Full text of "Investigation of concentration of economic power; monograph no. 1[-43]"

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^^|j Congressl SENATE COMMITTEE PRINT
3d Session I

INVESTIGATION OF CONCENTRATION
OF ECONOMIC POWER

TEMPORAEY NATIONAL ECONOMIC
COMMITTEE

A STUDY MADE UNDER THE AUSPICES OF THE SECURITIES
AND EXCHANGE COMMISSION FOR THE TEMPORARY
NATIONAL ECONOMIC COMMITTEE, SEVENTY-SIXTH CON-
GRESS, THIRD SESSION, PURSUANT TO PUBLIC RESOLUTION
NO. 113 (SEVENTY-FIFTH CONGRESS), AUTHORIZING AND
DIRECTING A SELECT COMMITTEE TO MAKE A FULL AND
COMPLETE STUDY AND INVESTIGATION WITH RESPECT
TO THE CONCENTRATION OF ECONOMIC POWER IN, AND
FINANCIAL CONTROL OVER, PRODUCTION AND
DISTRIBUTION OF GOODS AND SERVICES

MONOGRAPH No. 28-28A
STUDY OF LEGAL RESERVE LIFE INSURANCE
COMPANIES

Printed for the use of the
Temporary National Economic Committee

UNITED STATES

GOVERNMENT PRINTING OFFICE

WASHINGTON : 1940

NORTHEASTERN UNiVERSITY 5;r!-!f^n! of LAW LIBRARY

TABLE OF CONTENTS

Section Pagfl

Letter of transmittal vii

I. Introduction _ — 1

II. Size and growth of legal reserve life insurance companies 5

III. Control of legal reserve life insurance companies 13

A. Self -perpetuation in oflBce of directors of mutual companies. 14

1. Cumulative voting 24

2. Perpetual or long-term proxies 24

3. Staggered directors' terms 25

B. Directors of stock companies , 27

~ IV. Interlocking directorships ^ 29

V. Failure of directors to attend board meetings 39

VI. Activities of directors and officers for personal gain 46

VII. Change of plan o' company operation to benefit personal interests

of officers and directors . 65

A. Monumental Life Insurance Co 65

B. Shenandoah Life Insurance Co 70

C. Illinois Bankers Life Assurance Co__ 74

VIII. Responsibilities of life insurance company directors 88

IX. Salaries and profits ' 96

X. Company retirements — reinsurance and failures 101

A. "Federal Reserve Life Insurance Co 108

B. Missouri State Life Insurance Co. and affiliated comoanies. 120

C. Company failures with loss to policyholders 131

D. Convention values 135

E. Moratorium legislation 136

XI. Intercompany agreements to eliminate competition 141

A. The group association 141

B. Rate agreements for ordinary insurance 149

C. Hunter conferences 153

1. Uniform annuity rates .\ - - 154

2. Uniform surrender values and surrender charges.- 157

3. Uniform settlement option provisions 158

D. Other intercompany agreements and anticompetitive un-

derstandings :-- 161

1. Reinsurance conference 1- 161

2. Replacement agreement 162

3. The Medical Information Bureau . .. 162

4. Committee on Underwriting Large Risks 163

5. Agency Practice Agreement. l 163

XII. The life insurance company lobby 164

XIII. Classes and types of life insurance sold 177

XIV. Policy terminations 184

VI TABLE OF CONTENTS

Section Page

XV. Agency practices 192

A. The drive for new business •-_- ^ — _. 195

B. Training and selection of new agents . 211

C. Turn-over of agents 220

D. Compensation of agents _ 223

E. Contrasting methods of agency operation 228

F. Concluding observations 232

XVI. ■ Cost of ordinary life insurance : __ 235

XVII. Industrial insui anc^ 248

A. Size and gr' vth of indnstri al ccmpanies. . ^250

B. Duties and compensation of agents 253

C. The pressure for new business i 258

D. Turn-over of agents 268

E. Maldistribution and overloading of policies. ._ 271

F. Lapse - -.. 278

G. Cost ^-1 -- 283

H. Confusion of the industrial policyholder . 289

I. Advisory services for industrial policyholders 295

J. The future of industrial insurance 303

XVIII. Savings bank life insurance- 306

XIX. Reports to policyholders and accounting 315

XX. Operating results : ' 323

A. Income and disbursements . 323

B. Annuities » 328

C. Disability benefits . 336

XXL Assets and investment practices 342'

A. Mortgages- and real estate 344

1 . Farm mortgages and real estate . 345

2. Urban mortgages and real estate 1 350

B. Cash .. 355

C. Bonds 359

D. General investment considerations L 363

Appendix A. Seventy-five largest legal reserve life insurance companies. _ 379

Appendix B. Accounting practices of life insurance companies 383

LETTER OF TRANSMITTAL

Securities and Exchange Commission,

Washington, Z). C, Jvly 24, 1940.
Senator Joseph C. O'Mahoney,

Chairman of the Temporary National Economic Committee.
Dear Mr. Chairman: As the Commission's representative on your
committee in charge of the matter, I have the honor to transmit here-
with a factual report of our staff, based on the study of hfe insurance
which the ' Insurance Section of the Commission undertook at the
request of the Temporary National Economic Committee pursuant
to Public Resolution No. 113 of the Seventy-fifth Congress.

This study was headed by Gerhard A. Gesell, special counsel, and
Ernest J. Howe, chief financial advisor of the Commission's Insurance
Section. Collaborating with them on the actual preparabion of the
report were Helmer R. Johnson, William S. B. Lacy, James W.
West, Jr., Joseph Wolpe, and Michael H. Cardozo IV, together with
other members of the staff of the Insurance Section. Herbert Blom-
quist was responsible for immediate supervision of field investigations.
Donald H. Davenport acted as special economic consultant for the
study.

^o recommendations, legislative or otherwise, are made herewith.
Very truly yours,

Sumner T. Pike, Commissioner.

SECTION I
Introduction

On July 7, 1938, pursuant to Public Resolution No. 113 of the
Seventy-fifth Congress, the Temporary National Economic Com-
mittee requested the Securities and Exchange Commission to conduct
a study of insurance.

The Commission's study and this report have been confined to legal
reserve life insurance. There has been no examination of life insurance
as sold by fraternal societies or assessment companies. Furthermore,
no attempt has been made to investigate the operations of fire and
casualty insurance companies or to include any discussion of these
form^ of insurance in this report. The tremendous scope of the insur-
ance business and the limited funds available to the Commission have
made it necessary to restrict the study in this manner.

Even in the field of legal reserve life insurance the study has been
limited to those general topics outlined in the message of President
Roosevelt,* as delineated by specific assignments from the committee
which has been primarily concerned with the broad problem of the
concentration of economic power.

Although it has been impossible to make an exhaustive individual
study of each legal reserve company, the Commission has been able to
examine a sufficient number of representative companies to obtain a
cross-section of the business as a whole.

The development of the life insurance business in this country
represents an outstanding achievement. Life insurance provides the
channel through which millions of American people accumulate
savings to gain for themselves and their families a larger measure of
security and financial independence. The confidence which the
business justifiably commands in the eyes of the public is indicated
by the continually increasing numbers of people who take out life
insurance policies. There can be no question of the soundness of the
■ iJasic principles upon whicb the institution of life insiirance is foujided.

At the very outset of the insurance study it was stated by Justice
William O. Douglas, then chairman of the Securities, and Exchange
Commi&*sion, that no policyholder need have any concern that the
hearings would jeopardize the protection which he counts upon re-
ceiving through his insurance policy. This statement, was subse-
quently reaffirmed on several occasions in the cburse of the hearings.
In this comprehensive report covering all phases of the insurance
inquiry it can again be stated that nothing has been presented which,
justifies altering the initial statement of the Commission's chairman;'

As has been indicated, it was the function of the insurance inquiry
to explore those areas of the business under review which were of

' Message from the President of the United States transmitting recommendation relative to the strengthen-
ing and enforcemeut of antitrust laws, S. Doc. No. 173, 75th Cong., 3d sess., April 12, 1938. It was this mes-
, sage which led to the creation of the Temporary National Economic Committee.

2 CONCENTRATION OF ECONOMIC POWER

particular significance to a study of the concentration of economic
power. Wliere certain practices were disclosed in the course of in-
vestigation which might be considered contrary to the best interests
of policyholders or the general public, those practices were naturally
given special attention both in the hearings and this report. The staff
of the Commission does not consider the practices disclosed as being
so fundamental or so little subject to change that they undermine
the soundness of the basic principles upon which the institution of life
insurance is founded.

Among the principal topics considered in the report are the great
size of the legal reserve companies, their enormous growth and present
possibilities for future growth, the concentration of economic power
and influence which rests in the hands of the five largest companies aU
of whose offices are located in the New York area, the absence of any
effective policyholder control over the activities of the mutual life
insurance companies with the consequent self-perpetuation in office of
insurance directors, and the tangled web of interlocking directorships
which binds the principal life insurance companies with the country's
major banks and industries.

Prevailing attitudes in the business toward the responsibilities of life
insurance company directors are examined and discussed in a special
section. In this connection particular reference is made to the attend-
ance record of some directors at board meetings, and the use of their
positions by some directors for personal gains through the institution
of preferential business transactions and loans, or the initiation of
changes in the basic plan of company operation designed to promote
their private interests.

Considerable attention is also given to the experience of life insur-
ance companies during the depression. The withdrawal of 188 life
insurance companies from the business which has occurred since 1930
is examined with special respect to those retirements which resulted in
losses to policyholders. Causes for life insurance company failures
are also examined in the light of case histories of reinsurance deals and
other promotional activities. Special sections are also devoted to life
insur£t,nce company lobbying activities and to the nature and effect of
numerous anticompetitive arrangements arrived at through inter-
company conferences which established agreements fixing policy rates,
agents' commissions and uniform policy provisions. Detailed studies
of policy net costs and of lapse and other forms of policy terminations
are presented.

Two of the most important sections of the report deal with agency
practices and industrial insurance, respectively. In the first of these
sections the company drive for new business and the emphasis upon
size for the sake of size alone are examined and the resulting disloca-
tion in agency activity exemplified by inadequate training of agents,
poor selection of agents, high turn-over, and the seriously low com-
pensation of agents are explored. The discussion of industrial
insurance draws upon material developed before a subcommittee as
well as upon a field survey of insurance distribution to low-income
famiUes conducted by the Commission in cooperation with the Work
Projects Administration and analyzes the effects of over selling and
high-pressure methods frequently typical of this form of insurance.
Facts are presented demonstrating the resulting maldistribution of

CONCENTRATION OF ECONOMIC POWER 3

policies, and the excessive lapse and the high cost of industrial
policies. Factors leading to the confusion of the industrial policy-
holder and his inability to obtain proper service are set forth. The
inadequacy of company reports to policyholders is mentioned briefly
as preliminary to a detailed discussion of deficiencies in life insurance
accounting practices which will be found in one portion of the report.
In many respects the most significant sections deal with the operat-
ing and investment features of the business. After presenting back-
ground information on the nature of life insurance company invest-
ments and, the different problems which the companies encounter in
acquiring and managing these investments, the report takes up
certain general investment considerations. The increasing amount
of money passing through the hands of the life companies is shown to
have brought about serious investment problems which in turn have
become more acute due to the diminishing supply of bonds and mort-
gages (which are the companies' principal outlets for investment)
and the steadily declining interest yields on such securities. On the
one hand, the companies are admittedly unable to get a large part of
their money invested. Industiy, on the other hand, is obliged to take
into account this insatiable appetite of the insurance company for
bonds. The net effect is that judgment as to the type of security
best suited to a particular corporate structure is often affected by
the ease with which bonds may be marketed. The frequent long-
term advantages of equity financing are obscured by the vogue for
bond financing. Common-stock financing has gone increasingly out
of style with resultant serious effects upon the sources of capital of,
those portions of American industry where bond financing is either
inadvisable or unavailable. The desirabihty of insurance companies
investing in common stocks is considered and significant develop-
ments which may be expected to occur in the absence of these invest-
ment channels becoming open to insurance companies are indicated
in terms of the broad-range economic considerations involved.

This report assembles the significant facts revealed by the Com-
mission's inquiry. The report is based primarily upon facts developed
by the Commission in hearings before the committee. The record
of these hearings, which were held from time to time between Febru-
ary 6, 1939, and March 1, 1940, consists of approximately 3,900 pages
and contains testimony of 131 witnesses and 560 exhibits.^ Additional

2 Section 3 (b) of resolution No. 113 states that the Securities and Exchange Commission is "directed
to appear before the committee or its designee and present evidence by examination of witnesses or the
introduction of documents and reports."

Under specific authority contained in section 3 (a) of the resolution, an insurance subcommittee was
appointed and this subcommittee heard a part of the testimony, that bearing principally on the
subject of industrial insurance and retirements. (See pp. 101 to 135 and 248 to 305, infra.) The hearings
before the Temporary National Economic Committee or its insurance subcommittee are printed in
pts. 4, 10, lOA, 12, 13, and 28 of the Hearings Before the Temporary National Economic Committee,
Congressof the United States, 76th Cong., 1st and 2d sess., pursuant to Public Resolution No. 113 (75th
Cong.), authorizing and directing a select committee to make a full and complete study and investigation
with respect to the concentration of economic power in, and financial control over, production and distri-
bution of goods and services. For convenience all subsequent citations to the testimony printed in these
volumes will be stated in abbreviated form, e. g., pt. 4, R. 1391-1405. Likewise, all citations to exhibits
admitted in evidence will be similarly abbreviated, e. g., pt. 4, Exhibit No. 233. Since pt. 28 is still in galley
proof, references to testimony in this part will bo by name of witnesses and bearing dates, e. g., pt. 28. testi-
mony Winthrop Aldrich, February 26, 1940.

4 CONCENTRATION OP ECONOMIC POWER

facts presented in the report have been taken from replies to seven ques-
tionnaires ^ issued by the Commission, the pubhshed reports of the
companies themselves, and manuals or digests generally accepted and
relied upon in the conduct of the insurance business.

3 The Commission sent out seven questionnaires as follows: Preliminary questionnaire to 406 life insur-
ance companies on September 6, 1938; investment questionnaire to 26 largest legal reserve life insurance
companies on January 31, 1939; supplemental investment questionnaire to the 26 largest legal reserve life
insurance companies on August 11, 1939; letter questionnaire to 357 legal reserve life insurance companies
requesting copies of sample policies, rate boolis, annual statements, and similar material on May 20, 1939;
sales questionnaire to 67 largest legal reserve life insurance companies on October 18, 1939; questionnaire to
State insurance departments on October 24, 1939 (replies to this questionnaire were optional); and letter
questionnaire to approximately 5,000 life insurance agents on February 9, 1940.

SECTION II
Size and Growth of Legal Reserve Life Insurance Companies

At the present tirae life insurance companies control more assets,
receive more premiums, and have more poHcies in force than at any
time in the history of this country. There are approximately 365
legal reserve life insurance companies,^ whose total assets exceed
$28,000,000,000, operating in the United States. These companies
have over 124,000,000 pohcies outstanding with a face amount of
approximately $111,000,000,000.2 This insurance, which represents
over 60 percent of the life insurance in force throughout the world, is
owned by over 64,000,000 poUcyholders and is equal to $900 of life
insurance protection per capita of the Nation's population.^

The life insurance business is national in scope and is conducted
on an interstate basis. Life insurance is sold in every State of the
Union, and in no State are there less than 50 life insurance companies
licensed to do business. One- third of the companies, which account
for only about one-half of 1 percent of life insurance company assets,
operate within the confines of a single State, whereas 46 percent of
the companies, representing over 90 percent of the assets, operate in
five or more States.*

1 A legal reserve life insurance company is a life insurance company which agrees to pay a definite sum or
benefit that cannot be scaled down, which charges therefor a definite premium that cannot ordinarily be
increased, and which is required by law to establish, in respect to each policy issued and in force, a reserve
as defined by law based on the type of contract, age of issue, and mortality and interest assumptions in-
volved. The reserves in the aggregate constitute a fund which on the basis of actuarial computation is
deemed exactly sufficient to guarantee that the company will be able to meet its obligations under its out-
standing policy contracts as they fall due.

Fraternal orders and assessment associations do not meet all the requirements implicit in the definition
of a legal reserve life Insurance company. , Originally companies of these types wrote insurance on the assess-
ment or step-rate plan, and even thougfh virtually every fraternal order of importance and even some
assessment associations now use the level-premium plan and actuarial reserves, they still have the right of
unlimited assessment and are not in all cases subject to the same laws imposed on legal reserve companies.

About 95 percent of the life insurance in force in the United States has been written by the 366 legal reserve
companies. The remaining 5 percent is written by fraternal orders and assessment associations. According
to The Spectator Life Insurance Year Book, 1939, there are 243 fraternal orders with admitted assets of
$1,134,000,000, $6,348,000,000 insurance in force and 7,000,000 policies outstanding. Assessment associations
number 60, with admitted assets of $23,000,000, $214,000,000 insurance in force and 784,000 policies out-
standing.

' Compiled from The Spectator Life Insurance Year Book, 1939, Best's Life Reports, replies to Commission
questionnaires and Convention Form Annual Statements. Unless otherwise indicated, all statistics cited
in this report are as of December 31, 1938.

» Pt. 4, R. 1165, 1171, 1196. Life insurance in force in the United States is more than 6 times as great as
the amount in force in Great Britain, the second largest life insurance country. For information as to insur-
ance in force in principal foreign countries (1937), see pt. 4, exhibit No. 215.

* The smallest number of companies operating in any State is 51 (Nevada, New Hampshire, and Vermont),
and the largest number is 132 (Texas). The average number oijerating in a single State is 82, while 17 com
panics operate in over 40 States (Spectator Life Insurance Year Book, 1939).

The 5 largest life insurance companies, ranked in order of size, are Metropolitan Life Insurance Co., Ne^fr
York'City, the Prudential Insurance Co. of America, Newark, N. J.; New York Life Insurance Co.,
New York City; the Equitable Life Assurance Society of the United States, New York City; and the
Mutual Life Insurance Co. of New York, New York City. Each of these companies is licensed in every
State of the Union except New York Life and Mutual Life, which are licensed in all States except Texas
(pt. 4, R. 1170). The 75 largest legal reserve life insurance companies, which include all companies with
assets in excess of $20,000,000 as of December 31, 1938, are listed in appendix A, which also gives the location
of each company's home office, its admitted assets, its total insurance in force, its plan of operation, and the
number of States in which it Is licensed.

Q CONCENTRATION OF ECONOMIC POWER

The purely dimensional aspects of the life insurance business are so
staggeiing, the statistical aggregates themselves so enormous that it
is difficult fully ■ to appreciate the significance of hfe insurance in our
national economy. Today it may be said that every other man,
woman, and child is insured by a life insurance policy. Every fifth
man, woman, and child in the United States carries a life insurance
policy with the MetropoUtan, and that company insures in the first
year of life about one-fifth of the number of children born.*

Life insurance companies have an annual income totaling over
$5,000,000,000, an amount sUghtly less than the receipts of the
tjnited States Government and equal to about 8 percent of our
national income in 1938.^ Of this amount almost $4,000,000,000, or
over 70. percent, is received annually from poUcyholders m the form of
premiums. The assets of these companies exceed by over $11 ,000,000-
000 the combined assets of mutual savings banks and building
and loan associations in this country and are twice as much as the
savings deposits in State and National commercial banks combined.'^

In the course of the hearings, particular studies were presented
showing the operations and investments of the 26 largest legal reserve-
hfe insurance companies which account for, roughly, 87 percent of the
assets of the life insurance business. It appeared that in 1937
these 26 companies owned 11.6 percent of the long-term debt of the
United States Governm'ent and owned substantial percentages of all
principal classifications of long-term private debt.* In addition, the
companies owned niore than lYi billion dollars of farm and city real
estate.^ Additional facts concerning these 26 largest companies may
aid in an appreciation of their' size and the important part which they
play in the national economy. In the 10-year period from 1929 to
1938, inclusive, the companies had a total premium income of
$30,390,464,000 and in the same period made gross investments total-
ing $26,189,870,000.^° These investments were so substantial that in
addition to purchasing large blocks of Government bonds and investing
in sizable amounts of farm and urban mortgages, these companies
purchased 47.7 percent of all corporate bonds and notes issued in
1938." In that year alone the 26 companies invested about $4,000,-
€00,000, which was comprised, roughly, of $2,500,000,000 returned to
them through the maturity, sale, and redemption of their old invest-
ments and $1,500,000,000 of new money receipts. Stated in another
way, it may be said that into the hands of the officials of these life

' Pt. 12, R. 5955. Mr. Frederick H. Ecker, chairman of the board of the Metropolitan, stated (pt. 4,
R. 1238): -^

"* • • in some cities, like St. Louis, for example, more than half of the population are Insured, so It
might be said that in such cities every other man, woman, ' and child one meets on the street, in the home,
or in the cradle is insured in the MetropoUtan."

• Pt. 4, exhibit No. 218. The percentage ratio of life Insurance Income to total national income rose from
Ho of 1 percent in 1880 to 11.6 percent in 1932 (pt. 4, R. 1182). For more complete information on this subject
see pt. 4, R. 118(H1184 and R. 1641-1643. Figures for 1938 national income from U. S. Department of
Commerce.

' From schedule entitled "PrincipaL^avings Institutions in the United States, 1920-1938" (pt. 9, exhibit
No. 601).

* Pt. 2iB. exhibit No. 2259.

» Pt. 10 A, R. 180, 217, 255, 258.
'« Pt. 10 A, R. 6, 94.

» Pt. 10 A, R. 125. In 1934 these companies purchased 23.7 percent of new corporate bonds' and notes
issued; in 1935, 2^.8 percent; in 1936, 24.5 percent; and in 1937, 48.9 percent. Id.

CONCENTEATION OF ECONOMIC POWER 7

insurance companies there was an average daily flow of over $10,000,-
000 which they were obhged to invest. ^^

Though the hfe insurance companies have only small investments
in stock, it is not surprising to find that when default in their invest-
ments occurs they interest themselves in the operating problems of
various industrial enterprises in order to protect their interests as
principal creditors. As of December 31, 1938, these same companies
were represented on 65 bondholders' committees which had been
organized to protect their substantial interests in securities of cor-
porations experiencing financial difficulties.^^ Furthermore, particu-
larly in recent years, the companies have been active in operating
farm and city real estate. In the management of their farm proper-
ties, they have come to be among the largest farm landlords in the
country and have developed complicated methods for carrying out
proxy farming on a large scale involving the establishment of crop
rotation plans, soil erosion prevention, and simUar activities which
have a deep effect upon the life of the farming communities.^* Sim-
ilarly in the field of city real estate, the companies appear as the land-
lords managing properties which include one- to four-family houses,
apartments, hotels, stores, office buildings, theaters, banking houses,
schools, and various business properties.^^

Since most of the assets of life insurance companies are liquid, the
companies exert far greater influence on our -capital markets than do
many great industrial corporations a good part of whose assets are
represented by plant and equipment. In 1906 a committee of the
New York State Legislature, known as the Armstrong committee,
conducted a comprehensive investigation of the principal life insurance
companies.^® The Armstrong committee noted this special nature of
life insurance assets, stating: '^

No tendency in modern financial conditions has created more widespread
apprehension than the tendency to vast combinations of capital and assets. But
while in the case of railroads apd industrials these vast amounts are mostly fixed
in particular productive activities, the larger part of the huge accumulations of
life insurance companies consists of assets readily convertible into money and
susceptible of application to varied uses. It is this fact which has placed the
officers and members of finance committees of life insurance companies in posi-
tions of conspicuous financial power * * *.

Not only is it clear that a comparable condition exists today, but it is
also apparent that the financial power of life insurance executives

1' Pt. 28, Opening Statement, February 12, 1940. Indeed, to use the words of a recent editorial in the Wail
Street Journal as quoted in the opening statement:

"It would be hardly an exaggeration to say that the assets of the life insuraflce companies as a whole
represent a first mortgage on the coimtry's business and industry."

'« Pt. 28. exhibit No. 2339.

" For testimony concerning farm real estate, see pt. 28, testimony of Norman J. Wall, William G.
Murray, Ralph O. Limber, and Glen E. Rogers, February 15,^16, and 19, 1940.

» Pt. 10 A, R. 161, 184, 220; also pp. 350 to 355, infra.

" Report of the joint committee of the Senate and Assembly of the State of New York, appointed to
investigate the affairs of life insurance companies transmitted to the legislature February 12, 1906, vols. I to
X. The recommendations of the committee, printed in vol.X, urged remedial legislation much of which was
adopted and the report has been recognized as an outstanding contribution. The report considered the
activities of 17 companies in detail, and discussed such matters as: Organization of life insurance corpora-
.tions; control of the rights of policyholders in the election of directors; retirement of stock; Investments;
limitation of new business; political contributions; lobbying; expenses; valuation of policies; rebates; sur-
render values; ascertainment and distribution of surplus; forms of policies; pubUcity and State supervision.
Charles Evans Hughes, Esq., (now Chief Justice of the United States Supreme Court) was counsel for the
committee. Hereafter this report will be cited Armstrong Report, vol. — , p. — .

" Armstrong Report, vol. X, p. 389.

8 CONCENTRATION OF ECONOMIC POWER

has grown enormously since 1906 with the increasing size of their
companies.

This situation becomes more obvious when it is recognized that
there is a high degree of concentration tn the Hfe insurance business
and that the bulk of this economic power rests in the hands of rela-
tively few companies. Six companies, namely, Metropolitan, Pru-
dential, New York Life, Equitable, Mutual Life, and No'rthwestern
Mutual Life Insurance Co. of Milwaukee, Wisconsin, each had assets
in excess of $1,000,000,000 at the end of 1938. Of these, the five
largest companies accounted for 54.2 percent of the total assets of all
life insurance companies in the United States and the two largest
companies. Metropolitan and Prudential, with assets totaling
$4,942,900,000, and' $3,800,787,000, respectively, accounted for about
32 percent of the total.^*

In reaching its important position life insurance has experienced
spectacular and continued growth. By 1906, the date of the Arm-
strong committee investigation, the period of rapid growth was already
under way.^^ There were at that time approximately 138 legal reserve
life insurance companies whose aggregate assets totaled slightly less
than $3,000,000,000.20 Several of the now largest companies had
already been organized and at least three companies. Mutual Life,
Equitable, and New York Life, had accumulated approximately
one-half biUion dollars of assets apiece. The Armstrong report,
evincing alarm at the size and potentialities for future growth of these
companies, stated i^^

The growth of the three compajiies has long been a matter of grave concern
to students of insurance conditions. No useful purpose will be served by their

'8 Calculated from Spectator Life Insurance Year Book, 1939. See pt. 4, exhibit No. 222 for 1937 figures. A
similar concentration exists in respect to the geographical location of the home offices of the life insurance
companies. Six companies whose assets account for 56.9 percent of the total have their home offices in New
York City or Newark, N. J., and an additional group of 10 hfe insurance companies with assets representing
17.2 percent of the total as of December 31, 1937, have home offices in the New England area.

The MetropoUtan is the largest hfe insurance company in the world and, except for the American Tele-
phone & Telegraph Co., is the largest American corporation, having aggregate assets greater than any other
single industrial or banking concern, not excepting such corporations as United States Steel Corporation,
Pennsylvania Railroad, General Motors Corporation, New York Central Railroad or the Chase National
.Bank (pt. 4, R. 1194).

" The Armstrong report recommended that a limitation be placed on the writing of new business (pt. 4
exhibit No. 223, Armstrong Report, vol. X, pp. 392-396). Having determined that "The prohibition of the
issuance of new policies whenever the assets of the company reach a prescribed volume is impracticable"
(ibid.) the report recommended that companies be permitted to write insurance in amounts graduated to the
amount of life insurance in force at the beginning of a given year. Legislation based on this recommendation
became effective in New York State in 1906. This legislation limited expense and provided specifically
that no company with more than $1,000,000,000 of insurance in force could write more than $150,000,000 of
new business during any given year (Public Laws, 1906, p, 794, ch. 326, sec. 96). This law was amended in
1910 (Public Laws, 1910, ch. 697) to permit companies latitude in the writing of new business. Subsequent
amendments in 1911, 1913, 1916, 1917, 1920, 1927, and 1929 liberalized the law to give companies even greater
latitude for growth and to make restrictions on the writing of new business, if any, a matter more within the
discretion of the superintendent of insurance. The amendments lifted the $150,000,000 unconditional limita-
tion upon the amount of new business which could be written 'oy the larger companies and in addition re-
peatedly changed the formulae designed to limit. expense. The present law (ch. 28 Consolidated Laws
(1940) sec. 212) permits such a compatiy to write $150,000,000 of new business or in the alternative to write
within the limitations of a complicated first year expense formula an amount which is no more than 15 per-
cent greater than the largest aggregate amount written by the company during any 1 of the previous 3 years.
There is no evidence that the recent statutes have inipeded growth and in fact Mr. Thomas I. Parkinson,
president of the Equitable, when examined concerning the New York law stated that his com-
pany "• • • had no trouble with the limitation in past years" (pt. 13, R. 6541; see also pt. 4, R. 1252,
1253). Only one other State, namely, Wisconsin, has any statute limiting first year expense or designed
to place some ceiling upon the writing of new business (sees. 206.26-206.30, St. 1937) .

*> Pt. 4, R. 1163.

" Pt. 4, exhibit No. 223; Armstrong Report, vol. X, pp. 392-396.

CONCENTRATION OF ECONOMIC POWER 9

becoming larger. Their membership is so l^rge and their resoixrces are so. vast
as to make the question of responsible control and conservative management
one of extreme difficulty, and their magnitude if permitted to grow unrestricted
will soon become a serious menace to the community.

The assets of life insurance companies have increased from 1906 to
1938 by over 800 percent.^^ During the same period New York Life
and Equitable increased in size many times over and now each has
assets in excess of $2,000,000,000, while the Metropolitan and Pru-
dential have come to head the hst with their combined assets totaling
close to $9,000,000,000. Some measure of this growth may be found
by comparing its rate with that of the Nation's population. From
1890 to 1937 our population approximately doubled in size while in
the same period life insurance in force increased 2,500 percent or at a
rate 25 times as fast as that by which population increased.^

The steady accumulation of assets and insurance in force during
the period since the Armstrong Repdrt is indicated in the following
table .-2*

Year: Assets Insurance in force

1910 $3,876,000,000 $16,404,000,000

1915.. r 5,190,000,000 22,797,000,000

1920 . .. 7, 320, 000, 000 42, 280, 000, 000

1925 11, 638, 000, 000 71, 690, 000, 000

1930 18, 880, 000, 000 107, 948, 000, 000

1935 23, 216, 000, 000 100, 730, 000, 000

1938- . - 27, 755, 000, 000 1 11, 055, 000, 000

There were many factors responsible for this growth. To some
extent it was due to the broadening of the insurance services offered
including the development of new policy forms such as those designed
to cover substandard or impaired risks, double indemnity tienefits,
and disability and group protection. Some new markets were
developed, one of the most important of which was among women who
had become employed in* gainful occupations and thus entered the
economic life of the country. Another important factor was the
establishment of the War Risk Bureau of Insurance under the auspices
of the United States Government.^^ Insurance officials were quick
to seize upon the fact that the Government had, in insuring soldiers
and sailors during the first World War to the amount of $10,000,
placed a valuation upon a human life and to make use of it as a sales
device to sell new insurance as well^as to increase coverage on existing

" The number of companies included in this calculation increased from 138 to about 365 during the period.

» Pt. 4, R. 1170-1173. In 1910, population was 92,000,000 while insurance in force was $16,400,000,000.
By 1937, population had increased to 129,300,000 while insurance in force had increased to the staggering
amount of $109,600,000,000 (pt. 4, exhibit No. 217).

M Compendium of OflScial Life Insurance Reports. Replies of the 10 largest companies to the Commis-
sion's preliminary questionnaire Indicate that in no instance is a substantial portion of the growth since 1906
attributable to acquisition of life-insurance companies through merger, consolidation or reinsurance. Four
of these companies. Prudential Insurance Co. of America, Mutual Life, Travelers Insurance Co., and John
Hancock Mutual Life Insurance Co. reported no company acquisitions. The greatest number of companies
acquired through merger, consolidation or reinsurance were acquired by the Metropolitan and Equitable.
Metropolitan in the period from 1853 to 1916 acquired 18 companies by merger and 8 additional companies as
1 result of receiverships. These latter acquisitions were undertaken by the Metropolitan in the nature of
salvaging operations at the urging of regulatory authorities. Equitable Life acquired 7 companies by merger
and 1 by result of receivership. It should be pointed out that for the entire 10 companies only 3 companies
have been acquired in any of the indicated manners since 1906.

" See an act to authorize the establishment of a Bureau of War Risk Insurance in the Treasury I >"p.arr.-
ment, as amended by 40 Stat. 398, ch. 105, October 6, 1917.
264763 — 41— No. 28 2

IQ CONCENTRATION OF ECONOMIC POWER

policyholders. At about the same time the influenza epidemic,
according to Mr. Thomas A. Buckner, chairman of the board of the
New York Life,

* * * frightened the people of the country into a realization of the 'ncer-
tainties of life as no amount of ordinary argument could ever do.

and as a result gave added impetus to the growth of the companies. ^^
Over and above these important considerations it is apparent that
company policy was a substantial contributory factor to this unprece-
dented growth. In the past, to say nothing of the present, companies
all to frequently measured management efficiency in terms of the
amount of new insurance on their books at the close of a given year.
Methods of compensating agents made the writing of new business
and the consequent growth "inherent in the business" " and it cannot
be disputed that by and large life insurance managements constantly
strove to develop devices to push sales and increase the size of their
companies. This "human desire to grow" or, as it has been called,
this "philosophy of the mstitution of life insurance"^* probably arose
from the belief of many insurance men that it was sociably desirable
to extend the services of life insurance to the greatest possible portion
.of the population. In its practical application, however, it frequently
reflected itself in a race between companies, each striving for size
for the sake of size alone, and bred socially undesirable sales practices
which forced growth beyond that, attributable to normal demand.
As one competent observer has remarked in speaking of the period
from 1919 to 1929.

Undoubtedly some of the growth of this period was forced and unhealthy.
There was a good deal of high-pressure salesmanship and over-insurance * * *.2'

In connection with any consideration of growth it should also be
recognized that through the very operations of the business itself life
insurance companies increase in size even without adding to insurance
in force. Reverting for a moment to the principal companies to which
reference has already been made, it will be observed that during the
period from 1929 to 1938, the total amount of insurance in force in
these companies increased 18.3 percent while life policy reserves
increased 40.6 percent.^" The much more substantial increase in
reserves, results from the normal yearly additions to legal reserves
required to protect persistent business already on the books.^^

It should also be pointed out that in the period 1929 to 1938, the
assets oif the principal companies increased 61.9 percent as contrasted
with the considerably smaller increase of life policy reserves and ,
insurance in force.^^ This disproportionate asset increase suggests
one further development whicTi is of much importance in analyzing
causes _ for the spectacular growth of the life companies — namely ^,
the emphasis upon banking features of the business. Essentially, t^jiis"
emphasis,' which will be considered in more detail in a subsequent t

" Pt. 4, R. 1420. See generally pt. 4, R. 1418-1421.

" See testimony of Frederick H. Ecker, pt. 4, R. 1252, 1263.

" Pt. 10, R. 4325, 4326.

» See Life Insurance (5th ed.), p. 544, by Joseph B. MacLean, associate actuary. Mutual Life of New
York. Present day sales methods are considered in subsequent portions of this report. See pp. 192 to
234, Infra.

>« Pt. lOA, R. 4, 99 excluding Pacific Mutual, which is included in these tables only for the years 1936
1937, and 1938.

" For a fuller discussion of the actuarial aspects of the life insurance business, see pp. 177 to 184, infra.

" Pt. lOA, R. 6. '

CONCENTRATION OF ECONOMIC POWER H

sec.tion of the report,^^ has resulted, in encouraging poUcyholders
to make larger initial payments to their companies and to leave funds
with their companies after the maturity of the pohcy contracts to be
administered as trust funds for their beneficiaries. In the period from
1929 to 1938, annuity reserves have increased 565 percent, premiums and
rents paid in advance have increased 186 percent, dividends left with
the companies have increased 89 percent and supplementary contracts
not involving life contingencies, that is, contracts for the gradual
rather than immediate disbursal of policy proceeds, increased 390
percent.^* There are no indications that this growth has ceased.
Practically all factors which have brought the companies to their
present position are still at work.^*

33 See pp. 363 to 378, infra.

3< Pt. lOA, R. 99.

" The testimony of Mr. Thomas I. Parkinson is illustrative. When questioned concerning the. futai.
growth of his company, he stated (pt. 13, R. 6539-6541): •

"Mr. Parkinson. • * * What we are trying to do is to give the widest possible and the fullest possi-
ble coverage to the greatest number of people at a cost which they will stand.

"Mr. Gesell. So that though your company now is over the two-billion-dollar mark in the point of view
of size, and could maintain that position through the efforts of this 25 percent of the agency force who write
64 percent of the business, you feel that you have a mission to carry the service of your conIt)any to persons
who are not yet policyholders?

"Mr. Parkinson. That is a question that I can answer happily and enthusiastically, yes.

"Mr. Gesell. So that if you are entirely successful from the point of view of your present management
policies, you will still continue to increase at the same rate you have been going, both from the point of view
of assets and insurance in force?

"Mr. Parkinson. I think that is true.

"Mr. Gesell. It would look as though if you succeed in your present program that your company may
reach the five-, six-, seven-, eight-, ten-billion-dollar mark in time?

"Mr. Parkinson. That is possible.

"Mr. Gesell. Now there is a point here somewhere, is there not, where the society must consider whether
the advantages to the new policyholders who are brought into the business are equal to the disadvantages
w:hich may accrue to the existing policyholders because of the increase in size and the other complexities
which arise?

"Mr. Parkinson. Yes.

"Mr. Gesell. You feel you have not yet reached that point?

"Mr. Parkinson. By no means. • •

« * * * • • •

"Mr. Gesell. You see you have likened your activities, and I am sure of your sincerity, to an educational
or religious program.

"Mr. Parkinson. Yes.

"Mr. Gesell. You take even, though, a minister or a preacher or anyone else who is interested in putting
forward an idea,' there must be at some stage where he stops and works with the group who are subject to his
influence. Your continual desire to bring more and more people into your society would ihdlcate that to
some extent you have no confidence in the fact that those people will be taken care Of by other companies
writing insurance, preaching the same gospel, and woVking in other areas? i

"Mr. Parkinson. No; that is not so. I should dislik^ nothing more than that slU of the life insurance
should be in my company.

"Mr. Gesell. Where are you going to stop?

"Mr. Parkinson. That is an exceedingly difiScult question. As you have indicated, if we did not take
another member of our organization; that is, did not seU another policy to a nonmember, if we did not allow
an existing member to take any additional interest; that is, did not sell any additional policy to an existing
member, the development, assuming that the existing policyholders remained, in the institution, would
necessarily add to our alssets, add to them even faster, I am told by the actuaries, for the next fevf years than
if we do go on doing business.

"Mr. Gesell. And we have then, don't we, both in the very nature of your business and from the point
of view of the management policy which you have just expressed, the very present possibility of your com-
pany continuing to grow larger and larger and larger, accumulating more and more of the assets and invest^
ments of the country. i

"Mr. Parkinson. And it gives us a continuing problem which varies as other things alaout us, population
and other factors grow in this great country?

"Mr. Gesell. Have you set any ceiling as to your size from the point of view of assets or insurance in
force?

"Mr. Parkinson. No; because it is so difficult to do it without using a dollar value, and who can say
what dollar value used today would be a reasonable estimate in the future?"

12 CONCENTRATION OF ECONOMIC POWER

It would appear in fact that due to the operation of many factors
including forces inherent in the character of the policy contracts
written and the impetus of management, continued growth of life-
insurahce companies is certain. The companies are certain to ac-
cumulate more and more assets and they will become increasingly
important in our economy. In view of the fact that an 800 percent
increase in assets has been attained since 1906 the prospects of further
accumulation of assets in the future gives some cause for concern.
On the basis of past experience it is reasonable to expect that by 1950
the 26 principal companies will have increased their assets anywhere
from 54 to 60 percent, reaching the unprecedented size of from
$37,000,000,000 to $40,000,000,000.

SECTION III

Control of Legal Reserve Life-Insuraice Companies

Legal reserve life-insurance corporations are organized on one of
three plans— the mutual plan, the stock plan, or the mixed plan The
relative miportance of companies for, which information is Mailable
operatmg under these three plans is indicated in the followingtable-^

Plan

Number of
companies

Assets

Mutual

218

$22,229,000,000

5, 307, 000, 000

219,000,000

Stock

Mixed

Insurance in
force

$81, 999, 000, 000

28, 317, 000, 000

739, 000, 000

From the table it can be seen that though the stock companies far
outnumber the mutuals, the latter companies control more assets and
have more insurance m force than the; stock or mixed companies
combined. Of the 10 largest companies, which companies command
over 70 percent of the total assets, only one company is a stock com-
pany.^

Basically the difference in these plans of operation hes in4he nature
ot the groups given theoretical control under the company charter.

Ihe mutual companies are cooperative enterprises, which return
I,- u .^^ ^^•^- l^^^ ,^^^ P^^^^^ resulting from their operations and
which theoretically place management control, i. e., the right to elect
directors, entirely in the hands of the poUcyholders themselves.
IJirectors of stock companies, on the other hand, are elected by the
sto/ikholders exclusively. Policyholders have no voice in their selec-
tion or election Mixed companies, as the name implies, are managed
by a board of directors elected jointly by the stockholders and policy-
holders or partially by each group.

It should be noted that plans of company organization do not de-
termine the type of life insurance a company mav write. Generally
speaking, however, the mutual companies sell participating insurance
and the stock companies nonparticipating insurance. The policv-
holder who purchases participating insurance usually pays a slightly
higher original premium and receives a return of premium or "divi-
dend representing the difference between what he paid in -and the
amount necessary to meet all requirements of the business. Holders
01 nonparticipating insurance on the other hand receive no dividends
ail excess p remiums and operating profits of t!io business being drawn

' Spectator Life Insurance Year Book (1939).

> The Travelers Insurance Co. of Hartford, Conn., which ranks sev n' a in size (pt. lOA. R 5) One other
company m this group of 10, the Prudential, still has stock outs', ,.r ung by reason of the fact that it is
completing mutualization proceedings. To all intents and purpose: tl- j company is mutual (pt 4, R 1191-
pt. 12, R. 5913-5925, exhibit No. 1011).

24-- (X)NCENTRATION OF ECONOMIC POWER

off by the stockholders as dividends, or used to biiild up surpluses in
which the policyholder has no divisible interest. It is not infrequent
that stock companies issue both nonparticipating aiid participating
insurance. Mixed companies invariably have both types of insurance
in force.

A. SELF-PERPETUATION IN OFPtCE OF DIRECTORS OF
MUTUAL COMPANIES

Since the mutuals ic )unt for 80 percent of the assets of all life in-
surance companies 0T>erating in tha United States and include 9 of the
10 largest companies, the extent to which their policyholders have a
voice in the selection and election of directors presents a question of
paramount concern in any study of the concentration of economic
power.^ On the basis of the evidence adduced, it cannot be said that
the poUcyholders have any control over the management of the mutual
companies. The putative rights of the policyholders to select and
elect directors are of no practical value. The directors are completely
self-perpetuating.

Four of the five largest mutual companies are governed by the law
of the State of New York with regard to the election of their direc-
tors.* The complete inadequacy of this law in providing a proper
medium for the expression . of policyholder viewpoint was demon-
strated, tinder its term? every policyholder of a mutual company is.
entitled to one vote in the election of each director of his company
irrespective of the number of policies or the amount of insurance which
he holds as long as his policy is in force and has been in force for one
year at time of the election. Provision is made for a so-called "ad-
ministration ticket" which, as the name implies, constitutes a slate of
directors selected and nominated by the existing board of directors;
provision is also made for independent nominations by policyholders
who desire to nominate one or more persons not designated on the
"administration ticket." In order to nominate someone independent
of the "administration ticket," 25 policyholders must first petition the
superintendent of insurance for a list of policyholders which is to be
made available to the petitioning policyholders at the discretion of
the superintendent.^ Thereafter, in all corporations with over 100,000
policies in force one-tenth of 1 percent of the qualified voters must
certify to the independent nomination, which must be filed with the
superintendent at least 5 months prior to the election.^ That this.
In itself, is a sizable undertaking is indicated by the fact that in the
case of the Metropolitan approximately 24,000 signatures would be
required to bring about an independent nomination.^ If an inde-
pendent nomination is perfectfed^ the company at its expense must

3 Mutual companies account for 80.1 percent of the admitted assets of United States life insurance com-
panies, stock companies, 19.1 percent and mixed companies, 0.8 percent. Computed from Spectator Life
Insurance Year Book, 1939.

« Sec. 94, New York State Insurance Law; pt. 4, exhibit No. 232.

» In a letter addressed to the Securities and Exchange Commission dated January 10, 1939, the New York
Insurance Department stated, "The superintendent certainly would not make any arbitrary refusal when
a request of at least 25 policyholders appeared legitimate and when there seemed any likelihood of an inde-
pendent ticket being named" (pt. 4, R. 139&, 1405, 1406). ,

• The "administration ticket" is required to be filed at least 7 months prior to the election. Id.

' Contrast Wisconsin Law printed at pt. 4, exhibit No. 288. This law specifically prohibits proxies and
provides for independent nominations by as few as 100 policyholders. Compare also with recommendations
of Armstrong Committee. (Armstrong Report, vol. X at p. 41.)

CONCENTRATION OF ECONOMIC POWER 15

mail every policyholder a ballot containing the names of those di-
rectors nominated by the board and those nominated independently.
In the event an independent nomination has been made, the law con-
tains strict provisions governing the conduct of that election. These,
however, may be waived in the absence of an independent nomination
by compliance with such rules and regulations as the superintendent
of insurance may prescribe. If no independent nomination has been
made, no votes may be cast except for the "administration ticket"
and a single vote is sufficient to elect that ticket for the ensuing
term.*

Thus it may be seen that from the outset there are obstacles in the
way of policyholders desiring to nominate to the board of their
company persons other than those selected by the existing board of
directors. The expense of petitioning the superintendent and then
soliciting a list of policyholders for the necessary nominators' signa-
tures is too obvious to require discussion.®

Even in the case of companies operating under a law as restrictive
as New York's, policyholders might achieve some participation in the
management of their companies were it not for the fact that the com-
panies themselves do little to acquaint their policyhol'ders with their
voting rights or to encourage them to exercise the same. In view of
the inaction of the companies in this respect it is not surprising that
following the hearings, the Commission received many letters from
poUcyholders of mutual companies indicating their surprise in learn-
ing that they were eligible to vote in the election of directors in their
companies. ''^

An analysis of replies to a Commission questionnaire disclosed that
65 percent of the mutual companies did not mail special notices of
elections of directors to their policyholders." Furthermore, of the
80 mutual companies examined, as many as 19 announced the meeting
for election of directors only by notice on the policy or policy jacket,
and in the case of at least 65 percent of the companies the notice given
was .definitely of questionable value. ^^ In most instances the notice

s Since the passage of sec. 94 of the New York Insurance Law in 1906 there have been only 5 contested
electfbns of which 2 were directly attributable to the Armstrong Committee revelations. Of the 3 remain-
ing, 2 elections involved the unsuccessful efforts of a single nominee to obtain a place on the board of the
Mutual. In only one Instance was an independent slate elected and that was in the case of the Buffalo
Mutual Life Insurance Co., a relatively small assessment corporation where policyholders' dissatisfaction
resulted from an increase in rates due to unfavorable mortality experience. With the exception of the
Buffalo Mutual instance there have been no contested elections in New York State during the last 15 years
(pt. 4, R. 1405).

» Pt. 4, R. 1311. It should be pointed out that the statute is so drawn as to prevent policyholders obtain-
ing a list more than 8 months in advance of the election. This, coupled w ith the requiremenj that the
nomination must be filed not less than 5 months before the election leaves, only 3 months within which to
obtain a list, circularize the same, and corral the necessary signatures. The situation is further complicated
in the case of industrial companies organized under the laws of New York. The law does not fcontain any
provision whereby policyholders interested in bringing about an independent nomination may secure a list
of industrial policyholders though as far as numbers of policyholders are concerned, the industrial policy-
holders are far more important than the ordinary policyholders. In the case of the Metropolitan, which as
of 1937 had 24,821,000 policyholders eligible to vote, from 22 to 23 million of these policyholders held industrial
policies and their names would not have been available to anyone initiating an independent nomination
(pt. 4, R. 1311: exhibit Nos. 232, 255; pt. 12, R. 5955). The Metropolitan does not keep a list in its home
office of its industrial policyholders by name but only by policy number (pt. 4, R. 1305).

"Pt. 4.^. 1403.

" Pt. 4, exhibit No. 257. Out of 67 mutual companies for 'Which information was available only 15 sent
proxies to their policyholders. Contrast with stock life insurance companies. Over 88 percent of the stock
companies replying to the same questionnaire sent special election notices to their stockholders. Replies to
' Commission's Preliminary Questionnaire, question 10. >^

'» Pt. 4, exhibit No. 256. Jsj

CONCENTRATION OF ECONOMIC POWER

was cryptic, adequate to meet minimum statutory requirements but
far from sufficient to apprise the policyholder of his voting rights/^

An examination of votes cast in the elections of the 12 principal
mutual companies during recent years indicates the ineffectiveness of
the notice given and the resulting apathy of policyholders.^* In the
1937 elections of these 12 companies, which at that time accounted for
72 percent of the assets of all companies,^* an average of only 0.55
percent of the eligible votes was cast. It wUl be noted from the follow-
ing table that the ratio of votes cast to the eligible votes was found to
range from a low of 0.01 percent in the case of Northwestern Mutual
to a high of 2,51 percent in the case of Prudential. ^^

Company

1. Metropolitan —

2. Prudential

3. New York Life.

4. Equitable .

5. The Mutual of New York.
8. Northwestern

7. John Hancock

8. Penn Mutual.

9. Ii^utual Benefit

10. Massachusetts Mutual

11. New England Mutual

12. Provident Mutual-

Estimated
number of
policy-
holders

27,111,000

21, 300, 000

2,000,000

1, 149, 500

865,000

635,000

5, 170, 000

367, 674

364,004

363,696

253,950

189,000

Number of

possible

■votes

821,000
200,000
850,000
072,000
805,000
635,000
250,000
651, 678
(')

486,000
278, 500
189,000

IN umber
of votes
actually
cast per
director

437, 804

306, 675

318

532

177

1,169

12, 480

8,364

288

631

2,395

Percentage

ratio of

vote cast

to possible

votes

1.76
2.51
.02
.05
.02
.01
.02
.76

.06
.19
1.27

I Not supplied.

Three of the four large New York mutuals admittedly do nothing to
encourage policyholder voting. The Equitable, New York Life, and
Mutual did not advise their policyholders of their right to initiate
independent nominations and in the absence of such nominations none
of these companies mail ballots or proxies to their policyholders or
undertake to encourage their participation in the voting. It appeared
that the votes cast were largely votes of employees of the companies
who also happened to be poUcy holders, ^^ and that in at least two recent
elections of Mutual directors, for example, all votes, with the possible
exception of one or two which could not be identified, were cast by
employees of the company.'* With such a procedure in vogue, it is
small wonder that policyholders become apathetic and managements
become entrenched.

In the Metropolitan and Prudential a slightly different situation is
present. As these are the two largest American companies, a more

" It is significant that practically only a single instance, that of the Acacia Mutual Life Insurance Co. of
Washington, D. C, was a system of notice used which approximated adequate disclosure to the policy-
holder of his franchise rights (pt. 4, R. 1378-1387). This company was one of the few companies fotmd to
encourage its policyholders in initiating of independent nominations for the Board. In its case such nom-
inations are frequently made and the policyholders are given an opportunity to vote thereon . Approxlmatel j
25 percent of the policyholders eligible to vote participate in the elections (pt. 4', R. 1384).

" Pt. 4, exhibit No. 266.

'» Pt. 4, R. 1400.

■« Pt. 4, exhibit No. 256.

" Pt. 4, R. 1373, 1391.

" Pt. 4, R. 1392.

CONCENTRATION OP ECONOMIC POWER 17

detailed discussion of their elections is in order. The Metropolitan
has adopted a unique procedure. Its effect is to stir up policyholder
interest in the election after it is certain that the "administration
ticket" will be reelected. No notice is given to the policyholder of his
right to initiate an independent nomination. ^^ The "administration
ticket" is nominated 7 months prior to election and certified to the
superintendent of insurance according to law.^° No publicity is given
the composition of the slate, however, until much later, after the time
for independent nominations is past.^^ At this juncture one attirma-
tive vote will assure election of the entire ticket. For reasons which
were not made clear it is precisely at this juncture that the Metro-
politan undertakes to interest its policyholders in the election —
after the result cannot be changed.^^

The elections are usually held the second Tuesday in April of every
odd numbered year, at which time the entire board stands for re-
election.^^

In the case of contested elections the New York law prohibits agents
from soliciting policyholder votes during business hours. In uncon-
tested elections, however, this provision is waived by the superintend-
ent at the request of the Metropolitan in order to permit such solici-
tation by the company's agents.^* Accordingly, during the month of
January of each election year over 1,000,000 ballots and proxies are
printed and distributed among the company's agents and managers ^®
on a pro rata basis with instructions to obtain policyholders' signatures
thereon. ^^

Completed ballots and proxies are usually sent in by the office
manager.^^ They are opened and sorted prior to election date by
Metropolitan clerks. ^^ No signature comparison is made at any

" Pt. 4, R. 1297.

" Pt. 4, R. 1297, 1298.

" Pt. 4, R. 1297, 1298. There is a notice which appears on Metropolitan policies, premium receipts, and
premium receipt books to the following effect (pt. 4, R. 1298):

"An election of directors of the company is held in New York on the second Tuesday in April of every
odd year. The holder of this policy while it remains in force after 1 year from its date of issue will have a
right to vote either in person or by proxy or by mail. For full particulars how to vote, apply to the sec-
retary. No. 1 Madison Ave., New York City."

Formal notice to the same effect as the foregoing is given through a policyholders' magazine (pt. 4, exhibit
No. 256). Statutory newspaper notices are placed in New York City newspapers at intervals for 2 weeks
prior to the actual voting but these notices fail to mention that the policyholder has a right to vote (pt. 4,
R. 1299, 1300).

" A former superintendent of insurance for the State of New York, W. T. Emmett, stated in a letter
to the president of the New York Life, dated January 3, 1913 (pt. 4, R. 1398):

"* • • there being no contest, the law does not contemplate that your corqpany incur the expense
of mailing ballots to its policyholders or require it to take any action for the purpose of bringing out the
vote, for by the express requirements of the law, itself; the election could have but one itsult."

M Pt. 4, R. 1295.

" Pt. 4, R. 1296.

" Pt. 4, R. 1301.

*' A circular letter written to the Metropolitan agency force stated: "These ballots are not merely for
distribution, but are intended for use. As soon as an agent has exhausted his first installment of ballots
and proxies, he should be given another lot and encouraged to exert every reasonable effort to have them
used" (pt. 4, exhibit No. 248).

Agents are under pressure to get the ballots signed (pt. 4, R. 1317, 1324, 1362). One agent testified that
his manager told the men that they would be disloyal if they did not bring in completed ballots within a
certain time and a week's deadline was set (pt. 4, R. 1324). Another testified that the obtaining of proxie?
was part of the "detail work" and that his pay would have been held up had he not obtained the necessary
signatures, i. e., completed detail work by the end of the week (pt. 4, R. 1362).

" Pt. 4, R. 1302.

« Pt. 4, R. 1304.

Ig CONCENTRATION OF ECONOMIC POWER

time.^® The final count, a mere formality, is made in the presence of
representatives of the New York State Insurance Department.^"
In the 1937 election, 437,804 votes out of a possible 24,821,000 were
cast.^^ The great majority of votes were cast by mail. Only 40
policyholders voted in person. These were all home-office employees,
and the Metropolitan's assistant secretary in charge of the voting
laconically reported to the president that "No outsider called." ^^

Thirteen agents of the Metropolitan were subpenaed and testified
regarding the practices of the company in soliciting proxies and ballots
from policyholders.*^ These agents all worked for the Metropolitan
at the time and were employed in nine different branch offices of the
company located at Philadelphia; New York City; Paterson; Boston
and Somerville, Mass.** Without exception., the agents testified that
it was common practice for them to sign names of policyholders to
the ballots without the knowledge or authority of the policyholders.
It appeared that where resistance of policyholders was met or where
for various reasons the agents did not wish to approach the policy-
holders with regard to the ballots they would exchange the proxies
with each other asking fellow agents to sign names of policyholders
to the proxies.*^ This signing frequently took place openly in the
district offices of the Metropolitan and in the presence of the assistant
managers.*^ Though no agent was able to testify that any assistant
manager knew of the existence of the practice many indicated that it
was their belief the assistant managers did know and one agent
pointed out *^ that proxies were turned in to the assistant manager in
his office "before the ink was dry." A former assistant manager
testified that he had known of the practice when he was an agent

"Id.

31 Pt. 4, R. 1302, 1303. As further indication that the election is a mere formality, attention should be
called to the fact that packages of completed proxies and ballots are occasionally shipped by express from
the managers to the company's home office. Since the New York law requires that the proxies and ballots
be received by mail, a representative of the office takes the package to a local post office and thejiompany
mails the ballots back to itself (pt. 4, R. 1302). Similarly, the instructions issued by the Metropolitan to
the clerks counting the ballots instruct them to void any ballot which does not state a policy number.
These instructions were issued in the face of subsec. 16 of sec. 94 of the New York insurance law which
states that failure to state or correctly state a policy number shall not render a ballot void (pt. 4, R. 1303).

" Pt. 4.' exhibit No. 255.

3' Pt. 4. exhibit No. 245.

" Pt. 4, R. 1313-1369.

'* One agent had been with the company for 20 years (pt. 4, R. 1350), and the average length of service for
the 13 was 9 years. Pt. 4, R. 1313, 1323, 1332, 1338, 1342, 1346, 1350, 1352, 1355, 1357, 1359, 1361, 1363.

3» Pt. 4, R. 1316, 1317, 1328, 1333, 1337, 1343, 1347, 1351, 1352, 1355, 1360, 1361, 1364. Most of the agents testified
that they met objections from the policyholders when they attempted to obtain the signatures. For testi-
mony on this point, indicating the nature of the objections raised, see pt. 4, R. 1314, 1321, 1324, 1332, 1333,
1346, and 1358.

One agent testified as follows (pt. 4, R. 1356):

"They hesitated to sign. They either didn't want to sign the ballot because they didn't feel they were
fully acquainted with the practice, or if they did really attempt to understand the mechanics of elections
and examine the names on the ballots, they either didn't want to because they didn't know the people or
in some cases because they did know some of the people."

Another testified that many of the policyholders were illiterate and signed with an "X" and that (pt. 4,
R. 1324):

"It wasn't an easy job to sign them because most people objected for no good reason; they didn't want to
bother signing because they didn't know what they were signing for; some of them were very leery about
signing something they didn't understand."

8« Pt. 4, R. 1317, 1323, 1333, 1336, 1337, 1338, 1343, 1353, 1357, 1358, 1360, and 1364.

«'Pt. 4, R. 1343.

CONCENTRATION OF ECONOMIC POWER 19

and participated in it.^^ He stated that the practice of signing poUcy-
holders' names was common.. Referring to this practice he said:^^

When I was sitting with agents together I would see it, but as an assistant
manager I shut my eyes.

He indicated that he and the other assistant managers avoided
discussion of the question.**^

A representative excerpt of the testimony from one agent relating
to this matter is noted below :*^

Mr. Gesell. Is the practice in your office the same as the practice m the office
concerning which the previous agents have testified?

Mr. Pettinelli. Yes, sir.

Mr. Gesell. Is it the practice in your oflice to exchange ballots among the
agents and for the agents to sign policyholders' names to those ballots?

Mr. Pettinelli. Yes, sir.

Mr. Gesell. Was that practice in effect in your ofiice when you came to work?

Mr. Pettinelli. I went to work with the Metropolitan in the year of 1936 and
the week of June 29.

*******

Mr. Gesell. Tell us what was the practice.

Mr. Pettinelli. Well, the practice was that the ballots were distributed to
the agents by assistant managers, and they were requested /to take the ballots
out and get them signed by the policyholders. So naturally when I was given
the ballots, I went out on my debit and asked people to sign the ballots. In
many cases, as a matter of fact, at that time my debit was a 98 percent foreign
debit.

Senator King. I didn't get that.

Mr. Gesell. What do you mean by foreign debft?

Mr. Pettinelli. Italian people, and most of them, naturally, in many cases,
they didn't know what they were signing, and i^ many cases people had never
heard of the company having an election, and when the ballot was presented to
them, they kind of resented it because they didn't know what they were signing
for. In other instances people didn't know how to write their name. They made
cross marks, and naturally they weren't going to attach a cross to something that
they didn't know what it was.

Mr. Gesell. They couldn't read, in othe^* words.

Mr.. Pettinelli. Positively, they couldn't.

Senator King. They could perhaps read the -Italian languagip but not the
English, is that what you mean?

Mr. Pettinelli. That is right.

Mr. DoGGLAS. The ballots were in English?

Mr. Pettinelli. Positively.

Mr. Gesell. So what happened after that?

Mr. Pettinelli. So the next morning when I first was given the ballots, I
took in as many as I had signed by policyholders, and naturally an agent's time
is limited. He has no time control; he must go out and do a day's work, and
with all that he had to get these ballots signed, so naturally we didk't have very

" Pt. 4. R. 1351.

8» Pt. 4, R. 1351.

*' Id. Various estimates were received from the agents as to the percentage of ballots cast in their respec-
tive branch offices which were signed in this unauthorized manner. Estimates ranged from 20 to 98 percent
of the total ballots cast (pt. 4, R. 1339, 1344).

« Pt. 4, R. 1346. 1347.

20 CONCENTRATION OF ECONOMIC POWER

much time to get all our ballots signed, and one morning when I was sitting there,
the first thing I know, I saw some ballots stuck in front of me, so a man said, "Go
ahead and sign them for me."

Senator King. Was he an agent?

Mr. Pettinelli. Yes, sir. So the first thing you know ballots were floating
all over the office.

Mr. Gesell. And you saw then it was the practice in the office for the agents
to do the signing themselves?

Mr. Pettinelli. Yes, sir.

Mr. Gesell. And was that practice continued in the following elections?

Mr. Pettinelli. It only took place in the one election in 1937.

Mr. Gesell. That is the only one you have been in?

Mr. Pettinelli. Yes.

Mr. Gesell. Was it the general practice in the office for you to sign that?

Mr. Pettinelli. Yes, sir.

Mr. Douglas. What percentage of the ballots going out of your office in that
election would you estimate were forged?

Mr. Pettinellt. Why, I should say the majority.,

Mr. Douglas. Over 50 percent?

Mr. Pettinelli. Positively.

Mr. Gesell. How many men were working in your office?

Mr. Pettinelli. At that time there were approximately 46 men.

Mr. Gesell. Was any of this signing done in the presence of the assistant
managers?

Mr. Pettinelli. Well, the assistant managers were in the agents' room.

Mr. Gesell. When the signing was going on?

Mr. Pettinelli. Yes, sir.

Mr. Gesell. Do you know whether or not they saw what was going on?

Mr. Petinelli. That I can't say.

The Commission was prepared to present further testimony on
this general question but the committee ruled that such testimony
would be cumulative and prevented the calling of additional witnesses.
Subsequently numerous agents appeared at the hearings, including a
Mr. Roth, who stated he represented 1,800 Metropolitan agents who
desired to refute the testimony of the witnesses on this subject and to
deny the existence of the practice. No further testimony was taken,
however, the committee stating that further evidence would con-
stitute an unnecessary burden on the record. It was assumed the
testimony would be contrary to that already given.^-

It should be pointed out that this unauthorized signing in no way
affected the result of the election. The result was certain under the
law before the ballots and proxies reached the agents' hands. This
fact was evidently partly responsible for the attitude of the agents
who recognized the procedure as pure window dressing.*^

As further indication that the policyholders of the Mestropolitan
are given no bona fide opportunity to participate in elections of
directors, the company's treatment of policyholders who inquire
concerning their franchise rights is pertinent. First, it is clear that
such policyholders are not advised of this right to participate in the

"■ Pt. 4, R. 1367-1369, 1409-1410. All ballots and proxies are destroyed by the Metropolitan 4 months
after they have been counted (pt. 4, R. 1305). Such destruction is permitted by law. (Id.)
" See e. g., pt. 4, R. 1357.

CONCENTRATION OF ECONOMIC POWER 21

filing of an independent nomination.** Furthermore, several cases
appeared in which the Metropolitan investigated pohcyholders who
wrote in to inquire concerning their right to vote.*^ One such case,
that of Mr. C. L. Fontaine, of Kansas City, Mo., is in point. Mr.
Fontaine wrote the following on a postcard to the Metropolitan under
date of September 29, 1936:"^

Kindly advise me as a policyholder how to vote. Is there one vote for each
policy, one for each holder or is the vote regulated by the amount of insurance
carried?

Yours very truly,

C. L. Fontaine,
Kansas City, Mo.

This inquiry resulted in the Metropolitan making surreptitious
investigation of Mr. Fontaine. The manager of the Kansas City
district office of the Metropohtan was asked to find out about Mr.
Fontaine's business and general standing in the community and was
instructed as follows in a letter from the home ofl5ce:*^

There is no need for you to send one of your men to question him. Casual
mquiries of the agent or of others in the neighborhood of, his business should
enable you to give us a pretty good line on him and his interest in the company.

As a result, an inquiry into Mr. Fontaine's background was made and
a report filed. *^ Mr. Cletis Tully, assistant secretary of the Metro-
politan stated, that this investigation was for the purpose of obtaining
correct information as to the amount of insurance carried by Mr.
Fontaine and the policy number of his policy. He was unable satis-
factorily to state why this simple information could not be obtained
directly from the policyholder and his explanation appears meaning-
less in view of the fact that file was closed without his receiving the
information which he says was desired.*^ Mr. Tully stated that the
reason he took the trouble to make the investigation in this case was
"just poor judgment" ancihe denied that he was alarmed or had any
desire to determine whether Mr. Fontaine might be interested in
initiating an independent nomination.^" It is difiicult, however, to
find any other explanation for his activities in this regard.

There has never been a contested election in the Metropolitan since
its mutualization in 1915."

In the hght of the foregoing, it is interesting to examine the testi-
mony of Mr. Frederick H. Ecker, who steadfastly maintained that the
chief advantage of the mutual form of company was that it gave
policyholders the right and the practical opportunity to oust directors

" It is interesting to note that in the case of one policyholder who wrote for full information a reply was
sent which did not advise the policyholder of his right to make an independent nomination and that a tab
oh the letter to Mr. Cletis Tully, assistant secretary of Metropolitan, from a member of the leeal division of
the Metropolitan stated (pt. 4, E. 1310):

"This letter has had the consideration o- vltfisrs. TiqcoId and Ecker who don't want any further explana-
tion given." See also pt. 4, R. 1307.

" Pt. 4, R. 1307-1310.

" Pt. 4, R. 1308; exhibit No. 250.

«/d.

" Pt. 4. R. 1309.

M Pt. 4, R. 1309, 1310.

»i Pt. 4, R. 1295.

22 CONCENTRATION OF ECONOMIC POWER

when those directors were not conducting the company in accordantje
with the desires of the poUcy holders, ^^ He stated:®^

Jf there were an abuse and it was publicized, there would be votes by our
|)olicyholders that would put out of office any unsatisfactory board of directors.

It was this right of the pohcyholders which Mr. Ecker indicated gave
his company an advantage over companies operating mider the stock
plan."

An officer of the Prudential made no such claim in describing the
elections of directors in his company, and admitted frankly that he
could not tell whether there was any possibility of an independent
nominating succeeding." In the case of the Prudential, which it will
be recalled is in process of mutualization, elections are held once a
year, at which time 4 of the company's 16 directors are elected for a
term of 4 years. ^^ Although the elections are conducted under a New
Jersey statute," which differs somewhat from the New York statute,
the directors remain in an equally impregnable position. Any policy-
holder, industrial or ordinary, whose policy has been in force at least
1 year and who is 21 years of age or more may cast a vote.^^ Policy-
holders are notified of their right to vote by advertisements inserted
in newspapers published in the capital of each State in which the
Prudential does business and by notices delivered to the policyholders
through the agency force. There is no provision in the New Jersey
law for an '^administration ticket" as such and jio time limit within
which independent nominations must be filed. In one sense of the
word, each election is a contested election; that is to say, anyone can
be elected a director of the Prudential if he receives sufficient proxies
on his behalf to carry the yote, and it is not imtil this final vote at
the policyholders' meeting that it can be definitely determined
whether persons selected by the existing directors or persons desig-
nated by someone else have been chosen.^^ As a practical matter,
however, no one in recent years other than a nominee of the existing
board of directors has ever received more than 4 votes.®" The com-
pany prints and distributes, through its agency force, two types of
proxies; a;white proxy which contains the names of the four directors
<^^elected and nominated by the existing board and green proxies, upon
which a policyholder may designate a nominee of his own selection.®^
The number Of white proxies is always greatly in excess of the number
of green proxies.*'^ When executed proxies are received, no signature
comparison is made.®^

As in the case of the Metropolitan, election irregularities were dis-
covered. Representatives of the Commission selected af random 110

M See Metropolitan advertisement, pt. 4, exhibit No. 231.
M Pt. 4, R. 1276.

M Pt. 4, R. 1250 to R. 1252. inclusive.
M Pt. 12, R. 5961.
M Pt. 12, R. 5914, 5916.

" Kievised Statutes of New Jersey, 1937, sec. 17:21-1.

" Pt. 12, R. 5915. In the 1937 election, 12,200,000 policyholders out of a total of 21,300,000 policyholders
were entitled to vote. Of this number 306,675, or 2.51 percent actually voted. Pt. 4, exhibit No. 255.
«« Pt. 12, R. 5915-5917; exhibit No. 1005.
«« Pt. 12, R. 5920.
M Pt. 12, R. 5917.

M Pt. 12, exhibit No. 1008. In the industrial division of the company for the 1938 election, 569,000 white
Toxies were printed and only 29,500 green proxies were printed. Id.
«3 Pt. 12, R. 5919, 5920.

CONCENTRATION OF ECONOMIC POWER 23

proxies cast in recent elections' and compared signatures thereon with
ngnatures on the appHcations for insurance signed by the pohcy holders
purporting to have signed the proxies. These proxies were cast during
:he elections of 1934, 1936, and 1937 by policyholders residing in St.
Louis, Detroit, New York City, and Chicago. It was found that 21
proxies could not be compared because the policy number written on
the proxy did not correspond with the true policy number; that 5
proxies were signed by minors and hence invalid, and that 44 were
signed by unauthorized persons contrary to the certification on the
proxy that the policyholder had personally, in the presence of a wit-
ness, appeared and signed the proxy in question.®* Mr. William W.
Van Nalts, secretary of the Prudential, who stated that he was famihar
with all elections held in the Prudential since mutualization proceed-
ings were commenced, testified as follows:®"

Mr. Gesell. * * * can a policyholder of the Prudential call at the home
office or write and get a copy of the list of policyholders of the company?

Mr. Van Nalts. I don't know that anybody can get a list of the pohcyholders
of the company. It would be a tremendous job to do that.

Mr. Gesell. In other words, if I happened to be a policyholder of the com-
pany and decided I wanted to put someone of mj' own choice on the board of
directors and decided that I would undertake that venture and attempt to get
a policyholder's list I couldn't even find one ai,t your company?

Mr. Van Nalts. We couldn't make up a list without a tremendous amount of
labor and expense. It would be of no benefit to the policyholders.

Mr. Gesell. If I were attempting to put someone of my own choice on the
board of directors it might be of some benefit to me.

Mr. Van Nalts. No; we wouldn't care about that.

Mr. Gesell. So as a practical matter anybody who wants to really get under
way and move to put on someone other than that person selected by the board
of directors hasn't a possible chance of doing so,?

Mr. Van Nalts. I don't know.

The Vice Chairman. What.is the answer?

Mr. Van Nalts. I don't kni^ what the chance is.

Mr". Gesell. You don't think he has any?

Mr. Van Nalts. I don't know whether he has.^

Opportunity for policyholders of mutual companies actually to take
part in the management of their companies is even less than the fore-
going would indicate. The absence of provision for cumulative voting,
the occasional use of perpetual or long-term proxies, the staggering of
directors' terms, the failure of companies to bring their management
face to face with the policyholders at annual meetings sinular to
stockholders' meetings," and the policyholders' lack of legal authority
to gain access to the books and records of their companies or in many

M Pt. 12, R. 5924, 5925.

«» Pt. 12, R. 6921.

8« In one instance where a policyholder did make inquiry and request a list of policyholders, the Prudential
conducted an investigation from which it appeared that representatives of the office of the chief inspector
of the Prudential had examined exhaustively into the family and background of the inquiring poUcyholder
(pt. 12, exhibit No. 1010). Mr. Van Nalts testified (pt. 12, R. 5923):

"• • * it is only a natural thing to want to know who a man is who makes an inquiry."
The investigation appears to have been made for the purpose of determining whether the inquiring policy-
holder was one who was interested in initiating a plan to make in independent nomination for the board
of directors. Id.

" The laws of Connecticut, New York, Massachusetts, Ohio, Illinois, New Jersey, and Pennsylvania,
for example, contain no requirement for policyholders' meetings except such meetings as may be necessary
for the purpose of voting for directors.

24 CONCENTRATION OF ECONOMIC POWER

States even to obtain a list of their fellow policyholders ^^ are all factors
tending to disfranchise the policyholder and to entrench management.

1 . . Cumulative voting.

The usual practice is to permit each policyholder of a mutual com-
pany one vote for each candidate to fill each vacancy on the board of
directors. Thus if there are 10 directors up for election, a policy-
holder may cast 10 votes but must not vote more than once for any
candidate. Cumulative voting permits a policyholder to lump his
votes in favor of a single candidate. There can be no doubt that the
general availability of cumulative voting privileges would afford
policyholders greater opportunity to secure representation on boards
of mutual companies. Only 3 States, Arizona, Pennsylvania, and
Wisconsin, have statutes which require mutual policyholders be given
cumulative voting privileges. An analysis of the charters and bylaws
of 73 mutual companies disclosed only 1 company, a company incor-
porated in Pennsylvania, which granted cumulative voting privileges to
its policyholders.** Except for companies incorporated in the 3 States
indicated above, cumulative voting by policyholders of mutual com-
panies is nonexistent. In contrast, the laws of many States provide
cumulative voting rights for stockholders of life insurance companies.^"

2. Perpetual or long-term proxies.

Under this form of proxy the policyholder authorizes representatives
of the management to act as his proxy so long as he remains a policy-
holder in the company or until the authority given is specifically
revoked.'^^ These proxies are sometimes presented to the poUcy holder

«8 Under New York law, policyholders' lists (excluding names of industrial policyholders) can be ob-
tained under the restricted conditions previously indicated, p. 14, supra. No provision in this regard is
found, however, in the laws of other principal insurance States, including Connecticut, Massachusetts,
New Jersey, Illinois, or Ohio. In none of the above. States, including New York, does the policyholder
have the right to examine the books or records of his company. Stockholders on the other hand have
had this right for many years and indeed it is a rare exception that the right is not guaranteed both by
statute and by bylaws or charter provisions as well. The failure to give similar rights to policyholders,
either through statute or by law, is not explained.

M Replies to Commission's Preliminary Questionnaire, item 3.

" The laws of as many as 19 States contain mandatory provisions in this respect: Arizona, Arkansas,
-.California, Idaho, Illinois, Kansas, Kentucky, Mississippi, Missouri, Montana, Nebraska, North Dakota,
Ohio, Pennsylvania, South Dakota, Washington, West Virginia, Wyoming, and South Carolina. An
additional 17 States have permissive statutes: Colorado, Delaware, Florida, Indiana, Louisiana, Maryland ,
Michigan, Minnesota, Nevada, New Jersey, New Mexico, Rhode Island, New York, Tennessee, Virginia,
Maine, and Utah.

" The form of proxy used by the Home Friendly Insiuance Co. of Baltimore, Md., is set forth below
(pt. 12, exhibit No. 1073). This is typical of the type of proxy mentioned herein.

"Policy No.

"Know all men by these presents: That the undersigned member and policyholder of the Home Friendly
Insurance Co. of Maryland, hereby constitutes and appoints, for such period as I shall remain a member of
said company, Chas. H. Taylor, D. F. Zeigler, F. tDhaso MaoCubbin, George W. Kelley, Berlin F. Wright,
Daniel B. Chambers, George S. McKindless, and E. T. Westervelt, or the survivors of them, with full power
of substitution, and with full power for a majority of them to appoint a successor to any proxy who shall die
or resign, vested with the same power and authority as that possessed by the one so dying or resigning, my
true and lawfiil attorneys and proxies, in all matters and things as the majority of them shall determine and
direct, to act for me and in my place and stead to fully represent me at the aimual meeting of members or
policyholders, and at any and every other meeting of members or policyholders of said Home Friendly
Insurance Co. oi Maryland, and for me and in my place and stead to vote for the election of directors and
upon all other matters presented at any such meeting or meetings, thenumber of votes that I am entitled to
cast at any such meeting or meetings, as fully and to the same extent that I might do if I were personally
present.

"Witness my signature and seal this day of 19 — .

"[seal] •

"Debit No.

"Proxy must be witnessed and dated.''

CONCENTRATION OP ECONOMIC |^OWER 25

when he first joins the company and indeed one company uses a proxy
forin which requests signatures at the same time that the receipt for
the first premium payment is dehvered.^^ This form of proxy was
condemned by the. Armstrong committee and though subsequently
outlawed in some States is still used by at least five mutual com-
panies.^^

3. Staggered directors' terms.

Of 73 mutual companies examined in this regard, 41, including such
important companies as Prudential, New York Life, and Mutual
Life, provide that ail directors shall not stand for election at the same
time/^ This staggering places policyholders in a disadvantageous
position if they seek to elect a majority of directors since they must
prevail not in one election but two and more frequently three elections
in order to place a majority of directors of their owti selection on the
board. This doubles or triples the effort required and results in great
delay, particularly since it puts the existing board on notice of oppo-
sition at the time of the first election and thereby enables it better to
marshal forces to put down subsequent attempts. Presumably this
staggering of directors' terms results in part from a desire for conti-
nuity of raanagement. It has repeated! been stated by fife insurance
officials and other observers that the boards of insurance companies
should not be so readily removable as to lay the management open to
continual attack from unscrupulous individuals anxious to gain control
of the company and not motivated by a bona fide desire to protect the
pohcyholders' interests. This point was well stated in the Armstrong
report as follows: ''^ '

While it would be plainly unwise that the management of a life insurance
company should be rendered unstable or that its personnel should be frequently
changed, it is of the first importance that oflScers should realize their direct
responsibility to those whom they represent and should rely for their continuance
in ofl5ce upon proved efficiency and not upon a practical inability of the policy-
holders to depose them. • .

In the light of the discussion contained in this section, however,
the opportmiities for policyholder representation on the board appear
to be so slight as to raise some question whether the absence of pro-
visions for the staggering of directors' terms will lead to unstable
management. Presumably policyholder interest is at its greatest in
times of emergency. At such times immediate reversal of manage-
nient poHcy will probably more often than not be desirable.

In summary, it may be said that there are many legal and practical
obstacles in the way. of policyholders of mutual companies which

" Pt. 12, R. 6094. Reply to Commission's preliminary questionnaire, item 10, American United Life
Insurance Co. > '

?3 American United Life Insurance Co., Columbian Mutual Life Insurance Co., Minnesota Mutual Life
Insurance Co., Pathfinder Life Insurance Co. and Home Friendly Insurance Co. Replies to Commis-
sion's preliminary questionnaire, item 10.
, The Armstrong report stated (vol. X, p. 369):

"* * * it is the judgmef^t of the committee that proxies should not only be revocable at pleasure, but
should be required to be given within 2 months of the election and should be valid only for that election."

'* Mutual Life changed to a staggered system in 1939 (pt. 4, R. 1393) .

" Armstrong report, vol. X, p. 367. See also Life Insurance, extract from Eighty-first Annual Report of
the- Superintendent of Insurance to the Legislature of the State of New York, p. 11 et seq.
: Charles Evans Hu'ghes also acknowledged the desirability of isolating the managements of mutual com-
panies from "the tntra'sions and insincerities of politics or the fantasies of dreamers." While recognizing
that policyholders must have "real" power to exercise final control, he indicated in 1926 his general approval
of the New York law governing, electipiis of "directors, pointing out the undesirability of policyholders
managing the aflairs of their compailies directly (pt. 4, R. 1268).
2G4763 — 41— No. 28 3

25 CONCENTRATION OF ECONOMIC POWER

prevent them from electing directors to the boards of their companies.
Not only is the original selection of board members in the hands of the
managements rather than the policyholders/^ but policyholders are
found 'to have no effective recourse against directors whose actions
they may deem inimical to their best interests.

The great expense which mutual policyholders must undergo m
initiating and perfecting an independent nomination, the apparent
unwillingness of managements to educate their policyholders in the
advantages and use of their franchise privileges," and the many factors
which assist entrenched management when it deals with the widely
distributed and highly unorganized interest of the policyholder have
but one possible tendency, namely, to foster irresponsibility in
management.

The Commission's inquiry into the election procedure of mutual
life-insurance companies has revealed a condition almost identical
with that disclosed by the Armstrong report in 1906. In this con-
nection, the Armstrong report stated. ^^

Notwithstanding their theoretical rights, policyholders have had little or no
voice in the management. Entrenched behind proxies, easily collected by subser-
vient agents and running for long periods, unless expressly revoked the officers
Of these companies have occupied unassailable positions and have been able to
exercise despotic power. Ownership of the entire stock of an unmixed stock
corporation scarcely could give a tenure more secure. The rnost fertile source of
evils in administration has been irresponsibility of official power.

The situation has also been noted by others interested in the prob-
lem including the Pujo Committee in 1913 and Mr. James A. Beha,
former superintendent of insurance for the State of New York, in his
report to the legislature for 1927.^^

This undemocratic situation beconies even more a matter of con-
cern in view of the tremendous growth of the principal mutuals which
has taken place since the days of the Armstrong report. As the size
of the mutual companies increases, it would seem that it is^ more and
more desirable that pohcyholders be assured a definite voice in the
management of their companies. , It is a serious question whether a
system, under which the accumulation of large amounts of poUcy-
holder. savings are administered by a self-perpetuating group of indi-
viduals who have no direct responsibility to the policyholders and
whose activities are not even subject to threat of a possible pohcy-
holder review, should be permitted to continue. True, it is the
directors who have the ultimate obhgation for management and they

' '» Vacancies on the board of directors do not always occur on the expiration of a specific term of office.
Rather, vacancies result from sickness, death, withdrawal from active business, or other similar reasons.
The selection of an interim successor to the withdrawing director is, therefore, made by the board and on
the next election the director so selected appears along with other directors of longer service as an established
member of the board standing for reelection.

" Following the hearings on this subject before the Temporary National Economic Committee, the
superintendent of insurance for the State of New York on March 6, 1939, issued requests to companies under
his jurisdiction designed to bring about more effective notice to policyholders in matters affecting the election
of directors. These requests suggested that policyholders be notified by statement on their premium re-
ceipts, of their right to nominate an independent ticket 5 months prior to the election.

The department now also requires that within 30 days after the filing of the administration ticket, the name
atd affiliation of each director on the ticket be published in two daily newspapers in New York State and
one or more newspapers published in the larger cities of other States in which the company does & substantial
business. (See Life Insurance, extract from Eighty-first Annual Report of the Superintendent of Insur-
ance to the legislature of the State of New York, p. 16:)

These slight modifications will not materially change tl.e situation revealed by the Commission's inquiry.

" Pt. 4, exhibit No. 258. Armstrong report, vol. X, pp. 366, 367.

'• Pt. 4, exhibit No. 258. See also statements of Elizur Wright and other statements therein set forth.

CONCENTRATION OF ECONOMIC ]?OWER 27

are. in the eyes of the law trustees charged with a duty to carry out
the affairs of their companies in the interest of the pohcyholders.
When it is said that the directors of mutual companies are acting in
the interest of the policyholders, however, it should be noted that
they are not selected by the policyholders, elected in fact by the
policyholders or subject to immediate removal by the policyholders
in the event their actions are considered inimical to the policyholders'
best interests. There are admittedly great practical difficulties which
must be overcome before any true enfrancliisement of the policy-
holders can take place, but until substantial steps are taken in this
direction, the management of the mutual life insurance companies
will contiriue on an autocratic basis, and the mutual companies
will not have achieved the status of the democratic institutions it
was conceived they would be and which they should be if the policy-
holders' interest is to be best served.

B. DIRECTORS OF STOCK COMPANIES

No special studies were made of the machinery by which directors
of stock life insurance companies are elected. In the mauf it is clear
that thes* elections follow the usual corporate procedure, the directors
frequently being in a position to perpetuate themselves in office both
by reason of their access to the proxy machinery *° and because they
themselves may represent a substantial stock interest in the company.

Shares of life insurance companies are seldom traded on any Na-
tional Securities Exchange. The over-the-counter market is often
thin and trades few and far between.^' Furthermore, in many cases
the shares are not widely distributed. The Commission's studies
reveal that frequently a majority of the outstanding shares are held
by officers and directors of the companies and in almost all cases it
appeared that at least a substantial minority interest was owned by
such officers and directors.®^ Among larger stock companies, shares
of which are widely distributed, there is a continuity of management
similar to that found in the case of the large mutual companies. This
continuity of management is in itself some measure of the ability of
the management to control the situation as far as election of directors
is concerned.

A study of the seven largest stock companies discloses that all but
one company ^^ have both participating and nonparticipatin^ insur-
ance in force and in all but two companies,** both participating and
nonparticipating insurance is being issued at the present time. In
several cases, the amQ,unt of participating insurance on the books of
the companies is substantial and in the instance of the Equitable
of Iowa, the participating insurance accoimts for all but 16.7 percent

85 Many stock companies, including the following, use perpetual or long-term proxies: Conservative Life
Insurance Co. of America, Great Southern Life Insurance Co., Knights Life Insurance Co. of America,
Midland National Life Insurance Co., Mammoth Life & Accident Insurance Co., Northern Life Insurance
Co., Ohio State Life Insurance Co., Pan-American Life Insurance Co., Santa Fe National Life Insurance
Co., Southern Life Insurance Co. of Georgia, Standard Life Insurance Co. of Indiana, Union Central Life
Insurance Co., Western Reserve Life Insurance Co., American Central Life Insurance Co. Replies to
Commission's preliminary questionnaire, item 10.

« Pt. 13, R. 6462. This situation prevails in the case of the common stock of Travelers Insurance Co.
See p.t. 13, R. 6454. 6455.

« See p. 98, infra.

M Western and Southern.

" Western and Southern and Travelers.

28 CONCENTRATION OF ECONOMIC POWER

of the total. Furthermore, it is of interest to observe that reserves,
i. e., the savings of policyholders, constitute a large proportion of the
assets of these companies. The ratio of policyholders' liabilities to
total assets in these stock companies ranges from 81.8 percent in the
case of the Western and Southern to 95.1 percent in the case of the
Union Central.^® The fact that stock companies issue participating
insurance and are to a large extent reservoirs for the accumulation of
policyholder savings suggests the desirability of policyholders having
seme right to select and elect directors. With the exception of mutual
savings banks, in hardly any other type of business enterprise is such
an important contributor to the funds of the enterprise excluded
from representation on its board.

Reference to a subsequent section of this report entitled, "Company
Retirements — Reinsurance and Failures" demonstrates the ease with
which stock companies are bought and sold or traded back and forth
for personal profit between dominant proprietary groups, frequently
without regard for the interests of the policyholders concerned.
Furthermore, it is undisputed that the directors of stock compaijies
which carry both participating and nonparticipating insurance on
their books are faced each year with the delicate job of apportioning
the profits of the enterprise between the shareholders on the one hand
and the participating policyholders on the other. In matters of man-
agement policy it would appear that policyholders who contribute the
bulk of the assets of the enterprise niight well participate.*^

This problem was one of long standing. As early as 1906, the
Armstrong Report recommended that the New York law be
amended:*^

* * * so as to confer upon the directors of stock life insurance corporations
an unmistakable authority to grant to policyholders the right to vote for directors,
and thus, to have that voice in management to which their preponderate interests
justly entitle them. It may not be necessary, as a matter of law, but it would
more accord with the general sense of equity that such a change should be ac-
quiesced in by a majority of the stockholders, and the committee believes that
with an enlightened public sentiment it will not be difficult to obtain such assent.

The desirability of giving policyholders voice in the management of
stock life insurance companies has been recognized by statute in
Canada,- where it it provided that each stock company shall determine
by bylaw the number of directors to be elected by stockholders and
the number of directors to be elected by the participating policy-
holders, respectively, subject to the provision that the number of
policyholder directors so determined shall constitute at least one-third
of the total number to be elected.**

M Liabilities here shown include reserves, dividends left with the companies, supplementary contracts
not including life contingencies, impaid claims and amounts reserved for policyholders' dividends. Pt. lOA,
R. 101.

" It win be recalled that there are seven companies accounting for only 0.8 percent of the assets where
both iwlicyholders and stockholders can participate in the election of directors. See discussion of mixed
(ompanies, p. 13, supra.

Armstrong Report, vol. X, p. 379. This recommendation was not adopted.
■Revised Statutes of Canada 1917, sec. 93, subsec- 7. Insurance Act of 1917.

SECTION IV
Interlocking Directorships

In the field of life insurance where the economic power in the hands
of directors is unusually great, interlocking directorships have par-
ticular importance.^

A special study was made of the ousiness affiliations of the 13^
directors who serve on the boards, of the 5 largest companies. Among
this group of 135 directors are directors of 100 other insurance com-
panies, 145 banks or other financial institutions, and 534 industrial,
real estate, or other miscellaneous corporations. Thus the 5 largest
companies interlock with approximately 780 corporations while each
director is on the average a director of 6 other corporations. ^ Included
among these directors are many of the more prominent bankers and
industrialists of the country. In addition to the chief officers of
practically all the largest eastern banks, both commercial and savings,
principal executives of such companies as the following may be found
serving as directors of 1 of the 5 largest insurance companies: Western
Union Telegraph Co., CroweU PubUshing Co., Bethlehem Steel
Corporation, United States Steel Corporation, Pacific Telephone &
Telegraph Co., the Great Atlantic & Pacific Tea Co., National Biscuit
Co., Johns Manville Corporation, International Nickel Co., Ltd.,
Baltimore & Ohio Railroad Co., the Yale & Towne Manufacturing
Co., Air Reduction Corporation, Inc., R. H. Macy & Co., Inc.,
Canron Mills Co., and Radio Corporation of America.^

As the above indicates, the interests of the interlocking corporations
are varied, covering practically every line of busmess enterprise from
banking and finance on the one hand to publishing, real estate, manu-
facturing, communications, transportation, and_merchandising on the
other.'' "^ ■-

' In his message of April 29, 1938, on Strengthening and Enforcement of AntltrxisJ^^ I^aws (S. Doc. No. 173,
75th Cong., 3d sess.) which was incorporated into the joint resolution creating the Temporary National
Economic Committee, President Franklin D. Roosevelt suggested that the Committee should include an
examination of interlocking directorships within the scope of its studies and indicated thct possibly "more
effective methods for breaking up interlocking relationships and like devices for bestowing business by
favor" were desirable. The President referred to the "close financial control, through interlocking spheres
of influence over channels of investment" and stated, "Interlocking financial controls have taken from
American business much of its traditional virility, independence, adaptability and dating — without com-
pensating advantages. They have not given the stability they promised." Ibid.

' Compiled from information submitted by directors of Metropolitan, Prudential, New York Life, Equi-
table and Mutual Life in response to a request of the Securities and Exchange Commission.

' These directors are respectively Mr. Newcomb Carlton, Mr. Joseph P. Knapp, Mr. Charles M. Schwab
and Mr. Edward R. Stettinius of the Metropolitan; Mr. Horace D. Pillsbury of the Equitable; Mr. John
A. Hartford and Mr. Roy E. Tomliason of the Prudential; Mr. Lewis H. Brown, Mr. Robert C. Stanley,
Mr. Daniel Willard, Mr. W. Gibson Carey, Jr., and Mr. Charles E. Adams of the Mutual Life; and Mr.
Percy S. Straus, Mr. Charles A. Cannon, and Mr. James Q. Harbord of the New York Life.

* For schedules of interlocking directorships of Metropolitan, New York Life, Mutual Life and North-
western Mutual see pt. 4, exhibit Nos. 234, 262, 271, and 287, respectively.

CONCENTRATION OF ECONOMIC POWER
Diagram A

THE FIVE LARGEST LIFE INSURANCE COMPANIES
INTERLOCKED BY DIRECTORSHIPS WITH IMPORTANT CORPORATIONS

( OTHER

THAN
1938

BANKS )

pncPAKCD Br sfc a excH couti

The strength of these interlocking connections may be emphasized
bv observing that they are not solely dependent upon the dual capacity
of one or more directors. There are other tie-ms which operate to
make the relationships more binding. Frequently the msurance
companies have substantial bank deposits in the mterlocking^banks

CONCENTRATION OF ECONOMIC POWER

and substantial investments in, or outright business dealings with the
interlocking corporations which bring about a closer contact.

