies doing business in 
 Massachusetts and to require such other information as 
 they might deem proper. 1 This board was continued 
 for three years when it was abolished and the first state 
 department dealing exclusively with insurance matters 
 was organised. The new department was for a while 
 presided over by three commissioners, but subsequently 
 the number was reduced to one. 
 
 1 Chapter 231, Acts of 1852. 
 
148 LEGAL REGULATION. 
 
 At the time of the passage of this act in Massachu- 
 setts six other states were requiring companies doing 
 business within their boundaries to make annual re- 
 ports to some state official, but in all these cases the 
 official was one with other duties such as the treasurer 
 or the state secretary. However, the Massachusetts 
 plan began to be adopted. In 1859, New York created 
 an insurance department. In 1860, twenty of the 
 thirty-three states had enacted laws for the regulation 
 of insurance and in most of these states annual reports 
 from the companies were required, but as yet only the 
 two above mentioned states had insurance depart- 
 ments. The insurance business grew so rapidly during 
 the following years and a mass of laws regulating that 
 business accumulated, so that the necessity of having an 
 official whose time should be devoted exclusively to in- 
 surance matters became widely felt. Consequently we 
 find that in 1871, thirteen states had an official desig- 
 nated as the insurance commissioner or superintendent 
 whose sole duty was the administration of the insur- 
 ance laws. 1 Twenty other states had the work in- 
 trusted to various officials, and only seven had no of- 
 ficial whose specific duty it was to look after their in- 
 surance interests. The plan of having distinct insur- 
 ance departments has proven most satisfactory, and at 
 
 1 H. P. Olcott, Report of the National Insurance Convention, 
 1871, Preface. 
 
LEGAL REGULATION. 149 
 
 the present time, twenty-three states have such depart- 
 ments, which are coordinate with the various other state 
 departments, and have but the one branch of business 
 to look after. In addition to these twenty-three, New 
 Jersey has a department of banking and insurance, and 
 Kentucky has an insurance department which is a 
 branch of another department. Practically all the other 
 states have insurance departments, but have no distinct 
 official at their head, some other departmental head 
 being ex-officio insurance commissioner. 
 
 We have said that these insurance departments have 
 been created to administer the laws pertaining to the 
 business of insurance. These laws have had for their 
 purpose the protection of legitimate insurance business 
 both from the standpoint of the corporation selling and 
 from that of the man purchasing insurance, mostly the 
 latter. To secure this end laws have been passed se- 
 curing first publicity and then solvency. To secure 
 solvency standard reserve laws and laws regulating the 
 investment of the assets have been enacted. As this 
 thesis pertains to the investments, we will be concerned 
 with publicity only so far as it is related to the assets, 
 and with laws insuring solvency to the same extent. 
 
 Regarding the laws securing publicity of the assets 
 not much need now be said. A statement of the as- 
 sets and of the securities of which they consisted were 
 early required. Since the establishment of the Mass- 
 
150 LEGAL REGULATION. 
 
 achusetts department in 1855 these statements have 
 been published, showing the amounts invested in mort- 
 gages, the amounts invested in real estate, the particular 
 bonds and stocks owned, the collateral loans and the se- 
 curities on which they have been based, the cash de- 
 posits, policy loans, premium notes, accrued interest, 
 etc., and the insurance commissioner has been em- 
 powered to investigate the companies to see that these 
 statements of assets have been correct. 
 
 The earliest laws regulating the investment of the 
 funds belonging to life insurance corporations dealt 
 with the investment of the capital stock. Reserves upon 
 policies were still a problem of the future. Neither the 
 managers of the companies nor the legislators knew that 
 reserves were necessary when insurance laws were first 
 enacted. The problem then connected with the new 
 corporations was to see that at least a certain amount of 
 the capital stock was paid up and the cash safely in- 
 vested. In this respect Massachusetts again led the 
 way. In the law of 1836, the Legislature authorised 
 insurance companies to invest such portions of their 
 capital as might be for their interests in the stocks of 
 any corporation established in Massachusetts whose 
 corporate property consisted entirely of real estate, or 
 the companies could invest in the funded debt of any 
 town or city in the State. 1 
 
 1 Chapter 207, Laws of 183& 
 
LEGAL REGULATION. 151 
 
 New York, in 1849, enacted a law which for the first 
 time prescribed what investments should be made of the 
 capital stock and fixed the amount of that capital stock. 1 
 The law forbade any company organised for the pur- 
 pose of conducting life insurance on the mutual plan 
 from commencing business until a cash capital of 
 $100,000 should have been paid in and actually invested 
 either in bonds of the cities of New York, or bonds of 
 the State of New York, or of the United States, or in 
 mortgages on cultivated farms in New York worth 
 double the amount for which the same was mortgaged. 
 In this first general incorporation act for insurance 
 companies is seen two tendencies which have played a 
 part in much of the laws regulating the investment of 
 insurance companies, one tendency to restrict the invest- 
 ments to extremely safe securities, and the other tend- 
 ency to keep the assets invested in the state where the 
 company may be located. 
 
 In the following year Wisconsin enacted a law pre- 
 scribing yet narrower limits to the investment of the 
 capital stock. It was either to be invested in United 
 States bonds or in mortgage loans on real estate in Wis- 
 consin. 2 New Jersey in 1852 provided that life in- 
 surance companies should have a capital of at least 
 $50,000, half of which must be paid up and invested in 
 
 1 Section 6, Act of April 10, 1849. 
 * Act of February 9, 1850. 
 
152 LEGAL REGULATION. 
 
 bonds of New Jersey cities, or in mortgages on New 
 Jersey real estate before beginning business. Only 
 in one particular was this law more liberal than its pre- 
 decessors in other states; it allowed bonds of half a 
 dozen leading states to be purchased. 1 Indiana alone 
 of the states which early passed general incorporation 
 acts allowed freedom of investment. In an act of 
 1852, that State provided that companies should have at 
 least $100,000 of capital stock, half to be paid up and 
 the larger part of the half to be invested in bonds of 
 solvent corporations. 2 Pennsylvania in an act of 1856 
 left the amount of capital stock unlimited, and it was to 
 be invested as were the other funds of the companies. 
 
 Other states did not regulate the investment of the 
 capital stock for several years. In the later sixties, 
 however, there came an avalanche of laws for that pur- 
 pose. Kentucky and Ohio in 18 67 passed laws making 
 legal investments for the capital stock, California, Iowa 
 and Maryland in 1868, Georgia, Illinois, Michigan, 
 Minnesota, and Missouri in 1869, and Kansas and Ten- 
 nessee in 1870. The provisions of these acts followed 
 in the main the strict provisions of New York and New 
 Jersey, a new feature appearing in the Illinois statute 
 which gave the State Auditor the power to decide upon 
 assets submitted by the companies as good investments 
 
 1 Section 6, Act of March 10, 1852. 
 
 2 Sections 2 and 12, Acts of June 17, 1852. 
 
LEGAL REGULATLON. 153 
 
 for the capital, 1 and in Kentucky where the statutes al- 
 lowed the capital stock to consist of the notes of solvent 
 persons or corporations. The Tennessee Legislature 
 openly attempted to create a market for Tennessee state 
 bonds by inserting in the law a provision compelling the 
 companies to invest one-third of their capital stock in 
 these bonds. 2 
 
 By the end of 1870 eighteen states had laws regu- 
 lating in some degree the amount of the capital stock 
 of their life insurance companies, and the securities in 
 which that capital stock could be invested. During 
 the next three decades, and especially during the period 
 1870-80 similar laws were enacted by a number of the 
 other states, so that at the present time, more than 
 half the states have regulations concerning the capital 
 stock and its investment. 
 
 If a study is made of the present laws, it is found 
 that those states which had narrow restrictions upon 
 the investment of the capital stock thirty or forty years 
 ago have seen fit to enlarge the field for such invest- 
 ments. Those which formerly allowed wide latitude to 
 the companies have limited the field. For instance 
 Kentucky no longer allows stockholders' personal notes 
 as an investment of the capital stock, and has specific 
 investments which may be made. Maryland has added 
 
 1 Section 1, Act of March 26, 1869. 
 a Section 5, Act of July 11, 1870. 
 
154: LEGAL REGULATION. 
 
 to her formerly narrow list of United States, Maryland 
 and Baltimore bonds, the bonds of any state, or of any 
 city, county or corporation paying interest, and ground 
 rents and mortgages on real estate. Pennsylvania no 
 longer depends upon charter regulations, but now de- 
 mands $300,000 of capital invested in Pennsylvania 
 mortgages, United States, Pennsylvania, county and 
 city bonds, and ground rents. Tennessee has given up 
 her narrow limitations to Tennessee bonds, 1 and allows 
 the insurance commissioner to decide when capital stock 
 investments are good. The result is that the various 
 laws are much more uniform than formerly, a tendency 
 which will be found true in all branches of insurance 
 legislation. 
 
 Summing up shortly the present laws regulating the 
 capital stock of insurance companies, most of the states 
 require a minimum capital of $100,000. All the states 
 which have regulations allow this capital to be invested 
 in United States bonds, and in the bonds of the states 
 where the company is located. In general the capital 
 may be invested in real estate loans, the value of the 
 land mortgaged to be double the amount of the loan, 
 and the real estate to be located in the home state of the 
 company. City and town bonds can be purchased and 
 collateral loans made upon the above securities. 
 
 These laws regulating the investment of the capital 
 
 1 Section 13, Insurance Laws of 1903. 
 
LEGAL REGULATION. 155 
 
 stock are strict, and they have exercised an important 
 influence upon the life insurance business in this 
 country. As a guarantee of good intentions and to 
 provide a fund to tide over the first years, a paid-up 
 capital safely invested is a requirement of nearly every 
 state for a new company. 
 
 However important the regulations of the capital 
 stock and its investment may be to the young company, 
 they are of little significance compared with the statutes 
 governing the investment of the other assets of the 
 companies. This is true because the other assets are 
 so much larger than the capital stock. In 1904 the 
 combined capital of the companies doing business in 
 Wisconsin was eleven and one-quarter million dollars. 
 The assets of the same companies amounted to two bil- 
 lion, three hundred million dollars. When regulations 
 first were made, it was not known that reserves were 
 necessary. Gradually the companies, getting on a more 
 scientific basis, began to accumulate funds, then the 
 states required a legal standard reserve, and to secure 
 its safe investment enacted laws regulating the com- 
 panies' action in this respect. 
 
 In some cases we even find laws being passed regulat- 
 ing the investments of the accumulated funds before 
 reserves were required by the states. Particularly is 
 this true regarding the amount of real estate which a 
 life insurance company might possess. Massachusetts, 
 
156 LEGAL REGULATION. 
 
 as early as 1836, limited the real estate investments of 
 some fire insurance companies, and in 1849 New York 
 laid down certain requirements about holding real es- 
 tate by her life companies which have formed the basis 
 of many subsequent acts. This law limited the amount 
 of real estate which a company might hold to : 
 
 1. That which was necessary for the convenient 
 transaction of its business. 
 
 2. Such as had been mortgaged to the company in 
 good faith by way of security for loans previously con- 
 tracted or for moneys due. 
 
 3. Such as should be conveyed to the company in 
 satisfaction of debts previously contracted in the 
 course of its dealings. 
 
 4. Such as should be purchased at sales upon judg- 
 ments, decrees, or mortgages obtained for such debts. 
 
 All real estate obtained from settlement of debts due 
 the company had to be sold within Hve years. The pur- 
 pose of the act was clearly to restrict narrowly the own- 
 ership of real property by life insurance corporations. 
 Wisconsin in 1850 1 and New Jersey 2 in 1852 enacted 
 laws similar to that of New York. Indiana in the 
 latter year enacted that its companies could hold real 
 estate for business purposes equal in value to $30,000. 
 All that obtained through foreclosure of loans or taken 
 
 1 Section 11, Act of June 17, 1852. 
 9 Section 9, Act of February 9, 1850. 
 
LEGAL REGULATION. 157 
 
 for debts was to be offered at public sale and sold to the 
 highest bidder within a specified period. 1 Pennsyl- 
 vania in 1856, Ohio in 1867, Iowa and California in 
 1868, Michigan in 1869, Kentucky in 1870, and Kansas 
 in 1871 all prohibited the holding of real estate by their 
 life companies, except under the four conditions given 
 above for New York. 
 
 This peculiar policy of prohibiting the ownership 
 of much real estate by life insurance corporations in 
 this country was undoubtedly an inheritance from the 
 English law of mortmain. The laws restricting this 
 particular class of business corporations were an ex- 
 pression of the popular belief of the danger of allow- 
 ing unlimited ownership in land to an organisation 
 which did not die. 
 
 To-day the feeling of antipathy toward corporations 
 owning real estate has died out largely, but the policy 
 of prohibiting insurance investments in that particular 
 asset has been maintained. This is due to the bad ex- 
 perience which companies have had with real estate 
 during depressed business conditions. At the present 
 time twenty states have laws forbidding the companies 
 from holding any more real estate than that allowed by 
 the New York statute of 1849. The real estate ac- 
 quired through settlement of debts is in general to be 
 sold within five years after so taken. The exceptions 
 
 1 Section 11, Act of March 10, 1852. 
 
158 . LEGAL REGULATION. 
 
 to this rule are the States of Washington and South 
 Dakota, which fix no limit on the time the real estate 
 may be held; and in a number of states the five year 
 period may be extended if the company can prove to 
 the insurance commissioner of its state that it would be 
 injured by such a sale. Utah has a statute definitely 
 allowing investment in realty to any extent, and Ala- 
 bama likewise has a liberal law. Connecticut allows 
 her companies to improve real estate which they have 
 obtained. 1 Massachusetts adheres to the system of al- 
 lowing a certain amount to be invested in real estate for 
 business purposes, the value being fixed for each com- 
 pany by special legislation. Twelve states make no 
 provision whatever concerning what real estate may be 
 held. 
 
 Georgia and New York deserve particular mention. 
 Georgia not only provides for its companies to hold 
 realty for home office purposes, but they may make a 
 permanent investment in any city where they have 
 agencies. 2 New York has enlarged the powers of its 
 companies since 1849. In 1876, the privilege of own- 
 ing real estate for business purposes other than the 
 
 1 The Connecticut General Assembly in 1887 passed a special 
 resolution allowing the Connecticut Mutual to invest a sum not 
 exceeding five per centum of its assets in productive real estate 
 outside of Connecticut. This law is worthy of notice as being 
 one of the few providing for a direct investment in real estate. 
 
 2 Section 18, Number 301, Insurance Laws. 
 
LEGAL REGULATION. 159 
 
 home office was granted. 1 In 1883, the further right 
 was allowed of holding real estate in foreign countries 
 if it was needed for the transaction of business. 2 Land 
 acquired in settlement of debts was still to be sold in 
 five years, but in 1896 a law was enacted providing 
 that when a company sold real estate the supreme court 
 could authorise it to purchase more upon satisfactory 
 proof that the property purchased did not exceed the 
 value of the property sold by the company during the 
 last three years preceding the application of the com- 
 pany to make new purchases. 3 As a result of the ex- 
 posures made by the Armstrong committee this privi- 
 lege, granted in 1896, has been taken away from the 
 New York companies, 4 and the law concerning the own- 
 ership of realty in that State now corresponds to the 
 regulations found in other states. 
 
 It is thus seen that the laws regulating the real estate 
 investments are on the whole strict. Whether without 
 them the companies would have purchased real estate 
 in greater quantities or held on to that which came in- 
 directly cannot be known. The larger companies in 
 New York took advantage of the privileges granted 
 them, but doubtless the poor return which real estate 
 
 1 Chapter 357, Laws of 1876. 
 
 2 Chapter 36 i, Laws of 1883. 
 Chapter 35, Laws of 1896. 
 
 Chapter 228, Acts of 1906. 
 
160 LEGAL REGULATION. 
 
 has made would have prevented its forming a much 
 larger proportion of the assets than it already does. 
 
 Legal regulation of the investments has not stopped 
 with certain prohibitions concerning the ownership of 
 real estate. It has gone further and has decided to 
 some extent what should be the character of the assets 
 owned by life insurance companies. The first regula- 
 tions of this sort were contained in the charters of 
 various companies. Massachusetts in granting a char- 
 ter to the Berkshire in 1841, provided that its funds 
 should be invested in such securities as were permitted 
 to the savings banks. 1 In the charter of the Mutual 
 Life of New York in 1842 was the provision of power 
 to the trustees to invest not exceeding one-half of the 
 premiums received in bonds of the United States, or of 
 New York, or of cities in New York. 2 The Connecti- 
 cut Mutual charter in 1846 allowed that company to 
 invest in mortgage loans, and in collateral loans on 
 state bonds and bank stock. 3 Pennsylvania in 1847, 
 gave the Penn Mutual the right to invest one-fourth 
 of its funds in mortgages, ground rents, Federal and 
 Pennsylvania bonds, or in other good securities. 4 The 
 National Life, in its charter of 1848, was required to 
 invest in Federal or state bonds or in mortgages within 
 
 1 Sectior It, Charter of 1842. 
 
 2 Section 5, Charter of 1841. 
 8 Section 7, Charter of 1846. 
 
 * Sections 11, and 12, Charter of 1847. 
 
LEGAL REGULATION. 161 
 
 the State of Vermont. 1 The Phoenix in 1851, received 
 somewhat wider powers, being allowed to invest in 
 Federal or state bonds, in mortgages, or in bonds of 
 Connecticut cities, and one-fourth of the assets could 
 be loaned upon endorsed promissory notes. 2 
 
 These early charter provisions show one distinct tend- 
 ency, namely, to confine the investments to the home 
 states. There was one good and one bad motive for this 
 action. Home securities were safer, for the risk would 
 be better known than of those investments further away. 
 This accounts for the good motive. The other motive 
 which will not stand inspection so well was the desire 
 to keep the funds within the state where the company 
 was located. We saw this desire playing a part in the 
 regulations of the capital stock investments, it shows it- 
 self here in charter provisions, and in the general laws 
 we will see it frequently cropping out. 
 
 The first general statute regulating the investment 
 of life insurance assets was enacted by New Jersey in 
 1852. This law declared the legal investments for New 
 Jersey companies should be mortgages on real estate in 
 that Commonwealth, bonds of the United States, and 
 of a half dozen states. 3 Indiana in the same year passed 
 a law 4 regulating investments but its terms were so 
 
 1 Section 6, Charter of 1848. 
 
 2 Section 13, Charter of 1851. 
 
 8 Section 46, Act of June 17, 1852. 
 * Section 10, Act of March 10, 1852. 
 II 
 
 <$ 
 
162 LEGAL REGULATION. 
 
 liberal that the companies were not restricted. The 
 New York Legislature was the next one impressed with 
 the need of a general act prescribing the legal invest- 
 ments which a company could make. In 1857, such a 
 law was enacted permitting investments in United States 
 bonds, in bonds of any state, or in the bonds or stocks 
 of any institution incorporated in New York. Col- 
 lateral loans could be made upon the above securities. 1 
 
 Wisconsin in granting a charter to the Northwestern 
 in 1857, provided that at least half the funds should be 
 invested in mortgages. In addition to the common re- 
 striction to certain other bonds, a new power was granted 
 this company. It could make loans to its policy-hold- 
 ers from time to time. 2 
 
 The restrictions upon the powers of investing the 
 general assets did not become general as rapidly as did 
 the restrictions upon capital stock investment and the 
 holding of real estate. By the end of 1870 only nine 
 states had seen fit to place any restrictions upon their 
 companies in the general field of investments. These 
 nine states were New Jersey, New York, California, 
 
 1 It is difficult to determine whether this is the first act regula- 
 ting the investment of the accumulations of New York com- 
 panies. Legal reserves were not yet required and the language 
 of the acts is ambiguous. The law of 1849 regulated capital and 
 "funds." The law of 1857 regulated "surplus accumulations" 
 above capital stock, but provided that if any permanent fund is 
 established by a company it shall be invested as required in the 
 law of 1849. 
 
