Free press. [volume] (Hays, Kan.) 1888-1908, 1900-09-01
Two Correspondents Attempt to An
sWer the Questions Of Prop
erty Owner"

Mr.. Editor:-q read with interest a
letter addressed to you and printed in
your recent issue, signed "a Property
Owner" in which he inquiries why
capital remains in the fire insurance
business and why fire insurance COM
panies increase in size, If as was stat
ed in the article headed Business
Mems Ideas OF Fire Insurance." also
published in your paper, there is little
profit.
Being property owner myself, and
also possessing a small amount of fire
insurance stock, I have investigated
the question of profit in insurance
companies.
In the first place Property Owner"
is laboring under a serious misappre-
hension because he does not distin-
guish between the capital stock and as
sets Of a fire insurance company. Men
may subscribe 5000, 900 as capital stock
to start a company. For every premi-
UNI received so per cent of it has to
be put up as reinsurance reserve IL it
is an annual policy, and much more If
it is written for longer term. This
reserve is held to protect the policy
holder so that if his policy is cancell-
ed he can get the unearned premium.
The assets of company are its &C
tual holdings, it's own money. 1t in
vests them in stocks, bonds or any
approved security. Dividends to
stockholders are not paid on the as
sets which earn these dividends large
ly, but on the amount of capital stock
which has been used to start and or
ganize a company.
I know of one company that pays
II per cent dividends and people cite
1t as an example of enormous profits
in fire underwriting. On the surface
1t apears to be true, but let us examine
further. This company was organized
before 1850 and has never increased
its original capital, 100000, but the
assets OF the company now amount to
over 100000, representing the grad
.ual accretions from year to year.
Stockholders get no benefit of any in
come save dividends. Seventeen per
cent Of this company's stock equals
less than 2 per cent on its actual in
vestment assets.
If man buys a farm it is his capt.
tai. He works then to build up a sur
plus, which represents that which he
really possesses after deducting all
he owes. His investment is his land
and he desires to get reasonable re-
turns. If he can add to his surplus
his credit is that much better. He
wants 1t large enough to meet any
emergency. If he fails to do this and
has to mortgage his farm to meet ex-
penditures people will not be free to
give him credit.
So with a fire insurance company,
II it did not make money and grow
people would wisely be wary of it.
Hence the stockholders allow any prof
its it makes to accumulate, they mere
ly getting reasonable dividends on
their original investment. During pro-
tracted periods of fire losses a large
surplus is essential for a company to
hold the faith of its policy-holders.
For example, since January last, in
a period of six months, several COM
panies have lost over 5000, 900 in their
surplus and only two show even nora
NAL gains. AS all commercial transac-
tons are dependent on fire insurance,
and all business OF a material nature
has to have fire insurance to get cred
1t, it is plain that fire insurance COM
pany needs to build up safe net sur
plus.
People do not realize that there are
two parts to a fire insurance company,
first the investment of it's own funds
on which interest is carried, and sec
ond, the selling of its policies.
The public has nothing to do with
the first, although the interest and the
compound interest are great factors
in building up company's surplus
and stockholders usually are paid divi-
dends on the capital stock from the in
terest earnings. They could divide the
assets and invest them individually
if they desired.
The second part only concerns the
public as it is from the profits on the
sale of policies which determines
whether the people are paying too
high rates for their fire insurance.
The underwriting profit consists of
the difference between the total premi-
ums received on policies each year
and the losses paid together with ex-
penses paid for conducting the bust
ness.
l have carefully gone over the Of
fetal figures of fire insurance compan-
les which are made under oath and
reported TO our state insurance de-
partment at Topeka. I find for the
last eight years these companies show
only an actual underwriting profit Of
IA per cent. that is. on every dollar
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