The diagrams ^ which accompany the text were prepared to show
the character and extent of interlocking between the 5 insurance
companies and principcl corporations. Diagram A .presents all
corporations with assets of $200,000,000 or more that interlocked with
the 5 companies as of December 31, 1938. It will be observed that
there are 13 industrials, 17 railroads, 7 'itilities, and 8 insurance
companies in this category or a total of 4 , C)rporations, of which 20
interlock 2 or more times. Diagram B presents the principal inter-
locking connections of the same 5 insurance companies with banking
institutions. Here it may be seen that these companies are afl&liated
through common directors with 23 large commercial banks having
total assets of $15,691,000,000. The connection with New York

Diagram B

58 directorships in the five largest life ir>surance companies
interlock with 23 large commercial banks

19 3 8

' Diagrams A, B, and. C, which accompany the text, are J) oased upon information contained in pt. 13,
exhibit No. 1345.

CONCENTRATION OF ECONOMIC POWER

banks is particularly striking, 12 cf the 13 banks shown having 2 or
more common directors with the insurance companies.

Two aspects of this interlocking are particularly significant — the
almost complete absence of interlocking between these life insurance
companies ^ and the unusually pronounced connection between the
five largest companies and principal New York banking houses. This
latter fact requires special consideration.

As indicated by diagram C the 5 companies interlock with prac-
tically all major commercial and savings bajiks in the New York City
area.^ The most outsi-.a. ling featuic of this relationship is the
close connection between these 5 pr'ncipal insurance companies and
the commercial banks. The 13 commercial banks shown on the
diagram have a total of 48 interlocking directors on the boards of
the 5 insurance companies, a number which comprises over a third of
the total membership of the 5 boards. The representation of the 13
banks is indicated in the table below wliich lists these banks in order
of size measured by the amount of their assets.*

Commercial banks

Number of
directors
interlock-
ing with 5
largest in-
surance
companies

Commercial banks

Number of
directors
interlock-
ing with 5
largest in-
surance
companies

Chase National Bank of the City of

7
2
8
7
1
2
2

New York Trust Co

New York

■Rank nf New York

National City Bank of New York

Fidelity Union Trust Co

Guaranty Trust Co. of New York

Brooklyn Trust Co

Bankers Trust Co _

United States Trust Co .

Total... .

Central Hanover Bank & Trust Co...
Irving Trust Co

Chemical Bank & Trust Co ,

First National Bank of the City of
New York 1

These directorships are not divided evenly among the five life
insurance companies in question. The Metropolitan, for example,
has but four while well over 50 percent of the board of the Mutual
Life is composed of representatives of large commercial banks in the
New York area.^

The full significance of this interlocking may best be demonstrated
by reference to some specific situations. Eight of the 13 commercial
banks have either their president or the chairman of their board
(sometimes both) on th« boards of the "Big Five." For example, the
largest insurance representation of the Chase National Bank is on
the board of the Metropolitan. Mr. Winthrop W. Aldrich, chairinan
of the board of the Chase National Bank, is a director of the Metro-
politan and Mr. Frederick H. Ecker, chairman of the Metropolitan
board, is a director of the bank. The second largest representation

• Diagram A indicates that only four principal life insurance companies i^terlock with these five large
companies, namely; Acacia Mutual, Massachusetts Mutual, Penn Mutual, and Sun Life Assurance Co.
of Canada. In no case is there more than oiie interlocking directorship, (pt. 13, exhibit No. 1345).

' Two principal commercial banks in New York City, Manufacturers Trust Co. and Bank of the Man-
hattan Co., do not interlock with any of these insurance companies.

» Pt. 13, exhibit No. 1345.

» The 4S interlocking banking directorships are distributed as follows (pt. 13, exhibit No. 1346): Metro-
politan, 4; Prudential, 7; Equitable, 9; New York Life, 8; Mutual, 20.

CONCENTRATION OF ECONOMIC POWER

Diagram C

PRINCIPAL LINES OF RELATIONSHIP BETWEEN THE
FIVE LARGEST LIFE INSURANCE COMPANIES AND OTHER
FINANCIAL INSTITUTIONS IN THE NEW YORK CITY AREA

1938

COMMERCUU BANKS'

LIFE INSURANCE COMPANIES'

SAVINGS BANKS, ETC"

UEIROfOLlUN LIFE
INSURANCE CO.
J4. 943. 000. 000

S3.8OI.00O.00O

NEW YORK LIFE
INSURANCE CO.
t2.6A7.OO0.OO0

(2.261.000.000

MUTUAL LIFE INSURANCE

COMPANY OF NE» YORK

$1,393,000,000

BO«Rr SAVINS SANK
i583,WC,0CO

■N

aiCRANT HOUSIRIAL

BANK FCK 3AVIICS
IN T»E CITY OF ». '.

S2<o.oot.;oa!

OF BROOKLYN
J?!7.CO0.00O

CAST River savings sank
ues.ax.ux

r ^

mm ciit SAvi«seA«n

$161,000,000

StAXANS BANK FOR SAVINGS
S159.000.00O

BROOKLYN SAVINGS BA»K

jioe.ooc.ooo

FRANKLIN SAVINGS BAN

f 1^

NEWARK. N. J.
J107.000.000

FROVIOENT LOAN

socitn OF N. Y.

$29,000,000

ctcK I ml siesis[irs a* /'
0/ till sotm or otntcom
nemis nmtsiiii tssirs ■

lumociiKQ oiKtaostmr msiitii Lint iimcius iijnci i msmciir on i c»ai««a«
smutc ts t Diniciof or m iismmcc cotfttri.
IS Of CHS or l!3S.

PBiptfitt) fir aicsmriis aad ticnta i

34 CONCENTRATION OF ECONOMIC POWER

of the Chase National Bank is on the board of the Equitable Life
Assurance Society, and it is not surprising to find Mr. Thomas I.
Parkinson, president of the Equitable, on the board of the bank.
In the case of the Guaranty Trust Co., its largest representation
(five interlocking directors) is on the board of the Mutual Life, and
here again the chief executive officers of the two institutions, Mr.
William C. Potter, of the Guaranty Trust Co., and Mr. David F.
Houston, of the Mutual Life, are each on the board of the other.
The Guaranty Trust Co.'s second largest representation is on the
board of the Prudential where one of the interlocking directors is
Mr. W. Palen Conway, president and second executive officer of the
Guaranty.^" Furthermore it appears that the bank directors occupy
particularly strategic positions on insurance company boards by
reason of their frequent membership on the higldy important fmance
committees, which have general charge of the investment of company
funds. ^^ _ ■

Indeed the relationship is so close that it may be said that a single
group of directors has a substantial voice in determining the poKcies
of the two most powerful financial enterprises in this country, insur-
ance and banking.

In view of these dual directorships it is not surprising to find a close
community of interest existing between the large New York banks
and the neighboring insurance companies. With regard to bank
accounts, for example, it appeared that, as of December 31, 1938, the
5 principal insurance companies had $428,000,000 on deposit in their
various bank accounts. Of this amount $200,000,000, or almost half
of the total cash, was deposited in New York City with the 13 principal
interlocking banks. Furthermore, analyses of the principal home
office accounts of the several insurance companies disclose that the
allocation of these accounts has in many cases a direct relation to the
banking representation on the board of the company concerned. For
example, the Chase National Bank is the most powerful banking
influence on the boards of both the Metropolitan and the Equitable
and analyses of the bank deposits of these two companies disclose that
each has placed its largest deposits with the Chase which holds
$34,063,878 or 31 percent of its entire deposits, of the Metropolitan,
and $40,433,858, or 36 percent of the entire deposits, of the Equitable.
Similarly, the Mutual Life has placed its largest deposit, $10,575,932,
or 17 percent of its entire deposits, with the Guaranty Trust Co. which,
as has been indicated, occupies the dominant banking position on the
Mutual Life board. The Prudential's largest deposit is also with the
bank most influential on its board and the New York Life maintains
many of its principal deposits with its interlocking banks. No
instance was found where a major interlocking bank failed to get a
substantial deposit. ^^ Indeed there are strong indications that even

i» Pt. 13. exhibit No. 1345.

" The percentage of bank directors on the finance committees of the 5 companies at the end of 1938 was
as follows: Metropolitan, 62.5 percent; Prudential, 71.4 percent; New York Life, 70 percent; Equitable, 20
percent; Mutual Life, 72.7 percent. Information compiled from company replies to Commission's invest-
ment questionnaire.

n 1938 Convention Form Annual Statements, Metropolitan, Prudential, New York Life, Equitable,
and Mutual Life.

CONCENTRATION OF ECONOMIC POWER 35

the relative size of deposits in interlocking banks is occasionally
affected by the number of directors common to the bank and insurance
company in question.

It is difficult to determine to what extent deposits are the direct
result of solicitation by interlocking directors. Not only are most of
the banks located in the same city as the insurance companies, thus
making written communication infrequent, but the interlocking con-
nections of these various banking houses with the insurance companies
have existed over a long period of time and the maintenance of the
accounts has become to some extent a matter of custom.

The files of the New York Life contained correspondence with one
of its banking directors which is of interest in this connection. It
appeared that Gen. James G. Harbord, a director of the Bankers
Trust Co., joined the board of the New York Life in December 193L'^
In June of the following year the New York Life deposited $1,000,000
in its account at the Bankers Trust Co." Mr. Thomas A. Buckner,
of the New York Life, characterized the making of the deposit as
"purely a coincidence." ^^ Although the exact circumstances under
which the deposit was made were not explained, a letter from General
Harbord, written at the time, to the then president of the New York
Life is expressive. General Harbord's letter stated: ^®

Dear Mr. Kingsley: As a director of the Bankers Trust Co., I want to thank
you for the deposit of a round million which the New York Life has recently made.
As a director of your owti company, I want to express my appreciation.

I regard the directorship in those two companies as quite the best thing that has
come to me in business life, and it is very satisfactory to see this mutual relation-
ship established between them.

My cordial regards to you.
Sincerely yours, "

Some instances of direct solicitation by banking directors were dis-
closed. An examination of the files of the Mutual Life revealed con-
siderable information of this character. Of particular interest was
correspondence between principal officers of the Mutual Life and
Mr. John K. Ottley, president of the First National Bank of Atlanta,
Ga., and a Mutual Life trustee. Mr. Ottley was elected a trustee of
the Mutual Life on June 4, 193L^^ Prior to his election the Mutual
Life had established a small agency and home ofiice account with the
First National Bank.^^ The largest balance maintained by the Mutual
Life in the First National Bank during the month of May 1931, imme-
diately preceding Mr. Ottley's election as trustee, was $58,147.95.^

13 Pt. 4. R. 1433.

n Pt. 4, R. 1429, 1432.

» Pt. 4, R. 1433.

i« Pt. 4, R. 1429.

■' For testimony concerning New York Life's banking relationships, see pt. 4, R. 1428-1433; pt. 28, testi-
mony of Alfred H. Meyers. February 26, 1940: and pt. 13, exhibit No. 1126.

'8 Pt. 4, R. 1454.

1' Pt. 4, R. 1455; 1931 Convention Form Annual Statement, Schedule E.

w This was the highest balance maintained by the Mutual Life in the bank during the entire year ot
1931 and was greater than the highest balance of the previous year (pt. 4, exhibit No. 277; 1930 and 1931
Convention Form Annual Statement).

36 CONCENTRATION OF ECONOMIC POWER

The highest bank balances for the years subsequent to Mr. Ottley's
appointment were shown to be as follows:

Year: Amount

1932 $119,911.45

1933 - 551, 558. 30

1934 - 588, 108.46

1935 865,286. 39

1936 1,093,600. 62

1937 1, 138,681.06

1938 - 1 1, 103,801. 21

» Id.

These substantial increases in the Mutual Life's deposits with the
First National Bank can be traced to- Mr. Ottley's vigorous solicita-
tion after his election as trustee. On September 7, 1933, Mr. Ottley
wrote Mr. Turner, treasurer of the Mutual Life, a direct and revealing
letter which read in part as follows: ^^

In my conversation with President Houston I stated to him that the present
business of the Mutual Life with this bank is satisfactory and is duly appreciated.
However, I advised him that my desire to have the relationship broadened and
increased is based on three propositions. First, that as I make my living as
president of the First National, my first interest is to build up its business.
Second, that as a trustee of the Mutual Life — which is an honor I appreciate — I
want the full interest of mj^ bank — with its important sectional contacts- — in the
company's southeastern activities. This, I am sure you will agree, I can properly
expect only as the size and value of the Mutual Life's business with us is at least
on equal footing with other accounts with us of similar companies. Third, that
I believe these purposes can be accomplished without costing our company any-
thing.

You will understand that in going into this great detail I have tried to point
out practical arrangements whereby my desire as president of this bank and as
trustee of the Mutual Life could be accomplished with advantage to each and
disadvantage to no one. Anything you can do for me in the matter will be greatly
appreciated.

Nine days after writing this letter, Mr. Ottley's bank received a 90-
day time deposit of $500,000 from the Mutual Life, and Mr. Ottley
wrote Mr. David F. Houston, president of the Mutual Life, on Sep-
tember 16, 1933, stating: ^^

I am grateful for the special consideration shown and am very proud to have
the closer tie-in between the bank and the insurance company in which I have
very great interest.

In August of 1935, Mr. Ottley's correspondence indicates that he was
again taking up the question of increasing the bank deposits, and 10
days after writing Mr. Turner, Mr. Ottley's bank received an addi-
tional deposit of $250,000.23

': Pt. 4, exhibit No. 272.

>' Id.

» Pt. 4, R. 1456, exhibit No. 272.

CONCENTRATION OF ECONOMIC POWER 37

Later, on May 5, 1936, Mr. Turner wrote Mr. Ottley, stating in
part as follows: ^*

Referring to our conversation of last Wednesday, I have arranged to increase
the company's balance with your bank to, say, $1,000,000, including the time
deposit of $500,000, so that the relation between current and time funds may be
equal.

and Mr. Ottley replied under date of May 10;

I wish to assure you of my appreciation of this compliment, and' at the same
time to tell you how good this news makes your trustee feel.

Solicitation of bank accounts by other Mutual Life trustees was also
revealed. The evidence showed that in 1937, Mr. Stanley Field
while a trustee of the Mutual Life, solicited the account of the Mutual
Life for the Continental Illinois National Bank & Trust Co. of Chicago.
As a result of this solicitation an increase was made in the Mutual's
account with that bank, and Mr. Field acknowledged the increase
stating: ^^

* * * I wish to express my personal appreciation of the action which you
are taking to increase this deposit. * * *

It also appeared that a $2,000,000 deposit by the Mutual Life in the
Chase Bank was made in 1934 at the. solicitation of Mr. Cornelius
Vanderbilt, then a director of the Chase and a trustee of the Mutual
Life.^^ Similarly, an account was opened in the Bankers Trust Co.
of New York, with which Mr. S. Sloan Colt, trustee of the Mutual.
Life, was connected. This account was opened after Mr. Colt came
on the board of the Mutual Life and apparently authorized at a meet-
ing of the finance committee at which Mr. Colt was present." With
respect to this deposit, Mr. Houston testified: ^^

Mr. Gesell. The thing that interests me, Mr. Houston, is that in 1928 the
balance of your company with Bankers Trust Co. was a little in excess of $31,000;
in 1929, a little in excess of $3Ii000; in 1930, a little in excess of $26,000; in 1931,

" Pt." 4, R. 1457. With respect to these deposits, Mr. Houston, president of the Mutual Life, testified
(pt. 4, R. 1457, 1458):

"Mr. Gesell. Now would you have made these non-interest-bearing deposits with Mr. Ottley's bank if
he had not made a specific solicitation of your company for those deposits?

"Mr. Houston. In all probability. We were making them in different places. We had to put them
somewhere.

"Mr. Gesell. Do I understand from your statement that you had funds to deposit and if directors sought
those funds for those banks and you felt the banks ^ere sound, you were willing to make the deposits with
them?

"Mr. Houston. We made them in banks where we did not have directors.

"Mr. Gesell. That does not answer my question.

"Mr. Houston. I don't care whether it does or not. My disposition would be to do it, rather in spite
of the fact the trustee is an officer of the bank.

"Mr. Gesell. I would like an answer to my question, whether you care to answer it, sir. My question
was if a director or trustee of your company is connected with^a bank and solicits the deposit of your'com-
pany, and you feel that bank is sound, is it your practice to make the deposit?

"Mr. Houston. I would not say it is our practice. We might make the deposit."

» Pt. 4, R. 1458, 1459, exhibit No. 275.

S9 Pt. 4. R. 1464.

" Pt. 4, R. 1459, 1460.

» Pt. 4, R. 1460. 1461.

3g CONCENTRATION OF ECONOMIC POWER

a little in excess of $150,000; and then immediately after Mr. Colt becomes a
trustee of your company, the balance jumps to over $1,500,000.

Mr. Houston. Yes.

Mr. Gesell. Is there any connection between the fact that Mr. Colt becomes
a trustee of your company and a member of your finance committee and this large
deposit of $1,000,000 is made in this particular bank?

Mr. Houston. Not necessarily. I am rather surprised that it isn't larger,
in view of the strength of the Trust Co. and the service it renders.

What I meant to say was that it was not entirely improbable that if Mr. Colt
had never become a member of the board, we might have a deposit, and a large
deposit, in the bank, because I have confidence in his bank and it is one which I
believe would take good care of the funds, and as I said before in answer to a
similar question, I think it is some advantage to have an account in a bank, one
of whose responsible officers is a trustee of your company.

Mr. O'CoNNELL. Then you mean you were influenced by the fact?

Mr. Houston. Other things being equal, I certainly would have no objection
to it.

Mr. O'CoNNELL. I gathered from your last answer that you do mean that you
were influenced by his membership on your board and on the board of directors
of the bank.

Mr. Houston. We would not make a deposit in a bank simply because we
happened to have a trustee who is connected with that bank.

Mr. O'CoNNELL. I understand that, but I did understand you to say that you
were influenced by the fact that he was a member of your board. You said it was
to your advantage.

Mr. Houston. Yes.

Mr. O'CoNNELL. Which I understood you to say influenced you. Thank you.

. Mr. Houston testified that he did not recall any instance where his
company had refused to make a deposit when a director had solicited
one in the manner reviewed above. ^^

Further discussion of the influence of interlocking directorships
upon the conduct of officers and directors will be found in section VI.

" Pt. 4, R. 1463. Contrast testimony of Mr. Michael J. Cleary, president, Northwestern Mutual Life
"'Insurance Co. This company maintains 6 principal bank accounts, 2 in banks with which the company
interlocks and 4 where there is no common director connection. Not only do the accounts in the interlock-
ing banks antedate the connection through directors, but the company has adopted a policy of maintaining
substantially equal balances in all 6 banks. This is accomplished through daily transfers. It also appeared
that another bank affiliated through 2 interlocking directors was not 1 of the 6 principal banks of deposit
(pt. 4, R. 1498, 1499;)

SECTION V

Failure of Directors to Attend Board Meetings

Some directors fail to attend meetings of the life insurance company
boards of which they are members. Preoccupied with other affairs,
they falter in their attendance and in effect abdicate, placing their
responsibilities entirely in the hands of those directors who may
choose to attend.

The law does not, and indeed should not, recognize any distinction
between ''working directors" and "honorary directors." It is now
established beyond contradiction that directors, to fulfill the minimum
obligation of their position, must attend meetings of the board and
participate in the deliberations which result in formulation of company
policy.^ Even this minimum requirement has been disregarded by
many directors of the larger insurance companies. The records of
the Metropolitan, for example, show that though the company has 24
directors, an average of only 15 have attended the regular monthly
meetings during the last 10 years.^ Three meetings were found to
have been conducted with less than a quorum ^ and one-half or less
of the full board was present at 25 out of the 125 meetings held
since 1929.*

For certain directors, absence from directors' meetings was the rule
and attendance the exception. Mr. Charles M. Schwab, chairman of
the board of Bethlehem Steel Corporation, a director of Metropolitan,
attended but three meetings from 1932 through 1938 and for a period
of 3 consecutive years during this time failed to appear at a single
meeting;^ Mr. D'Alton Corry Coleman, vice president of the Canadian
Pacific Railroad, who was elected a director in 1929, attended but
nine meetings during the following 10 years and was never present at
meetings held during the 2 years immediately following his appoint-
ment to the board ;^ and Mr. William H. Crocker, president of the
First National Bank of San Francisco, failed to attend a single meeting
during the 5 years prior to his death in September 1937.^ Lastly it
was disclosed that Mr. L. A. Taschereau, Prime Minister of the
Province of Quebec, did not attend a single meeting during the 16

1 Fletcher, Cyclopedia of Corporations, vol. 3, sec. 1049; William v. Brady (232 Fed. 740, District Court,
N. J. (1916)); Bowerman v. Hamner (250 U. S. 504 (1919)); Prudevtial Trust Co. v. Brown (171 N. E. 42
(Mass. 1930)); Dinsmore v. Jacobson (242 Mich. 192, 218 N. W. 700 (1928)); Martin v. Hardy (251 Mich. 413,
232 N. W. 197 (1930)); Kavanaugh v. Oould (223 N. Y. 103, 11^ N. E. 237 (1918)).

» Ft. 4, R. 1529, exhibit No. 235.

» Ft. 4, R. 1278.

* Ft. 4, R. 1529, exhibit No. 235.

» Ft. 4, R. 1270, see also infra p. 40.

« Ft. 4, R. 1277.

' Ft. 4, R. 1277. Mr. Crocker was not in physical condition to travel during this period. Ibid. (See also
pt.4,R.1271.)

40 CONCENTRATION OF ECONOMIC POWER

years he was a member of the Metropolitan board. ^ Correspondence
introduced into the record of the hearings disclosed that he had
accepted the position of director with the distinct understanding that
he- would not have to attend meetings.^

On at least two occasions Metropolitan directors indicated their
inability to attend board meetings and requested to be relieved of their
responsibilities. It is significant that in both instances they were
persuaded to continue on the board and in effect permitted to remain
absent from its deliberations. The directors involved were Mr.
Charles M. Schwab, chairman of the board of Betlilehem Steel Cor-
poration, and Mr. John W-. Davis, a partner of the law firm of Davis,
Polk, Ward well, Gardiner, and Reed.

During 1932 and -1933 Mr. Schwab attended only 1 meeting of the
Metropolitan Board out of the 26 which were held.'" On February
9, 1934, he wrote Mr. Frederick H. Ecker, then president of the
Metropolitan, as follows :''

You probably have heard that I have been in pretty poor health the past 5
months, and I do not seem to be rapidly recovering. As a result of this, I am
retiring from everything I can. You probably also have noticed that I have even
retired from the Chase Bank, vi^here I have been a director so many years. The
only directorates 1 am now on are those of the Bethlehem Steel Co. and the
Metropolitan Life Insurance Co.

It seems to me that you should have someone who could give active attention
to your company as a director, and this I am at present unable to do nor likely to
be able to do for some little time. Under these circumstances I wonder if you
would not like me to resign to make way for someone else.

8 Pt. 4, R. 1279. Concerning the services fendered by Mr. Taschereau, Mr. Frederick H. Ecker testified
(pt. 4, R. 1281):

"Mr. Gesell. Can you tell me, Mr. Ecker, what services Mr. Tasehereau performed?

"Mr. EcKfiE. Specifically, no. I can tell you that he did stand very high in the community. His acting
as a director of the company was an endorsement of the company, and in Canada I know that means a good
deal among the French Canadians. They have high respect for men in public life, and there couldn't be
anjrthijig about a company that wasn't entitled to their respect if Mr. Taschereau was a director.

"In addition to that, I can't give you specific cases, but I haven't the slightest doubt that our people in
Canada.consulted and talked with Mr. Taschereau about matters that had to do with the management of
the company's affairs." '

.^ » Mr. Taschereau ceased to be Prime Minister in June 1936. In 1938 Mr. Frederick H. Ecker wrote Mr.\
Taschereau suggesting he be replaced in view of his inability to attend meetings (pt. 4, exhibit No. 241).
To this letter Mr. Taschereau replied in part as follows (pt. 4, exhibit No. 242):

"Some years ago, while in New York, I was approached by the then president of the company, Mr. Haley
Fiske, and was asked by him to join the board. Mr. Fiske told me that on account of his Canadian business
and especially of the French Canadian clients of the Metropolitan Life he wished to add on the board
the name of a well-known French Canadian. I was then the Prime Minister of the Province of Quebec.

"It was distinctly understood at the time that, as I was a very busy man, I could not ftitend the meetings
of the board, and I accepted the honor oflered to me under this distinct condition, which Mr. Fiske told me
he fully understood. Needless to say that I was ntt invited for the services that I could render to a board
composed of so distinguished men."

■o Pt. 4, R. 1270.

" Pt. 4, R. 1270, exhibit No. 236.

CONCENTRATION OF ECONOMIC fOWER 41

To this frank letter, Mr. Ecker replied asking Mr. Schwab to
remain on the Board :^^

Dear Charlie, and 'may I have the privilege of also adding my dear, dear friend:
* * * With respect to the particular subject of your letter, we are having no
difficulty in getting a quorum for our meetings. Frankly, I would have more
regret than you express at breaking off your relations with the MetropoUtan. I
much appreciate the way you write about it. My preference is the situation
should not be disturbed. If, on our sidej it changes at all, I wiU be frank and let
you know.

Mr. Schwab still remained on the board at December 31, 1938.
During the 5 years from 1934-38, he attended only 2 of the 60 board
meetings held."

The case of Mr. John W. Davis is similar. After attending but six
meetings in the preceding 4 years, Mr. Davis wrote Mr. Ecker in
June, 1930, as follows:^*

I was greatly disappointed when just as I was leaving my office to attend the
directors' meeting on the 24th matters came forward which made it impossible for
me to get away. This has happened so often in the past and my attendance at
meetings has been so infrequent that I am driven to the conclusion that I should
get oflF the board and permit you to elect someone whose attendance can be more
rehed upon. I quite agree that no member of any board of directors should
complain if he is called upon for a half day once a month. If he finds it, however,
difficult or impossible to give even that much time, I think he should get out of
the way.

Mr. Ecker replied r'^

I wish you would give the matter further thought in the hope that your decision
will be otherwise. I have understood that because of your many engagements it
was not always convenient to attend the regular meetings, but have felt that in
case of necessity you would be available.

Mr. Davis fmally resigned in April 1931, having attended but one
meeting, in 1930 and one m 1931.^^

There was ample evidence of the failure of many directors to attend
board meetings of two other large companies. Mutual Life and Equi-

" Pt. 4, R. 1269, 1270, 1271, exhibit No. 237. Mr. Ecker explained his action as follows (pt. 4, R. 1285) :

"Mr. Arnold. I understood that one of the considerations in your urging Mr. Schwab to stay was a sort
of reward for past services.

"Mr. Ecker. Oh, no; not a reward for past services; no; a recognition of his valuable service in the past and
our hope to continue him on the board. May I add' this: Service as a director is like service in any other
line. If you had a man a good while, ho knows more about the business and with less time can render more
valuable service than one who has never been a director and has to learn the business; and when we have a
valuable old director on the board— just because he is ill, it seemed a decent thing to keep him there, for his
sake, and a worth-while thing for the company."

Mr. Ecker testified that he did not take up the matter of Mr. Schwab's letter with the board "in a formal
manner" but that he "consulted with other members about the situation." There was no meeting of the
Metropolitan board between the date of Mr. Schwab's letter and Mr. Ecker's reply (pt. 4, R. 1271).
. '3 Pt. 4. R. 1270.

I* Pt. 4, exhibit No. 239.

" Pt. 4, exhibit No. 240. •

'• Pt. 4, R. 1276. Mr. Davis was also a director of the Mutual Life at the time. He has continued to be a
member of the board of that company, but in the 12-year period from 1928-39 there have been only 6 years
when he has attended one-half or more of the meetings ield (pt. 28, exhibit No. 2340).

264763— 41— No. 28-

CONCTENTRATION OF EOONOMIC POWER

table. Examples of directors' nonattendance in these companies
during the period since 1929 are indicated in the following schedule:^'

Mutual Life

Name of director

Number of

meetings

eligible

to attenu

during

period

Meetings
attended

Stanley Field

George P. Miller.....
John K. Ottley......

Daniel Willard

Clarence M. Wooley

Equitable

Name of director

Ralpb-3udd..

John J. Pelley

Horace D. Pillsbury
jiDhn H. Walbridge..

Meetings
attended

A director who fails to attend directors' meetings fails to exercise
;the ordinary care and prudence which policyholders may expect of
hinl in the fulfillment of his fiduciary responsibilities.^* Members
'of, an insurance board should share equal responsibility in the affairs
.of a company. The failure of some to attend meetings places an
Xhdue burden on those who are ^ctive and may frequently result in
the management directors, i. e., the officer-directors of a company,
acting in the capacities of managers as well as supervisor's and thus
eliminate the checks and balances which are desirable in th£ policy-
holders' interest.

" Pt. 28, exhibit No. 2340. Prudential and New York Life directors have been much more regular in
attendance. Ibid. \See also pt. 4, R. 1426, 1427.)

No instance was found where any company inforrred its policyholders, in connection with elections to
the board or otherwise, of the failure of certain directors regularly to attend meetings. Mr. Frederick H.
Ecker testified on this subject stating (pt. 4, R. 1281):

"Mr. Qesell. May I ask you with respect to all these instances which we have reviewed whether any
effort was made to acquaint the policyholders as the names were put up again and again for renomination
and election of the degree to which these particular directors had attended the meetings of the board of
directors, and participated through that means in the affairs of the company?

"Mr. EcKEr WonW tt be lacking in courtesy or out of place for me to say that I can only think of that as
my saying to the policyholders in some formal communication that the men who had been nominated on
-tlw •Uministration ticket were in any respect unfit to serve. I can't cooiSeive of that as possible, and again
it seems to me that is so obvious that it Isn't a suitable question. Orcourse, I didn't. Our action with
pplicyholders consisted in advising them of the men who had been nominated."

See also pt. 4, R. 1281-1283 and exhibit No. 243.

" Op. cit. supra, note 1, at p. 39.

CONCENTRATION OF ECONOMIC POWER 43

Pirectors fail to function for jnany reasons; they live too far
away,^^ they are too busyj^** they are chosen as figureheads and not
expected to render active service,^^ they are inadequately compen-
sated,^^ they are not policyholders and hence have no interest at
stake ^^ or they fail completely to recognize the obligations they have
assumed in accepting their positions. In addition the large size of
the boards undoubtedly dilutes the sense of individual responsibility
and tends to encourage a director to look to his fellow directors for
the fulfillment of his duties." Last, but not least, the entrenched
status of the board makes its members impervious to policyholder
pressure and tends to encourage complacency.

At the root of the problem is the apparent fact that the field for
selection of directors has been narrowed to a small group of men who
have assumed obligation for the conduct of many varied and technical
enterprises although practically each member of the group has some
primary and exacting business responsibility of his own.^* In regard
to this matter, Mr. Frederick H. Ecker testified as follows: ^^

Mr. Douglas. We all know instances in corporation history of this country —
I am not speaking now about Metropolitan — where directors have been chosen
merely for yvindow dressing. That has not been an unusual practice.

Mr. Ecker. Maybe those were the rubber stamps you referred to. We
haven't any.

Mr. Douglas. It is not necessarily to be classified with rubber-stamp direc-
tors or dummy directors, but a man whose name is a prominent name and who

" It must be recognized that sometimes directors are not resident in the city or State where the insurance
company may have its principal offices. The laws of many States contain provisions which require a certain
number of directors to be resident in the State of incorporation. For example, see sec. 48 (5f), New York
law 1940; ch. 175, sec. 94 of the Annotated Laws of Massachusetts; and ch. 73, sec. 652 of the Smith Hurd
Illinois Annotated Statutes. It is of interest to note that Prudential, which has had a very creditable
record of attendance, has no directors whose residence or place of business is not in Newarlc, N. J., where
the company's home office is located. Other of the larger companies have from 6 to 13 directors who do not
reside in the same city as the company's home office or within easy commuting distance thereto.

'" Mr. Frederick H. Ecker testified that some directors "are so much engrossed in other things they are
unable to get there (i. e. to board meetings) because they are men of affairs and prominent in their business"
(pt.4, R. 12g8).

" See discussion of Mr. L. A. Taschereau, p. 41 supra.

2' This becomes particularly obvious when it is recognized that compensation of directors is nominal if
viewed in the light of the duties and responsibilities they should assume. Customarily directors receive a
modest per diem when actually in attendance at meetings and traveling expenses when it is neces-^ary for
them to come from outside the city to attend. Average compensation of directors of the "Big Five" com-
panies during 1938 was as follows (compiled from 1938 Convention Form Annual Statements) :

Metropolitan i $1,306.50

Prudential... .• 2,053.75

New York Life 2,100.00

Equitable 1,688.71

Mutual . 954.29

M The laws of many principal insurance States, including New York, New Jersey, Connecticut, Massa-
chusetts, and Ilhnois, contain no provisions requiring directors of mutual companies to be policyholders.
Mr. Frederick H. Ecker testified that whether or not an individual owned a Metropolitan policy was not
a factor taken into account in the selection of the directors of that company (pt. 4, R. 1283).

^ There is considerable variation in the size of boards of directors of principal life-insurance companies.
Twenty-seven mutual companies and 25 stock companies or a total of 52 companies each with assets of
$35,000,000 or more were examined in this connection. It was found that 9 companies had from 6 to 10 direc-
tors, 23 companies from 11 to 15 directors, 11 companies from 16 to 20 directors, 4 companies from 21 to 25
directors, 1 company from 26 to 30 directors, and 3 companies with over 30 directors. The larger companle:.
had the larger boards. Of the 6 companies whose assets were each in excess of $1,000,000,000, 3 had more
than 30 directors, 2 had from 21 to 25 directors, and 1 company had from 11 to 15 directors. Compiled from
Convention Form Annual Statements.

» Pt. 4, R. 1286, 1288.

» Pt. 4, R. 1286.

44 CONCENTRATION OF ECONOMIC POWER

carries prestige and influence. I take it that has at times been a consideration
in the selection of the administration ticket by the Metropohtan.

Mr. EcKER. Not deliberately, expecting they wouldn't render any other
service' than that performed by having their name in the window, no; but it just
works out that way. It isn't possible to get men of the type I am speaking
of — 24 or 25 working directors — and it is becoming increasingly difficult to get
any directors who could qualify as a director of a great insurance company.

Mr. EcKER. As a general thing. I should think the companies I have had
opportunity to observe show about the same record as our own. Where there
was a large board, there are a few that are very regular in their attendance;
there are some that are irregular.

The Chairman. But it is becoming increasingly difficult, is it not, to get the
attendance of directors?

Mr. EcKER. Yes; it is, and as I have said, increasingly difficult to get directors,
to get men to serve as directors.

The Chairman. To what do you attribute that difficulty?

Mr. EcKER. The diflSculty in attending simply means occupation and that
they are so much engrossed in other things they are unable to get there because
they are men of affairs and prominent in their business.^^

The variety of responsibilities undertaken by directors of the five
largest companies has already been illustrated. It will serve to
emphasize the point, however, to mention that the directors of the
Metropolitan are also directors of 14 bank and trust companies, 13
industrial companies, 3 other life insurance companies, 1 accident
insurance company, 1 surety company, 9 fire insurance companies,
1 casualty insurance company, 2 mercantile companies, 2 oil com-
panies, 4 publishing companies, 8 real estate ventures, 10 raihoads,
1 steamship company, and 18 utilities.?^ It is not surprising that some
directots, occupied with other interests which are both lucrative and
more directly connected with their principal lines of business, are
unable to give much attention to the work of the particular life insur-
ance company on whose board they serve.

That the problem is not without solution was demonstrated through
the testimony of Mr. Michael J. Cleary, president of the Northwestern
Mutual, who stated that insofar as possible his company eliminated
interlocking relationships and that in his opinion this policy did not
impair the quaUty of the boa^rd-^' Mr. Cleary testified: ^

2' It is of interest to note In this connection that, with the single outstanding exception of Mr. Thomas A.
Buckner, chairman of the board of the New York Life, the chief executives of the five largest companies
have assumed heavy responsibilities which can contribute but remotely to the welfare of their individual
companies and which, if taken seriously, will require much time and energy, thus detracting from their
eflftciency as executives. The directorships of these officials are as follows (information submitted in response
to request of Commission) :

Mr. F. H. Ecker, chairman of the board of the Metropolitan is a director of: The Chase National Bank
of the City of I>tew York, Cincinnati, Indianapolis and Western Railroad, Provident Loan Society of New
York, Union Dime Savings Bank, Western Union, Consolidated Edison Co. of New York.

Mr. Franklin D'Olier, president of the Prudential, is director of: The Pennsylvania Railroad Co.,
National Biscuit Co., Morristown Trust Co.

Mr. Thomas I. Parkinson, president of the Equitable, is director of: Chase National Bank of the City
of New York, Consolidated Coal Co., Western Electric Co., Boardman Co., Westlnghouse Electric and
Manufacturing Co., Emigrants Industrial Savings Bank, Continental Insurance Co.

Mr. David Houston, of the Mutual Life, is director of: Guarantee Trust Co,, American Telephone &
Telegraph, United States Steel Corporation, North British and Mercantile Insurance Co., Mercantile
Insurance Co.

» Pt. 4, R. 1266, exhibit No. 234.

M Pt. 4, R. 1493, 1506.

M Pt. 4, R. 1493.

CONCTENTRATION OF ECONOMIC POWER 45

Mr. Gesell. Mr. Cleary, how many meetings of the board of directors of your
company are there a year?

Mr. Cleart. Four.

Mr. Gesell. Am I correct in saying that the Wisconsin law prescribed that
these directors must attend a certain number of meetings each year?
, Mr. Cleary. That is true. .

Mr. Gesell. What is the law about that?

Mr. Cleary. Three consecutive absences automatically removes a man from
the board and makes him ineligible to reelection for a fixed period of time.

Acting Chairman King. Would sickness be an excuse?

Mr. Cleary. No; there is no excuse.

Mr. Gesell. If a man is ill, if a man wants to travel, if a man is very busy, if a
man doesn't want to come, if he lives too far away — none of those things is an
excuse?

Mr. Cleary. None at all.

Mr. Gesell. Am I correct in saying that the operation of that law has resulted
from time to time in eliminating from your board of directors men .who do not
show sufficient interest to attend three meetings?

Mr. Cleary. It has.

Mr. Gesell. Also men who have fallen into bad health or by reasons of age or
otherwise are unable to attend?

Mr. Cleary. That is true.

Mr. Gesell. So that through, this statute you do have an active board of
directors in constant attendance on the afi'airs of the company?

Mr. Cleary. I would say that was true.

Mr. Gesell. Is it fair to say that most of your directors attend at least three
meetings a year?

Mr. Cleary. My recollection is that the tabulation showed an attendance
record of approximately 80 percent.

In explaining the procedure followed in selecting directors for the
company, Mr. Cleary brought further light to the subject: P^

Mr. Gesell. I notice that another man was eliminated because he was too
busy. Is that because he is unable to give enough attention to the affairs of the
cornpany, is that what you mean by "too busy"?

Mr. Cleary. Well, we have always taken the position that the law requires
attendance at meetings, that the trusteeship carries responsibility, and naturally
we don't want to put men on who may be forced off by failure to function. '^

The solution of this question of directors, nonattendance lies, in the
last analysis, with the business community which must come to
recognize that a life insurance company directorship is a position
requiring active service and genuine attention to d\ity.

31 Pt. 4, R. 1496.

'2 It is of interest to note that since the hearings before the committee on the subject of directors' non-
attendance, the Legislature of the State of New York has passed an act (ch. 88, sec. 62, Laws of 1940) which
provides:

"The office of a trustee or director of any domestic mutual insurer shall immediately become vacant
whenever he shall have failed to attend the regular meet;ri ;s of the board of trustees or directors, or to per-
form any of his duties of trustee or director for six succa ji- e meetings unless excused by the board for such
failure."

The wording of the statute leaves much to be desir.d Apparently complete^ discretion is left with the
board and it is not even clear whether the board must d\ use in advance of nonattendance.

SECTION VI
Activities of Directors and Officers for Personal Gain

A director or officer is in a position to use the funds of his company
in many ways to serve his personal interests. He may borrow money
directly or in the name of a corporation he owns or controls ; he may
sell goods or services to ihe msurance company, possibly at a pre-
mium; he may cause the inf.arance company to purchase his own securi-
ties or to provide money for financing a speculative business venture
he is promoting; he may place friends or business associates on the
pay roll of the insurance company at exorbitant salaries ; he may pad
expense accounts or draw compensation in advance with no contem-
plation of repayment; he may direct the depositing of company funds
to his advantage; he may cause preferential contracts to be executed
in his favor or, if he acts in concert with at least some of his fellow direc-
tors, he may even change the form of the company from mutual to
stock or stock to m^utual whichever best serves his private purposes.
Though the studies which the Commission was able to make in this
connection did not cover the field thoroughly it may be said that
many of these practices were not found to be prevalent in the largest
mutual companies. Our necessarily incomplete study of some of
these problems shows that many directors and officers of the largest
mutual companies have conducted themselves with propriety and
that relatively speaking officers and directors of the largest mutual
companies have used their positions to initiate transactions for their
personal profit less often than have the directors and officers of nu-
merous smaller companies. No direct personal loans to officers or
directors of the five major companies were disclosed.

As indicated above many Ufe insurance companies lend money to
their officers and directors or to business concerns in which their officers
and directors are financially interested. It is true that a few States
have enacted laws prohibiting such officials from borrowing from their
companies but elsewhere the practice still prevails.^ Thirty-one

' 16 States prohibit life insurance companies from making loans to their officers and directors or at least,
have statutes which to some degree restrict disposal of company funds in a manner which will pecuniarily
benefit the officers or directors. These States are: Massachusetts, Michigan, Texas, Pennsylvania, Mis-
souri, California, Indiana, Iowa, Kentucky, Minnesota, New York, North Dakota, Tennessee, Virgin ia,
Wisconsin, and the District of Columbia. The New York law effective December 31, 1938, reads as follows
(sec. 36, New York insurance law, printed in pt. 4, exhibit No. 259) :

"No director or officer of an insurance corporation doing business in this State shall receive any money or
valuable thing for negotiating, procuring, recommending, or aiding in any purchase by or sale to such cor-
poration of any property or any loan from such corporation, nor be pecuniarily interested either as principal,
coprincipal, agent, or beneficiary in any such purchase, sale, or loan; nor shall the financial obligation of any
such director or officer be guaranteed by such corporation in any capacity. And any such guarantee shall
be void, provided that nothing herein contained shall prevent a life insurance corporation from making a
loan upon a policy held therein by the borrower not in excess of the net value thereof.

"No insurance corporation doing business in this State shall make any loan to any of its officers, directors,
or trustees, nor shall such officers, directors, or trustees accept any such loan. Any corporation or person
violating any provisions of this section shall be guilty of a misdemeanor."

In the recodification of the New York insurance law, effective January 1, 1940, sec. 78, investment, officers,
and directors, restrictions upon officers or directors were increased to prohibit an officer or director from
receiving any direct or indirect interest in the prohibited transactions.

It appeared that the Mutual Life loaned $90,000 to Mr. Frank L. Polk prior to his becoming one of its
trustees. This was a mortgage loan on Mr. Polk's house and was carried at 6-percent interest. After Mr.

CONCENTRATION OF ECONOMIC POWER

companies, as of December 31, 1938, were found to have loans out-
standing on their books in the amount of $693,526.^ These direct
personal loans to officers and directors were distributed as follows:

Type company

Total
number of
companies
examined

Outstanding loans
Dec. 31, 1938

Number of
companies

Amount

65
173

2
29

$6,969

Other - - -

686, 657

Total --

238

693, 526

In addition, there is evidence of other loans to "insiders," which
would not be comprehended in the above table, including loans made
to nominees which concealed the beneficial interest of the director or
officer concerned, and a variety of different loans to corporations in
which officials of the lending insurance company were heavily inter- '
ested financially.^ Several examples of companies engaged promis-
cuously in lending money directly or indirectly to their officers and
directors were spread upon the record. One such example was that
of the Monumental Life Insurance Co., of Baltirnore, Md. This
company was organized in 1858;* it has at the present tim€ -approxi-
mately $300,000,000 of insurance in force, and operates in 13^ States.*
For many years, schedule C of the convention form annual statements
of this company, which it filed with all 13 State ofl&cials who had
supervision over its affairs, disclosed collateral loans made from time
to time to one Irene T. Reaney, whose name was shown on the
schedule in each instance as the "actual borrower." The statements
disclosed that 14 such loans were made from July 12, 1929, to Decem-
ber 9, 1937. These loans totaled $225,900, with as much as $45,000
being outstanding and owing at any one time.^ In the course of the

Poll^ became a trustee of the Mutual Life he became a memoer of both its real-estate committee and of a
special two man subcommittee, formed for the purpose of adjusting mortgage loans. On one occasion ar-
rangements were made for Mr. Polk's loan to be continued open and on another, interest was reduced to
5 percent coincident with a $15,000 payment on principal. Mr. Polk did not vote when either of these matters
came bef.)re the committees of which he was a member although on one occasion the adjustment was
originally recommended by the special two man subcommittee of which Mr. Polk was one of the members
(pt. 4, R. 1466, 1167).

' This information was compiled from item 11 of the general interrogatories in the convention form aimual
statement which reads as follows:

"Total amount loaned during the year to directors or other ofllcers, $ ; to stockholders not officers,

$ Total amount of loans outstanding at end of year to directors or other officers, $ ; to stock-
holders not officers, $ (exclusive of policy loans)."

It should be noted that schedule C of the statement requests information concerning collateral loans in
such form as to disclose borrowings by officers and directors. If officers and directors borrow through
mortgage loans or unsecured loans, however, the details of such transactions cannot be ascertained from the
statement. In addition, loans to relatives of officers or directors or companies in which officers or directors
are interested are not specially designated in any way and cannot be ascertained from the statement.

' See pp. 48 to 60, infra. In a slightly different category are loans by stock companies to their stockholders.
These loans totaled $244,749 as of December 31, 1938, and were outstanding in two companies (item 11, general
interrogatories, 1938 convention form annual statements). The record also contains evidence that certain
officers of life insurance companies drew salaries in advance and submitted liberal expense accounts. For
testimony on these subjects see pt. 13, R. 6753, 6755, 6758, 6759; exhibit No. 1134.

< Pt. 12. R. 5618.

•Id.

« Pt. 12, exhibit No. 1089.

48 CONCENTRATION OF ECONOMIC POWER

hearings it was developed that Miss Irene T. Reaney was a steno-
grapher employed at Monumental who received a salary of $50 a week.
She testified that all except $2,400 of these loans shown in her name
had actually been made to Mr. Paul M. BuTnett, then president of the
Monumental and later chairman of its board. It had been the prac-
tice for Mr. Burnett to put up the collateral and to receive the proceeds
of the loan.^ Examination of the convention form annual statements
disclosed that Mr. Burnett had signed such statements on several
occasions when those statements, both in schedule C and in the general
interrogatories, contained false entries with respect to his borrowing.^
Mr. Burnett testified that he had not arranged for his loans to be
concealed because of the charter provisions of the company wliich
made such loans unlawful or because such loans violated the laws of
several States in which the company did business.® No adequate
explanation of his conduct in this connection, however, was given.
In addition to the Burnett loans it appeared that another director,
Dr. F. H. Vinup, had borrow-ed money from the company on two
occasions in 1935 and that the wife of another director was at one time
obligated to the company in the amount of $20,000 resulting from
collateral loans. The fact that at least one of these was a loan to an
ofliicer or director was not disclosed.^"

Evidence was also presented demonstrating that certain officers of
the company had used the funds of the company to further various
business ventures in which they were interested as officers or stock-
holders. Mr. Milton E. Roberts, vice president and director of
Monumental was asked to explain a series of transactions between
Monumental and these various enterprises. Mr. Roberts had been
active in working out the details of the transactions under scrutiny
and was qualified to explain their over-aU result. His testimony dis-
closed that even after the transactions had actually been carried out,
he was unable to reach a judgment as to-^whether or not they had been
in the best interests of the insurance company.

Briefly, the facts were as follows: Mr. Roberts was the^ "controlling
operator" of a company known as Real Estate Trustees, Inc., a corpo-
ration incorporated in 1924." It appeared that although the Monu-
mental was authorized imder law to make mortgage loans directly,
at the suggestion of Mr. Roberts ^^ it was agreed that Real Estate
Trustees, Inc., would make mortgage loans and pledge the mortgages
with the insurance company as security against collateral loans from
the msurance company to Real Estate Trustees, Inc. In this manner
Real Estate Trustees, Inc., was placed in a position t6 receive a com-
mission from the broker in the case of each loan piade as well as the
benefit of an interest differential resulting from the fact it paid Monu-
mental a lower interest rate than that which it received from its mort-
gages. The net result of these transactions was that Monumental
lent money on mortgages indirectly through Real Estate Trustees,
Inc., and in this manner benefited ce^jtain of its ofiicers and directors
who were interested in the operations oi that company. It is not
surprising that the. Real Estate Trustees, Inc., prospered and paid
dividends from the date of its organization in 1924 until 1930" Even

' Ft. 12. R. 5681-5683.
» Pt. 12, B. 5689. 6690.
» Pt. 12, R. 5686, 5691.
» ft. 12, R. 5692, 5693.
» Pt. 12, R. 5703.
»» Pt. 12, R. 5704.

'CONCENTRATION OF ECONOMIC POWER 49

after it ceased paying dividends, it continued to borrow from the
Monumental on a collateral-loan basis. ^^

At the end of 1932, Real Estate Trustees, Inc., was obligated to
the insurance company in the amount of $766,803.87.^* At about this
time the mortgage company changed its name to Land Mortgages;
Inc., and the business was continued thereafter under that name. At
the same time steps were taken toward liquidating the indebtedness
between the two companies. This indebtedness remained at over one-
half million dollars from 1933 through 1937, however, and liquidation
proceeded very slowly.

It was not until 1939 that the indebtedness between the Monu-
mental and Land Mortgages, Inc., which then stood at $446,990.05.^^
was settled. At that time a series of round-about transactions involv-
ing the Consolidation Co., a real estate development company the
majority of whose stock was owned by Mr. Roberts, ^^ were initiated.
The transactions resulting in the liquidation of the $446,000 obligation
were as follows:

1. Monumental purchased from Land Mortgage for $296,500 certain securities
which had been hypothecated by the latter company with the Monumental as
partial collateral against the indebtedness. Of this sum, $274,125 represented
payment for 4,193 shares of Real Estate Trust Co. stock." The Real "Estate
Trust Co. stock was purchased at $125 a share when the then market price was
around $64 a share. '^ It was understood that Mr. Roberts, within 2 years from
the date of the agreement, would repurchase these same shares from Monumental
at the $125 a share price. '^ In effect. Monumental gave twice the value of the
stock to Land Mortgages in return for Mr. Roberts' agreement to repurchase.^"
The purchase price was applied to the indebtedness. ^^

•' Pt. 12, R. 5703-5705, exhibit No. 9 " . Mr. Roberts testified with respect to these transactions as follows
(pt. 12, R. 5706):

"Mr. Qesell. They were substantial transactions then, were they not, as between land mortgages and
real-estate trustee on the one hand, and the Monumental on the other?

"Mr. RoBEETs. And very profitable, during that time, to the insurance company.

"Mr. GEfiELL. Also of some profit to you gentlemen interested in the mortgage?

"Mr. Roberts. Quite naturally.

"Mr. OiESELL. Then this was another case, was it hot, Mr. Roberts, where certain of the officers and the
directors of the insurance company were dealing with the insurance company?

"Mr. Roberts. Well, you can't deny a fact, Mr. Gesell, that is shown from the records, but the question
of a motive is an entirely different thing.

"Mr. Sesell. I made no reference to a motive.

"Mr. Roberts. I am as human as anybody that ever lived and an opportunity to make money honestly
and fairly — I don't believe I would have passed it up.

"Mr. Qesell. Even though it was an opportunity to make money off a company where you were a
director?

"Mr. Roberts. If you depend on the integrity of the men involved that is the only thing you can pos-
sibly do business 6n."

» Pt. 12, exhibit No. 963.

"> Pt. 12. R. 5711. Mr. Roberts testified (Id.):

"» * * you could do practically nothing in the way of liquidating such frozen assets— that it was
deemed advisable to endeavor to get the indebtedness settled."

i« Pt. 12, R. 5709.

" Real Estate Trust Co. is a bank organized November 1, 1926. Mr. Roberts and other officers of Monu-
mental were interested in the bank from the date of its organization. A substantial amount of the original
capital was subscribed by Real Estate Trustees, Inc. (pt. 12, R. 5706, 5707). The Monumental carried
bank balances with Real Estate Trust Co. at all times subsequent to 1929, these balances reaching a high
of $255,769.61 as of December 31, 1932 (pt. 12, exhibit No. 964).

" Pt. 12, R. 5711.

'• Pt. 12. R. 5712.
. «Id.

«Id.

50 CONCENTRATION OF ECONOMIC POWER

2. In return for the payment of $50,490.05, the remaining indebtedness of
$150,490.55 to Monumental was settled in full " and Monumental agreed to
release all of the remaining security which Land Mortgages had pledged as col-
lateral. In other words Monumental wrote off $100,000 of the indebtedness.

It appeared that Land Mortgages did not have cash sufficient to
enable it to make the payment of $50,490.05. It, therefore, pledged
the collateral which Monumental had released with Consolidation Co.
in return for $50,000 which Consolidation advanced to Land Mortgages.
Consolidation in turn pledged the same collateral with Monumental
and received a loan of $50,000. In effect, therefore, Monumental
released certain collateral against which it could have foreclosed and
received value in order to enable Land Mortgages, through Consoli-
dation Co., to repledge the same collateral With it and in this manner
receive funds sufficient to pay off the remainder of the indebtedness.
It was simply a circuitous transaction by which Monumental lent the
money which was used to pay off the debt that was owing it, securing
the new loan with the collateral of the old.^^

The collateral which was released and subsequently repledged by
Consolidation with Monumental was given a release value of $148,625,
and Mr. Roberts testified that from the standpoint of Consolidation
it was worth considerably more than $50,000.^^ Mr. Roberts was
asked whether this transaction was in the best interest of the insur-
ance company; his testimony in this respect, considering that he was
interested in these transactions as director of the insurance company
as well as director of the other companies involved, is illuminating.^'

Mr. Gesell. Well now, that was a rather favorable transaction from the point
of view of you gentlemen interested in the real-estate business, from these various
real-estate companies, wasn't it?

Mr. Roberts. I would like you to put the same proposition to an outsider and
see what answer you would get on it. You couldn't possibly have worked it out.

Chairman Ferguson. Mr. Roberts, as I said a few minutes ago, when Mr.
Gesell asks you a question, please answer it "Yes" or "No," and then make your
explanation of it.

Mr. Roberts. I would say "No," and the other answer is ''Time will tell."

Mr. Gesell. Coming to the minutes, Mr. Roberts, that I was looking for, I
believe you stated you didn't think it was to the advantage of the Consolidation
Co., this transaction.

Mr. Roberts. I said time will only tell.

Mr. O'Connell. I understood you to say "No," in direct answer to the ques-
tion, Mr. Roberts. Didn't you say the answer to the question directly was
"No," and your comment on it was "Only time will tell."

Mr. Roberts. Yes, sir; I did.

Mr. O'Connell. Well, you did say it was not a favorable transaction from the
point of view of Consolidation. Isn't that correct?

Mr. Roberts. That is a correct answer if you want to look at it in the abstract.
There are other sides to it.

22 Id.

23 Pt. 12. R. 5713-5715.
2< Pt. 12. R. 5715.

» Pt. 12, R. 5716-5718.

CONCENTRATION OF ECONOMIC POWER 51

Mr. Gesell. Then I would like to caU this directly to your attention. The
minutes of the meetings of the bo^rd of directors of Consolidation Co., Inc., held
on May 23, 1938, at which you were shown to be present, contain the following
statement with respect to this transaction.

"It was obviously to the advantage of this company to persuade remaining
assets from Land Mortgages and repledge them with Monumental to secure the
loan aforesaid."

That is rather in direct opposition to your testimony.

Mr. Roberts. That may be true and that would be in making the transaction
and in order to straighten out and clear up the whole matter, was probably con-
sidered by the company +hat the prospect of the new money and the ability to
develop it would be an advantageous transaction. That is probably true.

Mr. O'CoNNELL. Which is true in your opinion? You have now said it was to
the advantage and it was not to the advantage.

Mr. Roberts. I would answer to the individual, if I were not associated with
the various interests I wouldn't have been interested. Now, my connection —
well, it would have to have been with somebody who had a sincere interest in not
only the Consolidation Co. coming in at the time it did, but with the interests of
the Monumental Life Insurance Co. to endeavor, as far as possible, to ins'^-e it'
against 'any loss.

Mr. O'CoNNELL. Rather a difficult position to be in when you are representing
three or four interests at one transaction?

Mr. Roberts. It is strange to try to explain aU your transactions and your
motives.

Mr. O'CoNNELL. Isn't it rather difficult to properly represent all the varied
interests that are involved in such a transaction?

Mr. Roberts. Well, Mr. O'Connell, it is a difficult thing; you divorce your own
selfish interests every time from every transaction.

Mr. O'Connell. Well, one way of doing it is not to be on both sides of the
transaction.

Mr. Roberts. Well, service is a beautiful thing.

Mr. O'Connell. That is one way to determine what to do in the future,
isn't it?

Mr. Roberts. Absolutely; I agree with you. I didn't want to refer to the
method by which I acquired control of the land mortgages, but I called (sic
"bailed" ^8) out everyone of those stockholders by giving them good stock.

Mr. O'Connell. Would you care to clarify the record as to whether you
think," in answering "Yes" or "No," whether this transaction was to the advan-
tage of the Consolidation Co. You have said both, actually.

Mr. Roberts. The only way I could clear it up is by saying I hope it will be.

Mr. O'Connell. So you now don't know?

Mr. Roberts. I am in a dilemma.

Mr. O'Connell. We have all the possible answers anyway: You think it was
an advantage; you don't think it was an advantage; and you don't know.

Thus does the commingling of a director's personal affairs with that of
the insurance company he represents prevent his independent exercise
of business judgment in the interest of the pohcyholders.

Another company from which officers and directors borrowed large
sums of money is the Shenandoah Life Insurance Co. of Roanoke, Va,
This company was organized under the laws of Virginia in 1914.^^ At

" See Verbatim Record of the Proceedings of the Temporary National Economic Committee, vol. 5,
p. 68.
« Pt. 13, R. 6464.

52 CONCENTRATION OF ECONOMIC POWER

the present time it has approximately $60,000,000 of ordinary insur-
ance and $120,000,000 of group insurance in force.^^ The company
does business in 14 different States. ^^

During the period from 1929 to 1938 Shenandoah made 95 collateral
loans to officers and directors, or members of their families. These
loans totaled $714,740, and the records of the company indicate that
there was as much as $330,000 outstanding in loans to officials of the
company at one time.^° It appeared that many of these loans were
made to the four principal officials of the company who had been
responsible for its organization in 1914 and who had been prominent
in its affairs since that time as stockholders, directors, and officers.
An examination of the records of the company also disclosed at least
15 mortgage loans made directly or indirectly to ofiicers or directors.
These loans were frequently in substantial amounts, running as high
as $150,000 in the case of a loan on an apartment house owned by
one of the officers.^'

, As in the case of Monumental, some collateral loans made by
Shenandoah were not truly reflected in the official reports of the
company, the beneficial interest of the borrowing officer being con-
cealed by making the loan to a nominee. For example, several col-
lateral loans totaling $15,871.21 were made to one M. F. Weaver. It
was developed in the course of the hearings that Mr. R. H. Angell,
then president of Shenandoah, put up the collateral and received the
proceeds of these loans which in all cases were made for his personal
benefit or that of his company, the Central Manufacturing Co.^^

Included in the collateral loans to officers and directors were indi-
rect loans made to various companies which they owned and con-
trolled. Among these were several real-estate concerns operating in
and around Roanoke, Va., and a lumber company in which Mr. R. H.
Angell, former president of Shenandoah, was interested.^^

In many instances the collateral against the loans was of doubtful
value. This is partly demonstrated by the fact that $38,142 of such
loans has been written off by the company and, as of December 31,
1938, may be found included as unsecured bills receivable in the non-
admitted assets of the company. In addition the collateral was for
the most part made up of securities of local companies which had no
estabUshed market price and in many instances were securities of
companies in which the directors and ofiicers were themselves inter-
ested.^*

Some doubts may also be raised as to the value of the collateral
because of the circumstances under which the loans were made. It

28 Pt. 13, R. 6464, 6465.
M Pt. 13, R. 6465.

30 Pt. 13, R. 6473. exhibit No. 1121.

31 Pt. 13, R. 6466-6472.

" Pt. 13, R. 6468, 6469. Tnis type of "dummy" loan to an officer or director deserves special mention.
Two other examples of loans of this character were disclosed by the testimony. In one instance a loan of
$400,000 was made by Federal Reserve Life Insurance Co. to one F. E. Bushman with the understanding
that Mr. Bushman would in turn loan a similar amount to Mr. Massey Wilson and Mr. E. W. Merritt,
two officers of Federal Reserve. Pt. 13, R. 6647, 6648. Similarly, it appeared that the Illinois Bankers
Life Assurance Co. loaned $250,000 to the Lincoln Securities Co. at the same time that the Lincoln Secu-
rities Co. loaned $200,000 to Mr. Hugh T. Martin, president of the Illinois Bankers. The circumstances
surrounding these two loans will be considered later in more detail. See infra, pp. 117 and 82.

33 Pt. 13, R. 6467-6469, 6471, 6472.

3< Pt. 13, R. 6470, exhibit No. 1133.

CONCENTRATION OF ECONOMIC POWER 53

appeared that the loans were approved by a so-called managing com-
mittee of the Shenandoah. This committee consisted of the principal
ofl&cers of the company who were also, as has been indicated, the prin-
cipal borrowers from the company. These officers therefore passed
upon the adequacy of their own collateral and placed a valuation upon
it. Under these circumstances it is highly doubtful that any objective
judgment as to the advantage of the loan from the point of view of the
company could have been obtained.^^

The Insurance Department of the State of Virginia repeatedly
criticized the loans, but the officers and directors of the company
failed to take vigorous steps to liquidate them, their failure being
due, in part, to financial embarrassment on the part of the persons
involved.^^ The Virginia Department stated that:

The practice of making such loans is open to criticism. There are too many
examples of the hazard of this practice when carried to extremes for our examiners
to fail to recommend that such loans now held to (sic) be substantially curtailed
from time to time and that the granting of further loans of this type be materially
restricted.

This statement was made in 1932."

By 1935, however, 17 such loans totaling over a quarter of a mJlUon
dollars and representing approximately 83 percent of the total col-
lateral loan account of the company were still outstanding.^^ It
appeared, moreover, that during the period from 1932 to 1935 addi-
tional-collateral loans approximating $100,000 had been made for the
benefit of officers and directors. These loans were made in spite of
the fact that during the period the disbursements of the company
exceeded its income and that the companj^ was operating under re-
strictions in order to conserve its liquid position.^^

In still another instance, that of the Lincoln National Life Insurance
Co., of Fort Wayne, Ind., an interesting, series of cross loans between
officials of several life insurance oorhpanies was revealed. Mr. Arthur
Hall, president of the Linooln, desired to. borrow money against stock
of his msm*ance company. The Indiana law prohibited Mr. Hall from
borrowing directly from the Lincoln National. Accordingly, he com-
municated with several neighboring insurance companies and arranged
through a series of letters written in May of 1929 to borrow a total of
$140,000 from three such companies, the Peoples Life Insurance Co.,
of Frankfort, Ind., the American Central Life Insurance Co., and
Central States Life Insurance Co., Officers of each of these companies
from which Mr. Hall borrowed also borrowed from Lincoln National.
Thus it appeared that in November 1929 the Lincoln National
loaned $50,000 to Mr. Thomas M. Ryan, chief counsel of the Peoples
Life Insurance Co., on stock in Peoples, Mr. Hall having borrowed a
similar amount from the Peoples the preceding month. In December,
the Lincoln National loaned $50,000 to Mr. Harry R. Wilson,' an
officer of the American Central Life Insurance Co., Mr. Hall haviijg
borrowed a similar amount from the American Central the preceding

«» Pt. 13, R. 6470. 6471.
M Pt. 13, R. 6476. 6477.
«' Pt. 13, R. 6476.
M Pt. 13. R. 6477.

" Pt. 13, exhibits Nos. 1121, 1123. These transactions will be considered further in a subsequent portion of
this report. Infra pp. 70 to 74. . '

54 CONCENTRATION OF ECONOMIC POWER

October. In January of 1931, Mr. James A. McAvoy, an officer of
Central States, borrowed $32,000 from the Lincoln National, secured
by Central States stock, and thereafter by three different loans made
from April to August, Mr. Hall borrowed a total of $40,000 from
Central States. It appeared that Mr. Hall was on the finance com-
mittee of the Lincoln National and the three borrowers from the
Lincoln National were on the finance committees of their respective
companies. In all but one case the loans were paid off but the Lincoln
National suffered a loss of $40,000 on the McAvoy loan. Mr. Hall
testified there was no reciprocity involved in these transactions and
that at the time one loan was made no return loan was contemplated.
It seems clear, however, that these transactions arose from a com-
munity of interest 'existing among the officers of the companies in-
volved and were prompted by a realization that in no case could the
borrowing official of any company have borrowed the money directly
from his own concern. It is significant that these loans were made
on terms more favorable than those which apparently could have then
been obtained from banking institutions.^^

An example of promiscuous borrowing may be found in the case of
the officers and directors of Travelers Insurance Co. who borrowed
heavily from two banks which their company owned or controlled.

Travelers is the seventh largest life insurance company in the
United States and the largest company not operating on the mutual
plan.*^ It is the parent company in the so-called Travelers group,
which includes, in addition to the two banks, a land company, an
indemnity company, a broadcasting company, and two fire-insurance
companies.*^ The combined assets of the Travelers group total over
$1,000,000,000.^^ All subsidiary companies in the group are owned
entirely by Travelers, except for equities represented by directors'
qualifying shares, with the exception of one bank in which, however,
Travelers maintains a controlling interest. Principal officers of
Travelers are officers of the subsidiary companies and the various
companies are further connected by extensive interlocking director-
ships.**

The two banks controlled by the Travelers are the Connecticut
"River Banking Co., in which it has a 71-percent interest, and the
Travelers Bank & Trust Co., which it owns 100 percent exclusive of
directors' qualifying shares. The former is a commercial bank and ,
the latter primarily a savings bank. Both banks have offices in the
Travelers Insurance Building, at Hartford, Conn., and are closely
allied with each other through common officers and directors. Trav-
elers representatives constitute a majority on the board of each bank
and both banks are depositories for Travelers funds.**

« Pt. 28, testimony of Arthur M. Hall, February 16, 1940.

<• Travelers has.200,000 shares of common stock, par value $100 a share, outstanding and approximately
7,000 stockholders. Officers, directors, and employees of the company own less than 10 percent of the
stock outstanding. Specifically officers own 2,419 shares; home-office employees other than officers, 870
shares; branch-office employees, 928 shares; and directors other than officers, 3,084 shares; a total of 7,301
shares. Pt. 13, R. 6369-6371; 1938 convention form annual statements.

" Pt. 13, exhibit No. 1093.

«Pt. 13, R.'6367.

" Pt. 13, exhibits Nos. 10!;3, 1094.

« Pt. 13, R. 6372-6378. exhibits Nos. 1098. 1099. 1111.

CONCENTRATION OF ECONOMIC POWER

Travelers acquired its interest in the Connecticut River Banking
Co. in 1912.*^ An examination of the records of the bank disclosed
that during the period 1912-39 it had loaned money at various
times to officers, directors, and employees of Travelers Insurance
Co. The majority of the loans were collateral loans, but some mort-
gage loans and even, unsecured loans were disclosed. In most in-
stances, officers and directors commenced borrowing in small amounts
and increased the amounts of their loans as time w^ent on. During
this period, 53 officers and directors of companies in the Travelers
group made a total of 506 loans from the bank. These loans amounted
to $3,047,664.92 and included loans to Mr. L. Edmund Zacher, pres-
ident} of Travelers; Mr. Wilbur S. Sherwood, cashier; Mr. Arthur
L. Shipman, a director; Mr. Louis F. Butler, then president and
director; and Mr. Benedict D. Flynn, vice president and actuary.
As of July 20, 1939, officers and directors and employees of Travelers
were obligated to the bank in the amount of $493,758.04.*^

A comparable situation was found to exist in the case of the Trav-
elers Bank & Trust Co., which was organized by Travelers.*^ This
bank also loaned money to officers, directors, and employees of Trav-
elers Insurance Co. Immediately after the bank was organized four
or five mortgage loans which Travelers had carried on its books for
its employees were transferred to the bank. Subsequently, many
loans to Travelers' officers appeared. An analysis of the accounts for
the period from 1930 to 1939 disclosed that directors, officers, and
employees of companies in the Travelers group borrowed $347,442.77
from the bank on loans other than mortgage loans. In addition, it
was found that mortgage loans were also outstanding on the books
of the bank to officers and employees of the insurance company.**

" Connecticut River Banking Co. was organized in 1825, and until 1912 the bank operated independently.
In 1912 the bank had 5,000 shares of capital stock outstanding of a par value of $30 a share. Travelers In-
surance Co. commenced purchases of the stock in.May 1912, and by Juhe 5 of the same year had succeeded
in accumulating around 62 percent of the outstanding shares. Some 608 shares, representing working con-
trol, were purchased from one of the pi^cipal' stockholders, and the remaining shares were picked up in
small blocks through market purchases or otherwise. As of December 31, 1938, a statement of condition
of the bank showed its total resources and total liabilities at $9,200,047.78. In the commercial department
of the Connecticut River Banking Co., $4,298,256.19, or 56.5 percent, of the entire deposits were deposits
held for companies in the Travelers group. Since it acquired control. Travelers Insurance Co. has received
dividends from the bank totaling $866,230.80 (pt. 13, R. 6372-6374, 6407, exhibits Nos. 1095, 1097).

« Pt. 13, R. 6379, 6382, 6387-6391, 6405-6407, 6416.

<* This bank was originally organized for the sole purpose of handling certain trust accounts which an
oflBcer of Travelers held as trustee for the benefit of stockholders of the insurance company. Subsequently
the bank's activities were expanded by the creation of a savings department and the opening of its trust
department to the public. The bank has resources and liabilities as of December 31, 1938, of $12,527,791.99
and has paid $391,000, to Travelers in the form of dividends since its organization (pt. 13, R. 6375, 6376,
exhibits Nos. 1096, 1097).

<' Pt. 13, R. 6417-6418, exhibit No. 1109. A recapitulation of borrowing by insurance officials from both
banks during the 10-year period from 1929 to 1939 is presented in the following table (pt. 13, R. 6414-6416):

Name of borrower

Position with Travelers

Number

banks

from

which

money

borrowed

Largest
amount
of loans
outstand-
ing

Date largest
amount of

loans
outstanding

TT. H, ArmstronE

Vice president -^-:.'.-

1
1
2
2
2

$36, 450. 62
15, 000. 00
20, 100. 00
17, 421. 29
48, 526. 20

Feb. 6, 1932

William B. Bailey

Economist.

Oct. 17, 1935

Gladden W. Baker

Treasurer

Oct. 5. 1931

Percy V. Baldwin

Assistant secretary

Jan. 1, 1929

Walter E. Batterson

Do.

Footnote 49 continued on page 56.

56 CONCENTRATION OF ECONOMIC POWER

Footnote 49 continued from page 55.

Name of borrower

Position with Travelers

Number

banks

from

which

money

borrowed

Largest
amount
of loans
outstand-
ing

Date largest
amount of

loans
outstanding

Bartlett T. Bent

Allan E. Brosmith

William Brosmith

Edmund J. Buckley. . .

Louis F. Butler

Thomas J. Butler

Joseph T. Cabaniss

James H. Coburn

John J. Cusick

Charles Deckelman

H. H. Elsworth

Everett S. Fallow .'

Charles E. Ferree

B. D. Flynn

Howard A. Giddings...

Frank B. Goudy

James C. Graves

F. L. Grosvenor

H. Pierson Hammond.
John J. Hart...

Frank P. Hayden...
James E. Hoskins...
James L. Howard...

Joseph R. Lacy

Joseph D. Leahy

Walter W. Mallory.
Francis T. Maxwell.

John McGinley

Bertrand A. Page...

Charles E. Perry

Fred E. R. Piper...

Jesse W. Randall

C. Donald Raney

Walter R. Rearick

Daniel A. Read

James E. Rhodes

Walter Roberts

Lewis M. Robotham...

Robert D. Safiord

Wilbur S. Sherwood. . .

Arthur L. Shipman

Wellington R. Slocum.

George M . Smith

C. Luther Spencer, Jr..
Howard R. Sullivan...

R.J. Sullivan

C. W. VanBeynum.

John L. Day

Roger W. Wight....
Robert H. Williams.
L. E. Zacher '.

Assistant secretary

Attorney .

D irector

Agent

President

Superintendent agencies

Medical director :

Vice president - .

Traveling, auditor.

Manager, claims

D irector ."

Actuary, accounting division..

Assistant agency secretary

Vice president-

Director (Neb. S.)

Surgical director. . . . . .

Medical director....

Actuary..^ ......'.

'Superintendent automobile
division.

Assistant secretary

Assistant actuary _ . .

Director and vice president.. .
Assistant secretary .'

— -d<V -- - -

Agency secretary.

Director...

Vice president

do -

Medical department

Assistant manager casualty

claim.
Vice president

Superintendent ...

Secretary

Attorney

Assistant cashier .

Secretary

Vice president

Assistant cashier

Director

Cashier

Assistant surgical director

Director •

Assistant manager casualty
claim.

Vice president-. .

Manager publicity depart-
^ment.

Director...

Superintendent agencies

Vice president

President

$15,
25,

5,
10,
52,

8,
11,
18,
10,

,357. 00
890.00
000.00
531. 20
000.00
500. 00
000. 00
000. 00
613. 75
078.24
000.00
473.00
122. 03
450.00
500.00
000.00
400. 00
000.00
000.00
520. 00

24, 000. 00
14, 300. CO
58, 500. 00
22, 220. 48
13, 700. 00
46, 000. 00

110,000.00
25, 000. 00

100, 000. 00
11,020.58
8, 500. 00

29, 276. 00
15,541.06
13, 699. 80
23, 315. 00
29, 300. 00
70, 500. 00
40, 000. 00

8, 500. 00
65, 000. 00
42, 658>87
17, 500. 00

8, 300. 00
19, 000. 00
47, 150. 00

17, 500. 00
13, 069. 84

10, 000. 00
10, 150. 00
41, 500. 00
50, 000. 00

Mar.

Feb.

Nov.

Feb.

May

Nov.

Jan.

Mar.

June

Mar.

Nov.

July

Jan.

May

Jan.

June

Jan.

Oct.

Nov.

May

July

Sept.
Oct.
Jan.
Apr.
Sept.
Sept.
Jan.
Nov.
June
Sept.

Jan
Nov. 15,
Oct. 31
Oct. 15,
Apr. 29
Oct. 31
Mar. 19,
Aug. 25,
Sept. 16,
Dec. 16,
Jan. 1
Do.
Dec. 5,
Nov. 21

Jan. 1
Sept. 16,

Jan. 1
May 31
Jan. 8,
July 15,

1932
1930
1929
1929
1629
1929
1929
1938
1930
1929
1929
1929
1929
1931
1929-
1931
J929
1932
1929
1929

1930
1930
1930
1929
1929
1931
1930
1929
1929
1930
1929

1929
1929
1929
1929
1930
1929
1929
1933
1929
1930
1929

1930
1930

1929
1936

1929
1932
1932
1929

It was the practice for the banks to lend money to Travelers Insurance Co. employees, oflBcers, and
directors at a preferential interest rate. Top officers of the company, including Mr. Zacher, borrowed
at a rate of interest lower by a full percent than the going rate (pt. 13, R. 6418-6421).

CONCENTRATION OF ECONOMIC :^OWER 57

That these loans bulked large in the activities of the banks is
easily demonstrated. At the Connecticut River Banking Co., the
loans to officers, directors, and employees of Travelers group repre-
sented a substantial percentage of the bank's loans. The following
schedule shows for the indicated dates the percentage of total bank
loans attributable to officers, directors, and employees of the Travelers
group: *°

Percent

Jan. 1, 1929 22.3

Dec. 15, 1931 26. 61

Jan. 1, 1933 28:85

Jan. 1, 1935 26.21

Jan. 1, 1939 39.43

Similarly at the Travelers Bank & Trust Co., loans to officers and
directors of Travelers equaled 17.06 percent of the bank's mortgage
loans and 36.17 percent of the bank's otber loans, as of January 1,
1939.^^

The nufnber and amount of these loans or their importance in rela-
tion to the total bank loans does not indicate the full extent to which
the personal affairs of the officers and dii'ectors became conmiingled
with the affairs of the Travelers Insurance Co. and other companies
in the Travelers group."

Travelers Insurance Co. found it necessary, for example, to bail out
the Travelers Bank & Trust Co. in which heavy loans to officers and
directors of Travelers were outstanding, by purchasing securities from
the bank at fictitious prices. Travelers Insurance Co. caused Ne-

M Pt. 13, R. 6392.

•I Pt. 13, R. 6412, 6413.

" The record contains considerable evidence of the financial difficulties which may beset life insurance
companies whose affairs become too involved with those of banking institutions. For example, Illinois
Bankers Life Assurance Co. held shares of Monmouth Trust & Savings Bank and placed one of its officers
on the board of the bank to guard its interest which represented an investment of $59,000 (223 shares out of
1,250 outstanding). The bank got int(j financial trouble and the Illinois Bankers put a disproportionate
amount of its deposits in the bank to "keep it running." When the bank became more pressed the insurance
company was obliged to take $41,045 of real estate and $87,000 of first mortgages from the bank and accept a
deferred deposit of $50,000 thus reducing the bank's deposit liability by $178,845 (pt. 13, R. 6901-6903). In
addition three cases of companies which failed as a result of banking afi^iations since 1930 with substantial
losses to policyholders were established— Home Life Insurance Co. of Little Rock, Ark., National Life
Insurance Co. of the United States, Chicago, 111.; and Continental Life Insurance Co., St. Louis, Mo.
Pt. 28, testimony of Alfred M. Best, February 29, 1940. See also pt. 13, R. 6655-6657.

264763— 41— No. 28-

58 CONCENTRATION OF ECONOMIC POWER

braska Securities Corporation,^^ at that time one of its subsidiaries, to
purchase on December 24, 1931, certain securities having a then
market price of $80,413.50 for a total of $22.1,720.58, or an amount
$141,307.08 in excess of the true market price, in order to prevent the
bank from failing through lack of adequate financial support.^*

Further involvement resulted from the fact that as collateral against
■ these loans the officials pledged substantial blocks of Travelers In-
^surance Company stock. The testimony disclosed that prior to the
d£ite Travelers became interested in the Connecticut River Banking
Co., that bank held a negligible amount of Travelers Insurance Co.
stock as collateral against its outstanding loans.^*' Commencing in
1912, however, the number of shares of stock so pledged increased
until by December 15, 1931, 3,515 shares uf Travelers Insurance Co.
stock were held as collateral by the bank, of which 2,043 shares
represented collateral pledged against loans to officers, directors or
employees of the company.^^ At about this time the market price
of Travelers Insurance Co.'s stock experienced one of its most pre-
cipitous declines. Commencing with a market price of $1,570 a
share in April of 1930, the stock dropped to $950 a share by April of
the next year and reached aiowpointof $175ashareby July 11, 1932."
The minutes of a meeting of the financial committee of the Connecticut
River Banking Co. held on July 12, 1932, the day after this low point
in the market was reached, record that as of Jmie 25> 1932, the collateral
securing the loans at the bank, which of course included many loans
then outstanding to officers and directors of the insurance company
was impaired to the extent of $367,000.^^ In an effort to prevent these
loans from going under water and partially to protect the interests of
its stockholders generally. Travelers Insurance Co. undertook to
purchase distress stock in the open market by making various pur-
chases through its several subsidiary companies during the period
from 1930 to 1932.^^ The purchases were for the purpose of steadying

" The factors prompting the organization of Nebraska Securities Corporation as a subsidiary of Travelers
were considered at some length in the hearings. It developed that in 1926 the company learned that one of
its mortgage loan agents in Nebraska had falsified >i's accounts and over a period of years submitted to
Travelers, and it had accepted, $1,251,500 of spurious mortgage paper. Travelers neither prosecuted the
loan agent nor publicized the condition of its accounts with him. Instead, it made an agreement with the
loan agent under which it obtained certain properties of dubious value owned by him and after crediting
these to his Account accepted his personal note in the amount of $685,429. 07,which represented the balance of
the obligation resulting from the issuance of the spurious paper. The note and properties were then sold
to Nebraska Securities Corporation which Travelers had organized for the purpose and Travelers took back
in payment therefor capital stock and notes of the Corporation. In subsequent years Nebraska Securities
Corporation was us^d as a clearing house for transactions other than those originally contemplated and it
became a repository for defaulted mortgages and certain foreclosed real estate which Travelers placed in the
Corporation from time to time, receiving in retiun Nebraska Securities' notes. In its statement for the year
1932, the notes (classified as bonds in the annual statement) appeared in the balance sheet at their face value
of $7,300,000 and the stock was carried at $459,900, a value of $20 a share instead of the par value of $100 a
share. There was nothing to indicate that the underlying security of these investments consisted only of
defaulted mortgages or farm properties of questionable values. The corporation was dissolved in 1936 and
the account at that time showed that Travelers had lost $2,303,893 in principal and approximately $1,300,000
in uncollected interest. On the dissolution of the Corporation, its assets were acquired by Travelers.
The ultimate loss to Travelers from these transactions, which were at no time fully revealed to its share-
holders or policyholders, will not be known until these properties are sold to bona fide purchasers
(pt. 13, R 6431-6463).
." Pt. 13, R. 6457-6459, exhibit No. 1118.

" Pt. 13, R. 6393.

•• Pt. 13, R. 6392.

" Pt. 13, R.6393.

" Pt. 13, R. 6394.

M Pt. 13, R. 6446-6449.

CONCENTEATION OF ECONOMIC POWER 59

the market price.^" The market for the stock was entirely an over-
the counter market and at best a thin one.^^ On occasions these
purchases were heavy, considering the general thinness of the market.
For example, on October 2, 1931, during trading which saw the price
of Travelers Insurance Co. stock drop from $540 to $473 a share,
nine different purchases were made from various brokers through the
Connecticut River Banking Co. for the account of subsidiaries of
Travelers, for a total of 103 shares and an investment of $54,201.*^
It is of interest to note that during this period Travelers Insurance
Co. took pains to conceal sales of stock by certain of its officers, in
some instances purchasing stock from these officers directly 10 prevent
it from appearing in the market.**^

The purpose and effect of the trading was revealed through the
following testimony of Mr. Zacher, who was primarily responsible for
initiating the actual buying and selling orders. Mr. Zacher testified: ®*

Acting Chairman O'Connell. Would it be fair to say that you were purchasing
stock during this distress period to help out the brokers and other persons who
either held or ordinarily purchased the stock, and at the same time you hoped
you would ultimately be able to liquidate the stock without taking tjie loss?

Mr. Zacher. Or stockholders that had a pledge with the banks and the banks
which had to liquidate part of those holdings.

Acting Chairman O'Connell. That is just exactly the point I am interested
in. Wouldn't it be a fact that a number of your stockholders who had substantial
blocks of stock would be in danger of losing their stock if it were pledged as
collateral with the price of the stock not maintained?

Mr. Zacher. Yes.

Acting Chairman O'Connell. Wasn't that one of the motives in buying the
stock, to maintain the price?

Mr. Zacher. Yes; it would have hurt the stockholders and indirectly the bank
would have lost money and the insurance companies would have lost money,
because they are all considerably interested in those bank stocks up there.

Mr. Gesell. And particularly your two banks, the Connecticut River Bank
especially, would have lost a great deal of money since, as we saw at this period,
there were over 2,000 shares of Travelers stock pledged as collateral against loans,
many of these loans being made to officers and directors of your company.

Mr. Zacher. Yes, but that didn't bother us so much because we knew the
character of the borrowers, we knew what kind of job they had, we knew eventually
without collateral they would make every effort to pay out.

Acting Chairman O'Connell. As a ruatter of fact, I think it was developed
that many of the loans were under water and it didn't apparently bother you
very much?

Mr. Zacher. There wa6 a short period, sir, where the market value went to
nothing. There wasn't any market value in that particular time, but after the
market steadied and we were able to get to these borrowers and call their attention
to it, we finally got margins, or had the loans paid oflf, so there were only a few very
loans that were what you might call under water so far. as their collateral was
concerned, and in each case we got insurance; so if they died before their loan
was paid we would be protected.

w Pt. 13, R. 6447.

" Mr. L. Edmund Zacher testified (pt. 13, R. 6462): "There isn't a great amount sold, from time to time,
except when somebody dies and they have to settle up the estate."
M Pt. 13. R. 6454.
*> Pt. 13, R. 6448.
W Pt. 13, R. 6460, 6461.

go CONCENTRATION OF ECONOMIC POWER

Acting Chairman O'CoNNELL. At any event, it seems pretty clear, doesn't it,
that one of the primary purposes of the purchase of this stock during the period
was to maintain the market price of the stock so as not to have the depreciated
pVice of the stock result in the sacrifice of the stock by officers or other persons
who had substantial stock interests?

Mr. Zacher. It wasn't so much the price as to keep the stuff moving, not to
have it get stagnant.

Acting Chairman O'Connell. Why is it important to the company that it be
kept moving?

Mr. Zacher. So that it won't sink out of sight overnight.

Acting Chairman 0'Connel.l. When you say "keep moving" you mean keep
"moving upwards?

Mr. Zacher. No; keep moving back and forth to steady.

Mr. Gesell. In other words, when too much supply and too little demand
existed you wanted to dry up some of the supply?

Mr. Zacher. That's it.

Of the same effect as direct loans to officers and directors are loans
made by insurance companies to corporations in which their directors
or officers are interested as promoters. Some loans of this character
have already been briefly mentioned. Many further examples may
be found in the discussion of reinsurance arrangements and failures
which follows in a subsequent section.

Not only do officers and directors borrow from their companies but
the evidence also discloses that certain directors have used their
connections to their, advantage in securing business preferment in
various types of transactions through the influence they are able to
exercise as members of life insurance boards.

An example in point was provided through the testimony of Mr.
Mitchell D. Follansbee, a director of the Metropolitan. Mr. FoU-
ansbee has been a director of the Metropolitan since 1915. During
this time he has also been a partner of the Chicago law firm of Follans-
bee, Shorey &.Schupp.^^ From 1915 to 1932, Mr. Follansbee's firm
did no business for the Metropolitan.^^ Mr. Follansbee understood
that it was the policy of the company to forbid any directors to
represent the company as counsel." In 1932, Mr. Samuel Fordyce,
an attorney from St. Louis, was nominated and elected to the board
of directors of the Metropolitan. Mr. Fordyce had represented the
Metropolitan in legal matters prior to becoming a director and
continued his legal representation of the company after he became a
director.*^ "V^hcn Mr. Follansbee learned of this fact he wrote Mr.
Leroy A. Lincoln, then vice president and general counsel of the
MetropoHtan, on May 7, 1932, as follows:^*

When I came on the board a great many years ago, when the compstriy was
first mutualized, I, or someone else elected at the same time, took the place of Mr.
Butcher, and Mr. Butcher was told in those days that the policy of the company
forbade any director to represent, as counsel, the conipany in any way. That
policy was changed, as I understand, and the evidence of the change was that my

«» Pt. 4, R. 1412-1416.

«« Pt. 4, R. 1413.

«♦ Pt. 4, R. 1413.

" Pt. 4j R. 1413 and 1414, exhibit No. 260. During the period from 1930 to 1938, the law Anns of which
Mr. Samuel Fordyce was partner received fees totaling $227,076. From 1930 to 1934 the amount of these
fees rapidly mounted reaching a maximum of $48,666 in 1934 (Convention Form Annual Statements, Metro-
politan 1930-38). •

«• Pt. 4, exhibit No. 260.

CONCENTRATION OP e60N0MIC POWER Ql

friend, Sam Fordyce, retained his legal representation for the company after he
became a director.

The company is apt to have a lot of important real estate foreclosures in this
vicinity, and I write to you as general counsel asking you to give our firm, which
has always had both knowledge and facility in such matters, consideration.

As a result of this letter, Mr. Follansbee's firm was given oppor-
tunity to represent the Metropolitan, and in the next 6 or 7 years his
firm represented that company in 1,382 foreclosures for total fees
amounting to $336,920; in 6 loans matti s for fees amounting to
$2,025; in 7 sales matters for fees amounting to $1,250, and in 7
miscellaneous cases for additional fees amounting to $18,885 making
a grand total of $359,080 in business received since the writing of the
letter in May of 1932.'" This substantial increase of business required
Mr. Follansbee's firm to hire 6 additional employees and to increase
its office space."

Another example of the use by a director of his position for personal
advantage may be found in certain transactions between the New
York Life and the Employers Liability Assurance Corporation, cf
New York City. Mr. Charles D. Hilles is a director of New York Life
and New York City resident manager and director of Employers.
The Employers Liability Assurance Corporation WTites various forms
of casualty insurance including workmen's compensation insurance,
general liability insurance, elevator insurance, steam boiler insurance,
and fidelity insurance. Mr. Hilles testified that New York Life was
interested in 4,922 buildings and that his firm had all of these properties
covered by one form of insurance or another.''^ It developed that Mr.
Hilles became a director of the insurance company in thq spring of
1922.''^ A business connection with the Employers had already been
established and thereafter the business grew rapidly. During the
last 12 years the average annual premium paid to Employers by New
York Life Insurance Co. amounted to $99,891.40'* and^ the records
showed that the yearly premiums had increased from $62,490.77 in
1927 to $182,658.43 in 1938, an increase of almost 200 percent. Mr.
Hilles is in constant communication with officials of New York Life
on business matters affecting the misceljaneous insurance account.
He stated that he never solicited business from the New York Life
but through one of his letters written in May of 1933, to Mr. Alfred L.
Aiken, then vice president of the New York Life, his active solicitation
of at least one line of business was disclosed. After indicating he had

'" Of this amount, about $25,000 was paid by owners of equities and the remainder was paid by the Metro-
politan. (Pt. 4, R. 1414.) The fees Metropolitan paid to Mr. Follansbee's firm increased, while the relative
amount of fees received by the firm of Hoyne, O'Connor, and Rubicam, which had previously represented
the Metropolitan in the Chicago area decreased.

" Pt. 4, R. 1416. The convention form annual statements of the 5 largest companies indicate that fees
are often paid law firms, 1 or more of whose partners interlock with the insurance companies. The following
interlocking law firms received fees in 1938: In the case of the Mutual Life; Bruce and Bullitt in the amount
of $8,105.59; in the case of the Prudential, Wainwright, Elder, and McDougall in the amount of $8,066.04
and Lindabury, Depue, and Faulke, $23,469.85; in the case of the New York Life, Root, Clark, Buckner,
and Ballantine, $15,000 (see also pt. 4, R. 1440); in the case of the Metropolitan, Follansbee, Shorey, and
Schupp, $14,772 and Fordyce, White, and Mayne, AVilliams, .rl Hartman, $29,479; in the case of the
Equitable, Milbank, Tweed, and Hope, $6,555.64; and Pillsbu j Madison, and Sutro, $8,285.94. These
fees totaled $113,734. For further testimony on the subject of dee tors acting as attorneys for the insurance
companies on whose boards they serve, see pt. 4, R. 1413, 1414 i4 0, 1441, and 1496.

" Pt. 4, R. 1473.

" Pt. 4, R. 1472.

'« Pt. 4, R. 1473.

Q2 CONCENTRATION OF ECONOMIC PQWER

not been able to reach Mr. Aiken by telephone Mr. Hilles' letter
stated :^^

Now, however, another matter arises due largely to the connection of the
McCall family with the National Surety Co., the surety and fidelity items of the
miscellaneous lines of insurance of the New York Life were turned over to the
National. I assume that the business of that company will be liquidated. In
that case I hope it will be agreeable to you to have your fidelity and surety placed
with us.

As to our financial posit' jn, 1 may say that we w^re the one company in a total
of 103 in business in the country which made a gain in 1932 in volume in under-
writing profit and in assets.

Mr. Hilles was also interested in the Employers Fire Insurance
Co. A letter written to Mr. HUles by the president of that company
disclosed that he was expected to bring his injQuence to bear in direct-
ing New Yorii Life's fire insurance business to the fire company. The
letter stated: ^^

In the past you have on a number of occasions attempted to prevail upon the
New York Life Insurance Co. to use the facilities of our fire company. They have,
I believe, taken the position they cannot influence their property managers, who
in many instances are insurance agents, to place with any one particular company
the fire insurance on buildings in which they are interested as mortgagee.

While I quite appreciate their position, I have recently learned from Mr.
Bertrand J. Perry, president of the Massachusetts Mutual Life Insurance Co.,
of Springfield, Mass., that they and niany other life companies have decided to
use but one fire company to give them the necessary coverage.

Possibly, the New York Life Insurance Co. has considered a similar plan. At
any rate, I am wondering if you would be so good as to find out what they do and,
more particularly, whether or not you could in some fashion or other influence
them to use the Employers' Fire Insurance Co. as the company to handle their
fire insurance on those properties they own. Such an arrangement, obviously,
would help the fire company a great deal.

Yours for profitable premiums.

Two memoranda from the files of the New York Life disclosed that
the officers of that company had adopted a policy of throwing business
toward the Employers' Liability Assurance Corporation. One mem-
orandum stated:"

Up to August 31 of this year (1933) the coverage referred to was placed with
the National Surety Co. (later the National Surety Corporation). However, we
were directed, after a conference of some of our executives, to place the coverage
with the Employers' Liability Assurance Corporation from August 31, 1933.

