require such thirty or sixty days' notice; that depositors of $100 or more have the right to convert their scrip into city bonds issued directly to them.

211. LIFE INSURANCE COMPANIES AS INVESTMENT

INSTITUTIONS1

BY A. S. JOHNSON

From a financial point of view the life insurance company is a device for accumulating savings which shall be returned, not to the man who saves, but to his heirs at his demise. Some of the insured, it is true, die long before the sum of the premiums they have paid equals the sum that the insurance company has agreed to pay at their death. On the average, however, the insured live long enough so that their premiums, together with the earnings of the capital which those premiums form, are at least equal to the sums which the insurance company pays out in death claims.

It is obvious that in a country like the United States, where life insurance is exceedingly common, immense sums of money must be collected by the companies every year to be held as a reserve against death claims. As the business of life insurance is steadily growing, the funds accumulated by these companies are also increasing. The annual receipts of practically every important life insurance company exceed the annual disbursements. Accordingly, a life insurance company may invest its funds without much regard to the possibility of turning its investments into cash at short notice. It is important, however, that the business should be conducted in a conservative manner, since the failure of an insurance company would be a more widely felt calamity than the failure of almost any other business enterprise of equal magnitude. The loss would be borne in the end largely by the dependents of propertyless men.

The reserves of life insurance companies are largely invested in real estate mortgages, in state and municipal bonds, and in the bonds of railway, commercial, and industrial corporations. Stock investments have often been made by insurance companies, but the practice is now generally regarded with disfavor, since the values of stocks are likely to show a wide range of fluctuation.

I

1 Adapted from Introduction to Economics, pp. 320-21. (D. C. Heath & Co.,

212. INVESTMENTS OF INSURANCE COMPANIES1

BY ROBERT LYNN COX

The table below is for all American companies whose figures were tabulated in the Insurance Year Book for their respective dates.

Some notable features in the above table attract the attention at once. First, and most important of all, is the fact that in ten years' time the assets of American companies have practically doubled in amount. Great as was this increase in the family-protection funds of the country, it only kept pace with the increase in national wealth, which also about doubled during the same period. The next striking fact is that investments in real estate mortgages are two and one-half times as large, increasing from $671,000,000 to $1,706,000,000. On examining the relations of the various classes of investments to each other, as given in the column showing the percentage of assets invested in the different kinds of securities, we find that during this period the companies' holdings in real estate have decreased more than onehalf in ratio to other securities, and have actually decreased in amount over $9,700,000. The percentage of investments in stocks is less than one-fourth what it was ten years ago and in actual amount is about $90,000,000 less. The percentage of collateral loans is less than onefourth what it was ten years ago and in actual amount over $22,000,ooo less. Cash on hand also has been reduced one-half in percentage and nearly $9,000,000 in amount. In short, the trend of the times has been to reduce investments in stocks, collateral loans, and real

estate, also to reduce the proportion of cash carried in offices and banks and to materially increase the amount and proportion of investments in real estate mortgages and policy loans.

In view of the fact that life insurance companies held over $1,700,000,000 in real estate mortgages and their ratio to other assets has been steadily increasing, it seemed desirable to make a critical examination of these securities by a geographical distribution of amounts loaned on farms compared with other real property, average interest rates, etc. To this end we invited the co-operation of the life insurance companies of the country and received responses giving data by states and class of securities from 125 companies and tabulated the investments of the only large company which declined to report. So our tables include the mortgage loans of 126 companies whose real estate mortgage loans amounted to 97 per cent of all such loans held by American companies. The total loans, divided between farms and other real property, but not separated by states, supplied by 22 other companies, enables us to show the separation between farm and other real property loans of 98 per cent of all the outstanding mortgages of American companies. Of these 148 companies, 17 make loans only on farm property, 15 only on real property in cities, towns, or villages, while 116 loan on both farm and city properties. The amount loaned by the 17 farm loan companies is $12,827,709. The amount loaned by the 15 city loan companies is $426,260,163, and the amount loaned by the 116 companies loaning on both is $1,158,014,595. There are 102 American companies whose figures are not included, but as their combined mortgage loans amounted to but $29,262,938, or 1 per cent of the total held by all American companies, their absence will not affect materially the completeness of this tabulation of life insurance mortgage investments.