 2 Section 11, Charter of 1857, Section 10, Amendment 1858. 
 
LEGAL REGULATION. 163 
 
 Illinois, Iowa, Kansas, Kentucky, Ohio, and Wisconsin. 
 At this time all of these states restricted the mortgage 
 loans of their companies to real estate at home. Six re- 
 stricted the purchase of state bonds to those of the state 
 where the company was located, and only the bonds of 
 cities within that state could be purchased. California 
 and Iowa in addition to New York allowed investments 
 in the securities of corporations chartered by them, and 
 Kentucky allowed securities of railroads to be pur- 
 chased, while Illinois permitted the stock of banks in 
 that State. All of the nine made United States bonds 
 legal investments, and permitted collateral loans on the 
 securities which the companies could purchase. Out- 
 side of the evident purpose to keep the assets at home 
 the noticeable feature is the restriction to public se- 
 curities. Illinois and Wisconsin alone had a policy 
 which was justifiable. These states provided that when- 
 ever companies chartered by them went into other 
 states to transact a life insurance business that they 
 could invest in all the securities of that state which 
 they could at home. New York had a provision allow- 
 ing her companies to purchase the bonds of those states 
 which required a deposit of their bonds as a pre-requisite 
 to doing business within their boundaries, 1 but the 
 strong desire of her legislators to keep assets at home 
 was visible in the new charter of the Mutual Life in 
 1 Section 1, Act of April 12, 1860. 
 
16-4 LEGAL REGULATION. 
 
 1866. One-half of its assets could be invested in 
 United States, New York state, and cities of New 
 York bonds, but at least one-half had to be invested 
 in mortgage loans on real estate in New York. 
 
 But even New York had been forced to make a 
 slight concession before 1870. The limitation of mort- 
 gage loans to real estate in New York was creating much 
 friction. The companies in that State were objecting 
 to it strenuously, because it forced them to make loans 
 at a lower rate of interest than was being obtained 
 by other Eastern companies untrammeled by state laws. 
 People in the middle West were also objecting just as 
 vigorously, for they felt that New York was unjustly 
 depriving them of a financial advantage which was 
 rightfully theirs to enjoy. The funds of the companies 
 were being collected in large part from policy-holders 
 in those states, the people in the West needed the 
 capital, and were willing to pay well for its use, in 
 a sense it belonged to them, yet the only security which 
 they had to offer was real estate, and this New York 
 compelled her companies to refuse. The companies 
 exerted pressure upon the Legislature, the agrarian re- 
 presentatives became convinced that their interests 
 would not suffer, and the privilege was granted of loan- 
 ing on realty outside of New York, provided the prop- 
 erty was located within fifty miles of New York city. 1 
 1 Section 1, Act of April 24, 1868. 
 
LEGAL REGULATION. 165 
 
 The developments in the insurance world during 
 the seventies led to much more legislation concerning 
 the investments. The failure of half the companies 
 in a decade, with the consequent disappointment and 
 loss to the policy-holders, gave an impetus to state regu- 
 lation which had not been felt before. States like Mis- 
 souri which witnessed failures of practically all their 
 once promising companies felt that legislation was nec- 
 essary despite the fact that in those states which did have 
 strict laws and insurance departments many companies 
 had become insolvent. Ever since, there has been a 
 gradual increase of regulation until at the present time 
 there are twenty-two states which have imposed more 
 or less stringent regulations upon the investments of 
 their companies. This number of states is hardly a 
 true criterion of the extent of the regulation of the 
 investments, for it is precisely those states having legal 
 enactments which have the largest insurance interests. 
 Only one exception need be made to this statement. 
 Massachusetts with a number of strong and well-known 
 companies has removed her restrictions upon their in- 
 vestments, even in 1888 those provided in the charters 
 of the mutual life companies. 
 
 Without going into detail as to the various changes 
 which states have made in the laws as they were in 
 1870, we find that at present all the states having legal 
 regulations allow their companies to invest in United 
 
166 LEGAL REGULATION. 
 
 States bonds, just as they always have. In the case of 
 state bonds a very noticeable expansion in the field is 
 shown. Whereas in 1870 most of the laws limited the 
 purchase of these bonds to their own particular state, 
 at the present time eighteen of the twenty-two states 
 allow investments in the bonds of any state. The same 
 broadening of the field is true of investments in city 
 and county bonds. Thirty-five years ago no state which 
 had attempted to control the investments by general 
 laws allowed the companies to go beyond their own 
 boundaries for such bonds. Now, fourteen states allow 
 this privilege. Not more than four states at present, 
 Georgia, Nebraska, Pennsylvania and Texas, confine 
 mortgage loans to the home state of the company. 
 Even the New York Legislature at last gave up the 
 attempt to keep the insurance funds within that State. 
 The fifty-mile limit around New York city was fin- 
 ally extended in 1875 to all the states adjacent to 
 New York, 1 but it was several years later before the 
 companies were given the privilege of loaning freely 
 on real estate wherever located. 
 
 In 1870 only four states allowed investments in cor- 
 poration securities. At the present time a number of 
 the states have exceedingly liberal provisions regarding 
 these investments. California, Colorado and Utah per- 
 
 1 Section 2, Chapter 423, Acts of 1875. 
 
LEGAL REGULATION. 167 
 
 mit their companies to invest in the bonds or stocks 
 of any solvent dividend-paying institution other than 
 mining corporations. Connecticut, which formerly de- 
 pended on charter regulations, now has a general law 
 which allows investments in all corporation securities 
 except those of mining and manufacturing companies. 1 
 One important provision is added, dividends must have 
 been paid on such securities for at least three years 
 preceding the purchase. New Jersey only excepts the 
 stock of mining and manufacturing corporations and 
 stocks commonly known as industrials. 2 Pennsylvania 
 allows all railroad securities and those of other corpora- 
 tions incorporated in Pennsylvania. 3 Illinois provides 
 that all corporation securities be purchased subject to 
 the insurance superintendent's approval. 4 Wisconsin 
 has a law which is regarded in many quarters as pos- 
 sessing exceptional merit. It allows no corporation 
 securities except bonds of railroads and street rail- 
 ways. 5 
 
 Nine states have made definite provisions for in- 
 vestments in policy loans up to a certain fixed proportion 
 of the reserve upon the policies. A majority allow the 
 companies to make collateral loans under certain re- 
 
 1 Section 28, Chapter 63, Acts of 1879. 
 
 2 Section 16, Insurance Laws of 1902. 
 
 8 Sections 18 and 19, Act of May 1, 1876. 
 
 4 Sections 11 and 12, Chapter 189, Insurance Laws. 
 
 8 Section 1, Chapter 22, Insurance Laws 1901. 
 
168 LEGAL REGULATION. 
 
 strictions upon the securities which they may purchase 
 outright. Usually it is provided that at all times dur- 
 ing the period of such a loan the market value of the 
 collateral must be at least twenty per cent, in excess 
 of the loan. 
 
 Some states, following in the main the above restric- 
 tions, have others peculiar to themselves. Iowa has 
 enacted that not more than five per cent, of the assets 
 shall be invested in national bank stocks. 1 Kentucky 
 prohibits her companies from owning more than one- 
 third of the capital stock of any bank or corporation. 
 Nor shall the investment in railroad securities exceed 
 one-half of the assets, and the mortgage loans on real 
 estate are not to exceed three-fourths of the accumulated 
 funds of any company. This law has the distinct pur- 
 pose to so scatter the investments that the companies 
 will not be seriously affected by the decrease in value 
 of one class of securities or of the securities of one 
 corporation. 
 
 Ohio permits no corporation securities of any kind to 
 be purchased by her companies. State, city and county 
 bonds can be purchased only when their market value 
 is equal to eighty per cent, of the par value. 2 Ne- 
 braska has the same provisions and further does not 
 even allow collateral loans. South Dakota has the 
 
 1 Section 1806, Chapter 8, Insurance Laws. 
 
 2 Section 3598, Laws of the General Assembly, 1902. 
 
LEGAL REGULATION. 169 
 
 strictest laws of any state. 1 Only Federal and state 
 bonds may be purchased, and these must be at least 
 at par in the market. In addition to buying such bonds 
 mortgage loans may be made. 
 
 Notwithstanding the strictness of the laws in the three 
 last-mentioned states, the tendency on the whole has 
 been to allow the companies a much wider field of in- 
 vestment. Especially are state boundaries now over- 
 stepped. Even the three with the strictest laws do not 
 attempt to keep the assets invested at home. No move- 
 ment in the field of insurance legislation is more strik- 
 ing than this one away from the narrow, unjust policy 
 of restricting insurance investments to a certain field, 
 not primarily for the sake of safety to the companies, 
 but for the purpose of securing a better loan market 
 for the citizens of that state. 
 
 This policy of restriction has not been entirely aban- 
 doned, neither has the opposite one which keeps appear- 
 ing in different sections. If the states with companies 
 were anxious to keep the assets at home, the states with- /. 
 out companies, but paying premiums, were anxious to 
 secure some advantage from the accumulated savings. 
 Such a desire was once made manifest in law. Wis- 
 consin in 1865, before she had a large company of her 
 own, enacted that all insurance companies doing business 
 in Wisconsin should deposit a certain percentage of the 
 1 Section 703, Article 17, Insurance Laws, 
 
170 LEGAL REGULATION. 
 
 premiums collected in Wisconsin with the State Treas- 
 urer in Wisconsin bonds. 1 The law overshot the mark. 
 Not content with trying to keep the capital at home, the 
 legislators tried at the same time to make a market 
 for Wisconsin state bonds. The last feature was 
 a most serious objection to a successful operation 
 of the law, and the whole law was repealed in less than 
 a year. 2 Since then such a law has never been enacted, 
 but the idea has been constantly in the minds of legis- 
 lators. We will see it more fully in a study of insur- 
 ance taxation, working indirectly, but it has been ex- 
 pressed openly in projected laws. In Kansas during 
 the session of 1880-1 a bill was offered to compel re- 
 serves to be invested in Kansas. Governor Culberson 
 of Texas in his message to the Legislature in 1896 
 strongly urged such a measure for that State, and as 
 late as 1903, a bill was introduced in the Illinois Legis- 
 lature requiring the life companies to invest ninety per 
 cent, of reserves on Illinois business in Illinois se- 
 curities. 3 The South in its present need of capital 
 is now urging the justice of this plan. 
 
 Another way in which states have regulated to a 
 very slight degree the investment of the assets has 
 been through the deposit laws. Arkansas in IS 64 
 
 1 Act of March 29, 1866. 
 
 2 Act of April 6, 1865. 
 
 8 The Insurance Spectator, Volume 70, Page 157. 
 
LEGAL REGULATION. 171 
 
 wanted to borrow $150,000. In the act authorizing the 
 loan it was provided that all life insurance companies 
 should make a deposit of $20,000 in Arkansas bonds 
 as a pre-requisite for doing business in that State. x The 
 plan thus inaugurated was followed somewhat exten- 
 sively for a few years, but it has fallen into general 
 disfavour. Virginia alone still requires a deposit from 
 all companies. It is now usual to require a deposit in 
 a single state, that being the one in which the company 
 is organised. 
 
 When New York passed the general incorporation act 
 for insurance companies in 1849, it prohibited the com- 
 panies organised under the act from directly or indi- 
 rectly dealing in, trading, buying, or selling any com- 
 modities. A half dozen states in the next few years 
 enacted similar laws. Wisconsin in 1870 prohibited life 
 companies from doing a fire insurance business or en- 
 gaging in banking. 2 The prohibition of life insurance 
 companies from doing other kinds of business is now 
 general. The result is that there are no life insurance 
 companies transacting fire insurance, a combination not 
 infrequent in England. 
 
 A class of laws affecting the investments of those 
 companies doing a foreign business remains to be con- 
 sidered. One of the most common of the requirements 
 
 * Section 1, Act of May 31, 1864. 
 2 Section 18, Act of March 14, 1870. 
 
172 LEGAL REGULATION. 
 
 of foreign countries is that outside companies must 
 invest the reserves upon the policies written in that 
 country in the securities of that country. A striking 
 example of these laws is afforded by the Argentine Ke- 
 public. By a law passed in 1898 the Argentine govern- 
 ment was authorised to issue a loan of seven million 
 pesos in five per cent, bonds. Contributions to the 
 loan were compulsory by foreign companies to guaran- 
 tee contracts entered into by them in that country. 1 
 Prussia required that one-half of the yearly premiums 
 of Prussian policies, besides the interest thereon, must 
 be invested in Prussian consols. Besides, American 
 companies were required to dispose of their stock and 
 loans on stocks if they continued to do business in 
 Prussia. 2 
 
 This concludes the study of the laws regulating the 
 investments of our life insurance companies. Before 
 taking up a discussion of those laws it will be well 
 to take a hasty survey of the regulations imposed 
 by other governments upon insurance companies. 
 
 Canada has followed the lead of the United States 
 in the matter of insurance legislation. Certain broad 
 classes of assets have been permitted as legal investments 
 to the companies, not always the same as those selected by 
 
 1 Charles Le Jeune. Transactions of the Second International 
 Congress of Actuaries, 1898, Page 35. 
 
 2 The Insurance Monitor, 1900, Page 35. 
 
LEGAL REGULATION. 173 
 
 the states, but still along the same general lines. It is 
 in England where we find the greatest variation in the 
 attitude of the government. For years that country 
 allowed her companies almost absolute freedom in all 
 respects, and then because of grave evils which arose 
 was forced to exercise some supervision, and a law for 
 this purpose was passed in 1872. 1 However, in that 
 law no restrictions were placed upon the investment 
 powers of the companies, and the only limitations to- 
 day are those contained in the charters of the com- 
 panies. Taking as a basis a report 2 made in 1891 re- 
 garding the privileges of some seventy-two companies 
 in England, it is found that thirty-three have unlimited 
 powers of investment. Of the thirty-nine having limited 
 powers, thirty-one have power to invest in ground rents 
 and income arising from land ; seventeen are allowed to 
 invest in real estate, usually in such as is required for 
 business purposes ; twenty-six can invest in foreign gov- 
 ernment securities, in most cases of any government; 
 twenty-four can invest in English or Colonial municipal 
 bonds; thirty-five out of thirty-nine have considerable 
 power to purchase the shares and other securities of 
 corporations, the usual requirement being that the 
 shares must be dividend-producing and with limited lia- 
 
 1 33 and 34 Victoria, Chapter 61. 
 
 2 Mr. A. G. Mackenzie, Journal of the Institute of Actuaries, 
 Volume 29, Pages 218 ff. 
 
174 LEGAL REGULATION. 
 
 bility; and nineteen can loan on personal security. 
 These investment powers are extremely liberal. Not 
 only can the companies go to the colonies to find paying 
 investments, but even to countries with no political con- 
 nection with England, and nearly one-half of the com- 
 panies are entirely unrestricted. 
 
 Australia has followed the English policy. The com- 
 panies are permitted to invest in whatever they choose 
 except in land. Land speculation is prohibited. 1 The 
 Government Insurance Department of New Zealand is 
 confined in its investments to government bonds, loans 
 to municipalities, policy loans and mortgages on real 
 estate. 2 
 
 Germany finally decided in favour of imperial control 
 of the insurance business, and while the restrictions 
 placed upon the investments by the Empire are not 
 as strict as were those of Prussia, they are probably 
 the most exacting now to be found. The funds are to 
 be invested in the same securities as are prescribed 
 by law for the investment of orphans' money, or in 
 mortgages on real estate, in policy loans, or in the 
 bonds of local public bodies, or in bank stocks. 3 
 
 For years the French laws compelled companies in 
 that country to invest in government funds all sums 
 
 1 Transactions of the Faculty of Actuaries, Volume 11, Part 
 V, Page 104. 
 
 2 The Insurance Times, November, 1887. 
 
 8 The Insurance Spectator, 1901, Page 62. 
 
LEGAL REGULATION. 175 
 
 received from the assured, and that within five days 
 after their receipt. 1 This limitation has been removed 
 until at present the insurance companies may invest 
 in whatever the " Council of State " deems are safe 
 securities. 2 
 
 It is not necessary to point out why some supervision 
 over the business of life insurance is essential. Abuses 
 in banking have forced most governments, certainly 
 those of the various commonwealths in the United 
 States, to exercise control over that business. Yet in 
 banking the public is far more able to protect itself than 
 it is in the business of life insurance. Even men who 
 are successful in other lines of business know few of 
 the underlying principles of insurance. Of itself the 
 public is helpless in regard to the equities of the busi- 
 ness and in respect to a quick test of solvency has no 
 power whatever. The liabilities of an insurance com- 
 pany are all deferred and a policy-holder cannot with- 
 draw when he is dissatisfied. In most businesses, a 
 wrong step shows immediate effect and compels an im- 
 mediate correction, but in life insurance a fatal error 
 may be made and yet no signs of it appear for years 
 so far as ability to pay present claims is concerned. 
 On these considerations, it seems evident that interfer- 
 ence on the part of the government in insurance affairs 
 
 1 The Banker's Magazine, Volume 11, Page 380. 
 
 2 The Insurance Monitor, 1894, Page 292. 
 
176 LEGAL REGULATION. 
 
 is not only justifiable, but that it is a matter of duty; 
 and though the legislators in the United States have 
 gone entirely too far in the matter of regulation, ex- 
 perience has justified the policy of some state interfer- 
 ence. 
 
 Every country which has insurance companies has 
 felt the necessity of legal regulation of their business. 
 We are here concerned, however, only with those enact- 
 ments which are aimed at the investments. Along this 
 line the action of the different governments has varied 
 widely. Countries with similar institutions in most re- 
 spects have pursued widely divergent policies in the re- 
 gulation of the investments of their companies. For in- 
 stance, England, Canada, Australia, and the United 
 States have homogeneous customs, precedents, and law, 
 yet in this particular form of regulation, the United 
 States and Canada pursue a diametrically opposite policy 
 from that of the mother country and of Australia. 
 