Another stated :^^

We find that the Buckeye union Casualty Co. and the Shelby Mutual Co. are
rather small concerns, and that the Employers' Liability and General Accident
Cob. are the larger companies with whom we ordinarily would be willing to do
business.

Our recommendation is that the Employers' Liability Assurance Corporation
be used for two reasons. First of all, the fact that our own blanket liability policy
is carried in that companj', and second, it is the writer's understanding that thf

" Pt. 4, R. 1473, exhibit No. 279.
" Pt. 4, exhibit No. 282.
" Pt. 4, exhibit No. 284.
" Pt. 4, exhibit No. 285.

CONCENTRATION OF ECONOMIC POWER g3

General Accident Insurance Co. takes a very independent attitude in the handling
of their business in New York. We have had very little insurance with them
ourselves and cannot say just how they would react to any business we might be
connected with.

The writer knows that several of our oflBcers would prefer that the Employers'
Liability Assurance Corporation be used for this coverage if possible.

Thus it appeared that New York Life's business with Employers'
Liability Assurance Corporation prospered after Mr. Hilles came on
the board of the former company both by reason of Mr. Hilles' solici-
tations and the disposition of his fellow officers to point business in
his direction. Mr. Hilles has a 10-percent interest in the profits of
his agency. The premiums from the New York Life Insurance Co.
contributed to the profits of the agency and in this manner he received
benefits from the New York Life business.^®

Two additional examples of business dealings, not necessarily in-
volving direct personal gain, between L^rge insurance companies and
business concerns with which one of their directors waa connected, are
as follows:*"

" Pt. 4, R. 1476, 1477. These transactions demonstrated the advantages which may accrue to a life-insur-
ance director interested In other miscellaneous lines of Insurance. For further testimony on this general
subject, see testimony of Mr. Hendon Chubb, a director of the Prudential, pt. 4, R. 1480, 1488; testimony
concerning the activities of Mr. Ridley Watts, a director of New York Life, pt. 4, R. 1479-1490; and testi-
mony of Mr. Michael Cleary, president, Northwestern Mutual Life Insurance Co. regarding attitude of
his company toward permitting directors interested in miscellaneous lines of insurance to sell the same to
that company, pt. 4, R. 1496, 1497.

"> An interesting excerpt from the testimony demonstrates the manner in which a company may utilize
its interlocking directorships to build up its business and establish advantageous contacts. Mr. Wilfred
Kurth, chairman of the board of the Home Insurance Co. of New York, the largest fire-insurance company
in the United States, testified that the directors of his company were representative citizen? who "must be
of value to the company, either as producers of-business or in the financial set-up."

He explained that the Home Insurance Co. maintained a service department whose duty it was to develop
profitable business contacts through the interests of the various directors on the board. (Pt. 4, R. 1442, 1443.)
Mr. Kurth testified (pt. 4, R. 1444, 1445):

"Mr. Qesell. How much do you pay your directors a year?

"Mr.. Kurth. Pay them $4,000 a year. That started a little over 2 years ago.

"Mr. Gesell. That is a flat salary?

"Mr. Kurth. Flat salary.

"Mr. GE3ELL. Is it the purpose of the service department to see that they earn it by getting you this
business?

"Mr. Kurth. Yes; we see to that, too. As a matter of fact, about the time I became president we began
to realize that we had not developed through our directors possibilities la the way of getting business and
we started about then and these calls became so great upon the directors that I finally suggested that we
put them on a salary basis rather than a fee basis.

"Mr. Qesell. So that the inconvenience that was caused by getting new business would be compensated
for?

"Mr. Kurth. They earned it.

"Mr. Qesell. Well now what prompted you to institute this plan of paying your directors for getting
business?

"Mr. Kurth. Just as I say, we were calling upon them so frequently and they were really doing a lot of
work and I don't think any ordinary fee pays a director that does his utmost in the Interest of hirCOmpany .

"Mr. Gesell. Did you find that without calling upon these connections you were excluded from business
because of other connections between other companies?

"Mr. Kurth. Not so much that; it is surprising how— perhaps I should not say it; perhaps our competi-
tors have not realized the advantage of using their directors, but It has been a very prolific source of Income
with us."

"Mr. Qesell. So that It is of real consequence to your company to get other board men who by reason of
their varied connections and directorships in other companies can bring business to your company or take
it away from someone else?

"Mr. Kurth. Verjj)ointedly."

As examples of how the system works, Mr. Kurth stated that his company obtained business on real estate
owned by the Bowery Saviiigsfignk through the eflortg.^ Mr. Lewis L. Clark, a director of the Home
Insurance Co. and director of the bank7~SevefBl-oWtJxamples were enumerated. Pt. 4, R. 1442-1445.

g4 CONCENTRATION OF ECONOMIC POWER

Mr. Alfred E. Smith, a director of the New York Life, is chairman
of the board of the Meenan Oil Co. On two occasions he addressed
letters to officials of the New York Life soliciting business on behalf
of his oil company and it appeared that the Meenan Oil Co. in 1937
received orders for 1,275,000 gallons or more than half the oil supplied
to properties of the insurance company. It appeared from the record
that preferential treatment was given Mr. Smith's company until
the matter came to the a-ttention of Mr. George S. Van Schaick, vice
president of the New York Life who issued contrary instructions to
the company's superintendent of real estate.^^

Mr. Carroll B. Merriam became a director of the Metropolitan in
1934. He was also a stockholder in and an officer of the Central
Trust Co. of Topeka, Kans., which in turn controlled the Central
Trust Mortgage Co.^^ These two concerns acted as mortgage corre-
spondents for the Metropolitan during the time Mr. Merriam was
on its board. The Metropolitan's connection with the Central Trust
Co. had been established prior to Mr. Merriam's undertaking his
directorship. Although the connection with the Central Mortgage
Co. was developed' after the directorship was established, negoti-
ations looking toward such an arrangement ' had been under way
before that time. In the period from 1934 to 1938 these firms received
fees as correspondents or managers of Metropolitan farm properties
totaling $132,852.83

81 Pt. 4, R. 1436, 1437, exhibit Nos. 263, 264, 265, 256, and 304.
M Pt. 28, exhibit No. 2340 and Moody's Manual of Investments 1934, 1935.

'3 Pt. 28, testimony of Glen E. Rogers, February 19, 1940. 1934r-38 Convention Form Annual Statements,
Metropolitan, schedules Q and J.

SECTION VII

Change of Plan of Company Operation to Benefit Personal Interests of
Officers and Directors

OflBcers of some insurance companies have utilized their positions to
their own advantage in still another way; namely, by changing the
form of their companies from stock to mutual or from mutual to stock
whichever their personal interests dictate. Three instances of this
procedure were developed in the course of the testimony and wUl be
discussed herein.

A. MONUMENTAL LIFE INSURANCE . COMPANY

The recent history of the Monumental Life Insurance Co. of
Baltimore, Md., provides an example of the manner in which the
directors of a mutual company may take control from the policy-
holders by changing its form to that of a stock company.' From the
date of its organization until February 6, 1928, Monumental operated
as a mutual company.^ At that time it was changed to the stock
plan under the following circumstances. Prior to the conversion,
the officers of the company who had been elected by the policyholders
and who were presumably representing their interests learned that
"cliques" were betag formed among certain branch managers of the
company to secure sufficient votes to control the forthcoming elections.
The officers who had been with the company during its earlier stages
were apparently fearful they would be ousted from their positions.
Mr. Paul M. Burnett, chairman of the board of the Monumental,
testified: ^

Mr. Gesell. Well, your concern was then more the fear that these managers
would oust you and your fellow officers from office than it was any overt act
that had taken place?

Mr. Burnett. That is not a fair construction. We had been in control of
the T!ojnpany and built the company for many years.

Mr. Gesell. But the policyholders hadn't been — were in control?

Mr. BuRlsTETT. We were in control; we were the ones managing the business
and there was always that condition that we had to face.

Mr. Gesell. Now I wish you would be specific about the condition. Had the
managers put men on the board of directors that you didn't want there?

Mr. Burnett. No; the managers had not.

Mr. Gesell. It was merely the fact they* were threatening fo do so, was it
not?

Mr. Burnett. They were forming little cliques and doing various things that
were exceedingly annoying to us in the management of our business.

' This company is primarily an industrial company, having $60,780,553 ordinary and $211,533,033 industrial
Insurance in force as of December^Sl, 1938. The company was incorporated in 1858 as a mutual company
under the laws of Maryland and began business in 1860. It was orginally known as Maryland Mutual Life
and Fire Insurance Co. of Baltimore, In 1870 its name was changed to Mutual Life Insurance Co. of Balti-
more. In July 1935, 7 years after it had ceased to be a mutual company, the company took its present name.
Best's Life Insurance Reports 1939, p. 681 et seq.

' Pt. 12, R. 5619.

» Pt. 12, R. 5624, 5625.

QQ CONCENTRATION OF ECONOMIC POWER

Mr. Gesell. And among those things was the soliciting of proxies from policy-
holders with a view to putting people on the board of directors?

Mr. Burnett. I didn't say that because they did not do that. I said it was
the fear of that. It was the threat of that.

Mr. Gesell. Is it a fact that you were afraid they might do it?

Mr. Burnett. They were in a position to do it.

Mr. Gesell. And had they done anything which indicated to you that they
might do it?

Mr. Burnett. Yes, we had known of several meetings that they had had to
discuss it.

Mr. Gesell. That is what I am getting at. There were plans afoot, then, by
these managers to solicit proxies from the policyholders and oust some Of you
fellows from the management of this company, weren't there?

Mr. Burnett. No; I wouldn't say that.- I don't know just how far they
would have gone. I can only say that there were these cliques formed and they
had some meetings for the purpose of discussing questions of that kind. Just
how far they went I don't know; I wasn't invited to the meeting.

Mr. Gesell. And you and your fellow officers were fearful lest these plans
might mature and result in displacing some of you from your controlling positions
in the affairs of the company?

Mr. Burnett. Well, I don't think that is just a fair presumption.

Mr. Gesell. I am not trying to presume anything.

Mr. Burnett. You are answering the question. You are answering the ques-
tion.

Mr. Gesell. Will you state it in your way, then?

Mr. Burnett. Well, I would say this, that in any corporation of that kind a
change of management would be disastrous.

Accordingly, the officers decided to take advantage of a statute,
then a part of the Maryland Code, pursuant to which a company
might change from a mutual to a stock plan of operation, and a for-
mal resolution of the board of directors to effect this change was voted
on October 6, 1927.* It is not entirely clear who was responsible for
suggesting the conversion plan. With respect to this question Air.
Paul M. Burnett, then president of the company and now its board
chairman, testified:^

Mr. Gesell. Well now, I want to understand that very clearly. You say you
think the suggestion came from the insurance department. Did the insurance^
department suggest this or didn't they?

Mr. Burnett. The insurance department did positively suggest it.

Mr. Gesell. Did they originate the idea?

Mr. Burnett. They did.

Mr. Gesell. Do I understand that the insurance department came to you
without any

Mr. Burnett. No; I didn't say that.

Mr. Gesell. Without any previous awareness on your part and made this
suggestion?

Mr. Burnett. I didn't say that. No, in our discussion of matters pertaining
to the company with the insurance department it was suggested that we avail
ourselves of the statute which had been passed several years before.

Mr. Gesell. Who initiated these discussions?

Mr. Burnett. I think it came probably through some examination of our
affairs.

' Pt. 12, R. 5627, exhibit No. 954,
« Pt. 12, R. 5623, 6624.

CONCENTRATION OF ECONOMIC POWER Q'J

Mr. Gesell. Then it was some examiner of the company who suggested that
you change from a mutual to a stock company?

Mr. Burnett. No; I would say that my best recollection is that it was the
actuary.

Mr. Gesell. What is his name?

Mr. Burnett. Siegk — Arthur Siegk.

Mr. Gesell. Your impression is that he made the suggestion?

Mr. Burnett. I think that he got back of it.

Mr. Gesell. That isn't my question.

Mr. Burnett. Well, I say — I mean to say, I think he was enthusiastic for it;
I think he was very anxious.

Mr. Gesell. I don't want to know who went out and beat the drum after it
was originated. I want to know who originated the idea, Mr. Burnett.

Mr. Burnett. I think the idea v/as originated by a suggestion made by him.

Mr. Gesell. To whom did he make that suggestion?

Mr. Burnett. I wouldn't remember.

Mr. Gesell. What is your basis for saying that he suggested it?

Mr. Burnett. Because I discussed it with him. I discussed the matter with
him.

Mr. Gesell. Then he came to you to talk about it?

Mr. Burnett. He came to me, or I went to him, I don't remember which.

Mr. Gesell. That is what I want to know. Did you go to him or did he come
to you?

Mr. Burnett. I don't know. I can't tell you at this late date.

Mr. Gesell. I will give you plenty of time to think about it.

Mr. Burnett. I don't need the time, sir. I only say that I can't recall.*

Shortly thereafter a meeting of the company managers was held
and the announcement made that the company intended to convert.^
A cryptic notice sufficient only to meet statutory requirements was
placed in two Baltimore newspapers, notifying the pohcyholders of
a meeting to be held on January 5 of the following year to vote on
the conversion plan.* No published notice was given outside of the

city of Baltimore although 30 percent of the company's business was

» It is clear that the Maryland Insurance Department approved the plan (pt. 12, R. 5626, 5627, exhibit '
No. 960). Three representatives of the Maryland Insurance Department acquired stock in Monumental
following the consummation of the conversion plan. These representatives were Mr. John P. Albert,
an examiner for the Department who was in charge of the periodic oflBcial examinations of Monumental;
Mr. Denton S. Lowe, an employee; and Mr. Arthur M. Siegk, actuary for the Department.
Mr. Albert obtained 20 shares of Monumental stock on May 10, 1928. These shares were transferred to
Mr. Albert from a certificate which had been issued in the name of Mr. Roberts and the purchase price of
$2,000 was raised through a collateral loan, secured by the 20 shares, which was anranged for Mr. Albert at
the Real Estate Trust Co.

Three months later Mr. Albert reduced his holdings to 10 shatfes and thereby reduced his indebtedness
to $1,000. Coincideflt with this transaction Real Estate Trust Co. loaned $1,000 to Mr. Lowe against col-
lateral of 10 shares of Monumental stock issued to Mr. Lowe at the same time. Mf. Siegk acquired 158
shares on February 20, 1938. The purchase price of these shares, or $17,380 was obtained through arrange-
ments made at Weilepp Bruton Co., a Baltimore brokerage house. Mr. Siegk paid $5,000 down and bor-
rowed $12,380 from this firm, pledging his shares as security. On the same day Weilepp Bruton borrowed
$12,380 from Real Estate Trust Co., pledging 158 shares of Monumental stock and 5 sh£.res of Mfercantile
Trust Co. stock as collateral. Thus the Real Estate Trust Co. financed directly or indirectly the stock
purchases of all three of the Maryland Insurance Department's representatives. The Real Estate Trust
Co. was closely aflBliated with the Monumental, five of its directors, Including Mr. Roberts, being directors
of both the Trust Co. and Monumental. Cash dividends on the stock held in the name of the three Mary-
land Insurance Department representatives or members of their families have totaled over $40,000. In
addition there have been substantial stock dividends declared by Monumental from time to time which
materially increased the holdings of these three individuals (pt. 12, R. 5663-5670, exhibit No. 969).

' Pt. 12, R. 5627.

» Pt. 12, R. 5628, 5629.

Igg CONCENTRATION OF ECONOMIC POWER

outside Baltimore, and only 2 of the company's 27 branch offices
were located in that city. No special notice of any kind was dis-
tributed among the policyholders.^ Proxies for the meeting were
solicited from the policyholders by the agents of the company^ who
each received $10 for obtaining signatures to proxies in favor of the
conversion. ^° The company at that time had approximately 1,000
agents and the expense of $10,J300 incurred was paid from the general
funds of the company." The form of proxy used, in addition to con-
taining authority to vote for the conversion itself, contained a provi-
sion whereby policyholders were asked to waive the rights guaranteed
them under the Maryland statute to subscribe to stock of the new
company. With respect to these waivers, which most of the policy-
holders signed, Mr. Paul M. Burnett, president of Monumental at the
time of conversion, testified as follows :-^^

Mr. Gesell. You were anxious to get those waivers, weren't you?
Mr. Burnett. Naturally we wanted them. That is the reason it is on there.
Mr. Gesell. Why did you want them?
Mr. Burnett. We wanted to control the company.

Mr. Gesell. That is a very frank statement, you wanted to control the
company.

Mr. Burnett. Naturally.

Mr. Gesell. This was the policyholders' company that was involved, wasn't it?

Mr. Burnett. We were proceeding under that statute.'*

Testimony obtained from agents of the company at the time of the
conversion indicated serious irregularities in the obtaining of these
proxies. One agent admitted that it was impossible to obtain bona
fide signatures to the proxies and that he signed the names of policy-
holders to the proxies in many instances.^* He stated that he believed
this was the general practice among the men at the time.^^ Another
agent testified that when he was instructed to solicit proxies he was
told that the proxies were simply for the purpose of changing the name
of the company and that he had been so advised by his manager.^^
There were 489,073 policies outstanding at the time of the conversion
and coiisents or proxies were obtained from holders of 376,982 policies."

Following the policyholders' meeting giving necessary approval of
the conversion plan, the officers and directors of the company under-
took to allocate the shares of stock to be issued as soon as formalities
in connection with the plan were completed. The minutes of the
meeting of the board of directors stated: ^^

Be it further resolved, that the Board is of the opinion that the balance of the
stock shall be allocated to the policyholders of the Mutual Life Insurance Co.

« Pt. 12, R. 5629.

'» Pt. 12, R. 5629-5C31, exhibit No. 956.

II Pt. 12, R. 5630, 5631.

" Pt. 12, R. 5632.

" This form of proxy was approved by the State insurance commission in the State of Maryland. Notice
to insurance commissioners of other States in which the company operated was not given until the plan
had been almost entirely carried into execution. This notice was not in detail (pt. 12, R. 5632, 5633).

» Pt. 12, R. 5652.

i» Id.

i« Pt. 12, R. 6162.

" Pt. 12, R. 5635. The proxies were counted by employees of the company (pt. 12, R. 5636). A respon-
sible oflBcial of the company in responding to a subpena duces tecum calling for the production of the proxies
stateH that he had made a search for the same and that in his best belief they had been destroyed in 1932
with the permission of a representative of the Maryland Insurance Department (pt. 12, R. 5660, 5661).

i» Pt. 12, R. 5643.

CONCENTRATION OF ECONOMJC POWER

holding an executive position therewith either as an official or departmental man-
ager of the company or other, capacities in order that the present management,
control, and operation of the company may continue in the same hands and under
the same managetnent which has successfully conducted the company for years
past * * *,

Shares were allocated on the following basis : ^^

Subscribing policyholders 315

Employees __. ' 350

Managers of oflBces 1, 425

Heads of departments 1, 100

Secretary _ 250

Assistant secretaries 300

Vice president 500

President-..-. 760

Total . .... 5,000

As a result of these allotments, only three policyholders who were
not employed by the company or connected in some way with its
management received any shares of stock.^"

The full extent to which the chief ofl&cers of the company consoli-
dated their position in the management of the new company is not
disclosed by the above allotments. It developed that many- of the
employees and managers were unable to take up their subscriptions
and as a result 1,550 shares allotted to employees and managers from
the total of 5,000 shares were released almost immediately from sub-
scriptions and were purchased in the main by principal officers and
directors of the company, principally Mr. Paul M. Burnett, who took
295 shares, and Mr. Adelbert W. Mears, a director, who took 500
shares.^^ It also appeared that many officers and employees who sub-"
scribed to the stock were subsequently unable to pay for it and as a
consequence there was a possibility that these shares might fall into
the hands of someone outside the influence of the management. Five

'» Pt. 12, exhibit No. 959. Mr. Burnett, who received the principal allotment, testified (pt. 12, R. 5644):
"I can only say to you that I do not recall having any discussions about the allocation of the stock prior
to this meeting (i. e., the meeting at which the allotments were made), nor did I participate in the discus-
sions that took place on that subject atlkhe meeting."

Mr. Roberts, another official of the company, testified, however (pt. 12, R. 5649):

"Mr. Roberts. Well, sir; I would be of the opinion that we knew really what we were going to do.

"Mr. Qesell. Ahead of time.

"Mr. Roberts. Ahead of time." .' . ■

See generally pt. 12, R. 5638-5650.

"> Pt. 12, R. 5699. Of these 3 policyholders, 2 received 5 shares each (pt. 12, exhibit No. 959); the other,
a policyholder named Mr. Summerfleld B. Pearson, eventually received 100 shares. Mr. Pearson was
the only policyholder who objected to carrying out the conversion plan. Mr. Roberts, an officer of the
insurance company, explained the issuance of 95 shares in excess of the allotment to Mr. Pearson as fol-
lows (pt. 12, R. 5678):

"Mr. Gesell. Instead of getting 5 shares he got 100 shares. What is the story behind that?

"Mr. ROBERTSi. Well, Mr. Qesell, of course you want the story just as you know it to be. He was a
broker. He also was a policyholder. He was employed by rather a large brokerage firm in Baltimore,
and if my recollection serves me correctly he scouted around and got either proxies or assignments or some-
tliing from other policyholders, in legal terms what we call a strike, and he came in and demanded more
than he would be entitled to or would have been entitled to. Now, we had no dissenting voices of any
moment except this Mr. Pearson. We weren't looking to engage in any acrimonious discussions with
anybody, and the stock that he got was rather in a settlement to get rid of his objections.

"Kir. Qesell. In other words, by upping his allotment from 5 to 100 you were able to silence his objec-
tions?

"Mr. Roberts." That is practically the situation.

"The Vice Chairman. You considered him a nuisance?

"Mr. Roberts. He was, because I dealt with him.

^'Mr. Qesell. Now, there is a regular provision in the statute for handling people like that. Why
didn't you follow the statute procedure?

"Mr. Roberts. I am not a crusader or a moralist, either one, and I choose the line of least resistance.

"Mr. Qesell. That explains it. I have no further questions."

" Pt. 12, R, 5675-5677, exhibit No. 962.

70 CONCENTRATION OF ECONOMIC POWER

oj0&cers and directors of the Monumental interlocked with a bank
known as the Real Estate Trust Co.,^^ and a close connection existed
between the insurance company and the bank. In order to assist
employee subscribers who had been allotted shares to purchase the
same, it was arranged that the bank would loan money to these sub-
scribers to enable them to take up their commitments.^^ No such
loan facilities were, of course, offered to the policyholders not con-
nected with the management. Direct and indirect loans by the bank
to assist these subscribers totaled $143,000.^*

Following the conversion of the company from a mutual to a
stock form, and the issuance of stock pursuant thereto, the same
officers and directors who had previously managed the company
remained in control' and occupied the same official positions they had
formerly occupied. It is significant that since the date of conversion,
the company has been extremely profitable. ^^ Starting with an original
paid-in capital of $500,000 and a paid-in surplus of about $50,000, the
company now has a surplus of approximately $2,100,000 and has
declared stock dividends totaling $1,500,000 and cash dividends
totaling $1,830,000.^^ An analysis of the dividend records of th&
company indicates that almost $600,000 in cash dividends has been
paid to "Mr. Paul M. Burnett, Mr. Milton Roberts, Mr. Howard W.
Emmons, and Mr. Adelbert W. Mears, the four principal ofiicers of the
company who conceived^ and carried out the conversion plan. These
four individuals remain in charge of the company's affairs at the
present time and are its principal stockholders."

B. SHENANDOAH LIFE INSURANCE CO.

_A slightly different situation arose in the case of the Shenandoah
Life Insurance Co., of Roanoke, Va.,^^ In this instance it was to the
advantage of the principal ofiicers to convert the company from a
stock to a mutual form. This change was accomplished speedily
under the following circumstances.

Inimediately prior to 1930 the management control of the Shenan-
doah rested in the hands of five officers,^^ most of whom had been
♦interested in the company since its organization in 1914. By 1930,
the company had 50,000 shares of capital stock outstanding of which
amount 40 percent, or 20,000 shares, was held by Associated Life
Cos., Inc., a Rogers Caldwell enterprise.^° The five officers owned '
only a few scattered shares themselves and occupied their positions
in the management under an understanding with Associated Life Cos.,
Inc.^^ In 1930 Caldwell's far-flung financial interests collapsed and
the 20,000 shares passed to Lehman Bros. & Co., the New York

» Pt. 12, R. 5670.

" Pt. 12, R. 5670-5674.

" Pt. 12, R. 5672;

»> Pt. 12, exhibit No. 966.

»« Pt. 12, R, 6723. The surplus of t)je company -immediately prior to }.he conversion date (Feb. 6, 1928)
was $641,000 (pt. 12, R. 5621).

'' Pt. 12, exhibit No. 969.

" See reference to collateral loans to officers, supra p. 63:

" Mr. R. H. Angell, Mr. W. 0. Andrews, Mr. John Peter Saul, Jr., Mr. J. H. Dunkley, and Mi. E. Leo
Trinkle (pt. 13, R. 6466, 6477).

•• Pt. 13, R. 64?7, 6478. For a more complete discussion of the insurance promotional activities of Mr.
Rogers Caldwell, see pp. 120 to 131, infra.

" Pt. 13, R. 6478. No officer or director of Shenandoah had any interest in Associated Life Cos., Inc. Id.

CONCENTRATION OF ECONOMIC POWER 71

investment banking firm which obtained the shares tlirough fore-
closure of a loan to Associated Life Cos., Inc.,^^ which it had made
some time previously. The five officers of Shenandoah undertook
to purchase the shares from Lehman Bros. & Co. in order "to keep
the control of the company in the Shenandoah Valley" and to make
sure of the continuance of their positions as officers in the company .^^
Mr. John P. Saul, Jr., executive vice president of Shenandoah,
testified: ^* "We didn't want that block of stock to get into the hands
of some interest which might not b^ friendly." An agreement was
reached in February 1931 fixing the purchase price at $800,000, or
$40 per share, payable $200,000 down and $125,000 a year thereafter
until completion of payments in February 1936.^® The down payment
was made and each officer executed his joint and several note for the
remaining $600,000 obligation.^^ Immediately thereafter the officers
created Shenandoah Holding Corporation "for the sole and express
purpose" of acquiring the 20,000 shares." It was recognized, how-
ever, that each officer remained personally liable for $600,000, owing
to Lehman Bros. & Co. under the purchase agreement.^^ After meet-
ing the $125,000 payment due in February 1932, Shenandoah Hold-
ing Corporation sold its interest in the Lehman Bros, purchase contract
to Insurance Equities, Inc., a concern operated by insurance company
promo tors. ^^ Insurance Equities, Inc., assumed, the obligation to
Leliman Bros. & Co. and, in addition, gave Shenandoah Holding
Corporation its note for $365,000.*°

The next installment on the purchase price ($125,000) fell due
February 25, 1933. This was also the date that the first interest and'
principal payments on the Insurance Equities, Inc. note to the Shen-
andoah Holding Co. fell due." During the preceding January, it
became evident to the insurance-company officials that Insurance
Equities; Inc. was in "precarious financial condition" and that a default
on its $365,000 obligation to the. holding company could be expected.*^
In anticipation of this detault the five officers undertook to meet the
payment on the Lehman ^ros. & Co. contract which was to fall due.
At this time the Shenandoah Holding Corporation was without funds
and the officers, therefore arranged for the Shenandoah Life Insurance
Co. to lend $116,000 to the Shenandoah Holding Corporation. This
loan enabled the officers to meet their commitments to Lehman
Bl'os. & Co. and thus preserve their equity in the block of 20,000
shares. The $116,000 loan was secured solely by the worthless note
of Insurance Equities, Inc. to Shenandoah Holding Corporation, upon
which a default was certain, and was made at a time when the life

3S Pt. 13, R. 6479.

M Id.

■» Id.

35 Pt. 13, R. 6479, 6480.

w Pt. 13, r: 6480.

" Id. In addition^ to the holdings of the five officers a small interest in Shenandoah Holding Corporatibn
was taken by Mr. W. W. Boxley, of Roanoke City. About 1 year after it was founded other stockholders
of Shenandoah Life Insurance Co. were given the opportunity to exchange two and one-half shares of
Shenandoah for 1 share of the holding company. Not long after the holding company was orgauized
Mr. Angell took over Mr. Andrews' one-fifth interest, giving the former a two-fifths interest (pt. 13, R. 8481).

« Pt. 13, R. 6480.

» Pt. 13, R. 6482.

«>Id.

« Pt. 13, R. 6483, 6484.

" Pt. 13, R. 6484.

72 CONCENTRATION OF BCON'OMIC POWER

insuraace company's disbursements exceeded its income and the com-
pany was operating under restrictions designed to conserve its liquid
.position.*^

The next payment on the Lehman Bros. & Co. contract fell due
in February of 1934, and Shenandoah Holding Corporation was not in
a position to meet this payment as it fell due. The possibility of a
default under the contract was therefore imminent and this would
have meant that each of the five officers would have become personally
obligated to Lehman Bros. & Co. in the amount of $350,000. Mr.
Saul testified in this connection as follows :^*

Mr. Gesell. The next payment came due in February of 1934; did it not?

Mr. Saul. Yes, sir. ^

Mr. Gesell. Was the Shenandoah Holding Corporation in a position to
meet that payment?

Mr. Saul. No, sir.

Mr. Gesell. If the payment had not been made you and your five fellow
officers would have been obligated, would you not, personally?

Mr. Saul. Yes, sir.

Mr. Gesell. In what amount?

Mr. Saul. In the unpaid balance of $350,000.

Mr. Gesell. Each of you would have had that as a personal obligation?

Mr. Saul. Yes, sir.

The ofl&cers decided to change the company from a stock to a mutual
plan in order to relieve themselves of this substantial financial obliga-
tion. -: The plan of conversion was so devised that the officers were at
the same time able to maintain their dominant positions in the com-
pany's management.

In order to change the form of the company, it was necessary that
the Virginia Legislature first enact a statute authorizing the same.
No such statute was in existence in January of 1934. - An ofl&cer of
the She-nandoah Life Insurance Co. conferred with the Insurance
Department of the State of Virginia and a statute to meet the situation
was prepared and subsequently enacted.*^ With respect to this
statute, Mr. John Peter Saul, Jr., an officer of th'e company, testified:**

Mr. Gesell. Was this an act which was passed primarily to meet the situation
of your company?

Mr. Saul. It was a very helpful act to our company and we received from the
legislature the entire cooperati«n in the passage of it.

Mr. Gesell. So that it was passed for the benefit of your company primarily?

Mr. Saul. I think it was passed with that view in mind, though it was not a
special act for our benefit in any sense.

Mr. Gesell. Who initiated the passaga^pf any such act as this? Was it your
company?

Mr. Saul. As I stated, I didn't hear of the consideration by the insurance
department of such a statute in Virginia until it was called to my attention bj' the
superintendent of insurance, and it immediately seemed to be a statute that would
be helpful to us, and immediately we began to do all we could to have it enacted
as promptl}' as possible.

" Pt. 13, R. 6483, 64.86. The ShenacQdoah Holding Corporation note was endorsed by four of the ofl5cers.
Objection was taken to this loan by the Insurance Department of the State of New Jersey and the company
withdrew from New Jersey at the end of 1933 (pt. 13, exhibit No. 1123).

" Pt. 13, R. 6487.

" Sec. 4251A and 4251B of the Virginia Code of 1636.

" Pt. 13, R. 6487, 6488.

CONCENTRATION OF ECONOMIC POWER 73

Mr. Gesell. You mean that the insurance commissioner was considering,
in a more or less general way, the possible advisability of having some such section
that wotild enable stock companies to mutualize? .

Mr. Saul. Yes, sir.

Mr. Gesell. And when you heard he had that idea in mind you told him how
desirable it would be from the point of view of your company?

Mr. Saul. Yes, sir.

Mr. Gesell. And thereafter you did what you could to encourage the im-
mediate passage of the act?

Mr. Saul. That is right. He knew that also before I told him and he was very
helpful and cooperative in the matter.

The statute was enacted sometime during the first week of March
1934.*^ Since the payment to Lehman Bros. & Co. fell due on
February 25, 1934, it was necessary to obtain an extension in order
that the conversion plan could be carried out. Accordingly an
extension to Alay 15, 1934, was obtained.*^

Thereafter events moved rapidly. On March 8, 1934, the directors
approved the plan to change the form of the company. A stock-
holders' meeting was held and necessary approval of the stpckholders
obtained. ,» Notices were immediately sent to policyholders of a
meeting to be held April 30, 1934, at which the consent of the policy-
holders was obtained. Thus all formal steps were taken to complete
the mutualization of the company by May 15, 1934, the date the
payment to Lehman Bros. & Co. became due.*^

The mutualization plan was so drawn as to require its completion
prior to the payment becoming due. It provided that the outstand-
ing shares of stock would be purchased at a price of $20 a share,"*
payable $15 in cash and $5 at some future time, subject to the author-
ization of the board of directors of the company. In addition,
dividends were to be received by the stockholders for a period of 15
years subsequent to the retirement of the stock. It was specifically
provided that the first shares to be purchased would be 20,000 shares
from Shenandoah Holding Corporation. In the notices which were
sent to the policyholders and stockholders, the principaL provisions
of the plan were set forth but no notice was given of the fact that the
consummation of the plan would relieve the five officers of the com-
pany of their joint and several obligation of $350,000.^'

There were other disclosures which should have been made to the
policyholders at this time by the Insurance Department of the State
of Virginia which, it h^-s been shown, assisted in the enactment of the
mutualization law, approved the plan and actually voted shares of
stock in favor thereof.^^ Although the insurance_department had
stated that it viewed certain aspects of the managenieM~of~the~
company with "utmost disfavor" it made no special effort to bring to
the attention of policyholders and stockholders the information it
possessed. In a letter written by three representatives of the Virginia

« Pt. 13, R. 6487.

« Pt. 13, R. 6489.

« Pt. 13, R. 6489, exhibit No. 1125.

" The market price of Shenandoah stock at the time lof the agreement was $6 a share and the plan of mu-
tualization provided for the purchase at $20 a share (pt. 13, R. 6490, 6491).

» Pt. 13, exhibit No. 1125.

" Lehman Bros. & Co. gave its proxy covering the 20,000 sharei, to the chief examiner of the State
Insurance Department of the State of Virginia (pt. 13, it. 6491, 6492).

264763— 41— No. 28 6

74 CONCENTRATION OP ECONOMIC POWER

State Corporation Commission, under date of April 14, 1934, to
Ex-Governor E. Lee Trinkle, then president of the Shenandoah Life
Insurance Co., the following indications of mismanagement of that
compd!ny were set forth: That a loan had been made to a director
without any appraisal of the collateral and without previous approval
of the company's managing committee; that the office system of the
company was loose and conducive to irregularities; that substantial
transactions had been recorded in the company's expense account in
oi'der to. keep them from appearing in the annual statements of the
company where they would come to the attention of proper authorities ;
that salaries were being drawn by the principal officers in' advance;
that unsecured advances were being made to officers; that the company
w^as being charged for traveling expenses incurred on behalf of the
Shenandoah Holding Corporation and that these charges were im-
proper; that excessive salaries were being paid and that the managing
3ommittee was not directing the affairs of the company in the manner
'equired under law.^^

Thus without adequate disclosure to policyholders, the plan was
carried to its conclusion. The Virginia statute did not require that
any specified percentage of policyholders approve the change ; only the
majority approval of those voting was required. Not only were the
pohcyholders' voting rights in this connection not fully explained to
them by the management, but no opportunity to vote, by proxy against
the plan was provided. Only 777 policyholders were represented at
the meeting and only seven negative votes were recorded.**

The same officers who were originally managing the company and
whose management was so severely criticized by the Insurance Depart-
ment continued to hold their offices, and there is no evidence that any
immediate changes were initiated which inured to the benefit of the
policyholders. The net effect of the transactions is conciselv sum-
marized in the following testimony:

Representative Casey. This mutualization bailed you and your associates out
of some $300,000 obligation?
Mr. Saul. That's right."

* C. ILLINOIS BANKERS LIFE ASSURANCE COMPANY

The maimer in which the management of a mutual assessment
company seized control of its assets in the process of changing it to
a stock company operating on a legal-reserve basis is exemplified in
the case of the Illinois Bankers Life Assurance Co. of Monmouth, III.**
Activities of the management in this instance give further illustration
of the ease with which officers of an insurance company can utilize
their positions for private ^ain.

Illiaois Bankers was organized in 1897 as an assessment company
with its main offices in Monmouth, lU. The'company , which was then

M Pt. 13, exhibit No. 1134. As indicative of the position of the State corporation commission, the fol-
lowing language from the letter can be quoted (Id.): "We can scarcely find words to suflSciently condemn
a practice whereby anyone, whether he be officer or otherwise, can go promiscuously into the files of the
cqmpany and take down the collateral securing any loan, much less one to himself or member of his family,
and keep this collateral in his possession for any purpose whatsoever. Such a practice is ver^ng danger-
ously close to a violation of the criminal laws and again we must condemn your office system which would
make it possible for any such thing to happen under ftny dfcumstances."

"Pt. 13, R. 6489, 6493.

" Pt. y ^. 6493.

»rf ,1-6950;

CONCENTRATION OF ECONOMIC POWER 75

known as Illinois Bankers Life Association, was owned and theoreti-
cally controlled by its member policyholders. By 1929 it was operat-
ing in three States and had more than $108,000,000 of insurance in
force." Mr. William H. Woods was president; Mr. J. H. Ebersole
was vice president and medical director; Mr. A. T. Sawyer was treas-
urer; Mr. R. M. Work was secretary; and Mr. Hugh T. Martin was
general counsel.^^ These five oflBcers also constituted the board* of
trustees of the association. None of them had any investment or
proprietary right lq the association except as a policyholder.*^

Sometime prior to 1924 the management had concluded that the
company's rates were inadequate and consideration was given to the
advisability of reinsuring in another company or placing the company's
insurance on a legal-reserve basis.^" Many proposals were submitted
by persons interested in acquiring an interest in the company and
apparently the company's officers were wiUing to enlenain offers from
which they could personally profit.- Mr. Woods, president of the
company, testified: ®^

, Mr. Gesell. And was some inducement ofiFered by these brokers to the officers
of the association for entering into the particular reinsurance agreer^ent or pro-
posal presented?

Mr. Woods. I think there was.

Mr. Gesell. Can you recall any specific instance of that, Mr. Woods?

Mr. Woods. No, sir, I don't, except one.

Mr. Gesell. Which one was that?

Mr. Woods. There was no contract at all suggested on that, only that there
was a fellow there from New York that offered a proposition of $750,000 for the
directors if we would turn the company over to them. That is the only definite
proposition, but there was no detail.

Mr. Gesell. What was that man's name, do you recall?

Mr. Woods. No, sir; I do not.

Mr. Gesell. Did the oflBcers and directors of the company agree to enter into
that arrangement?

Mr. Woods. Nobody knew it but me, so far as I know.

Mr. Gesell. That proposal was made to you.

Mr. Woods. I gave no consideration to it whatever.

Mr. Gesell. You turned them down?

Mr. Woods. Yes, sir.

Mr. Gesell. Had the officers of the company deciaea as a matter of policy
that they would not seek a contract whiph would give them any personal advan-
tage?

Mr. Woods. No, sir.

Mr. Gesell. Were they seeking a contract which would in fact give them some
such advantage?

Mr. Woods. Well, I wouldn't say they were seeking those contrapts. You
didn't need to. Those propositions came voluntarily, very largely.

" Pt. 13, R. 6772. Best's Life Insurance Reports 1930. For detailed information on the company's ad-
mitted assets, business written, and Insurance in force during the period 1925-38, see pt. 13, exhibit No.
1348-13.

M Pt. 13, R. 6773, exhibit Nos. 1348-27, 1348-28. Exhibit No. 1348-11 is a' schedule indicating directors of
niinois Bankers Life Association from 1925 to 1929.

•» Pt. 13, R. 6778. Mr. William H. Woods first gained a foothold in the management in 1903 by purchasing
a trusteeship from a previous incumbent for $2,000. See letter to the Temporary National Economic Com-
mittee, dated February 17, 1940 (pt. 13, R. 6778).

« Pt. 13, R. 6775, 6776.

•' Pt. 13, R. 6777, 6778.

76 CONCENTRATION OF EXjiONOMlC POWER

Mr. Gesell. Were they willing to enter mto such an agreement?

Mr. Woods. On a legal reserve basis; yes.
• Mr. Gesell. That if you could get some type of contract which you felt was
equitalile to the policyholders which would reinsure the business in a legal re-
serve company, you and your fellow trustees were willing to have as part of that
agreement a provision which would give you some personal advantage?

Mr. Woods. Yes, sir.

Mr. Gesell. On what basis was that justified, Mr. Woods? You gentlemen
were trustees, were you not?

Mr. Woods. Yes.

Mr. Gesell. It was a semi inutual, in fact, a mutual com'pany?

Mr. Woods. It didn't affect the pohcy contract in theJeast. It was not detri-
mental to the policyholder as far as that is concerned.

Mr. Gesell. They would have had adequate reserves and adequate protection?

Mr. Woods. As much so as without it.

Mr. Gesell. On the other hand, you gentlemen had no financial stake in the
company, did you?

Mr. Woods. ^No.

In 1924 a plan was evolved to change the form of the company to
a legal reserve basis by organizing a new legal reserve stock company
in which the business of the mutually owned assessment company
would be reinsured. Mr. Martin, who was apparently the originator
of this idea, was given an option to purchase all stock of the new
company which was subscribed to by the five officers mentioned above.
The reinsurance plan w-as tentatively approved by the insurance de-
'partment of the State of Illinois but before it could be put into effect
there was a political shift in the department and the new head of the
department, by giving notice that he disapproved the plan, caused it
to be temporarily abandoned.^^

By 1929, however, a new insurance commissioner was again in
office in Illinois and the 1924 plan was revived.^^ As a first step a
new corporation, the Illinois Bankers Life Assurance Co., was formed
for the purpose of reinsuring the business of the assessment association.
The officers were hesitant and fearful that the change might upset
the even tenor of their ways and jeopardize their security. Mr.
Martin, however, determined to gain control of the company and he
proposed to secure acceptance of the reinsurance plan by paying large
sums of money to his hesitant associates. Accordingly, in September
1929, he paid Mr. Woods, the president of the association, $100,000

" Pt. 13, R. 6790, 6791. It also appeared that the ofiBcers were involved in litigation at the time and that
their positions were threatened by opposition from certain of the company's agents who were soliciting
proxies to remove them from oflBce. In this connection; Mr. Woods testified (pt. 13, R. 6810):

"lylr. Gesell. • • • Did the officers of the company, the trustees of the association, learn that the
agents had been gathering proxies to oust them from office?
"Mr. WnoDa. Yes, sir.
"Mr. OiSELL. When did you learn that?
"/Mr. Woods. I can't give you the date.
"Mr. Gesell. Approximately.

'''Mr. Woods. The first I knew of it was we got a few of these proxies from one of the agents in Texas.
That was supposed to go to the general agent at Dallas. Instead of that, he sent it to the home office.
'"Mr. Gesell. That was about in 1924, was it not?

y'Mr. Woods. Well, I tell you, I don't like to say definitely on the date, but it was about that time, I
nink; yes.

I "Mr. Gesell. What did the management of the company do?
I "Mr. Woods. Well, we got busy.

"Mr. GfesELL. Tell us just what you did when you got busy.
"Mr. Woods. We got out and tried to get proxies."
M Pt. 13, R. 6780, exhibit Nos. 1348-14, 1348-19.

CONCENTEATION OF ECONOMIC POWER 77

in cash land gave hijh six notes in the amount of $10,000 each;*** he
paid Dr. Ebersole $25,000 in cash and three notes of $25,000 each;
and he bought certain property from Mr. Work for a price of $75,000,
which was about $35,000 in excess of the value of the property.
Mr. Martin agr9^ed to purchase for Mr. Sawyer a substantial block
of stock in the new company.®^

There can W no doubt that the consideration for these payments
was the consent of the trustees to execute t e reinsurance contract
and permit t^e business of the assessment company to pass to the
new stock c^tnpany. Mr. Martin testified:^®

Mr. GESEiii. You wanted control of the company, didn't you, Mr. Martin?
Mr. Margin. Yes, sir.

Mr. Gesell. And so far as you were concerned, that was the motivating factor
in your payment of these sums?
Mr. Martdn. Yes.

He denied, however, that any of the trustees receiving these payments
had indicated they would not sign the reinsurance agreement if the
paynVents were not made. Though admitting the trustees were either,
"rather fearful about the difficulties and the hazards of the change,"
or iJiat they wanted to be "secure" in their old age," Mr. Martin
insisted that they had not made any specific agreement.^* The situa-
tion was more clearly revealed by the testimony of Mr. Woods who
stated: ««'

/Mr. Gesell. You received this $100,000 in September, the previous'' September?
Am I not correct in sajing, Mr. Woods, that that $100,000 was the consideration
you received for signing this reinsurance contract?
/ Mr. Woods. No, sir.

/ Mr. Gesell. Isn't there a direct relationship between the $100,000 and your
/signature on these documents?

Mr. Woods. Well, I conclude that would be true to an extent, but in signing
that contract it was paying me for what I had done in the 28 years that I had
been there — 25 or 24 years, or whatever it was.

Mr. Gesell. You wouldn't have signed the contract if you didn't have the
$1 do, 000, would you?

Mr. Woods. Very likely not.

Mr. Gesell. In other words, you felt that your service with the company
deserved some compensation?

Mr. Woods. Absolutely.

Mr. Gesell. And you weren't going to agree to any reinsurance contract of
any kind with one person or another until you had the money that you thought
those services were worth?

Mr. Woods. W^ell, it wasn't necessary to consider it.

Mr. Gesell. In other words, you were in a position to control it, weren't you?

Mr. Woods. I was.

Mr. Gesell. You could have stopped the reinsurance agreement, couldn't you?

Mr. Woods. No; I couldn't mj-self.

" Pt. 13, R. 6782, 6788. In addition t&this substantial sum Mr. "7- ods received a salary increase of $6,000
per annum (pt. 13, R. 6784).
«» Pt. 13, R. 6789, 6790, 6807. .
«• Pt. 13, R. 6790.
" Pt. 13, R. 6788.
M Pt. 13, R. 6789.
M Pt. 13, R. 6785, 6786.

73 CONCENTRATION OF ECONOMIC POWER

Mr. Gesell. As president of the company for all these years, and with your
intimate contact with the agents, couldn't you have gone out and stopped this
contract?

Mr. Woods. No, sir; i could not, without the consent of the other directors.

Mr. Gesell. You had some of them with you?

Mr. Woods. It was practically unanimous as far as the directors were con-
cerned.

A month after receipt of the payments, the plan was carried into effect,
all trustees assenting. No disclosure of tlfe payments was made to
anyone including tie olicyholder^- of the assessment company for
whom the trustees wjre presumably acting.''"

The Illinois Bankers Life Assurance Co. was incorporated in Illinois
with a capital stock of $100,000 and a paid-in surplus of $50,000; 1,000
shares of stock were issued, 200 in the name of each of the 5 officers:
Messrs. Wood, Ebersole, Work, Sawyer, and Martin. Of these 5 the
first 3 had no real interest in the stock and endorsed it over in blank;
they appeared as stockholders, however, in order to give the public
and the agents of the association confidence in the new company,
Mr. Wood remained as figurehead president for the same reason. The
real parties in interest in the new company were Mr. Martin, Mr.
Sawyer, and Mr. John P. Nichol, a Chicago insurance man.^^ Though
Mr, Woods remained as president, Mr. Martin was thereafter the
dominating personality in the management and in control of its
policies.''^

The contract of reinsurance between the new stock company and
the old assessment company was executed on November 19, 1929, by
Mr. Woods who signed for both companies. This' contract of rein-
surance, provided in effect that the business of the mutually owned
association, amounting to over $100,000,000 of insurance and over
$7,000,000 of assets should be turned over, without consideration
therefor, ta the privately owned stock company.''^ ,

Though this contract was approved by the Illinois Insurance Depart-
ment, insurance departments of other States protested vigorously, at
first refusing to license the new company. The commissioner of
Indiana wrote: ^*

"> The Illinois laws CSmith Hurd Illinois Annot. Stats., ch. 73, sec. 791) provides: "No director,
olHcer, or member of any such company or companies, except as fully expressed In the articles of incorpo-
ration or contract of reinsurance, "Shall receive any tee, commission, other compensation or valuable consider-
ation whatever, directly or indirectly, for In any manner aiding, promoting, or assisting in such consolida-
tion or reinsurance." This law was originally enacted in 1919 (Jones Dlinoi^ Stat. Annot. 66.037).

" Ft. 13, R. 67^2, 6793. The 1,000 shares were actually owned by Mr. Martin and Mr. Sawyer who held
800 and 200 shares, respectively. These shares were pledged with the Boulevard Bridge Bank of Chicago
as partial collateral for a $160,000 loan made jointly by Mr. Martin, Mr. Sawyer, and Mr. Nichol (see p.
80, infra) (pt. 13, R. 6794). For names of directors of Illinois Bankers Life Assurance Co. from 1929 to
1938 see pt. 13, exhibit No. 1348-12.

" Pt. 13, exhibit No. 1348-12. Mr. Woods testified (pt. 13, R. 6782):

"Mr. Woods. So far as authority was concerned, Mr. Martin was the main officer.

"Mr. Gesell. You took instructions from Mr. Martin?

"Mr. Woods. Yes, sir.

"Mr. QeselL. On all phases of the business?

"Mr. Woods." Very largely.

"Mr. Gesell. Who determined matters of policy?

"Mr. Woods. Well, 1 think he did. Of course, it was considered, if there was any change there, by the
directors. .

"Mr. Gesell. You mean he would make the recommendations to the board which the board would
adopt on consideration?

"Mr. Woods. Yes; I think that is about the working of it" (Id.).

'» Pt. 13, exhibit No. 1348-14.

» Pt. 13, exhibit No. 1348-36.

CONCENTRATION OF ECONOMIC POWER 79

It further appears to me that a group of men have organized a stock company
and are going to take over a mutual company with all of its benefits and standing
without paying 1 cent therefor * * * I will not be disposed to permit the
new company to operate in this State.

The commissioner of insurance of Michigan wrote : "

* * * the reinsurance of the Illinois Bankers Life Association was a most
vicious one in the opinion of this department.

The actuary of the bureau of insurance of Nebraska wrote: ^^

This Department, believing that the proposed contract of reinsurance of the
business of the Illinois Bankers Life Association is not for the best interests of
the policyholders but detrimental thereto, and decidedly to the interest and profit
of the officers thereof, who own and control the company proposing to assume
under reinsurance contract, the business of the Illinois Bankers Life Association
hereby protests against the carrying out of that reinsurance contract.

Officials of several other State insurance departments made similar
protests. Nevertheless, the approval of the Illinois department was
not withdrawn, and licenses were subsequently granted in most of the
States which had protested in spite of the fact that the original terms
of the reinsurance agreement were not altered.'^^ Mr. William R. Baker,
himself a former insurance commissioner of Kansas,^^ who was em-
ployed by the company to aid it in securing its State licenses, was
questioned regarding this vacillating attitude of the commissioners.
His testimony indicated clearly the inability of the State insurance
commissioners to protect the policyholders of their respective States.
An excerpt from this testimony follows : ^^

Mr. Baker. * * * we will take Oklahoma as an example * * * Mr.
Reid [Oklahoma Commissioner] was sometimes rather vehement in his state-
ments

Mr. Gesell (interposing). What did he say to you on this occasion?

Mr. Baker. He told me that in his opinion the contract was extremely unfair,
and that — I am not endeavoring to quote.

]\^r. Gesell. As best you recall, of course.

Mr. Baker. Yes; he felt that the officers of the stock company and the board
of directors of the stock company and the officers, the stockholders, had taken an
unfair advantage of the assessment association, that they had not received value
for that assessment business.

Mr. Gesell. Well, now, Mr. Reid subsequently licensed this company in
Oklahoma, did he not?

Mr. Baker. Yes, sir-
Mr. Gesell. That was after your talk with him?

Mr. Baker. Subsequent to my conversation with him.

Mr. Gesell. Well, now, what suggestion or talks did you have with him that
led to his taking that position?

Mr. Baker. The argument, contention, that I made to Mr. Reid, and which
I made to the other commissioners of insurance, was that in my qpinion their
obligation was to the residents of their respective States, who were members of
the assessment association, and that it would be better from the standpoint of
those people for their home department to be in a position to exercise supervision,

" Pt. 13, exhibit No. 1348-39.
" Pt. 13, exhibit No. 1348-41.

" Pt. 13, R. 6881. Insurance Commissioners of Indiana, Michigan, Nebraska, California, Oklahoma,
Missouri, and Washington all expressed disapproval of the reinsurance contract (pt. 13, R. 688ii).
" See disc'ossion of Federal Reserve Life Insuranrw Co., p. 108, infra.
'»Pt. 13, R. C8SS

30 CONCENTRATION OF ECONOMIC POWER

jurisdiction, or control to some extent over the operations of this company by
permitting it to come into the State rather than by excluding it and therefore
lose its jurisdictional power, examination.

Mr. Gesell. You mean by that that if he refused the new company license,
then all he'd have, as far as the company was concerned, would be a bunch of
policyholders in his State who had taken out policies with the assessment associa-
tion, and no company which he could control or regulate.

Mr. Baker. That was my

Mr. Gesell (interposing). It was one of these b^tween-the-devil-and-the-deep-
blue-sea situations, then, wasn't it?

Mr. Baker. Yes, sir; one end of the stick was as hot as the other, possibly.

Mr. Gesell. And even though the commissioner thought the thing was unfair
or inequitable or the officers had taken unfair advantage of the assessment policy-
holders, in order to keep some control over the company, to protect those policy-
holders who had already come in previously into the association, he was obliged
to license it.

Mr. Baker. To do that, to have that power, he would be obliged to license; yes.

Mr. Gesell. And in that way obliged to let the new company come in and
conduct its business there, to sell new policies, continually?

Mr. Baker. Yes, sir.

By 1938 the company was operating in about 16 States including
all but 2 of the States which originally raised objections to the con-
tract.^" There is no evidence that the State commissioners had
knowledge of the surreptitious payments to the hesitant trustees or
of the many other management irregularities which arose before the
arrangements to put the assessment policyholders on a legal reserve
basis were completed. .

Before discussing the manner in which assessment policyholders
were switched from assessment policies to legal reserve policies it will
be necessary to mention briefly the method by which Mr. Martin
raised funds sufficient to purchase a controlling interest in the stock
of the new company and to make such generous payments to the
trustees. In order to finance the new company, Messrs. Martin,
Sawyer and Nichol pledged the thousand shares of its stock (both the
shares issued to them and those endorsed in blank) to the Boulevard
Bridge Bank of Chicago for a joint personal loan of $150,000. The
loan was further secured by a $50,000 certificate of deposit of the
new company. This certificate, which represented the paid-in surplus
of the company, was endorsed and shown by the books and records
of the bank to have been pledged as collateral against the loan. It
remained so pledged from October 1929 to June 1935, although on
occasion it was sent from Chicago to Monmouth to satisfy questions
of insurance department examiners working on the books of the
insurance company .^^ Mr. Martin denied that this certificate of
deposit was pledged as collateral and state that it was merely left
with the bank for "safekeeping." It would appear however that
since the certificate was endorsed and since Messrs. Martin, Sawyer,

e« California and Michigan (pt. 13, R. 6775, 6881).

»i Pt. 13, R. 6794-6798, 6799-6801. All arrangements for obtaining the certificate of deposit from the Boule
vard Bridge Bank of Chicago were made between Mr. Martin and Mr. Sawyer. Neither of these individuals
could explain why it was necessary to send the certificate to Monmouth froin Chicago to satisfy the exam-
iners (pt. 13, R. 6800-6803). In this connection it is of interest to note that the company regularly answered
"No" to Item 15 of the general i^aterrogatories of the 1938 Convention Form Annual Statement which asks,
"Were any of the stocks, bonds, or other pssets of the company loaned during the year covered by this
statement?" (pt. 13, R. 6801).

CONCJBNTRATION OF ECOISrOMIO POWER gl

and Nichol agreed not to withdraw the deposit until the loan was
paid, the officers of the insurance company used its funds to help
secure a personal obligation. ^^

If the transactions by which Mr. Martin raised funds to pay off
his fellow trustees are unraveled, an even more direct use of company
funds is revealed. In order to obtain these funds Mr. Martin arranged
to borrow $600,000 face value preferred securities of a real estate
company known as Holmhaven on the Gulf from Mr. Herbert G.
Shimp of Chicago. Mr. Shimp was a friend of Mr. Martin and
engaged in the business of rewriting policies, i. e., switching policy-
holders from one form of contract to another.*^ He loaned the securi-
ties because he hoped thereby to obtain the contract to rewrite the
policies of the assessment association following the execution of the
reinsurance contract. The testimony on this point ^* is unequivocal
and doubly significant in that Mr. Slump subsequently did obtain the

82 Pt. 13, R. 6794-6804. Mr. Sawyer, who took the stand immediately after Mr. Martin, testified with
respect to the endorsement of the certificate (pt. 13, R. 6802, 6803):

"Mr. Qesell. Why was the certificate endorsed, Mr. Sawyer?

"Mr. Sawyer. That I can't tell you. I don't remember. I don't remember when it was endorsed or
why or anything about it.

"Mr. Gesell. Well, now, you have been treasurer of this company. Why would you endorse a certifi-
cate? To make it negotiable?

"Mr. Sawyer. Yes.

"Mr. Gesell. In other words, to make it good collateral in the hands of the bank, wouldn't you?
, "Mr. Sawyer. I don't think that was the purpose.

"Mr. Gesell. That would be the effect of it if the bank wanted it as collateral? They'd want it endorsed?

"Mr. Sawyer. That I couldn't say.

"Mr. Gesell. Supposing you were in the bank and you had a certificate of deposit. You also have a
loan out. You wanted to have some recourse against the certificate of deposit. You'd want to have it
endorsed, wouldn't you?

"Mr. Sawyer. That 1 couldn't say. The bank never asked me to endorse the certificate and I dont
know anything about the endorsement, when it was or

"Mr. Gesell. If the bank didn't ask you to endorse this, then somebody signed your name to it im-
properly, because it says, 'Bearing the following endorsements: That of the Illinois Bankers Life Assurance
Co. by yourself as toeasurer.' Who asked you to, if the bank didn't?

"Mr. Sawyer. I can't recall. It was endorsed with my name.

"Mr. Gesell. This was a personal obligation of you and Mr. Martin and Mr. Nichol at the bank?

"Mr. Sawyer. I had no knowledge of that at all. The notice that I signed had no reference to this certifi-
cate in any way, shape, or form.

"Mr. Qesell. You knew you were borrowing money in your individual capacity, didn't you?

"Mr. Sawyer. Yes, sir.

"Mr. Gesell. Then, what was the certificate of deposit doing up there under any possible circumstances?

"Mr. Sawyer. As I said, my recollection of it is exactly as Mr. Martin's testimony. It was held there not
to be cashed at the bank.

"Mr. Gesell. Do you know it was trickling back to the company every now and then when the exam-
ners came in?

"Mr. Sawyer. I know it has been in our possession.

"Mr. Gesell. Why did you have to have it back?

"Mr. Sawyer. Well, I can't recall. I think the examiners questioned where It was and they seemed
satisfied with it. That is my recollection.

"Mr. Qesell. They seemed satisfied with it when they saw you had it in your own hands?

"Mr. Sawyer. Well. I can't recall.

"Mr. Gesell. Did you have any discussions with the examiners about it?

"Mr. Sawyer. That I cannot recaU.

"Mr. Ge.sell. The only thing you can really recall about this is that you can recall that what Mr. Martin
said was true?

"Mr. Sawyer. That is practically it; yes."

" See p. 105, infra, for a discussion of rewriting.

" Pt. 13, R. 6845.

82 CONCENTRATION OF ECONOMIC POWER

Illinois Bankers' rewrite contract under which he received gross
commissions of $1,527,452.^^

Mr. Gesell. Did you anticipate this loan would help you get the rewriting
business on that contract? Was that the purpose for which it was made?

Mr. Shimp. Well, I was hopeful it would be helpful in obtaining the contract.

Mr. Gesell. Well, was that one of the motivating considerations that led you
to make this loan?

Mr. Shimp. That and the friendship of Mr. Martin.

Mr. Gesell. Did Mr. Martin tell you at the time the loan was made that If
you made it to him, he would be in a position to give you this rewrite contract?

Mr. Shimp. No, sir.

Mr. Gesell. Well, what was there in your conversation with him that led you
to think that you would have some benefit with respect to this contract if you
made the loan?

Mr. Shimp. Well, it had been discussed with Mr. Martin and some of his
associates at various times.

Mr. Martin then pledged the $600,000 Holmhaven on the Gulf
with Mr. James W. Stevens, an officer of a bank known as the Lincoln
Securities Co., from v/hom Mr. Martin had borrowed $200,000 with
which to pay off his fellow directors who had indicated their uncer-
tainty about the reinsurance contract.^^ In order to repay the
Stevens' loan, Mr. Martin arranged for Illinois Bankers Life Assurance
Co. to lend $250,000 to the Lincoln Securities Co. The loan was
made on January 15, 1930, and on the same day the Lincoln Securities
lent Mr. Martin $200,000, which he used to pay off his obligation to
Mr. Stevens.^^

This loan was shown by the minutes of the insurance company to
have been recommended by Mr. Woods and approved at a meeting of
the board of directors. Mr. Woods denied that he had ever attended
such a meeting and stated that the loan was never approved by the
board of directors. ^^ Regardless of the manner in which the loan
was authorized, it is clear that Mr. Martin did not make an adequate
disclosure of his beneficial interest therein. He testified: ^^

Mr. Gesell. What disclosure did you make to your fellow trustees with
respect to this transaction?

Mr. Martin. To the fellow directors? I don't think I made any disclosure at
the time.

M. Gesell. As to your interest, your personal interest in this transaction?

Mr. Martin. No.

w Pt. 13, R. 6844, 6845, exhibit No. 1348-70. See also pp. 83 to 87, infra. Holmhaven on the Gulf went
went into receivership in 1933 and Mr. Shimp wrote ofl the loan aip a loss, never having received repayment,
in part or in whole, from Mr. Martin (pt. 13, R. 6846).

, 8« Pt. 13, R. 6818. Mr. Martin was counsel for Illinois Life Insurance Co. (pt. 13, R. 6823). This com-
pany failed in July 1933 with an estimated initial loss to policyholders of $15,276,000. Pt. 28, exhibit No.
2336.

" Pt. 13, R. 6814, 6815, 6818, exhibit No. 1348-20.

" Pt. 13, R. 6813-6816, exhibit No. 1348-18. In spite of Mr. Woods' denial Mr. Sawyer insisted that the
minutes reflected his best recollection of what happened. Mr. Woods testified (pt. 13, R. 6817):

"Mr. Woods. They called me to Chicago about this particular loan. They didn't tell me exactly what
the collateral was going to be.

"Mr. Gesell. Who called you to Chicago?

"Mr. Woods. Mr. Martin. Mr. Ramer was there. He told me about this loan, aoout the Lincoln
Securities. That i.s the first time I had ever heard of It. I asked him— I told him I would like to see a state-
ment of this Lincoln Securities, and he said, 'Well, the Lincoln Securities doesn't make any statement.'
That is exactly the situation as far as that loan is concerned, and I don't think it would be very hard to guess
why I wasn't very much in favor of the loan."

»» Pt. 13, R. 6820.

CONCENTRATION OP ECONOMIC POWER §3

The insurance company lost heavily on the Lincoln Secui-ities loan.
In order to raise the necessary cash to make it, it was forced to sell
certain Liberty bonds. The collateral received in turn from Lincoln
Securities was of an inferior character and included mortgage obliga-
tions of two of Mr. Martin's sisters-in-law amounting to $100,000, as
well as mortgage obligations of Mr. Martin himself. The Lincoln
Securities Co. subsequently defaulted on the obligation and the insur-
ance company got nothing but collateral of doubtful value since it
included mortgages which still remain in the company's portfolio and
which are seriously delinquent as to principal and interest; other col-
lateral became worthless. In addition to the loss on the note, the
insurance company was obliged to pay $46,267 in settlement of a
lawsuit ensuing out of this transaction.®"

Thus was Mr. Martin able to utilize the funds of the company to
meet his immediate financial requirements and to set the stage for the
final step in the plan to gain control of the company, namely, the
rewriting of the policies.

As has been stated, the lUinois Bankers Life Association operated
on the assessment plan. Under this plan no legal reserve was accu-
mulated, and premium rates could be raised from year to year if it
were found necessary to do so to meet claims. The policies reinsured
by the newly formed stock company were taken over as assessment
policies, and in order to get them onto a legal-reserve basis upon which
the new company was to do business, the management decided that
they should be rewritten.

Mr. Herbert G. Shimp, of Chicago, had formerly been in the busi-
ness of rewriting insurance policies and he was anxious to get back
into it. He was a friend of Mr. Martin's and as has been indicated,
had helped him finance the pay-off of the Ilhnois Bankers' officers.®^
Mr. Martin gave the rewrite contract to Mr. Shimp's newly formed
corporation, the American Conservation Co. This contract provided
that the American Conservation Co. would receive a commission equal
to 70 percent of the first premiums paid by the association policy-
holders after thay had transferred to a legal-reserve policy with the
new company, and 80 percent of the first pretnium and certain renewal
commissions on any new business written in connection with the
transfers. Under this contract the Illinois Bankers Life Assurance
Co. paid American Conservation Co. $1,523,479.54 from 1930 to 1935
for the transfer of the pohcies of about 40,000 members of the asso-
ciation.®^

The plan for transferring pohcies was inequitable both in its form
and execution.®^ To understand the proposal offered the assessment
policyholders it is necessary to describe a typical transfer. Assume
the case of a person who, in 1913, at the age of 35, had then taken
out an ordinary whole-Ufe policy in the assessment company. In 1930
the annual premium on his policy would have been $16.48 per $1,000.
Under the transfer arrangement he was offered his choice of four
types of pohcies: Ordinary life with endowment at age 85, dated cur-
rently; 20-payment endowment at age 85, dated currently; whole

•1 Pt. 13, R. 6816, 6820-6824.

•' See pp. 81 to 82, supra.

» Pt. 13, R. 6827, 6828, exhibit Nos. 1348-21, 1348-23, 1348-70.

•• It is significant that 2 senior officers, Mr. W. H. Woods, president, and Dr. J. H. Ebersole, vice presi-
dent and medical director, as well as 2 junior officers, Mr. Stephen E. Hinshaw and Mr. A. W. Barnes,
did not convert their assessment policies to a legal-reserve basis (pt. 13, exhibit No. 2262). No assessment
has been made against policies not transferred (pt. 13, R. 6841).

84 CONCENTRATION OP ECONOMIC POWER

life 50-percent return premium, dated back to 1913; or a 20-payment
life, 70-percent return-premium policy, dated back to 1918. Over 70
percent of the policyholders selected the 20-payment life policy which,
although the most costly to the transferring policyholder, was also the
most profitable to the transfer agents, whose compensation depended
on the size of the premium required by the rewritten policy. Under
this plan the policyholder who took out his assessment policy in 1913,
when he was 35, would be given in exchange a legal reserve policy
dated as of 1918, or at age 40. The annual premium on the new
policy at that age was $47.49 wliich the policyholder would pay from
the time he made the exchange, which was usually in 1930, until 1938,
a total of eight annual premiums.^*

After the transfer in 1930, then, the contract stood as if it were a
20-payment life policy which had been in force for 12 years. Such a
poHcy on a legal-reserve basis would have accumulated a reserve of
$350.55. To provide this reserve in the instant case, the policyholder
signed a loan note for the $350.55 plus an extra charge of 1 annual
premium, $47.49, to cover transfer expenses. (This amount under
the plan could be paid in cash.) This loan constituted a lien on the
reserves and was deductible from the value of the policy .^^

The assets already accumulated by the association for the benefit
of the policyholder were credited one-third to the payment of premiums
on the new policy, and two-thirds to a "survivorship fund" which was
to be held by the company for a period of about 8 years and then di-
vided among the surviving, persistent policyholders.^^

The transfer arrangement was unfair to transferring policyholders.
Interest on the "survivorship fund" was allowed at the rate jof 3K
percent compounded while interest on the lien on the reserves was
charged at the rate of 6 percent thus making a differential adverse to
the policyholders.^^ Furthermore the beneficiaries of an insured who
died prior to the disposition of the fund were deprived of two-thirds
of the reserves which their insured had accumulated under the associ-
ation. Similarly, a policyholder who surrendered his policy after
transferring but before the termination of the fund was forced to for-
feit his interest in the fund.

This "survivorship fund" had one further disadvantage in that it
provided an easy opportunity for misrepresentation. Evidence of
misstatements by agents of Mr. Shimp's American Conservation Co.
was spread upon the record in the form of letters written at various
times to the Illinois Bankers Life Assurance Co. by policyholders whose
policies had been rewritten.^^ One of the most general complaints
was that the transfer agents had promised policj'^holders that their
interest in the "survivorship fund" would be suflScient to pay off their
loan in full plus interest by the time the 20-payment life policies ma-

«* Pt. 13, R. 6830, 6836, 6837.

" Pt. 13, R. 6831-6833. The loan arrangement has frequently been used by other companies in changing
from an assessment to a legal-reserve basis, and it seems to be particularly susceptible of misunderstanding
and misrepresentation. See, e. g., James v. Franklin Life Ins. Co., 180 111. App. 632 (1913); Noth v. Fidelity
Mutual Life Ins. Co., 211 El. App. 94 (1918); Mayer v. Illinois Life Ins. Co., 211 111. App. 285 (1918); Rose v.
Missouri State Life Ins. Co., 148 S. W. 181 (1912); Dewerthern v. Reserve Loan Life Ins. Co., 234 S. W. 1048
(1921); I^ayne v. Minnesota Mutual Life Ins. Co., 191 S. W. 695 (1916); Boulware v. Missouri State Life Ins.
Co., 159 S. W. 761 (1913); Kapralian v. Central Life Ins. Co., 267 N. W. 598 (1936). All of these cases involve
the setting off of a reserve loan of the type here used against the cash-surrender value of the policy.

»« Pt. 13, R. 6832, 6833. exhibit No. 1343-25.

" Pt. 13, R. 6832, 6833.

»8 Pt. 13, exhibit Nos. 1348-51 to 1348-56.

CONCENTRATION OF ECONOMIC POWER §5

tured. In fact this proved not to be the case and as a result poHcy-
holders found the amoimt of their anticipated protection substantially
reduced in an amount equal to the still unpaid and outstanding loan.^^
For example, one policyholder complained to the company.^°°

My wife and I were told by your agent, Mr. Ralph M. Waterbury, that the note
which I signed was merely issued so that I could not draw out the cash value until
7^ years, and that the premiums would clear the note if paid in full to August
12, 1938.

Another said :^°^

In 1930 your high-pressure salesman so explained the plan of reinsurance so
that I thought that after the 22d of this month the policy which I hold would be
worth $1,000 to my beneficiary at my death. In other words, that the survivor-
ship fund and deferred dividend would be enough to liquidate the loan, and am
very much surprised at the status at the present time.

Numerous other policyholders made similar complaints. ^°^
Even more reprehensible was the addition of the extra year's premium
to the amount of the loan note.^°^ That this extra premium was a
most substantial levy is demonstrated by the fact that it enabled the
payment of commissions to American Conservation Co. totaling
$1,523,479 from 1930 to 1935. The true purpose of this charge was
disclosed as the result of an examination of the books and records of
the American Conservation Co. There appeared on the records of
American Conservation Co. an account designated No. 282, "Special
account earned commissions" which Mr. Shimp periodically credited
with amounts totaling $430,000, or 25 percent of the commissions he
received under the Illinois Bankers transfer contract. This was done
pursuant to a contract dated January 2, 1930, between Air. Shimp and
Mr. John P. Nichol which recited the latter's willingness to use his
efforts to get rewriting business, including the Illinois Bankers business,
for Mr. Shimp.'"^"

The $430,000 was drawn out of the account in a manner which
concealed the name of i\m person receiving payments. Only after
unravelhng a series of intricate transactions was it determined that the
money passed in devious ways from Mr. Nichol to Mr. Hugh T. Mar-
tin, who was the ultimate party in interest. Mr. Martin testified : ^°^

Mr. Gesell. Can you tell us how much money you ultimately received,
either directly or indirectly, from the American Conservation Co. by reason of
these kick-backs on the agreement which the American Conservation Co. had
with the Illinois Bankers Life Assurance Co.?

Mr. Martin. I wasn't quite clear about the total.

Mr. Gesell. Can you tell us how much was gotten on the contract?

Mr. Martin. There was something in excess of $400,000.

•Mr. Gesell. Mr. Leary's figure was $430,000.

Mr. Martin. Yes.

Mr. Gesell. Did you get all of that money?

Mr. Martin. You mean did I get it personally?

w Pt. 13, R. 6913-6915.
«» Pt. 13, exhibit No. 1348-52.
"' Pt. 13, exhibit No. 1348-51.
"« Pt. 13, R. 6913, 6915.
'«' See p. 84, supra.

•" Pt. 13, R. 6849, 6851, 6855, exhibit No. 1348-31.

'«» Pt. 13, R. 6856. Of this sum,- $50,000 was used to help finance a $100,000 increase in the capital stock of
Dlinois Bankers Life Assurance Co. (pt. 13, R. 6869-6871).

86 CONCENTRATION OP ECONOMIC POWER

Mr. Gesell. Or did it go to accounts in which you had an interest?
Mr. Martin. It went to accounts in which I had an interest.
Mr. Gesell. Or came to you personally.

"Mr. Martin. That may have been. Several checks came to me personally but
mostly all paid on accounts in which I was interested and loans there on the bank.
Mr. Gesell. So that the entire $430,000 came to your benefit?
Mr. Martin. Yes.

One or two examples will serve to illustrate the manner in which the
funds were drawn off.

On September 12, 1930, a check in the amount of $15,000 was drawn
by the American Conservation Co., payable to the order of the Boule-
vard Bridge Bank, This check was used to purchase a cashier's
check of the Boulevard Bridge in the amount of $15,000, issued on the
same date, and payable to the order of John P. Nichol. The check
bears the endorsement, "Pay to the order of Halsey, Stuart & Com-
pany, John P. Nichol," and the records of Halsey, Stuart & Co.
indicate this check was credited to the account of Hugh T. Martin,
and used by Mr. Martin in part to purchase on October 14, 1934^
$29,000 State and Washington Building bonds.

On September 30, the American Conservation Co. issued its check
in the amount of $25,000, payable to the order of the Boulevard
Bridge Bank in Chicago. This check was used to purchase two
cashier's checks from the Boulevard Bridge Bank. These cashier's
checks were made payable to the order of John P. Nichol, dated
September 30, 1930, and were in the amounts of $15,000 and $10,000,
respectively. The $15,000 check bears the endorsement " Pay to the
order of Lincoln Securities Company. John P. Nichol." The
$10,000 cashier's check bears the same endorsement. The cash-book
records of the Lincoln Securities Co. indicate that on September 30,
1930, $25,000 was credited to the accounts of the Hugh T. Martin
Loan Account at Lincoln Securities Co.^°*

'«» Pt. 13, R. 6852, 6853. Neither the nature nor effect of these transactions was explained to the board of
directors of Illinois Bankers Life Assurance Co. (pt. 13, R. 6859). Since some of the funds were used to pay
off the loans made to finance the original stock issue, Mr. Sawyer, who was obligated on loan, was directly
benefited by the arrangement. He learned of these transactions sometime after they had been consum-
mated. His testimony in this respect is revealing (pt. 13, R. 6866) :

"Mr. Gesell. Mr. Sawyer, you have been sworn, have you not?

"Mr. Sawyer. Yes, sir.

"Mr. Gesell. When did you first learn that Mr. Nicho! and Mr. Martin and yourself were receiving '
benefits from this rewrite contract which Assurance Co. had with the American Conservation Co.?

"Mr. Sawykr. I can't definitely say. I think it was the latter part of '31 or the early part of '32.

"Mr. Gesell. The latter part of '31 or the early part of '32?

"Mr. Sawyer. That is my recollection.

"Mr. Gesell. How did you find out about it, Mr. Sawyer?

"Mr. Sawyer. I was informed by Mr. Martin.

"Mr. Gesell. What did he say to you?

"Mr. Sawyer. He told me of the contract and that I would participate in it to the extent of paying off
indebtedness incurred in the reorganization of the company.

"Mr. Gesell. You mean in the purchase of your stock?

"Mr. Sawyer. Yes.

"Mr. Gesell. What did you do about it then?

"Mr. Sawyer. Well, I thought it was incom

CONCENTRATION OF ECONOMIC POWER §7

Thus, in summary, it appears that a group of policyholders owned
a hfe insurance company with assets of approximately $8,000,000.
Mr. Hugh T. Martin, an officer of that company, decided to take
control away from the policyholders and to place himself in the
dominant position. Some of his fellow officers hesitated to join him
in this venture. He, bought iheir cooperation for about $300,000.
A new company was organized to take over the assets and after an
inequitable reinsurance plan was consummated, Mr. Martin used
the funds of the company to satisfy obligations incurred in the pay-
ments to his fellow officers and even to finance in part the stock which
he owned in the company. Finally, a rewriting contract was en-
gineered through which policyholders, partially by misrepresenta-
tion, were persuaded to transfer their policies on a basis which was
inequitable and at a price which was padded to the amount of ap-
proximately $10 a policyholder in order that a fund of $430,000
might be diverted for Mr. Martin's personal benefit. This sum was
sufficient to satisfy all obligations incurred in acquiring the company
and Mr. Martin thus was placed in the position of controlling ap-
proximately $8,000,000 without having invested a cent.- This
position he has continued to occupy. He is both president and
principal stockholder of the company today. ^°^

"Mr. Gesell. I am sure it was.

"Mr. Sawyer. And I so reported it on my income-tax return.

"Mr. Gesell. You reported it as income on your income-tax return?

"Mr. Sawyee. Yes.

"Mr. Gesell. Did you feel that fulfilled your obligation to the policyholder and everybody else con- ■
earned?

"Mr. Sawyer. I did.

"Mr. Gesell. You had no concern as to the propriety of the contract or the arrangement?

"Mr. Sawyer. No, I did not.

"Mr. Gesell. You registered no protest before the board?

"Mr. Sawyer. No."

"" A similar case involving breach of trust by the managements of life msurance companies was that of the
reinsurance of the Western States Life Insurance Co. by the Cahfornia State Life and the merger of the two
companies, described in American TrvM Company v. California Western States Life Insurance Company,
98 Pacific (2d) 497. In order to secure control of Western States the president of California State began
negotiations with four large stockholders of Western States. A valuation of $7,000,000, or $70 a share, was
placed on the business and assets of Western States. Since, however, the California State did not have
enough cash to buy the stock outright, it was arranged that the general stockholders of Western States
should be offered $40 cash plus one-half share of California State worth $20, or the equivalent of $60, for each
share of Western States. The cash required was to come from new issues of California States stock and from
the cash and liquid assets of California itself and of Western after its acquisition.

The offer of $60 a share was considered acceptable for the general stockholders of Western States, but it
was not acceptable to the four large stockholders with whom the transactions were had. Accordir^ly, it
was agreed that these stockholders would sell their stock under the offered arrangements, but that Calffornia
State would agree to repurchase the California State stock of these four at $30 per half share, $10 mpre than
market. California State thus undertook a liability of about $1,400,000 under the repurchase agreement.
This repurchase agreement was not revealed to other stockholders of Western States or to the State insurance
commissioner who approved the reinsurance and merger. ^

In setting aside the repurchase agreement, the court said, inter alia: "There is finally, a much graver
fraud committee in this case than that hereinbefore discussed, namely, the fraud on the policyholders of
the companies. A life insurance company is something more than an ordinary business corporation and
its policyholders are not ordinary creditors. The directors of such a corporation cannot say that they owe
fiduciary duties only to the corporate entity as such. The statutes of this State and the States generally
contain the most positive assertion of duties owed to policyholders, and declare in unmistakable terms the
public policy of this State to protect them from any such abuses by those entrusted with the management
of their companies."

SECTION VIII
Responsibilities of Life Insurance Company Directors

It is to. be regretted that it is not now universally recognized as
axiomatic that life insurance company directors are fiduciaries (even
if not technically trustees) and as such must not confuse their personal
or business affairs -^yith those of the company to whose policyholders
and stockholders they are obligated to maintain the highest fiduciary
relationship. There is need of a more clearly defined attitude toward
life insurance directors who, as a result of their own efforts or otherwise,
are placed in a dual capacity and who thus exercise a divided respon-
sibility.^ "V\Tienever a director's personal affairs are confused with
those of his company or whenever he is called upon to satisfy conflictr
ing obligations, he can no longer act with complete independence.
This is true regardless of the form of the transactions involved or the
degree to which the director may directly benefit therefrom.

A few situations which arise in the day-to-day conduct of the insur-
ance business will serve to illustrate the potentiality of abuse that
inheres in this conflict of interests. An insurance company, for exam-
ple, owns securities of a corporation which are in default and the presi-
dent of that corporation is on the board of the insurance company.
The question arises as to what the insurance company shall do to pro-
tect or dispose of its investment. Consideration is also being given to
the attitude which the company should take in a forthcoming reorgan-
ization. It is obvious that the president of the corporation whose de-

i-The general law with respect to the responsibilities of corporate directors has been well established
through numerous cases. Fletcher, Cyclopedia of Corporation, vol. 3, states at Section 838 as follows:

"Directors and other officers, whOe not trustees in the technical sense in which that term is used, occupy
a fiduciary relation to the corporation and to the stockholders as a body."

Fletcher considers the conflicting theories of whether a director is an agent or a trustee, citing cases support-
ing either proposition, and concludes as follows:

"But whether or not directors and other corporate officers are strictly trustees, there can be no doubt that
their character is that of a fiduciary so far as the corporation and the stockholders as a body are concerned,
in other words, it is unquestionably true that, as agents entrusted with the management of the corporation, -
for the benefit of the stockholders collectively, they occupy a fiduciary relation, and in this sense the relation
is one of trust."

Twin-Lick Oil Co. v. Marbmy, 91 U. S. 587, 23 L. Ed. 328 (1876); Spiegel v. Beacon ParticipaUons, 8 N. E.
(2d) 895 (Mass. 1937); Bosuorth v. Allen, 168 N. Y. 157, 61 N. E. 163 (1901); Kavanaugh v.'Kavanaugh Knitting
Co., 226 N. Y. 185, 123 N'. E. 148 (1919); Pink v. Title Guarantee & Trmt Co., 274 N. Y. 167, 8 N. E. (2d)
321 (1937); 14a C. J., Corporations, sec. 1866; 19 C. J. S., Corporations, sec. 761; Berle and Means, The
Modern Corporation and Private Property, N. Y. 1933, p. 221; Spellman, Corporate Directors, N. Y. 1931,
sec. 6, and cases cited.

For leading cases on transactions initiated by directors for personal profit and transactions between
interlocking corporations, see: Qeddei v. Anaconda Mining Co., 254 U. S. 590, 41 S. Ct. 209, 65 L. Ed. 425
(1920); Ining Bank-Columbia Trust Co. v. Stoddard, 292 Fed. 815, C. C. A., 1st Circuit, 1923; Munson v.
Syracuse O. & C. R. Co., 103 N. Y. ^. 8 N. E. 355 (1886); Pollitz v. Wabash R. R. Co., 207 N. Y. 113, 100
N. E. 721 (1912); Globe Woolen Co. v. v'tica Gas & Electric Co., 224 N. Y. 483, 121 N. E. 378 (1918); 19 C. J S.,
Corporations, sec. 781; Fletcher, Cyclopedia of Corporation (Perm. Ed.), vol. 3, Sec. 931 and cases there
cited; Spellman, Corporate Directors, N. Y. 1931, sec. 182, and cases cited.

These cases establish generally the proposition that directors must not use the corporate assets for their
own benefit and-that whenever transactions between interlocking concerns are challenged the courts will
carefully scrutinize the dealings to make certain that the consideration and motivating representations
were fair and complete.

. . 88

tlONCENTRATION OF ECONOMIC POWER 89

faulted securities are involved cannot participate dispassionately in
the deliberations of his fellow directors and give necessary impartial
advice;^ Or, again, the case might arise of a life-insurance company
which has deposited a substantial portion of its funds in a large bank.
The chief executive officer of the bank and several of its directors
serve on the board of the insurance company which is considering the
advisability of changing its banking relationships either with a view
ro giving a broader distribution to its funds or perhaps even to
withdrawing its entire deposits from the interlocking bank whose
financial soundness may be under question. These banking officials
have an obligation to their bank. It is certain they could not properly
disclose confidential banking information to the board of the insurance
company especially if it might be injurious to the bank, and it is
equally certain that as members of the insurance board they could
not deliberate without bias.^ A similarly undesirable situation is
potential where a director is engaged in providing professional services
to the insurance company on whose board he serves. A lawyer, for
instance, who obtains substantial fees from the insurance company
and who has to a large extent built up his ofiice on the expectation
that those fees shall continue is not only unable to judge the merits
of the disbursements to himself but also his very presence in the
directors' room may make it difficult for his fellow directors to question
his fees or the basis upon which he is proceeding.*

' The larger legal reserve companies all own securities of interlocking concerns which are in default. As of
December 31, 1938, Metropolitan owned $15,791,000 bonds of this character, Prudential $2,824,000 and New
York Life $13,567,000 (par values). Replies to Commission's Investment Questionnaire for Metropolitan,
Prudential, and New York Life.

No instance of the removal of a director when defaulted securities of a corporation in which he was inter-
ested appeared in the portfolio was found in thecaseof the 5 largest companies. Itisofinteresttonote, how-
ever, that the Northwestern Mutual, in a wholly comparable situation, eliminated Mr. Fred W. Sargent,
president of the Chicago and North Western Railroad Co., from the board after securities of the railroad
held by the insurance company went into default (pt. 4, R. 1495).

3 Mr. David I. Houston, president of the Mutual Life, testified (pt. 4, R. 1469, 1470);

" Representative Reece. What is the responsibility of the directors of the company?

"Mr. Houston. They have complete control of it.

"Representative Reece. The interests of the directors, then, should first be to conserve and advance the
interests of the company —

"Mr. Houston (interposing). Of the policyholders.

"Representative Reece. In the case of an insurance company, of the policyholders.

"Mr. Houston. Yes.

"Representative Reece. Then the interests of the directors of a bank, of course, or the responsibility of
the director of a bank is to advance the interests of the bank, or the responsibility of a director of an indus"-
trial concern is to advance the interests of that concern* In case a man is a director of both the bank and of an
insurance company, if the two companies have interrelationship, there might be no conflict in his responsi-
bility, but on the other hand, it is possible that there might be a conflict and put him in a position where
he would have to decide which institution should have its interests first advanced. Or do you think there
is a possibility of that situation arising?

"Mr. Houston. There might be, in which case I think the trustee would resign from one or the other. I
certainly should, if I were aware of a conflict of consequence.

"Representative Reece. I think so, and I would assume that a director would not do so.

"Mr. Houston. I do not know any member of our Board where any. real conflicts of interest developed or
persisted, who would not tender his resignation from one or the other.

"Mr. ABNOtD. Which would he resign from? Heispatina very uncomfortable position, isn't he?

"Mr. Houston. Certainly.

"Mr. Arnold. And in general you would say directors sboilldn't represent conflicting interests, wouldn't
you?

"Mr. Houston. If real conflicts of interest exist.

"Mr. Arnold. Oi they shouldn't put themselves in situations which might in the future lead to conflicts
of interest. .

"Mr. Houston. That might be the case. We have not been troubled by any conflict to date."

* See testimony of Mr. Mitchell D. Follansbee, contra (pt. 4, R. 1415).

264763 — 41— No. 28 7

90 CONCENTRATION OF ECONOMIC POWER

The outright lending of money to directors for their personal use
presents this problem in even bolder relief. Such loans cannot be
acted upon by the directors objectively and handled dispassionately
in the" manner of ordinary business transactions.^ More often than
not they are forerunner to other types of malpractice. That they are
injuripus to the policyholders' best interests cannot be questioned.
The case of the Travelers will serve to illustrate the difficulties inherent
in such a situation. In this instance, as has been indicated, about 50
officials, of the company borrowed substantial sums of money from
banks which the Travelers owned and controlled and it appeared that
in order to protect some of these loans the insurance company was
obliged to purchase and sell shares of its own stock to bolster the
market price and thus prevent collateral values behind the loans from
being fu?:ther weakened.^ During the course of the transactions those
officials, who were also officers, directors, or members of the finance
committees of the banks were called upon to act in dual capacities and
in effect were obliged to pass upon the soundness of their own loans
and the advisability of the" transactions which were entered into -for
the purpose of protecting such loans. These officials in some cases
borrowed money on collateral which was appraised, by their fellow
officers, and they then participated in meetings of the finance com-
mittees and of the board of directors at which the advisability and
business soundness of the loans were passed upon and discussed. No
more forceful example could be found of the difficult position in which
directors and officers of insurance companies place themselves when
they conmaingle their personal financial affairs with those of the
company for whose policyholders and stockholders they serve as
trustees. It is difficult to believe that the directors in this case were
able to reach that degree of objectivity in decision which is required
of the true trustee.^

Differing only in degree from these outright loans to Officers and
directors is the great variety of transactions through which a director
inay obtain a preferred business position. In tms connection it is
mteresting to note that there is no imiform standard of conduct re-
quired or adopted by insurance officials in meeting this type of prob-r
lem. Some officials stated that in their judgment it was proper for
an insurance company to deal with its directors provided these deal-
ings were not to the disadvantage of the insurance company;^ another
seemed- to be saying that transactions with directors' banks, even
though resulting from the direct solicitation of the director himself,
were proper if the bank was sound and if the interlocking director
removed himself from his embarrassing position when an active con-
flict occurred f another director took the position that it would not be
proper for him to sohcit business himself from the insurance company
but that others interested in the same outside venture as himself

» Mr. H. Harold Loweree, secretary of Monumental whose concealed loans to an officer have already been
considered (p. 47, supra), testified (pt. 12, R. 6702):

"The Vice Chairman. In this instance I say the collateral was adequate — no question about this— but what
I am pointing out is the danger of this practice of establishing a precedent to allow the practice of directors
and managers of a company to come and obtain loans, even though they have collateral, because the Vjilue
a that collateral is passed upon by ihese selfsame men who come looking for loans.

"Mr. LowEBBa. I can't help but recognize the general principle that you say^and I agree with you."

• See pp. 58 to 60, sy,pra.

' For similar examples, see pt. 13, R. 6470^73, 6859-6862.

• Pt. 4, R'. 1434, 1446-1451.

• Pt. 4. R. 1454-1471.

CONCENTRATION OF ECONOMIC POWER 9_[

should be free to do as they pleased in this connection.^" Still other
officials who had used insurance funds to further their personal busi-
ness careers, and who in so doing had in some instances subjected their
companies to great risk and even loss and who had not disclosed their
full personal interest in such transactions, were unwilling to admit
the impropriety of their actions." Finally still other officials stated
that any business dealings between life-insurance companies and their
directors were abhorrent and should be scrupulously avoided.'^

Except in these latter instances the various attitudes toward insur-
ance directors, as outlined above, appeared to be more a justification
of their past activities than a carefully considered definition of the
policy proper from the viewpoint of the pubhc interest or as a matter
of business ethics.

Transactions between directors and their companies are frequently
explained or justified on the ground that only men of the broadest
business experience should be selected for directorships and that such
men inevitably have wide business interests, at least some of which
are certain to overlap with those of the insurance company. One
official stated if the elimination of interlocking transactions were car-
ried to its logical extreme, the company could not even fcfuy a desk
from Mady's department store since Mr. Percy Straus, president of
the store, is on the board of the insurance company. ^^ That con ment
was of course nonsensical; a matter of degree is clearly involved The
evidence, however, demonstrated conclusively that many dijectors
have a direct personal interest in the outcome of their cori'pany's
transactions, and that they are even active in initiating and .-ward-
ing transactions from which they intend to gain personal i>enefit.
Furthermore the evidence disclosed situations conducive to conflict
arising from interlocking directorships. One such example may be
found in the heavy investment of company funds in securities of cor-
porations which interlock with it.^* Such investments are frequent.
An analysis showed that as of December 31, 1938, only five of the 26
largest companies had no investments in securities of corporations
with which they interlock, and that the remaining 21 companies owned
$721,726,100 of bonds and 1,726,623 shares of stock in interlocking
corporations. Two companies had investments in as many as 24

19 Pt. 4, R. 1482-1485.

" Pt. 12, R. 5693-5696; pt. 13, R. 6807-6827.

>' Pt. 4, R. 1494-1500; pt. 12, R. 5931. Mr. Charles F. Williams, president of the Western & Southern,
testified as follows (pt. 12, R. 5931):

"Mr. Qesell. Have you or any of the other principal officers or controlling stockholders had business
relations with the company through outside affiliations of any sort?

"Mr. WnxuMs. Never.

"Mr. Oeseli. You have confined your business activities to the operation of the insurance company?

"Mr. WiLLUMS. That is right.

"Mr. Gesell. Is it your feeling that officers and directors should not deal with their own company, even
when it is a stock company?

"Mr. Williams. I don't see how they can do it. No, of course not.

"Mr. Gesell. You think it is undesirable for that situation to exist?

"Mr. Williams. Yes, yes; it is even worse than undesirable."