The total mortgage loans of these 148 companies amounted to $1,677,102,467, of which $654,650,505.72, or 39.03 per cent, were on United States farms; $993,480,170.03, or 59.24 per cent, were on other real property in the United States, and the balance-$28,971,792.14, or 1.73 per cent-was loaned on real estate mortgages in Porto Rico and foreign countries, most of it in Canada.

The proportion of mortgage loans on farms varies all the way from thirteen-hundredths of 1 per cent in the Middle Atlantic group of States to 86 per cent in the Northwestern group, the average for 148 companies in America being 39.72 per cent of their total United States mortgage loans. In the Eastern States the amount loaned on

farms is negligible, in the Central, Northern, and Southern groups the farm loans rise to considerable amounts, but it is in the great Southwestern and Northwestern sections, whose agricultural development in the last fifty years has been so marvelous, that the great bulk of the life insurance farm loans has been placed. On the other hand, we find that over half of the loans on real property other than farms have been placed in the populous commercial and manufacturing sections of the New England and Middle Atlantic States, which contain very nearly half of such property values of the entire country. B. Investment Banks or Bond Houses

213. THE MARKETING OF BONDS1

BY THEO. H. PRICE

The process of bond distribution is carried on mainly by three groups of men, or institutions. While there is much overlapping in the functions performed, those engaged in the marketing of bonds may be roughly differentiated as to the field in which they are most conspicuously active. These three groups are: (1) the houses of first purchase, (2) the underwriters, (3) the houses of distribution. This may be conceived of as three concentric circles, thus:

1 Adapted from an article on "Commerce and Finance," Outlook, CVI (1914), 429-30, 598-601.

The houses of first purchase compose a group small numerically but strong financially. Until recently it was supposed that membership in the so-called "Money Trust" was a condition of inclusion within this group. This idea is now exploded, for it is realized that some of the houses in the inner group are both able and willing to act with absolute independence. In New York there are perhaps seven or eight firms who may be classified as "houses of first purchase" for bond issues of five million dollars or over. In Boston there are three, or possibly four, and in Chicago and Philadelphia two each.

In the cities named, as well as in St. Louis, Cleveland, Baltimore, Pittsburgh, Cincinnati, Denver, and San Francisco, there are a number of concerns that are entirely competent to take the initiative in handling relatively small issues, but when the amount involved exceeds three or four millions it is generally found necessary to enlist the services of one of the larger organizations. Under conditions as they are and have been, few houses have had the enabling credit and capital required to buy outright a large issue of bonds and the prestige necessary to insure their subsequent distribution. The would-be borrower cannot afford to deal with any concern not able to promptly say Yes or No to his proposition, and large resources, commanding position, and a reputation for success are essential to any firm or corporation that would buy ten or twenty million dollars' worth of bonds and thereafter market them profitably.

When such an issue has been bought, the buyer almost invariably proceeds at once to minimize his risk in the transaction by distributing it among the underwriters. The function of this group will be better understood in the light of etymology. The distribution of risk which is now called insurance was at first accomplished by an agreement among merchants to share the hazard of each other's ventures. This agreement, being expressed in writing, was signed by the various parties thereto, and in so signing they wrote their names under it, thus becoming underwriters or insurers. This is precisely what is done in the underwriting of a bond issue, except that the principle of co-operation is applied, not only to diminish risk, but to increase the probability of a reasonable profit. To make this clear the illustration of a concrete case is necessary. Let us assume that a firm of bankers, having agreed to purchase $20,000,000 of 4 per cent bonds at 90, determine to offer them to the public at 94 and to pay the distributing houses who may finally dispose of them 1 per cent for their services and expenses in distribution. If and when the bonds are