 In seeking a cause of this divergence, it cannot be 
 found in the greater evils which America has suffered 
 from unscientific and fraudulent experiments in the 
 insurance business. England has suffered just as much 
 from abuses in insurance as has the United States, and 
 perhaps even more. However, her interests have prob- 
 ably not been injured so much through the invest- 
 ment side of the business, and this may account for the 
 difference in the laws of the two countries. One of the 
 
LEGAL REGULATION. 177 
 
 first evils which had to be combated in the United States 
 in the insurance world was the misuse of the funds 
 committed to the care of the companies. The spirit 
 of trusteeship has always been weak in this country, 
 and great risks in investing have had little terror even 
 to the guardian of trust funds. Added to these ele- 
 ments, there has been a great abundance of speculative 
 securities, giving the opportunity of which trustees were 
 prone to take advantage. Because of these conditions, 
 the American states began to throw restrictions around 
 the investment of the funds, even before it was de- 
 termined what were the liabilities of the companies. 
 
 An instance of this cause of legislation regarding the 
 investments is seen in the establishment of the state 
 insurance department of New York in 1859. Repeat- 
 edly during the previous years companies had been 
 formed to carry on the insurance business whose assets 
 consisted of mortgages on worthless land, or of bank 
 credits made to last only until false oaths as to their 
 ownership could be filed. This is a typical instance, 
 showing that legal regulation did not come because legis- 
 latures foresaw abuses which might arise. Much as one 
 may regret the turn that legislation took, and however 
 mistaken the policy of regulating the investments has 
 proven to be, it must be remembered that the laws 
 were called into existence to prevent a repetition of of- 
 fences already committed. State after state left the 
 
178 LEGAL REGULATION. 
 
 business untrammeled until abuses became serious, and 
 the legislative bodies thought that the evils could be 
 removed by regulating the investments. Missouri prac- 
 tically had no legislation on the subject of insurance 
 until three or four of her once promising companies be- 
 came insolvent. Connecticut had no general law regu- 
 lating investments until the largest failure in the annals 
 of American life insurance changed the policy of the 
 state and forced upon the companies general legal 
 regulation of their investments. At the present time, 
 the widespread demand for more restrictions upon the 
 investment power of the companies is due to the abuses 
 which managers have made of their present power. 
 This breach of faith on the part of the men conducting 
 the business must be admitted even by those who are 
 opposed to legal regulation. 
 
 We have said the legal regulation in this country 
 of the investments has had two objects in view, namely, 
 to secure the investment of the assets in certain classes 
 of safe securities, and to make those assets bear the 
 scrutiny of inspection through publicity. Taking up 
 the latter purpose first, publicity of the investments 
 has not secured as great results as might have been 
 expected. This is due to two causes. One has been 
 that the published reports of the companies have not 
 always been true. It has been the duty of the heads 
 of the various insurance departments to see that the 
 
LEGAL REGULATION. 179 
 
 annual reports are a true index of the companies' con- 
 dition. But it is a notorious fact that companies have 
 been able to grossly misrepresent their condition year 
 after year to the insurance departments, and when 
 the conditions became too bad to be longer concealed, 
 the assets which some of these companies possessed did 
 not have a value equal to a third of that reported. The 
 duty of the insurance commissioners is to make periodi- 
 cal examinations of the companies, but too often these 
 inspections have been made of little avail, because the 
 inspector has not descended into the strong rooms of 
 the companies and examined the securities in detail. 
 The public has been lulled to sleep, thinking that such 
 examinations were made, and the companies, undis- 
 turbed by official examinations or by inquiry by the 
 public, have violated sound business rules with im- 
 punity. 
 
 However, neither the state insurance departments 
 nor the managers of companies should receive all the 
 blame. Private vigilance can discover few of the weak- 
 nesses in life insurance companies, but the existence of 
 the best public supervision would have hardly justified 
 the lack of discrimination by the public which has been 
 so manifest in the United States. Apparently all ob- 
 ligation to see that the companies are well managed 
 has been shifted to the state by an apathetic public, 
 and this complete dependence upon state supervision 
 
180 LEGAL REGULATION. 
 
 which has not been efficient has been the means by 
 which weak companies have perpetuated their existence 
 far beyond their time of " actuarial " insolvency. 
 
 The other reason why publicity of the assets has not 
 accomplished much is because there can be no real pub- 
 licity in regard to a large amount of the assets. A 
 list can be printed of the stocks and bonds owned by a 
 company and the public can examine these for itself. 
 Similarly the securities pledged for collateral loans can 
 be published and the safety of such loans determined. 
 However, when other classes of assets are considered, 
 it is readily seen that the published report can give 
 little idea of the real value of the investment. Take 
 mortgage loans as an instance. Their safety depends 
 upon the value of the land mortgaged. The published 
 report does not give this, and even if the specific pieces 
 of property mortgaged were given, which perhaps might 
 be desirable, the report would still give little knowledge 
 to the average policy-holder, since he can know land 
 values only in his particular vicinity. Thus, of a class 
 of investments forming from twenty to ninety per cent, 
 of the total assets of various companies the annual re- 
 port can show nothing but a mere statement of value. 
 
 Such a condition detracts greatly from the utility of 
 publicity. It accounts to a certain degree for the fact 
 that some companies during the seventies with large 
 mortgage holdings continued to beguile not only the 
 
LEGAL REGULATION. 181 
 
 public but the insurance commissioners long after they 
 were insolvent. However, this does not indicate that 
 such itemised accounts of the assets as have been given 
 have been of no value or now should be omitted from 
 the official annual reports. It simply points out the 
 necessity of relying upon the state insurance depart- 
 ments to see that certain parts of the assets are secure. 
 It emphasises the responsibility upon the state and the 
 lack of power of the individual. 
 
 The other object of legal regulation has been to se- 
 cure safety of the assets by limiting the power of the 
 companies in the investment field. We have seen the 
 enactments by which the states hoped to accomplish 
 their purpose. It is extremely difficult to learn what 
 has been the effect of these laws defining legal invest- 
 ments. They were passed to prevent a recurrence of 
 abuses already committed, but there have been most 
 serious evils in the insurance business since they were 
 passed. In the first place it is to be noticed that the 
 legal limitations upon the investments have not pre- 
 vented numerous failures of companies. New York was 
 the pioneer in such legislation, and yet more than half 
 the companies organised in that State have become in- 
 solvent, and especially is this true of the period when 
 the restrictions upon the investments were the most 
 severe. It would be rash to say of these failures or of 
 any failures of insurance companies that they were due 
 
182 LEGAL REGULATION. 
 
 to poor investments alone, for poor investments seem to 
 be related to bad management in general. However, 
 the fact remains that in states having some of the 
 strictest requirements for the investment of insurance 
 funds, companies have succeeded in investing their 
 funds in unsafe securities. 
 
 There are some who urge that the want of success 
 of the present laws has been due to the liberality of 
 the laws. They claim that the restrictions have em- 
 braced such a large field that many chances for fraud- 
 ulent practices were included. Many of the failures 
 could have been avoided, and abuses still existing would 
 never have occurred, it is further said, if the states 
 had specified certain securities in which the companies 
 could invest. Thus, instead of allowing them to buy 
 any railroad bonds, have the legislature select certain 
 roads whose bonds could be purchased. To adopt such 
 a plan would be a serious mistake. It might or it 
 might not secure greater safety of the investments, but 
 we may be sure that it would be a heavy task to impose 
 upon the state legislatures the duty of selecting the se- 
 curities. The pressure which interested financiers would 
 bring to bear upon the law-makers to get securities ac- 
 cepted would not be conducive to good government, 
 and securities selected under such pressure would not 
 always be safe. Besides this serious objection to the 
 plan, its adoption would also mean a lower rate of 
 
LEGAL BEGULAT10N. 183 
 
 earning power on the assets, and thus insurance would 
 cost more. Because of these objections to this plan of 
 specifying certain securities, it has never received strong 
 support. 
 
 However, there is a vigorous demand for a more 
 moderate reform than the above. It is pointed out that 
 most of the abuses in the investment field, at least at 
 present, are due to the close alliance between insurance 
 companies and other corporations through the stock in- 
 vestments by the former. Therefore it is argued that 
 if the state would prohibit the insurance companies 
 from purchasing stock a long step would be made to- 
 ward freeing insurance assets from many dangers. 
 
 We must admit that there is much force in this argu- 
 ment. We have pointed out in a previous chapter the 
 peculiar position of an investor in stocks in relation to 
 the corporation whose stock is purchased. He is the 
 owner of the business to the extent of his stock pur- 
 chase, and as owner he is responsible for the control of 
 that enterprise. A law prohibiting stock investments 
 by insurance companies would prevent them from en- 
 tering into this relation of ownership, and undoubtedly 
 would remove some of the power now wielded by large 
 insurance accumulations. 
 
 Notwithstanding the strong arguments in favor of 
 this stricter limitation of the investment field, we be- 
 lieve that there are serious reasons why the plan should 
 
1 84 LEGAL REG ULA TION. 
 
 not be adopted, and in fact why all legal regulation of 
 the investments should be removed. The repeal of ex- 
 isting laws and the granting of freedom in the future 
 to the companies in making their investments is advo- 
 cated on the following grounds. 
 
 1. A limitation of the investment field will not 
 necessarily bring safety, and it involves a reduction in 
 the earning power of the assets. 
 
 2. Previous laws have had a pernicious effect. 
 
 3. Legal regulation is ineffective to prevent misuse 
 of funds. 
 
 4. Legal regulation leads to a decrease in personal 
 responsibility. 
 
 5. The desired result can be obtained in a more 
 effective manner. 
 
 Taking up these objections to legal regulation in 
 order, in the first place it must be realised that there 
 are poor and unsafe investments in every field, and 
 the best stocks are better than many bonds, yet by 
 limiting the field to bonds, the states are compelling the 
 companies to take less attractive securities than they 
 otherwise would if there were no limitations. Again, 
 investment in stocks does not necessarily mean that 
 evils are sure to come to the company. If the manage- 
 ment is worthy, such investments may be a source of 
 much profit to the policy-holders, and if the management 
 is unworthy of confidence, it does not make much dif- 
 
JNIV 
 
 OF 
 
 LEGAL REGULATION. 185 
 
 ference how many restrictions are thrown around the 
 investments. JSTo one claims that the companies should 
 not he allowed to invest in mortgage loans, yet mana- 
 gers have used this outlet for as shameful speculation 
 with policy-holders' funds as was ever made in stocks. 
 The evidence before the Armstrong investigating com- 
 mittee during the past year did not show that the 
 company without any investments in stocks had been 
 any freer from certain practices, now much condemned, 
 than were the companies with large stock holdings. The 
 fault lies not with the investments, but with the manage- 
 ment controlling the assets. 
 
 If the companies are confined to certain classes of 
 securities, not only will poorer securities in those classes 
 be purchased, than the best in other classes, but the com- 
 petition for them will be so keen as to drive the rate 
 of interest down. No one knows to what extent in- 
 surance accumulations will grow and it would be an 
 economic loss to the country if they were confined 
 to certain low-interest bearing securities. Besides it 
 would make insurance more expensive to the public, a 
 condition hardly desirable. 
 
 It may seem radical to advocate the repeal of the ex- 
 isting laws regulating investments, but such action is 
 justified by a study of the effects such laws have had. 
 It is pretty difficult to point out any good that has 
 been accomplished, but it is clear that there have 
 
186 LEGAL REGULATION. 
 
 been pernicious results which can be attributed to the 
 laws. A prominent case in point in the New York 
 law confining mortgage loans to New York real estate, 
 a law which was in force for years. For some time that 
 law may have been beneficial, at least it did not inter- 
 fere much with the companies. When assets were small 
 they naturally would have been invested near home. 
 When the assets became larger, the effect of the law 
 was mischievous. The New York companies were re- 
 stricted to a narrow field to compete with savings banks 
 and trustees confined by law in the same way. The 
 rate of interest on mortgage loans went down, and the 
 insurance companies, unlike savings banks, which are 
 local, had to face the rivalry of companies from other 
 states which were earning a higher rate of interest. To 
 maintain themselves, the New York companies turned 
 to other fields of investment, namely, large collateral 
 loans, deposits in trust companies, and corporation se- 
 curities, the very class of assets which it is now wanted 
 that they should give up. Connecticut did not allow 
 the Charter Oak to buy railroad bonds. It did not 
 buy such bonds, but it took the personal note of the 
 president of a railroad, and later came into possession 
 of the second mortgage bonds of the railroad. It might 
 not have been that the Charter Oak would have pur- 
 chased better railroad bonds if it had been free to do 
 so, but certainly the justification of loaning on a per- 
 
LEGAL REGULATION. 187 
 
 sonal note would have been lacking. These are but 
 two instances of the bad effect of the law regulating 
 investments, but they could be duplicated by a number 
 of others during the last thirty years. 
 
 This leads to a discussion of the third objection to 
 the laws, namely, their ineffectiveness to prevent abuses. 
 For instance, what shall be done about cash deposits 
 in banks and trust companies? Just how the states 
 can regulate the amount of these deposits and not do 
 serious injury to the business is difficult to understand, 
 yet it is through the cash deposits that many of the 
 most serious evils have crept into the business. The 
 advocates of state supervision say that surely insurance 
 funds must not be allowed to be used in promoting new 
 industrial enterprises. It is by far the best thing for 
 insurance companies to keep out of that sort of thing, 
 but they had better be allowed to do it openly than 
 through the medium of a trust company which uses 
 the cash deposits of the insurance corporation. If 
 insurance funds are to be used in underwriting securi- 
 ties, it is better that the company should do it openly 
 and get the profits rather than the officials who do it 
 secretly. The ineffectiveness of legal regulation is seen 
 in another respect. The Prussian law compelled the 
 American companies to sell their stocks as a prerequisite 
 to doing business in that country. One large company 
 did so, but how? By transforming them into bonds 
 
188 LEGAL REGULATION. 
 
 through the agency of a holding company. That in- 
 surance company was not strengthened by this sale of 
 stocks. Eather it was weakened, for now in looking 
 over its published assets, the public cannot learn just 
 what is the security behind these new-fashioned bonds. 
 
 The fourth objection to legal regulation, especially of 
 the present type in most of the states, is that it is 
 so general in character as to have very little positive 
 force. Many of the laws are only the semblance of regu- 
 lation, yet the public gets the false impression that its 
 interests are safe-guarded when they are not. At the 
 same time officers of insurance companies may feel that 
 they have done their duty to the investments when 
 they have not overstepped the boundaries set for them 
 by law, when in fact they could have done much better 
 toward getting safer and more remunerative assets. 
 
 On these grounds it is advocated that legal regulation 
 of the investments should be abolished. Especially is 
 this urged when it is possible that a more efficient 
 method can be devised to secure good management of 
 the assets. The discussion of this method will form 
 the subject of the succeeding chapter. 
 
 However, before leaving this chapter something should 
 be said about the state departments of insurance. If 
 the method of treating the companies here advocated 
 is ever adopted, its success will depend in a large meas- 
 
LEGAL REGULATION. 189 
 
 ure upon a more efficient organisation by the states of 
 their supervisory departments of insurance. 
 
 State officials must be secured who are able and coura- 
 geous enough to find what is the true situation within 
 a company. Having once learned the facts, the state 
 must publish them fully so that an intelligent opinion 
 can be formed. If all sorts of stocks are bought by a 
 company, if it is engaged in promoting new enterprises, 
 and in underwriting securities, the public must know 
 about it and policy-holders present and prospective must 
 care enough about the situation to become interested. 
 With the greater freedom of investment, should come 
 changes in the methods of management of the com- 
 panies, and the character of these changes will now be 
 discussed. 
 
CHAPTEE VII. 
 
 CONTROL OF THE ASSETS. 
 
 In the preceding chapter, the conclusion reached was 
 that legal regulation of the investments should be 
 abolished. It is claimed by many that such a step would 
 be disastrous to the insurance interests of the country. 
 An eminent actuary said a few years ago that he was 
 sure that without the present state supervision of the 
 investments, it would very quickly happen that ad- 
 vantage would be taken to secure control of companies 
 for the purpose of using their assets to help out other 
 undertakings. If such would be the result of the re- 
 peal of the present enactments it would be a most 
 serious objection to the policy which we advocate. 
 
 The answer to this objection is that we do not need 
 to wait until the legal regulations of the investments 
 are removed to have attempts made to secure control 
 over the assets of insurance companies. Almost from 
 the very beginning of life insurance in this country, 
 men have deliberately gone about to secure control of 
 companies, and once successful, have exploited the assets 
 for their own particular ends. If there is any fact 
 
 190 
 
CONTROL OF THE ASSETS. 191 
 
 which stands out more prominently than others after 
 a study of failed life insurance companies, it is not 
 that danger of failure comes from poor investments due 
 to a lack of judgment on the part of the officers of a 
 company, but that the great cause of failure is due to 
 mismanagement and fraud. When the officers of the 
 Globe lent money on the stock of a railroad which had 
 not been built, and never was, that was an appropria- 
 tion of the funds which was made wilfully. A clique 
 obtained control of the Charter Oak not for the purpose 
 of making investments of its funds for the good of 
 the policy-holders, but to help out their own private 
 enterprises. The syndicate which wrecked the American 
 Life never had any other purpose in view than to get 
 its assets as quickly as possible. These instances are 
 given to show that even under legal regulations more 
 strict than most of the present laws, the accumulated 
 funds of life companies have been the prey of designing 
 men. 
 
 It is not contended that the removal of the present 
 restrictions over the investments would remove the 
 danger of companies falling into improper hands. 
 Quite the contrary, it would emphasise that danger but 
 in doing so would direct the attention of the public and 
 of legislators to the vulnerable point in insurance man- 
 agement. As companies become larger and assets in- 
 crease in amount the proper control of them, already 
 
192 CONTROL OF THE ASSETS. 
 
 a vital question, will become of almost supreme im 
 portance. 
 
 What are the specific evils that have cropped out in 
 the management of the assets ? They are, first, that the 
 officers and directors of some companies have made in- 
 direct, if not direct profit from the investments which 
 they make of their company's funds; that the direc- 
 tors or trustees in many cases where they have not been 
 improperly interested in the disposition of the funds 
 have taken no interest whatever in the management of 
 their company; and lastly, that the policy-holders in 
 mutual companies have never come to realise that the 
 assets belong to them, and that the responsibility for 
 their proper management in the last resort really rests 
 upon them. 
 
 These weaknesses in the management have been long 
 apparent and a number of states have tried to eradi- 
 cate them through legislation. Taking the first abuse, 
 that of the officers and directors making a personal profit 
 from the investments, five states have enacted strict laws 
 prohibiting such practices. Without going into a history 
 of these enactments but taking the situation as it is 
 at present, Texas has a law which if it was enforced 
 would leave little to be desired in this respect. This 
 law provides that " any stockholder, director, member 
 of a committee, officer, or clerk of a home company 
 who is charged with the duty of handling or investing 
 
CONTROL OF THE ASSETS. 193 
 
 its funds shall not deposit or invest such funds except 
 in the corporate name of such company; shall not bor- 
 row the funds of such company ; shall not be interested 
 in any way in any loan, pledge, security or property 
 of such company except as stockholder; shall not take 
 or receive to his own use any fee, brokerage, commis- 
 sion, or gift or other consideration for or on account of 
 a loan made by or on behalf of such company," * New 
 York, 2 Massachusetts, 3 North Dakota, 4 and Nevada, 5 all 
 have laws which, while not as stringent as the Texas 
 statute, still aim to eliminate the same abuses. 
 