13 Pt. 4, R. 1438. In this connection Mr. Thomas A. Buckner testified (pt. 4, R. 1435):

"If we are stopped from having any ordinary transactions that are necessary transactions for our company,
if we are to be estopped from doing business with any institution where a director of our company was
connected — well, we would just have to get a lot of directors that lived out where they never neard of invest-
ments or securities or anything of that kind. We couldn't'get a board of directors that could give us proper
idvice and counsel and help."

'< At least two States, Indiana and Iowa, specifically prohibit domestic life insurance companies from
nvesting in securities of a corporation in which an officer of the insurance company is an officer or director.

92 CONCENTRATION OP ECONOMIC POWER

interlocking corporations.^^ In many instances, securities were in
default and the consequent position of the interlocking director was
subject to even more than ordinary conflict. Though it is sometimes
custoihary for interlocking directors to avoid participation in the
deals affecting the insurance company holdings of a particular security
in which they may have an interest ^® this does not eliminate oppor-
tunity for gross abuse. Indeed as a practical matter it would seem
that activities of an entire board might well be affected by the fact
that a substantial number of the important transactions coming up
may in some way involve the beneficial interest of one or more members
of the board.

An indication of the extremities to which such a situation may go
will be found in the acquisition of railroad securities by the Mutual
Life during the period from 1910 to 1930. In this period, the Mutual
acquired $300,759,420 of railroad bonds of which $146,596,121 or
48.7 percent, were securities of roads one or more of whose officers
or directors were then directors of the Mutual Life. In 1 year, as
many as 74.3 percent of the railroad securities acquu'ed by the Mutual
w„ere of roads connected with it in this fashion. Frequently the
directors who interlocked were found to be members of the Mutual
Life's finance cormnittee and thus in close touch with the company's
investment policy and required to exercise an especially high degree of
independent judgment iu formulating recommendations to the main
board."

The record also contains evidence of several companies which made
investments for the purpose of financing speculative activities in which
their officers or directors were interested. Frequently these invest-
ments weakened the reserves of the insurance company ^nd in several
notable instances actually brought about the failure of the company
with a resulting large loss to its policyholders. These examples are
sufficient warning in themselves of potential dangers' which may arise
from the accumulation of investments in interlocking concerns.^^

The experience of the Northwestern Mutual indicates that dubious
interlocking connections may be virtually eliminated and directors
kept removed from any possibility of conffict provided the manage-
ment has determined to avoid such situations as a matter of policy
and approaches the pro'blem realistically. The record of this company
has been so striking in this connection that it deserves some special
comment.^^ Mr, Michael J. Cleary, president of the Northwestern
Mutual Lifejnsurance Co., testified on this point as follows :^°

Mr. HiNRicHS. Mr, Cleary, you made it very clear that you tried to avoid
any kind of interlocking relationship between your trustees and the business
activities of, the company. In the process of eliminating people who might have
an interlocking interest, has it ever been necessary for you to turn down a man
that you regarded as superbly qualified and accept somebody whose qualifications
seemed to you to be inferior to those that you could have had if it were not for
that interlocking relationship?

i» Pt. 28, exhibit No. 2265.

i» Pt. 28, testimony of Thomas A. Buckner, February 12, 1940.

" Pt. 28, Supplementary data.

'' See section entitled "Company Retirements — Reinsurance and Failures," pp. 101 to 141, infra.

" Pt. 4, R. 1493-1500.

«» Pt. 4, R. 1506.

CONCENTRATION OF ECONOMIC POWER 93

Mr. Cleart. I wouldn't say that. My experience is that there is no superman.
You can always find a duplicate.^'

Under the Wisconsin law to which the Northwestern is subject, a
majority of the company's directors must be residents of that State.
The remaining directors of the company have been selected with a
view to representing various geographical areas in which the company
operates and have been chosen from various occupations in order to
"represent a fair cross-section of the policyholders." In order to
select a director to represent the New England area, for example, it
appeared that the company prepared • list of 2,000 policyholders
resident in that section. These persons were then subjected to investi-
gation through communication with company representatives in the
territory and through personal investigations by an oflBcer of the
company in an effort to determine their qualifications for a
directorship.^^

In selecting directors, the company has eliminated many individuals
whose business activities or connections might conceivably place them
in embarrassing or conflicting positions. Oiie individual was not
chosen simply on the ground that the Northwestern- Mutual had a
large investment in the company of which he was the chief executive
officer. Another, who was active in the real estate field, was elim-
inated on the ground that his extensive activities in the Cliicago area
where the Northwestern Mutual had substantial holdings might
bring him into conflict with the company's interests. Still another
was removed from consideration because he was "too busy" and
probably would not be able to attend meetings regularly, while
another, an attorney, was eliminated because the company jvanted to
be free in its decision as to who would represent it legally. It also
appeared that as a matter of general Dolicy the Northwestern Mutual
discouraged the inclusion of members of banking or investment
banking institutions on its board since it sought to be perfect!}^ free
from "any embarrassment in buying and selling securities " and in the
placing of its deposits. ^^

Mr. Cleary testified on this matter in part as follows: ^*

Mr. Gesell. Coming to the question of selection from another point of view,
do you look to see whether or not the man is in any way subject to becoming in a
conflicting position if he comes on the board of your company?

Mr. Cleary. We have frequently given thought to that phase of h, and on
several occasions eliminated men from consideration because of that factor.

Mr. Gesell. Since conflicting interest is subject to a difficult definition, will
you tell us just the type of men and the type of situations that have arisen where
you have felt that you had to eliminate a man because of this conflicting
relationship?

Mr. Cleary. Well, I might use the case of Mr. Way, of the Milwaukee Electric
Co. Mr. Way is president. At the time his name was considered the company

2' The Armstrong Keport (vol. X, p. 392) sta^cu;

"It is not believed that the companies will be deprived of suitable advice and direction bf the prohibition
of dealings with officers and directors, or with firms of whiib they may be members. The business of the
company should be transacted under the direct supervisi'in of the trustees and no opportunity should be
afforded for a conflict between their personal interest and tl eir ofiScial duty. It is entirely indefensible to
permit one to act as the trustee of an insurance corporatioa n a transaction in which -he may benefit, apart
from his interest in the corporation, by the exercise of h'. ci scretion."

" Pt. 4, R. 1493, 1494.

« Pt. 4. R. 1494-1500.

» Pt. 4, R. 1494-1495.

94 CONCENTRATION OF ECONOMIC POWER

owned between eight and nine million dollars of securities of that company. We
had considered the question as to whether the holding might not be too large,
what our attitude would be in the event of refunding. It was felt that it would be
embarrassing to Mr. Way, and possibly to the company. We dropped his name.

Mr. Gesell. That was a case simply where your company had a large invest-
ment in his company, was it not?

Mr. Clbary. Yes.

Mr. Gesell. Well now, what about any other instances that you have?

Mr. Cleart. Oh, I ior'^ know tha^" I recall specific detail, Mr. Gesell, on
another case.

Mr. Gesell. Do you remember the case of Mr. Fred W. Sargent of your
company?

Mr. Cleary. Yes.

Mr. Gesell. He became a trustee, did he not?

Mr. Cleart. Yes.

,'Mr. Gesell. He was president of the Chicago & North Western Railroad Co.?

Mr. Cleart. Yes.

'Mr. Gesell. Your company had an investment in that railroad prior to his
coming on the board?

Mr. Cleart. Yes.

Mr. Gesell. His railroad got into diflffculties?

Mr. Cleart. Yes.

Mr. Gesell. The securities went into default?

Mr. Cleart. Yes.

Mr. Gesell. Your company still held them, and as the result, the situation
was felt to be such as to warrant Mr. Sargent's leaving the board of directors of
your company.

Mr. Cleart. That is true.

Mr. Gesell. What about banking and mvestment-banking connections, Mr.
Cleary; do you seek bankers and investment bankers as your trustees?

Mr. Cleart. No. Five or six years ago we had a vacancy in New York and
my recollection is that we announced to the agents and others with whom we
considered a selection that we preferred to select outside of the banking and the
investment-house group.

Mr. Gesell. Why was that, Mr. Cleary?

Mr, Cleart. Well, we want to be perfectly free, naturally, without any embar-
rassment in buying and selling securities. We also want to be perfectly free in
dealing with our deposits in the New York area. Probably supercautious,
but-

Mr. Gesell (interposing) . You mean that there was the prospect that at some
time if you had a banker on your board that you would want to deposit money
in his bank, and then his presence on your board would be embarrassing, or you
might want to buy securities through some investment banking house and the
presence of that man on your board would be embarrassing?

Mr. Cleart. That is a possibility, and I imagine one of the viewpoints that
entered into our conclusion.

The nature of the life-insurance business is such that the highest
possible standards of trusteeship are required from its directors. Mere
compliance with the formalities of office are notenopgh. A director's
responsibilities are continuing and exacting. It must be recognized
that directors' meetings are frequently stilted or casual and prevent
directors from having a sufficiently close contact with management
problems. The mechanics of the board meetings may become all
sufficient in themselves and vital matters of company policy may be

CONCENTRATION OF ECONOMIC POWER 95

put into action after only pro forma consideration. Furthermore,
there is a danger that as individual companies grow larger and'^their
directors tend to become more immune from policyholder pressure,
they may act in disregard of the policyholders' interests. The all-
too-frequent use of their positions by some directors to promote their
Siclfish purposes, especially when coupled with the power of these same
directors to perpetuate themselves in ofl&ce regardless of their efl&ciency
or their concern for the welfare of the poHcyholders, gives rise to situa-
tions where laxness in administration may flourish and breach of trust
may pass unheeded. If these tendencies become too marked, there
can be no check on the honesty or prudence of the executive ofl&cers
and deterioration of management is ceftain to eventuate.

As watchdogs for the policyholders, the directors must be ever alert
to the policyholders' best interests and sufficiently attuned to problems
of management that they may direct rather than merely nod in
approbation and counsel rather than review. A director must be
independent and free to exercise his judgment without fear or favor.
His duties must be clearly defined, his responsibilities keenly felt. ■ It
is not enough that directors shall come forward in times of emergency
to guide company policies with a firm hand. A director, must be
willing and able to devote large portions of his time and energies, not
mere lip service, to his t.rust. In a business such as life insurance
where management decisions vitally affect the daily welfare of vast
sections of this country's population, the directors must have a
sufficient understanding of their company's problems not only to pre-
vent the great power of management from being abused or directed
into improper channels but to make certain that it is exercised at all
times in the positive interests of the policyholders.

Flagrant cases of conflict and breach of trust exist. Until these are
eliminated by a wider acceptance of the attitude taken toward these
problems by the more progressive States and the more enlightened
company managements, the funds of many policyholders will remain
in jeopardy.

SECTION IX

Salaries and Profits

Life insurance companies, as a whole, pay high salaries to home-
office executives. An examination of the Salary structures of the 6
largest mutual companies discloses that 2,465 executives in these com-
panies received $5,000 or more in salary, compensation and emolu-
ments (commissions excluded) during 1938. In the case of the Metro-
politan 1,052 executives receive $5,000 or more per annum. Of these
183 receive $10,000 or more and 23 receive $25,000 or more. A
somewhat comparable situation exists in the other 5"'largest mutual
companies,^

No attempt is made here to criticize or to defend the salary prac-
tices of the mutual companies. Attention should be directed, how-
ever, to the cooperative and nonprofit making character of a +ruly
mutual company, to the fact that similar enterprises flourish without
benefit of high-salary incentives, and to the fact that the policyholders
have no direct voice in management affairs, and must depend solely
upon the discretion of a board of directors whose responsibility to
policyholders is, as has been demonstrated, frequently tenuous and
unsubstantial. On the other hand, the heavy responsibilities of the
officials, and the urgent necessity for attracting men of the highest
ability must be recogni7:ed.

The 1938 salaries of the principal active executives of the 25 largest
mutual companies are listed below: ^

Salary of principal executives of 25

'argest mutual insurance companies

{1938)

Company

Name and title of principal executive

Salary

Mfitrnpnlitan IMp. Insiirancfi Do

L. A. Lincoln, president . .

$125,000

' 100, 000

New York Life Insurance Co .

T. A. Buckner, chairman of the board

T. I. Parkinson, president

100, 000

Equitable Life Assurance Society of the United

States.
Mutual Life Insurance Co. of New York

75,000
125,000

Northwestern Mutual Life Insurance Co

50, 000

John Hancock Mutual Life Insurance Co

Guy W. Cox, president . .

60, 000

Penn Mutual Life Insurance Co

William H. Kingsley, president. ... .

60,000

Mutual Benefit Life Insurance Co

60, 000

Massachusetts Mutual Life Insurance Co -.

50, 000

New England Mutual Life Insurance Co

Provident Mutual Life Insurance Co. of Phila-

George Willard Smith, president

M. Albert Linton, president .....

60,000
40,000

delphia.
Connecticut Mutual Life Insurance Co

James Lee Loomis, president ...

41,000

Phoenix Mutual Life Insurance Co

Arthur M. Collens, president.

30,000

Pacific Mutual Life Insurance Co . -

32,400

Bankers Life Co

' 36, 000

National Life Insurance Co

Fred A. Howland, chairman of board

Chandler Bullock, president

25,000

State Mutual Life Assurance Co

36, 000

> 1939 salary, first full year as principal executive oflScer.

1 Pt. 13, exhibit No. 1346.

> From 1938 Convention Form Annual Statements, schedule G.

CONCENTRATION OF ECONOMIC POWER

Salary of principal executives of 25 largest mutual insurance companies {1938) —

. Continued

Company

The Guardian Life Insurance Co. of America-
Fidelity Mutual Life Insurance Co

The Home Life Insurance Co.

Acacia Mutual Life Insurance Co -

Berkshire Life Insurance Co

State Life Insurance Co ---

American United Life Insurance Co.-

Total salaries...
Average salary.

Name and title of principal executive

Carl Heye, president

Walter LeMar Talbot, president

Ethelbert Ide Low, chairman of the board.

William Montgomery, president

Fred H. Rhodes, president

Robert E. Sweeney, president

George A. Bangs, managing director

Salary

$27,000
36,000
35,000
75,200
24,000
21,000
18,000

1,341,600
63,664

In the case of the stock companies, salaries and other emoluments
paid to principal executives are some-what smaller in amount than in
the case of mutual companies. The following table lists salaries paid
principal officers of the 25 largest stock companies during 1938.^

Salary of principal executives of 25 largest stock companies (1938)-

Company

Name and title of principal executive

Salary

The Travelers Insurance Co

L. Edmund Zacher, president

(')

Aetna Life Insurance Co ..

M. B. Brainard, president

> $52, 083

Union Central Life Insurance Co. of Cincinnati

W. Howard Cox, president ...

50,000

24,000

33,000

C. F. Williams, president. .-

60,000

The Lincoln National Life Insurance Co

A. F. Hall, president

50,000

General American Life Insurance Co

Walter W. Head, president

35,000

Reliance Life Insurance Co. of Pittsburgh

H. T. Burnett, vice president '

21,368

Kansas City Life Insurance Co

D. T. Torrens, president . . .

24,000

Life Insurance Co. of Virginia

Bradford H. Walker, president - .

65,000

Jefferson Standard Life Insurance Co

Julian Price, president .. . . .

40,000

The American National Insurance Co

W. L. Moody, Jr., president .. -

20,000

Northwestern National Life Insurance Co .

0. J. Arnold, president . .

36,000

30, 211

National Life and Accident Co

C. A. Craig, chairman of the board

25,000

Occidental Life Insurance Co

Dwight L. Clarke, executive vice president.

17,500

California-Western States Life Insurance Co

. 18,000

Great Southern Life Insurance Co

E. P. Greenwood, president

60,000

Columbian National Life Insurance Co

(*)

Ohio National Life Insurance Co

T. W. Appleby, president - -

50,000

Bankers Life Insurance Co

H. S. Wilson, president

19,500

Franklin Life Insurance Co

H. M. Merriam, president -.

18,000

Pan-American Life Insurance Co

Crawford H. Ellis, president ^

Paul M. Burnett, chairman of the board

16, 702

Monumental Life Insurance Co

25,000

Total salaries, 23 companies

790,364

Average salary

34,364

1 Full salary not revealed by convention form annual statement. Life department salary amoimt^
$32,603. - .

' Includes salaries from subsidiary companies.

' The president, Arthur E. Braun, receives no salary. He is reported as president of Farmers Deposit
National Bank. Farmers Deposit Trust Co., an aflUiate of the bank, owns 59.65 i)ercent of the outstanding
stock.

* Not supplied.

' From 1938 Convention Form Annual Statements, schedule Q, and correspondence with the companies.

CONC'ENTRATION OF ECONOMIC POWER

It must be recognized in this connection that the financial benefits
inuring to principal officers of stock companies are not limited to
salaries since in most cases these officers hold a substantial interest
in the stock of their companies and may receive liberal cash or stock
dividends from time to time. Information compiled from answers
to a special questionnaire of the Commission is summarized below
to indicate the percent of each company's outstanding shares held
by officers and directors of the company.*

Compahy

Percent of com-
pany's out-
standing shares
held by officers
and directors
of company '

Company

Percent of com-
pany's out-
standing shares
held by officers
and directors
of company '

The Travelers Insurance Co ...

Aetpa Life Insurance Co

2.7
6.8

12.6

10.6
20.8

• 56. 3

8.9

8.0

16.4

•6

Jefferson Standard Life Insurance
Co

32.4

Union Central Life Insurance Co.
of 'Cincinnati - .

American National Insurance Co. .
Northwestern National Life In-
surance Co

Southwestern Life Insurance Co.,

National Life and Accident Co

Occidental Life Insurance Co

California-Western States Life In-
surance Co . .. . .

71.2

The Connecticut General Life In-

54.0
12.2

Equitable Life Insurance Co.

Western and Southern Life Insur-
ance Co. --

The Lincoln National Life Insur-

37.3

ance Co - -

General American Life Insurance
Co-.

Great Southern Life Insurance Co.
Columbian National Life Insur-
ance Co - - ...

10.0
2.9

Reliance Life Insurance Co. of
Pittsburgh

Ohio National Life Insurance Co--

Bankers Life Insurance Co

Franklin Life Insurance Co

Pan-American Life Insurance Co..
Monumental Life Insurance Co...

19.6
74.1

Kansas City Life Insurance Co

Life Insurance Co. of Virginia

97.8
14.1
35.4

' Includes only stock held of record in the names of offlcers'&id directors. Holdings of estates, corpora-
tions, or other organizations in which these officers and directors may be interested are not included.

' Company in process of mutualization.

' 100 percent of outstanding securities owned of record or beneficially by Transamerica General Corpora-
tion which in turn is owned 100 percent by Transamerica Corporation. The corporations are further tied
together by interlocking directorships. •

* Not supplied.

In general, the Commission's studies indicate that insurance stocks
are closely held and traded primarily in over-the-counter markets.
About three-fourths of the companies listed have less than 1,000
shareholders and even in those instances where shares are widely
distributed it is still customary to find a ' controlling block closely
held. Complete information is not available to indicate the extent
to which the managements of the stock companies have participated
in cash and stock dividends, but the closely held stock and the fre-
quently high percentage of officers' and directors' holdings warrant
the assumption that this participation has been substantial. A
special study of the Monumental Life Insurance Co. of Baltimore
demonstrated the generous amounts of company earnings disbursed
to officers and directors. Commencing as a stock cornpany in 1928
with a paid-in capital of one-half million dollars the company, in

addition to increasing its surplus in a substantial amount, had paid
— »

* Companies were asked to supply information concerning capital stock outstanding and amount held
by officers and directors.

CONCENTRATION OF ECONOMIC POWER 99

cash dividends tofcaling $1,830,000 up to December 31, 1938.^ Of
this amount, principal officers and members of their families have
received amounts as follows : ^

Paul M. Burnett, chairman of the board $181, 474

In trust 197, 500

Milton Roberts, vice president and director 158, 837

Howard M. Emmons, vice president and director. . 112, 784

Stewart H. Clifford, vice president 34, 606

total . . 685, 201

The original paid-in capital of the 25 now largest stock companies
was $9,242,720. At the end of 1938 these companies had declared
dividends totaling $173,563,434 and had accumulated a surplus of
$137,913,582. A schedule reflecting original paid-in capital, cash, and
stock dividends and surplus accumulations for each of these 25
companies is set forth below: ^

Original capital, dividends, surplus — 25 largest stock companies '

Company

The Travelers Insurance Co.' --.-

Aetna Life Insurance Co.'

Union Central Life Insurance Co. of
Cincinnati

The Connecticut General Life In-
surance Co.'

Equitable Life Insurance Co-..

Western & Southern Life Insurance
Co

The Lincoln National Life Insurance
Co

General American Life Insurance

CO.2

Reliance Life Insurance Co. of Pitts-
burgh 2

Kansas City Life Insurance Co

Life Insurance Co. of Virginia

Jefferson Standard Life Insurance
Co-

The American National Insurance
Co.. _...,

Northwestern National Life Insur-
ance Co

Southwestern Life Insurance Co

National Life & Accident Co.'

Occidental Life Insurance Co

California-Western States Life In-
surance Co.'

Great Southern Life Insurance Co...
See footnotes at end of table.

Year
organ-
ized

1863
1850

1865
1867

1888

1905

1033

1903

1895
1871

1907

1905

'1885
1903
1900
1906

1912
1909

Organized
paid-in
capital

$200,000
150, 000

100,000

250,000
25, 000

100,000

110,300

2,000,000

2, 000, 000
125, 000
100, 000

250,000

100,000

1, 100, 000

100,000

15,500

225, 000

500,000
119, 690

Dividends

Cash

$17, 754, 000
21, 717, 000

4, 285, 735

5, 568, 738
1, 986, 186

19, 102, 500

6, 442, 423

142,500

1, 500, 000

2, 450, 000
14, 177, 423

2, 260, 000

3, 795, 000

165, 000

5, 766, 000

6, 693, 348
431, 000

2, 455, 898
5, 735, 000

Stock

$4, 100. 000

2, 400, 000

14, 900, 000

875,000
5, 200, 000

1,583,333

'1,750,000

3, 750, 000
3, 934, 500

1, 200, 000

Surplus as of
Dec. 31, 1938

$33, 356, 462
20, 386, 975

8, 197. 514

7. 027, 579
3, 424, 520

8. 807. 683
3,500,000

1. 960. 684

3, 637, 012
6, 021, 441
6, 307, 844

2,500,000

9, 776, 550

2, 329, 048
3, 610, 575
4, 060, 613
1, 731, 332

450,000
., 000, 000

» Pt. 12, R. 5723.

» Pt. 12, exhibit No. 969.

' Pt. 12, exhibit No. 951; Best's life reports; spectator insurance year books, convention form annual state-
ments. The figures representing original paid in capital may, in some cases, bQ larger than actually was the
case. The information relating to the early history of some companies is meager, and possibly identifies
authorized or subscribed capital, as paid in capital (pt. 12, R. 6613).

JQO CONCENTRATION OF ECONOMIC POWER

Original capital, dividends, surplus — 25 largest stock companies — Continued

Company

Year
organ-
ized

Organized
paid-in
capital

Dividends

Surplus as of

Cash

Stock

Dec. 31, 1938

Columbian National Life Insurance
Co.» — -

1902
1910
1887
1884
1912
M858

$200,000
106, 400
100, 000
100, 000
665, 830
500,000

$2, 866, 111

1, 146, 731

576, 260

383, 750

2, 590, 000

1, 830, 000

$400,000

150,000

1, 500, 000

$625, 969

Ohio National Life Insurance Co.'-..
Bankers Life Insurance Co

1,000,000
3, 583, 709

Franklin Life Insurance Co . --

1, 035, 364

Pan-American Life Insurance Co.'...
Monumental Life Insurance Co

1, 006, 536
2,576,172

Total -..

9, 242, 720

131, 820, 601

41, 742, 833

137, 913, 582

> Does not include data for departments other than life.

' Engaged in the sale of health, accident, fire, or casualty insurance, as well as life insurance.

'Stock company incorporated 1927.

* Stock company incorporated 1928.

SECTION X

Company Retirements — Reinsurance and Failures

During the 10 years, 1930-39, 188 life insurance companies dis-
continued operations as a result of reinsurance, merger or receivership,^
These company retirements were distributed among the 48 States and
the District of Columbia as indicated in the following table, which
differentiates between those retirements resulting in loss to policy-
holders and those which did not.^

Company retirements, 1930-39

With loss to policy-
holders

Without
loss to
. policy-

states

Domiciled

Doing
business

holders-
domiciled "

Alabama

3
1
3
1
1

8
1
2
2
1

5
0.

10
5

12
9
9

6
9

12
7
4

13
9
6

16
7
9

13
6

10
4

Arizona .^

Arkansas

California

Colorado

Connecticut

Delaware . . .

■nistrifit nf Onlnmhia

Florida

Georgia

Idaho 1 .■

Illinois :....-. '

Indiana...

Iowa_ :......

Kansas

Kentucky .. ...

Louisiana

Maine

Maryland . .

Massachusetts .

Michigan.

Minnesota

Mississippi I

Missouri

Montana

Nebraska.... ^

Nevada ^

•" Companies included under this column may in some cases have retired with a loss to policyholders.
Wherever information was incomplete or doubtful, companies have been classified as retiring without loss.
In addition at least 5 companies included under this column merged with or were reinsured by other
life insurance companies which subsequently failed. Pt. 28, exhibit No. 2338. '

' Pt. 28, exhibit No. 2337.

' Ibid. The number of companies retiring each year during the period were as follows (Id.) :

1930.
1931.
1932.
1933.
1934.

1935

1936

1937.

1938.

1939.

101

102

CONCENTRATION OF ECONOMIC POWER

Company retirements, 1930-39 — Continued

With loss to policy-
holders

Without
loss to
policy-

states

Domiciled

Doing
business

holders-
domiciled

New Hampshire

1
1

Q
5
4
1
6
5

14
7
9
1
4
5
9

15
5

7
3

12
3
5

New Jersey.

New Mexico _._J ,

New York '" ._. .

North Carolina...

North Dalcota. : ■.. .

Ohio.... J. -

Oklahoma.' ■._

Oregon.. _ ... . ... .

Pennsylvania

Rhode Island

South Carolina

South Dakota .. _ . .

Tennessee ... .

Texas

Utah

Vermont

Virginia

West Virginia _ _ .\..

Wisconsin

Wyoming .

Total .. .. .

149

Reinsurance is the most conunon form of company retirement.^
Not to be confused with reinsurance of an individual pohcy, reinsur-
ance of an entire company typically involves the assumption by the
reinsuring company of all policy liabilities of the reinsured company
and the taking over of assets equal to the accumulated reserves with
which to meet obligaticns assumed under the reinsurance contract.
The reinsured company ordinarily liquidates upon completion of the
reinsurance, distributing to its stockholders, and in some rare instances
its policyholders, the excess, if any, of its assets over its reserves,
together with any consideration it may have received from the re-
insuring company for its business. The reinsuring company continues
as a going concern, collects premiums from the policyholders as they
fall due and generally occupies the same position with respect to the
policyholders as did the reinsured company prior to reinsurance.*

Reinsurance is not necessarily disadvantageous to the policyholder.
There are situations where good management policy dictates the
consolidation of two previously independent companies.^ Moreover,
it is not unusual for reinsurance contracts to grow out of receiverships

' The various retirements may be classified under the following categories: 91 companies retired through
reinsurance without lien, 2 companies through reinsurance with lien, 21 companies through receivership,
31 companies^ through receivership followed by reinsurance with lien, 4 companies through receivership
followed by reinsurance without lien, and 39 companies through merger (pt. 28, exhibit No. 2337).

« Pt. 28, testimony of Alfred M. Best, February 29, 1940.

• Pt. 28, testimony of Alfred M. Best, February 29, 1940. Reinsurance is often considered a relatively
cheap method of acquiring new business and may bring about a reduction ia expense. Ibid.

CONCENTRATION OF ECONOMIC POWER 103

as a means of preserving for the policyholdei" of a failed company
such equity as may remain after the receivership,* Even more
frequently a reinsurance contract may be entered into in order to
prevent a receivership, adjustment being made when necessary so
that the reinsuring company will not undertake policy liabilities in
excess of those whicLthe acquired assets may justify.^

Reinsurance may be undertaken with or without a lien against the
policy reserves involved. If no lien is placed against the policy
reserves of the reinsured company, the reinsuring company assumes
liabilities at 100 cents on the dollar and the policyholders of the
reinsured company maintain their previous status in the reinsuring
company. When the company to be reinsured is in financial diffi-
culties it is customary to adjust policy provisions or subject the policy
reserves to a lien in order that liabilities assumed will not be out of
line with the true amount of the assets taken over under the reinsiVr-
ance contract. More frequently, a lien is imposed. This lien is in
effect a reduction of the policyholders' equity in the reserves of the
company by the amount of the lien imposed. Unless the policy-
holder dies within a period specified in the reinsurance contract the
lien is an obligation which he must ultimately satisfy, either by the
payment of cash or by having the amount subtracted from the
amount payable at death, surrender or maturity. In the meantime the
policyholder must pay interest on the lien just as if it were a policy
loan. Sometimes these liens are made flexible and are adjusted from
time to time as the insurance situation works itself out and those
policyholders who entered a reinsurance arrangement with their
policies subject to lien at the outset, may even eventually hold unim-
paired policies. In other cases the lien may have to be increased
from time to time as assets taken over fail to justify the valuation
placed upon them at the time they were assumed under the reinsur-
ance contract.^

In many instances reinsurance contracts are the result of strictly
promotional activities and are highly disadvantageous to the policy-
holders.

• Op. cit. supra note 3 at p. 102.

' The present methods for liquidating insurance companies require improvement due primarily to the
lack of coordination between the proceedings in tne various States. At present, insurance companies are
excepted from the provisions of the Federal bankruptcy law, and a receivership in a State court of an insur-
ance company doing an interstate business is a chaotic aflair. The receiver in the State of domicile, who is
ordinarily the primary receiver, has no authority outside of the jrjisdiction of the court which appointed
him, with the result that ancillary receivers must be appointed in each State in which the company did
business or had assets. Because of local interests and because of variations in State laws, these ancillary
receivers often work at cross purposes with the primary receiver. In some States the receiver's fee is de-
pendent on the amount of assets collected,. and controversy develops as to the authority to collect. In
many cases inequitable distribution of assets results because in some States the local receiver collects for the
benefit of local creditors, while in other States the local receiver collects for the benefit of all of the company's
creditors, pro rata. Some States require the company to keep a deposit with the State, and on the com-
pany's insolvency the deposit is available for creditors in thSt State only. Sometimes before ancillary re-
ceivers can be appointed separate proceedings are started in States other than that of domicile, and fhe
confusion is multiplied. Not only is the lack of system in receiverships confusing, but it is also expensive,
for each receiver, whether independent or ancillary, must be paid for his work and there is a tremendous
duplication of effort. In 1935 the National Convention of Insurance Commissioners recommended the
aaoption of a uniform State insurance bankruptcy law. In 1939 it reported that "imfortunately, only a
few of the States have enacted this law. New York, Indiana, California, Vermont, and Michigan." See
a(}dress of George S. Van Schaick, superintendent of insurance of the State of New York at the sixty-fourth
annual meeting of the National Convention of Insurance Commissioners, June 2, 1933 (pt. 13, exhibit No.
1348-9).

' Pt 28, testimony of Alfred M. Best, February 29, 1940. For a form of reinsurance contract see pt. 13,
exhibit No. 1348-17.

104 CONCENTRATION OF ECONOMIC POWER

Public information on the subject of company retirements is sparse
and in fact most State regulatory officials requested by the Com-
mission to furnish facts relating to specific retirements within their
States were unable to do so because of the unavailability of pertinent
records or difficulties encountered in assembling material therefrom.
The Commission was unable to make a thorough study of retirement
cases since the amount of time and expense required was prohibitive.
It was possible, however, to make special case studies of certain
specific reinsurance deals and to examine several reinsurance promoters
who were called to testify concerning their general activities. In the
main the emphasis was placed upon that type of reinsurance contract
which results purely from promotional activities and is most apt to
work to the detriment of the policyholders involved.

Persons who pyramid life insurance companies through reinsurance
follow a fairly uniform procedure. Practically no resources or show-
ing of financial responsibility are required. The usual method is for
the promoter first to organize a corporation for the purpose of acting
as a holding company for insurance stock. Then with the promoter's
own funds or with borrowed money ,^ the holding company buys'
enough of the outstanding capital stock of a small hfe insurance
company to assure it of working control. The promotor then has
himself and his associates elected directors and appointed executive
officers of the insurance company, which proceeds to make a loan to
the parent holding company. This loan may be secured by stock
of the holding company or by overvalued mortgages and other col-
lateral of dubious worth. With the money so secured the holding
company then purchases working control of another insurance com-
pany. Having secured control of the second company, a list of stock-
holders is obtained from its files. These stockholders are offered an
opportunity to exchange their stock for the ^preferred stock of the
holding company. Usually the offer is accepted by a substantial
number of stockholders, and the holding company thus gains control
of the entire outstanding stock of the second company. Acting on
behalf of both insurance companies, the promoter then arranges
stockholders' meetings to approve a contract whereby the first com-
pany undertakes to reinsure the business of the second. This done,
the first company either pays cash for the business of the second or
gives it a participation certificate under which the stockholders of
the second company are granted an interest in any mortafity savings,
excess interest earnings or other profits of the reinsured business.
The reinsured company is then out of the insurance business alto-
gether, having turned over its reserves and policy records to the
reinsuring company. The holding company organized by the pro-
moter is the controlHng and frequently sole stockholder of the rein-
sured company and as such has an interest in the cash paid as con-
sideration for the reinsurance contract. This cash can be used to
purchase the controlling interest, in another insurance company and
the reinsurance process liiay then be repeated. If the consideration
of the reinsurance contract was a participating certificate, this cer-
tificate can be discounted and the cash so obtained comes under the

• Sometimes even the Insurance company's own funds are used for this purpose. The purchase of the
Republic Life Insurance Co. of Dallas, Tex., was a case in point. The promoter, Paul Temple, bought a
building in Dallas, having previously arranged, with the assistance of an officer of the insurance company,
to sell the building to the insurance company at a substantial profit. With this profit he purchased control
of the company (pt. 13, R. 6745, 6746).

CONCENTRATION OP ECONOMIC POWER 205

immediate control of the holding company and may also be used for
the purpose of continuing promotional activities. It is obvious that
when four or five companies have been gathered together under the
domination of a single holding company the possibilities of additional
reinsurance arrangements and financial manipulations become in-
numerable.'"

In most States the consent of the poUcyholders to a reinsurance
contract is not necessary. It is conceived to be a transaction between
the managements of the two companies, and the policyholder is given
no voice in the matter. '^ The position of the policyholder was clearly
described by Mr. Massey Wilson, a well-known insurance promoter,
in the following terms :'^

Mr. Gesell. So you would say that is one technique in acquiring a company,
to buy a controlling interest, get a place in the management, switch the other
policyholders out of their stock and into preferred stock of an affiliated organiza-
tion?

Mr. Wilson. Yes; I had a dream of building another great company, and I
thought by getting a whole lot of companies together and merging them into
one I could finally build a greater company from that.

Mr. Gesbll. In a transaction such as that the policyholders are not consulted
are they?

Mr. Wilson. They have to be consulted when you finally reinsure it.

Mr. Gesell. They at that time are sort of in the position of having to jump
from the frying pan into the fire, aren't they? If they go with the reinsurance
contract, they must put their chances there, of if they stay, their interest is
liquidated, isn't it?

Mr. Wilson. That is right.

Mr. Gesell. It isn't a verj' happy choice at that stage for any policyholder,
is it?

Mr. Wilson. Usually they go along with the reinsurance.

Mr. Gesell. It isn't a very happy alternative for a policyholder to have to
face?

Mr. Wilson. No; it isn't.

Mr. Gesell. Particularly when the reinsurance contract is being entered with
a man who is, in effect, shaking hands with himself, having controlling interests
in the two companies involved.

Mr. Wilson. No.

Mr. Gesell. So, would you say I was perhaps fair in my statement that the
policyholder doesn't have much choice in a proposition like that?

Mr. Wilson. Yes; you are right about that, * * *

There may be one further step in perfecting a reinsurance arrange-
ment. It must be recognized that after the terms of the reinsurance
contract have been carried out the policyholders of the reinsured
company still hold the same policies which they held prior to the
execution of the contract. It frequently occurs that after the contract
has' been executed and the reserves transferred to the reinsuring
company that the promoter arranges to rewrite the reinsured business.
This rewriting operation, which is sometimes called transfer work, in
its simplest terms involved svdtching policyholders from one form of
policy contract to another. Policies may contain provisions disad-

'» Pt. 13. R. 6663, 6664, 6669, 6670, 6697, 6698.

" Pt. 13, R. 6675-6676. Practically all States require that a reinsurance contract must be submitted to
tlie commissioner of insurance for prior approval or review.
« Pt. 13, R. 6698, 6699.

264763— 41— No. 28 8

IQQ CONCENTRATION OF ECONOMIC POWER

vantageousi to the reinsuring company at the time of roinsm-ance and
if successful the transfer places the policies on a basis more advan-
tageous to the reinsuring company. It also enables the promoter, who
frequetitly appoints himself transfer agent, to collect substantial
commissions on the rewritten business.'^ Rewriting is often accom-
panied by misrepresentation aijd it is not unusual for policyholders to
agree to the rewriting plan without having an adequate understanding
of the nature of the contract they are signing, due to the complicated
m'anner in which the arrangement is presented to them.^*

During the course of the hearings, Mr. Herbert G. Shimp, president
of the American Conservation Co., of Chicago, 111.', was called as a
witness. ^^ Mr. Shimp is an important rewriting specialist and his
activities demonstrate that the business of rewriting offers a field
sufficiently lucrative to take up the entire time of a substantial organ-
ization. He testified he had been in the rewriting business for a
period of approximately 22 years during which time he, or organiza-
tions with which he was associated, had rewritten about $1,300,000,000
of life insurance. ^^ It appeared that the American Conservation
Co. which had been formed as recently as 1930 had, in the period
of 9 years, re wiitten $183,000,000 of insurance for 23 separate
insurance companies. Commissions of over $4,000,000 were' received
oil this transferred business alone which represented a net profit of
over one-half a million dollars for the American Conservation Co.^^
The size of the organization maintained by the American Conser-
vation Co. is naturally determined by the amount of business avail-
able at any given time. On some occasions, however, the company
had as many as 350 field men on its pay roll.'^ Methods used by
American Conservation Co. to obtain business were of particular
interest. In some cases commissions were split with persons who
assisted, in getting rewriting contracts. Thus, for example, Mr.
Raymond T. Smith, vice president of Alfred M. Best Co;, Inc., re-
ceived a contract calling for payments equal to 5 percent of all first
year premiums 6n rewritten business of Security Life Insurance
Company of America which was reinsured by Central Life Insurance
Co*, in return for his efforts in getting American Conservation
Co. the rewriting contract.^* Similarly a Detroit laW' firm was
given 10 percent of the first year premiums on the rewriting of
policies of the Detroit Life Insurance Co. for its assistance in obtain-
ing the rewrite contract. ^° Commissions were also paid former
agents of the^ reinsured 'company to keep them from opposing the
rewriting of policies in their territory ^^ and former State insurance
officials were sopaetimes employed to solicit business on the company's

"^ This commission runs as high as 70 and 80 percent of the first year premiupis collected from the business
transferred. Mr. J. D. DeBuchananne, an Insurance promoter, testified: (Pt. 13, R. 6670) "There was a
profit In it, that was the greatest reason in rewriting; there is a profit in it." Incidental gains from the
rewriting are the opportunities given to sell new insurance and to observe policyholders whose health is
Impaired, with a view to allowing those policies to lapse if possible. (Pt. 1'3, R. 6607, 6670, 6671.)

" Pt. 13, R. 6621, 6622; exhibit Nos. 1348-4, 1348-5, 1348-51, 1348-52, 1348-53, 1348-54, 1348-55, 1348-56.

i» For a discussion of the transactions' between American Conservation Co. and Dlinois Bankers Life
Assurance Co. of Monmouth, lU., see pp. 81 to 86, supra

>» Pt. 13, R. 6917, 6919.

'' Pt. 13, R. 6920, exhibit Nos. 1348-58, 1348-70.

'S Pt. 13, R. 6919.

" Pt. 13, R. 6923; exhibit Nos. 1348-60, 1348-61.

so Pt. 13, R. 6927; exhibit No. 1348-64.

« Pt. 13, R. 6925-6927; exhibit Nos. 1348-62, 1348-63.

CONCENTRATION OF ECONOMIC fOWER 1Q7

behalf. ^^ On at least one occasion the American Conservation Co.
actually acquired a substantial stock interest in a life insurance
company in order that it might control that company's pohcies to
the end that it might direct reinsurance business to itself,^^

A typical case of the use of the holding company device in pro-
moting reinsurance arrangements was that of the Reserve Co. of Kan-
sas City, Kans. This company was organized by Mr. E. W. Merritt,
Jr., in 1927. Its first step was to acquire, for cash, the stock holdings
of Mr. Clark Strickland, then president of the United States Reserve
Life Insurance Co. of Kansas City. Thereafter, Mr. Strickland
assisted the Reserve Co. in exchanging its stock for that of the
United States Reserve Life Insurance Co., of which company it soon
gained control. The Reserve Co., borrowed money from United
States Reserve Life Insurance Co., which it used to aid it in obtaining
control of Federal Reserve Life Insurance Co. Having^ gained con-
trol of Federal Reserve it caused the United States Reserve Life
to be reinsured by the Federal Reserve Life, taking a participating
certificate as consideration for the reinsurance contract. This cer-
tificate was discounted for cash which was used to pay outstanding
obligations of the Reserve Co. On the completion of the rftinsurance
the Reserve Co. rewrote the business of United States Reserve Life
for Federal Reserve Life.^*

Another example of the activities of reinsurance promoters was
found in the case of the Royal Union Life Insurance Co. of Des Moines,
Iowa. This company failed in 1933 with an indicated initial loss to
policyholders of over $11,000,000 after reinsuring or merging with
more than a score of other life insurance companies located in 11
different States. One of the principal contributing causes of its
failure was the tremendous draining of its assets by liberal commis-
sions paid to reinsurance promoters. During the period from 1927
through 1931 alone, the company paid two promoters close to one-
half a million dollars in commissions for their activities in locating
companies which could be reinsured. In the words of a former Iowa
insurance commissioner, the arrangements under which these com-
missions were paid "smelled bad." This commissioner said:

It's just been a racket with a lot of them. They care nothing about anj'thing
but the money they could pull out of these people who were saving up for their
death.25

In order to conduct a successful reinsurance operation the promoter
must be able to locate companies which can be purchased and rein-
sured into other companies which he controls. Many methods are
used to obtain information concerning companies which may be for
sale or which the owners might be persuaded to sell. Such companies

" Pt. 13, R. 6931, 6932; exhibit No. 1348-69.

!3 Pt. 13, R. 6941, exhibit No. 1348-69.

" Pt. 13, R. 6637-6641; exhibit No. 1348-2. The North American Co. w&s another holding company of
this same type. Shortly after it was formed the North American bought the controlling interest in Kas-
kaskia Life Insm-ance Co. (later renamed the Mississippi Valley Life) for cash, then exchanged preferred
stock of the North American for the remaining outstanding stock of Kaskaskia. The North American then
bought the controlling interest in the Two Republics Life Insurance Co., of El Paso, Tex., exchanged
preferred stock of North American for other outstanding stock of the Two Republics, and reinsured the
Two Republics into the Mississippi Valley. Upon the completion of the reinsurance, the North American
rewrote the policies of the Two Republics. At about the same time the Mississippi Valley reinsured the
business of the Western Life Insurance Co., of Chicago. The Mississippi Valley subsequently (ailed. See
pt. 13, R. 6662-6668.

" Pt. 13, R. 6751-6753, 6767. See generally pt. 13, R. 6751-6768; pt. 28, exhibit No. 2336.

IQg OONCENTRATION OF ECONOMIC POWER

are referred to as companies which are "ready for the doctor" and
the search for companies which may be so taken over by the promoters
is colloquially known as "bird dogging." Some individuals who are
not interested in concerning themselves with company naanagement
devote their entire time to locating companies which can be brokered
to reinsurance promoters. One promoter testified that he received
much information concerning companies . which might become the
subject of his operations from State insurance officials, and in return
for these tips he rendered political service through the insurance
companies which came under his control.^^

A. FEDERAL RESERVE LIFE INSURANCE CO.

Perhaps the best understanding of the reinsurance as practiced by
promoters can be gained from an examination of the affairs of the
Federal Reserve Life Insurance Co., of Kansas City, Kans., which
failed in 1936. A special study of this company disclosed a series
of reinsurance transactions which were rigged by the company's
management for its own advantage and which eventually impaired
the company's reserves to such an extent that the company was
thrown into receivership.

The Federal Reserve Life Insurance Co. was organized under the
laws of Kansas in 1920. At the time of its failure it had about
$33,000,000 of insurance in force, assets of between eight and nine
million dollars, and operated in seven States. Its home offices were
located at Kansas City, Kans. The principal organizers of the com-
pany were Mr. Wesley Paul Gregory, an insurance agent, and Mr.
D. H. Holt, a small-town Kansas banker. The company was formed
under a plan whereby the stock was originally sold to a group of sub-
scribers, who deposited it with a trustee, and 'it was then resold by
the trustee to policyholders under an arrangement which, enabled
them to apply policy dividends against the purchase price of the
stock. Pursuant to this plan the subscribers were eventually repaid
their money with 6 percent interest. ^^

The first president of the convpany was Mr. Walter Payne, who
was also president of a bank in Topeka, Kans., and treasurer of the
State of Kansas. Though he was not active in the affairs of the com-
pany, Mr. Payne received a salary of $5,000 per annum. He resigned
in 1924 as a result of charges that he held his position solely because of
the political influence which he commanded with the Kansas Insur-
ance Department. ^^ He was succeeded as president by Mr. W. H.

>• Pt. 13, R. 6671-6674, 6732. For a more detailed discussion of political activity see pp. 164 to 177,
injra. Some individuals spent tbeir entire time acting as brokers, trading insurance companies back and
forth from one reinsurance to another. The usual commission for such brokerage service was paid -at the
rate of $2 per thousand dollars of insurance in force in the reinsured company at the time of the reinsur-
ance contract (pt. 13, R. 6674, 6729, 6730).

" Pt. 13, R. 6602-6604. Best's Life Insurance Reports, 1936, p. 379. . The original capital was $100,000,
which was represented by 10,000 shares of stock. Mr. Gregory and Mr. Holt and a small group of other
persons purchased the issue at $15 per share, and it was resold to policyholders at $25, the difference repre-
sentifig a policyholder's contribution to surplus. A few years later a second issue of 10,000 shares was
marketed in the same manner. Mr. D. H. Holt, who became treasurer of the company, was made trustee
oj both issues (pt. 13, R. 6603, 6604, 6625).

2' Pt. 13, R. 6611, 6612. Federal Reserve also paid a stenographer $43.43 a month for acting as Mr. Payne's
wcretary. She was never at the offices of the company and in fact resided at Topeka, Kans., where she
was employed in the state house at a salary of $100 a month (pt. 13, R. 6612) . The directoics of Federal
Reserve were figureheads who always passed on proposals the way the management desired (pt. 13, R.
6614).

CONCENTRATION OF ECONOMIC POWER 109

Gregory. From the inception of the company Mr. Gregory held an
exclusive agency contract under which he was entitled to receive a
commission on all insurance sold by Federal Reserve in any State in
which it was doing business. This contract he assigned to a corpora-
tion which he owned, the Federal Agency Investment .Corporation,
and this corporation thereafter acted as the sole selling agency of
Federal Reserve until Mr. Gregory's resignation as president in 1928.
The contract was very lucrative, providing for first-year commissions
graded from 90 percent of the first-year premi iif do\vnward and
renewal commissions as high as 15 percent. The amount paid the
agency company over the 3 years from 1925-27, inclusive, during
which time Mr. Gregory was also president of the insurance company,
amounted to $666,790.51. 2^

The Federal Reserve grew rapidly. By 1928 it was operating in
Kansas, Illinois, Missouri, Indiana, Ohio, Florida, and Michigan, and
had assets of over $7,000,000. Much of this growth was the result of
a series of reinsurance transactions. During the period 1926-28 it
reinsured the following companies on the dates indicated: ^°

Company reinsured

Date

Assets

Apr. 30,1926
Nov. 9,1926
Apr. 30,1928
do -

$1, 000, 000

Union National Life Insurance Co., of Kansas City, Kans

100,000

United States Reserve Life Insurance Corporation, of Kansas City, Mo

Reserve Life and Accident Co., of Arkansas City, Kans -

333, 000
(')

Farmers National Life Insurance Co., of Huntington, Ind - . . .

Nov. 30, 1928

3, 000, 000

' The record does not disclose the assets of Reserve Life & Accident Go. of Arkansas City, Ka;^J., at
time of reinsurance. It had 136,000 policies in force. Pt. 13, R. 6608.

Federal Reserve acquired Providers Life Insurance Co. from two
insurance promoters, Mr. J. D. DeBuchananne and Mr. E,^W. Merritt,
Jr. The background and previous insurance experience of these indi-
viduals is important. Mr. DeBuchananne started in the insurance
business as an agent for the International Life Insurance Co. of St.
Lo<iis, Mo. There he met Mr. Massey Wilson, one of the company's
principal officers, and later to be a co-owner of Federal Reserve. On
leaving International Life, Mr. DeBuchananne associated himself with
Mr. E. W. Merritt, Jr., a rewrite expert, and with him organized in
1923 the North American Co., a holding company formed "to hold
insurance stock, to act as broker to buy one company and sell to
another, and transfer business and rewrite business. * * *" ^'
Some time after its organization, Mr. Paul li. Temple, who was also
to figure in a subsequent Federal Reserve reinsurance deal, became
associated with the enterprise. After promoting several reinsurance
transactions of which the most important was the Mississippi Valley
Life Insurance Co.,^^ Messrs. DeBuchananne, Merritt, and Temple sold
out their interests in the North American Co. This was accomplished
with the assistance of Mr. W. K. Herndon, then r. special examiner of
the Kansas Insurance^ Department, who recei-« ed from $22,000 to

» Pt. 13, R. 6604, 660.=;, 6632.
■ s« Pt. 13, R. 6607-6609.

" Pt. 13, R. 6662-6663.

" This company went into receivership April 1932 and was subsequen' y einsured with a 100 percent lien
at an indicated initial loss to policyholders of $2,970,000. Pt. 28, exhi it i Nos. 2336, 2338. See also note
24, supra.

XIO OONCBNTRATION OF ECONOMIC POWER

$23,000 for brokering the transaction.^^ Mr. Herndon was subse-
quently to become very active in the affairs of Federal Reserve to his
great personal profit. Following the North American sale, Mr.
DeBuchananne bought control of Providers Life Insurance Co. from
its then officers and became president of that company. Shortly there-
after he was joined by Mr. Merritt, who put up some necessary capital
and became half owner of the enterprise.^* At the time Mr. Merritt
took an interest, it was agreed that the Providers Life would either
merge with some Oihe insurance "ompany qt build up its business by
acquiring other ins .raxice companies. Efforts at acquisition having
been unsuccessful, Messrs. DeBuchananne and Merritt decided to
sell.3«

It was at this juncture that the arrangement between Providers
Life and Federal Reserve was worked out. Mr. W. K. Herndon, the
special examiner of the Kansas Insurance Department, who had com-
pleted an official examination of Federal Reserve 2 months previously,
was the principal go-between and acting as broker in the transaction
arranged for Federal Reserve to purchase the controlling stock interest
of Providers for approximately $190,000. For these services he re-
ceived $9,500 from Federal Reserve and approximately $18,000 from
Providers Life, or a total of $27,500.^8 With respect to the $9,500
payment, Mr. Vernon B Holt, a former officer and director of Federal
Reserve, testified: ^^ .

Mr. Gesell. He got a dollar a thousand from you?

Mr. Holt. A dollar a thousand from us.

Mr. Gesell. That is, a dollar per thousand insurance in force?

Mr. Holt. Yes.

Mr. Gesell. How much was in force?

Mr. Holt. Nine an a half million of insurance in force. A dollar a thousand
would be approximately $9,500.

Mr. Gesell. He got about $9,500?

Mr. Holt. Something like that.

Mr. Gesell. How was that paid to him?

Mr. Holt. It was paid to him by check.

Mr. Gesell. Was that check drawn to his order?

Mr. Holt. No.

Mr. Gesell. Was the check drawn on the Federal Reserve Life Insurance
Co. funds?

Mr. Holt. Yes.

Mr. Gesell. To whose order was it drawn?

Mr. Holt. Carl Willbrand.

Mr. Gesell. Who is Mr. Carl Willbrand?

Mr. Holt. An attorney in Kansas City, Mo.

" Pt. 13, R. 6662, 6668.

" Mr. DeBuchananne testified that a Mr. Hill, president of the Abraham Lincoln Life Insurance Co.
desired to buy Providers and insisted upon Mr. DeBuchananne selling his interest. An arrangement for
the sale was made and a $80,000 down payment was made. After the formalities of the deal were well
under way and stockholders meetings called to ratify the contemplated reinsurance transaction, Mr. Hill
refused to pay further on the purchase price and demanded that the company be turned over to him for
$80,000. Mr. Hill threatened to have the insurance examiners called in to examine the affairs of Providers.
Mr. DeBuchananne refused to sell on Mr. Hill's terms and was obliged to bring Mr. Merritt in with him
in order to raise the cash nece.ssary to efifect the $80,000 repayment (Pt. 13, R. 667&-6681).

35 Pt. 13, R. 6682.

3' Pt. 13, R. 6619, 6683.

" Pt. 13, R. 6619, 6620. In a subsequent oflScial examination report which Mr. Herndon submitted to
the Kansas Insurance Department tfiis item was reported as "legal expense" without qualification or
explanation (pt. 13, R .6620) .

CONCENTRATION OF ECONOMIC POWER m

Mr, Gesell. Now, why was the check drawn to Mr. Willbrand's order?'

Mr. Holt. Mr. Herndon didn't want the records of the company to show that
he received a commission in this reinsurance matter.

Mr. Gesell. Did he so state that to you?

Mr. Holt. He stated that in a directors' meeting.
. Mr. Gesell. And accordingly the check was made payable to this attorney?

Mr. Holt. That is right.

Mr. Gesell. Did the directors approve of that procedure?

Mr. Holt. Yes.

Mr. Gesell. How did that transaction appear on the books of the company?

Mr. Holt. I don't recall. I imagine it was charged to the legal e.'cpense.

After the assets of Providers Life had been taken over pursuant to
the reinsurance contract, it was found that they had been miscal-
culated and were deficient in the amount of $124,000. In addition
certain securities in the Providers assets taken over pursuant to the
contract were of poor quality and would have been found to be prac-
tically worthless if they had been inspected at the time in good faith.
Of particular importance in this connection were certain mortgages
on property in soutiieastern Missouri which came in-to the Federal
Reserve portfolio at a valuation of $246,000. These mortgages were
in the names of Negro straw men and when valued at the time of
the Federal Reserve failure were written down by over $100,000.^*

Immediately after the reinsurance of Providers, the Federal Reserve
Life began to rewrite the Providers' policies in order to get them on a
basis more favorable to itself. The rewriting contract was given to
the Federal Agency Investment Co., which, it will be remembered,
was owned by Mr. Gregory, president of Federal Reserve. The
Agency Investment Co. employed Mr. E. W. Merritt, Jr., to do the
rewriting. Commissions in the amount of $108,420, taken out of the
reserve belonging to Providers' policyholders, were paid to the Agency
Investment Co. for rewriting the business; of this amount Mr. Merritt
got 85 percent; the Federal Agency Investment Corporation got 10
percent, and Mr. Herndon got approximately 5 percent.^* Mr.
Vernon B. Holt, formerly an ofl&cer and director of Federal Reserve
Life, was questioned as to the reasons for Mr. Hemdon's participation
in this commission:^"

Mr. Gesell. That $5,000 was in addition to the nine thousand five hundred
odd dollars he got through the Willbrand transaction, was it not?

Mr. Holt. Yes.

Mr. Gesell. Now, what did Mr. Herndon do to earn this $5,000?

Mr. Holt. He got the insurance department of Kansas to approve the rewrite
contract.

Mr. Gesell. That was the quid pro quo? ■

Mr. Holt. Yes, sir.

Mr. Gesell. How do you know that, Mr. Holt?

Mr. Holt. Well, I was active, with Mr. Gregory, in the management of the
company and I had a thorough knowledge of that 5 percent.

Mr. Gesell. Were you present when the bargain was made? Did you hear
Mr. Herndon say that that wTi what he would do for this quid pro quo?

Mr. Holt. No; I don't recollect being present. It was just common knowl-
edge between Mr. Gregory and myself.

38 Pt. 13, R. 6620, 6621, 6651, 6681, 6682.
3» Pt. 13, R. 6621, 6623, 6624. 6683.
<« Pt. 13, R. 6623.

112 CONCENTRATION OP ECONOMIC POWER

Mr. Gesell. Did Mr. Gregory tell you that?

Mr. Holt. Yes.

Mr. Gesell. Did you talk to Mr. Herndon about it?

Mr. Holt. I even gave him some checks from the agency on part of that
commission.

Mr. Gesell. You remember giving him the checks?

Mr. Holt. Yes.

Mr. Gesell. But did you talk to him about why he was getting it?

Mr. Holt. Yes.

Mr. Gesell. What did he say?

Mr. Holt. I don't remember. I know I talked to him, of course, but I can't
remember any conversation like that.

Mr. Gesell. And you know from your acquaintance and transactions with
Mr. Gregory and Mr. Herndon at that time that was the reason why he received
this 5-percent participation.

Mr. Holt. That is right.

Mr. DeBuchananne assisted' Mr. Merritt with the rewriting work
and was in charge of about 15 agents concentrating on the pohcy trans-
fers in and around Chicago. He spUt a percentage of the commissions
with Mr. Merritt.*^ Some pohcyholders involved in the operation
complained. The reasons for these "kickbacks" as they were called
were made apparent in a letter Mr. D. H. Holt wrote Mr. Merritt at
the time. The letter stated in part:*^

The representative in the field, as a .rule, is interested only in the present and
in his commission in the immediate placing of business. The transfer men are
no exception to this rule. They are anxious to place a large number of new
poUcies each day for the purpose of making the daily earnings more attractive.
If they can put it over without a proper discussion of the principles back of it,
they want to do that because it is traveling the rcjad of least resistance. But this
is where trouble for the Federal Reserve Life Insurance Co. begins.

We have them (Providers' policyholders) now coming into the office, telling us
stories of seeming duress and without any knowledge of what the change means to
them. These people, as a unit, believe that the management of the Providers
has been to rob them of their rights and of their cash, and they believe that this
transfer is the last stroke to take their money away from them and to put them in
a position where their insurance will not be effective.

Some of the agents will go into a home with the policy of some member of the
family, and if this policyholder be not present the agent will require some other
member of the family to get the policy, get that member of the family to sign the
cash surrender certificate, to sign all other papers in connection with the transfer
take up the old policy, leave the new one, and return the case to the office here as
a completed case and congratulating himself on the fact that he made a sale.
Then the next day in comes the irate policyholder and states that the whole process
was one of duress and he demands that the old poUcy be returned and that his
status as before be established. I fear this process is being done in a more general

<■ Pt. 13, R. 6683, 6684. Mr. Merritt misrepresented the terms of his contract with Federal Agency In-
vestment Co. to his associate, Mr. DeBuchananne, who understood that Mr. Merritt had only a 30-percent
contract when in fact he had an 85-percent contract. Mr. DeBuchananne received a 3.75- or 4-percent com-
mission. Ibid.

« Pt. 13, exhibit No. 134&-4.

CONCENTRATION OF ECONOMIC POWER 113

way than is indicated by the specific case which turned up here at the office, and
if it is sometime down the line, we may have serious trouble with these people
whose policies have been taken up and new policies, by unauthorized signatures
of people whom the agents know are not legally qualified to sign same.

This work can be done in the right way, and if it is, there will be scarcely any
comeback and this is the way we want it done. Yesterday we had a case where
the policy of Pavil Gofron, 2617 West Haddon Street, was brought into the office
by a son. This young fellow said his father was very irate and wanted his old
policy returned. He said the agent forced his mother to give up the old policy,
the father's policy, in his absence — and sign all the papers. * * *

The Providers rewrite was not unduly hindered by these objectors,
however, and was completed in due course.

In November 1926 the Federal Reserve reinsured the business of
the Union National Life Insurance Co. of Kansas City, Kans.,
another company which Mr. Gregory had organized. After it had
been in business only a few years, Mr. Gregory had attempted unsuc-
cessfully to merge it with the Federal Reserve. In this connection
a third issue of 10,000 shares of Federal Reserve stock was authorized;
2,000 shares of this stock were issued to Gregory and others, and 8,000
shares were distributed to stockholders of Union National in exchange
for their Union National stock. The Federal Reserve stock was is-
sued on the basis of $15 a share, and it was planned that it should be
trusteed following the exchange and sold to policyholders in the same
manner as the first two issues. On the completion of the exchange the
two companies were to be merged. At this juncture, however, the
Kansas Insurance Department announced that such a merger was
illegal under the Kansas statutes, and required that the exchange of
stock be reversed and the affairs of the companies unscrambled.^^

This left the Federal Reserve with 8,000 unsold shares of stock.
They were promptly sold to Mr. Gregory for $10 a share.'** A plan
was then devised for Federal Reserve to reinsure the business of the
Union National. In furtherance of this plan, Mr, Gregory personally
exchanged Federal Reserve stock, at a valuation of $50 a share, for
the stock of Union National. The stock for which he got $50 a share
was the same which he had just bought from his company, Federal
Reserve, for $10 a share.*''

Although the Kansas Insurance Department had refused to approve
the Federal Reserve-Union National merger, it interposed no objec-
tion to a proposal that the companies be consolidated through rein-
surance. Mr. Hemdon was very active at the time, in assisting Mr.
Gregory to work out these transactions. On November 26, 1926,
Mr. Gregory wrote Mr. Hemdon a letter' which accompanied 1,000
shares of Federal Reserve stock. In this letter Mr. Gregory stated it
was agreed that he might repurchase the shares before July 1, 1927,

" Pt. 13, R. 6621-6628.

*< Pt. 13, R. 6626. Gregory did not have] the $*!0,000 necesary to pay for the stock, so he borrowed $40,000
from a bank and gave the Federal Life four checks for $10,000 apiece for the other $40,000. These checks were
carried by the company, as cash, until several months later when Gregory was able to make them good.
Id.

«' Pt. 13, R. 6627.

114 CONCENTRATION OF ECONOMIC POWER

at $25 a share, or $25,000.** The record is not entirely clear on the
consideration prompting this payment. Mr. Vernon B. Holt who
wrote the letter for Mr. Gregory and who was present at the time the
agreement was made between Mr. Gregory and Mr. Herndon testified
that it was in consideration of Mr. Herndon obtaining the approval
of the Kansas Insurance Department to the reinsurance agreement."
Mr. Herndon, on the other hand, though testifying that he was unable
to recall definitely the circumstances surrounding the transaction
said he assumed it had relation to expert assistance which he rendered
Mr. Gregory in working out the arrangement for reinsurance and the
unscrambling of the previous attempt at merger. He denied that the
payment had any relation to influence which he was in a position to
bring to bear on the Kansas Department and that he had no conver-
sations with the Kansas Insurance Department in this connection.**
It is clear, however, that Mr. Gregory did repurchase 500 of the
1,000 shares for $12,500 and that Mr. Herndon sold the remaining
500 shares for $10,000, thus realizing from the transaction a total
sum of $22,500. Accounting for the Herndon payment as an expense,
Mr. Gregory's profit on the Union National transaction was $80,000.*^

In 1927 Mr. Gregory becanie ill and was unable to attend to the
business of the company, Mr. Herndon, with the knowledge of the
Holts, undertook to "broker" the company. In his search for men
who would be willing to make the necessary investment, he first went
to the Royal Union Life Insurance Co. of Des Moines, Iowa. He
had reinsured other companies into the Royal Union in the past and
was able to obtain a proposal which, however, did not meet the
requirements of the Holts and which fell through partly for this
reason and partly because the Royal Union wished to move the home
offices of the company from Kansas to Des Moines, Iowa.^°

It was at this juncture that Mr. E, W, Merritt, Jr., and Mr. Massey
Wilson were brought into the negotiations.^^ Mr. Merritt, who will

« Pt. 13, R. 6628. This letter read in its entirety as follows (pt. 13, R. 6629):
Colonel W. K. Herndon City.

Dear Qolonel Herndon: I hand you herewith 10 certificates of capital stock of the Federal Reserve Life
Insurance Co. numbered as follows, to wit: 1110, 1111, 1112, 1113, 1114, 1115, 1116, 1117, 1118, 1119, each for
100 shares— total 1,000 shares.

Said certificates stand on the books of the Federal Reserve Life Insurance Co. in my name, but said
certificates have been signed in blank by me.

Eaid certificates shall be returned to me by you and shall remain in my possession until July 1, 1927, and
then they shall be delivered to you. However, I am to have an option on these shares from you at the
said date— July 1, 1927— at the price of $25 a share.

If for any reason 1 cannot raise the money at that time to take up all the said shares, you are to deliver
to me, at the said price of $25 a share, all the said shares for which I can pay you, and then I am to have an
option on any remaining shares, at the price of $25 a share, if I can arrange satisfactorily to you the payment
for my remaining shares.'
Sincerely yours,

W. H. Gregoet.

" Pt. 13, R. 6628.

" Pt. 13, R. 6712, 6713.

« Pt. 13, R. 6629, 6712.

»o Pt. 13, R. 6634, 6635, 6720-6''25; exhibit No. 1348-7. Mr. Herndon testified that at one time he was
"bird-dogging" for Royal Union trying to find companies they might reinsure and that he was compensated
by a salary contract which guaranteed him $50,000 at the rate of $1,000 a month and expenses of $35 per diem
(pt. 13, R. 6730-6732). Several years later Mr. Herndon became chairman of the e.xecutive committee of
Royal Union. The company was on the verge of receivershin and extravagant expenditures were being
closely watched by the insurance commissioner. The submission of a voucher for $1,902.32 to cover Mr.
Herrfdon's expenses for medical treatment precipitated the receivership (pt. 13, R. 6755).

«i Pt. 13, R. 6634, 6635, 6690, 6723.

CONCENTRATION OF ECONOMIC POWER 115

be recalled as an old associate of Mr. DeBuchanarme in transactions
which have been previously -described, was at this time owner of the
Reserve Co. of Kansas City, Kans., a holding company which owned
100 percent of the stock of United States Reserve Life Insurance Co.
Mr. Wilson, who will be recalled as a principal officer of the Interna-
tional Life of St, Louis, had sold out his interest in that company for
one-half a million dollars profit after it had successfully completed
approximately 20 reinsurance transactions and was at the time
engaged in building up another "great company" operating through a
holding company known as Insurance Investment Corporation,"

Mr. Henidon conferred with Mr. Merritt in January 1928, and after
some negotiation Mr. Merritt agreed to purchase 8,000 shares of
Federal Reserve stock for $375,000. These 8,000 shares were made
up of two blocks, a block of 5,000 shares which was owned by Mr,
Gregory, and a block of 3,000 shares which was held by Mr. D, H.
Holt as trustee awaiting possible future sale to Federal Reserve
policyholders. In order to put over the deal it was necessary to
persuade Mr, Gregory to dispose of his 5,000 shares. In addition Mr.
Gregory was still the beneficiary of the exclusive agency contract
which had been made out in his favor and it was not expected that
Messrs. Wilson and Merritt would be willing to buy into the manage-
ment of the Federal Reserve unless this contract ^ould be canceled.
Mr. Herndon discussed the matter with Mr. D. H. and Mr. V. B,
Holt, who agreed for a price to undertake to persuade Mr. Gregory
to give up his interest in the block of 5,000 shares and to cancel his
contract." Mr. V. B. Holt described his activities in this connection
as follows:"

Mr. Gesell. And I suppose the proposition was to get Mr. Gregorj' to let
go of his shares.

Mr. Holt. That was it.

Mr. Gesell. Will you tell us what took place in that connection?

Mr. Holt. I went to Mr. Gregory's every day for months while he was ill.
Finally we determined, Mr. Herndon and I determined, that I would tell him
tbat the insurance department demanded his resignation, demanded that he give
up his general agency contract, and that he sell 5,000 shares of his stock.

Mr. Gesell. You mean to say that Mr. Herndon told you to tell that to
Mr. Gregory?

Mr. Holt. That is right.

Mr. Gesell. Did you'tell that to" Mr. Gregory?

Mr. Holt. Yes.

Mr. Gesell. "Who was with you at the time?

" Mr. Wilson sold International Life to a group which operated the company for 2 years and then sold
the company in turn to a Mr. Toombs who took $5,600,000 of the company's money and caused it to fail.
Mr. Toombs was convicted and Mr. Wilson appointed receiver (Pt. 13, R. 6701).

" Pt. 13, R. 6634, 6635, 6720-6726. In this connection Mr. Massey Wilson testified (Pt. 13, R. 6690):

"Mr. Gesell. Was it not at your instance that arrangements were made to get Mr. Gregory out of his
contract with Federal Reserve?

"Mr. Wilson. Yes; I think before I was willing to go in as president I wanted that contract of
Mr. Gregory's out of the way somehow, and there were negotiations about it.

"•Mr. Gesell. You told Herndon that you wanted Gregory out of the way before you would buy in on
the stock?

"Mr. Wilson. Before 1 was willing to loan the money on the stock I wanted that contract canceled.

"Mr. Gesell. Why was that?

"Mr. WiisoN. It was a burden on the business, and with it out of the way it left the business that much
more profitable to the company. The company had that much better chance to win with it out of the way."

»< Pt. 13, R. 6636. •

115 CONCENTRATION OF ECONOMIC POWER

Mr. Holt. Nobody.

Mr. Gesell. You went and saw Mr. Gregory alone?

Mr. Holt. That is right.

Mr. Gesell. Did you tell him Mr. Herndon had told you the Insurance De-
partment wanted him out of the picture?

Mr. Holt. Yes.

Mr. Gesell. Mr. Herndon was at that time interested in this deal?

Mr. Holt. That is right.

Mr. Gesell. What did Mr. Gregory say?

Mr. Holt. Mr. Gregory said — he wanted to know what I was going to get
out of it.

Mr. Gesell. Did you tell him?

Mr. Holt. No * * *.

Mr. Gregory agreed to sell out his stock interest and to cancel his
agency contract provided he could continue to receive the renewal
commissions provided thereunder.^^

Having obtained Mr. Gregory's consent the transaction was con-
summated. Three hundred and seventy-five thousand dollars repre-
sented by notes in the amount of $90,000 and cash in the amount of
$285,000 was received from the Reserve Co., which, it will be recalled,
was owned and controlled by Mr. E. W. Merritt, Jr. This sum was
divided as follows:

To W. H. Gregory for 5,000 shares $60,000

To D. H. Holt for 3,000 shares 60,000

To Vernon B. Holt and D. H. Holt as commission" 140, 000

To W. K. Herndon as commission 115, 000

Total 57 375,000

Coincident with the transaction Mr. Gregory resigned as president
of Federal Reserve, his exclusive agency contract was canceled and
Mr. E. W. Merritt and Mr. Massey Wilson became officers of the
company at salaries of $18,000 and $7,500 per annum, respectively;^^

It is of interest to trace the manner in which the Reserve Company
obtained the money necessary to purchase this substantial stock
interest in Federal Reserve. First it was arranged that its subsidiary,
the United States Reserve Life Insurance Co., would sell mortgages
to Federal Reserve for $107,0^^0 and in this fashion cash became avail-
able to the United States Reserve Life Insurance Co., which enabled
it to lend slightly over $100,000 to the Reserve Corporation.^^ In
addition, the Reserve Co. borrowed $125,000 from Air. Massey
Wilson, who loaned this amount against the 8,000 shares as collateral.
The sum loaned by Mr. Wilson was advanced in part from the Insur-
ance Investment Corporation and the Reserve Co.'s note for $125,000,
together with the 8,000 shares, passed to the Insurance Investinent
Corporation or one of its subsidiaries, thus bringing the Federal
Reserve into common o,wnership with other life insurance companies

«Pt. 13, R. 6636.

M Mr. V. B. Holt gave $1,000 of his commission to a Mr. Harden, assistant secretary of Federal Reserve.
Mr. Holt testified (pt. 13, R. 6639):

"He conceived an idea that he would like to be able to broker this insurance company, and I told Kim that
if he would just leave it alone I would see that he got a little extra compensation. That was the extra com-
pensation."

" I^t. 13, R. 6637, 6639, 6724-6726.

»«Pt. 13, R. 6639.

M Pt. 13, exhibit No. 1348-2.

CONCENTRATION OF ECONOMIC POWER H'J

owned by the Insurance Investment Corporation.^" An additional
sum was obtained by arranging for the Federal Reserve to reinsure
the business of the United States Reserve Life Insurance Co., thus
enabling Mr. E. W. Merritt, Jr., who was in a position to control
both the reinsured and reinsuring company, to obtain a contract to
rewrite the policies of the United States Reserve Life. Mr. Merritt
received commissions on this rewriting amounting to $83,997.48.^^

The final and largest Federal Reserve reinsurance deal took place
in 1929 when that company reinsured the policies of the Farmers
National Life Insurance Co., of Huntington, Ind. This was a pros-
perous company which operated in five States and had assets in the
neighborhood of $3,000,000 and insurance in force of approximately
$24,000,000. The opportunity to acquire Farmers National was
developed by Mr. Paul L. Temple, who, it w^ill be recalled, had been
associated with Mr. DeBuchananne in the North American Co.
venture. Mr. Temple learned from a Mr. Presnall, an officer of the
Farmers National, that the president of that company, Mr. Billiter,
was anxious to dispose of his holdings at a price of $30 a share.
Though Mr. Temple did not know Mr. Massey Wilson except by
reputation, he telephoned him long distance and received Mr. Wilson's
authority to negotiate the reinsurance on his behalf. As the first
step in these negotiations a 30-day option in favor of Wilson was
obtained for the price of $2,000.^^ In order to purchase control
$400,000 was required and this was a sum in excess of that which Mr.
Wilson and his associate, Mr. Merritt, were readily able to raise.
Accordmgly it was decided that Federal Reserve would lend $400,000
to Mr. F. E. Bushman, a Detroit real-estate operator, with the under-
standing that Mr. Bushman would in turn lend this sum of money to
Mr. Wilson and Mr. Merritt to enable them to acquire an interest in
Farmers National. The $400,000 loan was made, secured by grossly
inadequate collateral and Mr. • Wilson and Mr. Bushman went to
Chicago to consummate the Farmers National transaction.^^

During the period of "the negotiations Mr. Temple was still in
partnership with Mr. DeBuchananne, though Mr. DeBuchananne's
association with Mr. Temple had not been revealed to the officials of
Farmers National who stated that they were anxious to handle the
transaction with responsible people and were not willing to deal with
Mr. DeBuchananne or other persons of his Llk. As a result, Mr.
DeBuchananne did not participate in working out the details of the
reinsurance arrangement. Just prior to the completion of the formal
papers, however, he declared himself in and shared commissions with
Mr. Temple and Mr. John V. Sees, a director of the company and
personal attorney for Mr. Billiter. Mr. Sees' participation in the
arrangements was limited to the preparation of a letter to stock-
holders offering tc purchase their shares. Messrs. Temple, .De-
Buchananne and Sees each received a $27,000 commission from
Mr. Wilson.^*

Tt. 13, R. 6689, 6690. Having obtained access to the Federal Reserve stockholders' lists, Mr. Wilson
was able to acquire additional shares of Federal Reserve stock by arranging for employees of Insurance
Investment Corporation to approach Federal Reserve stockholders and switch them into preferred
stock of Insurance Investment Corporation or purchase their holdings outright (pt. 13, R. 6690, 6691).

•«> Pt. 13. exhibit No. 1348-2.

M Pt. 13, R. 6738, 6739.

" Pt. 13, R. 6641, 6647, 6648.

M Pt. 13, R. 6739, 6740. Mr. Temple gave $1,600 of his commission to Mr. DeBuchananne's brother, George,
who had not had any participation in the Farmers National negotiations (p. 13, R. 6741).

llg CONCENTRATION OF ECONOMIC POWER

Immediately after Mr. Wilson and Mr. Merritt acquired coDtrol of
the Farmers National, Mr. Merritt was made its president and
shortly thereafter the company was reinsured into the Federal Reserve.
Presumably to compensate Mr. Bushman, an arrangement was worked
out appointing him an investment agent for Federal Reserve, which
undertook to lend $1,750,000 on mortgages provided by Mr. Bushman.
It developed at the time the company failed that losses of over one
and a quarter million dollars were suffered on mortgages subsequently
submitted by Mr. Bushman under this arrangement, which included
mortgages made on properties in which he was personally interested.''^

In addition to these various reinsurance transactions, other examples
of mismanagement of the company were disclosed. Some of these
examples may be m'entioned briefly. It appeared that the company
had failed to maintain a sufficient reserve deposit with the treasurer
of the State of Kansas as required by Kansas law; that many improper
mortgage loans had been made; that salary was paid to an officer of
the company during a time he was not fulfilling the functions of his
office; that numerous offices had been created and salaries paid to
officers far in excess of the value of the services rendered; that large-
company balances were maintained in. certain banks where officers
of the company were heavily indebted personally; that $50,000
borrowed by the company was concealed on its books and records;
that mortgages were released without collecting interest in full; that
records were inaccurately and carelessly kept; and that a fee of
$15,000 had been paid to an attorney who rendered no service to the
company.^^

One of the most striking features of the Federal Reserve failure was
the laxness of State supervision and the extent to which mismanage-
ment was able to continue under the very eye of representatives of
the State insurance departments. It appeared that during the time
from January 17, 1921, to April 1929, 7 separate and distinct
examinations of the affairs of the company were made either by the
Kansas insurance department acting alone or with representatives
of a group of States in convention. In 6 instances these examinations
were in charge of Mr. W. K. Herndon, special examiner for the
Kansas department.^^ Mr. Herndon had had considerable experi-
ence as an insurance examiner, having represented the departments
of the District of Columbia, Texas, Pennsylvania, Nebraska, Indiana,
Wyoming, and Colorado, as well as Kansas.^^ There can be no question
from the testimony that he was more interested promoting his personal
advantage than he was in examining the affairs of the Federal Reserve
to determine whether or not the interest of the policyholders were
safeguarded and the laws of the State of Kansas complied with.
The evidence reviewed above discloses that he received over $160,000
from transactions directly involving the Federal Reserve and other
evidence introduced in the record made it clear that he was paid
sums ranging as high as $50,000 lor handling reinsurance transactions

•» Ft. 13, R. 6694, 6703, 6704. Mr. Wilson testified that this contract wassufflcient to absorb all investment
requirements of Federal Reserve and that in effect it made Mr. Bushman the company's investment agent.
Mr. Wilson had had close business relations with Mr. Bushman prior to the execution of this contract (p. 13,
R.6694).

«« Ft. 13, R. 6654-6657; exhibit No. 1348-3.

«' Ft. 13, R. 6610, 6709.

«8 Ft. 13, R. 6708.

CONCENTRATION OF ECONOMIC POWER Hg

during this same period for other life insurance companies. ^^ In
fact, Mr. Herndon testified that in the period from 1920 to 1928 he
had procured from 15 to 20 reinsurance deals and that he had gained
information which was of assistance to him in this connection by
reason of his access to company records as an official examiner for
the Kansas Department.^" He testified that his superior, Mr.
William R. Baker, Commissioner of Insurance for the State of Kansas,
had no knowledge of his personal transactions, and as has been indi-
cated, Mr. Herndon was careful -not to disclose these transactions
in the ofl&cial reports which he rendered on the company's activities.^'
The evidence disclosed, however, that Commissioner Baker was
reelected several times during his incunabency partly through the
efforts of Federal Reserve which campaigned on his behalf and it is
clear that the Kansas insurance department treated the examination
of the Federal Reserve in a perfunctory^ manner, being willing on
occasions to accept reports from Mr. Herndon when these reports
had been prepared for his private purposes and not commissioned as
examinations to be made for the specific purpose of checking the
company's activities.^^ It is also interesting to note that the Federal
Reserve in 1929 unsuccessfully campaigned for Mr. John B. Smith
as commissioner, and. with Mr. Baker's retirement at the end of his
term, Mr. Charles Hobbs, the present commissioner of Kansas,
came into office. Mr. Hobbs had been an actuary in the Kansas
department prior to this time and on the basis of information which
had come to him from "stool pigeons who were in the company" he

«« Pt. 13, R. 6618-6620, 6622, 6623, 6628, 6683, 6711, 6712, 6715, 6716, 6731.

" Pt. 13, R. 6729, 6730. Mr. Herndon testified in this connection (pt. 13, R. 6719, 6720):

"Mr. Qesell. And do I understand your position to be that the fact that you were also interested in the
promotional activities of the company would be of no importance, provided your reports were fair and
complete and accurate in every respect?

"Mr. Herndon. That is right.

"Mr. Qesell. Is it your experience that that dual- activity of insurance examiners is rather a frequent
situation?

"Mr. Herndon. Rather freqiletit, I ^ould say; yes.

"Mr. Qesell. You found there were other examiners that were having personal transactions on the side
as well as yourself?

"Mr. Herndon. Yes; they only worked occasionally for these States.

"Mr. Qesell. As a matter of fact, I suppose these commissions you received in the Provider deal were
far more lucrative than any per diem you received for the examination itself in the Kansas department.

"Mr. Herndon. Much more so.

"Mr. Qesell. I was even wondering why you wanted to fool with the examinations.

"Mr. Herndon. There is always that in-between time when we have to have bread and butter.

"Mr. Qesell. Yes; and then I suppose also you get to find out quite a lot about what companies are for
sale and what companies are in difficulty if you are going around for the Kansas department examining
them.

"Mr. Herndon. Certainly you know all about the company you are examining and you hear about
many others.

, "Mr. Qesell. Did you quite frequently find that as a result of your entree to a company as the represent-
ative of the Kansas department you were able to set in motion a series of transactions which turned out to
be to your personal benefit?

"Mr. Herndon. No; I don't recall that generally.

"^r. Qesell. It certainly happened here, did it not?

"Mr. Herndon. Yes.

"Mr. Qesell. Were there any other companies? What about some of these Kansas companies you
reinsured ia the Royal Union, the same kind of situation there, wasn't it?

"Mr. Herndon. Very largely so."

" Pt. 13, R. 6619, 6728, 6729. Mr. Herndon testified that he had some of his information "unofficially"
and saw no reason for putting it in his official reports to the State (pt. 13, R. 6729).

" Pt. 13, R. 4719.

120 CONCENTRATION OF ECONOMIC POWER

had knowledge of some of the transactions which have been reviewed
above. Accordingly, he initiated a special examination of the Federal
Reserve which was conducted by representatives of the Kansas
de|)artment in conjunction with the representatives of the Kansas,
Missouri, Illinois, and Indiana departments.^^ In spite of gross
irregularities revealed by this examination the report was suppressed
and not made public until the hearings before the Temporary National
Economic Committee. A superficial change of management was
made at the suggestion of the Kansas department following the
examination. Messrs. Wilson and Merritt resigned as officers but
were allowed to retain their stock control of the company.^* The
preferential loan agreement with Mr. F. E. Bushman remained in
effect and Mr. F. E. Bushman's §on, Mr. Frank Bushman, became
president of the company, which continued in business. Another
examination was made by the insurance department in 1933. This
examination again revealed mismanagement but the report was also
suppressed and no action was taken by the State commissioners to
put the company into receivership. It was not until 1936 that a
receivership was obtained in a Federal court action. After an ex-
pensive receivership the company was reinsured in the Occidental
Life Insurance Co. with a lien of 50 percent on its reserves. The
indicated initial loss to policyholders was $2,690,000.^^

B. MISSOURI STATE LIFE INSURANCE CO. AND AFFILI-
ATED COMPANIES

The failure of the Federal Reserve was but 1 of 1«9 life insurance
company failures during the period from 1930 to 1939, each of which
resulted in an indicated initial loss to. policyholders of over $1,000,000
and, as has been indicated, but 1 of 39 company retirements during
this period which brought a loss to policyholders.''® The largest fail-
ure involved the 3 interrelated receiverships of the Intersouthern Life
Insurance Co. of Louisville, Ky., The Security Life of America of
Chicago, 111., and Missouri State Life Insurance Co. of St. Louis,
Mo., which resulted in a combined indicated initial loss to policy-
holders of $51,224,000.^^ The history of these failures is one of
financial manipidation. Some of the more important transactions
are reviewed below: ^^

The series of events which led to these failures may best be described
by commencing with the organization of Caldweir& Co., on Septem-
ber 26, 1917. Caldwell & Co. was incorporated under, the laws of

" Ft. 13, R. 6615, 6645, 6658, 6659.

'< Pt. 13, R. 6644, 6645. Mr. Wilson contributed approximately $300,000 to surplus at about this time.
This money was immediately loaned out under the Bushman contract. Mr. Wilson had business interests
with Mr. Bushman at the time (pt. 13, R. 6646, 6694-6696).

" Pt. 13, R. 6644-6659, 6692, 6693; pt. 28, exhibit No. 2336. A civil suit was brought against various prin-
cipals in the Federal Reserve transactions but was settled out of court. As to Mr. Herndon, the matter
was settled for $5,000 (pt. 13, R. 6652, 6653).

'« Op. cit. supra, note 3 at p. 102; pt. 28, exhibit Nos. 2336, 2338.

" Pt. 28, exhibit No. 2336; The Intersouthern Life Insurance Co. with assets of $22,201,913 and insurance
in force of $111,396,660 went into receivership on April 16, 1932. The .Security Life of America, with assets
of $10,456,993 and insurance in force of $62,270,054, went into receivership on April 18, 1932. The Missouri
State Life with assets of $155,248,182 and insurance in force of $673,776,412 went into receivership on August
28, 1933.

'8 The statement which follows is based upon an inquiry conducted by an attorney attached to the stafi
of the commission who made a special study of available records relating to the failures. Practically all
information set forth herein is a matter of public record.

CONCENTRATION OF ECONOMIC fOWEK 121

Tennessee for the purpose of dealing in stocks and bonds. ^^ All of its
capital stock was owned by Mr. Rogers Caldwell. During its early
history it was active in handling municipal bond issues.

Caldwell & Co. became interested in the life insurance business as
early as 1923.^'^ In 1926 a syndicate consisting of Caldwell & Co.,
Fourth and First National Co. and the American National Co. was
formed to purchase the control of Missouri State Life Insurance Co.
The Fourth & First National Co. was a security affiliate of The Fourth
& First National Bank of N^ashviUe, Tenn., which in turn was control-
led by Mr. James E. Caldwell, the father of Mr. Rogers Caldwell.
The American National Co. was a security afl&liate of the American
National Bank of Nashville, Tenn., which was controlled by a Mr.
Paul Davis. ^^

At this time the outstanding capital stock of Missouri State was
200,000 shares, par value of $10 per share. 86,000 shares were owned
by the president, Mr. M. E. Singleton, and his family. During
February 1926, Mr. Rogers Caldwell acquired the holdings of the
Singleton family and other holdings totaling 148,000 .shares.^^ The
purchase price was $100 per share for the Singleton stock and $75
per share for other stock. An earnest money deposit of $2,000,000
was put 1%) by Mr. CaldweU, each member of the syndicate furnishing
one-third of the cash required. The stock received was pledged with
a New York bank to guarantee fuU payment.*'

To raise its share of the earnest money and for incidental expenses,
Caldwell & Co. borrowed $1,190,000 from Missouri State,*" the very
company whose shares were being purchased.

The 148,000 shares of Missouri State stock acquired by the syndi-
cate were placed in the Insurance Securities Corporation, a holding
company organized January, 1927. Capital stock of this holding
company consisting of 2,250 shares was divided equally between the
three members of the syndicate.*^ On February 1, 1927, Insurance
Securities Corporation issued $11,250,000 of 1-year notes and pledged

" Minute-book containing minutes ot meetings of board of directors of Caldwell & Co.

'" In 1923 Caldwell & Co. entered the life insurance field through the purchase of the Cotton States Life
Insurance Co. of Memphis, Tenn., a small company with insurance in force of about $8,000,000. In 1925 it
acquired the North American Life Insurance Co. of Omaha, Nebr., a company with $13,000,000 of insurance
in force.

" Price, Waterhouse & Co. audit report of Insurance Securities Corporation, dated June 30, 1928.

" Price, Waterhouse & Co. audit report of Caldwell & Co., dated June 30, 1926.

M Price, Waterhouse & Co. audit report of Insurance Securities Corporation, dated June 30, 192C.

*< The records of Missouri State indicate that two collateral loans were made to Caldwell & Co. on Febru-
ary 15, 1926, one loan for $740,000 secured by 295,452.62% shares of stock of the Inter-Southern Life Insurance
Co., and another for $450,000 secured by 99,662 shares of North American National Life Insurance Co. stock.

Minutes of the executive committee of Missouri State, which was composed of Mr. M. E. Singleton and
two other directors, reflect the approval of the $450,000 loan on February 16, 1926. On that date, however,
Caldwell & Co. owned no Inter-Southern stock. The $740,000 loan is not shown in the minutes until the
application appears on the minuter of April 14^ 1926. These minutes show that Mr. Ben C. Hyde, superin-
tendent of insurance for Missouri, was invited to the meeting and after a conference with him the loan of
$740,000 to Caldwell & Co. was approved. The executive committee on April 14 was composed of Messrs.
M. E. Singleton, Rogers Caldwell, J. S. Smith, Paul M. Davis, and Hillsman Taylor. Mr. Davis was
president of American National Co. and Mr. Taylor was executive vice president of Missouri State and
formerly an officer of other Caldwell-controUed companies.

These loans were made despite the fact that the bylaws of Missouri State specifically prohibited loans to
officers or directors, whether n;ade directly or indirectly. Section 26 of the bylaws of Missouri State Life
Insurance Co. stated:

"No director or olHcer of the company shall directly or indirectly borrow the funds of the company or
use the same except to pay losses and other obligations and expenses incurred by the company."

" The American National Co. sold its Interest in Insurance Securities Corporation to Caldwell & Co.
and Fourth & First National Co. in 1927 and its 750 shares were retired by cancelation. '
264763— 41— No. 28 9

122

OONCENTRATION OP ECONOMIC POWER

the 148,000 shares of Missouri State stock as security, placing them
with the First Saving? Bank & Trust Co. of Chicago as trustee under
the 1-year no 3s.*® Coincident with this transaction, the balance of
the ptirchase price was paid and Mr. Singleton retired from the
presidency of Missouri State." Mr. Hillsman Taylor was installed
as president in his stead. ^^

Shortly after the syndicate purchase of Missouri State in 1926 the
investment policy of that company shifted sharply from real estate
mortgages to bonds and other securities. The majority of the bonds
purchased by Missouri State during the period from 1926 through
1938 were obtained from sources closely allied to its ownership. Its
total bond purchases from Mr. Rogers Caldwell, Mr. J. E. Caldwell,
and their affiliates amounted to $26,887,544, or 60.5 percent of the
total bonds purchased during tliis period. Many of these securities
were purchased at a price higher than their current market price. ^^

The Missouri State was examined jointly as of the end of 1927 by
the insurance departments of Illinois, Kentucky, Tennessee, and
Missouri. The report of "examination contained criticism of -the
company for purchasing such a high percentage of bonds from the
Caldwell interests. Nevertheless, no action was taken to recover the
•excess payments and no action except the mild criticism contained in
the report was taken to stop the practice, which continued.*" In
1930 the company was examined again and the report of examination
repeated the criticism. In later court proceedings when Mr. Hills-

8' Testimony of Timothy Donovan and exhibit 30 in General American Life Insurance Co. v. A. M.
Anderson, Receiver of National Bank of Kentucky (cited hereafter as Bank of Kentucky Case). ■

8' Minute book containing minutes of meetings of board of directors of Missouri State Life Insurance Co.

8' Taylor was made executive vice president when Caldwell acquired control. Previously he had beeii
president of Cotton States Life. During this same year the capital stock of Missouri State was increased
100,000 shares. Stockholders were given an option to purchase one share for each two shares held at a price
of $10, the par value. Under this option Insurance Securities Corporation purchased an additional 73,300
shares. In 1628 an additional 100,000 shares of Missouri State were issued. Under this issu6 stockholders
were given an option to purchase one new share at $20 for each three shares held. The bulk of these new
stock purchase rights, of course, accrued to Insurance Securities Corporation which increased its holdings
proportionately. About this same time Insurance Securities Corporation sold 125,000 shares of Missouri
State stock to Caldwell & Co. and Kidder Peabodjj Co., who were members of a joint account to sell and
distribute such stock. Because of the stock purchased under the stock -purchase rights, however, Insurance
Securities still retained control of Missouri State.

s» Bond purchases by Missouri State Life Insurance Co. from certain vendors and total purchases-from all
Sources for the years 1926 through 1930 as indicated below:

Caldwell
& Co.

Roeers ■

Caldwell

& Co.

Fourth & First

National

Co.

Nashville
Trust Co.

Total pur-
chases

1926

$148, 389. 72
4, 454, 216. 94
7. 391, 313. 08
4, 214, 170. 28
1,111,513.73

$2, 224, 076. 30

1927

$2, 628, 507. 81

3,852,900.72

1, 523, 937. 21

926, 470. 48

12,958,531.13

1928

13, 637, 610. 05

1929

9, 293, 624. 74

1930 ...

