OF THE

AMERICAN ACADEMY

ОР

POLITICAL AND SOCIAL SCIENCE

ISSUED BI-MONTHLY

VOL. XXIV, No. 3

NOVEMBER 1904

EDITOR: EMORY R. JOHNSON

ASSOCIATE EDITORS: SAMUEL MCCUNE LINDSAY, JAMES T. YOUNG

PHILADELPHIA

AMERICAN ACADEMY OF POLITICAL AND SOCIAL SCIENCE

1904

Copyright, 1904, by the American Academy of Political and Social Science

INSURANCE INVESTMENTS

The investments of our life insurance companies are attracting more and more attention among students of finance. The marvelous growth of the funds held and invested by these companies leads us to make inquiries about their volume, their character, safety, and earning power.

To a full understanding of these questions it would be necessary to discuss insurance as an economic institution, to explain the various kinds or classes of policies, so as to show how the funds are made up and classified, and to whom in the last analysis they belong. But this would lead us into too many technical questions that lie beyond the scope of the present paper. Suffice it to say that a company which issues a large amount of endowment insurance, or one which has a large proportion of its policies near maturity, must necessarily have a larger amount of assets in proportion to the amount of insurance in force than a company which is comparatively new, or one which is making a specialty of "ordinary life" or "term policies." Likewise, a company which has a large amount of deferred dividend, or "semi-tontine" policies on its books, must necessarily show a higher ratio of assets to liabilities than a company which makes a specialty of annual dividend policies. Between these extremes there are all sorts and grades according to the amount of investment in the majority of the policies issued. That is to say, a company which issues a large amount of investment policies will have a larger proportion of its income coming from interest and rents than a company which issues a large amount of "ordinary life" and "term policies."

This being true the following propositions may be stated as facts which demand careful consideration in any study relating to insurance investments:

I. The assets are trust funds which bear absolutely no fixed relation to capital stock, or to the amount of insurance in force.

2. The income, either gross or net, into which the premiums enter, cannot be called earnings in any proper sense of that term, because the premiums are not income either from money invested, or

for services rendered, but are deposits that are to be held in trust for the policyholders.

3. Dividends are of two kinds: 1, dividends to stockholders, in stock and mixed companies, and 2, dividends to policyholders in all companies, the latter being, in most cases, nothing more than the return of an overpayment.

In the selection of investments, the companies are guided to some extent by State laws relating thereto. Among the most concise, yet comprehensive laws on this subject are those of Iowa. They provide substantially as follows:

"The funds required by the law to be deposited1 with the auditor of State by any insurance company-organized under the laws of this State-shall be invested in the following described securities and no other:

3. Bonds, mortgages, etc., being first liens on real estate. 4. Bonds, etc., of counties, cities, towns and school districts. 5. Stock of solvent national banks (but not more than 5% of the assets of the company can be invested in such stock).

6. Loans upon the company's own policies, but not to exceed the net terminal reserve and not until the policy has been in force for at least three years.

7. Such real estate as may be necessary for office buildings for its own business, but rooms for rent may be added.

Similar provisions are found in the laws of most of the States and they have, no doubt, aided the companies materially in winning the confidence of the insuring public. The extent to which this confidence has been won is shown both by the rapid growth and the great magnitude of the life insurance business in recent times. To illustrate, the following paragraphs from a well known authority on the subject may be quoted.

"In 1860 all the American life insurance companies together had on an average about $5.00 at risk for each person in the United States; in 1901 the amount per capita at risk had increased to somewhere near $85.00; in forty-one years the average had been multiplied

1 These deposits are increased from year to year to correspond with the obligations of the company.

by seventeen. This is one of the factors that explain the future of our life companies.

"The second factor is the rapidity with which assets overtake insurance in force *** We can illustrate this in a striking way by citing the experience of the three great American companies: "On January 1, 1886, the New York Life, the Mutual Life, and the Equitable had about $986,000,000 of insurance at risk. On January 1, 1902, sixteen years later, the same companies will have in cash assets not far from the same total. In other words, cash assets will approximate in 1902 what the insurance in force aggregated in 1886. Does it follow that sixteen years hence these three companies will have in cash assets a sum equal to the present outstanding insurance-probably $3,500,000,000? Does it follow that to this will be added an increase in the amount of insurance per capita?

"We need not speculate on what may happen. We have only to deal with what is certain to happen, and we are forced to the conclusion that our life insurance companies during the next decade will play a part quite different from what they have hitherto undertaken.

"If no new insurance were written, if palsy should suddenly seize the tremendous activities of these companies, the contracts that are now outstanding and well established, in the very nature of the case would bring in such sums of money that the companies would be compelled to become an active factor in the investment world. "2

The above paragraphs, coming as they do from a man who has had many years of experience in the business, and is thoroughly familiar with the facts, are full of meaning.

The total amount of money in circulation in the United States has been estimated at $2,002,931,791, and the total assets of the life insurance companies alone, January 1, 1902, was estimated at $2,263,000,000 or about $260,000,000 more than the total amount of money in circulation in the United States. The total market value of all taxable property in the State of Wisconsin in 1902, including railroad property, was $1,724,687,950, or $438,312,045 less than the amount of property held by these companies. The four largest life insurance companies alone have sufficient assets to pur? Darwin P. Kingsley, Third Vice-President, New York Life Insurance Company, New York Independent, December 19, 1901. See Wisconsin Tax Commission Report, 1903, p. 216.

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