 No one questions the propriety of such laws, they can 
 only lament their necessity. That the officers or direc- 
 tors of a company should make a personal gain out 
 of the investment of the funds which they control 
 is repugnant to business morality. But the laws have 
 not accomplished much. Whether this is due to the 
 difficulty of determining when the law has been in- 
 fringed, or to the lack of specific provision for punish- 
 ment when broken, or to the fact that public officials 
 have not tried to enforce the act, is difficult to say. 
 Since the passage of the act in New York, there have 
 been a number of violations of it, apparently flagrant. 
 
 1 Section 56, Chapter IV, Insurance Laws, Digest of 1903. 
 
 * Chapter 434, Laws of 1881, and Section 9, Chapter 326, Laws 
 of 1906. 
 
 8 Section 25, Chapter 18, Revised Statutes. 
 
 * Section 3107 Chapter 14, Revised Code. 
 & Section 3, Act of February 23, 1881. 
 
 13 
 
194 CONTROL OF THE ASSETS. 
 
 In the famous investigation a number of years ago 
 of one of our larger companies having its domicile 
 in New York, it was found that for years the company 
 had been purchasing its securities from but one broker- 
 age firm. The senior member of that firm was a trustee 
 in the insurance company and a member of its finance 
 committee. During the period of his connection with 
 the company, his firm received commissions on sixty 
 million dollars worth of securities sold to the insur- 
 ance corporation. It may be granted that the insurance 
 company did not suffer through this close connection, 
 but nevertheless it should never have been allowed, for it 
 was a clear violation of law. 
 
 Men connected with the companies and even disin- 
 terested authorities claim that there are advantages 
 accruing to the insurance corporation in having men on 
 its finance committee who have close, perhaps official, 
 connection with other financial concerns. It is urged 
 that such men are in close contact with financial move- 
 ments, know the value of securities which the insurance 
 company needs, and whatever advantage they may ob- 
 tain as financiers are properly shared by the insurance 
 company. This situation is hardly possible. To serve 
 a banking house well, an official connected with it is 
 interested in selling securities at a high price, for that 
 same man to do equally well by the insurance company 
 he ought to buy just as cheaply as possible. The in- 
 
CONTROL OF THE ASSETS, 195 
 
 terests of the two companies are diametrically opposed 
 and no man can do his best for both. 
 
 The particular statute which Texas has enacted should 
 be copied in other states and enforced. If it is found 
 that present penalties are not severe enough, its viola- 
 tion can be made a penal offense. It is not necessary 
 that there should be a close alliance between insurance 
 and other financial enterprises such as banks and trust 
 companies. The labor of running an insurance com- 
 pany is great enough to command men with the highest 
 talent, salaries are ample and if they are not, it would 
 be to the policy-holders' interest to pay enough to get 
 men who will give their company their undivided at- 
 tention, rather than pay half as much and get men who 
 divide their energies between several undertakings. 
 
 We have spoken so far about the officers of the com- 
 panies for the most part. These officers, in theory, owe 
 their positions to the board of directors or trustees of 
 a company and are responsible to those trustees. A 
 trustee of an insurance company is in a peculiar posi- 
 tion. The directors or trustees in nearly all other lines 
 of business hold their positions because they are the 
 representatives of large financial interests in that par- 
 ticular line of business. They either themselves own a 
 large amount of its capital stock or represent a com- 
 bination which does. Therefore their action is deter- 
 mined by the one consideration, namely, that of securing 
 
196 CONTROL OF THE ASSETS. 
 
 the greatest net return upon their investment. All the 
 property they control is their own. But life insurance 
 companies are extremely different. Even in stock life 
 companies where the directors are perforce owners of 
 some shares in the corporation, these directors soon 
 come into the control of much larger funds than their 
 original investment. In the case of the mutual com- 
 pany, there has been no investment by the trustee what- 
 ever, and his relationship to the funds is one of trust 
 entirely. 
 
 This anomalous situation of life insurance companies' 
 boards is further complicated by another condition. 
 Men have been chosen frequently, indeed almost as a 
 rule, for directors or trustees not because of any par- 
 ticular interest which they have had in the business, but 
 because their names were prominent ones in the 
 financial world. These men have accepted the responsi- 
 bility, but loaded down with the burden of business in 
 which they have a direct pecuniary interest they have, 
 in many cases, given but little time to the insurance 
 company. The name of " dummy " has been given to 
 such directors, and the dummy has played an important 
 role in insurance history. In the seventies, when the 
 companies were younger and smaller than now, such di- 
 rectors and trustees were numerous. They did not per- 
 form the duties of their positions and officers looted com- 
 panies of their assets almost at will. Many of the com- 
 
CONTROL OF THE ASSETS. 197 
 
 panies which failed had boards of trustees composed of 
 able men. Now, it may be valuable in some ways to 
 a new company to have a board made up of prominent 
 figure-heads, but on the whole that policy has proved 
 unsatisfactory in this country. Unless the men chosen 
 for these positions are interested, and able to give part 
 of their time to close supervision over the business of 
 the company, that company is weaker for their names 
 being there than if they were absent. They give the 
 company the appearance of strength which it has not. 
 We could be much more assured of a hopeful future for 
 the companies and of a more beneficial use of the assets 
 both from the standpoint of the policy-holder and of 
 the public, if the so-called dummy director could be 
 eliminated. 
 
 Boards of directors or trustees composed of able but 
 very busy men have been more than willing to delegate 
 their powers to others. Such a procedure would have 
 been necessary in the case of a number of companies 
 with their large unwieldy boards, but the directors have 
 too often escaped all their duties by delegating their 
 powers to a committee of the board and then making the 
 officers of the company a quorum of this committee. An 
 examination of the charters and by-laws of the com- 
 panies under consideration in this thesis shows that in 
 nearly all cases a committee of the board has charge of 
 the investments. This committee has two typical forms, 
 
198 CONTROL Oi' THE ASSETS. 
 
 one type being a committee composed almost exclusively 
 of board members, and the other type being a committee 
 of which board members still form a majority, though 
 the officers of the company upon it are so numerous as 
 to be able to form a quorum. 
 
 Of this last type, the Berkshire is a good example. In 
 that company, the President, the Vice-President, the 
 Treasurer, and four members of the board of directors 
 constitute the financial committee. Three of the num- 
 ber may do business provided they all concur. 1 The 
 Equitable is another familiar example. Here the ex- 
 ecutive committee which consists of the President, the 
 Vice-President, and the Comptroller, the chairman of 
 the Finance Committee and five other directors, has 
 charge of the investments. Pour of these shall be a 
 quorum. Thus, in these two companies, the board of 
 directors has practically shifted all responsibility of 
 making investments and caring for the assets upon the 
 executive officials of the company. 
 
 The finance committee of the Massachusetts Mutual 
 consists of six directors, including the President, ex of- 
 ficio, and three members may constitute a quorum for 
 the transaction of business. The ISTew York Life, the 
 Home, the Germania, the State Mutual, the Michigan 
 Mutual, and the Northwestern, all have finance commit- 
 tees similarly composed. The trustees of the Mutual of 
 1 Section 8, By-Laws. 
 
CONTROL OF THE ASSETS. 199 
 
 New York and the Phoenix and the directors of the 
 Aetna have retained the control of the investments 
 exclusively in their own hands. In all the companies 
 the president is the. presiding officer of the board of 
 directors or trustees. 
 
 The result of this action on the part of trustees and 
 directors in transferring their power to the executive 
 officials is that the companies are, to all intents and 
 purposes, run by their officers. When mistakes or 
 frauds crop out in these managements the directors take 
 refuge in the plea that they did not know what was going 
 on. It is the one man power, or the power of a small 
 clique in a company, that makes life insurance assets a 
 desirable prize to be sought, and which leads to a use 
 of these accumulations which never would be sanctioned 
 by the policy-holders to whom they belong. The presi- 
 dent of a company should not control the investments 
 nor have sole custody over the assets. In the great 
 railway reorganizations the separate functions of the 
 president of the company and presiding officer of the 
 board of directors has often been vested in two persons. 
 This is the system employed in English insurance com- 
 panies and though these companies have not had the 
 rapid growth characteristic of American companies, 
 nevertheless they have had an expansion which has been 
 healthy and not produced at a tremendous cost. 
 
 There can be no doubt but that much of the misman- 
 
200 CONTROL OF THE ASSETS. 
 
 agement of the assets and improper investments could 
 be obviated if the responsibility of their control could 
 be fixed upon the men to whom it belongs. The board 
 jf directors or trustees must be brought to know that 
 their duty is not over when they have heard read the 
 annual report of the company, and they have been per- 
 functorily reelected by the officials. It has been sug- 
 gested that laws be enacted providing that an insurance 
 company should not be permitted to loan or invest any 
 money except at a regular meeting of the board of di- 
 rectors and that each director's vote should be recorded. 
 This would create a personal responsibility in each case, 
 an end very much to be desired. If it be objected that 
 this is a cumbersome method, as perhaps it is, the same 
 end might be accomplished by holding every man whose 
 duty it is to know the condition of the company re- 
 sponsible, civilly, and in criminal prosecution for any 
 material mismanagement of the assets, and for any 
 serious misstatement in the annual reports of a com- 
 pany. If there was certain punishment for fraud 
 in insurance managements, and if the officers and di- 
 rectors were held accountable for any malfeasance or 
 breach of trust, a long step would have been taken to- 
 ward the protection of the assets. 
 
 However, when the responsibility of managing insur- 
 ance accumulations is lodged with the board of direc- 
 tors or trustees, as the case may be, much remains to 
 
CONTROL OF THE ASSETS. 201 
 
 be accomplished. The members of these boards secure 
 their positions theoretically either as representatives of 
 stock-holders, or of policy-holders. Of all the questions 
 in the insurance world there is none more vitally im- 
 portant than the problem of securing the control of the 
 assets to those who really own them. The problem is 
 a difficult one with mutual companies and still more 
 complex in the case of stock companies. 
 
 The case of the stock companies will be considered 
 first because the dangers are more pronounced in the 
 case of such companies. It is not necessary to go into 
 the history of stock companies. The states have always 
 allowed such companies to be formed, and in fact after 
 the scandals attaching to the organization and subse- 
 quent failure of many of the earlier companies, even 
 passed laws which made the formation of anything but 
 a stock company difficult. The purpose of such laws 
 was good. During the early years of a company's exist- 
 ence the expenses are heavy, and unless some sort of 
 capital is put up the company is likely to fail. How- 
 ever, the legislation which the states have enacted in 
 this respect has had the boomerang effect noticeable in 
 so much of insurance legislation, and which we have 
 clearly seen in the case of the investments. Most of 
 the laws made no provision for a retirement of the 
 capital stock, and as companies formed under those 
 laws have outgrown the necessity of such stock, it has 
 
202 CONTROL OF THE ASSETS. 
 
 remained as a dangerous tool by which men can obtain 
 control of valuable assets, and in obviating one danger, 
 the laws have brought on a more potent one. A control 
 of the capital stock has been usually retained in the 
 hands of a single person or of a small group, and thus 
 such companies are always exposed to the danger of 
 those persons misusing their power, and still being able 
 to retain their positions or of selling their control to 
 some one who will. It is an absurdity that a few thou- 
 sand dollars of stock should control absolutely millions 
 of dollars belonging to another set of persons. If stock 
 companies were confined to writing non-participating 
 policies, and did nothing to impair their ability to carry 
 out the contracts entered into by them no objection 
 could be raised to the stockholders using the assets for 
 any purpose they might see fit. When, however, such 
 companies are allowed to write participating policies 
 and men are induced to insure in them with the under- 
 standing that they are to get the profits of the business, 
 then the stock control becomes an unfortunate condition. 
 With any kind of policy, participating or non-partici- 
 pating, the danger to a stock company from some specu- 
 lator by a small investment getting control of much 
 larger assets will always remain. With the stock cen- 
 tralised in a few hands the plan is easier of accomplish- 
 ment, and the history of the American Life, though a 
 company with small assets, shows how easily control 
 
CONTROL OF THE ASSETS. 203 
 
 of a stock company can sometimes be secured and its 
 assets dissipated. 
 
 The states should change their laws immediately. If 
 it is still considered necessary to have capital stock as 
 a guarantee of early stability, let the states provide for 
 its compulsory retirement at a time when the solvency 
 of the company will not be impaired. Such laws have 
 already been enacted and have worked satisfactorily. 
 Another way in which mutual life insurance companies 
 can be started successfully is through the operation 
 of the reserve deposit law. Perhaps this is better and 
 easier than the guarantee capital plan. By such a law 
 a new company is compelled to deposit with the state 
 a reserve upon its policies until the assets have reached 
 a certain amount when the deposit may be withdrawn. 
 In at least two of the middle Western states mutual 
 companies have been successfully formed in this way. 
 It is no absolute guarantee against failure, for the state 
 officials have not always been careful that the securities 
 deposited were valuable, but with able supervision the 
 plan ought to work. 
 
 In these ways mutual companies can be started. Cap- 
 ital need not be attracted by the great rewards of the 
 business, and the danger of having a small amount of 
 stock later control large assets can be removed. 
 
 However, when life insurance companies are made 
 mutual in their organisation, grave problems still re- 
 
204 CONTROL OF THE ASSETS. 
 
 main to be solved. In fact there is nothing in the insur- 
 ance business to-day calling for more consideration than 
 the question of securing some sound system of control 
 of mutual companies. All mutual companies are organ- 
 ised on the theory of control by the policy-holders. Each 
 year there is an election of a certain number of trustees, 
 and it is the assumption that the men chosen hold their 
 positions because the policy-holders in the company want 
 them. This is the theory, but practically mutual com- 
 panies have not been run in this way. With a large 
 membership distributed all over the country, the impos- 
 sibility of personal participation in the selection of 
 officers and of consideration of questions and methods 
 affecting the organisation has led to a resort to proxy 
 voting. This has placed most of the large companies 
 in the hands of a few individuals, so much so that 
 policy-holders have almost lost sight of the real owner- 
 ship of the accumulations and of their rights in the 
 companies. The officials by reason of their long tenure 
 in office have looked upon their company and its man- 
 agement as a matter that concerns them only as pro- 
 prietors and not as agents responsible for their acts. 
 The result has been that abuses have been almost as 
 numerous in the management of mutual companies as 
 in stock companies. 
 
 The lack of interest which policy-holders have taken 
 in the election of trustees is notorious. Each year the 
 
CONTROL OF THE ASSETS. 205 
 
 notices of the elections are advertised in the daily papers, 
 or notices are sent out in other ways, but the policy- 
 holder has not been concerned. So generally is this 
 true that the story is told of a policy-holder who, having 
 received the notice of the annual election in a company 
 in which he had insured, went on the appointed day to 
 cast his ballot. Met in the home office by the janitor 
 and stating his purpose, he was informed by that in- 
 dividual that no election was being held. Insisting, 
 however, the would-be voter finally persuaded the jani- 
 tor to see some officer. The officials of the company 
 were already gathered for the formality of the annual 
 election, and great was their surprise on learning that a 
 policy-holder wished to vote. After considerable de- 
 liberation on their part the member of the mutual com- 
 pany was ushered in and allowed to cast his ballot. 
 Whether this particular incident is authentic or not 
 numerous cases of apathy on the part of the policy-hold- 
 ers can be cited. In 1899, one hundred and seventeen 
 votes were cast for the trustees of the New York Life, 
 one hundred of which were proxy votes, leaving seven- 
 teen to be cast by persons, and few of these were policy- 
 holders not connected with the company in an official 
 capacity. In 1905 despite the excitement caused by the 
 disclosures in certain companies early in the year, only 
 twenty-eight persons voted for trustees in the same 
 company. 
 
206 CONTROL OF THE ASSETS. 
 
 Conspicuous as is this lack of interest on the part of 
 policy-holders it is not difficult to explain. Notwith- 
 standing the fact that every policy-holder has a vote 
 which he can cast, in actual practice, the number which 
 can be interested have been almost powerless to ac- 
 complish desired results. It is not necessary to give 
 many examples of this. In 1871, there was an at- 
 tempted opposition ticket for the Mutual Life board, 
 but nearly ten thousand proxies were held by the officers 
 and the attempt accomplished nothing. Suppose in 
 1905, a considerable number of policy-holders instead 
 of twenty-eight had desired to effect changes in the 
 board of the New York Life. It would have taken a 
 considerable number co-operating together to have ac- 
 complished anything, for the management controlled 
 twenty-five thousand proxy votes. If these proxies had 
 been given to officers because that many men believed in 
 the policy which the management had pursued the case 
 would not have been so bad, but too often the proxy is 
 given by the man who has not taken the trouble to in- 
 form himself and gives away his vote because he is 
 solicited. The management of the company has a 
 much better chance to gather such votes than does 
 any member outside of it. The officers have a com- 
 plete list of the policy-holders and an organised 
 agency force. The individual member has had no means 
 of interesting any great number of his fellow members. 
 
CONTROL OF THE ASSETS. 207 
 
 Until recently he has no access to their names, and as 
 was said, the members are scattered, and even the op- 
 position when of some size is likely to have many diverg- 
 ing opinions as to what policy to pursue. 
 
 The proxy system is further complicated by the giv- 
 ing of proxies often for long periods. In some in- 
 stances, the policy-holder has signed a proxy before he is 
 insured, the proxy being contained in the application. 
 When proxies are given thus so far in advance, the 
 policy-holder sometimes has wished to vote only to find 
 that he has already surrendered his privilege. 
 
 Whether the proxy system can be changed so as to 
 work well is doubtful. Under present conditions it is 
 necessary, for without it, mutual companies would be 
 at the mercy of designing schemers who, allured by 
 the large accumulations, would get together and, gather- 
 ing a mere handful of members at the annual elections, 
 would secure the control of the companies. That this 
 is a real danger is amply proven. An interesting ex- 
 ample of it is afforded by the experience of one of the 
 mutual companies of Connecticut. A number of men, 
 needing money to bolster up some land speculations in 
 which they had engaged, succeeded in getting a law 
 passed changing the mode of electing the trustees of 
 mutual companies. Simultaneously they scoured the 
 country for proxies hoping to secure enough to elect 
 themselves or their friends to the controlling position 
 
208 CONTROL OF THE ASSETS. 
 
 upon the board of one company, and then to use its 
 funds in making mortgage loans upon the land which 
 had fallen into their possession. The scheme fortu- 
 nately was discovered a short time before the annual 
 election of the company and frustrated. 
 
 The states have done something to prevent the abuse 
 of the proxy system. These attempts have in the main 
 aimed to prevent officers from maintaining themselves 
 in office by intrenching behind a wall of proxies and to 
 prevent any one from obtaining a proxy good for a long 
 period. Massachusetts has a good law to obtain these 
 ends. It provides that " members may vote by proxies 
 dated and executed within three months and returned 
 and executed on the books of the company seven days 
 or more before the meeting at which they are to be used. 
 No person as attorney or otherwise shall cast more than 
 twenty votes, and no officer by himself or by another 
 shall ask for, receive, procure to be obtained, or use a 
 proxy vote." 1 A number of other states have some 
 legislation upon the subject, but their provisions are in 
 general much more liberal than those of the Massachu- 
 setts law. 
 