$226, 425

$409,699.68

6, 324, 842. 09

«" The preliminary report of this examination stated:

"As the amounts paid (for bonds) did not always agree with the current market value • • • your
examiners secured • • • as accurate market priCes for these bonds as of the date of purchase as can be
obtained from the data at hand, and when these prices were applied to the individual bond purchases, the
(net) overpayment above market price was.$25,046.96."

CONCENTRATION OF ECONOMIC fOWER 123

man Taylor was questioned concerning these bond purchases from
Caldwell & Co. and other associated enterprises, he stated: ^^

I have never yet seen where a man should not trade with his friends as long as
he gets as much value from them as he does from anyone else and the fact that
CaldweU & Co. were interested in here was no reason that they should not do —
that the purchase should not be made from them. I tried to deal with them just
as I did with anyone else; they had been my friends; I had been their friend and
because the insurance department criticized the purchase I did not see it was any
reason why you should turn your back on your friends and go to somebody that
you are not interested in.

Several other transactions which took place during this period
deserve special notice particularly as they contributed in various ways
to the ultimate failure of Missouri State Life. In connection with
CaldweU & Co.'s early activities it had handled municipal bonds
under depository agreements through which the purchaser agreed
that the proceeds from the sale of bonds were left on deposit in banks
acceptable to Caldwell & Co, until the funds were used to pay for
actual construction of the projects being financed. In order to pror
vide a depository for such funds as well as to obtain additional work-
ing capital for the expansion of Caldwell & Co., the Bank of Tennessee
was incorporated in 1919. The capital stock of this bank was owned
by Caldwell & Co.; it occupied the same offices and had the same
personnel as Caldwell & Co.; its deposits came to it through bond
issues written by Caldwell & Co., or from concerns in which that
company had a stock interest. The bank did little if any public
banking business.^^ At the time of the failure of CaldweU & Co. in
November 1930, Missouri State had deposits in the Bank of Tennessee
totaling $870,534.23. Those deposits were secured by certain bonds
with a par value of $600,000 and 21,000 shares of the stock of Banco
Kentucky Co.*^ The Bank of Tennessee was declared insolvent
coincident with the Caldwell & Co. faUure and the subsequent re-
ceivership of Banco Kent^ucky Co. and a general decline in the value
of the bonds securing the deposit brought about a condition which
prevented the bank receivers from being able to pay a dividend to
common creditors. As a result, Missouri State lost approximately
$700,000 of its deposit with the bank.«*

In July 1929, Caldwell & Co. in conjunction with Mr. Carey G.
Amett, organized Associated Life Cos., which was authorized to act
as a holding company for life-insurance stocks. ^^ One of the first
companies acquired by Associated Life Cos. was the Southeastern
Life Insurance Co. of GreenvUle, S. C. The purchase of the stock of
this company was arranged in the following manner: Caldwell & Co.
loaned 120,172 shares of Inter-Southem stock to Associated Life,
which the latter company pledged as collateral for a loan of $220,000

•' Deposition of Mr.HUlsman Taylor In Bank of Kentucky case. Caldwell & Co. made further use of its
relation to Missouri State when it placed with it a mortgage on the Wciolford Hotel of Danville, 111.
Caldwell & Ob. had -origiAally underwritten the bond issue on this property which defaulted and a
bondholders' committee consisting of Mr. Rogers Caldwell and two other officers of Caldwell & Co. took
over the property. This committee then secured a mortgage loan on the property of $400,000 from
Missouri State.

•? Deposition of Mr. J. D. Carter, p. 5 et seq., Bank of KejUucky ease.

•» 1930 Convention Form Annual Statement of Missouri State Life Insurance Co.
r M Id.

•• Testimony of Mr. Carey Arnett, Bank of Kentucky case.

J24 OONCENTRATION OF ECONOMIC POWER

obtained from outside sources.^^ In addition $383,000 was obtained
when Caldwell & Co. caused Inter-Southem Life Insurance Co.,
which it owned and controlled, to advance this sum against the
purchase price." The advances made by Caldwell & Co. to Associated
Life Cos. remained unsecured until 1930. At this time Associated
Life Cos. borrowed $500,000 from the National Bank of Kentucky.
This sum was represented by two $250,000 certificates of deposit in
the" bank, which certificates Associated Life Cos. turned over to
Caldwell & Co. to be held as^ security against the prior advahces.
The National Bank of Kentucl^y was controlled by Banco Kentucky
Corporation. Mr. Rogers Caldwell had obtained a 30 percfent interest
irr'the capital stock of this/corporation several months prior to the
National Bank of Kentucky's $500,000 loan to Associated Life Cos. by
selling a one-half interest in Caldwell & Co. to Mr. James B: Brown of
Louisville, Ky., in return for the 30 percent interest.^* The certificate
of deposit of the National Bank of Kentucky had been turned over to
Caldwell & Co. with the written understanding that they were to be
cashed Only inujeduction of the Associated Life Cos', loan.^® In spite
of this understanding, however, Mr. Rogers Caldwell caused Missouri
State to purchase the certificates for their face value of $500,000.^°°
The National Bank of Kentucky failed November 1930, and the
receiver refused to honor the certificates of deposit which were still
held by Missouri State. The issue as to whether the receiver is
obliged to honor these certificates remains in litigation at the present
time and the ultimate loss to Missouri State and its policyholders from
these transactions cannot now be determined.

Reference has already been made to the fact that Caldwell & Co
controlled Inter-Southern Life Insurance Co. Its interest in. this
company was acquired during the spring of 1926 only a few months
after the syndicate purchase of Missouri State. At that time Inter-
Southem Life Insurance Co. had assets of $12,803,381 and' insurance
in force of $104,671,425. • It was capitalized at $750,000 represented
by 750,000 shares of $1 par value. Caldwell & Co. pilrchased 356,954
shares of this stock at a cost, including expenses, of $760,000 and it
was this block which represented a controlling interest in the com-
paw.^''^ Shortly after coming into the dominant position, Caldwell
& Co: installed Mr. Carey G. Amett as president and arranged for the
eompany to reinsure the business of the Cotton States and the North

"» MemoraDdum written b,y Mr. T. W. Ooodloe, secretary, Caldwell & Co., obtained from files of receiver
of Caldwell & Co. ^^ _ " "

»' 1930 convention form ^nnual stfttemeat of Inter-Southern Life Insurance Co.

" Cantract and supplemental agrfeements dated May 28, 1938, relating to merger of Caldwell & Co. and
Banco Kentucky OoFporatlSn- r^^

■ " This is substantiateytj^e following letifir (ftted August 21, 1930, appearing as exhibit 6 to deposition
, of Mr. Thomas W. "Goodlne in Bank of Kentucky case:

National Bank of Kentucky,

* Louisville, Ky.
Dear Sirs: You have today granted loan of $500,000 to this company from which proceeds we have
purchased tWto $?50,000 certificates of deposit from yoor banjj in the name of Caldwell & Co.

We hereby .agree and guarantee that these certificates of deposit will not be cashed only in reduction of the
above-mentioned loan.
Yours very truly,

Associated Lii"^ CouPANiEa, Inc.,
By Thos. W. Goodlge, Secretary.
i<» Exhibits 328, 329, 250, and 333, Bank of Kentucky cast.
ii» Price, WatertiOHSe & Co. audit report of Caldwell & £o. dated June 30, 1926.

CONCENTRATrON OF ECONOMIC POWER 125

American National Life Insurance Qos.^''^ which it will be recalled
were the first two companies acquired by, Caldwell & Co. in 1923
when its interest in insurance promotiems became apparent.

On April 23, 1930, the executive committee of Inter-Southern
authorized the purchase of 116,000 shares of stock of Missouri State
at a price of $10,208,000 or $88 a share. 1°=* Of these 116,000 shares,
80,000 shares were to be purchased from Insurance Securities Co.,
22,245 shares directly from Caldwell & Co. ar i the. balance from the
Fourth and First National Bank and individuals owning that bank.^"'*
At this date Caldwell & Co. owned 713,136.29 shares of stock of the
Inter-Southern out of a total of 1,250,000 then outstanding. ^"^

To finance the purchase of the Missouri State stock Inter-Southem
increased its capital stock by over 1,000,000 shares. ^°^ Of the pur-
chase price $4,988,000 was paid in cash and the balance of $5,220,000
was paid by 1,305,000 shares of Inter-Southern stock transferred on
a basis of $4 per share. Inter-Southern did not have enough cash to '
meet the cash payment indicated above. This defect was cured in
the following manner: $4,000,000 of bonds and mortgages from its
portfolio were sent on May 21, 1930, to the Nashville Trust Co., of
Nashville, Tenn.'°^ This bank was a subsidiary of Fourth and First
National Bank and acted as collection agent for Mr. -Rogers Caldwell
and others associated with him in the stock sale.

On May 22, 1930, the executive committee of Missouri State met at
Nashville, Tenn., and approved the purchase for Missouri State of
mortgage loans in the amount of $1,590,054.59 and bonds with an
amortized -value of $2,268,263.61 from the Nashville Trust Co.^°«
These bonds were the same securities which had been used by the
Inter-Southern to pay the Caldwell interests for their Missouri .State
stock and the Missouri State was thus indirectly financing Inter
Southern's purchase of Missouri State stock. The executive com-
mittee of Missouri State which approved the purchase consisted of
Messrs. Rogers Caldwell, James E. Caldwell, and Hillsman Taylor.

W,hen the bonds and mortgages arrived in St. Louis, the home
office of Missouri State, tliey were examined by officers of the Qom-
pai>y and it was learned that a number of the mortgages and some of
the bonds were in default, in spite of the fact that the purchase price
had been computed at par plus accrued interest. The officers became
suspicious and presented their views to Mr. Hillsman Taylor, the
Missouri State president, who called their attention to a promise of
Inter-Southern to enter into an agreement to repurchase any securi-
ties on demand within 12 months.'"^ This apparently satisfied the
Missouri State officers but it did not satisfy some of its directors who
demanded a rescission of the purchase."" Subsequently a demand to
repurchase was made upon both Inter-Southern and NashvUle Trust
Co., but without success, although no further securities after the first

'"- Minute books containing minutes of meetings of board of directors of Inter-Southerfi Life Insurance Co.
'M Id.

'"* Testimony of Mr. Timothy Donovan, Bank of Kentucky cane.

">' Investment ledger sheets of Caldwell & Co. obtained from rec i\ ;r of Caldwell & Co.
I'" Op. cit. supra, note 102.

'" Minute book containing minutes of meetings of board of d ;e cors of Inter- Southern Life Insurance
Co. and 1930 Convention Form Annual Statement of the compa y.
"" Minutebookscontainingminutesof meetings of board of diT'Ct rs of Missouri State Life Insurance Co.
'<" Testimony of Mr. Allan May, counsel for Missouri State if Insurance Co.,. P.avk of Kentucky case.
'1" Minute book containing minutes of meetings of board of dii , e' .rs of Inter-Southern Life Insurance Co.

226 OONCKNTRATION OF ElOONOMIC POWER

shipriient of $2,044,047.31 were^ accepted. On the bonds which were
received in the first shipment and which the company was forced to
retain, the Missouri State and its pohcyholders ultimately suffered a
tremendous loss.

On the same date that Inter-Southern authorized the purchase of
the Missouri State stock it also authorized the purchase of 18,000
shares of Home Accident Insurance Co., 18,000 shares of Home Fire
Insurance Co., and 7,300 shares of Home Life Insurance Co. from
Caldwell & Co. for an aggregate consideration of $3,877,098.31, of
which $2,020,000 was in cash or securities."' The three Home com-
panies' stock, wliich in ^ach instance represented control, had been
purchased by Caldwed ix; Co. in 1029.

The effect of these two transactions by which Inter-Southern ac-
quired the holdings of Caldwell & Co. and its affiliates in Missouri
State and in the Home companies, was that Caldwell & Co. was
enabled to dispose of these holdings for cash and marketable securities
and yet, through ownersliip of -Inter-Southern stock retain control of
the companies whose securities were involved. The effect on Inter-
Southern was to increase its outstanding stock by 1,843,066?^ shares
and to cause a withdrawal from its portfolio of cash or securities in
the amount of $6,845,098.31 and the substitution therefor of stock in
other insurance companies. Furthermore, the liigh valuation of newly
issued stock wliich had a par of $1 and was exchanged at $3.75 and
$4 resulted in a write-up of surplus of $5,396,333. On the completion
of these transactions Caldwell & Co. owned 1,456,178.21 of the
3,000,000 shares of stock of Inter-Southern then outstanding.

The events of the depression played havoc with the many inter-
twined business affairs of Caldwell & Co., and it went into receiver-
ship on November 13, 1930.

On December 22, 1930, the Keystone Holding Co., of Hammond,
Ind., purchased from the receivers of Caldwell & Co. that company's
holdings of Inter-Southern stock, carrying with it the actual or poten-
tial control of Missouri State, the Southwestern Life, the Home
companies, and the Southeastern Life. At this point it wdll be neces-
sary to review the activities of Mr. Machir Dorsey, president of the
Keystone Holding Co.

In 1924 Mr. Machir Dorse}'", who was at that time a real-estate
promoter and president of Dorsey Land & Lumber Co. of Kansas
C'ity, Mo., acquired control of the International Life & Annuity Co.
of \Ioline, 111. The price of this controlling interest of 12,000 shares
which he purchased directly from the company itself was $336,000
and was paid by a note of $120,000 secured by stock of Dorsey Land &
Lumber Co. and other notes for $216,000 secured by the stock of the
insurance company. Thus Mr. Dorsey secured control of the com-
pany without putting up any cash.'^^ The next step in Mr. Dorsey's
insurance activities was the acquisition of the Cresent Life Insurance
Co. of Indianapolis in May 1925. This company wliich at that time
had $316,421 assets and $4,952,950 insurance in force had 15,000

'1' 1930 Convention Form Annual Statement, Inter-Southern Life Insurance Co.

1" Subsequently the Dorsey Land & Lumber Co. became the Dorsey Co. and the International stock was
transferred to it and it assumed tho liability on the stock. The Dorsey Co. was also given an agency con-
tract with *he Inlernalinnal. Mr Dorsey '= loan was later reduced by the transfer of a parcel of land from
the Dorsey Co. to IntcriiHti'mai and various changes in collateral were made. Objections filed by Mr.
Machir Dorsey to findings coniaimJ in the report of examination of International Life & Trust Co. by the
insurance department of the State of Illinois as of December 31, 1924.

CONCENTRATION OF ECONOMIC POWER 127"

shares of capital stock outstanding. Mr. Dorsey entered into a
contract with the. owners of a block of 10,000 shares under which con-
tract he was to pay $225,000 for the 10,000 shares. Of this purchase
price $95,000 was paid by transferring 1,900 shares of International
Life & Trust stock (the name of the International Life & Annuity
had been changed to International Life & Trust) and of the remainder
$20,000 was paid in cash at the time of the transfer of the stock while-
notes were given for the balance."'

In December 1926 Dorsey and several of his associates, amongst
them Mr. C. Edwin Johnson, Mr. Harry Tressl, Mr. Bertram Day,
and Dr. J. W. Seids, formed the Keystone Holding Co."* and trans-
ferred to it the control of the Intemiational Life & Trust; and the
control of the Crescent. Shortly thereafter the Crescent reinsured the
business of the International."^ In 1928 the Keystone Holding Co.
purchased the controlling interest, 15,535 shares, in the Northern
vStates Life Insurance Co."^ Northern States had assets of $41103,465
and insurance in force of $35,320,809. On March 11, 1929 the busmess
of Crescent Life was reinsured by the Northern States."^ \

In May 1930 the Keystone Holding Co. purchased j;he controlling
stock of the Security Life Insurance Co. of America and the con-
trolling stock of Reinsurance Life Insurance Co. from the New York-
Hamburg Corporation."^ The Security was a Virginia corporation
whose home ofRce was in Chicago. On December 31, 1929, it had
assets of $9,410,627 and insurance in force of $64,378,924. The
Reinsurance Life with assets of $1,945,917 and insurance in force of
$65,687,690 was a company doing ex'clusively reinsurance business.
On May 26, 1930, only a few days after Keystone acquired Security,
it sold its stock of Northern States to it at a price of $80 u share, a
profit to Keystone of about $18 per share. "^ On June 30^ 1930,
Keystone sold the control of Reinsurance Life to Security for $1,838,-
370.28.'^" By these sales Keystone was able to sell its stock in these
companies for cash and yet through its holdings of the control of the
Security Life retain control over their affairs. It had been planned
to merge Reinsurance with Security but for some reasoa this plan
werlt awry and in 1931 Security, after having bought out the minority
stockholders of Reinsurance, sold Reinsurance's business to Lincoln
National Life at a tremendous loss.^^'

As has been stated, on December 31, 1930, Keystone purchased
the holdings of Inter-Southern stock of Caldwell & Co. from the
receivers. The purchase price of this stock was $2,192,000. At the
same time Security purchased this stock from Keystone at a total cost
of $2,841,525.01.122 _ -

Mr. Dorsey and certain of his associates found many wa-ys to use the
insurance companies under their control for their personal profit.

"3 Purchase contract of May 1925 between Mr. Machir Dorsey, Bertram Day, Mr. W. W. Washfitirn,
and Mr. C. B. Jenkins.

"< Certificate of incorporation of Keystone Holding Co.

"5 Minute book containing minutes of meetings of board of directors of Crescent Life Insurance Co.

"'- Ledger and journals of Keystone Holding Co.

'I' Minute book containing minutes of meetings of board of directors of Northern States Life Insurance Co.

'" Ledger and journals of Keystone Holding Co.

'" Id.; minutes of meetings of board of directors of Security Life Insurance Co. . ^

12' Minute book containing minutes of meetings of board of directors of Security Life Insurance Co. of
America.

"1 Id.

'" Id.;-aud ledger and journal of Keystone Holding Co.

I2S '»y01IVTRATIOX OF EJCONOMIC POWKR

v.- - ff*:":^?*! by inadequate collateral were made

- ^ and other securities were K>"Ji:h: at

vstm^it firms closebr allied wi:ii Kev-

s : «!t Co.^ At this stage the principal

"r - ~ ':--.. --:.: Co. were as indicated in the aocv^mpanv-

-:s of ^"irginia. Illinois. Kentucky. Michigan.
:ed an examination of SecirriiT as of the end of

A ■ -"- ~ --^^ - dared March 3. 1931.

s:srei :'i fxien: of -S525..574.29-

_ - rs valuation of the stock

- :!-3. bv th- Secunty Life.
T ^ - . wii^cii in December

- " " ?- 54 : ' - __ _ :: ^as carried

- - Keystone >_ - and the

T - :. :::. -:^ed at the -__:_-r valuation.

S "^ V was _ the Northern States stock at

s. _-_ >, . 1 __- was wr.::.- '"^ ~ ^^ — "^.eis to Sd90.2S5.

Security objected to these v _ rawn-out hearings

7 ~ ' "~ ^ ^ " _ - TTni^ ^ion-

- _ _- " > ons were

-ess under
~ - " ""-- :7se. some

- :ui.rs refused

! - \ and the

^ ; ^_. „ - _ " - - _ ..- „-- ■ r .gs of the

stock. A: : was forced to write its

jri State s". :.- ^- -_ .. >. rr. .^.-^ The strain of these

was more xh ATi it could stand and on April 16, 1932. it went

rier-Son: :se rendered its stock worthless

- ' V 1932. Security Life went into

- - -ate of Indiana Sled a petition

:i NcrJiTm States, which had been greatly

- :_ent of Mr. Dorsey and his associates, and

omied.

3 ^ 2^~i I*=tZ

- Col flf

CONCENTEATIOX OF ECONOMIC POWER

129

KEYSTOXE HOLDCTG
rr.

SECTSITT LJl'E

XOETHEBN STaTZS

LIFE IXSUEXSCE

CO.

later-SostkoB owmed
147,900 Aue* omt «f
SOOLOOe

2 jC» •.•'>•'. txtiririaed-

rSTEK-SOUTHEEy

LIFE IXgrEAS'TE

CO.

•F .^gKAVSA-r

>nSSOrEI STATE

LITE IXSU£A>f«?E

CO.

Missouri State Y~'A ec2-

SOrXHWE^cTKJBN

LITE tXSCaAX'ZE

CO.

230 CONCENTRATION OF ECONOMIC I'OWEIl

As we have seen, the portfoho of Inter-Southern contained 148,000
shares of Missouri State representing about 30 percent of the total
outstanding. Mr. Dorsey sought to name men of his choice to the
board of directors at the annual election of directors in January 1930.
He was opposed by the St. Louis directors who had been serving, but
under the cumulative voting law of Missouri he was enabled to elect
four directors.

In the fall of 1931 an open fight broke out between the home office
and St. Louis directors on one hand and the Dorsey group on the
other for stockholders' proxies of the annual meeting in January
1932. Letters were written to stockholders soliciting their proxies.
There was much public abuse and unfavorable publicity. '^^

Before the meeting was held a compromise was effected whereby
each side elected four directors and a new president was to name
three compromise director ;.

In 1931 a stockholder of Missouri State filed a suit for an account-
ing alleging mismanagement. He later amended his petition to
allege insolvency and on March 29, 1932, filed a bill for appointment
of receiver. A receiver was appointed but on the same day attorneys
from Missouri State sought and were granted a writ of prohibition to
prevent the receivers from taking possession of the property. Further
unfavorable publicity emanated from this action.

After the failure of Inter-Southern, its business was reinsured in
the Kentucky Home Life Insurance Co., a company organized for
that purpose and controlled by Mr. Frank Cohen and Mr. Albert
Greenfield. It was contemplated that the Missouri stock in the
Inter-Southern portfolio and the stock controlled by the St. Louis
directors of Missouri State would be placed in a voting trust to
prevent further proxy fights and to stabilize control. ^^^

However, the voting trust was not effected. The superintendents
of insurance of Missouri and Kentucky differed over the manner of
setting up the trust, negotiations were carried on for several months
without success, and in November 1932 the superintendent of insur-
ance from Missouri issued an ultimatum that the voting trust with
trustees acceptable to him must be completed within 30 days or he
would move to take over the company under the Missoiu-i liquidation
statutes. Within the period set Mr. Frank Cohen agreed to buy the
Greenfield interests in Kentucky Home Life Insurance Co, He had
no funds to finance this purchase but succeeded in borrowing part of
the money required from the Continental Bank of New York, pledg-
ing Kentucky Home Life Insurance stock for the loan; $800,000 more
was needed and Mr. Cohen agreed to trustee the Missouri State stock
in the Kentucky Home Life portfolio if he could borrow the necessary
money from Missouri State. The superintendent of insurance from
Missouri agreed to this proposition and the loan was made to Insur-
ance Equities Co., a corporation controlled by Mr. Cohen, and was
secured by stocks of other life insurance companies. '^^

The approval of the above loan by the board of directors of Missouri
State precipitated a new fight. Four directors voted against ap-
proval and shortly thereafter five directors resigned in protest.

123 From memorandum entitled "History of Missouri State Life Insurance Co." prepared by Mr. Allan
May, counsel, from files of that company.

i2« Id.

'" Minute books containinn minutes of incctinps of board of directors of Missouri State Life Insurance
Co.

CONCENTRATION OF ECONOMIC POWER

131

Although Mr. Cohen's interests had purchased control of Ken-
tucky Home they had overlooked the matter of obtaining the resig-
nation of the Greenfield directors and were not able to dictate the
policies of that company until the next election of directors and the
voting trust was not completed until that election which was held in
January 1933.

The difficulties of Missouri State had a discouraging effect on its
policyholders and had a demoralizing influence on the agency force.
The proxy fight in the fall of 1931 generated a run by the policyholders
for cash siu-renders and policy loans. This was further aggravated
by the suit for receivership in December 1931, the appointment of
receivers in March 1932, the failures of Inter-Southern and Security
Life, the granting of the $800,000 loan to Mr. Cohen, and the subse-
quent protest resignations of five directors, who, by resigning on
successive dates, spread this unfavorable publicity over a longer
period of time.

The table below indicates the inroads made on insurance in force
and the cash surrenders and policy loans requested by policyholders.'^^

Insurance in
force

Cash Rnd loans
outstanding
end of year

Decrease in in-
surance in force
during year

1929

$869, 324, 264
849,897,519
780, 479, 320
673,776.412

$5, 675, 603
6, 825, 737
10, 074, 508
16, 729, 733

$5,331,491
19, 426, 745
69 418 199

19.30

1931 -

193?:,

106, 702, 908

A convention examination of Missouri State was instituted during
December 1932 and was approximately completed early in 1933. It
disclosed an insolvent situation but the examiners were in disagree-
merit as to the degree of insolvency. In view of this the commissioners
of insurance instructed their examiners to continue the examination
and to bring it down to midyear June 30, 1933.

On August 23, 1933, the examiners completed .their report on
Missouri State. There was still a disagreement oh the degree of
insolvency but the superintendent of insurance of Missouri announced
that inasmuch as everyone agreed that the company was insolvent
the degree of insolvency and any action taken thereafter was his
concern and on August 26, 1933, he filed a suit to have the company
declared insolvent. On August 28, 1933, the company filed an
answer confessing insolvency and placing its business and assets in the
hands of the superintendent of insurance of Missouri.

C. COMPANY FAILURES WITH LOSS TO POLICYHOLDERS

It was impossible for reasons already indicated to conduct a survey
of other principal failures and the foregoing comprise the only case
studies that can be presented. The 19 principal failures to which
reference has already been made and which resulted in a combined

'28 1938 conventions form annual statements.

132

CONCENTRATION OF ECONOMIC POWER

total indicated initial loss to policyholders of $138,000,000 are listed
below:

Policyholders losses in life-company failures ' — period of Jan. 1, 1930, to Jan.

1, 1940

[Includes only companies where initial loss is estimated to be in excess of $1,000,000— All figures are in thou-
sands as of last statement available]

Net life

Name of company and date
of reinsurance

Date of re-
ceivership or
retirement

Date of last
statement
available

Gross

life
reserve

Policy
loans
and
premi-
um
notes

reserve
Gess

policy

loans
and

premi-
um

notes)

Rate of
lien,
per-
cent

Indi-
cated
initial
loss

1930 J J

1931

Home Life Insurance Co.,

January 1931 _

Dec. 31,1929

$3, 436

$997

$2,439

$1, 220

Little Rock, Ark.— rein-

sured in Central States Life

Insurance Co., St. Louis,

Mo., Mar. 31, 1931.

National Benefit Life Insur-

Sept. 24,1931.-

(')

(•)

(')

{')

(3)

ance Co., Washington, D.

C. (Negro company).

1932

Inter-Southern Life Insurance

Apr. 16, 1932. .

Dec. 31,1931

18,043

5,082

12,961

<50

6,481

Co., Louisville, Ky.— rein-

sured in Kentucky Home

Life Insurance Co., Louis-

ville, Ky., Aug. 8, 1932.

Mississippi Valley Life Insur-

Apr. 25, 1932.. -

3, 663

693

2,970

100

2,970

ance Co., St. Louis, Mo.—

reinsured in 3 companies-

American Life & Accident,

Insurance Co. of Michigan;

and Republic Life Insurance

Co., Dallas, Tex.

Old Colony Life Insurance

Sept. 20,1932..

do.

4,577

858

3,719

100

3,719

Co., Chicago, 111.— reinsured

in Life & Casualty Co.,

Chicago, 111.

Security Life Insurance Co.
of America, Chicago, 111.—

Apr. 18,1932...

8,979

2,253

6,726

100

6,726

reinsured in Central Life

Insurance Co., Chicago, 111.,

Sept. 15, 1932.

' Pt. 28, exhibit No. 2336. This exhibit was prepared by Mr. Alfred M. Best of Alfred M. Best, Inc.,
who testified that because of reserves on registered policies amounting to $2,000,000 for the Continental
Life and $6,000,000 for Missouri State, the total indicated initial loss is reduced $8,000,000 to $130,000,000.
For a running discussion of the causes for these failures and methods used in computing ipdicated initial
loss, see pt. 28, testimony of Alfred W. Best, Feb. 29, 1940.

' None.

' Details not available but loss probably well in excess of $1,000,000.

* Increased to 60 percent in 1939.

CONCENTRATEON OF ECONOMIC POWER

133

Policyholders losses in life-company failures — period of Jan. 1, 1930, to Jan.

1, i 540— Continued

Net life

Name of company and date
of reinsurance

^ Date of re-

'ceivership or

retirement

Date of last
statement
available

Gross

life
reserve

Policy

loans
and

premi-
um

notes

reserve
(less

policy
loans
and

premi-
um

Rate of
lien,
per-
cent

Indi-
cated
initial
loss

notes)

1933

Illinois Life Insurance Co.,

Nov. 28, 1932. .

Dec. 31.1931

$29, 796

$7, 973

$21, 8Z3

$15, 276

Chicago, 111.— reinsured in

Central Life Assurance Soci-

ety, Des Moines, Iowa, July

1933.

Northern States Life Insur-

Dec. 13, 1932. __

7,791

1,664

6,127

3,676

ance Co., Hammond, Ind.—

reinsured in Lincoln Na-

tional Life Insurance Co.,

Fort Wayne, Ind., March

1933.

Missouri State Life Insurance

Aug. 28,1933..

Dec. 31, 1932.

123, 583

47,550

76,033

38,017

Co., St. Louis, Mo.— this

company was taken over by

the newly formed General

American Life Insurance

Co., St. Louis, Mo., Sept.

7, 1933.

National Life Insurance Co.

Oct. 17, 1933...

do.

47, 705

14, 608

33,097

16, 549

of U. S. A., Chicago, 111.—

taken over by Hercules Life

Insurance Co., Chicago, 111.,

January 1934.

Royal Union Life Insurance

June 26, 1933...

do ,

33,094

■9,647

23*447

11,724

Co., Des Moines, Iowa-

reinsured in Lincoln Na-

tional Life Insurance Co.,

Fort-Wayne, Ind.

Peoria Life Insurance Co.,

Nov. 15,1933..

19,208

6,049

13, 159

6,580

Peoria, 111.— reinsured in

Life & Casualty Co., Chi-

cago, 111. — combined com-

pany continued under titlie

Alliance Life Insurance Co.,

Peoria, 111., Aug. 13, 1934.

1934

Independent Life Insurance

Feb. 19,1934...

do -

1,417

238

1,179

100

1,179

Co., Nashville, Tenn.—

taken over by Standard Life

Insurance Co., Jackson,

Miss., May 1934.

Apr. 8, 1934....

Dec. 31,1933

5,166

1,608

3,558

1,7J9

Davenport, Iowa— taken

over under management

contract by Guaranty Life

Insurance Co., Davenport,

Iowa, Sept. 26, 1934.

134

OONCENTRATION OF WH)N()ani" POWEll

Policyholders losses in life-company failures — period of Jan. 1, 1930, to Jan.

1, 1940— Continued

Name of company and date
of reinsurance

Date of re-
ceivership or
retirement

Date of last
statement
available

Gross

life
reserve

Policy

loans
and

premi-
um

notes

Net life
reserve
(less
policy
loans
and
premi-
um
notes)

Rate of
lien,
per-
cent

Indi-
cated
initial
loss

1935

Pacific States Life Insurance
Co., Denver, Colo.— rein-
sured in Occidental Life In-'
surance Co., Los Angeles,
California & Life Insurance
Co. of America, May 18,
1935.

1936

Federal Reserve Life Insur-
Co., Kansas City, Kans.—
reinsured in Occidental Life
Insurance Co., Los Angeles,
Calif., June 14, 1936.

Continental Life Insurance
Co., St. Louis, Mo.— rein-
sured in 'Kansas City Life
Insurance Co., Kansas City,
Mo., July 26, 1936.

Detroit Life Insurance Co.,
Detroit, Mich.— taken over
by the newly organized Life
Insurance Co. of Detroit,
Mich., Mar. 2, 1936.

1937J

Apr. 20,1935..:

May 25, 1936- .

May 1934

June 1935......

Dec. 31,1933

do--

Dec. 31,1935-
Dec. 31,1933

$3, 686

7,318
13, 076
7,616

$1,000

1,938
3,912
1,876

$2,686

5,380
9,164
5,740

100

50
50
60

$2, 686

2,690
4,582
3,444

1938»

1939

American Life Insurance Co.,
Detroit, Mich. — taken over
by the American United
Life Insurance Co., Indian-
apolis, Ind., Nov. 17, 1939.

June -7, 1939...-

Dec. 31,1936

13,894

3,624 ■

10, 270

7,702

352,048

111, 570

240,478

57.4

138,000

' None.

Failures in the legal reserve life insurance company field have been
confined almost entirely to companies which were the victims of
flagrantly bad investment policies, policies which in rnany cases were
tantamount to fraud and breach of trust on the part of company
managements. More specifically it appeared that companies failed
because their affairs were commingled with those of banks or because
of extravagant investment in home ofiice buildings, pyramiding and
excessive or unwise investments in shares of other life insurance com-
panies, efforts of directors to further their personal interests, ^nd
generally bad management.

The total assets of the above 19 companies amounted to only from
one-half to three-fourths of 1 percent of the average amount of large
insurance assets during the period. It should be noted, however,
that the amount of money lost was sizable and the number of policy
holders involved considerable, since the companies in question had
gross reserves of approximately $332,000,000.

CONCENTRATION OF ECONOMIC POWER ^35

D. CONVENTION VALUES

Whatever the underlying causes of their failures, most of the in-
surance company failures of recent years were directly precipitated
by the depression. Two artificial protective devices, convention
values rnd moratoria, "^ere called into play to meet the situation
growing out of the depression, and undoubtedly were instrumental in
preventing the failure of many other companies.

Convention values for securities are values assigned by State in-
surance commissioners to securities held by insurance companies.
During the time when market values were fluctuating rapidly the
values assigned were arbitrary. In most cases they were based on
actual market values, or averages of market values, at periods of time
prior to the date of the balance sheet for which they were used. As
a result of their use, it was possible for insurance companies to carry
their securities in their annual statements at a valuation in excess of
their then market.

Convention values for securities were established by the National
Convention of Insurance Commissioners ^^^ and were placed in effect
by insurance commissioners in the principal States where life insur-
ance companies were domiciled. The institution of convention values
with respect to the State of New York was explained by George S.
Van Schaick, former commissioner of insurance of the State of New
York, and now vice president of the New York Life Insurance Co.
Mr. Van Schaick's testimony, in part, was as follows : ^^°

* * * The matter of convention values which confronted insurance com-
missions in 1931, came to a head in October of that year, as I recall it, due to a
particularly low day on the exchange, when I as a new superintendent had the
chief examiners come in and say, "What will we do with these companies?" —
not life companies, it was the casualty companies and the fire companies that
were particularly affected because of- the large portfolios of common stock which
were held at that time.

'" Convention values for 1932 were prepared in accordance with the following resolutions adopted by
the National Convention of Insurance Commissioners on December 9, 1931:

"Whereas exceptional fluctuations of value of stocks and bonds as reflected on the exchanges have led to
the inquiry as to whether the market price quotations for stocks and bonds on any particular day are
indicative of the fair market value of such securities; and

"Whereas under similar circumstances it has been the policy of the National Convention of Insurance
Commissioners to endorse and recommend the substitution of the range of the market and the average of
prices thus found running through a reasonable period of time as a fair basis of market value of stocks and
bonds:

"Resolved, That the Committee on Valuation of Securities of the National Convention of Insurance
Commissioners is of the opinion that under present conditions the market quotations on stocks and bonds
for a particular day are not a fair standard for the ascertainment of fair market value of such securities and
recommends as a present substitute therefor the average price of stocks and bonds as reflected bv the ex-
changes for a range of five quarterly periods ending September 30, 1931.

"Further resolved, That since the fair average thus ascertained is approximately the closing price of secu-
rities on June 30, 1931, the prices of June 30, 1931, be taken as,th^Jair market value during rhe current year
and that such standard be accepted for the annual statements due as of December 31, 1931, except that
securities should not be valued at more than the purchase price if purchased since June 30, 1931.

"t'urther resolved, That in cases where the condition of companies may require the immediate disposition
of securities at present prices it is the opinion of this committee that the discretion of a commissioner 0'
insurance should be exercised to vary the general formula herein set forth so as to adopt the prices then
reflected by the exchanges.

'^Further resolved. That in the valuation of bonds which have defaulted in principal or interest since June
30, 1931, and in the valuation of stocks and bonds of corporations in receivership since June 30, 1931, the
convention value shall be the exchange quotations of December 31, 1931, instead of the average value as
provided in the principal resolution."

'w Pt. 28, testimony of Qeorge Van Schaick, February 20, 1940.

136 CONCENTRATION OF ECONOMIC POWER

It was a question which was put up almost in a moment as to whether at that
critical time there was to be a wholesale taking over of essentially sound com-
panies because of, you might almost term it, gyrations of a stock exchange, and
after canvassing the matter very carefully, it happened that the New York
commissioner, then, as now, the chairman of the committee on valuation of
what was then the National Convention of Insurance Commissioners, now called
the National' Association of Insurance Commissioners, called in the commis-
sioners who were near at hand, Massachusetts and Connecticut and New Jersey,
Pennsylvania, Illinois, and we worked it out. I used as the basis of it the very
best thought I could get hold of, some of which went back to the World War
days, when they had similar problems. * * *

First it was presented to the executive committee of the committee of valua-
tions of the convention' by telegram; they acquiesced in it. I put it into effect
in' New York immediately because I had to do something, and by early December
of that year we presented it to the convention and it was passed with only three
dissenting votes.

In the case of the 26 largest companies the method of valuation used
resulted in carrying bonds and stock as of December 31, 1932 at
$6,670,131,000. On that date the actual market value of these
securities amounted to $5,545,727,000. Thus, the balance sheet
value exceeded market value by $ 1 , 1 24,406, 000 so that the balance sheet
value of bonds and stocks was carried in company balance sheets at
20.28 percent in excess of market value. In succeeding years, con-
vention values have gradually been adjusted toward market so that
at the present time there is no substantial difference between market
values and convention values. .

Presumably the action of the National Association of Insurance
Commissioners was taken ndt only for the purpose of protecting some
companies in financial distress but by reason of the fact that the
securities held by life insurance companies were then as now in general
of high quality and sound character, and, therefore, not necessarily of
an ultimate value as low as that represented by the prevailing market
prices at the time. Events of subsequent years have, of course, con- •
firmed their judgment;

E. MORATORIUM LEGISLATION

During the period of the banking difficulties in 1933 moratorium
legislation and rulings limiting cash withdrawals and other demands on
life insurance companies, were put into effect in many States.

With respect to the introduction of moratorium legis^tion in New
York, Mr. Van Schaick testified: *^'

* * * You will recall that as we left '32 behind and got into January, I
think it was in February that the Michigan situation arose, the Michigan mora-
torium came along, and then you had your situation in Maryland and Indiana
and several other States, leading right up to Inauguration Day and then when
Ne^- York came on with its rporatorium on March 4 the President's proclamation

'31 Pt. 28, Testimony of George S. Van Schaick, February 20, 1940.

CONCENTRATION OF ECONOMIC ^0^\■Ell 137

followed on the Monday following Inauguration, when all the banks were closed
and we had the bank holiday, where were people going to go for their funds? '^^

Here was the banking burden of the country thrown on the life insurance com-
panies, and as liquid as they were, and in as fine condition as they were, no com-
pany that invests money can be enough liquid to take care of a situation like that,
and consequently I remember one instance of a man coming from the West by
airplane to get there and get his money out of one of the large companies. It had
the characteristics of a run. W hat did we do? As I came back from Washington,
I talked with the Governor over the phone. We got together on Sunday morning
and decided that we needed emergency legislation. We continued that on
Monday. We had the legislative leaders of both parties there. We drafted this
legislation known as chapter 40 of the Laws of 1933, afterward known as that;
we had some of the insurance executives in at the Governor's home, we had ad-
visers of various kinds we got the legislative leaders there from Albany that
night; we had to send the bill up by plane, it went through the Legislature that
night, they staj-ed in session that night, it" came down by plane was signed the
next day, and it was only then we had the authority to go ahead and declare a
moratorium.

It was pretty sweeping legislation, but it was carefully drawn.

This spiecial legislation was passed on March 7, 1933, and by virtue
thereof the New York superintendent of insurance issued the first
moratorium regulation under date of March 9, 1933. The superin-
tendent's ruling provided that no cash-surrender values should be
paid and that no loans should be made except for the purpose of and
to the extent of covering payment of premiums or any obligations to

"' Banking authorities in the different States had found it necessary to adopt emergency measures from
the beginning of February. On February 4, 1933 a 1-day holiday was declared in Louisiana. On February
14 a 4-day banking holiday was declared in Michigan but a satisfactory settlement of the difficulties was not
reached and the holiday was extended. On February 25 the Governor of Maryland declared ^ bank holiday
and at the same time restrictions were authorized on withdrawals of bank deposits in Indiana, Arkansas, and
Ohio. On March 1 Alabama, Kentucky, Tennessee, and Nevada declared bank hoUdays and similar action
was taken by 6 other States on March 2, and 7 others on March 3. On March 4, the Governor of the State
of New York issued a proclamation declaring that day, Saturday, March 4, and Monday, March 6, to be
bank holidays. Similar action was taKcn in Illinois, Massachusetts, New Jersey, Pennsylvania, and else-
where. On March 6 the President issued a proclamation declaring a Nation-wide bank holiday to continue
through March 9. At the same time the President called a special session of Congress to rtjeet on March 9
to enact such legislation as might be needed. After the Emergency Banking Act of March 9, 1933, the
President issued a proclamation indefinitely extending the bank holiday and on Friday, March 10, gave
the Secretary of the Treasury power to license members of the Federal Reserve System found to be in a satis-
factory condition to continue a usual banking business, wi^h the exception of paying out gold or furnishing
currency for hoarding. Similar power was granted State banking tuthprities with respect to institutions
under their supervision. On Monday, March 13, the Federal Reserve banks were reopened for the per-
formance of usual banking functiops. During the 3 days following March 9, the Secretary of the Treasury
had licensed many banks to reopen. On March 13 such banks located in the 12 Reserve citie.~ were reopened.
On March 14 licensed banks in spproximately 250 other cities having recognized clearing houses were re-
opened and on March 15 licensed banks in other places. At this time 4,507 national banks and 751 State
member banks, or about 75 percent of all member banks of the Federal Reserve System, were reopened leav-
ing unlicensed 1,400 national banks and 221 State member banks. By April 12, State banking authorities
had licensed approximately 7,400 nonmember banks, or about 71 percent of such banks. The resources of
such banks represented $23,000,000,000, or 90 percent of the resources of such member banks. By the end
of the year, licensed member banks had increased to 6,011, while the number of nonmember banks operating
without restrictions had increased to 8,200, leaving unlicensed 512 members of the Federal Reserve System
and approximately 1,400 nonmemberbanks (Twentieth Annual Report of the Federal Reserve Board cover-
ing operations for the year 1933) .

264763— 41— No. 28 10

138 CONCENTRATION OF BCONOMIC POWER

the insurance company by the poUcyholder. Tliis latter provision
was inserted, Mr. Van Schaick testified, for the reason that:

We didn't want, as a result of this thing, people to lose their insurance * * * '^^

The only exceptions permitted to this ruling were in cases of
extreme need. In such cases the companies were permitted to
pay each individual not in excess of $100 in the aggregate as cash-
surrender Or loan values on all policies of ordinary insurance carried
by him. Also in cases of extreme need the holder of industrial
insurance was allowed to receive a cash-surrender value on his industrial
policy or on the industrial policies of his immediate family, provided
the extreme need was ascertained from personal investigation by a
representative of the insurance company. In addition it was provided
that companies could not disburse any sums on deposit except in
cases in which sums were stipulated by contract and did not require
the exercise of the option to wnthdraw by the insured. However,
the companies were authorized to pay the interest on such sums on
deposit when the interest became due in the regular manner.

On March 17, 1933,^^* the original rules were amended to permit
the payment of the full cash or loan value if such payment were
necessary for the continuance of pay-roll expenditures. A further
modification was made at that time because of the anomalous situation
which had hehn created due to the fact that the New York regulations
in their original form were made to apply to the entire business of all
companies licensed in New York State. The regulations of other
States with respect to moratoria had conflicted with the rules of the
New York department and therefore in the amendment of March 17
it was provided in general that the rules of the New York department
should be modified to permit the company involved to comply in
another State with the requirements of the supervisory authority of
such other State. On April 3, 1933,"^ the restrictions of the New
York Insurance Department were further lifted by an extension of
the extreme-need category. Withdrawal was permitted for various
pm'poses, including taxes, interest, rent, hospital, and medical ex-
penses, food for the insured or his dependents, educational purposes,
agricultural purposes, and in order to avoid penalties on prior com-
mitments. On April 11, 1933,^^^ the restrictions. were further relaxed,
and on September 9,"'' all restrictions were removed by the, superin-
tendent of insurance.

Only one State, Kansas, passed insurance-moratorium legislation
before New York. This law was enacted March 6, 1933. Morato-

"3 Pt. 28, testimony of George S. Van Schaick, February 20, 1940. Nine States took care of this problem
by granting poHcyholders what amounted to a moratorium on the payment of premiums. This was accom-
plished by granting extensions to the grace period provided in the policy for the payment of premiums.
,These extensions of thetieriods within which premiums were payable were: Iowa, 30 days; Kansas, 31 days;
Maine, 31 days; Massachusetts, 31 days; Minnesota, 30 days; Nebraska, 30 days; Tennessee, 30 days; Ver-
mont, 30 days; Wisconsin, 30 days.

The ruling of the State of North Carolina granteJ no grace period but suggested that policyholders write
checks for premium payment on banks which would open when the banking holiday had terminated.
From insurance department rulings dated as follows: Iowa, March 14, 1933; Kansas, March 7, 1933; Maine,
April 5, 1933; Massachusetts, March 10, 1933; Minnesota, March 13, 1933; Nebraska, March 30, 1933; Ten-
nessee, April 8, 1933; Vermont, March 23, 1933; Wisconsin, March 20, 1933; North Carolina. March 13, 1933.

"< New York Insurance Department ruling, amendment No. 1, March 17, 1933.

13J New .York Insurance Department ruling, amendment No. 2, April 3, 1933.

lie New York Insurance' Department ruling, amendment No. 3, April 11, 1933.

'" New York Insurance Department ruling, Septerriber 9,- 1933.

CONCENTRATION OF ECONOMIC IJOWER

139

rium legislation was passed the following day in New York, North
Carolina, and Ohio. Indiana's law was enacted March 8, and Arkan-
sas, Connecticut, Massachusetts, New Jersey, and Vermont followed
on the 9th. Iowa's law was enacted March 11 and that of Minnesota
the 13th. These 12 States were the only ones which had moratorium
laws affecting life insurance before the Secretary of the Treasury
began issuing licenses for the reopening of banks found to be in satis-
factory condition on March 13 in the 12 Reserve cities; on March 14,
in 250 clearing-house cities, and in other places on March 15. Nine
other States enacted moratorimn legislation affecting life insurance
dm'ing the, remaining days of March, and three others were added in
April, one in May, and one in June.^^^

In Delaware, Michigan, Pennsylvania, Illinois, and West Virginia
insurance commissioners themselves proclaimed a state of emergency
and issued moratorium rulings which were subsequently confirmed
by legislative action. In Florida a moratorium was similarly declared
but was not confirmed by the legislature. The insurance commis-
sioners' moratoria rulings first issued were similar to. that of New
York State which was issued on March 9, modifications, however^
soon became necessary. Only Connecticut,'^^ Delaware,'*" *and New

138 The following list shows the States which enacted moratorium laws affecting life insurance and gives
the dateson which the legislation was enacted and the dates on which regulations were issued by the respec-
tive State departments of insurance:

State

Alabama

Arkansas

California-

Connecticut _._-.

Delaware

Florida

Illinois.

Indiana

Iowa

Kansas-.:

Maine

Maryland

Massachusetts...

Michigan.-

Minnesota

Nebraska

New Hampshire.

New Jersey _.

New York

North Carolina. .

Ohio.

Pennsylvania

Tennessee

Vermont ..:.

Texas

West Virginia

Wisconsin

Moratorium
legislation

Mar. 17, 1933
Mar. 9,1933
Apr. 6, 1933
Mar. 9,1933
Mar. 18, 1933'

(')
May 11,1933'
Mar. 8,1933
Mar. 11, 1933
Mar. 6,1933
Mar. 31, 1933
Mar. 28, 1933
Mar. 9,1933
Apr. 28,1933''
Mar. 13, 1933
Mar. 28, 1933
Mar. 16, 1933
Mar. 9,1. i
Mar. 7,1933

Apr. 26, 1933°
Mar. 23, 1933
Mar. 9,1933
Mar. 29, 1933
June 3, 1933»
Mar. 17, 1933

Insurance
department

Mar. 17, 1933
Mar. 9,1933
Apr. 6, 1933
Mar. 9,1933
Mar. 17, 1933
Mar. 13, 1933

Do.
Mar. 10, 1933
Mar. 14,1933
Mar. 11, 1933
Apr. 5, 1933
Mar. 29, 1933
Mar. 9,1933
Mar. 29, 1933
Mar. 13, 1933
Mar. 30, 1933
Mar. 16, 1933
Mar. 10, 1933
Mar. 9,1933
Mar. 13, 1933
Mar. 10, 1933

Do.
Apr. 8, 1933
Mar. 10,1933
Mar. 30, 1933
Mar. 10, 1933
Mar. 20, 1933

' Ruling made prior to emergency legislation.

' No enactment.
' Connecticut Insurance Department ruling, March 28, 1933.
» Delaware Insurance Department ruling, March 18, 1933.

140 CONCENTRATION OF HCONOMiC POWER

Jersey. ^*^ followed New York in lifting restrictions on cash payments
required for pay-roll purposes on March 17. The commissioner of
insurance in Kentucky announced on March 21, 1933/*^ that the
commi'ssioners of other States could not promulgate any rules and
regulations that could be legally maintained in the State of Kentucky
as the law of that State provided that the payment of cash surrender
values may not be deferred for more. than 3 months. Accordingly,
therefore, mos.t States which had enacted moratoria restricting cash
transactions by life insurance companies incorporated a reciprocity
clause in their rulings stating that —

* * * where the emergency rules and regulations of a supervising authority
or the law of any other State of the United States shall require conditions or
action in conflict with the foregoing rules and regulations of this department,
then, in. that event, such rules and regulations of this department may be modified
to permit the company to comply in good faith with the requirements of the
supervising authority of such State."*

By the 1st of April, 24 States had moratoria in effect while the
remainder and the District of Columbia had none. In an attempt to
obtain a solution to this dilemma, the insurance commissioners met
in Chicago on April 7, 1933, and proposed a uniform set of regulations.
At this time, 2-1 States and the District of Columbia decided to remain
free of any moratorium regulations and Florida and Alabama with-
drew all restrictions previously ir^voked. West Virginia, Kansas,
Maine, Nebraska, and Wisconsin adopted the resolution proposed by
the insurance commissioners in full. Illinois, Marykmd, and North
Dakota added amendments, while Connecticut, Delaware, Massachu-
setts, Michigan, Ohio, Pennsylvania, Vermont, and Texas accepted
the joint resolution in part only. Life insurance companies doing
interstate business, therefore, were faced with a complicated situation
brought about by differing and even conflicting .regulations jn mora-
torium States, and no restrictions in others. By this time, however,
the greatest danger was over, and the restrictions in effect in the most
populous States, where the most insurance was in force, were sufficient
to assure the safety of the compamies, although at the cost of some
discrimination amongst policyholders.

HI New Jersey Insurance Department ruling, March 18, 1933.
■ "' Kentucky Insurance Department ruling, March 21, 1933.

"' Sec. 10 of resolution adopted by the National Convention of Insurance Commissioners in Chicago,
April 7, 1933.

SECTION XI

Intercompany Agreements To Eliminate Competition

■ As has been indicated earlier, the principal insurance companies are
not linked by common directorships. Althou h a single banking or
industrial interest may have its representative i on the boards of two
or more insurance companies, the insurance companies themselves
rarely interlock. This is not to say, however, that the companies
have no interests in common; on the contrary, evidence before the
committee demonstrated the frequency with which concerted action
is undertaken among large companies in order to arrive at a common
understanding on vital matters of policy.

Prior to the hearings upon which this report is based, it was gen-
erally believed that the life insurance business was not subject to
anti-competitive agreements. Although it has long been known that
in determining rates, the companies pooled their mortality experience
in order to get the widest possible base for mortality tables,^ it was
supposed that the other two rate-making factors, i. e., loading (ex-
pense) and the guaranteed interest rate, were independently deter-
mined by each company on the basis of its own experience.

It now appears however that the principal life insurance companies
have for several years undertaken to eliminate rate competition by
means of intercompany agreements and "gentlemen's understandings."
Efforts in this direction have been highly successful and, as might be
expected, the agreements have been extended to bring about uniformity
in certain underwriting practices and in certain policy provisions as
well. The full extent of these activities is unknown as the testimony
was limited to agreements in which the krgcr eastern companies
participated. These agreements, summarized below, affecting com-
panies writing the bulk of the business are sufficient, nevertheless, to
indicate the nature, prevalence, and effect of anticompetitive and
monopolistic practices in the field of life insurance.

A. THE GROUP ASSOCIATION

The first agreement considered was one to fix rates and underwriting
practices among companies selling group insurance. Group insurance
is of comparatively recent development, ^ts rise has been meteoric.
Prior to 1915, the amount of group life insurance in force in the United
States was negligible. At the end of 1919, there was $1,102,466,000
of group life insurance in force in United States companies. By the
end of 1937 this amount had increased almost 1,100 percent, to
$12,957,266,000, with contracts then in force covering an estimated
9,000,000 lives.2

• The American Men Table of Mortality, for example, was compik d from the combined experience of 59
companies doing ordinary business. In the group insurance field, j ri the major companies doing group
business combine their exp'erience at irregular intervals. See vol. 7 X /I at p. 332 and vol. XXXIII at p.
333 of the Transcations of the Actuarial Society of America. Th s andard annuity tables, now widely
used as the basis of annuity rates, are also based on intercompany c jerience.

'Pt.lO.R. 4155, 4156, exhibit No. 641. Foradefinitionof groupin it nee op. cit. infra, p. 177 at note 4. For
tables reflecting number of group policies in force, amount of grou' li. s insurance in force, premium income
from group policies, total income from group policies, dividends pa 1 <.. oup policies, and net^hanges in group
surplus before and after dividend declarations, for 26 principal cc qj mies during period 1929 to 1938, inclu-
sive, see pt. lOA, R. 45-52. For similar information on group an u', ies see pt. lOA, R. 60-66.

242 CONCENTRATION OF ElCONOMIC POWER

Group insurance was still in its infancy when the principal companies
selling this form of insurance entered into agreements to control
competition. In 1917 there were but five or six principal companies
writing group insurance. Following a meeting of company actuaries
called by State insurance officials in that year to assist in formulating a
definition of group insurance, actuaries of the group companies con-
tinued to meet in informal gatherings to discuss group rates and under-
writing practices. The association had no permanent oflScers, no
minutes of the meetings were kept nor wece state insurance depart-
ments formally adv'sc ' of the results of the discussions. The agree-
ments entered into v ere usually iiv the nature of mutual understandings
or so-called gentlemen's agreements, rather than formal under-
takings. From its beginning, this informal association was dom-
inated by the large eastern companies, smaller companies being
allowed to participate on the understanding that they would follow
the leadership of the large companies.^

When the association was first formed, the practices of the com-
panies were not standardized and competition was "severe." The
informal gatherings were successful in bringing about the desired
uniformity.* Within 2 years, "gentlemen's agreements" had been
formulated establishing uniform rates, uniform underwriting practices,
and maximum commissions. The question of rates was apparently a
matter of primary concern.* The uniform rate established, known as
the "T" rate, was fixed as the minimum initial group life rate to be
quoted by Aetna, Travelers, Connecticut General, Metropolitan, and
Prudential,^ with the provision that the two latter companies, which at
that time wrote group life insurance on a participating basis, were to
quote a rate 5 percent higher than that of the other nonparticipating
companies in order that the payment of dividends might not give them
a competitive advantage.''

' Mr. Benedict D. Flynn, vice president and actuary of Travelers Insurance Co., testified (pt. 10, R. 4158,
4159):

"Mr. Gesell. Then, can you tell us whether there were invited into these conferences some of the smaller
companies which were writing group life insurance?

"Mr. Flynn. Any company that started to write group insurance which wanted to come in would be
invited to these meetings.

"Mr. Qesell. I read you a bit from a memorandum from yourself to Mr. Butler under date of Septem-
ber 30, 1924, in which you say: 'There is the general feeling among all of the smaller cpmpanies, based
upon that which has been said in the actuarial society and other meetings that all are invited to cooperate
to obtain policy forms, underwriting rules, etc., if they will be good.' What did you mean by that?

"Mr. Flynn. If they agreed to follow good practices.

"Mr. Qesell. You mean not if they would agree to follow the practices which the larger companies had
established.

"Mr. Flynn. I don't want to evade. I would say that the larger companies' main object was to establish
sound practices and, having had perhaps more experience than the smaller companies, they would like to
lead along that line, and that was what I meant in saying 'if they will be good'."

< Pt. 10, R. 4158.

' Vt. 10, R. 1102, 4163.

'■ iSince af that time (1919) the rates of the Equitable, the only other member of the informal association,
« eve considerably higher than those of othtr companies and did not, therefore, constitute" a competitive
uien.iCL', the Equitable was not included in the rate agreement (pt. 10, R. 4164.)

' I't. 10, R. 4165. In all cases in which the companies writing' group life insurance agreed to rates, these
were initial rates, that is to say, the rate to be quotedthe prospective purchaser of the master contract. This
contract provides that at. the end of the year the purchaser will receive a rebate based primarily on mortality
savings computed for each group contract separately on the basis of the year's experience for the group.
Although the ultimate rates could thus differ, the association members agreed to rigid restrictions regarding
rebate estimates to be made to prospective group contract purchasers. From a merchandising point of view,
therefore, the establishment of uniform initial rates to all intents and purposes eliminated competition (pt.
10 exhibit No. 658, rule 9A).

CONCENTRATION OP ECONOMIC POWER 143

For extra hazardous industries, graded rates at levels higher than
the "T" rate were set, again on a uniform basis. Further elimination
of competition resulted from the establishment of maximum com-
mission scales, the promulgation of underwriting rules limiting the
size of the group which could be written under the master contract,
the prohibition of transfers of business from one company to another,^
and from the setting of a maximum amount of insurance which could
be granted on the lives of group members.^

The net effect of these agreements which were elaborated from time
to time during the next 7 years was cryptically summarized by the
then actuary of the Travelers, who stated in a letter to the president
of that company as- follows:'"

It would seem, therefore, that the action which has been sought by the Hartford
companies involving an understanding as to rates and maximum commissions
is now possible and that competition on the basis of rates and underwriting, as
well as commissions, will in the future be avoided by an agreement of the three
Hartford companies, the Metropolitan, and the Prudential.

Companies participating in these anticompetitive agreements had
occasion to consider the possible illegality of their activities in this
connection from time to time. It appeared there were serious mis-
givings on the part of some members who feared that the "gentlemen's
agreements," particularly in fixing rates, were in violation of certain
State antitrust laws." Representatives of the Metropolitan were
particularly, concerned about this matter and indicated that their
company might withdraw from any participation in the "informal
get-togethers." '^ When the question first came up in 1922, Mr.
Flynn, then secretary of the Travelers, sought Mr. William 3roSmith,
vice president and general counsel of that company, for his opinion
on the legality of the informal Group Association's activities. In an

* Testimony on this point illustrated the effect of this prohibition (pt. 10, R. 4161):

"The Chairman. Your feeling is that those who are handling group insurance ought to be in a position
to raise obstacles to the free transfer by the insured of their policies? You moved affirmatively?

"Mr. Flynn. Yes.

"Mr. Frank. May I ask, purely out of ignorance, would your rules be designed to prevent a transfer,
even if in the particular case the cost to the employer was less? • * • What I am getting at is, might M not
the cost to the employer, regarding him as distinguished from the insurance company that lost the business,
be to the advantage of the employer in that he might in a particular case get a lower cost?

"Mr. Flynn. That is right.

"Mr. Frank. Assuming that that were true, would your rules nevertheless be designed to discourage the
transfer?

"Mr. Flynn. They would in that no commission would be paid to the agent effecting the transfer."

» Pt. 10, R. 4173.

i» Pt. 10. exhibit No. 643.

'I A number of States, particularly Arizona, Georgia, Kansas, Nebraska, Oregon, South Carolina, Texas,
and Washington, hav-e antitrust statutes which affect life insurance companies. See Revised Code, Arizona,
1928, sec. 3212; Georgia Code, 1933, sees. 5fr-219 (2466); General Statutes of Kansas, Annotated, 1935, sees.
50-101; Compiled Statutes of Nebraska, 1929, sees. 59-101; Oregon Code, Annotated, 1930. sees. 46-140; Code
of Laws of South Carolina, 1932, sec. 6620; Vernon's Annotated Texas Statutes (Civil) vol. 20, arts. 7429-
7437; Vernon's Annotated Criminal Statutes gf the State of Texas (Penal Code), vol. 3, arts. 1632-1640;
and Remington's Revised Statutes of Washington, sec. 7076 (pt. 10, exhibit No. 646).

In Arizona the definition of a trust includes: "• • • a combination of capital, skill, or acts, by two or
more persons • • • to control the cost or rates of insurance • * "' Revised Code, Arizona, 1928,
sec. 3212. (Ibid.)

The Georgia statute states: "No insurance company authorized to do business in this State, or the agent
thereof, shall make, maintain, or enter into any contract, agreement, pool, or other arrangeaient with any
other insurance company or companies, licensed to do business in this State, or the agent or agents thereof,
for the purpose of, or that may have the tendency or effect of, preventing or lessening competition in the
business of insurance transacted in this state." Georgia Code, 1933, sees. 56-219 (2466). (Ibid.)

'» Pt. 10, R. 4166-4170.

144 CONCENTRATION OF ECONOMIC POWER

evasive memorandum to Mr. BroSmith, he stated the substance of
the Association's activities to be as follows i^^

The recoinineiuiation of the informal committee of representatives can be
adopted or rejected by each company, but as a general rule no recommendation is
adopted by the committee unless the vote is unanimous. There is nothing bind-
ing upon any Company to follow the underwriting rule, the recommended com-
mission scales or the rates which are recommended, but each company appreciates
the advantages of cooperation to such an extent that it follows its own rules,
which are generally based upon the recommendations of the committee.

With respect to this memorandum, Mr. Flynn frankly testified:'^

Mr. Arnold. This certainly was drawn with the idea that there was a real
danger of violating the antitrust laws and it was drawn for the purpose of obtain-
ing the benefits of combination for your company and at the same time not
appearing to violate the law.

Mr. Flynn. I think that is right.

Needless to saj^, Mr. BroSmith's legal opinion was discreet.'^ The
question of legality was again raised in 1925 when certain officers
of the Metropolitan voiced that company's objection to continuing
its membership in the informal association.'^ Mr. Flynn again asked
Mr. BroSmith for a legal opinion, remarking that: '^

* * * it would also be much better to clear up the question of legality of
our meetings as some of the other companies may also become frightened if they
feel that the Metropolitan really have some legal grounds upon which to stand.

In his responding opinion, Mr. BroSmith said: '^

In many of the States the laws which prohibit" tru.sts and combinations in
restraint of trade have been held to apply to insurance companies * * *

To the extent that these laws apply to insurance companies it would seem that
they apply equally well to life insurance and accident insurance and to the organi-
zations of companies which care for the interests of life and accident insurance
companies so that a company official 'who is fearful of the results should avoid
membership on the part of his company or of its officers in the Life Presidents,
American Life Convention, Actuarial Societies, and kindred organizations, which
all have more or less to do with the establishment of the right premium rates for
insurance and the maintenance of right practices. * * *

To sum up, in many States there is no real risk at all. In some States there is
a technical risk but this is no greater than all of the companies are taking every
day in the year with regard to some requirement or other.

In other words, Mr. BroSmith came to the conclusion that the
gatherings and agreements probably constituted "technical" viola-
tions of some State antitrust laws. Nevertheless, no forthright steps
were taken lo disband the organization or to change the direction of its
activities. The Metropolitan never followed its convictions to the
point of withdrawing from the association. It continued to gather
with representatives of the other companies to discuss all matters but

» Pt. 10, R. 4166, exhibit No. 644.

» Pt. 10, R. 4167.

i» Pt. 10, exhibit No. 644.

'• Exhibit No. 645.

" Pt. 10, exhibit No. 645. It is clear that this objection on the part of the Metropolitan was prompted by
the advice of Mr. Leroy A. Lincoln, then general counsel for the company, and did not emanate from a
desire of the Metropolitan "to break over the traces." Id.

IS Pt. 10, exhibit No. 645.

CONCENTRATION OF ECONOMIC POWER I45

rates, in respect to which agreements were reached in special informal
meetings not attended by Metropolitan representatives.^^

For a time, the informal association of companies writing group
insurance accomplished the purposes for which it was organized, but
as group insurance increased in importance there appeared a tendency
for companies to break away from the rules and rates agreed upon.
By 1926 the situation became acute. The Travelers Insurance
Co. had cut rates, the Aetna had violated the rules and other com-
panies threatened to withdraw from the association entirely. ^° At
this point it became apparent to the companies interested in rnaintaui-
ing the agreements that a more formal arrangement must be worked
out if the association was to survive. Accordingly, plans for a more
binding organization were laid. On March 5, 1926, a formal con-
stitution was adopted by 10 companies ^^ who thus became the charter
members of the Group Association.^^

Following the adoption of this constitution, underwriting rules were
drawn on the pattern of rules previously adopted by the informal
association. The constitution provided that these underwriting rules,
first drafted in mandatory language, were to be binding on members.
In the statement of the rules as finally adopted, an effort 'was made to
make the rules appear to be less binding. This was accomplished
by the simple process of changing the word "shall" to "should"
whenever it appeared.-^ By this bit of grammatical jugglery it was
hoped to avoid appearances of combination in restraint of trade.

" Pt. 10, R. 4170.

2" Pt. 10, R. 4174, 4175. Indicative of the situation which then existed are the vigorous disciplinary meas-
ures taken against the Aetna for practicing a rate-cutting device contrary to the association's rule. A memo-
randum written by the Travelers' representative st<ites (pt. 10, exhibit No. 647) :

"In the course of the discussion a large number of cases where Mr. Cammack (E. E. Cammack, Aetna
vice president and actuary) had strained the rules for his company's advantage were brought out • • • I
am referring to the above matter as an important possible cause for trouble in the conference which was
successfully cleared up and matters put in good shape in short order. It illustrates the willingness of the
companies to play together on the basis of an honest interpretation of the rules. The meeting was unfor-
tunate in that the discussion became somewhat heated and personal and undoubtedly scandalized the John
Hancock representatives who were present. Clearly Mr. Cammack was being badly chastised and it was
apparent to all that upon the basis of his improper practices during the past 6 or 12 months he deserved the
rough ha"ndling that he was getting. The measures which were necessary to whip the matter in shape left
some of the weaker company members, such as the Connecticut General an'd the Missouri State, at the point
where they were hinting at getting out of the conference in order to enjoy cut-rate opportunities."

2' Aetna Life Insurance Co., Canada Life Assurance Co., Connecticut General Life Insurance Co., Equi-
table Life Assurance Society, London Life Insurance Co., Metropolitan Life Insurance Co., Missouri State
Life Insurance Co. (General American Life Insurance Co.), Prudential Insurance Co. of America, Travelers
Insurance Co., Sun Life Assurance Co. of Canada. According to available figures, member companies hud
in 1^, 95.2 percent of all group insurance written in the United States. By 1937 the number of members
had grown to 25, and, according to available figures they had 94.3 percent of all the business. Pt. 10, exhibit
Nos. 654, 656.

" The constitution sets forth the objects of the association as follows: "(1) To promote the welfare of hold-
ers of group policies; (2) to advance the interests of group insurant; (3) to promote economy and reduce
expense in the matter of general administration by an interchange of views on practice among instuance
companies which issue contracts of group insurance; (4) to represent the members of the association in mat-
ters pertaining to, or which may affect, group insurance before the insurance departments and other public
and quasi public official bodies; (5) to collect and analyze the group experience of the members of the Asso-
ciation, but nothing in this constitution, or in any rule adopted subordinate thereto, shall be held to author-
ize the making or promulgation of premium rates." Pt 10, exhibit No. 651.

" Pt. 10, R. 4177.

146 CONCENTRATION OF BCONOMIC POWER

In this connection the following testimony of Mr. Flynn, actuary
for Travelers Insurance Co., is revealing : 2*

Mr. Gesell. You recall this letter to Mr. Beers, that you wrote on March 12,
do you not?

"Mr. BroSmith has redrafted the rules adopted by the Group Association at its
meeting held March 5, 1926, as per copy attached.

"As I told you the other day, his feeling was that the association should be
careful in putting out its rules or its minutes of- meetings to steer clear of any
indication of combination in restraint of trade.

"My suggestion would be that you send out new set of rules in accordance
with Mr. BroSmith's draft to be used in place of the earlier set."

Mr. Flynn. Yes, sir.

Mr. Arnold. Am I correct in assuming that the phase "to steer clear of any
indication of combination in restraint of trade" means that you wanted the
combination, but you wanted to steer clear of the indication of the combination?

Mr. Flynn. Yes; I think that is correct.

The association's position on the question of rate fixing further
demonstrates that its basic purpose was to cultivate the benefits of
combination while avoiding the appearances of such combination.
The constitution of the association specifically disowned all rate-mak-
ing activities in the following terms :

* * * nothing in this constitution or in any rule adopted subordinate
thereto, shall be held to authorize the making or promulgation of premium rates. ^^

In the light of the association's activities, however, this phrase must be
considered mere camouflage. Mr. E. E. Cammack, the chairman of
the Group Association, made this patently clear. He testified that
some member companies felt that antitrust legislation made rate-fixing
activities "dangerous" and that, therefore, these activities were con-
ducted on an informal basis. Mr. Cammack stated :^^

The constitution of the association provides that we cannot fix rates, so that it
has been done informally through committees that have recommended rates on tHe
basis of the experience compiled.

It appears, moreover, that rate-fixing activities were contemplated
from the very outset. The minutes of one of the first formal meetings
of the association state :^^

Mr. Bassford said the Metropolitan could not consider entering if rates were
discussed, for some commissioner asks a .question every year about collaborating
with any other company on the subject of rates. It was felt that the subject of
rates might be handled by a temporary committee which might suggest rates and
then dissolve.

Mr. Cammack explained that ^^ "the association as such does not
fix the rates, but we have informal discussion and somebody suggests

" Pt. 10, R. 4177. At a slightly earlier date an officer of the Prudential, in a letter to Mr. BroSmith of the
Travelers Insurance Co., had stated that t had "been wondering whether a written constitution does not
contain seeds of difficulty for the future,' lor the reason that he was afraid "the proposed Group Life Asso-
ciation would be found only too satisfactory as evidence that the companies were combining to prevent such
freedom of competition as would result in the maximum service being offered for the premiums collected"
(pt. 10, R. 4176, 4177).

« Pt. 10, exhibit No. 651.

" Pt. 10, R. 4205.

2' ,Pt. !0, R. 4205, 4206.

29 Pt. 10, R. 4199.

CONCENTRATION OF ECONOMIC POWER I47

they are going to adopt a rate and all the other companies follow so in a
sense they do fix the rate * * *." He admitted that the section
of- the constitution specifying that the association would not fix rates
was more or less moribund though he pointed out that since the fixing
of rates was unofficial and not recorded in the association's minutes,
the companies were bound only by a "gentlemen's understanding."^^
The association, adopting tliis indirect procedure, established uniform
initial rates for group death and dismemberment insurance, group acci-
dent and health insurance, and group annuities.^"

In the case of group life rates, the rate-fixing activities of the
association take a slightly different form. Sometime after the organ-
ization of the Group Association, a law ^^ was passed in the State of
New York giving the superintendent of insurance authority to estab-
lish minimum initial group life fates. The enactment of this law was
opportune for the group companies which were experiencing difficulties
in preventing rate-cutting activity. The association immediately
recommended the "T" rate to the superintendent who adopted it
without modification and invested it with all the sanction of the stat-
ute. Member companies not subject to the jurisdiction of the New
York Superintendent of Insurance agreed that they would not quote
initial rates below the minimum set under the New York statute .^^
Since the members of the association underwrite over 90 percent of
the group life insurance in force in the United States, this understand-
ing resulted in the New York rates becoming the established rates for
the entire country.

With the rate question settled, the association was free to direct its
activities toward the elimination of underwTiting practices which
might in any way enable a member company to circumvent the estab-
lished rate or otherwise ob'tain competitive advantages. It therefore
adopted and perfected rules ^^ designed to prevent undercutting or
the raiding of member companies' business. Agents' commissions
were fixed on a imiform basis and actually prohibited in cases involv-
ing the transfer of business from the books of one member company
to another. Allowances, premium reductions, credits or any special
services in connection with the installation or administration of a
group-insurance plan were prohibited. In order to control competi-
tion on the basis of anticipated dividends, a rule was adopted which

2" Pt. 10, R. 4215. Other rules adopted are given a more formal and binding effect. The constitution
of the Group Association, art. V, sees. 4 and 5 read as follows (pt. 10, exhibit No. 651):

"Sec. 4. The association may recommend rules for the conduct of the business. If unanimously ap-
proved by all members present at a meeting, such recommendation shall be subrnitted in writing by the
secretary to all members, who must record with the secretary their votes in writing. Unanimous approval
by all members, who record their votes within 10 days from the date of notification by the secretary of a
recommendation, shall make such recommendation binding until changed by the vote of the association,
except as provided in sec. 5 following.

"Sec. 5. No member shall change or present any plan for future offer involving a change in a practice
required by any rule adopted, except after 60 days' notice has been served upon the secretary of the associa-
tion who shall notify all members immediately.''

" "Members of the Group Association have written practically all the group annuity business in recent
years; there being only one group annuity contract issued by a company not a member of the association
during 1938 (pt. 10, exhibit No. 659).

" McKinney's Consolidated Laws of New York (Ann.) sec. 101-a (3), Insurance Law.

32 Pt. 10, R. 4179.

33 Pt. 10, exhibit No. 658. Mr. Flynn in a memorandum to Mr. BroSmith, dated April 21, 1933, stated
(pt. 10, R. 4160): "These rules have not dealt with the minor detailed features of the underwriting but
with the important matters upon which the companies should be together in order to prevert ruinous
competition."

]^48 CONCENTRATION OF ECONOMIC POWER

provided that no overhead cost, dividend, or rate reduction should
be estimated by size or risk, either directly or indirectly, by statement
of cost of operation or otherwise and that the only data to be fur-
nished a prospective buyer should be actual past experience on actual
cases."*

The establishment of extra hazardous rates may be taken as another
example of the manner in which the association fixed uniform group
life rates. In certain industries where the mortahty experience is
greater than usual by reason of the occupation of the employees, extra
rates are charged. These so-called extras are an addition to the basic
initial rate and, like it, are promulgated by the New York superin-
tendent of insurance.^^ To determine the rate needed, a committee
of the association considers the combined experience of its six largest
member companies in a given industry ^^ and reaches an agreement
as to the interpretation of that experience. A rate recommendation
is approved ^^ at a meeting of the association and is transmitted to the
superintendent, who "invariably" adopts the recommendation and
establishes the extra in accord with the association's wishes.^** Official
action is practically automatic. The extra rate is agreed upon by
the association's committee, recommended to the superintendent,
and promulgated within a few days' time. In fact, this formal pro-
mulgation is frequently in the identical language of the recommen-
dation.^^

The association is still very active. Its controlling position in the
field of group insurance cannot be gainsaid. During the 12 years,
1926 through 1937, more than 80 percent of the group life insurance
written in the United States was written by association members.
In fact, six of these member companies alone (Aetna, Connecticut
General, Equitable, Metropolitan, Prudential, and Travelers) con-
trolled throughout this period approximately 85 percent of the total
group life insurance in force in this country and wrote during the
same period more than 70 percent of the group life insurance written
in this country.*" These six companies which have also been domi-
nant in the other fields of group insurance have at all times since
1917 .controlled the association's activities.*' Without exception,

3< Underwriting rules adopted by the Group Association cover almost every aspect of the business. The
rules establish the following (pt. 10, exhibit No. 658) : The established rate of interest which shall not be
exceeded in the calculation of payments by installment instead of in one sum; first-year and renewal com-
missions to be paid agents; the period of time for which rates charged labor union groups, employers' groups
or association groups shall be guaranteed; maximum contribution from employees per thousand dollars;
provision for the issuance of group policies covering employees sick at the time insurance becomes eflective;
provisions governing the transfer and replacement of group insurance; the maximum amount of insurance
which shall be issued to any group; conversion privileges of policies; etc.

3' Pt. 10, R. 4179.

3« Pt. 10, R. 4191.

3' In this instance only a majority vote rather than unanimous approval is necessary (Pt. 10, R. 4189,
4190, 4191).

3» Pt. 10, R. 4188, 4189, 4192

3' Pt. 10, exhibit No. 657. As in the case of the basic initial rate, those members of the association who
are not operating in New York are bbund by an agreement to follow the rates fixed by the New York super-
intendent (pt. 10, R. 4192, 4193).

" Pt. 10, exhibit No. 656.

« "Mr. Gesell. I notice that with respect to both of these documents (Schedule of Officers of Associa-
tion and of List of Standing Committees, pt. 10, exhibits Nos. 652, 653) the principal officers and the chair-
manships of the principal standing committees has been in the past almost uniformly allocated to one of
the larger companies. Has that been by chance, or what is the reason?

"Mr. Cammack. Well, the reason is, I think, that 6 companies have such a large proportion of this busi-
ness that I think it is naturally assumed they know more about it. Perhaps that is the reason." (pt. 10,
R. 4185).

CONCENTKATIiON OF ECONOMIC POWER J[49

their representatives have occupied the major offices in the associa-
tion and have been the . most consistent in attending- the regular
meetings.*' It is these six major companies who decided to curb
competition; it is they who were powerful enough to do sOj

B. RATE AGREEMENTS FOR ORDINARY INSURANCE

Among other agreements entered into by the principal eastern
companies are agreements to fix ordinary insurance rates. Though
some of these agreements affect both participating and nonparticr-
pating ordinary insurance, those with respect to nonparticipating
insurance appeared to be the more significant.

The three largest companies issuing nonparticipatmg life insurance
have their home offices at Hartford, Conn. These companies, the
Travelers, Aetna, and Connecticut General, have approximately 31
percent of the nonparticipating insurance in force in United States
companies on their books. *^ Prior to April 1, 1933, they sold non-
participting ordinary insurance at different rates and gave different,
"surrender values.** Travelers had last changed its rates in 1929
and the Aetna and Connecticut General had not modified their rates
since 1926 and 1928, respectively.*^ Commencing in the summer of
1932, however, the actuaries of these tliree companies held discussions
with a view to bringing about rate increases and at the same time
placing their rates and surrender values on a uniform basis. A memo-
randum, dated June 22, 1932, from the actuary of the Travelers to
Mr. L. Edmund Zacher, president of that company, referred to a
conversation which the actuary had had with Mr. Cammack, vice
president and actuary of the Aetna, in the following terms: *^,

Cammack stated that they would like to go ahead with the idea of increasing
rates, but, of course, would be embarrassed if the Travelers did not do likewise.
I told him that I did not see why the three local nonparticipating companies
could not get together on a joint program, for if he was agreeable, we weJe willing,
and from what Actuary Henderson said the other day the Connecticut General,
are thinking along the same line.

Another memorandum in the files of the Travelers written 3 daj'^s
later stated: "

Nonparticipating companies, American Life Convention, appear to want to
increase rates but are waiting to see what the three companies in Hartford will do.

In discussing the situation with Mr. Laird, he said that the Connecticut Gen-
eral was waiting to see what the Travelers and Aetna would do.

Thus it appears that in June 1932, the smaller nonparticipating
companies scattered throughout the Middle West and belonging to
the American Life Convention were looking to Hartford for action
on a rate increase; the Connecticut General, the smallest of the three
Hartford companies, was awaiting action by the larger two, and the
second largest company, the Aetna^ was unwilling to go ahead unles's
the" Travelers expressed itself in favor of an increase.

" Pt. 10, exhibits Nos. 652, 655.

" Pt. 10, exhibit No. 679.

** Pt. 10, R. 4228, exhibit No. 922.

<»Pt. 10, R.-4229.

" Pt. 10, R. 4229.
• " Pt. 10, R. 4230. The naturs and activities of the American Life Convention are described at note 1
p. 164 and note 48 at p. 176, infia.

150 00NCE3NTRATI0N OF BCONOMIC POWER

No adequate justification was offered as to why the three Hartford
companies should embark on a uniform program after competing side
by side for so many years. By way of explanation, Mr. H. S.- Beers,
vice president of the Aetna, stated: ^^

We had been competing in the past, because every now and then we would
come to the conclusion that we could write the business a little cheaper than we
had, and we wanted to cut the rate first to get a competitive advantage. When
it came to raising rates for the sake of safety and not to increase profits but to cut
our losses, we very much hated to be the first company, and we were all waiting
for each of the other two, so the only thing to do was to get together * * *

It appears, however, that only one of the three companies, the
Aetna, had lost money on its nonparticipating .business during 1931
and 1932. Its losses, amounting to $5,818,474, contrasted sharply
with the Connecticut General's profits of $949,841 and the Travelers'
profits of $5,207,039 during this same period.*® It is clear, therefore,
that any agreement to increase rates would be to the decided advantage
of the Aetna, and it cannot be overlooked that the other companies
would be favorably affected.

The actuaries of the three Hartford companies first met on June
28, 1932, at the office of the Travelers to consider the prospective
increase of nonparticipating rates.^" There was no unanimity of
opinion at the time, divergence of opinions being expressed on interest
rates, surrender charges, and the mortality factor to be used.^^ The
discussion at the meeting was friendly and cooperative, however, in
spite of these differences, and Mr. Flynn, of the Travelers, was able
to state at the close of the meeting that ^^ —

The general conclusion from today's meeting would be that material progress
has been made, and we can with fair assurance assume that the local nonpartici-
pating companies will act together in an increase in life rates at the end of this
year.

Efforts to bring about a final agreement were impeded by the
unwillingness of the Aetna to apply the new proposed rates to its
modified life policy, a form of policy which, though not written by
■the other two companies competed with their term policies. The
Connecticut General felt that the stand the Aetna had taken would
be ^^ "a very serious matter from a competitive standpoint" and
that " 'Sinless the Aetna Life will change its rates upon the modified

" Pt. 10, R. 4247.

" Pt. 10, exhibit No. 662. In the 10- year period from 1929 to 1938, the 3 companies pai(J dividends to stock-
holders totaling $51,075,000. The Aetna passed a dividend in 1933, which was the only year any of these
companies failed to pay annual dividends during the entire period (pt. 10, exhibit No. 661). For the years
1929 to 1938, the annual statements of the companies show the following operating results from the sale of
ordinary nonparticipating business: Aetna, $13,295,108; Cormecticut General, $2,282,242; and Travelers,
$17,513,974 (pt. 10, exhibit No. 6,62).

«• Pt. 10, R. 4232:

" Both the Travelers and the Aetna wished a guaranteed interest rate of 4 percent, whereas the Con-
necticut General felt a guaranteed interest of 4H percent was proper. The Aetna was against increasing
surrender charges, whereas the other 2 companies we^e agreeable to such increases, particularly in the early
years. Sharp divergences of opinion also existed on the question of the proper mortality factor. The
Connecticut General felt that the mortality should be computed on the basis of 75 percent of the American
Men's Table commencing at age 20, increasing to 100 percent at age 50 and possibly higher beyond. The
Aetna, on the other hand, desired to compute its mortality on the basis of 90 percent of the American Men's
Table to age 76, with a 2-percent increase each age to age 80. The Travelers opinion, though differing slightly
from the Aetna, did not closely approach that of the Connecticut General (pt. 10, exhibit No. 665).

»2 Pt. 10, exhibit No. 667.

M Pt. 10, exhibit No. 667.

M Pt. 10, exhibit No. 669.

CONCENTRATION OF ECONOMIC POWER I5I

life contract it practically nullifies the entire program." ^^ Appar-
ently 100 percent cooperation had been assumed. The presidents of
the three companies then met on November 16, 1932, to consider the
proposed program of r.^te increases but failed to give their final
approval in view of the Aetna's position. Thereafter, the actuaries
of the interested com])anies held three additional meetings and
reached a compromise understanding.^® The representative of the
Aetna testified that he had compromised his position for the sake of
uniformity ^' and agreed that this was because all three companies
would be more comfortable in their minds if competition was
eliminated. ^^

The uniform rate increase finally became effective April 1, 1933,
and coincident with its announcement the three companies also
announced uniform agreements on surrender charges and surrender
values.^^ Since that time all three Companies have operated on the
basis of uniform rates.

Once the companies had worked out this increase and placed their
rates on a uniform basis additional rate increases were immediately
discussed. By December 1933 negotiations for a new increase were
under way, it being the opinion of some of the company representa-
tives that competition from participating companies would be less
strenuous and that consequently "the traffic might stand a rate
increase."®'' On January 1, 1935, the second increase went into
effect, to be followed by still a third on March 1, 1937. The extent
of these increases over the years from 1933 to 1937 is indicated by
the fact that the premium for an ordinary $1,000 policy taken out at
age 35 in one of the three companies increased, $1.71 per year as a
result. Taking into consideration changes in uniform surrender
values, the resulting reduction in policy cash values might be shown
to have increased the net cost of the insurance still further. In the
case of the Connecticut General, for example; the surrendered net
cost of a $1,000 ordinary policy at age 35, computed on a 10-year
basis, was increased by o^er $40 or $4.11 a year.®'

In connection with the 1035 rate increase, a novel situation was
presented. In the course of conferences among r^epresentatives of
the three companies, it appeared that the new rates would closely
approximate the gross rates then being offered by several participating

" Mr. John M. Laird, vice president and actuary of the Connecticut General, testified (pt. 10, R. 4241);

"Mr. Gesell. • * * though your company and the Travelers did not write this modified life form
your term forms were so near to the modified life form that the Aetna's failure to apply the new program to
its modified life form gave it a competitive advantage.

"Mr. Laird. Well, the 2 situations were sufficiently close that the agents would make comparisons and
it could be shown that the Aetna was offering lower-priced insurance."

»« Pt. 10, exhibit No. 668.

" Pt. 10, R. 4244, 4247.
■ "Mr. Beers. Failure to agree would be a failure to agree, and that, of course, would nullify the agreement.

"The Chairman. And'you felt it very desirable that there^should be an agreement?

"Mr. Beers. Yes, sir.

"The Chairman. And therefore you agreed to abandon your position and to raise the rates in accordaflce
with the modified suggestions of the other 2 companies.

"Mr. Beers. We compromised; yes.. sir" (pt. 10, R. 4247).

»8 Pt. 10, R. 4245.

«» Pt. 10, R. 4239.

«« Pt. 10, R. 4259, 4160; exhibit No. 670.

<' Pt. 10, exhibit No. 677.

152 OONCENTRA-TION OF ECONOMIC POWER

companies, notably, Metropolitan, Prudential, and Provident Mutual.
In fact, at some ages and on some forms, the proposed nonparticipating
rate would actually have exceeded the gross rates of the participating
coriipanies, causing some companies, particularly the Connecticut
General, to feel that an increase in rates would make competitive
conditions too difficult.®^ The Connecticut General, therefore, refused
to agree to a change in rates, and for a short time the rate increase
was blocked.

At this point the Hartford companies appealed to the tliree partici-
pating companies mentioned, suggesting that they raise their rates,
and a conference between -representatives of the sLx companies for a
discussion of the rates and surrender values was arranged. ^^ As a
result of this and subsequent conferences, all six companies announced
an increase in rates early in 1935, the three nonparticipating companies
on a uniform basis, the participating companies on a basis calculated
to lessen competition as between themselves.®*

One of the reasons for the willingness of the participating companies
to join in these discussions and the subsequent rate increase-is reveal-
ing. In a memorandum written March 6, 1934, Mr. James Little,-
vice president of the Prudential, stated the matter thus:®^

In the opinion of the two larger companies (nonparticipating compan^'es) which
raised their rates at certain ages about a year ago, the necessity for a further
increase in premiums has become quite acute. They are, however, very much
hampered in the matter of premium rates by the fact that the premiums of the
three participating companies referred to are so low that a moderate increase in
the nonparticipating rates would bring them very close to the participating rates
of the companies mentioned, and at some ages even above these rates. From the
point of view of this and the other participating companies concerned, therefore,
we are in the position, by reason of our present premium rates, of holding down the
rates of the nonparticipating companies. If insufficient rates should eventually
result in the wrecking of these great nonparticipating companies, a very severe
blow would be given to the life insurance business, so that, for our own protection,
it is desirable that our gross rates should not be so low as to make it difficult for
the nonparticipating companies to increase their premiums to rates which shall
•be adequate and still appear less to a reasonable extent than the rates of any
responsible participating company.

The participating companies thus found themselves holding an
umbrella over the nonparticipating companies, and even protecting

82 Pt. 10, R. 4262.

"Mr. Gesell. Was it not a fact that the Connecticut General did not want to go along with those rates
1/ecause it was fearful of the competition which it would receive from the Metropolitan, the Prudential, and
the Provident Mutual?

"Mr. Flynn. Right."

M In a memorandum written at the time, Mr. Flynn said: "* * • it was decided to ball a conference
with those participating companies whose gross rates, in our opinion, should be increased, particularly at
the older ages" (pt.- 10, exhibit No. 672). The point was commented upon at the hearings (pt. 10, R. 4262) :

"Mr. Gesell. In other words, here you are actually going to the extent, you nonparticipating companies,
of approaching your principal participating company competitors in an effort to get them to increase their
rates, were. you not?

"Mr. Flynn. Correct."

" In a memorandum Mr. Valentine HoweU, actuary of Prudential, wrote (pt. 10, exhibit No. 674):

"Following conferences with the actuaries of the Metropolitan Life and the Provident Mutual, we have
tentatively decided on schedules of increased ordinary premium rates as shown in- the attached illustra-
tion. • • •" *

"The rates described above are believed to be reasonably consistent with those tentatively decided upon
by the Metropolitan and by the Provident Mutual."

« Pt. 10, exhibit r^o. 673.

CONCENTRATION OF ECONOMIC fOWEK 153

the nonparticipating companies.®^ Moreover, the agreement between
the Hartford companies resulted in a rate increase and considerable
unifonnity in rates throughout the nonparticipating field."

As in the case of the group association, no state insurance official
participated in these conferences. Mr. Valentine Howell, the actuary
of the Prudential, testified: ^*

Mr. Arnold. To have this power to fix the rate in private hands without
public supervision is the way you would have it?
Mr. Howell. Yes.

It should be observed, in conclusion, that no publicity was given
the methods or circumstances pursuant to which the uniform results
were achieved. Mr. Beers testified that this was out of deference to
those who were worrying most about the anti-trust laws and stated: ^^

Mr. Arnold. You thought it wise, in view of that split of opinion, then, in
your group as to whether the antitrust law's applied, to conceal this machinery?

Mr. Beers. To avoid pubUcizing, absolutely. That is, our lawyers did not
feel absolutely sure that they knew the answer; they thought the courts might
have to decide something.

C. HUNTER CONFERENCES

For nearly 20 years actuaries representing the principal life insurance
companies have met at the home offices of the New York Life to dis-
cuss annuity rates, pohcy provisions, underwriting problems, divi:
dends, and similar matters.^'' Inasmuch as these conferences have
resulted in the elimination or reduction of intercompany competition
in many important phases of the life insurance busmess, they deserve
special consideratio"n in this discussion.

The conferences take place from two to four times a year in the
office of Dr. Arthur Hunter, chief actuary and vice president of the
New York Life.^^ Usually representatives of about 20 of the largest
companies are present. ^^ .

Notices of the meetings, frequently accompanied by an agenda,
are forwarded company representatives in advance. The proceedings
are informal. At the conferences intensive discussions of the problems
covered by the agenda ensue, following which the participants vote
to commit their companies to a recommended course of action or
indicate what representations they will make to their fellow executives
with respect thereto. ^^ Conferees^ are generally ailthorized to speak

9' This fact is in direct contradiction to statements made by Mr. F. H. Ecker of the Metropolitan and
Mr. T. A. Buckner of the New York Life as to the positron of the mutual companies in the determination
of rates in che industry. Mr. Ecker said (pt. 4, R. 1246): "Competition • * • compels the stock com-
panies to come pretty close to meeting the cost of insurance issued by mutual companies." Mr. Buckner's
statement was even more positive (pt. 4, R. 1423): "The mutual life insurance companies are the factor that
keep down the cost on stock companies as well as the mutual xjompanies. In other words, they are the
bulwark: stock companies have to meet the issue or go out of business."

«' Pt. 10, R. 4277.

«« ?t. 10, R. 4274.

«» Pt. 10, R. 4257.

'» Pt. 10, R. 4508, op. dt. infra: notes 552, 562, 576.

" Pt. 10, R. 4509. See exhibit Nos. 754, 799.

" Pt. 10, R, 4509. On occasion companies represented at the conference have accounted for over 80 percent
of the admitted assets of all United States companies (pt. 10, exhibit No. 754).

" Pt. 10, R. 4510, 4511, 4517, 4518.

