Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-11-24
INSURANCE FIRMS
/ IN GOOD POSITION
Large Capital Structures
Provide Margin of Safety
in Slack Business.
BY RoLLIN M. CLARK.

Although there has been criticism in
the past that the fire and casualty in
surance business was overcapitalized,
the margin of safety provided by such
extra funds is proving its value today.
The shrinkage in value of securities
owned by the insurance companies has
made inroads on their surplus accounts
and in some cases the decrease has be-
come serious.
Fortunately, however, many COM
panies with reduced surplus find them
selves with more paid-in capital than
is necessary for the conduct of their
business. If the necessity arises 1t is
comparatively simple matter through
vote of the stockholders to reduce the
capitalization and transfer the differ
ence to surplus. Several companies of
late have announced they will take
this step.
Contribution to Surplus.
Another alternative in such cases is
to arrange for an additional contribu-
ton to surplus by the shareholders. In
ordinary times it would be possible to
sell more stock at two or three times
par value. using the excess above par
as a surplus accretion But the pres
ent time is not propitious for such
action.
still another method adopted in some
instances is to merge two or more COM
panies. This is being done by some of
the so-called "heets"-groups of COM
panies operated under single manage
ment. BY merging some of the weaker
units with the stronger economies are
being effected and the policyholders'
interests are being safeguarded.
ic there
have been few failures among insurance
companies in the last two years. Even
in the fire and casualty field, where
the pinch has been felt because of pa
per losses in common stocks in which
part of the assets has been invested, an
outstanding record of solvency has been
maintained.
Life insurance companies, whose in
vestments generally comprise first mort
cages. Government bonds railroad and
public utility bonds, and policy loans,
have not been forced to take heavy
losses. While their rail holdings rep
resent about II per cent of their assets,
these bonds, if amply secured, are car
rjed on an amortized basis unless in
default.
Factors in Situation.
Several factors contribute to the ia
Vorable situation in which the life in
surance companies find themselves.
Their rates are based on an assumption
that the interest return on their invest
ed reserves will be 3 or 3i2 per cent.
Actually it has averaged more than 5
per cent. Likewise their rates are predl-
Gated on mortality table which
makes ample allowance for the number
of deaths likely to occur in a given
year. The actual mortality experience
has been between so and so per cent OF
the expected. 1t is from these gains
that the so-called participating COM
panies are able to pay large DIVIDENDS
to their policyholders.
Fire and casualty companies. how
ever. do not have the prospect of such
savings. Their sources of profit are in
underwriting and from investments, but
both have been resulting in losses.
Higher rates would help them, but with
the exception of few branches OF in
surance the rate level is actually lower
this year. 1t is seldom that both I'M
derwriting and investments prove I'M
profitable, but. having realized the pos
sibility of such a contingency, most
companies find themselves well prepared
for it with an unusually large surplus
or more capital than is actually needed
in their business.
Copyright, 1917