 If all the states having important life insurance in- 
 terests were to place the above restrictions about proxy 
 voting, no doubt much good would result. Especially 
 would this be true if it would be found possible under 
 1 Section 74, Chapter 118, Revised Laws. 
 
CONTROL OF THE ASSETS. 209 
 
 certain restrictions to give policy-holders the privilege 
 of having access to the names of the other members in 
 their company. This right until recently has been 
 denied because of the abuses which it is claimed would 
 result from its exercise. Yet, if the proxy system is to 
 succeed even moderately well such a privilege must be 
 granted to policy-holders. 
 
 However, it does seem that the present system of 
 electing trustees of mutual companies should be entirely 
 changed. It is a system taken from other lines of busi- 
 ness and adapted to life insurance companies. While it 
 might be expected in a business enterprise in which 
 a score or a hundred men are interested as shareholders 
 that these men can most readily transact their busi- 
 ness by some empowering others to act for them when 
 they are not at the meetings of such stockholders, we 
 have seen that there is little ground for expecting any 
 such satisfactory results from governing a life insurance 
 company in the same way. Life insurance on the 
 mutual plan is not a business enterprise in the same 
 sense that that term is used in other companies, and 
 thus a system which works well in one instance does not 
 as a consequence fit the situation in another. 
 
 There is one system of voting for trustees which has 
 
 never been tried in this country, and which might be 
 
 successful. It is impossible for policy-holders to travel 
 
 many miles for the purpose of casting their ballots in 
 
 14 
 
210 CONTROL OF THE ASSETS. 
 
 person, but it is possible that their will could be obtained 
 on all important questions by mail, and especially as to 
 whom they will have to manage their companies. 1 The 
 objection to the plan which is met most frequently is 
 the reputed heavy task of verifying the signatures of the 
 voters. How this would be any more difficult than to 
 do the same for the proxies is difficult to say. That 
 the scheme is feasible is proven by the experience of the 
 Australasian Mutual Provident Society which has used 
 this method for years. The system is economical and 
 it causes the members to take great interest in the com- 
 pany. If it could be adopted with the same success in 
 this country it would be a great improvement over the 
 systems now in use and the apathy which they produce 
 among policy-holders. 
 
 This problem of the management of companies by 
 their policy-holders has been discussed at length in a 
 study of the investments because while our study is one 
 of investment of assets it is the assets which make the 
 control of a company so much sought after. It is not 
 sufficient to remedy abuses which have occurred so fre- 
 quently in the past that restrictions be placed upon the 
 officers and penalties be inflicted when they are over- 
 stepped, or that directors be held responsible for the 
 
 * Mr. M. M. Dawson has urged this scheme in his " Principles 
 of Life Insurance Legislation " and in other publications. Nu- 
 merous others have endorsed the plan. 
 
CONTROL OF THE ASSETS. 211 
 
 proper management of the investments, the policy-hold- 
 ers in a mutual company have a duty. Many of these 
 policy-holders are men of wealth and influence, and if 
 they object to the practices of the insurance companies 
 let them say so. They have felt that they were power- 
 less under the present system unless some great evils 
 have been exposed causing a wave of indignation among 
 the policy-holders which resulted in some concerted ac- 
 tion. But they have also been negligent. For the de- 
 parture of the companies from sound methods this lack 
 of interest on the part of credulous and indiscriminat- 
 ing policy-holders is equally as blamable as the officers 
 and directors. 
 
 If the recommendations which have been made in this 
 chapter were carried out, it is believed that much that 
 is mischievous in insurance management would be re- 
 moved. It would be better that legislation follow the 
 direction here indicated than to attempt to place strict 
 regulations upon the investments. A right sense of re- 
 sponsibility intelligently applied is better than legal 
 enactment. It is the duty of the state to find out pre- 
 cisely what the management of a company is doing, and 
 to publish the facts which it learns. If this were done, 
 and if the policy-holders had an easy and effective 
 method, such as has been suggested, of expressing their 
 will, most officers of insurance companies would be de- 
 terred from wrong-doing and those that were not would 
 
212 CONTROL OF THE ASSETS. 
 
 be quickly replaced. How state legislatures are going 
 to run the business of life insurance companies better by 
 regulating investments, ratio of expenses, new business 
 and other details is difficult to understand. It is safe 
 to surmise that evils just as great will result as those 
 which such legislation tends to eliminate. Under the 
 recommendations which have been here made, able of- 
 ficers would be allowed to make the best investments of 
 the funds of the policy-holders and the danger of an 
 improper use of the assets would be largely abolished. 
 Some more laws defining responsibility are needed, 
 policy-holders should be placed in power, and severe 
 penalties should be imposed for the non-observance of 
 laws, but further than this not much can be accom- 
 plished by legislation. 
 
CHAPTEK VIII. 
 
 TAXATION OF INSURANCE FUNDS. 
 
 In the conduct of the business of life insurance, taxa- 
 tion has played an important part. Many different 
 kinds of taxes have been imposed and even yet no well- 
 defined principles of taxing the business have emerged 
 from the confused mass of legislation upon the subject. 
 The reason for the confusion is not difficult to find. The 
 whole system of taxation in the various states has as a 
 rule been exceedingly bad. Property of every descrip- 
 tion has been taxed, and corporation taxes have been 
 grafted upon the general property tax. Many reforms 
 in the system of taxation are yet to be made. The prob- 
 lem of how to tax corporations so that they will bear 
 their share of the public burden has hardly had a fair 
 beginning at its solution. In the case of insurance 
 companies, the question of taxation has been further 
 complicated by the widespread ignorance of the plan of 
 life insurance and the purpose of its accumulated funds. 
 It is not strange in view of the fact that the problem 
 
 of taxing corporations which are engaged in trade and 
 
 213 
 
214 TAXATION OF INSURANCE FUNDS. 
 
 transportation has not been solved that much confusion 
 has prevailed in the taxation of insurance companies. 
 Legislators have seen these companies accumulating 
 large funds, apparently growing tremendously rich, 
 therefore, they have imposed taxes upon them. 
 
 Before attempting to discuss what should be the 
 principle of life insurance taxation, it will be well to 
 see just what taxes have been levied on the business. 
 In this rapid survey of these laws, those which imposed 
 taxes upon gross and net premiums will be included 
 along with those levying direct taxes upon the assets, for 
 while the latter is imposed by the home state, the 
 former taxes have been inspired by the desire to tax 
 assets of companies which were without the state. 
 
 New York was one of the first states to impose a tax 
 specifically upon life insurance corporations. In 1853, 
 a tax of two per cent, was levied upon the annual gross 
 premiums on the New York business of companies or- 
 ganised outside the State. 1 Two years later it was en- 
 acted by the same State that home mutual companies 
 should pay a tax on $100,000 of personal property. 2 
 In 1857 New York imposed one of the first taxes on 
 assets. Foreign corporations, that is, those outside of 
 the United States, had been compelled to make a de- 
 posit in New York, and in the above mentioned year, 
 
 * Section 15, Chapter 463, Laws of 1853. 
 3 Chapter 83, Laws of 1855. 
 
TAX A T10N OF INS URANCE FUNDS. 215 
 
 it was provided that these deposits should be taxed as 
 other property. 1 
 
 Ohio in 1859 enacted that the personal property and 
 assets of the life companies in that state should be taxed 
 in the same manner as if belonging to individuals, and 
 annual gross premiums of outside companies were to be 
 taxed in the same manner. 2 In 1862, Massachusetts 
 and Connecticut adopted the principle of taxing the 
 accumulations of their companies, a plan which the 
 latter has pursued consistently to the present time. 
 Massachusetts levied a tax of one-third of one per cent, 
 on the funds of the Hospital Life, then still doing a 
 small life business, 3 and Connecticut imposed a tax of 
 one-half of one per cent, on the total capital of mutual 
 companies in that State. 4 
 
 Two years later the taxation of assets appeared in 
 an unexpected quarter. Kentucky in that year provided 
 that the assets of companies in that State should be 
 taxed at the same rate as was real estate, and companies 
 outside of Kentucky should pay a tax of five per cent, 
 on the gross premiums collected in Kentucky. 5 In 
 1867, Connecticut raised the tax to three-quarters of 
 one per cent, on all the assets except real estate of her 
 
 i Section 1, Act of April 16, 1857. 
 2 Section 16, Act of April 5, 1859. 
 8 Section 3, Chapter 224, Laws of 1862. 
 
 * Section 6, Act of June 18, 1862. 
 
 * Section 5, Chapter 478, Laws of 1864. 
 
216 TAXATION OF INSURANCE FUNDS. 
 
 mutual companies. Even real estate was to be included 
 when it was not situated in Connecticut, and if in that 
 State was to be taxed by the local government units. 1 
 
 Delaware in 1869 devised a new plan of taxing her 
 companies. In a law of that year, the companies or- 
 ganised in Delaware were compelled to pay an annual 
 tax to the state of one and one-half per cent, of gross 
 income received from premiums wherever collected and 
 from investments wherever made. 2 Outside companies 
 were taxed two and one-half per cent, on gross premiums 
 on Delaware business. 
 
 It is thus seen that a number of states having insur- 
 ance companies of their own were taxing their gross 
 assets. To protect these companies against injury by 
 the tax in the competition with outside companies, a 
 tax could not be levied on the assets of the out of state 
 corporations, but their premiums could be levied upon 
 and the same result obtained, and thus along with the 
 tax on assets went the tax on premiums of foreign com- 
 panies. Now it was perfectly natural that when one 
 state having companies of its own had levied a premium 
 tax on companies from other states that those states 
 should retaliate by levying taxes upon the premiums 
 collected by the companies of the first state, and that 
 is exactly what was done. Those states having no com- 
 
 i Act of July 27, 1867. 
 
 2 Section 2, Act of April 9, 1869. 
 
TAXATION OF INSURANCE FUNDS. 217 
 
 panies of their own, but seeing the revenue which other 
 states were obtaining from the tax on premiums were 
 led to impose such a tax themselves. 
 
 One other cause of the popularity of the premium 
 tax must not be overlooked. The large and successful 
 companies at this time were practically all in the East. 
 We have seen how that State having the largest com- 
 panies attempted to keep most of the assets confined to 
 home investments. Certain sections of the West needed 
 capital very much and looked upon the drains made by 
 the insurance companies as a loss. Not only did some 
 of these states attempt to make it obligatory upon out- 
 side companies to invest the reserves in the state where 
 they originated, but they attempted to build up home 
 companies by imposing a discriminating tax on out of 
 state companies. 
 
 Thus by 1870, while only a half dozen states were 
 taxing assets directly, no less than twenty-two were levy- 
 ing a tax of from one to five per cent, on gross premiums. 
 
 Since 1870, the situation in regard to insurance tax- 
 ation has changed only slightly. Connecticut in 1872 
 reduced the tax on assets from three-fourths to one-half 
 of one per cent., 1 and in 1883, it was further reduced to 
 one-quarter of one per cent. 2 New York which had been 
 favorable to her companies since the inception of the 
 
 1 Section 1, Chapter 88, Laws of 1872. 
 
 2 Section 3, Act of April 1, 1881. 
 
218 TAXATION OF INSURANCE FUNDS. 
 
 business in the matter of taxation imposed a tax of one 
 per cent, upon the income received from investments 
 represented by, or based upon property situated in New 
 York State. 1 Fortunately for the interests of that State, 
 this unwise measure of the Assembly was never enforced 
 owing to a small technicality in the law. If it had been 
 enforced it would have driven the investments of the 
 large companies in that State to outside securities, and 
 New York would have been deprived of that aid which 
 her insurance companies have always given. 
 
 It was about 1880 that the tax on assets became most 
 popular. In the same year that the New York act was 
 passed, Massachusetts levied a tax of one-half of one per 
 cent, upon the aggregate net value of all the policies in 
 force in her companies. It was realised before the law 
 had been in force a year that it was unjust, and the next 
 year it was reduced to one-quarter of one per cent., and 
 subsequently it was removed entirely. 
 
 In 1898, the Legislature of Wisconsin passed a law 
 imposing a tax burden upon her life insurance com- 
 panies exceedingly heavy. They are to pay three per 
 cent, of their gross income from all sources, except from 
 real estate upon which they otherwise are taxed and ex- 
 cepting premiums collected outside the state of Wiscon- 
 
 1 Laws of 1880. 
 
 2 Section 1220, Statutes of 1898, as amended in 1899 and 1901. 
 
TAXATION OF INSURANCE FUNDS. 219 
 
 Virginia in the comprehensive revision of her tax 
 laws in 1902-3 levied a tax upon the assets of life insur- 
 ance companies. The real and personal property of 
 every company is now taxed at the rate of thirty-five 
 cents a hundred. Besides this a license fee of two hun- 
 dred dollars is exacted and a tax of one per cent, on 
 gross premiums is imposed. 1 
 
 At the present time four states are taxing gross assets 
 or the income from gross assets. Michigan, Missouri 
 and Vermont tax the net assets, or the surplus of their 
 home companies. Massachusetts, Minnesota, and Tenn- 
 essee among others have a fee for the valuation of 
 policies which in reality amounts to a considerable tax. 
 A dozen states tax the gross premiums of their home 
 companies, in a number of cases no matter where the 
 premiums are collected. Three levy on net premiums, 
 and several tax the premiums collected by home as well 
 as foreign companies as personal property of the agent 
 collecting them or of the company to which they are 
 sent. More than two-thirds of the states have taxes 
 upon gross or net premiums collected within their 
 boundaries by outside companies. Besides these taxes 
 on assets and on gross and net premiums by home states 
 and by other states in which the companies are doing 
 business, there are a large number of license fees and 
 various other charges which the companies have to pay. 
 i Section 23, Act of April 16, 1903. 
 
220 TAXATION OF INSURANCE FUNDS. 
 
 These charges are usually small, but in the aggregate 
 they constitute a considerable burden upon the business. 
 In nearly every state the insurance department is more 
 than sustained by the fees which it receives. 
 
 The effect of these taxes upon particular companies 
 and upon the states which have levied them will be con- 
 sidered later. However, it should be said in passing 
 that the annual tax burden upon life insurance com- 
 panies is not far from ten million dollars. 
 
 Needless to say there has been much opposition to the 
 above taxes. While this opposition has been justifiable, 
 the grounds on which it has been built have not always 
 been sound. Those interested in the welfare of the sys- 
 tem of life insurance have attempted to excite a senti- 
 mental feeling against the laws, and in doing so they 
 have not always used sound arguments. One of the 
 most common reasons that have been urged against the 
 taxation of insurance assets has been that these assets 
 are a provision laid up by provident people for the fu- 
 ture. Undoubtedly this is true. But all capital is a 
 provision for the future, and in attempting to differen- 
 tiate insurance savings from other savings, the oppon- 
 ents of taxation have not succeeded in establishing their 
 point. 
 
 Again it is usually argued that a tax upon insurance 
 is a tax upon a tax. The claim is made that the pre- 
 mium paid for insurance is in itself a tax for the relief 
 
TAXATION OF INSURANCE FUNDS. 221 
 
 of distress and misfortune, and that the state in levying 
 upon these premiums or upon the assets increases the 
 burden of an already existing tax. By imposing the tax, 
 the state adds just to the extent of the tax to the cost 
 to the members of an insurance company of making 
 losses good to the individual who has suffered. There- 
 fore, this tax exacted by the state, it is urged, is an in- 
 justice and as such should be abolished. This argument 
 overlooks one condition which is necessary. We might 
 imagine a community in which every citizen carries in- 
 surance on his life in proportion to its value. In such 
 a condition of society the premium would be a tax which 
 each citizen would pay in proportion to the value of 
 his life to provide a fund for the payment of losses to 
 any member of the community, and a tax upon insur- 
 ance would be a tax upon a tax. However, when only 
 a small proportion of the community carry insurance, 
 the payment of the annual premiums cannot be consid- 
 ered as a tax, for a tax is exacted with some regard to 
 equality in its effects. As long as some men make pro- 
 vision for the catastrophe of sudden termination of earn- 
 ing power in other ways than by insurance, or no pro- 
 vision at all, so long can a tax upon insurance not be 
 considered as a tax upon a tax. 
 
 However, there are vital objections to the policy of 
 taxing the insurance business. It must be admitted 
 though that many of these objections do not apply only 
 
222 TAXATION OF INSURANCE FUNDS. 
 
 to life insurance taxation, but to many other taxes which 
 are now levied. Take the case of taxing assets with 
 which we are primarily interested. It is a fact that 
 most states tax bonds, stocks, notes, and cash when they 
 are held by private citizens and the question imme- 
 diately arises why should they not be taxed when held by 
 a group of individuals when associated together in an 
 insurance company. Even a considerable number of 
 states tax mortgage loans when made by individuals, and 
 when this is done, those individuals cannot be persuaded 
 but that the same sort of securities should be taxed when 
 in the possession of insurance corporations. If taxed in 
 one instance, they should be taxed in the other, but if 
 the whole system of taxation were worked out on better 
 principles, such assets would not be taxed no matter by 
 whom owned. 
 
 Any one who has made even a casual study of taxation 
 in the United States realises how difficult is the solution 
 of the problems found in that field. Many of these 
 problems are wellnigh insoluble because of the various 
 units into which the country is divided, and because of 
 the interstate character of much of the business of vari- 
 ous corporations. The result of having many independ- 
 ent governmental units has been much double taxation. 
 Thus a corporation is frequently taxed upon all its 
 wealth in one state, and then, if its bonds and stocks are 
 owned in another state, they are taxed by that state, and 
 even not infrequently are they taxed when owned in the 
 
TAXATION OF INSURANCE FUNDS. 223 
 
 same state where the corporation is located. An appli- 
 cation of this principle of taxation is found in Massachu- 
 setts, which in most respects has had good legislation. 
 This state taxes the securities of corporations located in 
 Massachusetts no matter where owned, and also taxes 
 the securities of corporations located without the state 
 which are owned by Massachusetts citizens. If the 
 other commonwealths had the same law, to which Mass- 
 achusetts could not deny their right, there would be 
 double taxation of all securities owned outside of the 
 states chartering the corporations. 
 
 Without going into any elaborate discussion of 
 remedies for the present methods of taxation, there is 
 one which would solve most of the difficulties of double 
 taxation. Let the states give up the plan of taxing 
 wealth, and at the same time evidences of ownership 
 in that wealth. They do not tax an individual who pos- 
 sesses a deed for real estate located in other states. Then 
 why tax the stocks of a corporation located outside the 
 state ? These are not wealth, they are evidences of own- 
 ership just as is the deed to the real estate, and if it is 
 right that the deed should be exempted, it is right that 
 the stocks should not be taxed. It would be best to ex- 
 empt both, for in no other way can double taxation be 
 prevented. 1 
 
 1 For a more elaborate discussion on this point see Irving 
 Fisher, " The Nature of Capital and Income," Chapter 2. Mac- 
 millan and Co., 1906. 
 