2G47G.3— 41— No. 28 11

J54 CONCENTRATION OF ECONOMIC POWER

for their companies/^ and quite often a formal vote hj show of hands
is taken. ^^ It is not infrequent that companies quaUfy their agree-
ment to a particular recommendation by indicating that their actions
jvill be premised upon other companies taking similar action. ^^

Following a conference, Dr. Hunter, by prearrangement, acts as a
sort of "clearing house"; representatives not authorized to bind com-
panies at the conference may report back to him the substance of their
talks with their superior officers and the nature of the final decision
reached by their companies with respect to a proposed line of action."
Thereafter, follow-up letters l^eep every company informed of the
action taken by other companies participating in the conference.
Successive meetings are sometimes necessary to crystallize opinion.
On occasions special subcommittees have been chosen to explore a
problem and report back the most likely basis upon which a uniform
agreement can be reached. ^^

No minutes are kept of the proceedings and at the end of each year
Dr. Hunter's files relating to any subject upon which discussion has
been closed are destroyed.^^" No publicity is given the deliberations
and no representative of any State insurance commission or other
governmental authority is present or invited to attend. All com-
munications relating to the activities of the conferences are sent under
confidential cover.

In the course of the hearings special consideration was given to
conferences held for the purpose oi fixing uniform annuity rates and
establishing uniform surrender values and- settlement options. The
nature of these conferences will be discussed below in some detail.

1. Uniform Annuity Rates

Annuities have been a "problem child" to the insurance business
for many years.^" Companies first, started writing annuities on a
large scale in 1927,^' but it was not untU 1933 that the heaviest selling
took place. From then on through 1937 the premium income from
personal annuity contracts amounted to $1,758,500,000 which is
equal to 68 percent of total premium income received from personal
annuities during the entire period 1913-37.^^ Of this amount, during
the years 1935, 1936, and 1937 over 90 percent was received by
companies attending the Hunter conferences.^^

'< Pt^ lOr R. 4522. After preliminary conferences, representatives were sometimes given special encourage-
ment' to attend with full authority to speak for their companies. For example, a memorandum, subtitled
"Steps in Preparation for Intercompany Conferences on June 3," prepared by Mr. Ray D. Murphy, vice
president and actuary of the Equitable, states in part as follows (pt. 10, exhibit No. 785): "Progress can only
be made If individual companies are willing to waiv6.small differences in viewpoint because of the much
greater advantage which will accrue to all through the sound solution of these problems. At this stage it is
most desirable that each representative comfe to the conference invested with authority to speak for his
company as to its willingness to accept each of the above rules individually, provided that the great majority
of the other companies are willing to do likewise."

'» pt. 10, R. 4517.

""Pt. 10, R. 4520, 4522.

" Pt. 10, R. 4510, 4511.

.'8 Pt. 10, R. 4510, 4511, 4517, 4535, 4575, 4576, 4585.

" Dr. Hunter strfted (pt 10, R. 4511): "It never crossed my mind for a moment that anyone, including
sych a body as this, would be interested in notes made in connection with informal discussions."

" For a discussion of the history of annuities and some of the principal o^ eratlng problems created by
their sale see pp. 328 to 336, infra.

«' Pt. 10, R. 4506.

«» Pt. 10, exhibit No. 751.

»*Pt.lO, exhibit No. 780. .

CONCENTRATION OF ECONOMIC ^OWER J 55

Vp until 1932 the principal companies broke about even in the sale
of annuities. In 1932, however, 17 of the 24 largest companies ex-
perienced losses, and since that time losses totaling over $75,000,000
have been incurred.^* The "Big Five" companies have been the
Jargest losers during the last 10 years, the New York Life showing
losses aggregating $36,882,535 for the period.^^

Companies were just commencing to feel the strain when the first
annuity conferences were held in March 1933. The New York
insurance commissioner had suggested revision of mortality and interest
factors used in computing annuity ra,tes, and the companies themselves,
with the 1932 losses in mind, were beginning to recognize the error
of the original annuity calculations.*® From March 1933 to October
1938, a series of 14 conferences of the principal United States and
Canadian companies were held.*^ For the most part these conferences
convened at the offices of Dr. Hunter, though occasionally elsewhere.**

At the conferences all factors to be considered in computing annuity
rates were discussed, including mortality, interest, and loading.*^ It
was the purpose of these meetings to reach as near as possible a uni-
form program for increasing annuity rates. ^ In the period of 5 years
during which these 14 conferences were held, 4 rate increases for
immediate annuities were agreed to and put into effect by principal
companies. These increases became effective July 1, 1933,^' January
1, 1935,^2 Januaiy 1, 1936, ^» and July 1, 1938.^^" In addition, many
other phases of the annuity problem were discussed and efforts made
to standardize practices.^^ Most important were the efforts to estab-
lish uniform commission rates for agents in the sale of annuities.
• Two such agreements entered into by a substantial number of com-
panies became effective coLncidently with the announcement of the
first two rate increases.**

The Metropolitan, Prudential, New York Life, Equitable, and the
Mutual Life, leaders in the sale of annuities, appointed themselves a
steering committee of the Hunter annuity conferences. In advance

» Pt. 10, exhibit No. 753.

M Pt. 10, exhibit No. 762. For information indicating individual annuities in force and annual income
payable thereunder, first-year and total premium income received from individual annuities, dividends
paid annuitants, and changes In total annuity surplus, see pt. lOA, R. 53-59.

M Pt. 10, R. 4509, 4510, exhibit No. 753.

f Pt. 10, exhibit No. 764.

" Pt. 10, R. 4509; 6 of the conferences were steering committee conferences at which only the 5 largest
companies were represented (pt. 10, exhibit No. 754).

» Pt. 10, R. 4516.

"Mr. Gesell. • • • you wei;e considering at these meetings _ ' * ' not only questions of mor-
tality experience but also loading and interest rates.

"Dr. Hunter. That is true.

"Mr. Gesell. Those are the 3 factors which go to make up the annuity rate.

"Dr. Hunter. Yes."

•« Pt. 10, R. 4513.

" Pt. 10, R. 4517.

" Pt. 10, R. 4531.

« Pt. 10, R.4534-4537.

M Pt. 10, R. 4540, 4541.

" Among other annuity problems considered at the conferences were lue lollowinr: Retirement annuity
rates, survivorship annuity rates, checking more carefully evidence of date of birth c annuitant applicant,
the desirability of participating or nonparticipating annuities, limitations on the amount of single premium
annuities, the desirability of continuing the issuance of single premium annuities on the same life without
medical examination, tlK. elimination of single premium retirement annuities, cash refund installment and
temporary annuities, the desirability of dispenskig with combined single premium and annuity contracts
and mortaUty experience on aimuities of various types (pt. 10, exhibit^ Nos. 755, 766, 767, 772, 774).

« Pt. 10, R. 4618, 4533, 4634, exhibitsNos. 762, 763, 764.

156 CONCENTRATION OF ECONOMIC POWER

of meetings at which important matters were to be considered, repre-
sentatives of these companies would meet, compromise their own dif-
ferences, and arrive at a tentative decision on the matters under dis-
cussion.^^ This tentative decision would then be recommended at the
large? meeting of company representatives.^^ In this manner the five
campanies were often able to dominate and give direction to the pro-
gram.

The record is replete with evidence that company representatives
surrendered their individual judgments for the sake of fixing a uniform
rate. Some of the companies et^en yielded their right to an individual
opinion in advance, indicating that they would go .along with what-
ever the majority chose to do."^ Notes of the meetings are profuse
with such statements as "We expect to go along with the majority
of the conipanies and certainly will if the Travelers and Connecticut
General fall in line." ^'^ "Three others preferred not to change now
but would probably fall in line later: Connecticut Mutual, New Eng-
land Mutual, State Mutual." ^''^ "Guardian: Thinks increase too
great, but probably will go along with other companies after further
discussion with officers." ^"^ With respect to the 1936 rate increase,
at least seven companies indicated that their action was premised upon
the action of other companies. A memorandum by Dr. Hunter records
the following company attitudes :^°*

New England Mutual, if there is any general trend in that direction.

Sun Life, anxious to adopt if 10 companies of importance in the annuity field
are willing to do so.

Home Life, would follow if one-half of the companies in the Little Entente
did so.

Guardian Life, will probably follow the action of the majority of the other
companies.

Provident Mutual, are sympathetic and would like to adopt the new basis if a
substantial number pf companies do so.

Prudential, are awaiting to know more definitely which companies will make
the change indicated.

Phoenix Mutual, depends on tb£ action of the other companies, including the
two participating companies.

Efforts were made to induce these companies which had not indi-
cated a "ready willingness to go along on a proposed program to con-
form. For example, of the meeting on May 18, 1933, Mr. Flynn, of
the Travelers, wrote :'^*'^

* * * 'j'j^g general feeling was that '1 some missionary work were done on
the Connecticut Mutual, Ehoenix Mutual, and New England Mutual, practi-
cally all important companies, with the possible exception of the Provident
Mutual, would go along on the proposed program.

Self -solution of problems was discouraged. In the interest of the
elimination of competition, it was important, that all companies of
any one competitive class adopt the uniform program. By continu-

«' Pt. 10, R. 4528, 4529, exhibit No. 754.
»8 Pt. 10, R. 4529.
;»9 Pt. 10, exhibit No. 756.
"» Pt. 10, exhibit No. 777.
11" Pt. 10, exhibit No. 762.
i«l Pt. 10, exhibit No. 756.
»M Pt. 10, exhibit No. 768.
"i< Pt. 10, exhibit No. 756.

CONCENTRATION OF ECONOMIC POWER J 57

ous conference, compromise, and persuasion, uniformity was in fact
achieved.

2. Uniform surrender values and surrender charges

Another instance of the elimination of intercompany competition
is found in agreements bringing about an increase in surrender charges
and a corresponding reduction of cash-surrender values. For many
years prior to the depression, there had beer crmpetition among the
companies on the matter of cash surrender values. ^°^ In 1933 dis-
cussions were initiated at the Hunter conferences looking toward a
reduction of surrender values and an increase of surrender charges.
These discussions were led by the five largest companies, who appar-
ently took the position that when any conservative action is taken the
larger companies have to lead the way.^*^^ A plan for increased sur-
render charges was prepared by Mr. James Little, actuary of the
Prudential. The plan was not, however, immediately submitted for
approval to the Prudential board of directors because apparently it
was thought best not to follow the procedure which the actuary
thought best unless similar programs were adopted by its principal
competitors. • A memorandum of Air. Little, WTitten with respect to
this matter, stated: ^^^

It probably would not be feasible for any one company to start alone along the
path indicated, but if the Prudential, jointly with the four large New York com-
panies, adopted the plan, it would unquestionably be followed by many other
companies who at the present time are very anxious to provide, as far as possible,
against a recurrence of the extremely difficult situation which they have suffered
from for the last year or two. It is suggested, therefore, that if the plan is felt
to be desirable the matter should be discussed with the four other companies
indicated (i. e.," Metropolitan, Equitable, Mutual, and New York Life) to see
what possibilities of joint action may exist.

A meeting of representatives of the five named companies was held
and a tentative decision reached. This decision, embodying a com-
plete new scale of surrender charges, ^°* was then submitted to a larger
meeting of the representatives of the principal companies. Final
action on the recommendation was not taken until after a series of
intercompany conferences stretching over a period of approximately
a year.^°^ These conferences were carried out along lines which
marked the general path of the Hunter conferences already discussed

In the course of the conferences it was revealed that in 1932 the
Northwestern Mutual, Provident Mutual, Massachusetts Mutual,
National of Vermont, Connecticut Mutual, and State Mutual had
adopted a program fixing uniform surrender values and charges.. "° As

"" Pt. 10, exhibit No. 807. A memorandum written by Mr. William A. Hutcheson, actuary of the
Mutual, in speaking of the enormous demand for cash values states that (pt. 10, exhibit Ko. 807): "Th.e
Federal banking holiday of March 1933 was followed by numerous State embargoes on cash values and loans.
Had it not been for these embargoes many life companies would h.vi e gone under, and once this had hap-
pened there is no saying where it would have stopped." ^

">« Pt. 10, exhibit No. 807.

"" Pt. 10, exhibit No. 801. In another memorandum Mr. Littl.' v, rites (pt. 10, exhibit No. 802): "• • •
it (is) felt that the new schedule of surrender values would be u- d' iirable unless adopted by at least 3 or 4
of the 5 large companies. If substantially reduced values are J' Jted by the very large companies, it is
almost certain that many of the smaller companies will be glad o allow suit."

109 Pt. 10, exhibit No. 806.

"» Pt. 10, R. 4619^632; exhibits Nos. 801-807.

"D Pt. 10, exhibit No. 802.

J 58 CONCENTRATION OF ECONOMIC POWER

has already been indicated, the three nonparticipating companies at
Hartford, Conn., adopted a, uniform basis of their own at about the
same time."^ The surrender values adopted by these two separate
groups of companies were not strictly in accord with the plan proposed
by the five principal participating companies. The first group
declined to make any immediate change. However, the Hartford
companies revised their procedure, adopting higher surrender charges,
and the five largest companies entered into a joint program which
resulted in an announcement by these companies of a new surrender
value program sulstantially identical for each company. "^ A memo-
randum of the Mu U'^ Life's actuary stated the tenor of the confer-
ences indicated that the scale adopted by these larger companies would
soon be followed by other companies participating in the conferences.
The memorandum stated : "^

It may, therefore, be said that there is a general movement throughout the
United States, and Canada as well, to go back to a more conservative scale of
cash values than those now guaranteed in present contracts.

3. Uniform Settlement Option Provisions

Practically all ordinary life insurance policies contain provisions
granting a choice as to the manner in which the proceeds of the policy
are to be paid if other than a lump sum settlement is desired. Under
these options the proceeds, may be left at interest with the company,
may be used to purchase an a.nriuity, or may be held to the use of
the beneficiary in innumerable other ways.

Prior to 1935, the comparative liberality of the companies in the
number and provisions of the options alloved was undoubtedly an
important factor in competition."^ Over the course of years these
settlement options grew increasingly numerous and complex as com-
panies strove to meet the varied needs and demands of policyholders
or to present some new settlement device not used by their com-
petitors."^ Settlement option forms had become so varied and com-
plicated by 1935 that it became apparent to the actuaries of several
companies that the continued extension of settlement privileges was
certain to bring about serious underwriting problems and was not
good business."^

It was recognized that the insurance companies were being forced
to act as executors and trustees for the estates of their deceased
policyholders,"^ but it appears to be a phenomenon of the insurance
business that where a proposed change in practice would touch upon
matters affected by competition, no company is willing to act alone.
True to form, therefore, in an attempt to secure a uniform practice

"1 Ibid.

112 From company rate books.

1" Pt. 10, exhibit No. 807.

i!< Pt. 10, R. 4570, 4571, 4584.

•1' Pt. 10, R. 4570, 4571.

1" Mr. J. F. Little, of the Prudential, stated in a letter written to Dr. Hunter on November 12, 1935, as
follows (pt. 10, exhibit No. 782) :

"I have felt for along time that we, under the stress of competition, have become rather too liuir?! in 2
directions: First, in undertaking certain arrangements that, perhaps, we should refuse; and seconds in
allowing very complicated an<i intricate settlements, some of which have already come through to the
claims department and had that department very much concerned as to just what the complicated settle-
ment really meant."

•1' Sec c. g. pt. 10, exhibit No. 785.

GONCENTRATrON OF ECONOMIC POWER I59

among the leaders of the industry, the technique of the Hunter con-
ference was again called into play."®

Discussions commenced in October 1935 and continued in a series
of 11 meetings until May of 1938, when final agreements were reached
on a uniform settlement option program."^ When the conferences
first got under way there was a general feeling that options should
be curtailed, but beyond that there was such a wide divergence of
opinion that agreement was impossible. Dr. Hunter testified: ^^°
"* * * so far as I remember, the differences were so great that we
didn't come to any common understanding." A subcommittee, com-
posed of actuaries and lawyers, was formed to make specific recom-
mendation, but by 1937 it had produced no results, and consequently
a second subcommittee, headed by. Mr. Ray D. Murphy, '^^ vice
president and actuary of the Equitable, was appointed by Dr. Hunter
to formulate a set of rules for recommendation to the companies.

At about this time tlie problem was being considered by the super-
intendent of insurance of New York who proposed to study the situa-
tion with a view to making reconmiendations for provisions to be
included in the New York Insurance Code then being drafted. On
learning that the insm-ance companies would prefer to handle the
matter themselves, he obligingly left it to them. The testimony on
this point deserves particular attention: *^^

Mr. Murphy. * * * j had a subsequent discussion with the superintendent
which verified the fact that the question in his mind was whether such provisions
should be put in because, very obviously, in his opinion, the companies through
this, what I may call compounding of beneficiary clauses, had gone further than
appeared in his opinion to be good practice, considering the general welfare and
safety of the whole body of policyholders.

Mr. Gesell. He was interested in writing provisions into the New York law
which would eliminated some of the abuses which he thought might have
developed.

Mr. Murphy. He was until I told him about our meetings and what we were
studying and that the problem seemed so complicated that it might be rather
difficult to draft statutory provisions which would turn out to be wise, and that
it seemed to me that it might be more practicable to let the companies see
whether they could not come to a reasonable consensus of opinion as to what

1" The reason for the desire for uniformity was brought out in testimony (pt. 10, R. 4584):

"Mr. Gesell. Am I correct in gathering from the last letter which I read that this question of settle-
ment options did have some competitive importance? In other words, that companies with more liberal
settlement option provisions stood, perhaps, to gain in the sale of insurance as against companies which
had stricter provisions?

"Dr. Hunter. Yes.

"Mr. GE3ELL. If that is correct, I take it, it is also correct that one of the great interests of the companies
attending these conferences was to bring about a uniformity of position on the part of the companies so
that competitive advantage would not accrue to any particular company.

"Dr. Hunter. To such an extent as it was possible.

119 Pt. 10, R. 4617, 4618, exhibit No. 799.

120 Pt. 10, R. 4572.

121 Pt. 12, R. 4575. Mr. Murphy testified (pt. 10, R. 4577): "My best recollection is that in discussing
the matter, it was very difficult, with a large group, to consider all possible suggestions for reasonable limi-
tation on these combinations of modes of settlement that would still preserve the essential services to the
beneficiaries and yet not go to what a great many people considered a bit dangerous point, and in order to
have a workmg basis that was more practicable, it was felt that if they had a committee, a subcommittee,
that they could probably in a more intimate way discuss the matter and get to some sort of recommenda-
tions which they could in turn pass over to the group." The other members of this committee were rep
resentatives of the Prudential, Connecticut General, Mutual, and Provident Mutual. Ibid.

'" Pt. 10, R. 4578, 4579.

IQQ CONCENTRATION OF ECONOMIC POWER

limitations would be wise, and then follow that process of, what I may call,
voluntary action rather than specific statutes at a time when it is very difficult
to tell just what these specific statutes should be.

He thereupon said that he thought that that probably was a satisfactory way
to handle the matter, and would I keep him advised as to what the recommenda-
tions of this group were, which,of course, I duly did.

Having .thus forestalled legislation, Mr. Murphy's subcommittee
continued its efforts to formulate a uniform program.

On May 28, 1937, the subcommittee issued its report entitled
"Revision of practice on optional settlements." The first paragraph
of the report read as follows: '^^

There is a growing realization that current practices under optional settlements
need revision. Many companies now desire to solve the problems of unsound
practice which have been encouraged by unwise competition in the past and greatly
accentuated by the conditions of the last 3 years.

Twelve specific settlement option rules were recommended in the body
of the report and each company was requested to send a representative
to a conference scheduled for June 3, 1937, in Dr. Hunter's office, to
vote on the adoption of the recommended rules. '^* Some 20 companies
were in attendance. A few companies Indicated their disapproval of
the specific recommendations, and in almost every instance a number
stated that they "were on the fence." '^^ Nevertheless, there were
indications that the program would in the main be put into effect by
the great majority of the companies present. ^^^ Subsequent to the
meeting the rules were revised and again sent out to each company
representative.

Two months later, it appeared that the program was not going
through as anticipated. Many companies had not adopted the rules
and the New York Life, which had gone ahead apparently on the
assumption that other companies would follow, stated that it was
"finding it very tough in competition." ^" At least one smaller com-
pany requested an additional meeting "to clear the air." '-^ At the
semiamiual meeting of the Actuarial Society of America at Swamp-
scott, Mass., the followiitg October, a group of interested companies
again set in motion efforts to bring about greater uniformity and a
conference was scheduled in the offices of the Metropolitan for the
middle of the following November. '^^ According to a letter of Mr.
p]. W. Marshall, vice president of the Provident Mutual, written at
the time to Mr. Murph}^ it appeared that — '^^

Quite a number of the representatives at the conference indicated the readiness
of their respective companies to adopt Uie rules provided a majority of the com-
panies of their own group did likewise. Some of them however were reluctant
to ''pioneer" in the absence of definite information regarding the official attitude
and intentions of other compnnios.

in order to overcome the reluctance of the individual companies
to "pioneer," Mr. Marshall sent out a questionnaire to each companj'

1-'' VI. K). oxliibit No. TSf).

I" I't. 10, cxJiibit No. 785.

•« PI. 10, K. 4o81, 4.^2, e.vhibil. No. 787.

'■« Pt. 10, R. 4582.

i^' Pt. 10, R. 4583, 4584.

i2« Pt. 10, exhibit No. 789.

'2« Pt. 10, exhibit No. 790.

"0 Pt. 10, cxhiliit No. 790.

CONCENTRATION OF ECONOMIC POWER JQl

requesting it to state with respect to each of the 12 proposed rules
whether or not it would adopt the same, provided: '^' "At least 75
percent of the companies of your group will do so." Each company-
was further requested to name those of its competitors whose approval
would be considered a condition precedent to its own adoption of the
rules. An intercompany conference was held November 15, 1937, "for
the purpose of stimulating the adoption of settlement rules by addi-
tional companies" and certain modifications made to effect greater
harmony. A revised schedule of questionnaire replies which included
the results of the intercompany conference was sent under cover
marked "Very confidential" to each of the 27 interested companies.
It indicated that on almost every rule as finally proposed there was
little or no disagreement and that the adoption of all such rules by a
great majority of the companies was certain. One factor apparently
contributing to this great uniformity was the understanding voiced
at the meeting that any company subscribing to the rules rleed not
feel bound in competition with a company wliich had declined to adopt
them.'32

Immediately after tliis agreement was effected, the companies
turned their efforts toward eliminating from competition other settle-
ment option problems and under the guidance of Mr. Marshall, some
20 companies reached substantial agreements on 5 additional points
of controversy, including the guaranteed rate of interest, the interest
option, and the bases to be used in computing the life income option,
the maturity settlement endowment option, the fixed income unti'
proceeds and interest exhausted option, and the installments certain
option; these being the 5 principal optional modes of settlement. ^^i

D. OTHER INTERCOMPANY AGREEMENTS AND ANTI-
COMPETITIVE UNDERSTANDINGS

Space does not permit a full discussion of other forms of intercom-
pany agreements in the life insurance field which tend to stifle compe-
tition. A brief reference to certain agreements not already considered
must suffice.

1, Reinsurance Conference

The reinsurance conference is an informal organization of companies
writing life and accident reinsurance which was formed in 1929 to
"encourage constructive rather than destructive competition between
the respective companies" writing this type of insurance."^ The
principal efforts of the organization have -been to eliminate rate cut-
ting activities; and the president of the largest member company was
able to testify that these efforts have been successful -to the extent
that price competition is no longer a factor in the reinsurance field. ^^*
In addition, the conference has promulgated and enforced rules gov-
erning underwriting practices many of which are, as was found in the
case of the Group Association, designed to prevent indirect rate
cutting by the offering of special services to companies purchasing

"1 Pt. 10, e.'ihibit No. 790.

I" Pt. 10, R. 4598, exhibit No. 793.

'33 Pt. 10, exhibit Nos. 79S, 79n.

"" Pt. 10,.exhibit No. 824.

>" Pt 10, R. 4(»1.

IQ2 OONCENTRATION OB' BCONOMIC POWER

reinsurance."** No public regulatory body has participated in the
determination of the rates or the underwriting rules established by
the conference."^

2. Replacement Agreement

The anti-twisting laws of almost every State prohibit" one life insur-
ance company from taking insurance away from another by means of
misrepresentation or omission to state a material fact."* These laws
usually leave open to any company the right to represent its policies
truthfully to the policyholder of another company and thereby to
attempt to transfer the business of that policyholder. To prevent
this kind of competition and to supplement the antitwisting laws,
about 90 of the principal American and Canadian companies in 1931
entered into the so-called replacement agreement."^ This agreement
is officially known as "A plan for discouraging the replacement of life
insurance of one company by new msurance in another company." ^^
It provides that all signatory companies should ask the prospective
policyholder to state in his application whether the policy applied for
is intended to replace another. If such is the case, the company re-
ceiving the application agrees to notify the other company whose
policy is being replaced and to delay issuance of a new policy for 2
weeks in order to give the latter company an opportunity to prevent a
transfer by discussing the raatter with its policyholder.'*^

3. The Medical Information Bureau

The medical information bureau is designed to facilitate the inter/
change of information bearing on the insurability of persons seeking
insurance.'*^ There are 100 life insurance companies which are
regular members of the bureau and 115 additional companies which
are associate members.'*^ At present on file with the bureau are
approximately 6,700,000 names of individuals who have physical
impairments making them undesirable or questionable risks. When-
ever any member of the bureau receives information indicating a
medical impairment of any policyholder or prospective policyholder,
it reports this information to a central clearing office which makes up a
card containing the name of the individual reported and a code state-
ment of his impairment.'** Copies of these cards are then distributed
to all members of the bureau. In this manner the competitive advan-
tages adhering to any company by reason of careful medical selection
are almost entirely eliminated.'*^

'39 Pt. 10, R. 4677, exhibit No. 825.

"7 Pt. 10, R. 4678.

138 Pt. 10, R. 4649. New York, cb. 28, Consolidated Laws (1940) sec. 127; Connecticut, sec. 4140, General
Statutes, 1930 (Pam. 1938, p. 23); Massachusetts, sec. 181, ch. 175 General Laws 1932, amended, oh. 395, L.
1939; and New Jersey, sec. 2: 142-1 Revised Statutes, 1937.

"9 Pt. 10, exhibit No. 817. Some companies instruct their agents that any kind of policy replacement is
undesirable and illegal. See, e. g., Replies of Business Men's Assurance Co. (Supplemental Training Plan
pt. 4) and West Coast Life Insurance Co. (A Preliminary Guide) to commission's sales questionnaire.

i« Pt. 10, exhibit No. 815.

'<' Of similar effect is an agreement among 4 of the 5 largest companies not to take business from another's
agents without first giving notice to representatives of that agent's company, (pt. 13, R. 6564).

'" Pt. 10. R. 4634.

1" Pat. 10, exhibit No. 810.

'" Pt. 10, R, 4636-4038

i">Pt. 10, R. 4641, 4642.

CONCENTRATION OF ECONOMIC POWER lg3

4. Committee on Underwriting Large Risks

The committee on underwritijig large risks is a committee composed
of actuaries and medical officers of the principal companies who have
joined together for the purpose of establishing uniform underwriting
rules applicable to the issuance of poHcies in amounts in excess of
$50,000.^*® These rules have been adopted by most of the leading
life insurance companies and, in general, are designed to require more
rigid medical examination and more extensive inquiry into the back-
ground of apphcants for large policies. ^*^ The committee also main-
tains a central clearing office to which is reported all insurance taken
in blocks of $50,000 or more.^*^ Information thus reported is available
to member companies.

5. Agency Practice Agreement

In 1935 the principal legal reserve life insurance companies entered
into a declaration of 10 guiding principles which they agreed to prac-
tice in the conduct of their agency departments.^*^ By 1938 some 62
United States and Canadian companies were signators to the agree-
ment which, in general, was intended to eliminate the employment of
part-time agents in cities of 50,000 persons or more and to estabheh
certain general criteria for the selection and training of new agents, ^^"
The ninth provision to the agreement to which most of the 68 com-
panies have subscribed provides that no signatory company will
make a contract with an agent of another company without first
communicating with the agent's home office. ^^^

Thus we have seen that the principal legal reserve life insurance
companies have entered into formal agreements and "gentlemen's
understandings" to fix the rates for ordinary insurance, group insur-
ance, reinsurance, and annuities as well; and have, by intercompany
conferences, established a uniform basis for surrender values, settle-
ment option provisions and the underwriting of large risks. In
addition they have sought to control the transfer of business as
between one another, to regulate the exchange of medical information
and to control commissions and agency practices. Though this field
has not been entirely explored, the evidence is adequate to demon-
strate that as a result of these activities competition has been seriously
limited in many important areas of the business.

The intercompany agreements invariably originate with the
largest companies who are anxious to keep their dominant position
intact. In the interests of uniformity, companies participating in
the agreements have been willing to surrender their individual judg-
ments for the sake of harmony. Without regard for existing anti-
trust statutes and sometimes apparently in spite of such statutes,
the companies have carried on their anticompetitive undertakings in
the absence of participation from any public authority and in a
manner which has kept secret both the fact of the agreements them-
selves and the methods by which they were reached.

'« Pt. 10, R. 4642-4644, exhibit No. 8U.

'«' Pt. 10, R. 4644.

1" Ibid.

•« Pt. 13, exhibit No. 1337.

'«« Pt. 13, exhibit No. 1337, 1338.

I" pt. 13, exhibit No. 1337. For a discussion of Equitable's withdrawal from this agreement see Ibid.

SECTION XII
The Life Insurance Company Lobby

Another form of intercompany activity may be found in the
combination of hfe insurance companies for the purpose of defeating
or influencing State and Federal legislation. The principal legal
reserve companies conduct their legislative activities through an
association known as the Association of Life Insurance Presidents.'

This association was organized December 21, 1906.^ At the present
time, 67 legal reserve life-insurance companies representing appro.xi-
mately 85 percent of the legal reserve- life-insurance business in the
United States are members.^ Over 60 persons are employed by the

' The Association of Life Insurance Presidents is perhaps the principal trade association in the legal
reserve life insurance field. Among other important trade associations arc the following which reported
to the Department of Commerce in response to a questionnaire sent trade associations in connection with
special studies being conducted for the Temporary National Economic Committee:

American Lije Convention. — A voluntary, unincorporated association of legal reserve life insurance
companies engaged in collecting and distributing to its members information on all subjects pertaining to
life insurance. It has 150 members, which members underwrite about 40 percent of all life insurance in force.
It maintains a legal section, which reports legal news of interest to life insurance companies. Its cash receipts
for 1938 were $119,852.71. Almost $50,000 were paid in salaries. The Convention has a vice president in each
State in which a member is domiciled, and through these vice presidents it renders legislative service to its
members. For further discussion of the legislative activities of the Convention, see p. 176, infra.

National Association of Life Underwriters. — An association of general agents, managers, superintendents
and agents engaged in the sale of life insurance and annuities. Its 1938 membership was 26,094. Its princi-
pal activities are arranging of conventions, recommending or disapproving proposed legislation, and publi-
cising life insurance. It maintains a New York office, with a staff of 15 full-time paid employees. Addi-
tional information on the purposes and activities of this association may be found in pt. 28, exhibit Nos.
23-.'0, 2330, 2333.

Industrial Insurers' Conference. — An organization of 35 insurance companies writing industrial life insur-
ance, designed to exchange information and improve practices in the industrial field. Members are almost
all stock companies.

Life Office Management As.iociation. — An association of 143 members, formed to forward research in
management problems of life insurance companies. Annual conferences are held as open forums for the
presentation of member company operating routines and practices. It conducts the Life Office Manage-
ment Association Institute, which gives educational courses in various insurance company management
subjects.

Association of Life Agency Officers.~An association formed for the purpose of the consideration and
interchanging of opinion on distribution problems in life insurance. It has 130 company members.

Life Insurance Sales Research Bureau. — This is an organization formed for the purpose of studying the
selling conditions in life insurance and to act as a medium for the exchange of ideas between members. It
is supported by 130 members, representing over 90 percent of the life insurance in force in the United States.
Its income for 1938 amounted to over $200,000. It has made a great many detailed studies of many angles
of life insurance marketing. See testimony of Mr. John Marshall Holeombe, manager of the Life Insurance
Sales Research Bureaut pt. 10, R 4317-4339.

Institute of Home Office Underwriters.— -A.n association of 42 company members. It was organized for the
purpose of developing sound and uniform underwriting practices among its members by means of discussions
and interchange of information and ideas.

National Negro Insurance Association. — An organization of 39 legal reserve companies controlled by Negroes.

National Association of Insurance Brokers, Inc. — An association of members who are licensed to act as
insurance brokers in any capacity. Its stated purposes are to arrange trade-practice conferences, to combat
unfair competition, to represent its rtiembers before legislative bodies, and to furnish information and legal
service to its members. Almost 2,500 brokers and brokerage firms are members.

2 See pt. 10, exhibit No. 690 for minutes of organization meeting.

3 Pt. 10, exhibit No. 691. The association's constitution provides that any legal reserve life insurance
company of the United States or Canada, which has operated on a legal reserve basis fdr at least 10 years, is
eligible for membership. Pt. 10, R. 4347. Technically, the president of such a company applies for mem-
bership, but practically, the company itself becomes and is the member.

164

CONCENTRATION OF ECONOMIC TOWER 165

association, which maintains offices in New York City.* Its pohcies
are determined by an executive committee of 11 members, among
whom are the presidents of the five largest companies and Mr. L.
Edmund Zacher of the Travelers, the seventh largest company.^ The
association is financed by initiation fees, dues and in greater part by
contributions of its members, upon whom "calls" computed on the
basis of relative size and first-year premium income, are made for
their pro rata share of the expenses.^ Just as the largest companies
dominate the executive committee, so also do they make the largest
contributions to the association's income. In 1938, the Metropolitan
alone contributed $76,195 and the six largest member companies con-
tributed $257,474, an amount equal to approximately 59 percent of
the entire income of the association.^

The association has three principal activities: ^ to assemble statis-
tical information for the benefit of the member companies,^ to partici-
pate in or give financial support to "test litigation" affecting insurance
companies,'** and to engage in legislative and lobbying activities on
behalf of its members. The predominant importance of the latter
activities is evidenced by the fact that in 1937, disbursements for
lobbying expenses totaled $181,246 out of a total disbursement by
the association of $398,380. A similar, heavy expenditure in other

* Pt. 10, R. 4348.

' Pt. 10, R. 4349, 4350. The Northwestern Mutual is the sixth largest legal reserve company and the only
large company not a member of the association. Mr. Cleary, president of that company, stated that there
was no particular reason why it had not joined the association and testified: "We are a bit far away and we
maintain very friendly and satisfying contact with the association" (pt. 4, R. 1499).

» Pt. 10, R. 4348. Once a member, it is difficult for a company to differ from the general policies formulated
by the association inasmuch as a dissenting member refusing to cooperate in a particular venture is, never-
theless, assessed its share of expenses (pt. 10, R. 4351).

■' For information indicating initiation fees, dues, and contributions paid by the association's member
companies, see pt. 10, exhibit No. 691.

9 The association's guiding principles which it was stated have been followed ever since its origination
are (pt. 10, exhibit Nos. 690, 692):

(1) To promote the welfare of policyholder;

(2) To advance the interests of lite insurance companies in the United States by the intelligent co-
operation of officers in charge;

(3) To prevent extravagance and reduce expenses by encouraging uniformity of practice among life
insurance companies in matters of general administration;

(4) To consider carefully measures that may be introduced from time to time in legislative bodies
with a view to ascertaining and publicly presenting the grounds which may exist for opposing or advo-
cating the proposed legislation; and

(5) To consider anything that may suitably be a matter of general concern to the life insurance busi-
ness.

» Pt. 10, R. 4351, 4352.

" Pt. 10, R. 4352-4355. The association has been active in this field of test litigation. During the period
from 1934 to 1938, it gave financial support to 30 different actions and paid legal fees of over $197,000 and
expenses of over $27,000 in connection therewith, hiring such well known firms as Davis, Polli, Ward\.-ell
Gardiner and Reed; Root, Clark, Buckner and Ballantine; and Bruce and Bullitt (pt. 10, exhibit No. 693). .
• The most important test litigation in recent years involved the association's participation in litigation
testing the constitutionality of the Frazier-Lemke Act. The executive committee of the association felt
that this act, which it had opposed unsuccessfully in the Confess, might cause grave danger to the security
behind many mortgages owned by the insurance companies and consequently hired attorneys to represent
tho.Louisville Joint Stock Land Bank, one of the parties to the litigation. The association's participation
in this litigation was not disclosed although the legal fees expended by the association in 1935 in this con-
nection totaled $60,000 (pt. 10, R. 4352-4354, exhibit No. 693).

166

CONCENTRATION OF BCJONOMrC POWER

legislative years is apparent from an examination of the association's
accounts."

In an "on year," that is, the odd-numbered years when most State
legislatures meet in regular session, the association is particularly
active in the legislative field. In each of recent years the staff of the
association has examined and classified approximately 10,000 bills
having some bearing, direct or indirect, on the conduct of the life
insurance business.'^ Special attention is given those bills which are
deemed "objectionable" or which might become "objectionable" at
some later date." Policyholders are not consulted as to what bills
should be deemed "objectionable," the association taking the position
that "obviously anything that would be to the detriment of a com-
pany * * * wduld also be to the detriment of the policy-
holders." '* That the association has given the broadest possible
interpretation to its assumed prerogative is indicated by the great
variety of legislation in which it interests itself. Confidential reports
customarily sent to member presidents at the end of each legislative
year indicate that the association has opposed, among others, bills
raising premium taxes, compulsory-investment bills, bills reducing-
policy-loan interest rates, savings bank life insurance, bills requiring
examination of agents prior to licensing, mortgage moratorium, and
loan bills of many types, net and gross income and sales-tax measures,
and proposals for premium notices, attorney's fees and penalties, bills

" Some idea of the total disbiirsements and legislative disbursements of the association in recent years
may be obtained from the following table (pt. 10, R. 4355, 4356, exhibit No. 694k

Year

Amount of

alldis- .

bursemonts

Amount of
legislative
disburse-
ments

1935 _

$480, 783
331, 260
390, 380
505, 344

$139,601

1936 .

91,241

1537

181, 246

1938 .

147, 683

Total -

1,715,777

559, 751

This amount of S^sgiTSl includes the fees, compensation, and expenses of the association incurred in con-
nection VFith legislation and appearances before Government departments as follows:

Year

Fees, and
compen-
sation.

Expenses

1935

$46, 085
13, 850
39, 675
8, 950

$44,154

1936. .

13,997

1937

34,381

1938 • ..

14, 551

For a detailed schedule reflecting thfe amount of money spent by the association for legislative purposes
in each State during each year 1934-38, see pt. 10, exhibit No. 694.

"The numjaer of bills examined in legislative years since 1925 are as indicated; 1925, 2,626; 1927, 3,045;
1929, 4,336; 1931, 5,739; 1933, 10,427; 1935, 10,876; 1937, 11,047 (pt. 10, exhibit Nos. 695, 696).

13 Pt. 10, R. 4358.

"Id.

CONCENTRATrON OF ECONOMIC POWER 167

requiring sale of term insurance, and for the appointment of certain
life companies' directors by a State insurance commissioner.'^

As an analysis of its expenditures for legislative years indicates,
there is no State in which the association is not active; '^ in fact it
has a representative in every State. ^^ Most of these representatives,
or legislative correspondents as they are called, are "voluntary
workers"; that is to say, representatives of life insurance companies
who donate their services and who bill the association only for limited
amount of their expenses.*^ The correspondent may be a general
agent of a member company, a company official, or an officer of the
local agents' or underwriters' association.'^ Occasionally the associa-
tion employs local counsel to represent its interest and it is not
unusual for a staff member of the association to go to the field to
supervise or "coordinate the local activity." ^°

The association conducts only a limited amount of its lobbying
activities in its own name. It does, however, keep in touch with its
local representatives and directs them as to which proposals to urge
for adoption and which bills to oppose. Choice of tactics is generally
left to the discretion of the individual representative. In addition to
furnishing expense money, the association prepares arguments for its
legislative correspondents and on occasion prepares comparative
statistical studies for presentation to interested legislators. When-
ever hard put to defeat a particular bill, due to the fact that it has
been voted out of committee and has reached the floor of the legisla-
ture, for example, the association communicates with the member
companies and requests them to cooperate through their local repre-'
sentatives with the representative of the association.^' In such cases
a form letter similar to the one set forth below, which was sent to 47
member companies operating in the State of California, is mailed out
by the association. The letter read as foUows: ^^

Re California Senate bill No. 460 — Segregation of Assets

Dear Sir: Section 8 of the_^bove bill would. require segregation of certain life
insurance assets by all companies doing business in California. It is actively
sponsored by Insurance Commissioner Carpenter and has been vigorously op-
posed by the association since its introduction in January.

" For types of bills opposed by the association, see pt. 10, erfiibit Nos. 695 and 696. Special reference
to opposition to savings bank life insurance may be found infra p. 312.

i» Pt. 10, exhibit No. 294.

" Pt. 10, R. 4359.

'i« Pt. 10, R. 4357, . '

" Pt. 10, R. 4359. Concerning the association's cooperation with underwriters' associations, Mr. Whit-
sitt. testified (pt. 10, R. 4368, 4369>:

"Mr. Gesell. There is one part of this problem that I would like to ask you a few more questions about
before we finish. You have spoken of your cooperation with underwriters' associations and may I ask
whether you have any formal agreement or understanding with the underwriters' association that they
will cooperate with you or is it a matter which is dependent upon the particular circumstances in every
case?

"Mr. Whitsitt. We have no agreement whatsoever. ,

"Mr. Qesell. By and large you are able to call upon the underwriters' associations for assistance, are
you not?

"Mr. Whitsitt. Their interests are largely the same as ours on most propositions.

"Mr. Qesell. You have worked rather closely with them, have you not?

"Mr. Whitsitt. At times, in some States, yes— in some States not so much."

'» Pt. 10, R. 4360.

>> Pt. 10, R. 4360.

« Pt. 10, exhibit No. 697.

168 CONCENTRATION OF E<:J0N0MIC POWER

The section has passed through several drafts, and a copy of the latest redraft
is attached hereto. While still vague and ambiguous, it would now be appli-
cable not only to companies doing an accident and health business, as originally
coritemplated, but also to companies writing life insurance only.

A Senate hearing, which has been postponed twice, is now set for Monday,
April 12. Mr. Shepherd — now in the fourth week of his second trip to California
on this bill — advises that the commissioner is under the impression that our op-
position is solely in behalf of a few member companies doing an accident and
health business. In order to reinforce the association's opposition and dispel
any misunderstanding, it would be most helpful if, at your early convenience, you
would

(1) Telegraph to Insurance Commissioner Samuel L. Carpenter, Jr., 417
Montgornery Street, Sail Francisco, advising that you fully concur in the opposi-
tion of our association to this measure;

(2) Telegraph to your general agents or managers in the San Francisco and
Los Angeles areas, asking their active cooperation with Mr. Bruce E. Shepherd,
St. Francis Hotel, San Francisco, and Mr. Karl L. Brackett, president of the
State Life Underwriters Association, 1122 Russ Building, San Francisco, and

(3) Send air-mail confirmations of the telegrams to the law firm of Pillsbury,-
Madison & Sutro, attention Mr. L. B. Groezinger, Standard Oil Building, San
Francisco, which firm has been specially retained by the association to oppose
this measure.

With much appreciation for your assistance and cooperation, I am.
Sincerely yours.

Manager and General Counsel.

As this method of approaching legislative problems suggests, the
association has conducted its affairs without revealing the full extent
of its efforts in combating legislation which it considers objectionable.-^
To appreciate the influence the association exerts, therefore, it is
necessary to review its activities in some detail, in particular the
conduct of its field representatives.

As has been indicated, the association on occasion sends its own
executives to the field for the purpose of coordinating lobbying
strategy in a particular State. Some idea of its policy and procedure
in such cases may be gained from a memorandum written by the

M The Armstrong report severely criticized the "clandestine activities" then pursued by lobbyists actine:
for the insurance companies. The report stated (vol. X, p. 399):

"It has been insisted that the insurance companies have been so continuously menaced by the introduc-
tion of improper and ill-advised legislative measures in many States that they have been compelled to
maintain a constant watchfulness and to resort to secret means to defeat them. An insurance corporation,
however, holds a position of peculiar advantage in opposing any legislative measure which really antag-
onizes the interests of policyholders. A very large proportion of the voters of the State hold policies of life
insurance. It is easy for the company to apprise them of hostile legislative measures, and in addition a
department of the State government exists for their protection, whose recommendations have rarely failed
to receive proper consideration ip the Legislature. It is not a difficult matter to direct public attention to
an objectionable bill affecting life insurance corporations or to have opposing argument and criticism effec-
tively presented. Again, if, in spite of argument fairly and publicly presented, the Legislature insists upon
passing a law inimical to the true interests of the companies, it is not the officers, but the policyholders, who
must bear the loss, and the consequences which can readily be pointed out are almost certain to bring about
an early repeal of the obno.xious legislation. The employment of agents to disburse large sums, and of
clandestine methods to defeat legislation is wholly inexcusable."

Various States have enacted lobbying legislation. Legislation of this character has been adopted in the
following States: Alabama, Alaska, Connecticut, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana,
Maine, Maryland, Massachusetts, Mississippi, Montana, Nebraska, New Hampshire, New York, North
Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Ten-
n;. see, Texas, Virginia, Vermont, and Wisconsin.

CONCENTRATION OF ECONOMIC I^OWER 169

assistant counsel of the association following the 1935 session of the
Florida State Legislature. This memorandum, part of which follows
below, succinctly states the procedure adopted for handling legislative
matters in that State: 2*

PROCEDURE

As soon as a study of the pending insurance measures had been completed^and
some thought given to anticipated introductions, it was decided in view of the
administration control of both houses, that it was imperative some effort should
be made to overcome the antagonistic attitude of the Governor, otherwise effec-
tive contacts with the membership of either House would be ineflFeetive. To
accomplish this end, it was decided the approach to the Governor should be
through purel}^ political contacts. Work was begun immediately along this line
and was prosecuted incessantly throughout the entire session. Further, since
proposed insurance taxation was only a part of the Governor's program and was
the portion capable of mustering strenuous opposition, the Governor through its
defeat might suffer a loss of prestige. Consequently these political^contacts
urged upon the Governor that a further increase in insurance taxes was wrong on
principle and then from the purely' political viewpoint the mfeasure might be
defeated on its merits, thus affecting administration prestige:

These efforts were stressed while at the same time direct legislative contacts
were also developed by the insurance groups.

COOPERATION WITH FLORIDA LIFE UNDERWRITERS

, 1. The agency directors' and managers' conference at Jacksonville is the best
organized group of life underwriters in the State. These men were advised of
the threatening nature of the legislative situation and requested to furnish a list
of the names and addresses of their Flor'Ja agents. Card index was then made
for this information.

2. Contacts were immediately established with the individual agents to ascer-
tain their sphere of influence with members of the house and senate. Each agent
was furnished with the name of the members of the house and senate from his
particular locality and asked to advise us at once as to acquaintanceship. Where
tlie particular agent was close to some member, suggestions were made to ascer-
tain the attitude of the particular member toward insurance. Manyother items
of a personal nature were also made the subject of inquiry.

3. After the agency contacts had been established, the check of the house and
senate membership was made to ascertain the names of those with whom any
such agency contacts had been directly established. For example, in many in-
stances members came from some towns where there were no life agents. To
meet this problem those members from various small communities with no resident
life agents were listed an^i assigned to a larger city for contact. Notably the
Jacksonville agents assumed the responsibility for contacts with some members
from the north and the northeast sections of the State, Tampa for the south-
central portion, and so on.

LEGISLATIVE CONTACTS

In order to obtain' the most effective contacts with members of the senate
and house, the'following course was followed:

1. The geographical location of each member was indicated upon a large map
of the State by using red tacks for house and blue tacks for senate members.

2: Pt. 10, exhibit No. 698. The author of this memorandum, Mr. Robert L. Hogg, discussed it at length .
in the course of his testimonj'. See pt. 10, R. 4375-4396, inclusive.

204763 — 41 — No. 28 12

IJQ CONCENTRATION OF BOONOMIC POWER

Attached to each tack was the name and post-oflSce address of a particular mem-
ber. The niap was on a large scale and clearly discernible for ready reference.

2. An individual card index ^s was made for members of the house of represent-
atives and a similar index for members of the senate. Each carried the post-
office address and personal data of the particular member. Notation was made
in some instances as to the best method of approach. For example, if a particular
life-insurance agent was personally acquainted with a member, a notation was
made to that effect. It was not considered wise, however, to place much per-
sonal information on these cards. This was carried on a separate memoranda.
To indicate a member's attitude toward insurance, or the names of the particular
agents with whom he was on intimate terms, might be subsequently the cause of
some embarrassment to both the member and ourselves in the event that the
cards should come to the attention of unauthorized persons. Consequently
records as to attitude of members or each plan of contact were in most cases
omitted from the card record, although preserved by independent means.

3. Every adverse measure °was examined from th'e standpoint of its sponsor.
For example, another set of cards was prepared showing the authors of all adverse
measures. Whenever we found that the same member had introduced several
adverse measures or was cointroducer of several adverse measures, we concluded
his general attitude toward insurance was unfavorable. This theory was cer-
tainly borne out by subsequent check.

4. After determining the identity of our opposition, we then established its
geographical distribution upon the map. This course was followed in order to
find out the activities behind our opposition. In gther words, we -Wanted to
know whether the attitude of the particular member was his own personal con-
clusion or whether it reflected the sentiment of some particular section of the
State. In pursuing this theory, it developed that most of our opposition cen-
tered around the less densely settled sections of the State — primarily in the
north and north central counties.

NATURE OF CONTACTS

The actual contacts with individual members rested primarily with local
people. The following methods of approach are — listed in the order of their
effectiveness,

(a) Personal interview by sonae life representative on intimate terms "with the
member;

{b) Contact by telephone, telegraph, or letter , irom tne same party where
personal interview was not practical;

(c) Interviews by telephone, telegraph, and lett^j^ from representative citizens
and especially life insurance policyholders;

(d) Telegrams and letters from the public generally.

The use of these different methods of approa(!:h, of course, depended upon the
nature of^ legislation under consideration.

Havftig used such strategy, the association at the conclusion of the
1935 Florida legislative session was a.ble to assume that "although
many adverse measures were introduced and pressed for passage, nohe
was enacted." ^^

Further insight into the association's lobbying methods can be
obtained from a review of the activities of the legislative correspond-

" Concerning this card index, Mr. Hogg testified (pt. 10, R. 4384):

"Tiie Chairman. I do take it that in the compilation of this card index and in the assembling of the
information with respect to each of the various members of the house and the senate you overlooked nothing
that could possibly be regarded as helpful in swaying the vote of that member.

"Mr. Hogg. Absolutely not. In conformity with facts."

2« Pt. 10, exhibit No. 702.

CONCENTRATION' OF ECONOMIC ^OWEJl l7;[

en.ts or "voluntary workers." One such correspondent, Mr. Robert
L. Cooney, for the last 15 years the association's representative in
Georgia, was subpenaed and testified with respect to his legislative
activities in that State.^^ The association selected its representative
well. Mr. Cooney has important insurance contacts in Georgia. In
addition to representing the association he is inspector of agencies for
the New York Life Insurance Co., chairman of the legislative com-
mittee of the Georgia Life Underwriters Association and chairman
of the legislative committee of the Atlanta Association of Life Under-
writers.^^ The New York Life, as well as the Underwriters Associa-
tion, financed Mr. Cooney in his work and it is apparent that he was
in a key position to mobilize insurance pressure and direct it where
it could be most effective.^*

Mr. Cooney's work has not been done in the open where all can
hear and all can challenge. His legislative activities have been
directed primarily toward "killing"- bills before they come out of
committee and, if possible, even before they are introduced. In a
letter written during the 1937 legislative session, he and two associates
explained their methods to the association. The letter stated: ^°

It has been our practice for years:

1. To try to persuade the author of a bill, either before its introduction or after
introduction and reference to a committee, to withdraw same. This has worked
oiit oftener thAn might be thought.

2. We make effort in advance, as described to you, to have friends on the
committee and to have meetings at the proper time and under favorable environ-
ment. This has frequently worked out.

3. If we do not succeed in getting a bill adversed, we try to introduce another
bill, hoping that the whole thing will wind up in a row, to be plain about it. This
has worked at this session, and I will add in passing that we have one man, that
if any bill comes out on the floor, to get up and say that he does not believe in
taxing life insurance premiums at aU and create a diversion in that way.

4. If a bill passes either house and goes to the other house, we try to repeat
the above tactics * * *.

These obstructionist tactics have been successful; only one bill
adverse to the insurance interests has gotten onto the floor of the
House of Representatives of the State of. Georgia in- the last several
years.^'

Mr. Cooney's methods are simple and effective. In furtherance
of his lobby activities, he has interested himself in the election or
defeat of certain candidates for the legislature and has made "quite
a number" of campaign contributions.'^ Mr. Cooney described his

" Pt. 10, R. 4396, 4397.

« Pt. 10, R. 4396, 4397.

" Pt. 10, R. 4397, 4398. In recent years Mr. Cooney's salary from the New York Life has ranged from
$9,600 to $11,000 plus commissions. Despite his continued legislative activity which admittedly takes
substantial portions of his time, particularly while the Georgia Legislature is in session, the New York Life
has never included in schedule K of the convention form annual staterhent- any portion of his salary as an .
allocation to legislative expenses. The caption on schedule K indicates that the schedule is designed to
reflect "All expenditures in connection with matters before legislative bodies, oflScers, or departments of
government during the year" (pt. 10, R. 4417, 4418).

'« Pt. 10, exhibit No. 703.

»' Pt. 10, R. 4405.

3' Pt. 10, R. 4402; 4403. At one time Mr. Cooney approached a group of 20 prominent policy-holders
who were residents of Rome, Qa., and received their promise that if he indicated to them legislatoiviater-
ested in increasing premium taxes they would do the best they could "to keep them from going to the legis-
lature agaip." Pt. 10, R. 4407-4409, exhibit No. 709.

jy2 CONCENTRATION OF ElCONOMIC POWER

technique in this regard in a letter to an officer of the New York Life
as follows: ^^

* * * I am going to say in passing tliat (admitting, of course, that we have
been rither successful in heading off legislation) the method is to interest our-
selves in kej' men before they are elected, help them to get elected, and then
they owe us something instead of our owing them. That is the whole secret.

Not only did the Georgia insurance men assist in the election of
Sjiate representatives, but they also arranged to have an agent of the

■w Pt. 10, exhibit No. 705. If i.s not unusual for life insurance companies to make political contribution.^;
or to participate actively in campaigns. For example, it appeared that the Federal Reserve Life Insurance
Co., of Kansas City, Kans., through the Federal Agency Investment Co., campa'sned regularly for Mr.
William R. Baker, insurance commissioner, during the period from 1922-28 (pt. 13, R. CGla-6617).

Mr. W. H.' Gregory, president of the Federal Reserve, wrote Afr. Baker on August 5, 1920, as follows
(pt. 13, exhibit No. 1348-1):

"Dear Major Baker: It js my pleasure to make lhe.se suggestions; you may, or may not, think well
of them.

"First. During the campaign some bad news was collected; it will be sent to you in due course. Don't
worry about it, because people who do things surely will be criticized.

"No bad news was sent you during the campaign, as you seemed to be somewhat worried and it wa-s my
wish to relieve you as much as possible; and it will only be sent now in order to,kcep you posted.

"Second, It seems to me that one of the most important things now is for you to write the people here in
Wyandotte County a letter of appreciation— thank them for their good work.

"For instance: When a judge on the bench lays aside judicial matters and goes out to work for you, that
should be acknowledged in a letter that shows feeling.

"If you are too busy to do this, send us your stationery and we will have the proper letters wiitten for
each and every one; send them back and you can sign thern, or you can make such changes as you like.
Rest assured that they will be written in the proper spirit and they will be written to fit the case.

"Third. We do not know what you ambition is — no one has told us — but a great secret has been discovered
by me. If you should like to continue as superintendent of insurance for the fourth, fifth, sixth, or seventh
term, and so on, this secret will enable you to do it. It is not necessary to talk about it now, but in a short
time plans should be laid. However, the work would be done so unobtrusively that no one would realize
your ambition, or the point at which yoii were driving until the proper time.

"Think the matter over and, if at any time in the future you are in a receptive moqd, we could discuss
my plan.

"In this campaign something was learned by me about politics; it seems that there are four essentials:
(a) Soirte money, (li) some brains, (c) hard work, and (rf) friends.

"It requires some money to acquire ammunition and guns and then to plant thom in the right spot;
it requires brains to know what to do, how to do it and to know what your opponent is doing and then to
outgeneral him; it requires hard work, because nothing worthwhile can be accomplished without hard
work; it requires friends— friends with whom one can trade and with whom one may work- friends who can
turn the trick for one.

"Perhaps we did not do everything exactly and precisely as you ordered, because we were enthusiastic
and determined to win; vve used our judgment, but, in looking back over the ground over which we traveled
no errors can be seen by us.

"We spent money— it was necessary to do it— but you wUl never know what we spent; in fact, we do not
know ourselves, and that is the way it will rest if anything comes up in the future. But, in my opinion,
nothing will come up in the future, because there would be too much to investigate.

"It is our impression that more money was spent in this campaign than probably any other campaign in
Kansas; it rolled as freely as water running down stream.

"Sometime, if you wish me to do so, it will be a pleasure to write you something of the intricacies of this
last campaign and you would acknowledge that we played the game to win.

"My ambition in life is to win every time, the goal always is in sight, with a steady tramp to that goal —
never allowing myself to be deflected from a path that leads directly to the goal.

"It seems to me that you are in position now to get anything you wish along political lines, although it is
our impression that some fight will be made on you at the next session of the legislature; but we can find out
in advance what they wish to do and Senator Vincent, if you will pardon a slang expression, will have the
'low down' on it.

"You must take off your hat to liim when it comes to politics. He knows a great deal about the game.
And he will place the cards on the table iii a manner that everything will move along satisfactorily to all
concerned; he will smooth the rough edges.

"Senator Vincent has been in politics for a quarter of a century and 6 years and he loves to smile at the
other fellow. He has an attractive smile that sinks deeply into the heart of his opponent.
"Congratulations and very best wishes."

Mr. J. D. DeBuchananne, a reinsurance promoter, gave political assistance to insurance commissioners or
members of their party iu return for tips or inside information which he received concerning the financial
condition to promote his reinsurance activities. Mr. DeBuchananne testified (pt. 13, R. 0673):

CONCENTRATION OF ECONOMIC POWER J 73

New York Life Insurance Co. appointed chairman of the insurance
committee of the House. ^' It further appeared that Mr. Cooney had
adopted the practice of distributing the legal business of the New
York -Life Insurance Co. among "smart lawyers" in the legislature
to assure their goodwill and legislative assistance. ^^^

In order to make sure that he would be fully advised 01 all curfent
legislative developments, and having in mind that it was far easier
to deal with a single legislator than with a committee or with the
legislature as a whole. Mr. Cooney arranged for the association to

"Mr. DeBuchananne. * * * We always try to" work with le pjop' > who are in oflSce; politics, and
so on, down the line.

"Mr. Gesell. Oh, you politic with these insurance departments?

"Mr. DeBuchananne. Yes; you have to do a little of it occasionally. There are always fellow&Tunriiu:
for oflBce and if we can help out a little bit when the time comes, we do,;you know.

"Mr. Qesell. I don't know that; no; and I am interested in it. Tell me a littte'more about it. How
would you politic for the insurance department officials?

"Mr. DeBuchananne. Well, we know who the different organizations hope to reject in different Darts
of the State, and we assist them in whatever way we can with our agency ,-with the agency force.

"Mr. Gesell. You mean you turn your agents into ward heelers for the time being, is that it?

"Mr. DeBuchananne. We get them busy. We would usually faVor some officers, but we would get
them to work.

"Mr. Gesell. What would you get them to do, drive cars, and that

"Mr. DeBuchananne (interposing). Well, talk to the people in the town, and electioneer in a general
way.

"Mr. Gesell. Would you sometimes send out notices with your premium receipts in favor of particular
candidates?

"Mr. DEBtrcHANANNE. Well, we did have circulars once or twice, but we did not make a practice, of
that. * • •"

He admitted that it was his practice to pay campaign contributions from the funds of insurance compani^
in which he was interested. These contributions were disbursed in a manner which concealed their nature,
the customary practice being to employ individuals as attorneys or appraisers with the understanding
that they would do nothing to earn the fee disbuised to them. In one case, for example, at the request of
Mr. Huskinson, Insur£.nce Commissioner of Illinois, Mr. DeBuchananne caused the Mississippi Valley
Life Insurance Co. to.pay an attorney in Springfield, 111., a retainer of $500 which was used to raise campaign
funds and for which the attorney never performed any services. Pt. 13, R. 6676, 6077.

'♦ Pt. 10, R. 4415. The chairman of this committee was Mr. Harold Dobbins, an agent for the New York
Life. The evidence disclosed that on December 1, 1934, Mr. Lewis A. Irons, deputy insurance commissioner
of Georgia, wrote Mr. Cooney as follows (pt. 10, exhibit No. 713):

"A few days ago 1 had a call from Mr. Harold Dobbins, who seems to have an agency contract with you
and who is very much concerned about the payment of his occupational tax, although it had been my
previous understaiiding that the company takes care of such matters for its agents. In any event, Mr.
Dobbins gave me the impression that he was called on to pay this tax and that by reason of his inability so
far to close some business, although he said he had some iinder way which he expected to close if he could
hang on, he.found himself unable at this time to pay the tax levied against hira, and asked whether or not

• t could be allowed to run along for a little while uppaid.

"I did not take up the above matter with Miss Nagle, although she is in direct charge of, and has super-
vision in, the matter of occupation tax collection and license fees. My plan was rather to take it up with
you, in the thought that under all of the circumstances you might feel that it would be a good 'investment'
for the company to meet this expense, at least for the time being, in view of the fact that Mr. Dobbins is
again scheduled, I understand, for the chairmanship of the insurance committee and his goodwill might be
worth keeping.

"Think it over, and destroy this letter when you have its contents in mind."

Mr. Cooney paid the $10 tax for Dobbins (pt. 10, R. 4415).

" Pt. 10, R. 4410. With respect to employing, as lawyers, legislators who were sympathetic to the insur-
ance point of view, Mr. Cooney testified (pt. 10, R. 4410):

"When we found a smart lawyer in the legislature and we were unable to show him that our particular
proposition was correct and he indicated that he believed it, I have told our general couilsel to take that
man into any local litigation that we might have. I repeat that, and am going to keep on doing it."

Concerning one lawyer and legislator. Judge E. M. Davis of J' mUla, Qa., Mr. Cooney wrote to a vice
president of the New York Life as follows (pt. 10, exhibit No. 7 1:

"Judge Davis, I make the statement unreservedly, has the n pi tation in the legislature of. knowing more

• eneral constitutional law than all the rest. He is one of the tw ■ Ci^n to whom the legislature listens with the
-reatest respect and has been on the law committee at every si >s: in that he has attended. We are going to
need him in the legislature to cover the constitutionality of an ■ ,;t lepriving municipalities of the right to levy
'taxes, and that is the priiicipal reason why I would like to see fir in this Lannie Thompson case. * * *"

174 OONCBNTRATION OF ECONOMIC POWER

employ newspapermen who had the privilege of the floor in order
that he might be supplied with up-to-date information. In a letter
to the association, Mr. Cooney described services which could be
expected from one such newspaper as follows: ^^

For $100 this man will keep his eyes open, not only for the introduction of
bills, but for the talk that goes on before a bill is introduced, and this service
has proven very valuabl"* t' us and has enabled us to abort on occasion the
proposed tax measures,"

With the same end in view, Mr. Cooney and his associates spent
money in entertaining legislators. He testified that it was far easier
to influence legislation by communicating with legislators in' this
manner. Thus he wrote to the association that ^^ —

* * * we believe in killing a bill before it gets on the floor, or before a
committee, if possible. It is much easier to handle one man or two men alone
than it is to argue with a whole committee, and it is impossible to argue with
the whole house. This money has" been spent in invitations to those of whom
we wishedto make friends, and seeing that their wives and daughters were looked
after properly and courteously, and a large portion of it in giving a dinner after
the session was over to all of those who were good enough to favor us. We have
been told that one reason we are kindly received is that we do not forget favors
after we get them.^^

Where entertainment, the distribution of legal patronage, or giving
assistance in campaigns for ofiice. failed, more coercive methods were
used to influence legislators. Two specific cases may ser^e to illus-
trate. Mr. Cooney induced one legislator to withdraw his bill by
having the latter's financial backer, the First National Bank of Val-
dosta, Ga., wire him stating that the bill was "detrimental to business
interest of Georgia." ^° In another instance, a legislator named Dr.
Daves withdrew a bill following a "salty interview" with Mr. Cooney,
in the course of which Mr. Cooney indicated that the doctor would
no longer receive medical examination fees from insurance companies
if he continued to sponsor the bill.*^

When all efforts to force withdrawal of a bill or to smother it in
conMnittee fail, the association encourages policyholders and agents
of member companies to communicate personally with their repre-

» Pt. 10, exhibit No. 706.

", Mr, Cooney testified (pt. 10, R. 4404):

"* * * as a matter offact, we had 1 man who is a reporter for a newspaper who had the privilege of
the floor and he hears talk all over the floor about biUs to be introduced and then reports it to me, so we can
get hold of the men individually instead of having to wait to_ argue the queation in detail before a large body
of men."

Mr. Cooney stated in further correspondence (pt. 10, exhibit No. 707);

" • • • I am a marked man! I have the privilege of the floor, and I have been down to the legislature
several times, possibly a dozen or more. The speaker of the house has made one public statement that he
does not vrish any member to accept any invitation given by any person who has any interest in legislation
before the house. I will try to deal with this later."

M Pt. 10, exhibit No. 704.

" 3 specific instances of cases where legislators had withdrawn legislation following entertairmient were
revealed by a letter of Mr. Cooney's which, in reference to 1 such instance reads (pt. 10, exhibit No. 704):

"The Honorable J. W. Culpepper (previously our friend and our friend again now), previously chairman
and now on th* ways and means committee, gave notice that he would introduce a 3-percent tax bUl. One
of our committee had supper with this gentleman, and a long interview, afterward. This bill never made
its appearance."

*o Pt. 10, exhibit "No. 712.

*) "Mr. Oesell. Did you indicate to him in this salty interview that if he didn't withdraw and amend
the biD you would attempt to see that he didn't get any more examination?

"Mr. CoONXT. Yes;' i told him that very thing" (pt. 10, R. 4417). (See also pt. 10, R. 4416.)

CONCENTRATION OF ECONOMIC POWER I'J^

sentatives and senators to voice protests against the enactment of
the particular bill being opposed by the association. Memoranda
from the association's fUes indicate that this procedure is used fre-
quently in last minute attempts to influence legislative action. One
such memorandum from the association's California representative
written in 1935 is informative: *^

We are using as our field forces the California Association of Life Insuraace
Agents, the State organization of life underwriters, and the various local under-
writers' associations throughout the State who are working under our direction.
Among other things, they have by this time, through friendly agents, contacted
practically every member of the senate and assembly in the State. In addition
to that, we are securing a certain amount of publicity through the metropolitan
and rural papers against the increase in insurance taxes.

While we have only allowed a comparatively small number of policyholders to
be contacted, we have succeeded in creating the impression that over 2,000,000
policyholders in this State are up in arms against any increase in insurance taxes,
and the writer is competently advised that Governor Merriam's administration
is weakening in its purpose to increase the insurance taxes.

It appears that in some instances the association has even paid for
the telegrams and letters sent under such circumstances. During
the 1935 session of the Florida Legislature, for example, Mr. Hogg,
the association's representative in that State, wrote to the representa-
tive of the Mutual Life Insurance Co. in Florida, stating: *^

It is thought wise that there should be as many telegrams and telephone calls
as possible to reach these members from their respective home communities.
This, of course, is a matter with which you are thoroughly familiar. Further-
more, it is advisable to have as many communications as possible from policy-
holders. These, of course, are details concerning which you will use your own
judgment.

In response to this letter, Mr. Hogg was advised that all members
were writing their agents "to immediately solicit 10 letters each from
policyholders." ** Quick action was promised, and in 2 days' time a
series of letters addressed to senators and representatives had been
obiained. The expenses incurred in preparing these letters were paid
by the association.^^

Thus, it can be concluded that the Association of Life Insurance
Presidents is a powerful lobby able to combat successfully legislation
intended to regulate or affect life insurance companies. Its influence
extends from the initial election of State representatives to the building
up of propaganda through the artificial stimulation of policyholders.

It is clear thafci the association has departed from its fourth stated
object, namely: *^ • ,

" Ft. 10, R. 4366.

« Ft. 10, exhibit No. 699.

" Ft. 10, exhibit No. 700.

" Pt. 10, R. 4385-4387, exhibit No. 701. For other illustrations of this procedure, see pt. 10, R. 4406, 4427,
exhibits Nos. 733, 734. -The use of form telegrams by underwriters' associations in efforts to defeat savings
bank life insuraace in New York are described infra, p. 313. In connection with this, Mr. Whitsitt testified
(pt. 10, R. 4367):

"Our general policy has been not to contact policyholders on a wholesale basis. There have been instance
as I mentioned a moment ago, where a number of general- agents or agents will wish to contact a certain
limited number of their own policyholders, men whom they have insured, and enli-st their assistance in op-
posing certain legislation, but our policy has not been, so far as I have beei^ with the association, to send
out a wholesale circularization or wholesale request to policyholders to enlist them."

« Ft. 10, exhibit No. 690. ,

If 6

CONCENTRATION OF KC()N0:MIC POWER

To consider carefully measures that may be introduced from time to time in
legislative bodies, with a view to ascertaining and publicly " presenting the grounds
wliich may exist for opposing or advocating the proposed legislation, according as
the welfare of the companies and their policyholders shall point to the one course
or the other.

A "clandestine" lobby still exists/* While present-day practices
are not as crude as those scored by the Armstrong committee in 1906,
ihe life^ insurance lobby has become more polished and its effective-
ness has been increased tlirough concentration of funds and initiative
in the hands of a single unit. No justification exists for a lobby
carried on without adequate disclosure and financed with the funds of
policyholders whose interests more properly should be guarded by
the free judgments of their elected representatives.

<' Emphasis supplied.

« One striking example of recent legislative activity on the part of life insurance companies was disclosed
when correspondence written by Mr. C. B. Robbins, manager and general counsel of the American Life
Convention, to the member companies of that association wi s made public by the chairman of the Tem-
porary National Economic Committee. It appeared that under date of December 1, 1939, the American
Life Convention had sent to each member company a form letter which stated:

"A resolution was passed at the last annual meeting of the American Life Convention, directing the
executive committee to prepare a vigorous and effective campaii;n of education for the purpose of advising
Members of Congress of a possible purpose behind the present investigation by the Temporary National
Economic Committee in Washington. It was thought advisabi to warn them of the desire of some mem-
bers of the Temporary National Economic Committee for Federal supervision of all life insurance, together
with the taking over by the Government of industrial insurance and merging it with the social-security
system. During the course of the investigation sayings bank life insurance has been held up as a model
institution in .view of the fact that no agents' commissions are p^id, and the agency system of selling life
insurance has been severly criticized.

"Pursuant to this resolution, the enclosed pamphlet has been prepared, and approved by the e.xecutive
committee, with the thought that each State vice president of the convention would contact, through per-
sonal interviews, the Members of Congress from his State and give them a copy of the pamphlet for their
information. He could also ascertain the attitude of the Members of Congress toward the objectives of
those members of the T. N. E. C. who desire Federal supervision arid absorption by the Government of
industrial insurance. I am sending you under separate cover 25 copies of the pamphlet. Should you desire
any more from time to time please advise us and they will be forwarded to you promptly. Inserted in
the pamphlet you will find a mimeographed copy of a recent address by Hon. James M. McCormack,
commissioner of insurance and banking for the State of Tennessee.

"The companies in are likewise members of the convention. I am sure that they

will cooperate with you in this matter, and if you will contact then, asking that they see the Congressmen
nearest their home ofHces, the work of interviewing all the Members of Congress from your State will be
distributed so that your task will be considerably lessened. I am sending each company a copy of this letter
so that they may be advised as to what is being done.

"May I have your assurance that you will see to it that every Member of Cons;ress-and both Senators
from your State are interviewed by you or by one of the executives of the member companies in your State.

"We do not believe congressional members of the T. N. E. C. are in sympathy with the critical attitude
of the departmental members in the investigation— criticism seems to come largely from the Securities and
Exchange Commission and other departmental members of the committee.

"It will also be interesting to you to know that, at the present time, we are informed that the S. E. C. has
64 investigators among the companies, obtaining minute information as to conduct of the offices of the
companies, examining files, etc. You are probably familiar with the questionnaire which was recently sent
to all State insurance commissioners, inquiring closely into the conduct of the various State departments.
It is our understanding that this questionnaire will be considered at the commissioners' meeting in Biloxi,
Miss., December 6-9, inclusive.

"Copies of the pamphlet are being sent to nonmember as well as member companies, and if you know some
executives of nonmember companies in your State, I am sure they will assist in the work of contacting
Members of Congress.

"I enclose a list of the Congressmen and Senators from your State. Will you please advise me from time
to time, as you have interviewed them, what the results of your eflorts have been?

"If you desire further information, or if we can be of any assistance to you, please write me and I will be
delighted to give you anything which the convention has on this matter."

This letter enclosed a pamphlet entitled "Life Insurance Should Be Supervised, Regulated, and Governed
by Law in the States." The American Life' Convention letter and pamphlet contained misstatements of
(act. See letter of Chairman Joseph C. O'Mahoney, of the Temporary National Economic Committee,
dated January 22, 1940, to Hon. Edward T. Taylor, pt. 28, supplemental data.

SECTION XIII
Classes and Types of Life Insurance Sold

The business done by life insurance companies falls into three broad
categories — life insurance, accident and health insurance, and annui-
ties.^ One or more of these forms of business may be written by a
single company. They require no particular discussion at this time,
since their, very namep are sufficient to define their general character-
istics. It is with only one of these categories, namely, life insurance,
that this sestion of the report is primarily concerned.

The classes of life insurance sold are ordinary, industrial, and group.^
While in many respects similar, and often offered for sale by the same
company arid sometimes even held by a single individual, these three
classes of insurance differ considerably in their form and operation.^
In the case of group insurance,* a group of persons, customarily em-

' Of these, life insurance, which is essentially the insuring of persons, individually or in groups, .against
the financial hazards of death is by far the most important. Accident and health insurance, as written by
the life insurance companies, is in most cases a side line offered for the purpose of rounding out an individual's
insurance program by providing protection against injury or ill health. There was only passing reference
to this type of business in the course of the hearings. (See pt. lOA, R. 68-71.) Annuities, however, are of
greater importance. An annuity has been defined as (MacLean, Life Insurance, fifth ed., p. 56):

"A periodical payment to continue during a given status. The 'status' may be, and usually is, the dura-
tion of a single Ufe, in which case the annuity is called a life annuity or, more correctly, a single life annuity."
The principal forms of annuities are immediate annuities and deferred annuities. An immediate annuity
contract is one which provides that the benefits to the annuitant shall begin to accrue at once. Immediate
annuities are generally paid for in 1 premium payment. A deferred annuity contract provides that the
payments shall commence after a stated period of years has elapsed. Deferred annuities may be purchased
either by single premiums or by periodic premiums payable during the deferred period. In many companies
the sale of annuities in the last few years has accounted for substantial portions of their business. A full
discussion of annuities wQl be found in the section on operating results, which follows, pp. 328 to 336, infra.
2 Pt. 4, exhibit No. 216. Industrial iBsurance was made the subject of a special study and is discussed in
detail, pp. 248 to 305, infra.

' The study of 1,666 insured families, reported in Families and Their Life Insurance, disclosed at p. — the
following distribution of types of insurance within the insured families:

Families

Industrial life insurance only ._ 701

Industrial and ordi nary only 370

thdustrial, group, and fraternal only 198

Industrial, ordinary, group and fraternal only J 104

Subtotal ......: - 1,46a

Ordinary only .- 104

Ordinary, group, and fraternal only.. 36

Group and fraterpal only 63

Total.. 1,666

Group insurance has been defined by the National Convention of Insurance Commissioners (Pt. 4,
R. 1168):

"Group life insurance is that form of life insurance covering not fewer than 50 employees with or without
medical examination, written under a policy issued to the employer, the premium on which is to be paid by
the employer or by the employer and the employees jointly, and insuring all of his employees or all of any
class or classes thereof, determined by conditions pertaining to the employment for amounts of insurance
based upon some plan w^ich will preclude individual selection, for the benefit of persons other than the
employer; provided, however, that when the premium is to be paid by the employer and the employee
jointly, and the benefits of the policy are offered to all eUgible employees, not less than 75 percent of such
employee.'! liiay be so insured."

177

178

CONCENTRATION OF ECONOMIC POWER

ployees of a single employer, are insured under a master policy which
provides benefits for each person who participates in the program.^
This form of insurance is usually issued without medical examination
and is written on a yearly term basis, the master policy being renewed
each year. Ordinary and industrial insurance policies, on the other
hand, are issued on an individual contract basis, and are usually so
arranged that they are continuing contracts and need not be renewed
annually. The ordinary insurance policy is customarily written in
units for a face amount of $1,000 or more, and premiums are payable
annually, semiannually, or quarterly and sometimes monthly. The
industrial policy, which is primarily sold to persons in the lower income
brackets, is for smaller amounts and is paid for in weekly or monthly
premiums which are collected by house-to-house canvassers who call
at the homes of the policyholders. In- general, industrial policies are
issued without medical examination, while ordinary policies usually,
though not always, require such an examination. The relative im-
portance as of December 31, 1938, of these three classes of life insur-
ance business,^ for the 26 largest companies, is indicated below :^

Number of
policies

Amount of insur-
ance in force

Ordinary insurance.
Industrial insurance
Group insurance

27, 728, 000

70. 309, 667

1 17, 350

$63, 241, 613, 000
17, 453, 863, 690
11,555,487,273

' In the qase of group insurance, only master policies are indicated

The principal types of insurance sold in both the ordinary and
industrial departments of the business are whole Kfe, endowment, and
term. ^ Though American companies issue a great variety of poHcy
plans numbering as high as 136 in the case of the Prudential,® these
plans are but combinations or variations of the 3 principal types
indicated above. The modifications and variations of these types
reflect the efforts of the companies to design plans to suit the many
different needs and family situations that inslirance is expected to
meet.

The relative importance of whole life, endowment, and term insur-
ance in force in companies reportuig to Spectator as of December 31,
1938, is shown in the following table: i°

Number of
policies

Amount of insur-
ance in force

Whole life 1

73,981,529
42, 350, 220
8, 146, 439

$79, 779, 470, 559

Endowment. ..

23, 370, 672, 889

Term and other '. . .

6, 744, 820, 408

I Inclu les group insurance.

' Excludes group insurance and dividend additions.

» Benefits allowed under group insurance sometimes include health and accident benefits, hospitalization
benefits, accidental death and dismemberment 1-mefits, or retirement annuity benefits.

' Life insurance may be classified in yet another way, as participating and nonparticipating insurance.
This difference has been described in sec. in. (Seep 13, supra.) ,

' Pt. lOA, R. 18, 19. 25, 26, 45, 46. (See also pt. 4, exhibit No. 216.)

» Amounts of industrial originally written on a term plan are negligible.

' Pt. 28, exhibit No. 2323. For information as to ntiraber of life-insurance plans issued in 1939 by principal
companies see Id.

'« Oompiled from Spectnlor Insurance Year B(iok:.'l9:w.

CONCENTRATION OF ECONOMIC POWER J 79

These three types of insurance require the same basic actuarial
assumptions. It is necessaty to pass for a moment to a description
of the net level-premium plan in order to understand the essential
differences.
. The basic theory of life insurance " in its simplest aspect presup-
poses the existence of a large group of persons banded together in
order to assure each one of the group that he will leave an estate of a
certain size whenever he shall die. For illustrative purposes, it is
customary to assuine a group of 100,000 persons of the same age.
Let us suppose that each of a group of 100,000 persons i§ exactly
35 years old, of comparable health, and that each person wishes to be
assTjred that his estate \vill have $1,000 if he should die during the
year. For this purpose the group may elect a few of their number to
manage the enterprise. The company obtains a table of mortality,
such as the American Experience Table of Mortality. ^^ which has been
compiled from actual experience to show the mortality wliich inay be
expected within such a representative group at various age levels.
The company examines this table of mortality to ascertain the number
of the group which will probably die before the end of the next year.
According to this table this number i^ found to be 8.95 persons per
thousand at age 35. Therefore the company will expect 895 of its
100,000 members to die by the end of their thirty-fifth year. In order
to pay a thousand dollars to the estate of each deceased, the company
must collect a total of $895,000 from the group of 100,000. This
means a payment or premium of $8.95 (excluding any interest assump-
tion on the amount collected) from each member of the group. This
amount is called the net annual cost of insurance (no margin for ex-
pense is included) for a 1-year term.

At the beginning of the second year, assuming actual experience
follows that indicated by the table, there will remain 99,105 persons
of the original group who were 35 years old when the company began
doing business. If these 99,105 wish to continue their insurance for
the second year, each one must pay another premium to the company.
An examination of the mortality tables shows that the mortality rate
is slightly higher between the ages of 36 and 37 than between the ages
of 35 and 36. The mortality table indicates that out of the 99,105 there
are 901 who will probably die before the end of the second year,
Nine hundred and one thousand dollars is then the amount needed
this second year to pay $1,000 to the estate of each of the 901 persons
expected to die. A contribution of $9.09 from each^will be required.

It should be observed that this represents an increase the second
year over the premium of the first year. ' Tliis same process can be
continued during each succeeding year until all the members of the
group have died. However, it can readily be seen that* the premium
would have to increase every year because of the rising rate of mor-
tality as the group gets older. By the time the individuals have
reached the age of 69, for instance, when approximately half of the
group that started would be dead, the net annual premium on $1,000
insurance would have to be about $57. From this age on the premiums
increase so rapidly as to become almost prohibitive. In order to
obviate the difficulty presented by this continually increasing cost of
annual 1-year term insurance, there was devised what is known as

" See MacLean, Life Insurance (5th ed.), ch. I.
•' Pt. 10, exhibit No. 681.

180

OOXOEXTRATION OF EiCONOMIC POWER

level-premium life insurance. This calls for an annual premium
which remains the same throughout the lifetime of the insured.

Reference to the accompanying chart and table will assist in under-
standing the significance of the level prem-ium plan.^^ The illustration
is worked out for a whole-life policy for $1,000 taken out at age 35.^:*
At this age the net level premium.each year is'$21.08. This net level
premium is based on the American Experience Table of Mortality
and assumes that the company will be able to earn from its invest-
ments interest at the rate of 3 percent.

WHOLE LIFE POLICY ($1,000) AGE 35

CHA R G E S

40 49 SO 55 60 M TO 79 80 89 80

ATTAINED AGE OF POLICtHOLOER BEGINNING OF YEAR
§jnfO OH tmt^-CMH nammtMcc rMULi. 3 pc^ceir

Whole-life' policy ($1,000) age 35

Attained age at beginning of
year

Annual net

level
premium
for $1,000

Annual cost

of insurance

for $1,000

Tabular

cost of

insurance

for amount

at risk

Reserve at
end of year

Amount at
risk

Sum of

reserve and

amount

at risk

$21.08
21.08
21". 08
21.08
21. 08
21, 08
21.08
21. 08
21.08
21.08
21.08
21.08
21.08

^.95

9.59

10.83

13.11

17.40

24.72

36.87

56.76

87.03

131. 73

211.36

395. 86

857. 14

$8.84
8.94
9.25
10.05
11.70
14.20
17. 59
21.85
26.27
29.73
32.97
37.37
43.04

$12.88
68.16
146. 01
233.28
327.58
425. 49
522. 92
61,5. 14
698. 21
774.29
844. 01
905.59
949. 79

$987. 12
931. 84
853. 99
766. 72
672. 42
574. 51
477. 08
384. 86
301.79
225. 71
. 155,99
94.41
50.21

$1, 000
1,000

1,000

.54

1.000

.59 :

1,000

f.4

1,000

79 .-

1,000
1,000

84 -

1,000

89- ..•

1,000
1 000

'3 See pt. 10, exhibit Nos. 681, 682.

'* This is a regular life insurance i>olicy payable at death and requiring regular premium payments until
death.

COXCENTRATI'ON QF ECONOMIC POWER JgX

The level premium is computed in such a way that the interest
earnings augmented by the annual pr(^miums will provide the com-
pany with sufficient funds to meet all claims. To maintain $1,000
of life insurance in force throughout his lifetime, a person who takes
out this insurance at age 35 must pay a net level premium of $21.08
each year plus his share of the expenses. In the early years of his
life, this net level premium is in excess of what it would cost to buy
one-year Term insurance; in the latter years it is less.

This excess charge, which represents an amount above that required
to cover his participation during the year, constitutes the policy-
holder's savings and is accumulated by the company for him at com-
pound interest and with benefit of survivorship, by the company.
When the insured has attained an age where the mortality rates are so
high that the annual cost of insurance would be greater than this level
premium, the company begins to draw on the interest earned by the
accumulated savings or "reserve" of the policyholder.

Reference to the table upon which the chart is based will indicate
how the savings element in the net level premium accumulates for an
individual policy. Ten years after the policy is taken out, the savings
or "reserve" will amount to $146.01.

When the policy has been in force 20 years the "reserve" will amount
to $327.58. Under the table being used by the tiine the policyholder
is 96 years old the "reserve" will have reached the face value of the
policy, $1,000. The company holds the "reserve" for the benefit of
the policyholder. Subject to certain restrictions the policyholder
may obtain it in cash by surrendering his policy. On the other
hand, he may borrow almost all of his "reserve" from the company,
at interest.

There are two elements, therefore, insurance and savings, that make
up the amount that is paid upon the death of the insured. These
parts vary in importance depending upon the' number of years the
policy has been in force. In the early years the insurance element,
the amount at risk, is predominant. In the later years the "reserve,"
or the policyholder's accumulations of savings, overshadows the
insurance.

To return to the discussion of the tliree principal types of insurance
sold it may be seen that in term insurance the insurance element is
predominant. Term insurance is so designated because it insures for
only a term of years, after which the policy expires. Term policies
may be paid for by almost any number of premium payments as long
as the payments fall within the designated term of years. The
"face amount" or "princioal sum^' of a term policy is payable only
upon the death of the insured. The savings element in term insurance
is relatively insignificant, as is reflected in the fact that it seldom
offers cash and loan values, and it is generally offered at much lowei
rates than other forms of insurance.^* *Most term contracts wriltei .
today provide that a policy may be converted, subject to certain
conditions, into a more permanent form of insurance dujing or, at the
expiration of the term period.

Whole life policies are ■ generally purchased by persons who desire
insurance for an indefinite period at low cost. The savings element

^' Term policies for periods longer than 10 years occasionally have cash and loan values, paid up and
extended insurance values, depending on the provisions of the State law. These values, when given, are
very small. Of course, a term policy, written to expire at age 96, would be exactly the same as a straight
life policy, which in turn is merely- an endowment maturing at age 96.

182 ~ CONCENTRATION OP ECONOMIC POWER

is far more important in whole life insurance than in term, as is
evidenced by the fact that whole life policies usually include sub-
stantial cash and other surrender values.

The face amount of a whole-life policy is payable only on the death
of the insured and the policy may be paid for either throughout the
life of the insured or fpr a limited number of years. A policy which
requires the payment of premiums continuously throughout the life
of the insured is known as a straight life pojicy.^^

When the premium payments are for a limited number of years the
policy is known as a limited-payment policy, such as 20-payment
life, a designation which means simply that the policyholder pays for
his insurance over a period 20 years, but that the face amount is paid
to' his beneficiaries if his death occurs during or after the premium-
paying period. ^

Endowment insurance is a combination of a savings plan with term
insurance. It is purchased by those who wish insurance for a definite
period as well as a definite sum of money at the end of this definite
period. The face amount of the policy is payable to the insured if
tie lives to the end of the endowment period or to his beneficiaries in-
the event that he dies before the endowment period has elapsed.
Like term policies and whole life policies, endowment policies may be
paid for in any number of payments within the endowment period.

Whole life, endowment, and some term policy contracts offered
by American life insurance companies at the present time contain
certain basic standatrd policy provisions. Some of these provisions
may be mentioned oriefly in order to describe in general terms, at
least, the principal clauses in a life insurance policy. ^^ Two of the
most important provisions of a life insurance policy are those estab-
lishing its cash, i. e., (surrender, and loan) values.

The cash value of a policy represents that amount of cash which
the company will pay the policyholder if he surrenders his poUcy,
This value has been defined by law in terms of the policy reserve
described in connection with the discussion of the net level premium.
The .amount of money available to the policyholder under the cash-
surrender provision of his contract is usually less than the reserve
•and the difference has come to be known as a surrender charge. The
loan value, on the other hand, represents that amount of cash which
the company will lend the policyholder against his policy as security.
This amount is almost always equal to the 'cash value of the policy.
The policies of a few companies provide that the cash or loan value
will equal the reserve by the end of the second year of the life of the
policy; in the vast majority of companies the cash or loan value equals
the reserve only after the policy has been in force from 10 to 20 years
and, in a few companies, those values are never equal to the reserve.
The loan against a policy bears interest at an interest rate fixed by the
company within the limitations of State laws. Both principal and
interest of the loan are secured by the value of the policy and both
the loan and the policy, if premiums are regularly paid, remain in effect
as long as the cash value of the policy is sufficient to guarantee the
repayment to the company of the loan, both as to principal and
interest. There is no obligation upon the borrowing policyholder' to

'• As has been explained above, the American Experience Mortality Table ends at age 96; the face amor *
of any whole life pilicy based on this table is payable at that attained age.
1' For a detailed discussion of industrial po, '.y provisions see pt. 12, R. 5768-5782.

CONCENTRATION OF ECONOMIC POWER 133

repay the loan within a given period of time and frequently the loan
remains outstanding until the policy is terminated.

Another basic provision establishes certain options known as non-
forfeiture values, which the policyholder may utilize in the event of,
default on his premium payments (usually available only after three
full annual premiums , have been paid) instead of obtaining his equity
in the policy either by borrowing on it or surrendering. The three
principal nonforfeiture values hre paid-up insurance, extended insurance,
and automatic premium loan. The paid-up insurance value and
extended insurance value are measured not in terms of cash, but in
terras of the in/urance which the cash value wiU purchase. The paid-
up insurance value of any life insurance policy is the amount of paid-up
insurance which the cash value of that policy will buy. Extended
insurance value is measured by the length of the period of term insur-
ance, in an amount equal to the face amount of the policy, which the
cash value applied as a single premium will buy. The automatic
premium loan value provides that if the policyholder has not remitted
the premium required under the pohcy contract the company will
automatically charge the amount of the premium due against the
cash value^of the policy as a loan and continue the poHcy in force —
provided, of course, that the cash value is sufficient.

Another provision creates a grace, period of approximately 30 days
during which time the policy remains iri force in spite of the fact that
a premium has fallen due and has not been" paid. This provision
frequently permits the insurance company to deduct the unpaid
premium with interest in the event a claim matures during the grace
period. Policies also frequently contain a statement that after the
policy has been in force for a period of 2 years it shall be incontestable
except for nonpayment of premiums or for violation of policy condi-
tions relating to military or naval service or other similar exceptions.
It is customarily provided that the provisions of the policy shall
constitute the entire contract between the parties, that the policy^
holder may participate in^he surplus of the company if the policy be
participating and ai 'angement is made for a readjustment of the
proceeds of the policy in the event the age of the insured has been
misstated. The policy also permits the policyholder to reinstate his
policy within a definite period from the date of default if the cash
value has not been paid or the period during which extended insurance
is in effect has not expired, subject of course to a provision that the
policyholder shall be an insurable risk at the time and that he pays all
overdue premiums or other indebtedness against his policy, with
interest, which is usually computed at the rate of 6. percent. There
is still one final provision which deserves mention; namely, that
which permits the policyholder to arrange for the payment of the
proceeds of. his policy either in installments to his designated bene-
ficiaries or in the same fashion as if the proceeds had been used to
purchase an annuity. There are many complicated arrangements
made pursuant to this general policy provision. These are frequently
referred to as settlement options.^^

19 For a more complete discussion of standard policy provisions, see MacLean, Life Insurance (5th ed.),
pp 221-224.

SECTION XIV

Policy Terminations

As has been indicated there are three principal types of Hfe insur-
ance poHcies sold in either the ordinary or industrial departments of
the business; namely, whole life, endowment, and term. Policies of
^these types in the normal course of events would be expected to termi-
'nate with the death of the insured, the maturity of the endowment,
or the expiration of the term. It is a striking phenomenon of the life-
insurance business that only a small percentage of policies remain in
force until these modes of termination result.^ The great bulk of
terminations are the result of lapse or surrender, both essentially
wasteful modes of termination which, in the case of most policyholders
involved, represent at least some loss.^

During the 10-year period, January 1928 to January 1937, insurance
in force (excluding group insurance) in the United States increased
from approximately $8(1,592,000,000 to $96,662,000,000, an increase
of $16,070,000,000, To attain this increase American companies sold
$146,656,000,000 of new insurance, an amount over nine times as great
as the increase acliieved. Thus during tliis same period $126,675,-
000,000 of insurance was terminated, an amount nearly eight times as

' For testimony relating to policy terminations, see pt. 10, R. 4281 et seq.

2 There are several ways in which a contract of life insurance may' be terminated. The most important
of these are death, disability, maturity, expiry, decrease, surrender, and lapse. The cessation of all en-
forceable legal relations under an insurance policy between the company and the policyholder or insured
constitutes a termination. In case of a "decrease" the amount by which the policy is decreased constitutes
a termination pro tanto. Termination of the policy through the death of the insured or through the attain-
ment of the date specified in the policy as the maturity date constitutes an involuntary termination. In
every dase in which a disabihty payment is identified as a termination of the policy, in whole or in part, that
termination is deemed involuntary. The phrase "voluntary terminations" includes all terminations which
•the policyholder might have avoided had he conformed to the provisions of the original policy contract in
respect to payment of premiums. The various categories of voluntary terminations are:

Death. — When a policyholder dies, his policy is said to terminate by death.

Disability. — Some policies carry provisions by which premium payments cease and benefits are paid to the
insured by the company if the insured suffers total and permanent disability. When this occurs the policy
has terminated by disability.

Alaiurity. —Tolicy contracts, such as endowments, written to mature within a stated period of time, at the
end of which the benefits are paid to the insured, terminate by maturity when the stated period arrives.

Expiry. — A term policy, or a policy which has been transferred to extended term insurance by the opera-
tion of a nonforfeiture provision, may be terminated through expiry, which means that the period of years
designated as the "term" has totally elapsed. The termination through expiry of a policy originally written
as term insurance is an involuntary termination, while the termination through expiry of a policy which has
been transferred to "extended term insurance" by the operation of a nonforfeiture provision is voluntary
termination. Therefore, in respect to ordinary insurance, expiry may be regarded as cither a voluntary or
an involuntary mode of termination, depending on the particular circumstances. In respect to industrial
insurance, all expiries are deemed voluntary, since practically no industrial term policies are written.
■ Decrease.— The amount by which the face amount of the original policy is reduced during any of its life is
deemed termjinated by decrease.

Swrrewder.— Termination of a policy except through death, maturity, disability, or expiry, after a cash-
surrender value is available to the policyholder, is deemed a termination by surrender.

Lapse. — 'i'ermmation of a policy, other than by death, disability, or expiry, before p cash-surrender value
Is available to the policyholder, is deemed a termination by lapse.

184

CONCENTRATION OF ECONOMIC |»OWER

185

great as the increase in insurance in force for the 10 years, '^he
importance of life insurance terminations is thus self-evident.^

Theextent to which the above terminations may be regarded as
successful depends on the extent to which the terminations represent
the accomplishment of the purposes for which tlie msurance was
originally purchased. Obviously, a policy that terminates through
death, maturity, or disability (and to some extent through expiry) *
can be said to have terminated through the eventuation of the con-
tingencies against which the policyholder wished to insure. On the
other hand, if the policy terminates tlirough decrease, surrender, or
lapse, it has not served the purpose for w^hich it was purchased and in
most cases it may be said that its owner has experienced some degree of
frustration in liis insurance program.

Of the $126,675,000,000 of insurance terminating during the indi-
cated 10-year period, only 21.59 percent terminated by death, ma-
turity, disability, decrease, or expiry; while 78.41 percent terminated
by lapse or surrender. The relative importance of the modes of termi-
nation is indicated below.^

1928-37

Amount of insur-
ance terminating

Percentage
of total
termina-
tions for
period

Lapse

Surrender.

Expiry

Death

Decrease. -
Maturity..
Disability.

$65, 388. 000, 000
33, 932, 000, 000
12, 246, 000, 000
8, 353, 000, 000
5, 407, 000, 000
1, 255, 000, 000
94, 000, 000

51.62
26.79

6.59
4.27

Total 126,675,000,000

100.00

The significance of lapse and surrender cannot be overemphasized
since at least 78.41 percent of the insurance terminating during
this 10-year period terminated in a manner which did not fulfill the
principal purposes for which it was intended.

It will be recalled from a discussion of the net level premium plan ^
that policyholders purchasing whole life and endowment insurance
pay considerably more than the cost of their protection during the

3 Pt. 10, R. 4294-4301, exhibit No. 684. A fairly comparable situation was found for the period 1918-27.
(Id.) These figures are based upon Spectator Life Insurance Year Books and since the number of com-
panies reporting to this publication over the years covered varies considerably the figures are not completely
reconcilable. (See pt. 10, exhibit No. 684, footnote 3.) During the period there were revivals amounting to
$11,314,000,000. (Id.) The figure for amount of new business also includes revivals and reinsurance of
business in bulk. The termination experience of industrial policies willijot be considered separately in
this section, but may be found at pp. 278 to 282, infra.

■• When a term policy terminates through expiry it has clearly fulfilled the purpose for which it was pur-
chased. Terminations by expiry include, however, the expiry of extended term insurance. Extended
term insurance is one of the nonforfeiture values available to a policyholder who is unable to continue pay-
ment of his premiums and, to this extent, terminations by expiry may be regarded as representing the
frustration of the policyholder's original purpose.

•Pt. 10, exhibit No.' 684.

• Pp. 179 to 182, supra.

2C47C.3— 41— No. 28-

-13

IgQ CONCENTRATION OF ECONOMIC POWER

early years a policy is in force in order to reduce premiums which
would otherwise increase precipitously in later years. In the case of
most companies an ordinary policy must have been in force 3 years
before* the policyholder may draw out any portion of his savings
through surrender or policy loan. If premiums are discontinued
during the period^ — i. e., if the policy lapses— the policyholder's savings
are forfeited to the company and can never be retrieved. Thus with
over $65,000,000,000 of insurance lapsing in the 10-year period '' the
tremendous waste which exists in the insuring machinery is readily
apparent. In the case of surrender a similar, though somewhat less
serious, situation is to be found. It must be recognized that when a
policy is surrendered the policyholder is not always able to recover the
full reserve which has been accumulated against his policy. Fre-
quently a surrender charge is made at the time of surrender which is
deducted from the reserve. In the case of a policy which lapses, the
surrender charge is in effect 100 percent of the reserve. After 3 years
have elapsed from the time the policy was taken out, however, com-
panies commence to release at least a portion of the reserve to -the
surrendering policyholder.

. The following schedule* shows for present issues of different com-
panies the first policy year in which the full amount of the policy-
holder's reserve is returned in the event of the surrender of his policy :

Year in which full reserve
is first paid on sur-
Company: ' render of policy

Mutual Benefit Third policy year.

New England Mutual Do.

Guardian Mfe .._-■-. Eighth policy year.

Connecticut Mutual -- Tenth policy year.

John Hancock i — Do.

Massachusetts Mutual .. Do.

National Life Do.

Northwestern Mutual Do.

Penn Mutual ^ Do.

Provident Mutual Do.

State Mutual - . Do.

Union CentraL. Do.

Bankers Life Fifteenth policy year.

Equitable (Iowa) • Do.

Lincoln National Nineteenth policy year.

Aetna - - - Twentieth policy year.

Connecticut General ^ — Do.

Equitable - Do.

Metropohtan , — : — Do.

Mutual (New York) _ . Do.

New York Life 1 -- Do.

Pacific Mutual . . Do.

Phoenix Mutual .-- Do.

Travelers Do.

Western and Southern Do.

Prudential Surrender charge always

made.

' Pt. 10, exhibit No. 68*.
'Little Oem Life Chnrt, 1939.

CONCENTRATION OF ECONOMIC POWER 187

Thus many policyholders whose policies terminate by surrender
receive, in" accordance with their policy contracts, a refund of only a
portion of their reserve and suffer a loss to the extent of the surrender
charge assessed. This charge is substantial, amounting to as high as
$25 per thousand dollars of insurance in force in certain large New
York companies.

There is yet another way to demonstrate the extent of termination
by lapse which from the point of view of the policyholder is certainly
the most undesirable. The figures presented above undertake merely
to show the relationship between the amounts of insurance terminated
by lapse and total terminations; they do not reflect the amounts of
insurance which terminated through lapse in relation to the amount
of insurance exposed to lapse. This latter relationship is known as a
lapse rate. There is no lapse rate available for the industry in its
entirety. Lapse rates for its member companies are prepared on a
confidential basis by the Life Insurance Sales Research Bureau.^
These rates show that in the year 1938, 21 percent of all insurance in
force with all the Bureau's member companies which was exposed to
all the various modes of termination, terminated by lapse. The
lapse rate for some of the member companies was as high»as 65 per-
cent; the lowest lapse rate in the group was 11 percent. Lapse rates
as calculated by the Life Insurance Sales Research Bureau for indi-
vidual companies are set forth below.^"

19S9 19SJ, 19S8

Percent Percent Percent

Acacia ._ _. 24

Aetna . . • 16 18 15

Atlantic . 37 ' 39 32

BankpT-s (Iowa) .. __ 26

Bankers of Nebraska 25 42 37

California- West States .. 36 38 35

Canada 17 17 21

Connecticut General 17 20 19

Connecticut Mutual 17 19 17

Continental American ._ .. 28

Farmers & Bankers 45 55 53

Fidelity Mutual 24 24 19

Franklin . . .. .. 42

Great Southern . 46 52 42

Great-West .^-- . 26 27 24

Guarantee Mutual . _- 43

Guardian _.. 19 25 20

Home of New York 19 22 16

Jefiferson Standard 33 38 31

Lamar . 39 50 38

Lincoln National... 37 35 30

Manufacturers ..., 32 25 20

Massachusetts Mutual 9 18 15

Midland Mutual '24 i 29 23

Midwest 44 53 65

Minnesota Mutual . ._ _. 35

' Estimated.

• Pt. 10, R. 4319-4325.
'» Pt. 10, exhibit No. (

188 CONCENTRATION OF ECONOMIC POWER

1929 I93.i 19!!8

Percent Percent Percent

Monarch (Massachusetts) • 31 35 42

MutuaLBenefit 9 20 13

Mutual Life 11 17 12

Mutual Trust • 31 33 30

National Guardian 17 32 24

National Life & Accident ^. .. HI 50

National of Vermont 17 24 19

New England Mutual. : 9 13 11

Northwestern Mutual - 10. 16 12

Northwestern National 35 30 30

Occidental of California J 46 72 34

Oregon Mutual 31 50 31

Pacific Mutual 23 26 22

Pan-American __ 37

Penn Mutual 1 15 23 IS

Philadelphia ■ 35 39 29

Pilot.-.- 41 49 41

Phoenix Mutual . 12 11 16

Provident Mutual ._ 12 18 16

Southland . 37 50 46

Standard of Pennsylvania 32 48 26

State Mutual...^ .13 22 14

Sun -^ . . .... 19 28 21

Union Mutual . .. __ 30

United Benefit 1.. .. 52 60

United Life & Accident --._.• _. .- 26

Volunteer State.. - 38 46 36

West Cqast..... . •_. 51. 52 48

Western.' . .. 49

There are no figures available from any source which reflect the
amount lost -to policyholders through lapse and surrender. Un-
questionably this amount would reach staggering proportions if it
were known. The convention form annual statement casts little
light on the subject. In one schedule companies are asked to state
the net 'gain from lapses and surrenders. In every year since 1918
the American companies in the aggregate have reported a gain from
these two sources. The total "gain from lapses and surrenders"
to companies during the period 1918 to 1937 amounted to
$1,328,443,189 or an average of $66,000,000 a year. The results by
5-year periods since 1918 are shown below.^^

1918-22 . 1 $128, 254, 209

. 1923-27 -' 257. 156, 216

1928-32 532, 178, 653

1933-3^- --'- --- 410,854,111

Total . 1, 328, 443, 189

These figures may represent a fairly accurate measure of policy-
holders' losses. They overstate companj'' profits, from lapses and sur-
renders. The difficulty in obtaining figures on this highly significant

" Pt. 10, exhibit No. 687.

CONCENTRATION OF ECONOMIC POWER JgQ

question, namely, What are the losses and profits to pohcyholders and
companies from lapses and sm:Tenders — arises from basic deficiencies
in life insurance accounting. "V\Tien a life insurance company sells a
policy it incurs certain initial expenses or acquisition costs. These,
when added to the amount which the company is required to set aside
as a legal reserve against the polic}^ may total more than the first
premium received. It is necessary, therefore, for the company to
draw upon its surplus to make ends meet, an ' it is not mitil the poUcy
has been in force for a given period, varyini, in the case of each com-
pany, that the income from the policy repays the surplus account for
the drain resulting from acquisition.

If the release of the reserve, which results from and is made possible
by the termination of the policy contract by lapse, is insufficient to
reimburse the company for the amount of its surplus expended tip
acquire that policy, then the lapse results in a loss to the company
pro tanto. If, however, the reserve is true, the company may break
even or may realize a profit from the lapse. Similarly in the case of
a policyholder who surrenders his policy; though the policyholder
always recovers a portion of his reserve, the company may gain from
a surrender if the difference between the money released to the
policyholder and the reserve itself (surrender charge) is more than
sufficient to reimburse the company for the cost of acquiring that
•pohcy and maintaining it in. force. Since the figures given on gains
from lapses and surrenders are net it is impossible to determine to
what extent a gain for a given year constitutes simply a return of
the amount originally withdrawn from surplus and to what extent it
represents additions to surplus from profits realized through the
lapse and surrender of the policies in question.

The problem of lapse and surrender has confronted the hfe insurance
business almost since its inception. Repeatedly critics have called
for correction, pointiRg to social evils residting therefrom. Company
officials have replied that they are conscious of the problem and work-
ing toward its solution. "Wlien their failure to make substantial
progress toward this end, however, is mentioned, and pointed refer-
enoiB is made to the serious deficiencies in their accounting methods
which prevent any true estimate of the gams or losses experienced as
a result of lapse and surrender, most companies offer excuses, arguing
that lapse and surrender are to a certain extent inevitable because
they are the result of the natural human tendency to discontinue a
program of thrift and savings and other factors beyond the control
of the msuring company. ^^

The Commission's sales c|uestionnaire requested companies io
state the results of any studies or statistics which they might have
indicating the causes for lapse, surrender, decrease, or transfer to
extended term insurance. An effort was thus made to determine
what were m the opinion of the companies tlie principal causes for
voluntary terminations. Many companies indicated by their answer
that they did not have any definite information on the subject.^^

" Pt. 10, R. 4315, 4316, 4323, 4324, 4325: pt. 12, R. 5962, 5963, 59' 0, 5971, 5972, 6020.

" The answer of the Mutual Benefit, for example, stated, Bvp.y to Commission's sales questionnaire,
item 73:

"The principal causes which in the declarant's opinion aflect .;i aination of insurance by lapse, surrender,
or transfer to extended term insurance are the inability or unw -iii jness of the insured to keep the insurance
in foixe. Declarant has no means of knowmg or ascertaining si ih jauses at the time the insurance is written.
Declarant has not made any study with respect thereto."

J 90 CONCENTRATION OF ECONOMIC POWER

Among the principal causos mentioned by companies were the
following: A change in the financial condition of the insured resulting
from loss of job or other change in economic status, the operations of
twisters, accumulation of indebtedness against the policy, instability
of the insured, loss of contact or dissatisfaction with the particular
agent responsible for the sale and the discontinuance of the need for
which the policy was taken.**

There w6re very few companies however which indicated they had
made any special studies to determine causes for voluntary termina-
tions. The only com ir- lensive study which was presented in reply
to the questionnaire v.as a study by the Northwestern National based
upon information assembled over a period of 10 years. These studies
indicated that the principal cause of lapse was simply the "normal
human failure to carry out projected plans." *^ Education, social
standing, type of policy, and a great variety of other factors were
shown to have some effect upon the persistency of business. For
example, business women, business executives, teachers, nurses, book-
keepers. Government employees, and railroad workers were found to
have particularly high persistency, whereas nonskilled laborers and
farm laborers, for example, were found to have a low persistency.
In setting forth the results of the study, the Northwestern National
stated: 1^

If we approach the question from the standpoint of the man who sells the
business rather than from the standpoint of large classes of buyers sold by the
agents, we find that the variation in performance tends to be far more extreme
indicating that the influence of the agent has a far more vital influence than
any other.

In substantiation of this statement the company presented figures
comparing the records of two agents and disclosing that regardless
of the size of the policy, the amount of insurance sold, the income
level of the .purchaser, his age, sex, or occupational standing, one
agent wq,s found to consistently write insurance with a lower per-
sistency record than the other. The Northwestern National's con-
cluding findings are:*^

* * * the major factors affecting lapse are these:

1. Hdw exactly does the original sale fit the existing needs or desires of the
buyc" and how thoroughly is it sold as a solution to a vital problem of the buyer?

2. I^'ow frequently and thoroughly is the policy serviced and resold?

3. Is the agent's compensatipn and are his incentives so set up that these two
essentials to persistency are emphasized and encouraged in his work and his
potential earnings dependent on them?

This study indicates that lapse and other voluntary terminations
are partially the result of selling practices. This view was substan-
tiated by several companies which indicated that the activities of the
agency force were in at least some measure responsible.*^ The strong-

" Replies to Gominission's sales questionnaire.

" Northwestern National reply to sales questionnaire No. 73. See also pt. 28, exhibit No. 2332, showing
study made by Connecticut Mutual.

"Id.

" Id.

18 Central Life, Life Insurance Co. of Virginia', Ohio National, Penn Mutual, Volunteer State, replies to
Commission's sales questionnaire, item 73.

CONCENTRATION OF ECONOMIC POWER JQX

est statement in this regard was made by the Southwestern Life
Insurance Co. which listed the following six causes as the chief causes
of lapse :^®

1. Change in financial status -of the insured.

2. Improper selection of agents.

3. Lack of training of agents.

4. Inadequate compensation of agents.

5. Overemphasis on production on the part of the company and agency super-
visors, especially in the use of sales contests.

6. Policies were originally purchased to cover a temporary need. This reason
for termination of insurance is sometimes ascertainable at the time tJie insurance
is written.

In the absence of more complete comi)any studies or the testimony
of the many policyholders involved it is impossible to weigh the exact
significance of each factor contributmg to lapse and other modes of
voluntary termination. So important a phenomenon cannot be
explained or justified by simple reference to "the human frailties."
Upon analysis a substantial portion of the blame will be found to
rest primarily upon certain management policies, particularly those
policies relating to the sale of insurance and the servicing of insurance
after it is sold. In the sections on agency practices and industrial
insurance which follow, it will be demonstrated that insufficient
training of agents, high turn-over in sales personnel, poorly designed
methods of compensation of agents and managers, high-pressure
selling and other related matters contribute materially to lapse anc^
surrender and the losses to policyholders incident thereto.

" Reply to Commission's sales questionnaire, item 73.

SECTION XV
Agency Practices '

'It has been traditional in the life insurance business that policies
be sold by agents. During the years when the companies were yet
to. be established in the public's confidence and the benefits of life
irvsurance were not known to large sections of the population, the life
insurance agent pioneered in making people insurance conscious and
in so doing unquestionably performed an important service. Al-
tliough it is now recognized and quite generally admitted that agents
of many companies were goaded into overzealous actions by manage-
ments interested only in increasing volume and that high-pressure
tatitics frequently prevailed during the period,^ these excesses may be
peirtially overlooked in the light of good accomplished.

Today, however, problems of serious economic and social conse-
quence confront the agency system. During recent years, weaknesses
in the traditional method of distributing life insurance have become
increasingly apparent. Though the country is security-conscious
to -such an extent that life insurance will be found an accepted part
of the family budget, the agency machinery has been maintained on
essentially the same basis as when life insurance was a novelty and
unfortunately has not been adapted to the changing conditions. In
brief it is evident that the number of agents is too great, that many
agents are unfit and untrained and that average agency compensation
is- very low. Furthermore, due to their continued emphasis upon the
prgduction of a volume of new business the companies have failed
t© develop adequate methods for servicing the needs of their existing
policyholders, and, in perpetuating sales practices no longer suited
to the market, have encouraged a condition which fosters maldis-
tribution of policies and results in unnecessary losses to many policy-
holders.

The agency system, itself, is not at fault. When properly managed,
it provides the backbone of the entire business and its continuation
is essential. Through the ignorance or carelessness of management,
however, it has been permitted to deteriorate until it no longer fills
the needs of the insurance buyer.

' This section is confined to a discussion of agency practices of companies selling ordinary insurance.
A gency practices of industrial companies are considered at p. 258, et seq.

» In discussing the historical development of life insurance during the post-war period 1919-29, Mr. Joseph
B. MaeJean, associate actuary of the Mutual Life, states (Life Insurance, Tith cd., p. 544):

"Undoubtedly some of the growth of this period was forced and unhealthy. There was a good deal of
high-i ressure salesmanship and over-insurance and, in fact, of over-purchasing of insurance by those whose .
purchaser were being financed temporarily by the easy gains of the stock market."

See also annual meetings of the Association of Life Agency Officers and Life Insurance Sales Research
Bureau; 1D38 at pp. 7 and 223; 1937 at p. 113 and 1935 at p. 23.

192

CONCENTRATION OF ECONOMIC POWER I93

That department of a life-insurance company concerned with sales
and agency affairs ^ is generally headed by an executive at the home
office who in many cases woi'ks in close cooperation with a sales or
agency committee of the company's board of directors. The home
office executive and his assistants are usually compensated on a
salary basis and are responsible for exercising general supervision
over sales activities in the field. Most of the records concerning the
performance of agents are maintained at the main offices of the com-
pany and matters of policy are initiated and put into effect by the
staff of its agency department.

It is only in rare instances that agents are directly responsible to
the home office. Usually an agent will work under the direct super-
vision of a general agent or branch manager. The general-agency
system was the first system used by life-insurance companies to
supervise selling activities in the field and it is still the most important.
Under this arrangement, the company appoints an individual as
general agent and assigns him a specified area over which he is given
control and sole jurisdiction. It is his job to hire and fire agents in
the territory he has been assigned and he must himself stand financial
responsibility for the principal expenses incident to the conduct of
the agency. The general agent recer\"es a commission usually- equal
to a percentage of from 55 to 65 percent of first-year premiums on
whole life policies written by agents whom he employs on behalf of
the company and renewal commissions on the same policies ranging
in amount from 5 to 10 percent for a period of from 6 to 10 years
from the date the policy was written. The general agent not only
•retains a portion of these first-year and renewal commissions but he
also receives commissions on. business which he, himself, writes
directly.*

Under the branch-manager system the company appoints managers
to administer field offices of the company set up in various key locali-
ties throughout the territory in which the company operates. The
branch manager performs the same functions as the general agent,
including the hiring and firing of agents. Agents' contracts are, how-
ever, made directly with the company. The branch manager is
somewhat less independent than the general agent and may count on
more, financial assistance from his company. He usually receives a
guaranteed salary which is often augmented by underwriting commis-
sions on his own business and business written by agents under his
jurisdiction.^

It is not unusual for a single company to utilize both the general-
agency and branch-office systems simultaneously. Out of the 58 com-
panies examined, 17 operated under both systems while 35 used the
general-agency system exclusively. Of the total insurance in force,

' This genera! information was obtained from company replies to the Commission's sales questionnaire.
For a description of the operations of the agency department of the Equitable see pt. 13, R. ■6508-6514.
* Replies to Commission's sales questionnaire, exhibit V.
«Id.

194 CONCENTRATION OF ECONOMIC POWER

as of December 31, 1938, in these companies, almost twice as much
insm'ance was carried with general agencies as with branch managers.^
The method of compensating life-insurance salesmen by first-year
and renewal commissions has existed with little variation for many
years. Regardless of whether he is responsible directly to the home
office of his company or' to a general agent or branch manager^ he
receives a first-year commission w^hich is augmented by renewal
commissions. The first-year commission is equivalent to a percentage
of the premium paid on the policy during the first year it is in force
and the renewal commission is based on a lower percentage of the
annual premiums paid on the policy during a specified number of
years following the first year. An agent usually receives from 45 to
75 percent as a first-year commission on whole-life policies written by
him and a somewhat lower percentage of first-year premiums on other
plans of insurance which he sells. The renewal commission paid

« Replies to Commission's sales questionnaire, items 20 and 27.

Companies using tlie general-agency system urge that its chief advantages lie in the fact that it enables
the company to attract men of experience, initiative, and financial resources who are willing to accept a
general-agency appointment whore they would not accept a branch-manager assignment because they have
as general agents more of a stake in the enterprise and greater opportunity for profit if successful. Companies
employing general agents feel that they can better control field expenses since the general agent is an inde-
pendent contractor and cannot demand money from the home office in excess of that specified in his contract.
These companies also believe that under a general-agency system they do not have to be concerned with as
many supervisory problems. Those companies using the branch-manager system, on the other hand, argue
that it gives a better supervisory control, a more flexible basis of operations, enabling a company to initiate
modifications in agency programs more readily. The smaller companies almost uniformly use a general-
agency system since it requires less original cash outlay. Many companies follow one system or the other
primarily because that system was traditional to the company's operations. In only a few replies to the
questionnaire did any company indicate a positive conviction that one form of field management was the
only form conducive to good agency organization. (From companies' replies to Commission's sales ques-
tionnaire, item 28.) Mr. Parkinson, president of Equitable, whose company employs both systems, dis-
tinguished the general agent from the branch manager in the following manner (pt. 13, R. 6512):

"The general agent, speaking generally, derives very little of profit for himself from the first year's commis-
sion; he makes his compensation principally from the renewal commissions, and his renewal commissions
run always for 9 years, and under our contracts usually for 5 succeeding years; and the agency manager, on
the contrary, has only a limited interest in renewal commission, deriving his compensation largely from his
guaranty and from his performance of the various functions assigned to him; but we have in recent years
varied our agency-manager contract to increase his interest in the renewal commissions and thereby have
tended to remove the distinctions between the agency-manager contract and the general-agent contract."

Out of 58 companies replying to the Commission's sales questionnaire there were 28,788 agents working
under branch managers and 61,216 working under general agents. Replies to Commission's sales question-
naire, item 20.

CONCENTRATION OF ECONOMIC POWER

195

ranges from 2K to 5 percent of the annual premium and customarily
is received by the agent for a period of 9 years 7

A. THE DRIVE FOR NEW BUSINESS

It will be observed that the above method of agents' compensation
depends largely upon the production of new business. It effectively
implements the desire for growth which has been one of the principal
preoccupations of company management. This attitude of manage-
ment toward growth was apparent from the testimony of several com-
pany officials. Mr. William Montgomery, president of the Acacia
Mutual Life Insurance Co., for example, testified that in his opinion
some companies were:®

* * * pushing agents too hard to get a volume of business that will make the
company good window dressing.

' The following list of representative companies pays whole-time agents the indicated first-year commis-
sions for whole life, 20-payment-life and 20-year-endowment policies:

Whole life

20-payment life

20-year endowment

Prudential

Occidental Life
John Hancock.

Northwestern Na-
tional.
Travelers.--

Southwestern

Central Life

Kansas City Life. . .
Guarantee Mutual..

50 percent

60 percent

45 or 50 percent, depend-
ing on age of policy-
holders.

do--

25 to 55 percent, depend-
ing on age of policy-
holder^ and size of
policy.

75 percent

55 percent

70 percent

30 or 50 percent, depend-
ing on age of policy-
holder.

45 percent

50 percent

45 percent

55 percent

25 to 47H percent, de-
pending on age of pol-
icyholder.

75 percent

50 percent

70 percent.-

50 percent

35 percent.
40 percent.
30 percent.

45 percent.

25 to 35 percent, depend-
ing on age of policy-
bolder.

75 percent.
35 percent.
65 percent.
35 percent.

In almost all cases the companies pay a 5 percent renewal commission for a period of 9 years. In the
case of Prudential, renewals may continue for 10 years while in the case of the Occidental Life renewals are
paid as long as the agent remains in the company and the policy continues in force. In the case of the
Kansas City Life, the agent's contract provides that the renewals may be fixed by the conTpany and no
specific percentage is stated. The Central Life, Guarantee Mutual, and Southwestern have renewal
systems which pay the agent longer renewals if the amount of his new business' written is in excess of a
specified figure. The Southwestern for example will pay renewals up to the end of the sixth year if the
new insurance written is between $50,000 and $75,000, up to the end of the eighth year if it is between
$75,000 and $100,000 and if the agents writing are $100,000 or over it will pay renewals of 10 percent in the
second year and of 5 percent for from 3 to 10 years thereafter (from current agent's contracts submitted by
companies in reply to Commission's sales questionnaire).

' Pt. 13, R. 4340. Most companies replying to the Commission's sales questionnaire indicated that
growth was one of their objectives. Statements of company objectives in respect to growth and the writing
of new business are illuminating. The Union Central, for example, has as its objectives the writing of
$100,000,000 of new business in 1939, the continual increase of business in force and the writing of an amount of
new business equal to IH percent of the total new business in the industry. The Penn Mutual set as its
objective in this regard the writing of new business each year equal to about 2 to 3 percent of the total or-
dinary new business written in the United States. The Atlantic Life Insurance Co. stated that it wished to
write about $10,000,000 new business each year and show a gain of about $1,000,000 a year. The Aetna
stated that it wished to write an amount of new business equivalent to 1 percent of its business in force with
a view to Meeting a net increase of about 2 percent. Replies to Commission's sales questionnaire, item 7.

195 CONCENTRATION OF ECONOMIC POWER

Mr. Frederick H. Ecker, chairman of the board of the Metropohtan,
acknowledged that his company definitely encouraged the writing of
new business and considered growth inherent iri the business. In
response to a question as to whether his company had come to a con-
clusion that it "should stop growing" he stated:^

It never has * * *^ that would result in our going out of business. You
can't stand still. You either go forward or you go backward. You have an or-
ganization in the field who are depending for a livelihood upon their writing of
life insurance. If you tell them to stop writing they will go to a company where
they will get paid, and that whole organization will disintegrate.

Mr. Thomas I. Parkinson, president of the Equitable, testified to the
same effect. After discussion of the sales objectives of his institu-
tion he said it was possible that if the Equitable was successful from
the point of view of its present management policies its assets might
grow in size to 5 or even 10 billion dollars in time and that, he felt there
must be growth for the life insurance companies to have the most
vigorous and sound policy. '°

1 Pt. 4, R. 1252.

"> Pt. 13, R. 6539, 6560. The attitude that unlimited and continued growth is either necessary or beneficial
was not shared by all company executives who testified. Mr. Charles F. Williams, president of the Western
& Southern, testified, for example, that if his company grew to have more than $1,000,000,000 insurance in
force, It would be bound to lose contact with the problems of the agency force and the policyholder (pt. 12,
R. 6935). Approximately this same position was taken by Mr. Arthur Coburn, vice president of the South-
western Life, who testified (pt. 13, R. 6593, 6594):

"Mr. Gesell. Then you think that the writing of policies on a high-pressure basis, and the consequent
lapse and continual turn-over of policies, creates ill will among the people?

"Mr. COBUEN. Oh, definitely so.

"Mr. Gesell. And from a strictly operating, realistic approach to the conduct of the business on a profit-
and-loss basis, it is desirable to keep policyholders contented and not to trick them out of too much money.

"Mr. Coburn. I think that is correct.

• • * * * • •.

"Mr. Gesell. Have you ever given any consideration to going outside of the State of Texas and doing
business in the surrounding States?

"Mr. CoBURX. We have.

"Mr. Gesell. Why have you decided not to do so?

"Mr. Coburn. Because we were writing so much business in Texas.

"Mr. Gesell. Well, I take it you could write more if you went outside.

"Mr. doBURN. We think it would be unwise to write more business than we are now writing.

"Mr. Gesell. I take it, then, that you do feel that there is some advantage to a company which keeps its
operations from growing too extensiv..

"Mr. Coburn. It is more profitable not to grow too fast. You make more money.

"Mr. Gesell. What about it from the point of view of the policyholder?

"Mr. Coburn. I don't feel that we are under any obligation to the citizens of Oklahoma. We have never
undertaken to render them any service. I don't think that Oklahoma is in any way Jeopardized by the fact
that we have not entered Oklahoma.

"Mr. Gesell. Do you feel that you can better service a smaller group of policyholders than you can a large
group of policyholders?

"Mr. Coburn. I believe you secure maximum efficiency in the life-insurance business with a regular
company that has $500,000,000 of life insurance in force. 1 believe any growth, any substantial growth, or-
derly growth up to $500,000,000 is definitely advantageous from an operating point of view.

"Mr. Gesell. Beyond that, you have serious doubts?

"Mr. Coburn. Beyond a billion dollars of life insurance in force, to maintain the same eflSciency becomes
a problem. It has been done, but rievertheless it is a problem to be solved. You have in this country one
notable example of a company that has solved it."

See also testimony of Mr. John A. Stevenson, president Penn Mutual, who stated that it was not necessary
for a company to grow in order to maintain the integrity of policies now in effect (pt. 28, testimony on Feb.
13, 1940; testimony of Mr. George S. Van Schaick, vice president New York Life; pt. 38, testimony on Feb.
20, 1940; and testimony of Mr. Alfred M. Best, president Alfred M. Best & Co., pt. 28, testimony on Feb.
29, 1940).

CONCENTRATION OF ECONOMIC POWER I97

This desire for growth is perhaps nowhere more apparent than in
the cold statistics which present the actual results accomplished in
recent years. As has already been indicated, in less than 60 years
insurance in force has increased 2,500 percent or at a rate 25 times as
fast as population, and in the last 28 years alone it has grown from
16 billion dollars to Ul billion dollars in force." There is a frequent
saying that life insurance is sold, not bought. The tremendous
growth which has been experienced, though partially attributable to
many causes, is to a considerable extent the product of a push for
sales. In this respect activities of company managements in spon-
soring sales contests and in distributing high pressure sales literature
to their agents and managers are revealing.

Of the 62 companies replying to the Commission's sales question-
naire 55 companies held company-sponsored sales contests during
1938.^^ These sales contests take many forms but the only criterion
of success in practically all of them is the volume of new business
written. The persistency of insurance written during the contests
is seldom a consideration. '^

The character of the sales contests may be judged by typical
examples chosen from a wide group of contests described by witnesses
before the committee or reported 'to the Commission in reply to its
sales questionnaire. Almost any excuse is used to justify a contest:
the breaking of ground for a new office building, the birthday or
anniversary of some executive officer, the anniversary of the com-
pany, the retirement or promotion of an executive officer or well-
known salesman. Thanksgiving Day, Christmas, the opening of the
baseball or football season, the September lag, the opening up of a
new territory or the achievement of a liigh mark in insurance in force.
No matter what the excuse, the contest is presented to the agent in
dramatic and glowing terms, the effort being made to stimulate him

" p. 9, supra. ' ' "

'2 Replies to Commission's sales questjonnaire, item 17.

'3 Some company officials have statecPthat the lapse rates of contest business are much higher than the
lapse rates of business obtained at other times. The testimony of Mr. Arthur Coburn, vice president of the
Southwestern Life, is interesting in this connection (pt. 13, R. 6591):

"Mr. Gesell. Do youbelieveintheusual type of high pressure contests such as we considered yesterday?

"Mr. Coburn. I am absolutely unalterably opposed to high-pressure selling.

"Mr. Qeseli.. Do you believe that sales contests generally promote that kind of selling?

"Mr. Coburn. Highly detrimental * * *.

"Mr. Gesell. It is your experience, I take it, that any efforts to emotionalize the salesmen or artificially
stimulate them into production results in writing a poor form of business * • *.

"Mr. Coburn. It does."

See also p. 258 infra at note 59.

In its reply to the Commission's sales questionnaire, item 17, the Central Life Assurance Society stated.

"The persistency of business written during these contests cannot, of course, be determined as a year has
not elapsed and we cannot ascertain how, much of the business written will renew. Previous experience
indicates that the persistency of this business will be less than the company average primarily because there
is business written which is oversold to some extent and also a certain amount of high pressure selling is
involved. In addition a certain amount of poor business is submitted to enable agents to qualify for prizes
primarOy. These are disadvantages involved in and a natural result of any sales contest when an attempt
is m.ade to develop enthusiasm and maximum effort from salesmen. Our point system and minimum
renewal requirement were adapted to correct this as far as possible."

198 CONCENTRATION OF ECONOMIC POWER

to greater productive activity.^* The Continental Assurance Co., of
Chicago, 111., for example, held a contest known as the Second
Sellebration. A 2-weeks' vacation was promised the winner, a cash
prize of $300 for the man who reached second place and several third
place prizes were offered to men who produced a minimum volume of
$25,000 of new business. Literature distributed by the company in
connection with this contest carried pictures of prizes and warm
sunlight vacation spots to which the winner might resort. ^^ The
contest literature read in part as follows: '^

How would you like to give your wife a Christmas present she will remember
for the balance of her life * * * ^ present so big, so generous, so unusual
that she will be envied by all of her friends, relatives and acquaintances?

Better yet, how would 3'ou likd* to make that gift a joint present * * *
something she can share with you * * * something fascinating, romantic,
exciting * * * something you both can enjoy and, look back on in later years
with memories so vivid you can't forget them?

You'd like that? Okay. You can arrange right now to play Santa Claus on
a magnificent scale next Christmas Eve. And best of all * * * it * * *
won't * * * cogt * * * yQ^ ^ cent. No sir; not one red cent. Con-
tinental will buy this gift for you * * * a present to your wife and you

I* Replies to Commission's sales questionnaire, item 17 and exhibit F. The Continental American Life
Insurance Co. distributed literature during 1938 in connection with founders month reading as follows
(reply to Commission's sales questionnaire):

"Will you be on the roll of charter members of the founders club which will be put on display in the
home office next month? Will you wear the gold key, and hang in your office the membership certificate?
Will your agency display the new type bronze and silver plaque?

"Founders month is just half over, and there is still plenty of time for you to be among the select '31.'
Don't think the same old fellows are going to be among the top 31 at the end of October, either. Several
dark horses are piling up applications and making new records. You will have to get a few extra ones to
keep your position. Will you exert that little bit of extra effort as your personal tribute to those who founded
Continental American and the ideals behind the company?

"In our first 3 regular bulletins we reminded you of the priceless contributions of Philip Burnet, of the
original directors, and of the 'old timers' in the home office. In this, bulletin No. 4, we call your attention
to tbe original old guard of Continental American, and ask you as an evidence of your appreciation of the
work of these men, to send us every possible piece of business you can during the rest of October, tne com-
pany's anniversary month."

• ' * • • • • •

"There is still time: ,

"The end of founders month is in sight. When you read this bulletin, 3 working days will remain In
October. Yet, when you stop to think of it, 3 days is 10 percent of the month— and a lot of constructive
work can be done in 10 percent of any month.

"Our applied-for business is well ahead of October 1937— and so is the issued. All of you arfe heartily
congratulated for this showing. We know it has meant a lot of hard work. But the weak link in the
chain is the paid-for business, and we can't let that defeat us. We are too near to beating the biggest October
in the company's history— October of 1937. That is why -we want to ask you, today, this personal ques-
tion: What can you individually do to put every possible policy in force before Monday night, October 31?
Which policies need a little extra effort to secure payment?

"There is still time to pay for your outstanding policies.

"There is still time to get one more application to boost founders month for yourself, and the best way
to insure getting it in this month is to get cash with the app.

"There is still time to nose out some of those near the top of the list and become a charter member of the
founders club. The upsets on today's list of potential club members proves that.

"If you are pear the top, we salute ypu. But we' warn you not to stop working yet. Others are fighting
for your place.

' 'If you are further down on the hst, turn on the steam. It's not too late to be 1 of the 31 who will
• wear the gold -key. The battle isionly nine-tenths over. '

"And if you are not on the list. at all: We earnestly request you to get on it. All of us in the com-
pany want to see the name of every last Continental American representative on the founders month list.
Whether you can win a membership or not, get 1 application and be on the list."

'* Reply to Commission's ssiles questionnaire, item 17 and exhibit F.

i« Id.

CONCENTRATION OF ECONOMIC POWER- JQQ

* * * .in return for just one thing — namely, production. Consistent, day-
by-day production that will take you out in front of the producers in your group
and keep you in front until after the close of this "Sell'bration."

As a reward for that effort, Continental will present you with two railroad and
Pullman tickets to New York City, reservations aboard a palatial ocean liner
saihng to Bermuda, hotel accommodations and meals during your stay on this
lovely tropical island.. In addition, before you sail, you'll be given a check for
$100 for incidental expenses and spending money.

That's a real Christmas present. A 2-weeks' winter vacation * * * the
finest, most luxurious accommodations, fit for a millionaire * * * old-world
charm * * * exotic sights and .scenery * * * fun, fellowship, an
eventful, ever-exciting, ever-changing journey. Man, you can't possibly give
your wife * * * or 3'ourself * * * a finer, more lasting gift.

But * * * before you can enjoy this gift * * * you'll have to earn
it. You'll have to set yourself a daily quota, make more calls, start earlier and
stop later, sell more forcefully * * * get out in front of the men in your
group and stay in front until you've won your reward.- You'll have to make
every day count. Every day a sale * * * every sale a step closer to your
vacation reward. You can do it * * * if you start, go * * * and keep
going.

Remember, showmanship on your part is what will put over this contest.
Decorate the agency office with, pennants, banners, football equipment if possible.
Also, provide a gridiron, either on your blackboard or on cardboard to keep a
running account of the yardage gained by each team; Enthusiasm and show-
manship are the thing. Let's u^e "em."

Emphasis upon persistency and sound underwriting would seem
impossible in such an atmosphere.

A good example of a contest run as a game was found in the "Pigskin
Classic of 1939" contest sponsored by the Cahfornia-Westem States
Life Insurance Co." Under the rules of this contest the agents in
each branch office were divided into two groups and a "football game"
was played by setting up, charts representing gridirons in the office.
Each team scored in accordance with the amount of insurance sold
and a series of prizes were arranged for the winning team. Company
executives gave branch managers detailed instructions designed to
work up enthusiasm. Some of these instructions were as follows: ^^

Bedeck yourselves in coaches garb ((a) tap; (b) sweat shirt; (c) whistle) at every
meeting during the contest.

Provide a water bucket with bottled "cokes," or sumpin', for a half-time break
in the meetings.

Use the whistle to call your meetings to order or halt a speaker.

You may want to pass the football to the team captains, and those called on to
speak at meetings.

A contest run by the Equitable in connection with its opening of
new territory in the State of Texas during 1939 was an outstanding
example of pressure tactics used to bring in production at all costs.
Tlie contest was in charge of Mr. W. W. Klingmaii, the Texas general
manager of the company, who staged what he called a "double barrelled
effort" for production during June. In the midst of this drive,
arrangements were made to bring in one half a million dollars of new
business on a single day. This day was set for June 20, 1939, and was

" Id.
" Id.

200 CONCENTRATION OF ECONOIMIC POWER

designated as "the perfect day." Beginning 10 days in advance
literature went out to prepare the agents toward the big drive that
day. Thus on, June 10, Mr. KQingman wrote he was planning to
have "the perfect day." He described that program as —

A day perfect from the standpoint of a tremendous day's work well done — a
day perfect from the standpoint of complete cooperation on the part of 'each one
in fighting to attain the goaj which we have set for that daj^, which is one-half
million of new written business at the end of a perfect day — Tuesday, June 20 —
may we have so far exceeded our goal of "one-half million" in a single day that
all the world will know that we are building the greatest life insurancy agency
in the world right here in Texas.

In subsequent iil^erature to his agents Mr. KJingman urged that
this was to be "a red letter day"; a "supreme 1-day effort" requiring
the "never say die spirit" and that the company was to make —

* * * a path of blazing glory to heights never yet achieved in the history
in the State of Texas in a single day's business.

As the big moment approached, special telegraph apparatus was
installed in Mr. Klingman's private office. Every Texas agent of
the Equitable was to be handed five form telegrams addressed to
Mr. Klingman's office at Dallas, Tex. Each telegram marked "a
perfect day" was intended to indicate the agent had written an
application. . The telegrams read: ^^

Got my first for $._ Still going.

Here is my second $ Going strong.

Here is my third $ . Fighting through.

Here is my fourth $ . It is a dandy.

Here is my fifth $ The end of a perfect. daj'.

Contests are however but a phase of the drive for production.
Though in some companies they occur with a frequency which almost
makes them a normal condition, ^° they are intended not only to get
volume but to be the exciting moments which break up the steady
day-to-day emphasis upon new business.^^ The instructions given
agents on how to sell insurance and the various sales tricks which all
agents are taught demonstrate even more clearly the underlying
tempo of the sales efforts of most life insurance companies. In the
next few pages this material will be presented on the basis of excerpts
taken from typical instruction books and literature given the agents
from time" to time in the course of their duties. It will be seen that

'»Pt. 13, exhibit No. 1342.

20 For example, one agency of the Equitable had had 14 contests during the period June 1, 1937, to June
1, 1939. These contests were identified as a national educational conference, a turkey campaign, a scrimmage
campaign, a loyalty day campaign, an eightieth anniversary campaign, an Ott eighth anniversary campaign
traffic court, life insurance week, another turkey, world series, a scrimmage, another loyalty day, a 5-and-lO
club, and a ninth anniversary of the Ott agency campaign (pt. 13, R. 6545).

" The companies justify sales contests on many grounds. The following statement by the Continental
American Life Insurance Co. in reply to the Commission's sales questionnaire, item 17, is typical:

"While, of course, the immediate reason for thes'e or any other similar contests or 'drives' is to increase,
through the arousement of greater activity and interest of the sales force, the volume of new sales, yet there
are also other reasons equally important — or, indeed, even more important since their pur])ose is to im-
prove the morale and well-being of the sales force. Some of these other reasons are to relieve the tedium of
day-after-day solicitation by injecting the spirit of fun resulting from the salesmen vieing with one another;
the improvement in the bank account of the salesmen resulting from the stimulation of effort due to the
contest; the building up of enthusiasm and confidence of the successful participants that results from having
been successful; increased loyalty and ambition that is engendered by recognition and acclaim of earnest
effort— not merely for the production of a large volume, for our contests are so planned as to give recognition
for meritorious accomplishment rather than only for totals, by taking into consideration in making awards
the difference in opportunity for large volume, as, for instance, between rural and urban agents.''

CONCENTRATION OF ECONOMIC POWER 201

in order to accomplish the ideal of more and more sales the agent
is given detailed instructions on how to break down sales resistance.
All the legerdemain of sales psychology is placed at his disposal.
"Canned" sales talks and other set speeches to meet objections and
to force the final signing of the application are made the agent's
stock in trade. He is even told how to modulate his voice and when
to smile. Little and frequently no emphasis, on the other hand, is
given to standards which will enable the salesmen to suit a particular
insurance program to the needs and income of his prospect.

Most companies have worked out a detailed plan of sales procedure
for their agents. An agent is told there are four steps to a life insurance
sales presentation: (1) Preapproach, (2) approach, (3) presentation,
and (4) close.^^

The "preapproach," which is the locating of potential purchasers
of life insurance, is generally known among agents as prospecting.
Many companies teach their agent three methods of prospecting:
The personal-contact method, the center-of-influence method, and
the endless-chain method. The use of the first, pergonal contact,
depends principally on the making of as many friends as possible and
the recognition of each of them as a prospect. The center-of-influence
method of prospecting requires that the agent make use of some
individual who has a wide circle of friends with whose problems he is
familiar and who will have a serious respect for his opinion. From
his "center" the agent tries to obtain introductions to friends as well
as tips on their interests and their needs. The endless-chain method
of prospecting consists simply in making every interview lead to
another one. When an application is signed or a policy delivered,
the agent asks the recent prospect for the name of one person to whom
the insurance plan he has just purchased might apply. ^^

With the "approach" the actual job of selling begins. One device
recommended in starting the selling interview is for the. agent to tell
the prospect that the purpose of the interview is not to sell insurance.
Thus the Bankers Life Co. of Iowa suggests: ^*

Assure the prospect that you have not come to sell him life insurance today.
Take that barrier and deftly lay it aside, b)^ a.'^eement. It's hard work to out-
argue him. It is an easy job to agree with ham. If he knows that you aren't
going to try to sell him today, he is far more willing to grant you an interview
today.

Many companies furnish their ^agents with a series of "opening
lines." Among those recommended by the Kansas City Life is the
following: ^^

Bill, I have just made a connection with a financial concern that seems to have
more money than it knows what to do with and I want to distribute some of it
among my friends.

" See, e. g., Life Insurance, What It Is and How to Sell It— Midland Mutual; Single Need Selling-
distributed by John Hancock and others; Applying Life Insurance to Human Js'^eeds,- vol. 3 — distributed by
Bankers Life (Iowa); Sales Course, sec. 8— distributed by West Coast Life; and Sales Results, Skill in Sell-
ing—distributed by Connecticut Mutual, all submitted in reply to Commission's sales questionnaire.

w See, 6. g., Prospecting, Whom to See — distributed by Connecticut Mutual; Profitable Prospecting—
distributed by Berkshire; and the Market for Life Insurance— distributed by Fidelity Mutual, all sub-
mitted in reply to Commission's sales questiennaire.

" Applying Life Insurance to Human Needs, vol. 3, p. 24, submitted in reply to "Commission's- sales
questionnaire.

>* From Calling the Life Underwriter (Walter Cluff) distributed by the Kansas City Life, submitted in
reply to Commission's sales questionnaire.
•' 264763 — 41— No. 28 14

202 CONCENTRATION OF ECONOMIC POWER

The Mutual Benefit suggests: ^^

Mr. Prospect, I've come to talk to you about having one of these (hand him an
unsigned check made out to Mrs. Prospect) come to your wife every month.

The agent is taught to lise a prepared or "canned" sales talk in his
initial "presentation." "^"^ In fact many companies give great em-
phasis to this feature of the "canvass" and have dozens of sales
talks and stock stories to meet the salesman's every requirement, a
different sales talk for every policy, and a different story for every
type of prospect. These sales talks may be written for the salesman
to memorize or they may be more general in character.

Of this latter type is the graphic advice on "How to Apply Sales
Pressure" given agents of the Columbus Mutual. ^^

In imagination picture yourself living in your later years the way you would
like with a life income guaranteed. You'll become enthusiastic about it. When
in the prospect's presence draw him out and imagine a similar picture for him —
living as he tells you he would like to live later — perhaps in the South or in Cali-
fornia or abroad, with a life income guaranteed. In a word picture describe with
■■nthusiasm a future for him — one that will please. Stir his imagination.

The pressure that will put over the sale hoped for is the pressure of the want
which you uncover for a specific kind of ease and comforts later on. The word
picture assists you in making that want keen enough to exert pressure. Your
enthusiasm will be a tremendous factor.

When a pleasing picture of the future fails to get action, a scare picture may be
hinted at to move the prospect; he can be pictured living later as a dependent —
perhaps in ill-health.

Word pictures and moving stories are great factors in appeals to emotions and
feelings, wherein lie the mainsprings of thoughts and actions.

Such appeals may be greatly strengthened by making definite the problem
embraced in the want so that the prospect squarely faces it and by putting on
paper some figures — not many — for the prospect to see. His money may be
doubled or trebled, live or die.

As part of his sales presentation the life insurance agent is frequently
taught how to create a fear of dearth which will frighten the prospect
into taking out a policy. This is made clear by excerpts from litera-
ls Your Sales Talk, p. 4, Mutual Benefit Study Leaflets, submitted in reply to Commission's sales
questionnaire.

J' A pamphlet called Single-Need Selling distributed by several companies including John Hancock and
Mutual Trust Life, and submitted in reply to Commission's sales questionnaire, states at p. 9:

"• * • it is important that you master one proven sales talk right at the very beginning. You will
want to master others from time to time with some regularity until soon you have a good talk for each of
the primary needs.

"Every life insurance man uses what we call an 'organized talk' whether he realizes it or not. It would
be impossible to improvise a different talk for each person on whom you call.

"From month to month the good salesman discovers that certain phrases 'click'; he excludes those ■yehich
do not. Other salesmen try the same phrases. They work. They try the entire talk. It works. Then
ifit is good enough the company may pass it on to the new man in order that he may save himself months
of eSort and experimentation.
• '"'There are other advantages in using an organized sales talk.

"It provides a sales track for you. The prospect cannot switch you on to a dead-end line, nor wreck
you on the bridge of objections. All of the necessary ideas are included and in logical sequence, while
superfluous ideas are excluded.

'"This means that organized sales talks are a time-saver for you and for your prospect. You are enabled
to see more people, and as you have a good talk, to make more sales.

"A sales talk which you learn will sound entirely natural as soon as you have made it your very own.
. You will do this by rehearsing it time after time until you can give it any way you please — slow or fast,
soft or loud — but particularly in aconversational manner so that the modulation of your voice becomes the
' result of your feeling, not of your memory."

>8 Supplement to sec. 2, Sales Course, at p. 6, submitted in reply to Commission's sales questionnaire.

CONCENTRATION OF ECONOMIC ]?OWER 203

tur-e distributed to agents containing advice regarding the effective use
of fear in selling insurance. The Columbus Mutual suggests three
specific methods for arousing this fear in the mind of the prospective
insurance purchaser.^^

(1) Suggestion that the prospect or his dependent may suffer serious hardships
and privations if action is not taken;

(2) Suggestion that the prospect may not be able to qualify tomorrow — if
death does not intervene he may become uninsurable;

(3) Suggestion that if action is postponed the prospect may not be able to obtain
a contract as advantageous as the one he may obtain today.

This company then goes on to say: ^°

"Back the hearse up to the door" in such a way that the prospect will not
suspect or resent it, put before him a word picture of the future that thrills — an
attractive picture — then follow up with a suggestion of a displeasing picture —
the kind of future which the prospect does not want but which may become a
reality if action is not taken today. Such a contrast is eflfective.

The Travel -^Ts describes this same technique in the instruction book
for its agents. ^

Fear is an instinct that all men possess to a greater or lesser extent. In it is
found an impelling clause for action when others fail. We do not recommend
scaring a man into the buying of insurance but we can conscientiously advocate
an emphasis being placed on the freedom from worry afforded only through the
possession of adequate insurance protection. Even so it is better to scare a man
into the purchase of insurance that he needs than to leave him uninsured.

Still another company instructs its agents as follows : ^^

Ask disturbing questions. For example: "If you knew you hud only 24 hours
to live, would buying this insurance be one of the things you would try to do?"

This emphasis upon fear is but part of a general appeal to the
emotions which the agent is urged to employ. The Travelers lists
love of kin, curiosity, vanity, rivalry, play, sociability, and self-
preservation among the gamut of emotions which its representatives
should use in attempting to sell their wares. ^^ The agent is told that
people do not buy on logic but because their emotions have been
aroused. Based on this one company advises : ^*

It is seldom necessary to make a full and complete explanation of the policy.
In fact, the contrary is true, present merely the highlight, as it were, in a few
sweeping but carefully selected remarks. Too much detail as we have given in
the explanation of the policy, if given all at once, is too confusing.

The thing to bear in mind is that definite details of a policy contract do not sell
insurance; that few prospects are interested in the technicalities in the contract.
A wise rule perhaps to follow is this, explain just as little as possible. •

This "wise rule" of "explain just as little as possible" is expressed
by another company in a slightly different fashion . ^^

2' Columbus Mutual log— October 1938, submitted in reply to Commission's sales questionnaire.

30 Id.

" Agents' Handbook in, H5, submitted in reply to Commission's sales questionnaire.

" Leaflet distributed by California- Western States Life, submitted in reply to Commission's sales ques-
tionnaire.

" Agents' Handbook III, H.4, 5, 6, submitted in reply to Commission's sales questionnaire.

" Calling the Life Underwriter (Wa.ter Cluff), distributed by the Kansas City Life, submitted in reply
to Commission's sales questionnaire.

" Selling and Success, distributed by Ouardian Life, submitted in reply to Commissi' 'n's sales ques-
tionnaire.

204 CONCENTRATION OF ECONOMIC POWER

Where you are dealing with a prospect strict^ in the mental field you are
always more or less in doubt because there is such wide difference in mental
concepts. It is much easier to win a man's heart than to win his mind. Emotions
are better understood because they are a common factor in all men.

Logic which would carry deep meaning and significance to one man might go
entirely over the head of another; there may be no common ground between their
minds or intellects. There is, however, a common ground for emotions. These
same men who could not understand each other in the mental sphere would
ea[|)erience exactly the same feeling if both were hungry, thirsty, or in pain —
perhaps in different degrees but still the feeling v/ould be the same; it would be a
common understandable factor.

Similarly the Mutual Benefit Life Insurance Co. in instructing its
agents on how to make sales talks says:^^

Make your talk simple. Omit technicalities about the mechanics of life
insurance. Your prospect wants to know what a Mutual Benefit policy will do for
him or his family .^^

Agents are instructed to lise every effort to make a prospect buy- at
once before, he has time to think the proposition over. To allow him
to think is to lose the effect of the emotional appeal. The companies
give their agents full instruction in methods of forcing an immediate
decision regardless of what the prospect may say. For example, if
the prospect says ^^ —

I wish }-ou would write that out so I can muUlt over at my convenience —

one company instructs its agent to answer,-

I know exactly what you want. You want to see it in black and white. Can
you see the doctor at 2:15 today? We will see if the company will offer this con-
tract to you and then you can mull it over as much, as you like. Anything I
could write might be very different from the company's offer and would be of no
value as a basis for your consideration. Is 2:15 all right?

If the prospect says "Give me a sample of that policy," the agent of
one company is instructed to answer r^^

Not I. A man was killed and his widbw called me in to adjust his life insurance
affairs. We found five $10,000 sample policies in his desk from five different
companies, and oot a dollar of insurance in force. I am not going to run the risk

'« Your Sales Talk. Mutual Benefit Study Leaflets, submitted in reply to Commission's sales ques-
tionnaire.

" But after the policy has been sold, the agent is permitted to tell the policyholder what he has bought.
The instructions continue (Id.):

"When you are selling life insurance you talk about what your prospect wants to accomplish in life for
himself, his family, or his business. You discuss the place of life insurance in his plans. You talk about
what life insurance will do for him, and you refrain as far as possible from technical explanations of a life
insurance policy.

"When your sale has been completed and you go back to deliver the issued policy to the new policyholder
your interview is on an entirely different basis. You are not persuading the prospect to make a purchase,
you are showing him the advantages of a purchase which he has already made, encouraging him in his
feeling of pride and satisfaction because of it. The policy you refer to now is his policy. It has his name
on it. His wife's name is written in as the beneficiary. It promises definitely to do something for him, and
for his wife, in event of certain contingencies. You are now in a position to explain a contract which is to
him not merely another policy, but his own possession. Praise of the contract is now a compliment to him
aild his good judgment.

"For these reasons tbe delivery interview is considered by most salesmen the. most effective time for a
detailed discussion<of all the policy features."

" How to Solicit (p. 131), distributed by Guarantee Mutual Life, submitted in reply to Commission's
sales questionnaire.

.»» Id.

CONCENTRATION OF ECONOMIC POWER 205

of your widow's finding one of my sample policies in your desk. What you need
is some life insurance in force, so as to carry out your ideals, and I want to start
you on a plan of doing just that. I'll use your phone to see if the doctor will see*
us right now.

If the prospect indicates a desire to delay in order "to talk it over"
with his wife, the agent is equipped with answers designed to prevent
him from doing so. One company tells the agent to explain to the
prospect that his wife's judgment is perhaps not to be relied upon,
especially regarding a proposition with hich she is entirel}^ un-
familiar, but that if he wishes the opinion of a woman, he had better
consult a Avidow to whom life insurance money has "been paid. She is
the one who can give him proper advice.'*"

The prospect will, of course, seldom sit through the whole sales talk
without interruption. But if he objects, the agent has been told just
what to do to meet the many different objections which may be
presented.*^

" From Calling the Life Underwriter (Walter ClufE) distributed by the Kansas City Life at p. 160; 3ub-
mitted in reply to Commission's sales questionnaire.

« One company sets out these objections which a prospect might raise (Basic Training Plan, Busmess
Men's Life Insurance Co.; submitted in reply to Commission's sales questionnaire):

"I want to talk it over with my wife. I want to think it over, and would like to ha\e you call back later.
Leave me a sample contract and I will look it over."

For any of these objections, an omnibus answer is suggested:

"I would be glad to comply with your request but it just happens that my company has designed a
plan, which practically does the same thing, and still gives you more advantages than would ordinarily be
the case. As you perhaps already realize, the deposits and consequently the commissions are so small
that this proposition should be presented in a concise manner with sufficient time granted the apphcant
to confirm his decision in the event he should apply. This is taken care of in the application blank, by
granting you the privilege of returning the policy within 3 days if it is not satisfactory. If you are eligible
and I can secure the contract for you, it will take about 7 days to get it; you will then hav^3 more days in
which to examine it, and accept, or return it. This is done not only to be fair with the applicant but also
because it is consistent with the company's method jf doing business. You perhaps realize that a com-
pany doing business in the ordinary manner could not give you such an attractive proposition at so low a
cost. We could not, either, if we followed the ordinary method of doing business through brokers and
maintaining collectors. We are dealing with i select class of risks upon the assumption that thej would
prefer to make their subsequent payments by mail and save the collection cost in increased protection,
than to have collectors call far tlie payments. This system, however, would not work out unless we took
special care to have our people who apply absolutely satisfied with the deal, because they would lapse at
the Mid of the first por'od. That is why we take your application today, and still leave you absolutely
free to accept or reject the contract when it is received. In fact (assuming a deposit is made now) , we will
actually give you accident protection from today if you are eligible, which will be effective during the time
you are deciding, even though you should return the contract. You make your check payable to the com-
pany, not me— it is sent in with your application, and the money will be returned to you if for any reason
the contract is not satisfactory— you to be the sole judge. Let's complete the information."

The West Coast Life Insurance Co. Usts "The 17 most common objections" as follows (Sales Course,
sec. 9, submitted in replj to Commission's sales questionnaire) :

1. "Not interested."

2. "Can't afford it."

3. "Don't need it."

4. "My wife objects."

5. "I want to talk it over with my wife."

6. "I must pay off my debts first."

7. "I'll think it over."

8. "I invest my money— it pays better."

9. "I'm not ready yet; see me later."

10. "I don't believe in life insurance."

11. "I prefer assessment insurance."

12. "My wife is well provided for; so am I."

13. "I am worth more dead than alive, now."

14. "I can get better return on my money in a savings bat k."

15. "I have a friend in the business."

16. "I don't want to leave a lot of money for some other ;■ ar to spend.'

17. "I have ample property to leave my family."

206 CONCENTRATION OF BOONOMIC POWER

The Bankers Life of Iowa, for example, tells its agents: *^

* * * don't take objections too seriously. A good many objections which the
prospect fires at the salesman are nothing more than his customary, method of
treating all salesmen. * * * They feel that he is fair bait for a great deal of
biting wit and unpleasant sarcasm, and that * * * the proper attitude to
assume toward a salesman is to put him on the spot and give him an uncom-
fortable half-hour.

Life insurance agvnt are customarily told that there are four effec-
tive methods of nip 3tl-ig objections.*^ T&ese are usually listed as
follows : **

1. The direct return (the "Boomerang" method).

2. The indirect return (the "Admission — But" method).

3. The emphatic denial (the "Head-on" method).

4. The "passing up" method (self-explanatory).

The West Coast Life Insurance Co. defines these various methods
thus: "

1. The direct reiurn.— This is called the "Boomerang" method because the ob-
jection of the prospect is hurled back in the form of a selling argument. * * *

2. The indirect return. — With the "Admission — But" method the agent appears
to agree with the prospect, but qualifies his admission by statements that destroy
the force of the prospect's objection. * * *

3. The emphatic denial. — This method should only be used when a prospect,
through ignorance or misinformation, .makes statements that are obviously false
or without foundation. The most effective way of meeting such objections is to
flatly deny them, taking care, if possible, not to offend the prospect in so doing.
Your robust defense of life insurance or your company will win the prospect's
respect and you can swing into your sales talk again. * * *

4. The ^'passing-up", method. — A prospect will sometimes advance many trivial
objections in quick succession for the express purpose of confusing the agent.
He does not expect them to be answered, indeed he does not give the agent an
opportunity to answer them. The best way to handle such a case too, is to pass
up the objections if you can do so without giving the prospect the impression that
you are evading the issue. If he insists on replies, assure him that you will
handle them later. By the time your sales talk is concluded the majority of them
will have passed from his mind. Some agents make a rule never to answer an
Dbjection until it has been raised twice.

For each objection, or each group of objections, prepared answers are
furnished. For example, if the prospect demurs on the ground of
religious scruples, the a^ent is instructed to quote Scripture to him.
The New York Life furnishes |,his answer to the religious objection : *^

*' Applying Life Insurance to Humap Needs, vol. 3, p. 75, submitted in reply to Commission's sales
questiomiaire.

« The Mutual Life classifies all objections in 6 groups: (The Fundamentals of Selling, vol 2, p. 46,
submitted in reply to Commission's sales questionnaire).

1. "Adequate" objections.— Tho prospect is not opposed to life insurance, but he believes that he has
sufficient life insurance or other investments and that, therefore, adequate provision has been made.

2. "Investment" objections.— The prospect prefers other plans" of ■saving and of investing.

3. "Spending" objections.— The prospect recognizes his need for life insurance, but prefers to put his
surplus money into luxuries and current pleasures.

4. "Principles" objections.— The prospect is opposed to the principles of life insurance.

5. "No Money" objections. — The prospect feels that he is financially unable to purchase additional life
insurance.

" Sec. 9, Sales Coarse; submitted by West Coast Life in reply to Commission's sales questionnaire.
(See also pt. 13, E. 6524.)
" Sales Course, sec. 9, Op. cit. Note 44.
** Objections Answered, submitted in reply to Commission's sales questionnaire.

CONCENTRATrON OF ECONOMIC POWER 207

In ch. 41, of Genesis, Joseph tells of what was probably the first insurance
project: "Now, therefore, let Pharaoh appoint oflBcers over the land, and take up
the fifth part of the land of Egypt in the seven plenteous years * * * and let
them gather all the food of those good years * * * and that food shall be for
store, to the land against the seven years of famine * * * " .

The Bible says. First Timothy, ch. 5, verse 8: "But if any provide not for his
own and especially for those in his own house, he hath denied the faith and is
worse than an infidel."

If the prospect says he can't afford the insurance offered, the
Businessmen's Assurance Co. suggests this answer: "

The fact that you feel you cannot afford it is the very reason why you need it.
If it is difficult for you to pay current expenses now, while you are receiving j'our
full income, your family would have great difficulty when you are disabled or gone.

This company also gives certain universal answers, to be used for
any objection. By keeping a few of these universal answers handy,
the agent need never be caught without anything to say. Some of
these all-purpose answers are:^*

That's a good point, Mr. Prospect. We'll cover that in iust a moment. [Then
proceed with interview.]

* * * * * * *

I was at fault in not developing that point in detail a moment ago.

Well, if you were going to buy additional insurance today, what form of con-
tract would you prefer? [Or, how would you want to pay the annual deposits?)
[Or, what amount would you apply for?]

Yes, Mr. Prospect, that is very true but I wonder if you have considered, etc.

I will get to that point in just a moment.

' :<« * :*: * * :Js *

Mr. Prospect, I'm afraid I can't answer that objection [regardless of what the
objection may be], because it is not your real reason for not buying life [accident,
and health] insuilftnce. Your real reason for not buying is that you don't think
that you are going to die [be disabled]. Now you are perfectly justified in think-
ing so, because that thought has a perfectly sound psychological basis. Any
fear to which you are subject, Mr. Prospect, can make you forget that fear of
death [disability]. Picture your wife on the sidewalk seeing your child fall in
front of an approaching automobile, and what does she do? She rushes to save
the child. You can understand that picture, Mr. Prospect, but can you under-
stand this one? In place of your wife and child substitute yourself and your new
straw hat, and exactly tlie same thing will happen. The fear of losing the hat is
going to make you forget tl* fear of death [of being hurt]. We were made that
way; we may just as well face it. Now the fear of giving up the things that you
will have to give up in order to pay your premiums is strong enough to make y-ou
forget youl" fear of death [disability]. And so, Mr. Prospect, you will never
decide to buy life [accident and health] insurance through thinking of what might
happen to your family if you die [become disabled]. But you will buy life [acci-
dent and health] insurance if you will just think for a minute of some of the things
that might have happened to your family had you died [been totally disabled] in
the p ast fe w years.

*' Daily Reference Course, sec. F, submitted in reply to Commission's sales questioiiii,.:re.

<9J(1.

208 CONCENTRATION OF ECONOMIC POWER

The final step in the life-insurance agent's presentation is the ''close. "-
In making the attempt to secure an application the agent is instructed
to push the prospect along by getting minor decisions. The South-
land Life Insurance Co. says:*^

It is fatal to say to the prospect, "Will you buy this policy?" Such a decision
is too big a one to ask him to make. But it is not fatal to use the law of implied
consent and .ask him to make a little decision. Each little decision brings him
a bit closer to the signature of the application.

This company suggests that the request for the little decision be
on the alternative basis, not upon a direct "yes" or "no" basis.
Some suggested questions are:^°

Would you rather see the doctor here at your office or drop in this noon at his
office while you are downtown?

Would you want the premium notices sent to your home or to your office?

Shall the payments in the event of the death of your wife go direct to your
son or to your trust company?

Another device frequently recommended to secure action is suggest-
ing to the prospect that he may not be able to qualify for the insur-
ance offered. The Business Men's Assurance Co. tells its agents:"

Try to raise a question in the prospect's mind all the way through and quite
often in the sales interview, telling him what the plan will do "if you can qualify".
These four little words, "if you can qualify," promote action. When you are
ready for his signature, write your own "name on the blank and then hand him the
pencil or pen, suggesting "Please write your name here above where I have
recommended you, just like you want it on your income checks, and we will
see if you can qualify for this special plan."

The Western and Southern Life Insurance Co. advises its agents
in these homely terms concerning the close :^^'

Try to close early in the interview. Remember when your mother was baking
how she used to test the cake with a straw? It it came out sticky she put the
cake back in the oven and applied more heat.

Do not hesitate to test your prospect early in the interview. If he begins to
ask questions during your presentation try him out: "You would like to have this
contract, wouldn't you?"

When the response to such a feeler indicates your prospect is not yet ready,
turn on some more heat.

As the climax of the sales canvass approaches and the frequent
urgings to decide the "little points" have had their expected effect
it comes time for the prospect to sign his name to an application.
Here again psychology and special sales technique are brought into
play. Thus under the heading, "Getting Action from the Prospect,"
the Equitable agent is given this explicit direction in the use of
"psychology":*^

The weighing part of the brain, the brain cells.that perform the act of deciding,
are not the cells that need to be actuated now. The motor part of the brain

" Sales Process of Life Underwriting, p. 143; submitted in reply to Commission's sales questionnaire.
«ii Id.

" From an address by Robert Sanders distributed by Business Men's Assurance Co., submitted in reply
to Commission's sales questionnaire.
52 Pt. 12. R. 5947.
" Pt. 13, R. 6523.

CONCENTRATION OF ECONOMIC POWER 209

must be set to work and these cells will perform the act of signing on the dotted
line much more quickly if some sort of action is previously requested of the
prospect in order to rouse them into activity. It is for this reason that many
salesmen hand the prospect a pen and ask him to do some figuring or write some
data before asking him to sign his name. When you ask for the signature, a
good way to make the request is to say, "Write your name here as I have written
it above." You note in this statement we have put two ideas forward, writing
a name and writing it as written above. Since j'ou give the prospect two ideas
to think about, he doesn't give all his attention to the question of signing his
name."**

If these techniques are not enough to bring the prospect to a decision
the agent is urged to use sterner methods. The Bankers Life suggests
its agents make this vigorous statement to a recalcitrant prospect: "

Mr. Prospect, here is the application blank to the Bankers Life I had planned
for you to sign today. Put it in your desk, and when you get ready to sign it, let
me know. But I don't think I would keep it in ny desk if I were you. If some-
thing should happen to you, your wife will come doTATi and look over your desk.
Who is coming with her? Your children? Your father-in-law? Your brother-
in-law? Do you want them to find this unsigned application In your desk?
Don't give it back to me, because I can't afi'ord to walk the streets with your
wife's bread and butter and your children's education in my pocket. Either tear
it up or sign it. It's your blank now, not mine."

Another company, the Equitable, suggests this final ruse if the agent
has not accomplished the results he originally desired. ^^

If a prospect says, "I will take $5,000" and you are trying to sell him $25,000,
stop right there and write the application for $5,000 * * * Close him for
5,000 and order out 20,000, and try to deliver it when you deliver the ,5,000.

This attitude toward sales which places the production of new
business above all else is not conducive to good agency organization.

The basic objectives to be achieved by a satisfactory sales organiza-
tion are fairly apparent. Insurance should be sold at the lowest
possible cost commensurate with safety. In addition to receiving
their insurance at a fair price, policyholders are entitled to receive
adequate' professional advice on their insurance needs at all times.
The agents who come in contact with such policyholders must be

" The Midland Mutual tells its agents (Life Insurance, What it is and How to Sell it, p. 79, submitted
in reply to Commission's sales questionnaire) :

"Closing is urging him (the prospect) to accept the insurance ofler. In the close is where you use pressure,
if need be, and there usually is need of it. No anxiety must be shown in your urge, but only sincere desire
to benefit him and his. Your close is composed of both suggestioq and argument. The following is a good
urge argument for closing purposes: 'Mr. Jones, after you have started this purchase going you will do one
of four things: Either you will continue to live, or you will die, or you will lose your earning power, through
injury or disease, or you will sell your policy back to the company. Now, if you live.-you will save more
money; if i ou die, you wiU leave to your people more money; if you permanently lose your earning power,
the company pays the premiums in your stead; and if you withdraw from the company, you will receive
an equitable and fair settlement for your policy.' You are using a suggestion each time you repeat the urge,
'Let's fix it up right now.' 'Nf'w's the time, as delays are dangerous.' 'You're alive today and in health;
tomorrow may be too late.' While using closing arguments and suggestions, frequently offer him your
fountain; pen, with the injunction, 'Write your name on that line.' Never ask him to 'sign' his name.
Use the word 'write' instead."

" Applying Life Insurance to Human Needs, vol. 3, p. 150, submitted in reply to Commission's sales
questionnaire.

" Pt. 13, R. 6523. The Guarantee Mutual suggests this colloquy to its agents: "Prospect. All right,
I'll take $1,000. Answer. Fine, $1,000 for the undertaker. Now how much for wife and children." Reply
to Commission's sales questionnaire. "How to Solicit" by J. B. Duryea, submitted in reply to Com-
mission's sales questionnaire.

210 CONCENTRATION OF ECONOMIC POWER

adequately compensated on a basis which is not conducive to over-
forced sales or other types of malpractice and which will enable them
to provide conscientiously for the continuing service wliich policy-
holders require. Finally an agency organization should maintain and
increase insurance in force only if this can be done through the acquisi-
tion of business of good quality and persistency and without abandon-
ing at any time for the sake of growth, practices which contribute to
the achievement of the other indicated objectives.

The three principal factors upon which good or bad agency manage-
ment rests are the selection, the training and the compensation of
agents. A well-selected agent, carefully trained and adequately com-
pensated, should produce a satisfactory volume of more persistent
business at a lower cost. An agent chosen without regard for his
capacity to do the job, who is permitted to set out to sell without
sufficient training and subject to the compulsion that he must produce
new business at all costs to earn commission sufficient to feed himself
and his family," brmgs only harm to the company he represents and to
the policyholders with whom he comes in contact. The policies he
writes will usually have a high lapse rate and a bad mortality experi-
ence and he, himself, will soon drift away from the business or to
another company. New agents may be brought in to take his place
under the same conditions and thus the process will be repeated over
and over p,gain with the result that there is a continual churning of
policies and turnover of agents and, as a consequence of all these
factors, a great waste decidedly to the disadvantage of the policy-
holders.

A carefully selected, properly trained, and well compensated agent
on the other hand, grows in experience and efficiency and because of
his success is more likely to stay with his company and accomplish
the purpose for which he was hired.

The four objectives identified above can never be attained by a
company which places primary emphasis upon the acquisition of
new business and is preoccupied with growth for growth's sake. A
drive for volume inevitably leads to the indiscriminate employment of
many- agents who can produce the amount of new business desired.
Wholesale employment of agents goes hand in hand with poor selec-
tion; inadequate or hasty training methods are then adopted in order
that the agents may be turned out to seek new prospects. Impelled
by a constant emphasis upon new business, the agent seeks to induce
his prospect to sign his name on an application rather than to pur-
chase insurance which meets his needs and as a result there is an
uneconomic distribution of policies and high lapse. When new
business becomes hard to find, the agent, having no backlog of con-
tinual renewal commissions on persisting business, cannot feed and
clothe himself. Finally n.i deficiencies in his basic training become
apparent and his circle of ready prospects becomes exhausted, the
agent becomes discouraged by a lack of compensation and resigns
from his company which then hires another agent to take his place
who must in turn face the same experience. Those agents who stand

" In this connection a statement by the Northwestern National in reply to Commission's saJes ques-
tionnaire, item 7, is of interest. This company stated:

"But we do believe that where the agent's compensation leads there the agent is likely to follow; and
conversely, we believe it takes 10 times the effort to lead an agent in the direction we want him to go if, by
chance, his compensation leads in the opposite direction."

CONCENTRATION OF ECONOMIC POWER 211

the gaff and are able to continue in the business are frequently forced
to adopt a course of action which prevents them from achieving the
position in their community which the word "life underwriter"
should rightfully imply.

From the point of view of the policyholder, the situation described
above is important. Inexperienced agents, harried into constant
search for new poUcies, obviously cannot give adequate service. In
addition, it is clear that turn-over of agents, nonpersistent business,
and generally inefficient sales operation increase the net cost of
insurance and have a direct effect on the policyholder's pocjietbook.

A summary of the companies' principal methods for training and
selecting agents and the results achieved in compensating such agents
will demonstrate the degree to which the emphasis upon growth has
prevented the companies from adapting their agency organizations
to the changing needs of their policyholders.

B. TRAINING AND SELECTION OF NEW AGENTS

In approaching the question of training it must be recognized that
as soon as the new agent begins his job he is subject to "an economic
compulsion to write new business. . He has no renewal commissions
upon which the older and successful agent can sometimes depend for
continuity of income. In almost all cases his livelihood is entirely
dependent upon commissions he receives from the sale of new policies
or loans from his general agent or manager which he must soon repay
with such commissions.^^ It is obvious that an agent entering the
employ of a life insurance company should be taught to underwrite
in a professional m'anner and to offset the natural inclination to
produce new business recklessly by exercising a conscientious regard
for the policyholders' best interests.

The Commission's sales questionnaire forwarded to the larger legal
reserve companies requested detailed information concerning the
training courses given new agents. An analysis of the replies dis-
closed a basic inadequacy in the training methods employed by the
great majority of the companies. There were 57 companies which
furnished sufficient information on the subject of training to permit
analysis. Of this number all but 6 companies offered some type of
training course for their new agents. It appeared however, that in
the case of as many as 30 companies the courses offered were not
mandatory, with the result that it can be said that 63 percent of the
total companies had no definite training requirements of any type.
Furthermore, it appeared that 11 of these companies which had no
required course confined their permissive training activities to corre-
spondence courses which were optional with the agent. In a few
instances these correspondence courses were 'supplemented by some
sort of field training but this was found to be the exception rather
than the rule. The remaining companies within this group of 30
were content to send literature to their managers or general agents,

" The general agents of many companies, and some companies directly, occasionally make cash advances
to new agents. These advances, however, do not provide an adequate solution to the problem, because they
are usually made at irregular intervals, and because they depend on future commissions for repayment.
Since they are secured by future commissions there is a natural reluctance to finance any but the most
promising agents, whose possibilities of success justify,the risk. Th^-e who are financed are under pressure
for early production in order to earn the commissions necessary to make the repayment. Some companies
are now experimenting with minimum guaranteed salaries for new agenti . (See pp. 225 to 227, infra.)

212

GONCENTIlATIiON OF ECONOMIC POWER

leaving to their complete discretion both the manner in which the
training, if any, was to be conducted and the scope and content of
the courses given. In 4 cases this literature was not made available
unless it was purchased by the agents or for them by their general
agent or manager. It also appeared that of the 27 companies which
had some mandatory training course, 10 companies had no provision
requiring any basic or so-called preliminary training prior to permitting
the new agent to solicit prospects for business. Thus only 29 percent
of the companies required that their agents receive some preliminary
training prior to solicitation.^^

For the most part the training courses offered are of a short duration.
By far the larger number of companies have no definite period for the
completion of their courses — the length of training being left either
to the agent himself or the discretion of his general agent or manager.
The following schedule indicates the duration of training courses of
companies which submitted adequate information in response to the
Commission's sales questionnaire: ^°

Minimum period of training ^r^jj^^^,. ^j-

course: companies

No definite period.

1 week

2 weeks

3 weeks

4 weeks

5 weeks

6 weeks

24
2
5
2
2
1
2

Minimum period of
course — Continued.

2 months

10 weeks -..

3 months

6 months

32 weeks

1 year _.

training ^,^^f,„ ,f
companies
3

In view of the fact that, as has been indicated, many of the compa-
nies left training procedure to the discretion of their general agents or
managers and consequently had little knowledge of the extent or true

" Replies to Commission's sales questionnaire, items 41, 42, and 43.

«" Id. Many companies do not have information on the cost of training new agents. The following schedule^
on the cost of selecting and training agents <■ c'ves such information in this regard as is available (pt. 28,
exhibit No. 2325) :

Name of company

Total cost
during 1937

Cost per agent appointed
during 1037

Based on
all agents
appointed

Based only on

those who

remained under

contract

throusrhout

■ 193S

Acacia

Business Men's Assurance

Central Life

Equitable Iowa

Great Southern

Guarantee Mutual (Nebraska) .

Lincoln National ..^..-

Mutual (New York)_

Penn Mutual

Southwestern

$45, 110. 00
10, 203. 48

''27,215.87
10, 654. 24

4, 173. 33
386, 613. 74
592, 096. 00
250, 405. 77
78, 325. 90

$254. 86

47.68

70.89

21.88

1S9.05

11.89

131. 75

313.00

388.82

842. 21

$867. 52

179.01

200. 12

57.02

1,081.70

40.11

252. 62

596. 00

1, 526. 86

2, 175. 44

■ Does not include general agents, branch-office managers, supervisors or other sales-promotion
assistants. This schedule does not include agents soliciting indu.strial business.
' Estimated cost to company only.

CONCENTRATION OF ECONOMIC POWER 213

character of the courses given, it is difficult to generalize concerning
their nature. A considerable portion of the literature quoted in
previous pages of this section as indicating the desire for growth and
pressure for new business was taken from company training courses,
and in many courses a disproportionate emphasis was placed in this
direction. The general company attitude appears to have been well
expressed by the Aetna in the introduction to the training course
where it is stated: ^^

We all agree that the purposes of training are three-fold; to get the agent into
production more quickly, to increase his production, and to keep him in produc-
tion.

A group of companies, definitely in the minority, appear to give
their agents adequate training. Many of these companies, however,
emphasize but one portion of the training problem and there are less
than a dozen companies which may be said to give a well-rounded
course. Many companies give special courses for advanced agents.

This group includes 17 which encourage and sometimes assist their
agents in obtaining the designation of "chartered life underwriter" ^^
and which run regional or home office schools for the advatice train-
ing of qualified agents.

«i From Trainer's Guide Book, Aetna Training Course in Planned Salesmanship, submitted in reply to
Commission's sales questionnaire.

■ 2 In January 1927 the board of trustees of the National Association of Life Underwriters approved the
creation of the American College of Life Underwriters. This is a nonprofit organization designed to further
the following objectives in the manner described (The American College of Life Underwriters Announce-
ment and Directory, 1939-40):

"(1) To establish an educational standard for the profession of life underwriting which will comprise
(a) all the general fields of knowledge with which an underwriter should be acquainted in order to under-
stand life insurance as a functioning institution in a world filled with economic, social, and political problems
which it can help to solve, and (6) all the specific fields of knowledge essential to the rendering of expert
advice and service to the insuring public.

"(2) To encourage and foster the training of sti^dents in educational institutions for the career of profes-
sional life underwriter. To this end the college stands prepared to cooperate in every way possible with
universities and colleges which are contemplating the introduction of a complete insurance course. The
college does not conduct educational courses itself, believing that the work of instruction can best be given
by the Institutions already in existence, just as has been the case in the field of accounting.

"(3) To cooperate with universities and colleges in general life-insurance education for laymen, since
the subject is regarded as fundamentally important and well worthy of incorporation into a business school's
curriculum.

"(4) To award to properly qualified life underwriters a professional recognition."

For completion of the designated course of study and a satisfactory examination the college grants to can-
didates the designation of cnirtered life underwriter. By June 1939 this designation had been granted to
1,530 candidates. The course of study covered by the examinations includes the following (id.):

I. Life insurance fundamentals:

(a) Economics of life insurance.

(b) Principles and practices.
II. Life insurance salesmanship:

(a) Principles of salesmanship.

(b) Psychology of life insurance salesmanship

III. General education (including English) :

(a) Economic problems.

(b) Government.

IV. Law, trusts, and taxes:

(a) Qeneral commercial law, "including law of life Insurance.

(b) WUls, trusts, and estates.

(a) Corporation finance.

(b) Banking and credit.

214 CONCENTRATION OF EiCONOMIC POWER

There are 7 companies which give fairly complete training
courses and are definitely the most advanced in this respect. These
companies are the Acacia Mutual, Aetna, Bankers Life (Iowa), the
Connecticut Mutual, Northwestern National, Penn Mutual, and
Southwestern Life. The Acacia, for example, offers a formal study
course and field training work conducted under the supervision of its
branch managers. Though it has no requirements for training prior
to solicitation, it does require that all or at least part of the prelim-
inary portion of the training course be completed and weekly progress
reports on the training are made to the home office. The course takes
about 6 weeks. In addition, the company encourages continued
study through coaching, meetings, and outside training courses par-
ticularly directed to'ward the attainment of the chartered life under-
writer degree. New agents are compensated at the rate of $33 a
month for servicing old policies during their training period. The
training course of another of these companies, the Souti >vestern Life,
provides for field training and a formal school for experienced agents.
All agents are required to complete 2 weeks of study or 12 units of the
training com"se prior to solicitation and thereafter all agents arer
required to complete a training program which covers approximately
1 year's time. New agents are brought in as junior salesmen for a
6 months' training period which is followed by 3 days' special class-
room work. Qualified experienced agents attend home office schools
on advanced subjects. In many cases, the new agents receive a
basic minimum salary during the period of training.^^

In some respects it may be said that training commences with the
method used to select new agents. Here also the controls set up by
company managements are frequently not conducive to the best
results. In almost every case the selection of new agents is left in
the hands of the gen6ral agent or branch manager who may receive
some general instructions from his home office. Few companies, how-
ever, have any educational requirements and seldom is any effort
made to limit selection to agents whose finances will permit them to
support themselves for the period of adjustment and training. Re-
cently experiments have been made, particularly by the Life Insur-
ance Sales Research Bureau, in an effort to develop. aptitude tests as
aids to selection. These or similar tests are now being widely used
by managers and general agents.®^

In reviewing selection procedure, the effect of State laws must also
be recognized. Though laws governing the licensing of life insurance

«3 Note 59 at p. 212, supra. '

9« CompUed from comiJifny replies to item 41. sales questionnaire. See note 59, supra. The Life Insur-
ance Sales Eesearch Bureau was organized January 1, 1922, with a stated object according to article 2 of
its constitution:

"• * ♦ to investigate through its own activities or otherwise the selling conditions in life insurance
and to act as a medium for the exchange of ideas between members."

The Bureau has members who are representatives of legal reserve life insurance companies in United
States, Canada, and Newfoundland. Members pay dues on a formula based upon the amount of insur-
ance in force.'and these dues finance the research work of the Bureau. As of December 1, 1938, there were
146 members (taken from Membership Roster of the Bureau). Some indication of the work of the Bureau
may be obtaiped from the following list of some of its publications: Aptitude Index, Recruiting, How to
Train the New Man, Selling Yourself, Programming, Planning for Profit, How to Improve the Quality
of Business, Measuring Agency Profit, General Agencies and Branch Ofiices, Monthly Survey of Life
Insurance Sales, Handbook of Agency Management, Selection of Agents, Compensation of General Agents,
Compensation of Branch Managers, Not Taken Business, Written Business, etc. (See generally pt. 10,
R. 4317-4338.')-'

CONCENTRATION OF ECONOMIC POWER 215

agents may be found on the statute books of every State, they are
of Httle aid to the companies in eliminating the unfit agents. In
many instances these hcensing laws are designed primarily for the
purpose of supplying machinery for collecting property and franchise
taxes from the companies or to facilitate the collection of premium
taxes and commissions received. It is clear that the licensing stat-
utes are insufficient to guard the policyholders of a State against
unqualified or unfit agents. An analysis of these statutes discloses
that 4 States have no statement of minimum character or training
requirements with which the apphcant for an agent's license must
comply. Furthermore, there are but 6 States which require such
applicants to take an examination, and only 2 additional States
which permit the insurance commissioner to examine applicants at
his discretion. In as many as 23 States, the applicant is simply
required to file a statement which contains a general indication of
minimum qualifications. In these States legal requirements are satis-
fied if it be found that the applicant is "a suitable person" or that
''the facts warrant" the issuance of a license. In a few instances
there must be a specific negative finding to the effect that the appli-
cant has not been guilty of bad practices in the past. In the remain-
ing States the statutes provide one or more additional safeguards, but
these are frequently of doubtful value. In most States, for example,
the applicant must file one or more vouchers with his apphcation
certifying to his character and fitness and in a few instances it is
necessary that there be a statement to the effect that the applicant
has had previous experience or that he will receive immediate
training.^^

The unproper direction and inadequacy of training methods em-
ployed by many companies is made further apparent by a recognition
that the agents' job involves much more than mere Sales ability and
success in getting prospects' signatures on the dotted lines. The
agent's duties are numerous and varied; and his job when conscien-
tiously performed is indeed a complicated on e.^* Not only should he
be thoroughly conversant with a great variety of policy forms issued
by his company and by his company's competitors but he should be
equipped to sell insurance intelligently and to fit insurance to the
needs of the prospective pohcyholder. It is not unusual for the agent
to be required to give preliminary advice on matters involving tax
questions and business insurance problems or to assist in drawing up
complicated settlement option arrangements w^liich the insured wishes
followed in distributing the proceeds of his policy. The agent is called
upon to give advice concerning the methods of premium payments and
to assist in the payment of claims, taking the necessary papers to the
beneficiary and attending physician, procuring affidavits from the
undertaker, and doing whatever else is necessary to see that the claim
is properly and promptly paid. The policyholder may wish to secure
a loan on his policy, change the beneficiary, alter the income agree-
ment on his policy or even the plan of insurance, and to add features
to the policy, such as family income, w^aiver of premium, or double
indemnity. On all these matters the agent should be able to give
expert advice. When policies lapse the agent is called upon to advise
on questions of cash recovery or the desirability of taking paid-up or

w For summary of State laws concerning licensing of life insurance agents see pt. 10, R. 4929.
«8 The duties of the-life insurance agent were discussed in detail by Mr. Charles J. Zimmerman; president,
National Association of Life Underwriters (pt. 28, testimony on February 28, 1940).

216 CONCE^TRATrON OF ECONOMIC POWER

extended insurance. "^^ With the constant development of new policy
forms, the agent should be ever alert to changes in the business m
order that he ma}^ adequately serve the needs of his policyholders and
analyze correctly the insurance requirements of his prospects. His
responsibility to his policyholders is a continuing one, as many of the
above duties indicate. In recent years, the emphasis upon program-
ming in the sale of insurance has meant in effect that the agent
commences an insurance program with a policyholder and, as circum-
stances permit, assists him in working out a protection, educational,
and retirement program, which in effect follow the policyholder almost
from the cradle until his death. The development of endowment and
retirement fund policies, mortgage policies, educational policies, poli-
cies to pay inheritan'ce taxes, business insurance policies, and annuities
are but a few of the more recently developed policy forms which an
agent now has to offer. Life insurance has long since ceased to exist
purely for the purpose of meeting contingencies arising out of prema-
ture death. The investment and security features of the policies are
being emphasized more and more, and the idea of pure protection is
receiving a correspondingly secondary emphasis. These developments-
and the increased benefits '^* which life insurance now offers have

•' In addition, he is usually assigned the responsibility of caring for a number of "orphaned policyholders";
that is to say, policyholders who were sold by an agent no longer in the employ of the company. Thus his
service responsibilities are broadened beyond the necessity of caring for his own policyholders (pt. 28, testi-
mony of Charles J. Zimmerman, February 28, 1940).

«8 Some appreciation for the many benefits offered through life insurance policies may be found in the fol-
lowing description of the uses for life insurance taken from the Travelers Insurance Co. Agent's Handbook
III, H 3 B-P-BH, submitted in reply to Commission's sales questionnaire:

"The uses to which life insurance can be applied are many and varied. In general, they pertain first to
the personal and family needs of the individual; and second, to his business interest. It is not feasible to
list all the known uses of life insurance. Business life insurance will not be discussed here. The following
personal uses are given to prompt you to uncover wants in your community. The most common uses
follow:

"The husband insured for the benefit of his wife to provide:

"•1. Money to pay the current monthly bills, final sickness, and funeral expenses, etc.

"2. Money to pay off mortgages, loans, and other outstanding obligations.

"3. Money to cover inheritance and estate taxes.

' '4. Money to tide over the interval prior to the settlement of large estates (1 to 2 years required to probate) .

"5. An income large enough to keep the family together and educate the children at least through high
school.

"6. A life income thereafter for the wife.

"The wife insures for the benefit of her children or husband to provide:

"1. Money to replace the economic loss incident to her death.

"2. To perpetuate her name and tender though tfulness for her family— her memorial.

"A father or mother may be insured for the benefit of children to provide-

"1. Money for their education.

"2. A life income for the daughter to maintain her financial independence.

"3. A lump sum of money to start the son in business.

"4. Special gifts at Christmas and birthdays.

"A son may be insured for the benefit of his father or mother:

"1. To protect the financial investment already made in him.

"2. To cover the amount spent for college education.

"3. To cover a loan made for a college education.

"4. To provide for them when they are aged.

"A daughter may be insured for the benefit of her father or mother:

"1. To cover the financial investment made in her.

"2. To cov§r the money spent for a college education. ^ |

"3. To provide money for aged or possibly dependent parents later in event of her prior death.

"The individual insures himself to provide:

"1. A guaranteed monthly income for himself for life in later years without worry of investment or
reinvestment.

"2. A fund to start in business later on.