I 
 
 224 TAXATION OF INSUBANCE FUNDS. 
 
 That mortgages should not be taxed has often been 
 demonstrated by experience. A loan upon real estate 
 does not create any new wealth, and to tax both the 
 real estate and the mortgage is double taxation. It has 
 been found that the borrower gains when the tax is 
 placed upon the real estate, and when no attempt is 
 made to levy upon the mortgage. Bonds of corporations 
 are similar to mortgages, and though the effect of tax- 
 ing them to the holders has not been seen so clearly as 
 in the case of mortgages, yet the same principle applies 
 to both, and neither form of loan should be taxed. 
 
 All this bears directly upon the taxation of insur- 
 ance companies. If the states would tax corporations 
 upon their wealth where it is located, and not attempt 
 to tax the multitude of holders of corporation securities, 
 and would tax real estate and not the mortgage upon it, 
 if all this were done, then insurance assets would not 
 be taxed, for they consist, as we have seen, of mortgages, 
 bonds, and stocks. Thus if the above principle of tax- 
 ation were adopted, the problem of taxing insurance 
 companies upon their assets would be solved. The ob- 
 jection to taxing these assets is not that they belong to 
 companies which have the worthy object of relieving 
 distress, but that such a tax should not be levied on the 
 kind of assets which they possess no matter to whom 
 they belong. 
 
 Not only does the taxation of insurance assets by the 
 
TAXATION OF INSURANCE FUNDS. 225 
 
 state where the company is located result in much double 
 taxation, it is peculiarly unjust as it levies a tax on 
 wealth which is without the state and owned by citizens 
 without the state. !No successful insurance company 
 has gathered its assets even for the most part from the 
 savings of citizens within the state where it is located, 
 savings have flowed into it from every part of the coun- 
 try, these to be held, invested and accumulated at in- 
 terest, and yet the state in which the company is located 
 claims the right to tax all these savings even if they 
 do belong to citizens without the state. An insurance 
 company must have a habitat in some state, but the fact 
 that some one state is fortunate enough to have a suc- 
 cessful company established within its boundaries does 
 not give it the moral right to tax all the assets whichv 
 that company possesses. If those states with companies 
 doing business throughout the country are going to con- 
 tinue the taxation of property rights of persons, and 
 thus those possessed by their insurance companies, they 
 should be consistent at least and tax only that portion of 
 the assets which belong to citizens of their states, leav- 
 ing to other states the right to do as they please with the 
 portions belonging to their citizens, but which for the 
 time being happen to be stored away in the vaults of 
 the home office in another state. 
 
 If the above objections to the taxation of insurance 
 companies by the state in which they are located do not 
 '5 
 
226 TAXATION OF INSURANCE FUNDS. 
 
 appeal to the lawmakers of that commonwealth, there is 
 an objection which will. No one can doubt the value 
 of a successful life insurance company to a state through 
 the free (i. e. loanable) capital which such a company 
 is constantly bringing to a state. Whether the state 
 forces the company to invest in home securities or not, 
 there will always be a tendency for a large portion of 
 the funds to be invested in the home state. Other things 
 being equal, the finance committee of a life insurance 
 company would rather invest its funds in enterprises 
 with which they are familiar than of those further away. 
 Many of the barriers to an easy flow of capital have 
 fortunately been broken down, but it is doubtful if 
 capital will ever become completely mobile. Therefore 
 it is of great importance to the financial interests in a 
 state that it have insurance companies which are con- 
 stantly bringing in capital. If this is true, then the 
 legislators of a state should hesitate long before placing 
 any burden upon their companies which will hinder 
 their legitimate growth. By levying a tax upon the 
 companies which it has created, a state may handicap 
 them greatly in the competition with companies from 
 states which are not so taxed. As a result, their assets 
 accumulate slowly in comparison with other companies 
 and the loss to the state of financial resources may more 
 than offset the gain in revenue from the tax. 
 
 It is impossible to point to the companies of any 
 
TAXATION OF INSURANCE FUNDS. 227 
 
 state and say their growth has been retarded by the 
 taxes which have been imposed upon them. We can say, 
 however, with considerable assurance, that the tax bur- 
 den has had a serious effect. Take the case of the Con- 
 necticut companies which have been taxed on assets now 
 for more than thirty years. There is reason to believe 
 that these companies have, in general, been ably man- 
 aged. They got a good start and an early one, why did 
 they begin to fall behind three decades ago? The fol- 
 lowing table throws light upon the situation. 
 
 Total Taxes Paid by Eight Selected Companies for 
 the Ten Years, 1871-1880 : 
 
 Company. 
 
 Rate per $1000 of Mean 
 Annual Assets. 
 
 Aetna 
 
 $5.26 
 
 Phoenix 
 
 5.59 
 
 Connecticut Mutual 
 
 Northwestern 
 
 Mutual Life 
 
 7.22 
 2.01 
 2.05 
 
 Equitable 
 
 2.67 
 
 Mutual Benefit 
 
 2.72 
 
 New York Life 
 
 2.05 
 
 
 
 The heavy taxes of the Connecticut companies de- 
 creased their dividend-paying power, and it is the divi- 
 dends by which policy-holders measure the companies. 
 Since 1882, when the tax on assets in Connecticut was 
 cut to one-half of its previous amount, the difference in 
 
228 TAXATION OF INSURANCE FUNDS. 
 
 burden upon Connecticut companies and those of other 
 states has somewhat diminished, but through the whole 
 period the tax has been heavy. If the tax did contribute 
 largely to checking the growth of the Connecticut com- 
 panies, it is a fair question whether the increased 
 amount of capital which otherwise would have come to 
 the State would not have been of more general benefit 
 to the State than the revenue which has been secured by 
 taxing the insurance business. 
 
 Kentucky is a state which has taxed its own com- 
 panies heavily, taxing assets at property rates. The law 
 has defeated its own ends, for life insurance companies 
 have not thrived at all in that State, and hence, not only 
 is the State deprived of the financial assistance of in- 
 surance accumulations, but no revenue is produced. It 
 would be rash to say that the tax on assets was the only 
 cause of the failure of insurance companies in Ken- 
 tucky, but it is a sufficient cause, and the one given for 
 the reinsurance of a promising company in that State a 
 few years ago. 
 
 Thus, taxation of insurance assets is a mistaken policy 
 for a state to pursue. First, such a policy is wrong in 
 principle, for it results in double taxation ; secondly, it 
 violates our sense of justice, for its taxes assets really 
 belonging to persons outside the state; and lastly it is 
 an inexpedient policy, if the tax is made so onerous as 
 to check the growth of the insurance companies. 
 
TAXATION OF INSURANCE FUNDS. 229 
 
 Many of the objections which have been made to the 
 policy of taxing insurance companies' assets apply with 
 equal force to the taxation of premiums. For the most 
 part these taxes have been levied on the premiums paid 
 by citizens of one state to companies of another. What 
 is the justification of such taxes ? In the first place, it 
 is said that such taxes should be levied because the com- 
 panies have large assets, some of which belong to people 
 in the state levying the premium tax, and since these 
 assets cannot be reached for purposes of revenue, the 
 state must have recourse to the premium tax. In reply 
 to this, it is obvious that if the state where the assets 
 are located should not tax them, then no other state 
 should attempt to do so. 
 
 Again taxes on premiums are advocated on the ground 
 that they are necessary to secure justice among the citi- 
 zens of a state. Suppose, it is argued, that there are 
 two men in the same locality who have equal earning 
 power and that each saves the same amount of his earn- 
 ings. One of these men does not feel the necessity of 
 insuring his life, and with his savings buys bonds or 
 stocks of some corporation. The other buys a level 
 premium life insurance policy. Since the man who 
 buys bonds or stocks is usually taxed, the advocates of 
 premium taxation claim that the man who buys insur- 
 ance should also be taxed. There is some truth in this 
 claim especially when endowment policies are pur- 
 
230 TAXATION OF INSURANCE FUNDS. 
 
 chased, but under the system of taxation which we have 
 advocated, neither man should be taxed. The purchaser 
 of stocks should be taxed only once and then through 
 the corporation, and so far as the man who buys insur- 
 ance is laying up capital, it is invested in the same se- 
 curities and thus would be taxed in the same manner as 
 the other man's investment. To levy a tax upon each 
 one again is double taxation. 
 
 Even if a state decides that premiums must be taxed 
 in order that justice be done to all its citizens, it does 
 not follow that it has a right to collect the tax from the 
 insurance companies. The companies have a fixed con- 
 tract with their policy-holders. The annual premium is 
 determined when the contract is entered into, and it can- 
 not be increased by the company no matter how urgent 
 are its needs. When a state levies an extremely heavy 
 tax upon premiums, the life insurance company cannot 
 return the reserve upon its policies in that state, thus 
 terminating its contracts and in this way avoid the tax. 
 The state demands that the contracts be carried out to 
 the stipulated time and for the amounts previously 
 agreed upon, yet at' the same time assumes the right to 
 exact payments from the companies which may imperil 
 their ability to carry out their obligations. This is un- 
 just in principle, and if taxes are to be levied upon the 
 insurance business, the right should be given to the 
 companies to increase their premiums proportionately 
 
TAXATION OF INSURANCE FUNDS. 231 
 
 to the tax, or better, the tax should be imposed upon the 
 policy-holder directly. 
 
 We conclude then that taxation of life insurance 
 assets and premiums is wrong. If it is wrong, the taxes 
 should not be levied. Life insurance is not a business 
 which requires repressive measures in the way of penal- 
 ties for its continuance. The beneficent characteristics 
 of life insurance are so well understood in most coun- 
 tries that the companies carrying on the business in 
 them have been fostered and protected and not in general 
 been burdened by heavy taxation. In England the com- 
 panies have to pay the income tax on investments, but 
 this corresponds to our corporation tax and is not a 
 second tax upon assets. In striking contrast to the 
 almost universal premium tax in this country, England 
 does not levy such a tax, but rather offers a reward for 
 saving in this direction. Each policy-holder who is 
 liable to the income tax is allowed to deduct in his re- 
 turn the amount of premiums paid by him on life in- 
 surance policies up to the extent of one-sixth of his in- 
 come. 1 Holland in the laws in the early nineties which 
 introduced the taxation of capital and of income in that 
 country particularly favored life insurance. In the 
 law imposing a tax upon capital, life insurance policies 
 were exempted from taxation, and the income tax law 
 allows life insurance premiums up to an amount of forty 
 1 Statute 16 and 17 Victoria. 
 
232 TAXATION OF INSURANCE FUNDS. 
 
 dollars to be deducted from the income which is liable 
 to taxation. This fair treatment of the insurance busi- 
 ness by England and Holland is due to a considerable 
 extent to the progress which has been made in those 
 countries in all matters pertaining to taxation in gen- 
 eral, but it also shows a knowledge of the true nature of 
 the life insurance business which has been so sadly lack- 
 ing in this country. 
 
 Before concluding this chapter it should be said that 
 all taxation of insurance companies should not be abol- 
 ished. If these companies own real estate, they should 
 be taxed on its value just the same as if it belonged to 
 a private individual. However, they should be taxed 
 on it only where the property is situated, and not twice 
 as Connecticut taxes the companies in that State. When 
 these own realty outside of Connecticut, of course they 
 have to pay a tax upon it in the state where it is located, 
 and then Connecticut also levies a tax upon it. Let the 
 companies pay a tax upon it but only once. Again, if a 
 company is carrying on a life insurance business upon 
 the stock plan, the state should tax the capital stock or 
 the dividends upon it just as it taxes other capital stock. 
 That would only be just. What has been urged in this 
 chapter is that those laws which levy taxes upon the 
 premiums in one state, and then upon the assets or in- 
 come from investments in another, resulting in double 
 and often triple taxation, should be abolished. Special 
 
TAXATION OF INSURANCE FUNDS. 233 
 
 favors for the insurance business are not advocated. 
 Only those reforms in the system of insurance taxation 
 are desired which a clear comprehension of the system 
 of old line life insurance would indicate as right and 
 just. It is not expected that these reforms should be 
 made in insurance taxation alone. As has been pointed 
 out the changes should come about through a general 
 improvement in the whole system of taxation. 
 
CHAPTER IX. 
 
 SOCIAL EFFECTS OF THE ACCUMULATION" OF INSURANCE 
 
 ASSETS. 
 
 Prom preceding chapters some idea has been gained 
 of the important effect life insurance has had upon the 
 economic life of the country during the last fifty years. 
 During this period, the accumulations of the companies 
 have grown from nothing to nearly three billion dollars. 
 Three billion dollars have been taken out of current 
 earnings of three million policy-holders and added to 
 the capital engaged in productive enterprises. That 
 this has influenced greatly the industrial development 
 of the country no one can doubt, and not only must the 
 level premium companies be considered as agencies 
 furnishing insurance, but also as institutions favoring 
 the accumulation of capital. 
 
 However, the assets which the companies have in their 
 possession at the present time do not represent all the 
 savings of capital which must be attributed to them. 
 All the time during which these assets have been ac- 
 cumulating, the companies have been paying death 
 claims, dividends, and surrender values, and these 
 
 234 
 
EFFECTS OF THE ACCUMULATION OF ASSETS. 235 
 
 amounts represent savings from income in years past. 
 When these claims are paid, the capital is usually not 
 dissipated but invested by the beneficiaries. Hence, the 
 level premium companies have brought into existence a 
 fund of savings which includes not only the assets now 
 in the hands of the companies, but some three or four 
 billion dollars now in private hands which has been paid 
 by the companies in death claims and maturing policies. 
 This makes a total of six or seven billion dollars of sav- 
 ings attributable to this system of life insurance. 
 
 Is it good that these savings should have been made, 
 and would so much have been saved if the insurance 
 companies had not existed I In answer to the first ques- 
 tion, it is extremely desirable that most men should save 
 something out of their annual earnings. Unless they 
 do so, there can be but little progress made by the in- 
 dividual or by society. The accumulation of capital 
 alone has rendered practicable the great discoveries of 
 mankind in geography and in the natural and applied 
 sciences. All material progress demands large amounts 
 of capital and if the insurance companies have been the 
 agency through which capital has been saved which 
 otherwise would have been dissipated in the enjoyments 
 of the hour, they have rendered an important social 
 service. 
 
 In all probability, a great part of the savings made 
 by insurance companies would not have been accumu- 
 
236 EFFECTS OF THE ACCUMULATION OF ASSETS. 
 
 lated in any other way. The amounts which they have 
 taken each year from the individual policy-holder have 
 been exceedingly small. In 1870, the average premium 
 on each policy of all the companies doing business in 
 New York was only ninety-six dollars. In 1890, it was 
 one hundred and seventeen dollars, but it has since de- 
 creased to an even hundred dollars. Some of these 
 premiums would have been saved in other ways if there 
 had been no life insurance companies, for insurance ap- 
 peals only to the prudent class in a country and a pru- 
 dent man will save, but the difficulty of investing such 
 small amounts each year must be taken into considera- 
 tion. Savings banks could not have been used for even 
 yet only a few states are supplied with such institutions. 
 The average man who saves only a little from each 
 year's earnings cannot enter the investment field for 
 himself. He cannot take a hundred dollars and make 
 a loan to a Western farmer. He might be able to buy 
 one bond of some corporation, but the usual small saver 
 is unacquainted and distrustful of such securities. Con- 
 fronted with the difficulty of investing small amounts of 
 capital, much of it never would have been saved if it 
 had not been that the insurance companies with their 
 organised agency forces have constantly kept before the 
 public an easy and eminently safe method of investing 
 in protection. Furthermore, the companies have not 
 waited for people to come to them with their savings, 
 
EFFECTS OF THE ACCUMULATION OF ASSETS. 237 
 
 but they have sent their agents to the individual to set 
 forth the advantages of what they had to offer. In this 
 way the savings of a class of people who are able 
 and desirous of making small annual savings, if the op- 
 portunity is given them, have been gathered by the in- 
 surance companies. 
 
 In addition to the class of people who are able to save, 
 but not to invest, there is a class, and a much larger 
 one than is commonly supposed, which cannot save any- 
 thing unless there are certain definite payments which 
 have to be made at fixed times during the year. To this 
 class, level premium life insurance is peculiarly adapted. 
 The premiums are fixed, they can be divided into small 
 payments, and they fall due at regular periods. Once 
 insured, the policy-holder cannot stop paying or with- 
 draw his investment without suffering some slight 
 penalty. Many men with spendthrift dispositions have 
 taken insurance, and the reserves upon their policies are 
 savings of capital which would otherwise not have been 
 made. 
 
 It is not claimed that some of the savings turned into 
 the life insurance companies would not have been made 
 if there had been no insurance companies. The invest- 
 ment element in the policies has in many cases been a 
 simple substitute for other investments, and if the in- 
 vestment policies had not existed the other investments 
 would have been made. We refer to the endowment 
 
238 EFFECTS OF THE ACCUMULATION OF ASSETS. 
 
 business of the companies already discussed and which 
 we believe has been carried too far. On to the pure 
 indemnity policies have been grafted endowments and 
 various investment schemes, and agents of some com- 
 panies have so pushed the investment business that not 
 a few of their companies partake more of the nature of 
 savings banks than of insurance corporations. But even 
 not all of the investment policy business is to be con- 
 demned. Such policies are admirably fitted for a large 
 number of people especially the classes of small savers 
 and easy spenders which have been noticed above. How- 
 ever, it must be true that many men have been induced 
 to purchase endowment policies who should not have 
 done so. They could have used the extra cost of capital 
 to better advantage in their own business. For this the 
 companies and especially the agents are to blame. The 
 desire for insurance has played the large part in getting 
 business, but too often false representations are made 
 to prospective policy-holders about the advantages of in- 
 vesting in endowments. As a matter of fact, most men 
 engaged in business enterprises or those who have access 
 to good savings banks can ill afford to invest in endow- 
 ment insurance. The expenses of the investment are 
 too heavy, and the insurance company cannot loan the 
 money at so good a rate as a man in business can get 
 from his investments. Therefore, that portion of the 
 insurance assets which have been taken from men who 
 
EFFECTS OF THE ACCUMULATION OF ASSETS. 239 
 
 need capital, but who have purchased endowment pol- 
 icies, has meant an economic loss to the country. Capi- 
 tal has been taken from where it could earn eight per 
 cent, and placed where it was worth only five or six per 
 cent. _-c7 
 
 However, as the endowment business forms even at 
 the present time only about one-fourth of the total busi- 
 ness of the companies, we cannot consider that much loss 
 has resulted to the country from the investment in en- 
 dowment policies by men who are able to make good in- 
 vestments for their own capital and at a slight cost. 
 Many of the investment policies have been taken by 
 small savers who could not have made investments for 
 themselves. Such men always have to pay high for what 
 they get, and it has been far better that they would have 
 saved something even at a high cost than to have saved 
 nothing. 
 
 Therefore, we are led to conclude that the life insur- 
 ance companies have been the direct agencies by means 
 of which tremendous amounts of capital have been taken 
 out of current earnings and added to the existing supply 
 in the country. 
 
 The funds when once in the possession of the com- 
 panies have not been kept as idle cash. They have been 
 invested, and the result has been that many lines of in- 
 dustry have been benefited. In discussing just what in- 
 fluence these large accumulations have had, the first 
 

 240 EFFECTS OF THE ACCUMULATION OF ASSETS. 
 
 thing to notice is the effect upon the distribution of capi- 
 tal between the various sections of the country. The 
 life insurance business has been localised so far as the 
 situation of the companies is concerned. Outside of five 
 or six states in the East, there are only two companies 
 which have obtained much size. Although the com- 
 panies have been located in the East, they have written 
 insurance in every state. It has been frequently claimed 
 that bad results have followed from this situation. It 
 is urged that the companies located in a small section 
 of the country have, through the collection of premiums, 
 drained capital from other places where it was much 
 needed, and have added it to a section already well 
 endowed. 
 
 Formerly the complaint against this effect of the in- 
 surance business came largely from the middle West. 
 To-day it is coming from the South. A few years ago 
 when Mr. Culberson was Governor of Texas in a mes- 
 sage to the Legislature of that State, he declared that 
 Texas from 1886 to 1887 had sent out twenty-five mil- 
 lion dollars more in premiums to insurance companies 
 than these companies had returned in the same period. 
 He ascribed much of the difficulty in getting capital in 
 Texas to this drain and pointed to the plethora of capi- 
 tal in ISTew York, to which place most of the premiums 
 had gone. 1 Last Fall a Southern writer pointed out 
 1 The Insurance Spectator, 1897, Volume 58, Page 38. 
 
EFFECTS OF THE ACCUMULATION OF ASSETS. 241 
 
 that in 1903 residents of Southern states paid fifty 
 million dollars in premiums to Northern companies. 1 
 
 We saw in a previous chapter that the belief that their 
 states were being depleted of capital led certain legis- 
 latures to pass laws compelling the investment of the re- 
 serves in the state where they originated. A great num- 
 ber of taxes have been levied to stop the supposed flow 
 of capital, and public-spirited citizens have been con- 
 cerned as how to build up home companies in order to 
 keep the insurance premiums within the state. 
 
 Have there been any grounds for believing that the 
 location of the companies has been a disturbing feature 
 in our economic development ? The answer is that the 
 location of the home office of a company in a particu- 
 lar state does not ipso facto affect the distribution of 
 capital at all between the various sections of the country. 
 A company may be located in Portland, Maine, and 
 make its investments in San Antonio, Texas. The pay- 
 ment of premiums to an out-of-state company does not 
 necessarily mean that capital has gone out of the state. 
 I}ven the checks by means of which the premiums are 
 paid may never have gone to the home office of the com- 
 pany. They may be deposited in a local bank, and the 
 company may make loans on mortgages on real estate in 
 that vicinity, or buy municipal bonds or bonds of a rail- 
 
 i New York Times, September 3, 1905. 
 16 
 
\ 
 
 242 EFFECTS OF THE ACCUMULATION OF ASSETS. 
 
 road in that state. In that case, there has been no drain 
 of capital out of the state. 
 
 If many of the premiums have been collected in states 
 needing capital as evidenced by a higher rate of interest 
 than in other sections, the tendency would have been 
 for capital to flow to those states. Theoretically, the 
 companies make investments where the rate of interest 
 is highest, and therefore, the location of the company 
 has no harmful effect upon the distribution of capital in 
 the country. 
 
 If there is nothing in the location of the companies 
 which in theory makes necessary a depletion of capital 
 in one section of the country, why has there been so 
 much complaint about Eastern companies? There are 
 three reasons. First, men have not seen clearly and 
 understood its significance the fact that the funds could 
 be owned in Boston and the capital in which they are 
 invested located in Illinois, thus giving to Illinois the 
 advantage of the accumulation of insurance assets. 
 
 Secondly, capital in actual practise has not been so 
 mobile as to respond readily to the most urgent demands 
 for its use. It may go where it is most needed, but it 
 goes slowly. A man in New York hesitates to invest 
 capital in Texas. It is too far away, he cannot estimate 
 the risk, and the result is that he invests nearer home. 
 It will be seen later that this timidity of capital has not 
 
EFFECTS OF THE ACCUMULATION OF ASSETS. 243 
 
 affected insurance investments a great deal, but never- 
 theless it must be considered. 
 
 The third cause for complaint by certain sections is 
 a just one. There has been an abstraction of capital 
 from certain regions and it has not always been re- 
 turned. The reason why the return investments have 
 not been made by the insurance companies is the state 
 laws which have been imposed upon them. No matter 
 how much managers of life insurance companies may 
 have wanted to invest the funds in certain localities, 
 they have not always been allowed to do so. This has 
 not been a fault of location except in the sense that if a 
 company happened to be located in New York, for years 
 it was not allowed to make mortgage loans outside the 
 state, and there were many sections which needed capi- 
 tal which had no other security to offer for loans than 
 real estate. Thus it is seen that the complaint about 
 the location of insurance companies having a bad effect 
 upon the distribution of capital in the country has been 
 partly due to ignorance of the distinction between capi- 
 tal and its ownership, partly to the immobility of capi- 
 tal and partly to state laws. 
 
 That the state laws have had a greater effect upon the 
 investment of the insurance funds than timidity of the 
 management in investing is shown by the fact that when- 
 ever the state in which the companies are located have 
 not placed restrictions in the way, many of the pre- 
 
244 EFFECTS OF THE ACCUMULATION OF ASSETS. 
 
 miums have been returned to the states from whence 
 they came through loans and investments. If New York 
 had not for years attempted to keep a large part of her 
 companies' assets invested within her borders, much of 
 the sectional difficulties which have resulted in laws 
 and taxes would have been avoided. The Connecticut 
 and Massachusetts companies, not confined to one state 
 for their investments, sent capital to those regions where 
 it was much in demand, and in so doing relieved to a 
 considerable extent the unfortunate situation of having 
 the large companies nearly all in one small section of 
 the country. 
 
 It would be interesting to know how great has been 
 the influence of insurance funds upon certain sections 
 of the country. For years, money was Hve per cent, 
 higher in the West than it was in the East. At that 
 time, the Eastern companies which were permitted to 
 do so sent large amounts to the West to be invested. No 
 one knows the beneficial effect that the Aetna of Hart- 
 ford had in Illinois from the system of small farm loans 
 which it pursued at a time when the farmers could 
 scarcely get any capital whatever. The Connecticut 
 Mutual carried out much the same policy but loaned 
 more on city realty. President Greene in 1896 stated 
 that in the fifty years of the existence of the Connecti- 
 cut Mutual it had loaned one hundred and forty million 
 dollars to sixty thousand Western men, an average of 
 
EFFECTS OF THE ACCUMULATION OF ASSETS. 245 
 
 two thousand dollars to each man. The rate of interest 
 on farm mortgages in the great agricultural states might 
 have come down to its present level of five per cent, and 
 even lower without the aid of insurance assets, but it is 
 doubtful. The Northwestern has had thirty million 
 dollars invested in mortgages on real estate in Illinois 
 alone, and to those loans much of the prosperity of the 
 agricultural interests in that State is due. What the 
 Northwestern has done for Illinois, the Union Central 
 has done and is doing for Ohio and Indiana, though per- 
 haps not on so large a scale. Mutual Benefit fund 
 have also been sent out West, much to the advantage of 
 that section as well as of the policy-holders in the com- 
 pany. At the present time life insurance money is 
 being used extensively in the development of Oklahoma, 
 through loans upon the only asset which the territory 
 possesses, namely, rich farming lands. 
 
 How important have been these loans to Western 
 states is seen by the experience of Missouri more than 
 a score of years ago. The Legislature of that State 
 passed a law placing severe restrictions upon foreign 
 corporations loaning money in Missouri, and the result 
 was that the life insurance companies refused to loan 
 any longer in the State. Money had before the enact- 
 ment of the law been freely secured in Missouri at six 
 per cent, upon long time farm mortgage loans. After 
 the law went into effect the rate nearly, if not quite, 
 

 24:6 EFFECTS OF THE ACCUMULATION OF ASSETS. 
 
 doubled. This single example shows how great has been 
 the influence of the life insurance assets upon the de- 
 velopment of that large area enbodied in the North 
 Central states. The effect of the investment of insur- 
 ance capital can be seen clearly in this region, for it 
 was without any capital only a short time ago. Because 
 a number of the states where the companies were located 
 did not restrict the investments to any particular region 
 has this return flow of capital to the states where much 
 of it came from, and where it was needed, been possible. 
 
 Doubtless life insurance assets have had as much in- 
 fluence upon the development of railroads as they have 
 had upon the agricultural interests in certain sections. 
 Perhaps they have had even more effect, for a larger 
 amount of capital in proportion to the total capital used 
 in railroad development has been furnished by the in- 
 surance companies than they have supplied to agricul- 
 ture in proportion to the total invested in that industry. 
 The insurance companies have not been pioneers in rail- 
 road building, at least not to any extent, but when the 
 roads have once been put upon a paying basis, the insur- 
 ance corporations have been large purchasers of their 
 securities. Thus have they freed private speculative 
 capital of staying in secure enterprises, and have al- 
 lowed it to be used in building new roads. 
 
 The insurance accumulations have had an important 
 effect upon public loans. While many such loans now 
 
EFFECTS OF THE ACCUMULATION OF ASSETS. 247 
 
 bear a rate of interest too low to be attractive to the in- 
 surance companies, and as a result the companies are 
 not large purchasers of them, this was not the situation 
 only a short time ago. For years the companies were 
 heavy bidders for public bonds and even yet absorb a 
 considerable number issued by the smaller governmental 
 units, such as school districts, which cannot float their 
 securities as readily as the large cities. The insurance 
 accumulations have made it easier and cheaper for 
 public improvements to be made, and while the very 
 eagerness of the companies and other financial interests 
 to secure public bonds may have led to some extrava- 
 gance on the part of the counties and municipalities the 
 blame for this cannot be attributed to the companies. 
 Life insurance assets have helped to make it possible 
 for public bodies to borrow capital at a low rate of 
 interest and this of itself is a highly desirable situation. 
 Not only have the funds gathered through the agency 
 of the life insurance companies affected particular in- 
 dustries directly, they have indirectly affected all. The 
 rate of interest has declined sharply in the last thirty- 
 five years. Whatever have been the causes of this de- 
 cline, certainly the accumulation of capital by the insur- 
 ance business has been an important influence. This 
 lowering of the rate of interest has been conducive to 
 greater prosperity of the country in general. Therefore 
 as one of the agencies which have made the lower rate 
 
248 EFFECTS OF THE ACCUMULATION OF ASSETS. 
 
 of interest possible, the insurance companies must be 
 given considerable credit. 
 
 To the beneficial effect which insurance funds have 
 exercised upon the development of the resources of the 
 country no one objects. Regarding the companies as 
 savers of capital, the desire is universal that they should 
 continue to increase rapidly in assets. However, from 
 time to time a note of alarm has been sounded that dan- 
 gers may result from allowing unrestricted growth to 
 the companies, and of late this alarm has been expressed 
 frequently. It has been experienced in the United States 
 that individual plutocrats have by the unlimited wealth 
 which they command been able to control railway and 
 other finance. It is pointed out that our life insurance 
 companies are becoming vast financial corporations and 
 may become a source of danger to the public by reason 
 of the large money power lodged in the hands of a few 
 men. Because of this possible danger, there has come a 
 demand that the states should limit the business of the 
 companies so as to keep their funds from threatening 
 dimensions. 
 
 Before the states can limit the business of the large 
 companies, they must decide when they are large. When 
 is a company big? In the seventies when the largest 
 company had about eighty million dollars of assets, 
 there was a discussion about limiting the dangerous 
 growth of insurance corporations. In the early nineties, 
 
EFFECTS OF THE ACCUMULATION OF ASSETS. 249 
 
 the largest companies were approaching the two hundred 
 million dollar mark in assets, and again the question of 
 restricting their growth was debated. Now the com- 
 panies which have made the biggest growths have over 
 four hundred million dollars of assets and if there is 
 any limitation of business it must be somewhere beyond 
 the present amount of assets. The company with ninety 
 million dollars of assets is not now considered as pos- 
 sessing dangerous power, there are questions connected 
 with its management which are of vital importance, but 
 these are not such that make it necessary to restrict its 
 growth. May it not be that in twenty years more, five 
 hundred millions will not be considered a dangerous 
 amount of assets? 
 
 There is nothing in the nature of the case that makes 
 danger from large insurance assets inevitable. A group 
 of speculators upon the market find it to their interest 
 at times to derange prices, to stop industries, and to 
 cause widespread commercial depression. Even polit- 
 ical disturbances, such as war between nations may 
 sometimes suit their purposes. This is not true of life 
 insurance companies, if they are managed for the wel- 
 fare of their policy-holders. Insurance companies, if 
 ably managed, will exercise only a beneficial effect in 
 the financial world. They will only make the most 
 conservative investments and be only in favor of finan- 
 cial tranactions that are constructive and conducive to 
 
250 EFFECTS OF THE ACCUMULATION OF ASSETS. 
 
 stable prices, never in favor of anything that is de- 
 structive. They will always desire peace, and never 
 want war. If a management desires anything else but 
 these things, it means that the funds are being misused, 
 this is not a fault of size, but of the management. 
 
 The companies cannot increase in assets indefinitely. 
 There is a natural limit to their growth. Some day the 
 outgo will equal the income, and even may be in excess. 
 This result will come about through the operation of the 
 law of mortality and the problem of size will then be 
 solved. The states should do nothing which tends to 
 give the large companies unusual advantages in com- 
 petition, and to this end should remove some of the 
 obstacles in the way of forming new companies. Un- 
 der the present conditions new companies are so hard 
 to organise and get started that those established have 
 almost a monopoly. With different laws this monopoly 
 feature could be removed. 
 
 Already the large companies are not holding their 
 own in the competition with smaller ones. For years 
 it did look as if a few large companies were going to 
 absorb most of the life insurance business. In 1873, 
 three companies had thirty-one per cent, of all the 
 business done by companies reporting to the New York 
 Insurance Department. This percentage steadily in- 
 creased until in 1894, the three largest had fifty-five per 
 cent, of the total business. However, the percentage 
 
EFFECTS OF THE ACCUMULATION OF ASSETS. 251 
 
 began to decrease so that in 1900 the three only had 
 forty-six per cent, of the business. Not only are the 
 three largest showing a relative decline, but also are the 
 six largest and even the ten largest, which shows that 
 not only are the smaller companies maintaining their 
 position, but are absorbing each year a larger propor- 
 tion of the business. 
 
 If the business of the larger companies were limited 
 by law, is there any reason to believe that the same 
 amount of insurance would be written as if there were 
 no restrictions? It is hardly possible, and if there 
 would not be, then the accumulation of capital through 
 the agency of insurance companies would be checked. 
 While an increase in the amount of capital is not to be 
 purchased at the price of grave social dangers, yet the 
 state must be sure that such dangers would be the pen- 
 alty of allowing free growth. There are methods of 
 control and reform in management which should be 
 given a trial before the extreme measure of limitation 
 of business is adopted. 
 
 Since there is nothing in the nature of life insurance 
 which must necessarily lead to political corruption or to 
 the abuse of power in the financial world, the limitation 
 of business is a confession that men cannot be found 
 who can be trusted morally with the responsibility of 
 managing large trustee funds. Nothing which has been 
 disclosed in the investigation of any company of im- 
 
252 EFFECTS OF THE ACCUMULATION OF ASSETS. 
 
 portance has shown that the officers and trustees were 
 not mentally capable of handling the companies well. 
 The trouble has been with lax morals. It is hoped that 
 these can be reformed, and the companies allowed to go 
 on accumulating assets to the gain of the individual 
 policy-holder and of the country in general. 
 
 Life insurance has rendered a signal service to the 
 country. It has compelled those who have insured to 
 exercise economy, and this has influenced their careers 
 for good. It has gathered together innumerable small 
 savings and has made them available for the develop- 
 ment of our resources. Mistakes have been made in 
 managing the funds, problems remain yet to be solved, 
 but these should be met in a spirit of encouragement to 
 the business, for life insurance should be encouraged. 
 The companies relieve distress which can be relieved 
 in no other way, and accumulate capital which other- 
 wise would be dispersed. 
 
INDEX. 
 
INDEX. 
 
 Abuses in management, 192-3. 
 
 Accrued interest, as an asset, 
 21 ; as affecting the rate of 
 earnings, 69, 70. 
 
 Accumulation of capital by in- 
 surance companies, 234-6. 
 
 Aetna, rate of earnings, on total 
 assets, 74 ; on real estate, 83 ; 
 on mortgage loans, 89 ; on 
 bonds and stocks, 97 ; cost of 
 investing, 115 ; loans in the 
 West, 244 ; management, 199. 
 
 Agio theory of interest, 106-7. 
 
 American Life Insurance Com- 
 pany, failure, 142-3 ; reasons, 
 191. 
 
 Armstrong committee, results 
 of exposures, 159. 
 
 Assets, cost of investing, 116-17, 
 121 ; market value, 66 ; rate 
 of earning power, 74-6 ; tax- 
 ation of, 214-17. 
 
 Australia, assets of companies 
 in, 45-6 ; legal regulation, 
 174 ; rate of interest. 103. 
 
 Australasian Mutual Provident, 
 method of electing manage- 
 ment, 210. 
 
 Berkshire, charter of, 160 ; 
 cost of investing assets, 115 ; 
 finance committee, 198 ; rate 
 of earnings, on assets, 74 ; on 
 bonds and stocks, 97 ; on mort- 
 gage loans, 89 ; on real estate, 
 83. 
 
 Bonds and stocks, compared 
 with mortgage loans, 101-2 ; 
 cost of investing in, 122-3 ; 
 decline in earning rate, 101 ; 
 power conferred by owner- 
 
 ship of, 111 ; rate of earnings, 
 979. 
 
 Canada, character of invest- 
 ments in, 44 ; legal regulation 
 in, 172-3 ; rate of interest, 
 103. 
 
 Capital stock, investment of, 
 150-4. 
 
 Cash, as an asset, 15-19; with 
 English companies, 48-9. 
 
 Character of assets, Australasi- 
 an companies, 45-6 ; Can- 
 adian companies, 44 ; English 
 companies, 47-9 ; French com- 
 panies, 50-2 ; German com- 
 panies, 49-50 ; United States 
 companies, 10-54. 
 
 Charter Oak, cause of failure, 
 191 ; charter provisions, 186 ; 
 failure of, 139-142. 
 
 Charter regulations of invest- 
 ments, 150-1. 
 
 City bonds as an investment, 38. 
 
 Collateral loans as an invest- 
 ment, 34-35. 
 
 Company management, 190-212. 
 
 Connecticut, taxation in, 226-8. 
 
 Connecticut Mutual, charter 
 regulations, 160 ; character of 
 assets, 11 ; loans in the West, 
 244-5 ; rate of earnings, on as- 
 sets, 74 ; on bonds and stocks, 
 97 ; on mortgages, 89 ; on real 
 estate, 83 ; reduction in inter- 
 est rate, 58. 
 
 Continental Life of N. Y., fail- 
 ure of, 135. 
 
 Continental Life of Hartford, 
 failure of, 142. 
 
 Control of the assets, 190-213. 
 
 255 
 
256 
 
 INDEX. 
 
 Corporation securities, as an in- 
 vestment, 39-42 ; dangers of, 
 53-4 ; legal provisions con- 
 cerning, 166-7. 
 
 Cost of investing, in general, 
 112-126 ; in bonds, 122-3 ; in 
 mortgage loans, 122-3. 
 
 County bonds as an investment, 
 37-8. 
 
 Culberson, Gov. of Texas, 
 quoted, 240. 
 
 Deferred and outstanding pre- 
 miums, 20. 
 
 Departments of insurance, 147-9. 
 
 Directors, duties of, 195-200; 
 " dummy," 132, 196-7. 
 
 Double taxation, 224-5. 
 
 Duties of policy-holders, 204-9. 
 
 Distribution, of assets, 14, of 
 capital in country, 240-7. 
 
 Eagle Life and Health, failure 
 of, 128. 
 
 Earnings, rate of, 55-111. 
 
 Election of trustees, 204-12. 
 
 Endowment policies, benefits 
 and disadvantages, 237-9. 
 
 England, character of assets in, 
 47-8 ; legal regulation in, 173 ; 
 rate of interest in, 104-5 ; tax- 
 ation in, 231. 
 
 Equitable, expense of invest- 
 ing, 115 ; management of, 
 198 ; rate of earnings, on as- 
 sets, 74 ; on bonds and stocks, 
 97 : on mortgage loans, 89 : 
 on real estate, 83. 
 
 European capital in U. S., 198. 
 
 Failures of insurance com- 
 panies, 127-145. 
 
 Finance committees, composi- 
 tion of , 197-9. 
 
 Fisher, Prof. Irving, referred to, 
 108, 223. 
 
 Foreclosure of mortgage loans, 
 94-6. 
 
 Foreign bonds, investment in, 
 36-7. 
 
 Foreign countries, legal require- 
 ments of, 171-2. 
 
 France, legal regulation in, 174- 
 
 5. 
 Fraudulent companies, 176-8. 
 
 Gain and loss exhibit, 114-5. 
 
 Gas and water company bonds 
 as an investment, 40. 
 
 Germania, finance committee 
 of, 198 ; mortgage loans of, 
 95 ; rate of earnings, on as- 
 sets, 74 ; on bonds and stocks, 
 97 ; on mortgage loans, 89 ; 
 on real estate, 83. 
 
 Germany, character of assets, 
 49-50 ; legal regulation in, 
 174 ; rate of interest in, 105-6. 
 
 Globe insurance company, fail- 
 ure of, 137-8 ; mismanage- 
 ment of, 191 ; rate of interest 
 assumed, 56. 
 
 Gotha Mutual Life company, 
 rate of interest made by, 105- 
 6. 
 
 Gross assets, taxation of. 214-16. 
 
 Gross premiums, taxation of, 
 216-17. 
 
 Guarantee capital, necessity of, 
 203. 
 
 Home insurance company, 
 
 finance committee of, 198 ; 
 
 rate of earnings, on assets, 
 
 74 ; on bonds and stocks, 97 ; 
 
 on mortgage loans, 89 ; on 
 
 real estate, 83. 
 Home office buildings, rate of 
 
 return, -87-8 ; Charter Oak's 
 
 experience with, 140. 
 Holland, taxation of insurance 
 
 in, 231-2. 
 
 Insurance departments, 188-9. 
 
 Insurance laws, early Massa- 
 chusetts, 146-7. 
 
 Interest rate, effect of war on, 
 107-8 ; and prices, 108-9. 
 
 Investments, expenses of mak- 
 ing, 112-126 ; fluctuations in 
 value, 67-8. 100; legal regu- 
 lation of, 160-89 ; methods of 
 making, 200. 
 
 Investment policies, 237-9. 
 
INDEX. 
 
 257 
 
 ^John Hancock, expense of in- 
 vesting, 115 ; rate of earnings, 
 on assets, 74 ; on bonds and 
 stocks, 97 ; on mortgage loans, 
 89 ; on real estate, 83. 
 
 Kentucky, legal regulation in, 
 168 ; taxation in, 228. 
 
 Kentucky Mutual insurance 
 company, failure of, 129. 
 
 Knickerbocker insurance com- 
 pany, failure of, 138. 
 
 Legal regulations of invest- 
 ments, in Australia, 174 ; in 
 Canada, 172-3 ; in England, 
 173-4 ; in France, 174-5 ; in 
 Germany, 174 ; in New York, 
 151 ; in United States, 146- 
 189 ; objections to, 184-9 ; per- 
 nicious effects of, 186 ; as to 
 real estate, 155-160 ; what is 
 necessary, 145. 
 
 Life Association, failure of, 137, 
 
 Limitation of size of companies, 
 248-251. 
 
 Location of companies, effects 
 of, 241-5. 
 
 Management, evils in, 192-3. 
 
 Manhattan, character of assets, 
 11 ; rate of earnings, on as- 
 sets, 74 ; on bonds and stocks, 
 79 ; on mortgage loans, 89 ; on 
 real estate, 83. 
 
 Massachusetts Mutual, finance 
 committee of, 198 ; rate of 
 earnings, on assets, 74 ; on 
 bonds andstocks, 97 ; on mort- 
 tges, 89 ; on real estate, 83. 
 tetropolitan, rate of earnings, 
 on assets, 74; on bonds and 
 stocks, 97 ; on mortgage loans, 
 89 ; on real estate, 83. 
 
 Michigan Mutual, cost of invest- 
 ing, 122 ; finance committee 
 of, 198 ; rate of earnings, on 
 assets, 75 ; on bonds and 
 stocks, 98 ; on mortgages, 90 ; 
 on real estate, 84. 
 
 Minnesota insurance report, 
 quoted, 115. 
 
 i7 
 
 Mismanagement, causes of legis- 
 lation, 7. 
 
 Missouri, effect of insurance 
 loans in, 245-6. 
 
 Mobility of capital, 242-3. 
 
 Mortgage loans, as an asset of 
 early companies, 12 ; com- 
 pared with bonds and stocks, 
 101-2 ; costs of making, 122- 
 3 ; depreciation in value, 31 ; 
 of English companies, 48 ; 
 foreclosure of, 31-2 ; of Ger- 
 man companies, 50 ; good 
 qualities of as an investment, 
 52-3; history of, 25-32; loss 
 on, 94-6, 144 ; of New York 
 companies, 164 ; and panics, 
 28-30 ; profitable return of, 
 111 ; rate of earnings, 89-91 ; 
 in the West, 27. 
 
 Mutual Life of New York, char- 
 ter provisions, 160 ; finance 
 committee of, 198 ; proxy vot- 
 ing in, 206, rate of earnings 
 on assets, 75 ; on bonds and 
 stocks, 98 ; on mortgages, 90 ; 
 on real estate, 84. 
 
 Mutual Benefit, character of as- 
 sets, 11 ; cost of investing, 
 122 ; mortgage loans of, 245 ; 
 rate of earnings, on assets, 75 ; 
 on bonds and stocks, 98 ; on 
 mortgage loans, 90 ; on real 
 estate, 84. 
 
 Mutual companies, formation 
 and control of, 203-12. 
 
 National bank stocks, restric- 
 tions concerning, 168. 
 National Life of Vermont, char- 
 ter provisions, 160 ; rate of 
 earnings, on assets, 75 ; on 
 bonds and stocks, 98 ; on 
 mortgage loans, 90 ; on real 
 estate, 84. 
 Nevf England Life, formation 
 yof , 2 ; assets of, 11 ; rate of 
 ^earnings of, on total assets, 
 75 ; on bonds and stocks, 98 ; 
 on mortgage loans, 90 ; on real 
 estate, 84. 
 
258 
 
 INDEX. 
 
 New Jersey Mutual, failure of, 
 136-7. 
 
 New York law regulating mort- 
 gage loans, 164, effects of 243- 
 4. 
 
 New York insurance depart- 
 ment, creation of, 13. 
 , New York Life, assets of, 11 ; 
 k finance committee of, 198 ; in- 
 corporation of, 3 ; investment 
 expenses, 122-3 ; proxy voting 
 in, 206 ; rate of earnings on as- 
 sets, 75 ; on bonds and stocks, 
 98 ; on mortgage loans, 90 ; on 
 real estate, 84. 
 
 North American Life, failure of, 
 134-5. 
 
 Northwestern, charter provis- 
 ions, 162 ; mortgage loans of, 
 245 ; rate of earnings, on as- 
 sets, 75 ; on bonds and stocks, 
 98 ; on mortgage loans, 90 ; 
 on real estate, 84. 
 
 Ohio Life and Trust company, 
 failure of, 129. 
 
 Pacific Mutual, rate of earn- 
 ings, on assets, 75 ; on bonds 
 and stocks, 98 ; on mortgage 
 loans, 90 ; on real estate, 84. 
 
 Panics, effects on investments, 
 131-2; cause of legislation, 
 165 ; and the rate of interest, 
 78, 107. 
 
 Penn. Mutual, charter provis- 
 ions, 160 ; mortgage loans of, 
 95 ; rate of earnings, on as- 
 sets, 75 ; on bonds and stocks, 
 98 ; on mortgage loans, 90 ; 
 on real estate, 84. 
 
 Phoenix Mutual, charter pro- 
 visions, 161 ; finance commit- 
 tee of, 199 ; rate of earnings, 
 on assets, 75 ; on bonds and 
 stocks, 98 ; on mortgage loans, 
 90 ; on real estate, 84. 
 
 Piedmont and Arlington, fail- 
 ure of, 138. 
 
 Policy loans, as an investment, 
 23-5 ; of Australian com- 
 panies, 46 ; of English com- 
 
 panies, 48 ; permission to in- 
 vest in, 167. 
 
 Premium notes, 21-3. 
 
 Premium on gold, 77-8. 
 
 Premiums, taxation of, 216-17, 
 229-31. 
 
 President, duties of, 199-200. 
 
 Prices and the rate of interest, 
 108-9. 
 
 Provident Life and Trust, rate 
 of earnings, on assets, 76 ; on 
 bonds and stocks, 99 ; on mort- 
 gage loans, 91 ; on real estate, 
 85. 
 
 Provident Savings, rate of 
 earnings, on assets, 76 ; on 
 bonds and stocks, 99 ; on mort- 
 gage loans, 91 ; on real estate, 
 85. 
 
 Proxy voting, 204-9. 
 
 Prudential, rate of earnings, on 
 
 / assets, 76 ; on bonds and 
 
 / stocks, 99 ; on mortgage loans, 
 91 ; on real estate, 85. 
 
 Public, the, and company man- 
 agement, 179-80. 
 
 Publicity, attempts to secure, 
 149-50 ; value of and failure 
 of, 178-81. 
 
 Railroad bonds as an invest- 
 ment, 39-40. 
 
 Rate of earnings, of bonds and 
 stocks, 97-9 ; in Civil War 
 period, 27 ; in colonial times, 
 61 ; by Australasian compan- 
 ies, 103 ; Canadian companies, 
 103 ; English companies, 104- 
 5 ; German companies, 105-6 ; 
 in New Zealand, 103-4 ; con- 
 ditions determining, 106-10 ; 
 cost of investing and, 117-8 ; 
 decline in, 102-3 : importance 
 of, 10 ; method of calculating, 
 63-72 ; legal standard, 55-60 ; 
 on mortgage loans, 89-91 ; on 
 real estate, 83-5 ; by savings 
 banks, 62; by United States 
 companies, 74-6. 
 
 Real estate, as an asset, 32-4 ; 
 Charter Oak's experience 
 with, 141-2 ; cost of investing 
 
INDEX. 
 
 259 
 
 in, 118-20 ; earning rate of, 
 83-5 ; home office buildings, 
 87-8 ; legal regulations con- 
 cerning, 156-9 ; of French com- 
 panies, 51-2 ; rise in price, 86- 
 7 ; taxation of, 224, 232-3. 
 
 Reserves, knowledge of, 9. 
 
 Reserve deposit laws, 203. 
 
 Savings, amount secured by in- 
 surance companies, 234-5. 
 
 Savings banks, investment ex- 
 penses of, 124-5 ; number of, 
 234 ; rate of interest earned 
 by 62. 
 
 Scottish National, rate of inter- 
 est earned by, 104. 
 
 Securities, taxation of, 223. 
 
 Security Life and Annuity, fail- 
 ure of, 135-6. 
 
 Small versus large companies, 
 251-2. 
 
 Social effect of level premium 
 insurance, 234-252. 
 
 Spendthrifts and insurance, 237. 
 
 State bonds, as an investment, 
 37 ; restriction to, 166. 
 
 State deposits, 169-71. 
 
 State Mutual, finance commit- 
 tee of, 198 ; rate of earnings, 
 on assets, 76 ; on bonds and 
 stocks, 99 ; on mortgage loans, 
 91 ; on real estate, 85. 
 
 State supervision, 175-189. 
 
 Stock investments, danger from, 
 40-2 ; discussion about, 183-4. 
 
 Stock companies, problems of 
 managing and controlling, 
 195-203. 
 
 Taxation, insurance, in United 
 States, 213-233, bad effects of, 
 227-8 ; in England, 231-2 ; in 
 Holland, 231 ; of premiums, 
 229-231 ; of real estate, 232-3. 
 
 Taxes, law of regulating per- 
 sonal profits, 192-3. 
 
 Travelers insurance company, 
 investments in Canada, 36 ; 
 rate of earnings, on assets, 
 76 , on bonds and stocks, 99 ; 
 on mortgage loans, 91 ; on 
 real estate, 85. 
 
 Trust companies and insurance, 
 17-19. 
 
 Trustees, duties of, 195-200 ; 
 election of, 204-12. 
 
 Union Central, benefit of ac- 
 cumulations to Indiana and 
 Ohio, 245; cost of investing, 
 122 ; results of mortgage loan- 
 ing, 95-6, 126 ; rate of earn- 
 ings, on assets, 76 ; on stocks 
 and bonds, 99 ; on mortgage 
 loans, 31 ; on real estate, 85. 
 
 Union mutual, rate of earnings, 
 on assets, 76 ; on bonds and 
 stocks, 99 ; on mortgage loans, 
 91 ; on real estate, 85. 
 
 Uninvested assets, 15-25. 
 
 United States bonds as an asset, 
 35-6. 
 
 United States Life, assets of, 11 ; 
 decline in assumed rate of 
 interest, 59 ; rate of earnings 
 on assets, 76 ; on bonds and 
 stocks, 99 ; on mortgage loans, 
 91 ; on real estate, 85. 
 
 Universal Life, failure of, 136. 
 
 Valuation of assets, 41-2. 
 Voting by mail, 209-10. 
 
 War, effect of, on rate of inter- 
 est, 130. 
 
 Washington Life, rate of earn- 
 ings, on assets, 76 ; on bonds 
 and stocks, 99 ; on mortgage 
 loans, 91 ; on real estate, 85. 
 
 Wright, Elizur, referred to, 56. 
 
 OF - 
 
 UNIVERSITY 
 
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A POLITICAL HISTORY OF THE 
 
 STATE OF NEW YORK 
 
 (1774-1861) 
 
 By D. S. ALEXANDER. Two volumes. 840 pp. 8vo. 
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Hmcrican public problems 
 
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A NEW EDITION UP TO DATE 
 
 WALLACE'S RUSSIA 
 
 By Sir DONALD MACKENZIE WALLACE 
 With two colored maps, $5.00 retail 
 
 The first edition of Wallace's "Russia" was published in 
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 Lord Novgorod the Great; The Towns and the Mercantile Classes; 
 The Pastoral Tribes of the Steppe; The Mongol Domination; The 
 Cossacks; Foreign Colonists on the Steppe: Among the Heretics; The 
 Dissenters; Church and State; The Noblesse; Landed Proprietors of 
 the Old School; Proprietors of the Modern School; Social Classes; 
 The Imperial Administration and the Officials ; Moscow and the 
 Slavophils; St. Petersburg and European Influence ; The Crimean 
 War and its Consequences ; The Serfs : The Emancipation of the 
 Serfs; The Landed Proprietors since the Emancipation; The Emanci- 
 pated Peasantry; The Zemstvo and the Local Self-Government; The 
 New Law Courts; Revolutionary Nihilism and the Reaction; Socialist 
 Propaganda ; Revolutionary Agitation and Terrorism ; Industrial 
 Progress and the Proletariat; The Revolutionary Movement in its 
 Latest Phase; Territorial Expansion and Foreign Policy; The Present 
 Situation. 
 
 "One of the stoutest and most honest pieces of work produced in 
 our time ; and the man who has produced it, . . . even if he never 
 does anything more, will not have lived in va\n."FortnigMly 
 Review. 
 
 M Excellent and interesting, . . . worthy of the highest praise. 
 . . . Not a piece of clever book-making, but the result of a large 
 amount of serious study and thorough research. . . . We commend 
 his book as a very valuable account of a very interesting people." 
 The Nation. 
 
 Henry Holt and Company 
 
 9 W. 23D Street (vii, '05) New York 
 
AMERICAN FOREIGN POLICY 
 OUR PHILIPPINE PROBLEM 
 
 By Prof. HENRY PARKER WILLIS 
 A study of American Colonial Policy. i2mo, $1.50 net 
 (By mail, $1.64) 
 A book of vital interest, based on personal investiga- 
 tion in the Philippines by a former editorial writer of the 
 New York Evening Post, who was also Washington 
 correspondent of the New York Journal of Commerce 
 and Springfield Republican, and is now a professor in 
 Washington and Lee University. 
 
 "Anyone desiring to inform himself fully as to the history, pol- 
 itics, public questions, in short, everything dealing with the subject 
 of American control of the Philippines from the day Dewey entered 
 Manila harbor to the present, will find Mr. Willis's work a most im- 
 portant book. . . . He writes of the Filipinos as he found them, and 
 with the knack of the true investigator, has avoided falling in with 
 the political views of any party or faction. More valuable still is his 
 exposition of the Philippine question in its bearings on American 
 life and politics. A most exhaustive, careful, honest and unbiased 
 review of every phase of the question." The Washington Post. 
 
 "A keen, exhaustive and merciless criticism of the whole Philip- 
 pine experiment. . . . His unsparing analysis of all the departments 
 of Philippine government must (however) command respect as able, 
 honest and sincere ... no other book contains more solid truth, or 
 a greater section of the truth." Springfield Republican, 
 
 AMERICA, ASIA AND THE 
 PACIFIC 
 
 By WOLF von SCHIERBRAND 
 Author of " Germany of To-day " 
 
 Considers America's relations to all the countries affected 
 by the Panama Canal, to those on both coasts of the 
 Pacific, and to the islands, besides analyzing the strength 
 and weakness of our rivals. 13 maps, 334 pp. $1.50 net. 
 By mail, $1.62. 
 
 "A most interesting treatise . . . having an important bearing 
 upon our future progress." Public Opinion. 
 
 "His observations on the Panama Canal and the future of the 
 Dutch East Indies are particularly interesting and suggestive." 
 
 Review of Reviews. 
 
 "An interesting . . . survey of a broad field . . . contains a great 
 yariety of useful information . . . especially valuable to American 
 exporters. " Outlook. 
 
 Henry Holt and Company 
 
 *.9 W. 23d Street (v, 'o6j New York 
 
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