"3. A fund to carry out some ambition in later life.

"4. Bequests to beloved educational or charitable institutions."

CONCENTRATrON OF ECONOMIC pOWER 217

greatly increased the responsibilities of the agent and the services he
is expected to render to his poHcyholder.^^

That many Hfe-insurance executives have not taken a reahstic
position in the matter of training and selection of new agents is
demonstrated by their continued willingness to employ part-time
agents. A part-time agent is one who does not spend his entire time
in the sale of life insurance and who in fact has other business respon-
sibilities which he carries on in conjunction with his work as an
insurance salesman. Part-time agents are employed by most com-
panies at the present time,. there being approximately 18;.000 part-
time agents in the employ of 44 companies furnishing information in
this regard in reply to the sales questionnaire.^" Generally speaking,
part- time agents are to be. found in the smaller communities, although
it is true that even in the large metropolitan areas they are fairly
numerous in the case of some companies. Originally the need for
part-time agents arose from the fact that in some communities the
nurnber of possible insurance buyers was not sufficiently large to
justify the establishment of a regular insurance agency or even the
employrnent of a single person on a full-time basis. In the drive for
new business, however, many companies were anxious tp have as
many fieM representatives as possible and made arrangements with
persons in strategic jobs, such as bank cashiers, employees of credit
unions, personnel officers, clubmen, politicians, and others who might,
through -their many contacts and as a sideline to their principal
occupations, encourage the writing of insurance and obtain new
business.

The evils of the part-time agency system are apparent. A part-
time agent receives less training and has less interest in his job. As a
consequence he is apt to be unfit and is more likely to utilize improper
selling methods. As one agent stated : ^'

Except in towns of less than 5,000 population, I am against the part-time agent.
The part-time agent has a part to play, and a lot of families would have gone

I' It is not clear whether the renewal commission which the agent receives is simply a delayed first year
commission or whether it represents an amount paid the agent for servicing the policy after it is written.
In the light of the agent's varied duties and responsibilities toward the policyholder which have been con-
sidered above and in view of the many services he performs on the policyholder's behalf after the execution
of the policy contract, it would appear that the renewal commission should properly be considered as in the
nature of a service fee paid the agent for hJs work in this connection. Mr. Zimmerman stated he thought
the sounder concept was that the renewal commission was a service commission. He testified (pt. 28,
testimony on February 28, 1940) :

"Mr. Gesell. What would you think about paying an agent a little lower first year commission and
stretching his renewal commissions out over a longer period?

"Mr. Zimmerman. Well, personally I think that would be a good idea again. There would be some
opposition to it, naturally, but I think there might very well be a reduction, let's say, of 10 percent in first-
year commissions, with the renewal commission or service commission paid as long as the' policy is a
premium-paying policy.

"To me, there is no logic in the fact that when I get to the tenth year, my service commission stops, because
quite often I have do do as much service in the twelfth or thirteenth years as I do in the sixth or seventh."
(See also pt. 28, exhibit Nos. 2588-2604.)

'" The number of part-time agents sems to be gradually decreasing; 26 companies reported a total of 31,540
part-time agents in 1930, 39 companies reported 26,527 in 1934, while 44 companies reported 17,641 in 1938.
All except one of the companies reporting for both 1930 and 1938 reported less full-time agents in 1938 than in
1930. Replies to commission's sales questionnaire, item 20.

" Pt. 28, exhibit No. 2595. Statements of agents appearing hereafter in this section are frequently taken
from letters received in reply to a questionnaire letter of the Commission and introduced in evidence as
exhibits Nos. 2587-2604 after having been selected by a special subcommittee as typical of numerous replies
received (pt. 28, copy of form letter to agents, May 13, 1940).

264763— 41— No. 28 15

218 OONCENTRATION OF ECONOMIC POWER

unprotected had it not been for the part-time agent and it's impossible for a full-
time man to work in these smaller towns and make a living. The companies
are too eager for new business, and they allow their managers and general agents
in the field to appoint entirely too many part-time agents. They appoint these
part-time agents without serious investigation, and in many cases they are simply
contracts placed in order to write business on the members of their own firm.

Recently in a town of approximately 5,000 population, an owner of a chain
store was in the market for approximately $200,000 of life insurance on himself
arid other executives. He began to shop around. One of the agents writing for
a New York company told him that he would get him a contract with h^s company
and give him a part of the commission. An agent with a company not operating
in the State of New York said that he could have his company give the man a
part-tijne contract and give him a lot more commission. A third agent who is,
I am told, related to the prospect and is with still another companj-, got the man a
contract with his company so that he could get aU the commission. The com-
pany accepted the contract and the business. I have seen numerous instances
where this has been done and the companies O. K. these contracts.

Part-time contracts have been" placed in banks, manufacturing plants, depart-
ment stores, general merchandise stores, and the agents appointed therein have
their fingers on local gossip so that they know every time anyone buys life insur-
ance and they thereby cut full-time men out of business. This part of ' our
business is wrong.

In receijt years, through the adoption of the so-called agency prac-
tices agreement," companies have attempted to eliminate the part-
time agent in communities of over 50,000 population. These efforts
have been only partly successful; several companies, including the
Equitable of New York, have refused to adhere to the agreement.^^

It is notable that life insurance agents who commimicated with the
Commission in response to its questionnaire letter almost uniformly
objected to the part-time agent and stated that the eliroination' of
such agents would greatly benefit the business of hfe insiu'&,nce and
the public generally.^* Indeed, it seems difficult to justify the em-
ployment of part-time agents, since there is a great need for intensive
training of life insurance agents which cannot be given the part-time
man.

In the final analysis, the eflScacy of the training and selection
methods employed by legal reserve life insurance companies may be
judged by the fitness of the agents and the extent to which the number
of qualified agents is adjusted to the market for life insurance. There
was an alihost universal recognition among company representatives
that there are too many unfit and poorly trained hfe insurance agents
selling Hfe insurance in the United States today. Mr. Charles J.
Zimmerman, who in the past year had traveled from coast to coast,
interviewing agents and addressing them at their meetings, testified
unequivocally that, while he did not think there were enough good

" Pt. 13, exhibits Nos. 1337, 1338; pt. 28, testimony of Charles J. Zimmerman, February 28, 1940.
. wpt. 13, R. 6562, exhibit No. 1339.

W'< Pt. 28, exhibits Nos. 2588, 2589, 2590, 2591, 2592, 2593, 2594, 2595, 2596, 2597, 2600, 2601, 2602, 2604. One
agent stated (pt. 28, exhibit No. 2592):

."in my opinion, there is no place in the field of life underwriting for part-time agents. Twisting, rebat-
ing, misrepresentation, incomplete and unfair comparisons, and all of the other evils incidental to this
business flourish where the ill-trained, uneducated, ill-flnanced part-time agent abides. In my 16 years in
the business, I have yet to meet the first part-time agent who ever became even a good class 'B' underwriter,
and it is my conviction that the very few exceptions to this rule are those exceptions which prove the rule."

OONCBNTRATTON OF ECONOMIC PjOWER 219

agents in the country he was certam there were too many unqualified
and unfit agents in the busitiess.'^^

Similarly, Mr. Arthur Cobum, vice president of the Southwestern,
of Dallas, Tex,, stated that in Texas there were 139 companies who
employed 8,000 life insurance agents excluding companies which sold
burial and industrial insurance. He testified: ^®

Mr. Gesell. Now, do you believe that these 8,000 agents are a large enough
group to service the interests of the policyholder?

Mr. CoBUBN. Oh, they are far too large.

Mr. Gesell' They are far too large. Why do you say that?

Mr. CoBtTRK. Because 7,000 of them are utterly incompetent.

Mr. Gesell. You mean untrained?

Mr. CoBXTRN. Unqualified and untrained, incapable of rendering a satisfactory
public service. f

Mr. Gesell. Then, I take it, your feeling would be that it would be desirable
in the interests of life insurance and the public for there to be fewer and better
trained agents.

Mr. CoBURN. I believe the best interests of Texas would bei served if Texas
had 3,000 carefully selected, thoroughly trained salesmen. They could get thfe
job done, t^^.

Mr. Gesell. Well, I suppose Texas is not any different in that respect from the
country at large.

Mr. CoBTjRN. I am more familiar with the conditions in Texas, but I assume
the conditions in other States are somewhat comparable.

Statements from individual agents located in various parts of the
country were to the same effect. One agent stated : ^^

* * * I believe the number of agents attempting to seU insurance is alto-
gether beyond the number necessary, and I believe the business could be much
more/^^efficiently handled and maintained by a smaller corps of more able under-
writers.

Another stated: ^^

It is my conviction that a definite lack of balance exists between the size of the
life insurance market and the number of agents attempting to sell therein. As
you probably know, 80 percent of the business is now being written by 20 percent
of the life underwriters (probably the better-trained and better-equipped group).
If we could have another 30 percent of the life underwriters trained to do as good
a job as the top 20 percent and eliminate the lower 50 percent, a situation would
undoubtedly result much more satisfactory to the public and the companies.

Another who had been for 24 years in the life insurance business
stated: ^^

I do believe, however, that there are too many unqualified men in the life insur-
ance business, inadequate in knowledge to render proper service, who are burning
up territory and creating adverse centers of influence.

And finally the question was summed up by another agent in these
vivid terms: *°

" Pt. 28, testimony of Charles J. Zimmerman, February 28, 1940.

'« Pt. 13, R. 6594, 6595.

" Pt. 28, exhibit No. 2590.

" Pt. 28, exhibit No. 2592.

" Pt. 28, exhibit No. 2588.

'« Pt. 28, exhibit No. 2594. (See also exhibits Nos. 2589. 2593, 2600, 2602, 2604.)

220 CONCENTRATION OF EtCONOMIC POWER

It is a matter of common knowledge that life companies contract men indis-
criminately in the hope that they will at least write a few of their friends and
relatives, and that they might develop into producing agents even though the
percentage who come through is pitifully small. * * * This practice results
in a lower income to those agents who are capable, a low standard of service to the
policyholders of the temporary agent, and a large percentage of poor underwriting
by men who know little or nothing about covering a risk with the right type of
contract.

'The existence of unfit agents is attributable to the bad training
and selection methods employed by the life companies. Their failure
to take more forthright steps in this connection is attributable in turn
to their emphasis on the production of new business. The situa-
tion was well summarized by Mr. William Montgomery, president of
the Acacia Mutual Insurance Co., who testified: ^^

Mr. Montgomery. * * * If an agent isn't trained, if he doesn't understand
what he is selling, is picked off the street, given a rate book, and told to go out and
sell life insurance, how can he intelligently sell any man a policy?

Mr. Gesell. Is it your experience in the business, Mr. Montgomery, that
frequently that is what is done?

Mr. Montgomery. It seems so, sir.

Mr. Gesell. Would you feel managements which do engage in that practice
are perliaps motivated by the desire for volume in getting business on the books at
any cost without regard to the training of their personnel in connection therewith?

Mr. Montgomery. Well, if that isn't their motive, why .should they do it?

C. TURN-OVER OF AGENTS

It is only natural that the press for the production of new business
when coupled with inadequate selection and training, should result
in the contracting of a large number of unqualified agents whose con-
nection with their company is brief, whose- average compensation is
very low, and whose business is improperly sold. The situation was
summarized by Mr. Arthur Goburn speaking before the American
Life Convention in Chicago in 1935, where he said: ^^

Because of the interest of management in the volume of new business, the path
of the disreputable lifje insurance agent has been made easy. In other lines of
endeavor 'a disreputable salesman fired by bne concern finds it difficult to secure
employment with another cqncerli. That, however, is not the rule in the life
Insurance business. * * * Little thought is'given to the public point of view
that life insurance cannot be sold if we hire disreputable agents fired by other
companies. * * * Because of the emphasis that has been placed on the
quantity of new business sold by life insurance companies managers have appointed
in recent years a very large number of new life insurance agents. It is estimated
at the present time that there are 200,000 licensed life insurance agents in this
country, of which 15 percent are making a decent living.

The New York Life Insurance Co. observed to the same effect in a
pamphlet issued to its agents in 1926:^^

An inspection of the books of any company will reiveal an astonishing condition
as to the length of service of the average agent. It is not an exaggeration to

81 Pt. 10, R. 4341.

" Proceedings American Life Convention, 1935, Thirtieth Annual Meeting, Chicago, 111., "Sales Side of
Life Insurance," Arthur Coburn, pp.- 51-55.

" From pamphlet entitled "NYLIC," No. 3, at p. 6, submitted in reply to .Commission's sales ques-
tionnaire.

CONCENTRATION OF ECONOMIC POWER

221

say that too many agents are migratory, shifting, and uncertain in their company
connections.

Figures combining the experience of 45 representative companies
disclose that during the year 1938 these companies terminated the
contracts of 16,297 whole time agents out of a totaL force which
numbered at the end of the year 43,452. A review of the experience
of these companies over the preceding 4 years disclosed a comparable
though somewhat higher turn-over ranging as high as 22,178 in 1934,
at the end of which year 48,775 agents were employed m these com-
panies.

From 1934 to 1938 these 45 companies hired 85,899 new agents.**
The experience of individual companies reflecting a particularly high
turn-over for the year 1938 is indicated below :^^

Name of company

Number of

of agents

employed,

Dec. 3,

1937

Number of

of agents

appointed

during

1938

Number of

of agents

terminated

during

1938

Number of
of agents

employed,

Dec. 31,

1938

Alliance, _

American United

Bankers Life (Nebraska)

California- Western States Life

Franklin Life

Great Southern Life

Jefferson Standard .

Minnesota Mutual.

Mutual Life of New York

Ohio National

Prudential

Reliance Life

Volunteer State..

85
514
139
325
484
651
392
318
2,983
673
848
797
40

55
522

88
179
386
280
415
270
1,292
538
529
586

52
369

94
224
416
428
478
250
1,410
531
^4
522

671
133
277
453
503
329
351
3,035
680
861
830
62

M Pt. 28, exhibit Nos. 2324, 2324A. As might be expected turn-over of general agents and managers is
much less than turn-over of soliciting agents. The following schedule shows for a group of 7 companies
chosen alphabetically from the list of companies replying to the sales questionnaire turn-over experience
during 1938 for branch managers and general agents, respectively:

BRANCH MANAGERS

Company

Acacia

Bankers Life (Iowa)

Business Mens..

Conn. General..

Continental American..
Continental Assurance.
Equitable (Iowa)

Number
at begin-
ning of
year

Ap-
pointed

Termi-
nated

Number

at end of

year

GENERAL AGENTS

Aetna

Alliance

American United..

Atlantic Life

Bankers Life (Iowa)

Bankers Life (Nebraska).
Berkshire

174

109

75
41
215
14
18
39

" Replies to Commission's sales questionnaire, table 1.

222 OONCENTRATrON OF ECONOMIC POWEil

Statements by various life insurance agents left no doubt that
turn-over is a pressing problem with the men in the field and that its
causes are basically attributable to bad agency management. One
agent who had been in the life insurance business for 18 years and who
received an average annual income in commissions in excess of $16,000
stated:*®

There is a large turn-over of agents not only in my office but in every office in
my locality, and from what I am told, in the whole country. The main factor
responsible for this is that general agents are anxious to make a showing and,
therefore, take every available man who is unemployed and give him a contract
to sell life insurance. A great many of these men are not equipped to sell insur-
ance and sell their friends and relatives and then drop out of the business, with
the result that the business does not stay on the books. I think that the crux
of the whole matter is in picking salesmen who, first, have character, second,
selling ability, and, third, an aptitude for the life insurance business. The life
insurance business takes no capital and so if a man is out of a job, he turns to
this business to make some money. I believe that the continual entrance of new
agents in my office and in other offices hinders the sale of life insurance not only
in my territory but in all territories.

Another agent called particular attention to the effect of the emphasis
upon production on agency turn-over: ^^

My office has had about the same experience in agent turn-over as the rest
because in the desire to build a sizable agency force we have naturally placed
under contract people that did not fit in, and only trial and error could determine
this because sometimes the least likely to succeed are the ones who, in some cases,
turn out to be good producers and vice versa. In this connection, it is my opinion
that there are too many men in the life insurance business due to the fact that
the companies' home-office organizations, in order to justify their salary and
positions, are constantly urging more production; and the only answer to that is
to put on new men, with the result that under home-office pressure new men are
constantly being recruited into the business, but very few of them are worth
having, and in a short while they fade from the picture, leaving the company
the gainer by whatever business they have written.

Still another agent discussed the situation in more detail but to the
same effect. He said: ^^

Despite my 7 years' insurance experience, my failure in the life venture was
assured due largely to inadequate and improper training plus pressure for pro-
duction. In less than 6 months I witnessed a complete turn-over of personnel,
and as I look back over this period I can't help but conclude that a system of
recruiting which demanded immediate production from the novice encouraged
failures on a large scale. In fact it almost appears as if the companies deliberately
operated on the theory of wholesale recruits to maintain production, figuring
each recruit was good for at least $25,000 among his friends and relatives. Each
new recruit is asked immediately for a list of his friends and relatives for the pur-
pose of solicitation in the company of the agency's high-pressure supervisor. You
are expected to begin practice on your friends and briefly your sales argument is
as follows: "Bill, I've become a special agent for life company. I need

8« Pt. 28. exhibit No. 2590.
" Pt. 28, exhibit No. 2593.

98 Pt. 28. exhibit No. 2599. See also pt. 28, exhibit Nos. 2588, 2589, 2591, 2592, 2595, 2596, 2597, 2600, 2601,
2602, 2604.

OONCENTRATION OF ECONOMIC POWER 223

your application as a demonstration of confidence in me. Frankly, I don't know
much about life insurance as yet, but I do know that you cannot go wrong in
buying more life insurance." And poor friend who is put on the spot usually
comes across with a $2,500 "testimonial" application and a year or two later when
you leave the field the policy is lapsed. An effort is made to reviv-e this contract
but this effort consists of a "training" call by some new recruit, who has been sold
on the idea that it may become the source of new business some day. Needless
to say, the recruit receives no compensation for his efforts even though successful
in reinstating the policy. By this time, fi- .n other sources, you have learned
that an agent renders many a free service in connection with old policies.

There are many causes for agency turn-over. Among those given
by the majority of companies are insufficient earnings, lack of
production, transfer of employment to another company, personal
differences with the general agent, illness or death, deficiencies in
accounts, poor persistency of business written, resignation or promo-
tions, company's withdrawal from a territory, failure of agent to re-
ceive renewal of bond, and the nonadaption of the agent to his work.*'

Of these causes, lack of production, or as it is sometimes stated,
insufiicient earnings, was almost uniformly listed among the chief
causes for agency terminations. It represents the following percentage
of total terminations in the case of the companies listed below: ^

Percentage

of total
terminations
due to
r-, insufficient

Company: earnings

Bankers Life (Iowa) 51.

Berkshire Life 94. 1

Businessmen's Assurance

Co 6. 1

Central Life 91.1

Connecticut General 56. 7

Continental Assurance 100.0

Equitable of Iowa 58. 4

Franklin Life 92.6

General American 56.

Great Southern 82.0

Guarantee Mutual 89.

John Hancock 49. 4

Percentage

of total
terminations
due to
r^ /-I i- J insufiicient

Company — Contmued. earnings

Home Life 50.0

Life Insurance Co. of* Vir-.

ginia 19.0

Midland Mutual 68. 5

New York Life 79. 1

Northwestern National 70.

Northwestern Mutual 35. 8

Pan-American Life 75. 2

Penn Mutual 70.5

Union Central 46.5

Prudential 57.7

Reliance Life 65. 4

Volunteer State 65. 1

Other companies not submitting information enabling a presenta-
tion of the exact percentage of terminations resulting from the causes
indicated frequently stated that nonproduction or insufficient earn-
ings were one of the chief causes for the terminations of agents.

D. COMPENSATION OF AGENTS

In addition to inadequate training, poor selection, and other causes
contributing to turn-over as listed r.bove, insufficient compensation
must be recognized as one of the priir e avoidable causes for turn-over.
Even an agent naturally adapted to t ^le work cannot be successful if
he is poorly trained and wUl not rer.f ji on the job if he is underpaid.

" Replies to commission's sales questionnaire, item '0.
'"Id.

224

OONCENTRATrON OF ECONOMIC POWER

Detailed studies were made to show the compensution of agents
employed in a representative number of companies. On the basis of
"figures submitted by 27 companies which reflected the amount of
compensation paid agents during the year 1938, it appeared that a total
of 23,923 whole-time agents received during the year $20,216,935.16.
Of this number 81.70 percent received only 29.72 percent of the
indicated compensation. It appeared that 50 percent of the agents
received during the year a sum of less than $250; that 74.14 percent
received $999 or less; and that 90.36 percent,received less than $2,500.
It is, of course, true that "^here figures include agents not employed
for the entire period of a ye ir .nd exclude ^ ompensation paid agents
by insurance companies other than those reporting. Some life
insurance companies' agents received compensation from several
companies and may in some instances represent casualty and fire
companies as well as life insurance companies.^^ The figures are,
howev<^ indicative of the very low compensation received by life
insurance agents.

The inadequacy of the compensation of the average agent was
demonstrated by special figures on agents' remuneration received from
28 representative companies. These 28 companies paid their agents,
on the average, amounts ranging from a high of $3,696.74 in the case
of the Indianapolis Life to a low of $625.01 in the case of the General
American.®^ These average compensations, though very low, partially
conceal the serious situation which exists with respect to agents'
compensation. It was found that even after eliminating all agents
who had not been in the employ of these companies for more than 1
year, as many as 19 of the 28 companies paid 50 percent or more of
their agents $1,500 or less, and that as many as 5 companies paid
50 percent or more of their agents $750 or less. The following
schedule shows for these 28 companies the average earnings of the
agents who have been with the company more than 1 year and the
percentage of the total agents who receive amounts less than that
indicated on the respective columns. In all cases agents not receiving
any compensation during the year have been eliminated.^^

Name of company

Average com-
pensation of

those re-
ceiving com-
pensation

Percent of

agents re-
- ceiving
under $750

Percent of Percent of
agents re- agents re-
ceiving ceiving
under under
$1,000 $1,500

Percent of
agents re-
ceiving
over $1,500

Acacia. ._

$2, 309. 80
1, 403. 26
1, 045. 79
971. 96
2, 109. 41
2. 382. 48

10.85
41.38
65.24
68.15
31.10
33.04

17.63
49.31
70.05
71.85
40.16
37.44

35.59
65.17
78.61
77.04
52. 76
49.78

64.41

Bankers Life Co

34.83

Bankers Life Insurance Co .

21.39

Berkshire Life.- .- . . . ..

22.96

Business Men's

47.24

California Western States

50.22

»i Pt. 28, exhibit Nos. 2326, 2327!

" Replies to Commission's sales questionnaire, table 6.

" Id. Southwestern does not make brokerage or surplus-line agents contracts but will accept such business
from its regular agents under certain conditions. The amounts paid its agents as indicated above include
commissions on these types of business and such commissions are presumably shared with the originating
broker or agent. Reply to Commission's sales questionnaire, table 3. These 28 companies employed a total
of 663 agents who, though licensed for the entire year 1938, received no compensation during the year. Of
this number 286 were employed by Occidental (California), and 272 by Bankers Life Insurance Co. (id.).
(See also pt. 28, exhibit Nos. 2326, 2327.)

CONCENTRATION OF EiCONOMIC POWER

225

Name of company

Average com-
pensation of

those re-
ceiving com-
pensation

Percent of
agents re-
ceiving
under $750

Percent of
agents re-
ceiving
under
$1,000

Percent of
agents re-
ceiving
under
$1,500

684. 35

69.15

76.06

86.70

1, 799. 81

28.84

38.74

53.68

1, 900. 71

23.47

32.80

52.25

2, 117. 78

26.73

34.65

45.54

1, 453. 17

41.03

48.88

62.33

625. 01

77. 25

80.24

88.62

1, 605. 49

39.73

48.00

64.53'

1,903.11

26.30

36.67

54.44

3, 696. 75

1.64-

13.11

21.31

1,955.65

10.19

21.36

47.09

1, 240. 41

40.48

47.62

64.29

1,514.97

42.46

50.99

67.46

1,463.40

41.29

48.86

64.39

768.95

73.21

77.26

84.64

2, 066. 44

27.62

35.19

50.75

1,961.16

19.59

28.45

45.77

1,721.41

24.82

34.79

54.50

2, 151. 43

28. 22

36.31

51.04

2, 637. 12

20.83

29.86

49.31

3, 435. 84

2.46

7.02

16.84

1, 447. 92

44.19

51. 56

66.29

1, 315. 15

43.00

50.00

70.00

Percent of
agents re-
ceiving
over $1,500

Central Life

Connecticut General

Connecticut Mutual

Continental American

Equitable, Iowa..

General American

Great Southern

Guardian Tafe

Indianapolis Life . . -

Jefferson Standard :

Life Insurance Co. of Virginia

Lincoln National

Northwestern National..

Occidental _

Penn Mutual

Phoenix Mutual

Prudential

Reliance

Southland

Southwestern.

Union Central

Volunteer State

13.30
46.32
47.75
54.46
37.67
11.38
35.47
15.66
'8.69
52.91
15.71
32.54
55.61
15.36
19.25
54.23
15.50
48.96
50.69
83.16
33.71
30.00

In order to give additional information on the compensation of
agents, schedules were introduced which reflected the highest com-
missions paid to the leading whole time agents of 35 dift'erent com-
panies. From these figures it appeared that the greatest amount
received bj" any life-insurance agent in any of the companies indicated
was $36,463.70 in the case of the Southland Life. It appeared,
however, that the highest paid agent in each of 10 companies received
commissions of less than $10,000 and that there were but three
instances where the highest paid full-time agents received over this
amount.^^

In the case of all companies presenting adequate information, it was
found that those agents who remained with the company an average
of from 3 to 4 or 5 years commenced to receive more substantial com-
pensation. The principal problem as far as agents' compensation is
concerned rests, therefore, in the development of adequate means of
compensating the new agent during his period of training. A new
agent who does not receive adequate compensation is forced either to
leave the business or to engage in unethical selling practices. There
are very few companies, however, which have developed adequate
means of financing the new agent. Of all th^ companies replying to
the Sales Questionnaire there were only 14 which were even experi-
menting in this field and in no case was any company found which

>* Pt. 28, exhibit No. 2328.

226 CONCENTKATION OF ECONOMIC POWEK

had adopted an over-all program in this direction.^^ One of the most
advanced companies in this respect is the Southwestern Life. This
company started- in June of 1935 to experiment with a salary basis
for recruits and has met with such success that it plans to carry on all
its recruiting on a salary basis beginning in 1941. At the present
time about 40 percent of the new agents are receiving a guaranteed
minimum salary of $100 a month. The agent who receives this
salary is given an intensive training course and is permitted to receive
commissions if those commissions on the basis of a regular agent's
contract would exceed the amount of the minimum guaranteed salary.
The Southwestern Life has found that agents employed on t'his basis
are much less apt to leave the company, are more successful, adopt
more satisfactory sales methods, and that from an over-all point of
view the general agents and others associated with the selection of

'5 Experiments with minimum salaries or guaranteed earnings are being conducted by Acacia, Berkshire
Life, Connecticut General, Guardian Life, Home Life, Mutual Life, New York Life, Northwestern National,
Penn Mutual, Phoenix, Union Central, Southland Life and Southwestern. (Replies to Commission's
sales questionnaire, item 55). Comments by the Northwestern National are most illuminating. This
company stated (reply to Coiftmission's sales questionnaire, item 8):

••New agents: Declarant's objective is to provide some means by which declarant may compete for top-
grade available men and provide for limited earnings from other than new sales sources for new agents
during their early period of training and development.

"Over 2 years ago, declarant began experiments with employing new agents for a limited period of time on
a salary basis. Objective of this experiment has not been to test the salary basis as a practical mode of pay-
ment for new agents, but it has been to determine what sort of performance and what particular activities
might be developed for the new agent which would prepare the new agent for new business sales and at the
same time pay the home office a return adequate to warrant some direct compensation to the agent. De-
clarant's aim has been to see what sort of activities might be compensated in such a way as to at least supple,
ment commission earnings for the new salesman and assist him in financing his early months in the business-
Agents employed for this experimental work have not been permitted to sell insurance to the public.
Declarant has been experimenting with teaching these agents how to obtain data on prospects for the use of
full-time active agents, how to analyze the insurance and the needs of prospective buyers, how to handle
simple service activities, and other activities apart from direct new sales effort to determine the value of such
activities when performed l)y new men and to determine the degree of preparation provided by such activi-
ties as a basis for selling on a commission. These new agents have been kept on a salary basis for 3 to 4
months.

While results of this experiment are as yet inconclusive, declarant is encouraged to believe that new agents
can be given a better start, if, during their preliminary training, they are not made reliant on new business
sales. Declarant also is of the opinion that preliminary training and field work aimed at teaching agents
how to obtain information necessary for sound analysis of the policyholder's or prospective buyer's insurance
needs and how to handle simple service requests are both the best means of grounding new agents in sales
methods in keeping with the declarant's objectives and the best way to equip the agent for the type of
activity for which the declarant can pay the agent at least a basic or supplementary income. If these con-
clusions prove to be well founded, declarant believes investment in the preliminary training of agents
along such lines will be warranted on a larger scale. Moreover, if these conclusions prove to be sound,
declarant, upon completion of new agents' preliminary training period, will assign to these agents business of
inactive agents and orphaned business for service under close supervision. Such policies as are assigned to
the new agent will be entered in his insurance in force record exactly as though he had produced the business
as of the original date of issue. Thereafter he will be responsible for service, and the persistency of the
business will affect his earnings exactly as it afiects the earnings of the active, full-time agents. It is declar-
ant's belief that training and inducting the new agent on the basis described above will be both the most
eflective kind of sales training that could be afforded the new agent and the best basic training for molding
agents into the type of activities which support declarant's sales objectives. Renewal commissions under
the declarant's current plan will, at ,the same time, provide a basic or supplemental source of earnings for
the agent and relieve to some extent the problem of financing and the difficulties inherent in the present
widely accepted practice of making agents in their first year or more wholly dependent on new business
sales."

OONCENTKATrON OF ECONOMIC POWER 227

new agents are inclined, as a result of the program, to be more careful
in their selection.*^

That some system of salaries for the new agent is necessary was
demonstrated by the testimony of Mr. Charles J. Zimmerman, presi-
dent of the National Association of Life Underwriters, He stated: ^^

Mr. Zimmerman. I believe — again my own personal belief — that a salary plan
for perhaps 3 years to 5 years at a maximum on a decreasing scale, a minimum
salary plus commission, to give the added incentive to go out and hit the ball,
would be a desirable thing for the business, on the basis that it would help this
man, take the pressure off of him in many instances to go out and do a job; the
pressure would still be strong enough, the incentive for him to do the job because
of the fact that he could earn additional commissions, and in the second place it
would enable us to get better men into the business.

Mr. Gesell. Now we are beginning to get down to something, I think. If you
pay a man something so he can live when he first comes into the business, you are
going to be able to offer your job to a different clientele, aren't you? You are
going to be able to get more college graduates, for example. You are going to get
more people who want to look at it as a profession, as a career.

Mr. Zimmerman. That is right.

Mr. Gesell. And as a result you are going to have over a period of time a better
trained, more professional agency crowd; isn't that right?

Mr. Zimmerman. I think that is true.

«8 Pt. 13, R. 6586-6592. Mr. Coburn testified (pt. 13, R. 6587, 6588);

"Mr. Coburn. * • * In the calendar year 1937 we hired 74 recruits that we did not guarantee a salary
to. Out of these 74 recruits, 16 of these men are now salesmen for the company; a little better than 20 percent
have survived.

"In 1937 we hired 19 recruits on a salary. Thirteen of them are now successful life insurance salesmen, a
little better than 60 percent survival. Our experience to date has been that we have done three times better
with recruits that hired on salary.

"The Vice Chairman. And probably you had a superior type of man, as you have indicated, to
begin with when you took men to whom you advanced a salary.

"Mr. Coburn. Definitely so, sir.

"Mr. QESELt. So that your solution of this problem of turn over, which is so troubling the insurance
industry, is to give some kind of a guaranteed salary in the first year, carefully recruit your agents, and
train them well.

"Mr. Coburn. Yes, sir.

"Mr. Gesell. Now, what effect from a strictly operating point of view has this'new program of recruiting,
training, and salary, had upon your business?

"Mr. Coburn. We have increased by $75,000 a year our expenditure in the selection and training of agents.
We believe by virtue of that investment of $75,000 a year we have increased our cash earnings $300,000 a.
year."

" Pt. 28, Testimony of Charles J. Zimmerman, February 28, 1940. Statements by various life insurance
agents were to the same effect. Pt. 28, exhibits Nos. 2591, 2592, 2593, 2595, 2596, 2601, 2602, and 2604. Portions
of two letters from life insurance agents are quoted below:

"I believe that a guaranteed minimum salary for new agents is desirable. This would eliminate compa-
nies signing on 'policy peddlers' doomed from the beginning to failure, and would serve to develop competent
life underwriters. I would not reduce the first-year commissions to increase renewal commissions" (pt. 28,
exhibit No. 2601).

"I am of the opinion that the present method of compensation for life insurance agents is out of date and
not at all practical. The present system dates many, many years back; and in spite of the change in every
other line of selling, and the adoption of newer methods, the life insurance business has remained as it was.

"A giiaranteed minimum salary for new agents is necessary either now or some time in the future if our
present agency system is to survive. Many of the new agents going in now are going in on an advance or
drawing account which in many ways is a salary; however, the agent has this disadvantage and mental
hazard to overcome and that is he realizes that any deficit must be repaid if he does not make the grade.

"I know of no other selling' organization that has such a handicap for a new man" (pt. 28, exhibit No.
2595).

See also exhibits Nos. 2588, 2589, 2597, and 2600; pt. 28, testimony of Thomas R. Crowley, February 28, 1940.

228 OONCENTRATION OF BOONOMIC POWER

Mr. Gesell. In addition you are going to have men who are not going to be
under the serious economic compulsion of going out and placing a policy for the
sake of bringing home some food at night.

Mr. Zimmerman. That is right. It will take the pressure off.

Mr. Gesell. And you feel very definitely that pressure is there on the new men,
do you not?

Mr. Zimmerman. It is on some of them, yes; it is on too many of them, let's say.

Mr. Gesell. We are talking, I understand, about the pressure that is inherent
in the situation, not the pressure that comes from some guy pounding the table in
front of the agent.

Mr. Zimmerman. That is right.

Mr. Gesell. And you would feel that if this was a minimum, just as the word
indicates, and a man might go above that if he were a successful agent and were
placing insurance through some commission, arrangement, that that would be
desirable in that it would keep a man alert and interested in improving his .status.

K CONTRASTING METHODS OF AGENCY OPERATION

As was indicated earlier in this section, the factors of selection,
training, and compensation are closely interrelated. A company
which disregards any of the three will in all probability experience
lapse and a heavy agency turn-over with the concomitant disad-
vantages to policyholders. In order to demonstrate the manner in
which this situation develops in practical operations of a company a
contrast of the agency management of two companies — the Equitable
and Southwestern Life — was presented.^^

Mr. Thomas I. Parkinson, president of the Equitable, in discussing
the sales operations of his company stated that he was not operating
the company for the purpose of keeping net cost down as low as pos-
sible but was rather trying to expand than to restrict service. He
testified in this connection :^^

I could immediately, even with my little knowledge of the life insurance busi-
ness, so restrict our activities territorially, occupationall.v, and otherwise that,
we could easily score a very much lower net cost. What we are trying to do is
to give the widest possible u.nd the fullest possible coverage to the greatest num-
ber of people at a cost which they wiU stand.

He likened the activities of his company to those of religious or
educational institutions. Mr. Arthur Coburn, vice president of the
Southwestern, on the other hand, described his company's sales pro-
gram in the following terms: ^°°

" The testimony with respect to the operations of the Equitable may be found at pt. 13, R. 6505-6579,
and with res{)ect t6 Southwestern at pt. 13, R. 6581-6598.

»« Pt. 13, R. 6539. Equitable policies have a high net cost and its expenses for acquiring new business are
also high. The Southwestern, a stock company, has a slightly higher policy net cost than the Equitable
which as has been stated is a mutual company. Southwestern's net cost has gradually lowered, however,
and in fact it appeared that in spite of the great increases in average earnings of agents and the amounts
expended for training and the consequent reduction in net cost the company's profits to its stockholders
had increasedjn 1938 by over $300,000. However, as to those policyholders who die or lapse or surrender
their policies at the early durations the cost in the case of the Southwestern is definitely lower. For example,
if a $1,000 whole life policy of each company is compared for age 35 on the basis of the 1939 dividend scale
such a policy terminating by either death or lapse at the end of the first year would cost about $7 more in
the Equitable than in the Southwestern and at the end of the second year if terminated by surrender the
policy would cost about $15 less in the case of the Southwestern. (Equitable and Southwestern 1939 Rate
Books and Equitable 1939 annual dividend or refund pamphlet submitted in reply to a Commission ques-
tionn'airo, pt. 13, R. 6561, 6587, 6588).

i»» Pt. 13, R. 6592.

CONCENTRATION OF ECONOMIC POWER 229

The problem of compensation: Better-paid salesmen do a better job. The
problem of turn-over: Reduce your turn-over and you inevitably reduce your
lapses. Select a better class of citizen and they do a better job. Train them
more thoroughly and the}' render a better public service, and in turn the pubhc
appreciates that service. All are intimately associated with one another.

A detailed considevauion of the agency mechanism of these two
companies will serve to emphasize jnore sharply the basic differences
in the methods of operation employed. The Equitable is a mutual
company with assets of over ^$2,000,000,000 and over 6% billion dol-
lars of insurance in force. It takes in annually over $279,000,000 in
premiums and operates in all States in the Union. It has 110 branch
offices and 6,000 agents. ^°^ The Southwestern on the other hand is a
stock company with assets of $65,000,000 and only $358,000,000 of
insurance in force. It confines its operations entirely to the State
of Texas, where it is incorporated and where all its stockholders reside.
It has 10 managers and 396 agents.^"^ Because of its size the home-
office officials of the Equitable find it a more difficult problem to super-
vise and keep in intimate touch with the field force. It is significant
that Mr. Coburn of the Southwestern was able to testify that he could
keep in close contact with the field and that he knew personally 70
percent of the agents employed by his company.^"^

The Equitable uses miany techniques to bring in new business.
Starting with its original training course which includes suggestions for
salesmen on some high-pressure tricks of the trade, it continually
reemphasizes production through sales contests which are run on an
individual basis by its managers and supplemented by company-
sponsored contests and prizes. Though it appeared that these con-
tests resulted in the writing of much fictitious or "hooey" busi-
ness,^"* Mr. Parkinson stated that he thought the agents liked and
expected contests. The Southwestern considers.sales contests "highly
detrimental" and conducive to maldistribution and lapse. No sales
contests are sponsored by the company except for one traditional
contest held each year in which only agents with a high persistency
record are allowed to participate. '°^

The Equitable has no ceiling on the amount of new business it
expects or desires to write. ^"^ The Southwestern, on the other hand,

i«i Pt. 13. R. 6506-65n.

lo^ Pt. 13, R. 6582-6585.

i»3 Pt. 13. R. 6510, 6585.

i»< Pt. 13, R. 6543-6550. An analysis of business Written by the Equitable agents in the last 2 months of a
sales contest ending December 31, 1937, disclosed that by the end of the following February $1,790,000 of busi-
ness termed "phoney" by the Equitable's own representatives had lapsed (pt. 13, R. 6547). A letter written
by the Kansas City General Manager of the Equitable stated (pt. 13, R. 6546):

"I am convinced we are getting quite a percentage of this laR^" business in what I term in slang language
as 'hooey' business. That 'hooey' business was developed largely through pressure from unit managers
during campaigns."

With regard to sales contests Mr. Parkinson testified (pt. 13, R. 6545):

"You know the extraordinary thing about it is that they like it and they expect it. They like us to indi-
cate,, the agents and the managers, what we expect of them. They like us to put a little bit of a goal beyond
what they might otherwise obtain. And they will stand more talking than any group of human beings
that I have ever come across, and that is because the work they do is missionary and it is a drain not only on
the nervous system but on the emotions * * *."

»" Pt. 13, R. 6591. Mr. Coburn testified in this connection (id.1:

"Mr. CoBUEM ■! am absolutely unalterably opposed to high-pressure selling.

'*Mr. Qesell. Do you believe that sales contests generally promote that kind of selling?

"Mr. CoBUHN. Highly detrimental."

'»«Pt..l3, R. 6540, 6541.

230 CONCENTRATION OF ECONOMIC POWER

has a definite yearly limit on the amount of insurance which it desires
to ^vTite and consistently passes up opportunities to write more
business within the State of Texas in the interests of obtaining business
of' better quality and greater persistency. ^^^ The Equitable recently
expanded its territory ^°* while the Southwestern has resfrained from
doing so.^°^

Radically different methods of selecting new agents are employed
by the two companies. Mr. Parkinson indicated that his company
was willing to give almost anj^one a try at selling insurance. He
»«.tated that— ^'^

* * * in these days when employment is not easy to get we do not shut the
doors; we let them con[ie in and try * * *,

The Southwestern oh the other hand confines its selection to persons
between the ages of 21 and 35 who have had a high-school education
and who can pass the requisite aptitude test and physical examina-
tion.'" The Equitable gives less training to the new agents selected
than the Southwestern. Though the company is not certain as to the
amount it expends for training, its best estimate is in the neighbor-
hood of $600 a year per man whereas the Southwestern spends about
$1,900 a year per man for the same purpose. In both cases the new
agent receives a 2 weeks' training course before he is permitted to
sell. In the case of the Southwestern, however, there is an additional
feature of a mandatory 1-year training.'*^

The companies also differ as to the methods, employed in compensat-
ing a new agent during the first year of his employment. The
Equitable does not believe in a guaranteed minimum salary. Mr,
Parkinson stated that it has been the experience of his company that
it is better to pay a man a commission for what he does and thus keep
an incentive in front of him."^ The Southwestern, on the other hand,
is in the process of experimenting with a guaranteed minimum salary
and thus far has met with great success. It pays 40 percent of its
new agents a guaranteed salary of $1,200 a year believing that adequate
incentive is maintained by promising the agent com 'ssions if his
commissions under the regular agency contract would exceed the
-amount of the guarantee. The Southwestern has found that its pro-
cedure under the guaranteed salary plan has made their turn-over
experience three times more favorable, having radically cut down the
number of new agents employed and dismissed each year. It has '

'8' Pt. 13, R. 6583, 6584.

'«' The Equitable of New York withdrew from Texas In 1906 In protest against a T.exas law governing
insurance investments. By 1937 Texas had become a prosperous State, and the company decided to reenter
it although at that time there were about 140 companies doing business In the State. Mr. W. W. Klingman,
who had been vice president in charge of agenc/es. of the Equitable, was put In charge of the Texa^opera-
tlons. Offices were opened In Dallas, Houston, oiid San Antonio, and two of Mr. Klingman's sons, both
without previous managerial experience, were put in charge of the offices in Dallas and in San Antonio.
In an effort to develop the territory quickly, the Equitable relaxed many of Its agency rules, ran contests,
and made a studied effort to develop Influence In the State. One of the means adopted for accomplishing
the latter was the opening of numerous bank deposits in banks throughout the State. The cost to the
Equitable of its first year's operations in Texas was $669,024 (pt. 13, R. 6565-6759).

iM Pt. 13, R. 6584, 6585.
■ "O Pt. 13, R. 6533.

'" Pt. 13, R. 6586.

"' Pt. 13, R. 6528, 6529, 6588. In its later reply to the Commission's sales questionnaire the company re-
ported spending $2,175.44 to trsin an agent. The figure given In the paragraph above is that stated by Mr.
Coburn In his testimony.

"3 Pt. 13, R. 6636.

CONCENTRATION OF ECONOMIC POWER 231

also found that it prevents many bad sales practices from getting a
foothold in the organization."*

The earnings of the average Equitable agent who stays more than
2 years mth the company (that is, a successful agent) are about $804 a
year, or $67 a month. A special study made of the compensation of
agents connected with Equitable offices in the greater New York
metropolitan area disclosed that 31.4 percent earned $750 or less a
year, that 49.1 percent earned $1,250 or less a year, and that 78.4
percent earned $2,500 or less a year."^ The average earnings of the
agent of the Southwestern Life Insurance Co. were $2,643."^

The Equitable experiences a heavy agency turn-over. At the be-
ginning of the year 1938, the Equitable had 5,894 agents; at the end
of the year they had approximately 500 iewer agents. During the
12-month period, however, 2,721 were terminated. Recent figures
for Southwestern indicated that it terminated approximately 4 out
of 10 contracts."^

Mr. Parkinson stated that he believed it is better to have been
insured for a while than never to have been insured at all. The lapse
rate of the Equitable is high. In fact the lapse rate of the Equitable
is half again as high as comparable companies and it appeared that
during 1937 from forty to fifty railhon dollars more insurance lapsed
off the books of his company than any other company in its rank.
In certain individual cases general agents or managers of the Equitable
were shown to have a lap^e record over twice as great as that of the
ordinary companies operating in their territory."^ Though the
Southwestern has an equally high lapse rate it has reduced its lapse
rate by 50 percent in the last 10 years. Individual records are kept
of the salesmen and dismissal results if a high lapse rate persists. In

IK Pt. 13, R. 6587, 6588.

"» Pt. 13, exhibit Nos. 1329, 1330. The records of Equitable disclose th^t 25 percent of its agents produce
64 percent of its business (pt. 13, R. 6539). A memorandum prepared' September 15, 1937, by Arthur M.
Spalding, assistant to the Equitable's agency vice president, stated (pt. 13, exhibit No. 1332);

"Based on a life insurance sales research study of a large number of agents, they report that out of 100
new, full-time agents in the United States without previous experience, 27 are left at the end of 2 years.
Only 5 pay for as much as $100,000 in their first and second years. The average annual production of the
27 agents who stay at least 2 years is $56,000 which translated into earnings at the rate of $12 per $1,000, means
about $672 a year or $56 a month.

"Comparing this with the study made of new full-time Equitable agents, they find that only 20.2 percent
of the agents were left at the end of 2 years. The average annual production of those who stay" (that is the
successful ones) "is $67,000 and translating that into actual earnings on the same basis as above means that
these Equitable agents earn about $804 a year, or $67 a month • * *."

To the same efTect was a letter dated June 10, 1938, from the Company's Pittsburgh, Pa., general agent
which stated (pt. 13, exhibit No. 1334):

"Compliments to the Woods Company are at times embarrassing to the manager when such a situation
as the following is true:

"On May 31 we had under contract 296 whole-time agents, and 119 part-time agents, a total of 415.

"By December next I hopi that we will not have over 300 agents and with this number most of them
substantial.

"Making a study of our records divulges the fact that 116 agents last year produced less than $50,000 apiece;
.therefore, earned not even a fair living. This 116—25 percent of our force then— produced 10 percent of our
business and consumed, I would say, at least 50 percent of our time.

"li the lyord lets me live, I expect to see to it that a very large percentage of those who remain under
contract are substantial agents, selling substantial amounts of insurance to substantial people. What is the ,
use of talking about life insurance as a career when one-fourth of our people are not making a decent living,
and when year in and year out we hire and fire about 10 people a month?"

"« Pt. 13, R. 6589. See infra, at note 95.

M' Pt. 13, R. 6588; exhibit No. 1330.

"• Pt. 13, exhibit No. 1336.

232 GONCENTRATrON OF ECONOMIC POWER

addition special types of contracts and premium payment arrange-
ments liave been devised to reduce losses to policyholders from
lapse. ^^^

The expert testimony of Mr. Charles J. Zimmerman substantiated
the analysis of agency problems inherent in this sharp case history
contrast. Mr. Zimmerman testified: ^^"

Mr. Gesell. * * * If there were less turn-over of agents you would have
less lapse.

Mr. Zimmerman. Yes, you would have less lapse, and yet it wouldn't affect
it materially, in my Opinion.

Mr. Gesell. If you had less turn-over of agents there would be lower net
cost of insurance, woul^ there not?

Mr. Zimmerman. That is perfectly true.

Mr. Gesell. If you had better selected ag{ ts there would be less lapse,
would there not?

Mr. Zimmerman. Yes.

Mr. Gesell. If you had better selected agents there would be lower net cost,
would there not?

Mr. Zimmerman. TUat is true, Mr. Gesell.

Mr. Gesell. * * * You have agreed that if we had less turn-over and
better selection of agents we. would have less lapse and lower net cost. Is that
right?

Mr. Zimmerman. That is right.

Mr. Gesell. If you had better trained agents there would be less lapse and
lower net cost, would there not?

Mr. Zimmerman. Yes.

Mr. Gesell. If there were less emphasis on the first year's commission, partic-
ularly in the case of inexperienced agents, there would be less lapse, would there
not?

Mr. Zimmerman. Yes; that would be a factor.

Mr. Gesell. If you paid a guaranteed minimum salary to men coming into
the business until they had trained and proven themselves, you would have less
lapse.

Mr. Zimmerman. On the assumption that you attract better men, do a better
job of training and supervising, that is right.

Mr. Gesell. * * * jf vq^ i^^d fewer unfit agents 3'ou would have less
lapse, would you not?
Mr. Zimmerman. Yes.

Mr. Gesell. You would have lower net costs?
Mr. Zimmerman. Yos.

F. CONCLUDING OBSERVATIONS

This discussion of company agency practices is of necessity some-
what limited. To develop fully the many ways in which bad training,
selection and low compensation of agents, when coupled with high-
pressure .selling and turn-over, prevent the companies from giving
adequate service to their policyholders would have required funds

119 Pt. 13. R. 6589 6593.

i» Pt. 28, testimony of Charles J. Zimmerman, February 28, '940.

GONCENTRATrON OF ECONOMIC POWEU 233

and a staff far greater than that available to the Commission. Letters
received from life insurance agents and the hundreds of complaint
letters received from policyholders throughout the country bear wit-
ness to the serious difficulties which exist. The summary of con-
ditions which has been presented above, however, is sufficient to
demonstrate how completely the companies as a whole have failed
to adapt their agency organizations to changing times and the present
needs of their policyholders.

The Commission's sales questionnaire forwarded to the 68 largest
legal reserve companies was designed to obtain detailed information
on the agency practices of the various companies. The returns to
this questionnaire indicated that company managements were on the
whole completely ignorant as to conditions within their own com-
panies which had a vital bearing on the efficiency of their agency
staff and the quality of the service which it was rendering to the
public. In fact, the great majority of the companies failed to answer,
on the grounds of unavailability of information, the more significant
items in the questionnaire relating to many basic questions, as com-
pensation of agents and expense of turn-over and training.

In seeking a formula for a solution of agency problems, aompanies
must develop means of ascertaining the weaknesses which exist in*
their respective agency organii^ation. Obviously, the absence of con-
crete information prevents companies from taking forthright steps
toward the solution of their sales problems. Though many compa-
nies replying to the Commission's sales questionnaire acknowledged
laudable sales objectives, such as adequate training, high compensa-
tion for agents, and the acquisition of persistent business, it was
surprising to find that these companies were not in a position to sub-
mit information which would indicate whether or not progress was
being made toward the achievement of these various objectives. The
lack of realism which is thus exhibited is tantamount to self-deception,
and is an obvious obstacle to the solution of the problems of the
agency system. The fact, for example, that many companies who
declare that one of their chief objectives was the adequate compensa-
tion of their agency force were obliged to admit in their reply to the
sales questionnaire that they had no information relating to the com-
pensation of their agents, is startling to say the least. Similarly, a
large number of companies who acknowfeged the importance of
adequate training as an approach to the solution of certain agency
problems admit in their questionriaire replies that they had neither
knowledge of nor control over the training courses required of or
offered to their agency force. Consequently, companies which have
had the most progressive management with regard to problems of
agency organization were \iniforraly the companies in a position to
provide the Commission with complete replies to the questionnaire.
This fact is indication in itself that a realistic approach can only be
founded upon adequate knowledge.

There is obviously no single solution to the problems which con-
front the American agency system. Within certain limits, each
company must work out its own cure. Some observations can, how-
ever, be made with certainty. The work of the life insurance agent

•J64-'r.3 41— No. 28-

234 CONCENTRATION OF ECONOMIC POWER

must be recognized as something more than that of a salesman.
Economic and management pressure on the agent to sell more and
more life insurance must be reduced and in substitution thereof must
come 'a willingness on the part of life insurance company manage-
ments to discard "growth for growth's sake alone''' ia favor of a
selling program which has as its primary objective the sale of insurance
in the manner which is most suitable to the policyholders' needs and
their ability to pay. The unfit agent must be eliminated and only
those persons equipped through careful selection and • training to
approach the public in a professional manner with a view to rendering
expert service must be permitted to carry a rate' book for a legal
reserve life insurance company. Unless these things are done imme-
diately through the combined effort of regulatory officials and com-
pany managements, the time will have arrived when the social dis-
advantages residting from the system as presently conducted can no
longer be ignored.

SECTION XVI
Cost of Ordinary Life Insurance

Because there are usually many companies writing insurance in the
same territory, each offering a variety of policies, it is customarily
thought 'that in selling life insurance there is keen competition, par-
ticularly on ihatters of policy prices and policy provisions. This is
not necessarily true. In fact, many life insurance companies have
made a determined effort to eliminate competition among themselves
in these respects. This noncompetitive attitude has already been
demonstrated in the previous sections of the report describing elabo-
rate intercompany agreements to fix uniform rates for annuities and
nonparticipating life insurance and various attempts to establish
uniform surrender charges and to standardize practice in regard to
settlement options.^ The so-called replacement agreement*to which
the great majority of American companies have subscribed is another
effort ip this same direction in that the signatory companies have in
effect bound their agents not to disturb for any reason insurance
a,lready in force in another company.^

The attempt to control sales competition in certain directions may
be further demonstrated by an examination of instructions distrib-
uted by representative companies among their agents. The general
attitude of many life insurance companies ^ in this respect is sum-
marized in the following extract from instructions given to West
Coast Life Insurance Co. agents: *

The life insurance business enjoys an excellent reputation for business integrity
and financial soundness. Most people believe that all life insurance companies
are financially reliable. They think that all life insurance companies are good
companies, and this feeling of confidence is a great help to the life insurance sales-
man. The life insurance salesman must therefore strive at all times to strengthen
this attitude. He should avoid any disparagement of life insurance companies.
Such criticism would tend to weaken public confidence in the whole institution
of life insurance. At all times, the life insurance salesman should speak well of
other companies and emphasize that alf legal reserve life insurance institutions ,
are safe, sound, and reliable.

Most of your sales will be completed without any necessity for a discussion of
the comparative merits of companies. An excessive desire to establish ^ superi-

1 See pp. 141 to 163, supra.

' See p. 162, supra.

.' A few companies dissent from this attitude. The Northwestern Mutual, for example, tells its agents
(The Northwestern Agent, Lesson 10, p. 23, submitted in reply to Commission's sales questionnaire) :
"The important thing to realize, first of all, is that competition is not an unmitigated curse, as the com-
ments of some agents would occasionally lead us to think. ■ It is not a curse at all. Active competition stim-
ulates public interest and increases the sales of the best products. An experienced salesman offering a
product of unusual merit prefers a highly competitive market because he knows that he will profit by the
public attention which competition always directs toward the best product in Its class." The North-
western Mutual is a- low net-cost company (pt. lOA, R. 282-314.)

■* A Preliminary Guide, p. 58, submitted in reply to Commission's ."sales questionnaire.

235

236 CONCENTRATION OF ECONOMIC POWER

ority of your, own company may sow the seed of doubt in your prospect's mind,
and perhaps make him feel that he can make a serious mistake bj' buying life
insurance from the wrong company. Such an attitude of doubt may disappoint
your pfospect's existing confidence and replace it with indecision. If this happens
it will be difficult to make a sale.

A textbook on the sale of insurance distributed by one company to
its agents covers this point in detail: ^

* It pays to avoid competition altogether. Competition is putting life insurance
on a par with commoditJ^ Service is not and should never be made a matter of
barter. Service cannot be weighed and a price fixed accor<iingly. An attorney
renders a service — there is no barter. Service is a matter of confidence, knowledge,
and judgment, and one man's service may command a price many times greater
than another man's for doing the same work.
Competition is bad because:

1. It antagonizes the prospect's mind.

2. It takes time which could be more profitably spent in writing new business.

3. When you bring out the demerits of another company, the prospect puts
you off until he can learn from someone else the demerits of your company.

4. Competition tends to discourage you and takes you out of your usual routine
of work.

5. Competition is not an objection to lauying I'ife insurance, but an objection
to buying it from you.

Tliis textbook then goes on- to point out things that cause competi-
tion to arise and which should, therefore, be avoided:

L Emphasizing your company's advantage puts the idea into the mind of the
prospect that there are other companies.

2. When you rely on a sample policy for points of benefits, the only thing the
prospect sees is the difference in rates.

3. Delay in-closing the case brings up competition because the time- given the
•prospect for deliberation makes him want to "look around."

4. Sellirfg life insurance as a mere commodity instead of a service brings up the
question of price, and that makes comparison necessary.

Some companies go to the extent of preparing evasive answers for
the agent to give to the prospect who sa5^s he wants to compare policies
offered by different companies before he buys insurance. The
Travelers suggests the following procedure if a prospect says he would
like to get figures from other companies.^

. If this objection is made before the policy is apphed for, the following reply is
suggested: "If I were in your position, Mr. Prospect, I would probably waht to
get competing figures, too. But as an agent in the business, I know that it is far
more important to find out first of all whether you can qualify for a plan like this."
(Proceed to sell him on this idea rather than getting in a competitive discussion of
cash values, dividends, and policy, provisions.)

If this objection is encountered when you are placing the policy, sell your
prospect on the idea in wiiat follows: "I know just how you feel, Mr. Prospect.
You want to be sure you are getting full value for your money and that no other
company can offer y6u more than we can. If I were in your position I would
probably feel exactly as you do about it.

' Guarantee Mutual Life Co., How to Solicit, by J. B. Duryea, pp. 55, 56. Submitted in reply to
Commission's sales questionnaire.
' Agents' Handbook III H. 27, submitted in reply to Commission's sales questioiinaire.

GONCENTRATI'ON OF ECONOMIC POWER 237

"But to make certain that you are getting the most foi j-our money will require
considerable time and study on your part. There are approximately 300 com-
panies writing life insurance in this country. Of course, you would not want to
obtain proposals from each 1 of the 300. You would probably be satisfied with
10, 15, or 25 of the larger and better-known companies. To write for their pro-
posals, receive their replies, study and classify them as to all their features and
premium outlay, is going to take time. It may take ou 3 months, possibly 6
months or more. During that time your insurability m j.y change on account of a
neglected cold, sudden illness, or an accident. Here is our contract right in your
hands now. Don't take a chance on your becoming uninsurable while making
this study of other companies' proposals. Let me have your check for the first
premium on this contract. That will put the plan in force immediately."

Guardian Life Insurance Co. has detailed answers of evasion pre-
pared for the prospect who shows ari inchnation to compare companies
or the rates of various companies. To the prospect who says: "I
want to compare your proposition with one or two other companies,"
the agent is instructed to answer: ^

Mr. Prospect, life insurance is not a commodity that can be bought at different
prices at different stores. Life insurance is a service. All companies use the same
or very similar tables in figuring actual rates for protection. You will get only
what you pay for in every company. No company can give you greater protection
for your money than another. You are purchasing a policy, yes — but back of the
policy is the service of "the friendly company."

If the prospect says that the offering company's rates are too high,
the agent is instructed to say: ^

We get in this world, Mr. Prospect, just what we put into it and ne more. All
old-line insurance companies are on practically the same net cost basis." It stands
to reason that with competition as keen as it is today one company cannot give
you the same thing for less money than you get it elsewhere. If this were the
case, the low-cost company would soon be getting all of the business. I am not
selling you a premium rate, Mr. Prospect; I'm selling you protection and in addi-
tion to a certain amount of protection, I am offering you Guardian service, which
is vmexcelled. Just let me tell you of a few features of the Guardian service
program. Insurance may be considered safe and safer. By choosing a safer
percentage basis in making up the premium rates, the Guardian can offer you
safer insurance and, at the same time, agree to annually return to you the unused
portion of the collected funds standing to the credit of the policy. These refunds
we call dividends, and they have simply provided a larger margin of safety for the
protection of you and your loved ones, while in possession of the company.

My company is rendering a service — we furnish complete protection. Protec-
tion to your fanxily in event of your urftimely death; protection to both you and
the family in event of your living to old age; and protection against loss of income
in case of total disability. You cannot get something for nothing. You receive
full value for your investment. After all, protection is what you want; dividends
are a byproduct.

' Pt. I, Course of Study for Guardian Agents, III B-39, submitted in , e.ily to Commission's sales question-
naire.

» Ibid., B-37, 38.

» This, of course, is a direct misrepresentation of fact. Net costs d .1' ■ widely. (See pt. lOA, R. 282-314,
aud pp. 242 and 213, infra.)

238 OONCENTRATrON OF ECONOMIC POWER

In the event the prospect says, "I want to investigate some other
companies and their rates," the Phoenix Mutual makes these sugges-
tions to its agents: '°

1. Reduce this to an absurdity. If he is to make an adequate investigation, he
will' have to investigate several hundred different companies.

2. Emphasize the unique position you hope to occupy as his ctjunselor, to give
him service rather than just sell him a policy.

3. "You are an expert in your business; I am in mine. Just what would you
like to know? I will -^et *he information and then/you can make your decision."

4. Stress the uniqu s /vice of ths Piioenix Mutual, and emphasize the fact
that if he has reference to so-called "net cost" that that can never be anything
but an estimate."

To the insuring pubhc the question of competitive costs which
the companies' thus evade is of prime importance. Since the financial
strength of the principal American life insurance companies, in terms
of ability to meet their contracts as they mature, is in most respects
on a par, the policyholder has little to choose between insurance
companies in this respect; thus the relative cost of his insurance
should become the most important consideration when he is pur-
chasing life insurance. The poHcyholder naturally desires to get the
most insurance protection for his money. It is, however, very
difficult for a prospective policyholder to compare costs as between
policies or between companies, or even to determine the cost of any
one particular policy. The policyholder who attempts to make the
determination will quickly find himself in a maze of technical terms
and obliged to make numerous adjustments for variable factors which
might affect the cost.

Before a cost comparison between two companies can be under-
taken the policies on whicd costs are to be compared must be on the
same basis and provide substantially the' same benefits. To deter-
mine which policies are thus comparable is no easy matter, for practi-
cally all companies have adopted the practice of issuing policies in
almost innumeraole forms. Though the laws of most States require
that policies offered by companies authorized to do business shall
contain certaia basic provisions, these provisions are obscured by a
mass of other policy detail. Even the basic provisions themselves are
not similarly worded, and it may require much analysis to determine
the differences in benefits provided by generally similar provisions.
To indicate the nature of the problem, it is only necessary to refer
to the great number of policies offered by representative companie'
and the variety of designations by which many substantially similar
policies are known in different companies. The Aetna, for example,
offers 92 different plans of insurance; the Lincoln National offers 102;

'" Sales Plans, No. ST 261 (3116), p. 9, submitted in reply to sales questionnaire.

" The Guarantee Mutual prepared this ruse for its agents if the question of cost should be brought up.
The agent is instructed to say ("How to Solicit," p. 131, submitted in reply to Commission's sales ques-
tionnaire):

"It will not cost anything. This is a savings proposition, not one of expense. You never think of savings
deposits in cost. Cost in 10 years? You figure it. Here are the facts: You deposit $263.50 with my company
and die during the first year and we will give your wife and children $100 a month for ten and a quarter
years— a total of $12,300. Or suppose you deposit for 10 years and then stop. You will have deposited
$2,635. We will change the policy and pay back your $2,635 whenever you die and $1,710 in addition.
That's all your money back and 64 percent in addition. Pleasefigure the cost — I can't. If you can't we will
see the doctor at 2:15."

CONCENTRATION OF ECONOMIC POWER 239

the Mutual of New York, 125; and the Prudentitll, 136. '^ A state-
ment of the names of some, but by no means all, of the policies offered
is sufficient to indicate the confusion confronting an inquiring policy-
holder:'^

Ordinary life.

Twenty-pay life.

Twenty-year term.

Life paid up at 70.

Endowment at 85.

Business preferred.

Berkshire benefactor.

Economic protector.

Economist.

Thirty-three-payment 35-year endowment.

Improved 20-year term.

Life-expectancy term.

Graded premium life.

Whole life double protection to 60.

Guaranteed paid-up additions.

Family special premium.

Family maintenance, 20 years.

Protector.

Term to expectancy.

Five-year automatic convertible term.

Annuity endowment at 65.

Special whole life increased benefits at 65.

Thirty-year endowment.

Fifteen-year convertible term.

Adjustable whole life.

When it is recognized that all of the above policy forms are among
those most frequently sold by principal companies the extent of the
policyholders' confusion becomes even more apparent. It has been
said that there are, however, only four basic policies and that in spite
of t-heir many variations it is possible to reduce the policies offered by
different companies to a common denominator through the use of
which actual benefits may be compared. As has been indicated this
is not a simple task but the statement finds some support. In the
event a policyholder can make such an analysis of the policies offered,
he is then and only then in a position to approach intelligently the
question of the cost of his policy.

In order for the policyholder to determine the cost of insurance he
may make calculations in either of two recognized ways — on the
assumption that the policy is continued or on the assumption that it is
surrendered. In the first case, an attempt is made to find the cost
to the policyholder over a given period of time, the policyholder never
surrcndermg liis policy. Thus if the policy had been in force for 20
years and is continued in force the cost to the policyliolder is the sum
of all premiums paid less all dividends received. If the policyholder
dies after the policy has been in force for exactly 20 jears, his bene-
ficiary will receive the face amount of the policy, and the total c.ost
of the insurance will be the sum of 20 annual premiums paid less all

'» Pt..28,-exhib«^No. 2323.
•3 Ibid. '

240 CONCENTRATION OF ECONOMIC POWER

dividends received. Calculating the cost on the "policy surrendered"
basis, it is assumed that the policy is kept in force for a number of years
and then surrendered. In this case if the policy were kept in force for
20 years and then surrendered, the policyholder would receive a cash
surrender value of an amount stipulated in the policy in lieu of his
continuing insurance. The cost of the insurance for the 20 years, then,
would be the sum of all premiums paid less all dividends received, less
also the cash-surrender value received.

As has been stated, the factors which go to make up an insurance
premium are the rate of interest assumed, the estimated rate of
mortality, and a loading for expenses such as selling and administering
the fund, profits in the case of a stock company and margins for con-
tingencies. The rate of interest assumed is that which the company's
management is prepared to guarantee it can earn on the reserve funds
deposited with it; the estimated rate of mortality is based on one of the
actuarial tables of mortality and the loading is an estimate of the
amount which will be required to sell the policy and to pay its pro-
rata share of conducting the business of the insurance company.

In the case of nonparticipating policies the initial premium rate thus
computed is also the determinant of the net cost of the policy, which
can be calculated with certainty. For a whole-life policy the net cost,
continued basis, is the sum of the premiums paid from the date of the
policy to the date of death. For a 20-payment life policy it is 20
times the given annual premium or the sum of as many premiums as
shall have been paid between thfe date of the policy and the date of
death. If the net cost of nonparticipating insurance is calculated on a
discontinued basis it is the sum of all premiums paid less surrender
values received. If any savings are made in mortality or administra-
tion or if a rate of interest higher than that guaranteed is earned, the
company makes a profit for its stockholders but the cost of insurance
to the existing policyholders is not affected.

In participating insm-ance the initial rate is not the determinant of
the net cost because of dividends. The amount of the dividend is
varied in that it is increased or decreased as profits or losses are realized
from the operations of the company as a whole. At regular intervals,
usually annual, a part of the surplus of the participating company is
divided among its policyholders. This division is made by means of
complicated fornmlas which attempt to divide the distributable surplus
in accordance with the equities of the groups of policyholders which
contributed to it, the policyholders being grouped by ages, year of
issue, and by type of policy held. The factors of loading, interest,
and mortality and sometimes gain or loss from special lines of business
are given weight in these formulas.^* Because of the many difficult
allocations and assumptions involved, these formulas, which differ
widely as between companies, can at best accomplish only roifgh

i< Dr. S. S. Huebner describes the usual dividend formula thus (Life Insurance, 3d ed., p. 345):
"Stated in the form of a debit-and-credit account, the policy is credited under this plan with (1) the termi-
nal reserve at the end of the previous year, (2) the premium paid under the policy, and (3) the interest ac-
tually earned on these two items minus investment expenses; and is debited with (1) actual expense of con-
ducting the business, (2) cost of insurance as shown from the actual experience of the company, and (3) the
terminal reserve of the policy at the end of the year. The difference between the two sides of the account is
regarded as the surplus contributed by the policy under consideration."

CO.N'CENTRATI'ON OF ECONOMIC POWER 241

justice in distributing the surplus according to the equities of the
various groups. ^^

It will be readily observed that it is impossible to forecast what
dividends will be paid in futiu^e years (except to the extent that it is
possible to evaluate the efficiency of management) but it is possible
to obtain some idea of comparative net costs in different companies
by using the dividend scale for a given year. This, of course, will not
produce the same results as a calculation of net cost from an historical
point of view nor will it indicate with complete accuracy the net
costs which may be expected to result in the future. However, one
of the simplest and most effective methods of determining relative net
costs of various companies is to use the premium rate and the divi-
dend scale applicable to a given point in time.

A simple example will clarify the methods of determining the cost
of insurance to the policyholder. A $1,000 whole-life participating
policy issued by the Aetna on a person aged 35 calls for an annual
premium of $26.57 at the 1939 rate. In 20 years this annual premium
will have been paid 20 times, or a total of $531.40 will have been paid
in. During those 20 years it is estimated that $105.50 in dividends
will be paid on the policy. This estimate is made on the basis of the
dividend scale in effect in 1939. At the end of 20 years, then, the
policyholder will have paid in $531.40 of which $105.50 will have been
returned to him, making a net cost to him of $425.90 if he leaves his
policy in force. However, if at the end of the 20 years he decides to
surrender his policy he will receive from the company a cash payment
of $328 and his policy will be canceled. The total cost for the 20
years' insurance protection will then be $425.90 less $328, or $97.90.

A detailed study, along the lines indicated, of the premium rates and
dividends paid by the various companies, shows a wide divergence in
the cost of the insurance to the policyholders. Based upon the 1939
dividend scale, the costs to the policyholder in each of the 26 companies
at the end of 20 years of a $1,000 whole-life policy, or the nearest
comparable form of policy, issued at age 35, on both a continued and
a surrendered basis, is as follows:'^

" Sometimes the justice thus accomplished is exceedingly rough. For example, some companies calculate
the mortality saving at a flat amount per $1,000 at risk, regardless of age. This favors policyholders at older
ages. Other companies, having devised a dividend formula, use arbitrary percentage modifications of it
from year to year. This of course changes the relative weights of the various factors involved in the formula
(replies to Commission's investment questionnaire, item 48).

'9 Only a few net-cost comparisons are given here. On pp. 282-314 of pt. 10-A are tables showing the
policy-continued and policy-surrendered net costs for 10- and 20-year periods of whole-life, 20-paynient life,
and 20-year-endowment policies, both participating and nonparticipating, issued at ages 25, 35, and 45, for
the 26 largest companies. These costs are calculated on the basis of 1939 rates and dividend scales, and are
calculated both without consideration of interest and on a discounted basis. Net costs of participating
policies of the kinds and ages listed above, calculated on a historical dividend basis, are iripluded in the record
(pt. 28, exhibits Nos. 2343-1 to 2343-9, inclusive).

242 CONCENTRATION OF BCONOMIC POWER

Standard participating policies — sold in the amount of $1,000 or more

Company

Aetna

Bankers Life

Connecticut General...
Connecticut Mutual...
Equitable, New York

Equitable, Iowa

Guardian Life

John Hancock...

Massachusetts Mutual

Metropolitan

Mutual Benefit

Mutual, New York

National Life

New England Mutual.

New York Life

Northwestern

Pacific Mutual

Penn Mutual

Phoenix Mutual

Provident Mutual

Prudential

State Mutual

Union Central

Annual
premium

$26. 57
26.91
25.53
26.35
28.11
26.35
26.35
26.06
26.35
25.35
26.35
28.11
26.35
27.00
28.11
26.88
26.36
26.35
24. 58
25.88
25.42
26.35
26.30

20 annual
premiums

$531. 40
538.20
510.60
527. 00
562. 20
527. 00
527.00
521.20
527.00
607.00
527. 00
562. 20
527. 00
540. 00
562. 20
537. 60
527. 20
527.00
491. 60
617.60
508.40
527.00
626.00

20 years
dividends

$105. 50
110. 93
90.16
111.48
2 145. 60
120. 33
90.67
101.40
- 107.75
122. 06
110. 43
100.68
134. 99
127. 03
♦ 169. 11
150. 21
118.71
2 126. 84
79.38
129. 10
104.07
107.90
93.09

20-year net
cost, policy
contmued

$425. 90
427. 27
420.44
415. 52
416. 60
406. 67
436. 33
419. 80
419. 25
384. 94
416. 57
461. 52
392. 01
412. 97

393. 09
387. 39
408. 49
400.16
412. 22
388.50
404.33

419. 10
432. 91

20th year
cash value

$328. 00
331.45
328.00
327. 68
327.00
328.00
327.68
331. 00
327. 68

3 348. 74
327. 68
327. 58
327.00
327.58
327.00
327. 58
328. 00
327. 58
319. 00
327.00
337.00
327. 68
327. 00

Net cost,
policy sur-
rendered
end of 20th
year

$97.90
95.82
92.44
87.94
89.60
78.67

108. 75
88.80
91.67
36.20
88.99

133. 94
65.X)1
85.39
66.09
59.81
80.49
72.58
93.22
61.60
67.33
91.52

105. 91

' Pt. 10-A, R. 286, 287. The net cost figures given above are calculated on an undiscounted b and on
the basis of the 1939 dividend scale. Both are subject to some objections. The undiscounted basis is ob-
jectionable in that $1 of premium paid, or dividends received, in the early years of the contract, is given
equal weight with $1 of premiums, dividends, or cash values in the latei* years of the contract. This dis-
regards the element of interest. As a result, this method of deriving net costs shows comparative fig ures
which generally favor (1) participating policies over nonparticipating policies; (2) high premium participat-
ing policies over low premium participating policies; (3) participating policies which pay extra or special
dividends at the end of 8-year periods or in later policy years.

The 1939 dividend scale was used because it provides the best available criterion of the 1939 position.

Net costs for the policy represented above, on a discounted basis (3H percent) and on a basis using actual
dividend rates for thc,last 20 years, are as follows (pt. 10-A, R. 302, 303; pt. 28, exhibit 2343-1 to 2343-9):

Standard nonparticipating policies — sold in the amount of $1,000 or more

Company

Annual
premium

20 annual
premiums

20 years
dividends

$428. 40

428. 40

424.00

457. 60

428.40

428.00

20-year net
cost, policy
continued

20th year
cash value

Net cost,
policy sur-
rendered
end of 20th
year

Aetna

Connecticut General

Equitable Iowa

Lincoln National....

Pacific Mutual

Travelers...

Western & Southern.

$21.42
21.42
21.20
21.88
21.42
21.42
21.40

$428. 40
428. 40
424. 00
457.60
428. 40
428. 40
428. OO'

$311.00
311.00
311.00
325. 00
311.00
310. 75
314.00

$117.40
117.40

.113.00
132.60
117.40
117.65
114.00

CONCENTRATION OF ECONOMIC POWER

243

standard participating policies— sold in the amount of $1, 000 or more

Company'

Aetna

Banker's Life

Connecticut General.. .
Connecticut Mutual...
E qui table, New York..

Equitable Iowa

Guardian Life .

John Hancock :..

Massachusetts Mutual.

Metropolitan

Mutual Benefit

Mutual, New York

National Life

New England Mutual..

New York Life

Northwestern

Pacific Mutual

Penn Mutual

Phoenix Mutual

Provident Mutual

Prudential...

State Mutual

Union Central

Discounted

Based on actual dividends

20-year dis-
counted net
cost, policy
continued

Discounted

net cost,

policy

surrendered

end of 2nth

year

20-year net
cost, policy
continued

Net cost,

policy

surrendered

end of 20th

year

$317. 17

$152. 33

$414.73

$83.73

320.03

153. 45

408. 05

97.30

313. 43

148. 59

404.03

93.03

310."o9

146. 06

405.04

77.40

311.76

147. 42

396. 12

k 69. 12

304. 25

139.41

389. 44

78.44

324. 67

160. 04

410. 16

82. 58

314. 78

148. 43

410. 11

99.11

.313. 56

148. 93

392. 45

64.67

291. 39

« 116. 13

370. 15

•i 37.31

311.05

146. 42

388. 10

60.52

342. 96

178. 33

404.08

76.50

294.00

129.66

393.88

60. 30

309.75

145. 12

387.58

60.00

301. 67

• 137. 33

373,83

.46.83

290.04

125. 41

367. 56

39.98

306.54

141.70

435. 36

132. 36

300.77

• 136. 14

364.06

56.48

306. 71

146. 39

410.38

78.93

291.79

127.45

371. 79

61.79

303. 50

134. 14

361.69

50.69

312. 45

147.82

398. 79

71.21

322. 42

158.08

407. 72

97.72

• Includes discounted value of "extra" dividend payable at end of 5th policy year.
' See note 17 infra, at p. 244.

« Includes -$9.92, the discounted value of "cash settlement" dividend, payable in addition to guar-
anteed cash value of policy, in event policy is surrendered at end of 20lh policy year. After a policy
has been carried for 17 full years, a "cash settlement" dividend is payable upon surrender, the amount
of such dividend increasing with duration.

■' Includes "cash settlement" dividend of 18.84, payable in addition to guaranteed cash value of
policy, in event policy is surrendered at end of 20th policy year.

• Includes discounted value of "extra" dividends payable at end of 10th, 15th, and 20th policy
years as follows: 10th year, $5; 15th year, $10; 20th year, $20.

f Includes "extra" dividends paid at end of 5th, 10th. 15th and 20th policy years.

Standard non-participating policies— sold in the amount of$t, 000 or more

Company

Discounted

20 'Year Dis-
counted Net
Cost-Policy
Continued

Discounted
Net Cost,
policy sur-
rendered end
of 20th year

Aetna

$315.08
315.08
311.85
336. 56
315.08
315.08
314.79

$158. 78

Connecticut General '.

158.78

Equitable Iowa

155. 55

Lincoln National..

173.23

Pacific Mutual - - - - - .

158.78

Travelers

158.91

Western & Southern ..

156. 98

' Includes "extra" dividend payable at end of 5th policy year.

' Includes "cash sett4ement" dividend of $19.74, payable in addition to guaranteed cash value of policy,
in event policy is surrendered at end of 20th policy year. After a policy has been carried for 17 ful!
years, a "cash settlement" dividend is payable upon surrender, the amount of such dividend increasing
with duration.

* Includes "extra" dividends payable at end of 10th, 15th, and 28th policy years as follows: 10th year,
$5; 15th year, $10; 20th year, .$20.

244 CONCKXTILVTION OF EiCONOMIO POWER

These figures deserve some comment. It will be noted that on the
participating policies the range in annual premiums is comparatively
small although the annual [)remiums of three companies — Equitable,
Mutual Life, and New York Life — are considerably higher than those
of the other companies. In the twentieth year cash value also, the
range is comparatively narrow. In the dividend estimates, however,
there is a wide range with the result that there is a great deal of
difference in the cost to the policyholder. An effective comparison
may be made by looking at the figures for the three companies named:
Equitable, Mutual Life, and New York Life. These companies all
have the same initial premium rate of $28.11 which is the highest rate
of any company listed and cash surrender values are practically iden-
tical, yet on the basis of 1939 dividends/ policyholders wiio kept
their policies in force for 20 years and then surrendered them would
find that in the Equitable the 20 years' cost would have been $89.60;
in the Mutual of New York, $133.94; and in the New York Life,
$66.09.^'' On the nonparticipating policies the annual premium is
consistently lower, as low as $21.40 in the case of the Western &
Southern, but in almost all cases the ultimate cost to the policyholder
over 10 or 20 years is less on the participating than on the non-
participating policies. Nonparticipating companies have for many
years criticized this type of cost comparison on the ground that it
does not give sufficient weight to fundamental differences existing
between participating and nonparticipating policies. Nonparticipat-
ing companies point out that they contract to provide life-insurance
protection for a fixed annual premium during the life of the contract
and that as a consequence their net cost is fixed while that of the
participating companies may fluctuate. The persistent decline in
interest rates has led the nonparticipating companies to contend that
the participating companies w411 be obliged to cut dividend rates and
thus increase their net cost. Only the future can demonstrate how
valid this argument may be.^^

Similarly striking differences in cost as between companies appear
in 20-payment life and 20-year endowment policies. Based on the
1939 dividend scale the cost to the policyholder in each of the 26
companies at the end of 20 years of a $1,000 20-payment life policy
and of a $1,000 20-year endowment policy each issued at age 35 on
both a continued and a surrendered basis is as follows: ^*

" On the basis of actual dividends declared 1919 to 1939 the 20-ycar cost of a policy surrendered would
have been $69.12 in the Equitable of New York. $76.50 in the Mutual of New York, and $46.83 in the New
York Life (pt. 28, Exhibit Nos. 2343-1 to 2343-9, inclusive).

'* For a more complete discussion of the various factors to be taken into account in comparing the net
ccsts of- policies issued by participating and nonparticipating companies, see pt. 28, testimony of Ernesl J.
11 awe, February 29, 1940.

'9 Pt. lOA, R. 290, 296. Interest earned on the reserves in excess of the mortality and administration
expenses, and returned at the end of the endowment period along with the contributions to the reserve,
accounts for the minus fiKures in the table.

CONCENTRATION OF ECONOMIC POAVEK 245

Standard participating policies sold in the amount of $1,000 or more

Company

20-payment life

20-year net
cost-policy
continued

Aetna

Connecticut QeneraL.
Connecticut Mutual..
Equitable New York..

Equitable Iowa

Guardian Life

John Hancock.

Massachusetts Mutual

Metropolitan

Mutual Benefit-

Mutual New York

National Life

New England Mutual.

New York Life

Northwestern

Pacific Mutual

Penn Mutual

Phoenix Mutual

Provident Mutual

Prudential

State Mutual

Union Central

.$609. 92
606.18
588. 86
598. 48
591. 65
624. 52
590.42
587. 89
557. 63
591.58
653. 18
575, 46
587. 84
565. 75
565. 31
585. 69
582.54
579. 63
568. 82
555.84
590.11
609. 74

.Vet cost-

poliey

surrendered

end of

twentieth

year

-.$0. 08
-3.82

-21.06
' -10.52

-18.35
14.60

-19.58

-22.03
2 -88. 97

-18.34
43.26

-33. 54

-22.08
< -43. 25

-44.61

-24. 31
• -27.38

-40. 18

-18.16

-19.81

.74

20-year endownient

20 annual
premiums

less
dividends

.$864. 12
850. 77

829. 76
849. 18
847. 41
884. 34
829.23
828.99
793. 10
833. 13
913. 36
828. 87
827. 32-
821. 92
811.04
835. 84

830. 78

836. 97
818. 14
798. 83

825. 98
854. 28

Net cost-
policy

matured
end of

twentieth
year

-$135. 88
-149.23
-170.24

1 -150.82
-152.59
-115.66
-170.77
-171.01

3 -256. 90

-166.87

-86. 64

. -171.13

-72.68

5 -178.08
-188.96
-164.16

> -169.22
-163.03
-181.86
-201. 17
-174.02
-145.72

> Includes "extra" dividend payable at end of fifth policy year.

8 Includes "cash settlement" dividend of $36.60, payable in addition to guaranteed cash value of policy, in
event policy is surrendered at end of twentieth policy year.

' Includes "maturity" dividend of $50, payable in addition to guaranteed maturity value of policy.

< Includes "extra" dividends payable at end of tenth, fifteenth, and twentieth policy years as follows:
Tenth year, $5; fifteenth year, $8.75; twcatieth year, $17.50.

' Includes "extra" dividends payable at end of tenth and fifteenth policy years as follows: Tenth year, $5;
fifteenth year, $5.

Standard nonparticipating policies sold in the amount of -$1,000 or more

20-payment life

20-yearendowment

Company

20-year net
cost-policy
continued

Net cost-
policy
surrendered

end of

twentieth

year

20 annual
premiums

less
dividends

Net cost-
policy

matured
end of

twentieth
year

Aetna

$611.80
611. 80
600.00
626.80
611.80
611.80
590. 40

$45.80
45; 80
34.00
59.80
45.80
45.65
24.40

$883.60
883.60
878. 60
886. 40
883.60
883.60
872. 40

-$116. 40
116 40

Connecticut General

Equitable Iowa.. .. ....

121 46

Lincoln National.. .

113 60

Pacific Mutual"-.-

116 40

Travelers -

— 116 40

Western and Southern

127 60

246 OONCENTRATION OF ECONOMIC POWER

It will be observed from the first table, above, that in every case
the annual premium is higher on the participating than on the non-
participating insurance. This is the result of a custom existing among
most mutual companies in the industry to add an extra large loading
to the net rate.

Why this should be done year in and year out without change does
not appear. The rate adopted by the nonparticipating companies is
presumably not only adequate, but profitable, for the nonparticipating
companies are obliged, if possible, to make a profit for their stock-
holders.^° There is no compelling reason why the initial premium
charged by the mutual companies should be so much higher. Some
difference for contingencies may be desirable but the margins appear
all out. of proportioli particularly in the case of the high gross premi-
um mutual companies.

While no necessity for the practice appears, however, some effects
of it can be observed. In the first place, by making ample funds
available for administrative expenses, it enables the mutual companies
to pay generous salaries and high commissions. At the same time it
enables the companies to pay larger dividends, creating the illusion of
very profitable operations, and giving to the policyholder the im-
pression that he is receiving a windfall.

This custom of charging higher-than-necessary initial premiums
not only deprives the policyholder of the interim use of his money
and repays him only approximately in proportion to his contribution,
but it is a direct item of expense. As one witness expressed it:^*

* * * you can never return to the policyholder in its entirety th; additional
amount you have collected because the agent gets his commission, the Uovernment
steps in and gets taxes; it costs a good deal of money to adjust these, to arrange
these dividends and distribute them again. Then how can you pay back to the
policyholder the overcharge?

•Another effect of the extra premium charge becomes apparent in
the light of the studied efforts of many companies to avoid cost
competition. If the initial premium rates of mutual companies

20 Mutual companies sometimes advance the argument that the extra premium is needed to take the place
' of the capital stock of the stock company. It should be observed, however, that in any established com-
pany this capital stock Is an almost negligible percentage of the insurance in force. Furthermore, the mutual
companies customarily keep a surplus which is as large, or larger, proportionately, than the capital and
surplus of most stock companies. The following figures show the surplus, or capital and surplus, per billion
dollars of insurance in force, as of December 31, 1938, in three mutual companies and in three stock companies;

MutiM companies, surplus per billion insurance in force

Metropolitan... t.... ..-. $12,930,000

New York Life...:.... 18,330,000

Equitable of New York 11,680.000

Stock companies, capital and surplus per billion insurance in lorce

Travelers... : $11,490,000

Aetna ". .... 8,880,000

Connecticut General 1 ...-• • 8,740,000

During the 10 years 1929-38 these three stock companies paid dividends to stockholders as follows:

Travelers, with a capital stock of $20,000,000 $35,200,000

Aetna, with a capital stock of $15,000,000 13,125,000

Connecticut General, with a capital stock of $3,000,000 ■. b 2,750.000

» Best's Life Insurance Reports, 1939.
kPt. lOA, R. 15.

." Testimony of Mr. William Montgomery, president, Acacia Mutual Life Insurance Co. (pt. 10, R. 4343)

CONCENTRATION OF ECONOMIC POWER 247

approximated those of the non participating companies, the latter
would Ibe forced to lower their rates as far as possible, and a true cost
competition, based on efficiency of management, would necessarily
result. This the companies seem particularly anxious to avoid.^^

As a result of the efforts of the companies, competition on a cost
basis is greatly minimized in the field of life insurance, and the policy-
holders' difficulty in determining net cost and comparative costs is
correspondingly increased.

To the extent that a prospective policyholder cannot determine
costs, or even make inteUigent estimates of cost, he cannot purchase
his insurance on the basis of cost, with the result that the prices of
the commodity cannot react to competitive factors. '

The insurance regulatory bodies in the United States are concerned
only with minimum, or safety, rates. They do not attempt to control
maximum rates. The actual effective rates are left to the discretion
of company managements, and are sometimes actually arrived at by
concerted action designed to ehminate competition.^^

" See p. 235, supra.
23 See p. 141, supra.

SECTION XVII
Industrial Insurance

Industrial insurance ^ is a type of life insurance sold " in small
amounts primarily to persons of little means. Premiums for this type
of insurance are paid in weekly or monthly installments and are
regularly collected by agents who call at the homes of the policy-
holders. There are about 90,000,000 industrial policies in force in
this country, held by about 50,000,000 ' people or several times as
many as hold all other forms of life insurance policies combined. In
1937 these 50,000,000 people made premium payments amounting to
approximately three-quarters of a billion dollars on the $20,591 ,000,000
of industrial insurance in force.^

The amount of industrial insurance which can be purchased by
the weekly or monthly contributions of the average wage earner is
necessarily very small. An industrial policy taken out during 1938
in the Metropolitan at age 20, for example, would insure the policy-
holder in the amount of $113 if until his death or for the next 54 years
he regularly pays a nickel a week to the agent who calls at his door.
If his insurance was not taken out until age 35, a similar weekly
contribution will purchase but $69 of insurance. If he purchased an

' There is no generally accepted definition of industrial insurance. The definition contained in the
recently enacted recodification of the New York insurance law, sec. 'ioi (1), is a good example of a .statutory
definition:

"1. The term 'industrial life insurance,' as used in this chapter, shall mean that form of life insurance,
either —

"(a)' Under which the premiums are payable weekly, or

"(b) under which the premiums are payable monthly or oftener, but less often than weekly, if the face
amount of insurance provided in any such policy is less than one thousand dollars and if the words 'indus-
trial policy' are printed upon the policy as a part of the descriptive matter."

" The District of Columbia Code once referred to industrial insurance as "the business commonly known as
Industrial Insurance" (31 Stat. 1293, ch. 854, sec. 65S).

Monthly debit ordinary insurance, which is a type of ordinary insurance sold in small amounts for month-
ly premiums collected at the homes of the ipsured, should really be classed with industrial, for the only
real difference lies in a few policy terms, of which the average policyholder is unaware. However, this
report deals only with the type of insurance classed as industrial in public recbrds.

2 The exact number of persons holding industrial policies cannot be ascertained, since many people hold
several policies, frequently in more than one company (pt. 12, R. 5955). However, the' best available esti-
mate is that there are about 50,000,000 industrial policyholders in the United States. See Maurice Taylor's,
The Social Cost of Industrial Insurance, 1933, p. 54. The Metropolitan actuaries estimate that there are
about 22,500,000 holders of Metropolitan industrial policies. Since there are about 34,000,000 policies in
force, each policyholder has an average of 1.5 policies (pt. 4, R. 1238, exhibit No. 950). If this figure is applied
to the total number of policies in force, a figure of 59,000,000 policyholders is obtained. However, since many
persons have policies in several companies, this is undoubtedly an overestimate. The 50,000,000 appears
to be as close an approximation as can be made. •

' Pt. 12, R. 5597, 5598, exhibit Nos. 945, 948, 949. The importance of industrial insurance can be measured
in the following terms: As of December 31, 1937, it accounted for 19 percent of the life insurance in force,
23.4 percent of the amount paid in premiums to life insurance companies, and 72 percent of the number
of policies in force (pt. 12, R. 5597).

Most of the data relied upon in the hearings and in this section of the report are from the Spectator Life
Year Books and the figures given, unless otherwise indicated, are as of December 31, 1937. Detailed statis-
tics on all companies writing industrial insurance are not available, since only 66 of the 138 companies writing
this type of insurance were reported in detail in the Spectator Life Year Book as of that date. Id.

248

CONCENTRATrON OF BCONOMIC ^OWER 249

industrial 20-year endowment policy, from the same company liis
nickel a week would purchase a $43 endowment if payments commence
at age 20 and a $40 endowment if payments commence at age 35,^
The average size of an industrial policy is only $232.

Traditionally, industrial insurance has been considered as burial
insurance. Mr. John F. Dryden, former president of the Prudential,
the first company to write industrial insurance on a large scale ^ in
this country stated in 1905:^

Industrial insurance provides primarily for the expenses of burial; therefore,
since death is likely to happen to any member of the family and as the- burden of
funeral expenses would fall with nearly equal weight upon all the survivors, a
small policy of insurance on the life of every member is evidenth% for this object, a
better provision than a large sum placed upon a single life. '

That this primary purpose has not been abandoned in the case of
the Prudential, now the second largest carrier of industrial insurance,
was made apparent by the testimony of Mr. Henry B. Sutphen, vice
president of that company, who testified in the present hearings that
the purpose of industrial insurance is — ^

* * * tg provide for the average workingman a fund payable upon death
which will take care of the necessary funeral expenses and the incidental expenses
in connection with the death, and a reasonable amount for the readjustment of the
family, temporarily only.

Mr. Leroy A. Lincoln, president of the Metropolitan, the largest
company, stated, on the other hand, that though he had no knowledge
of the uses to which industrial-policy proceeds were put by those who
were insured in his company, he did not consider industrial insurance
burial insurance but rather, because it was available on the endow-
ment plan and because it offered cash-surrender values and nursing
service * as part of its benefits, chose to classifj'^ it along with all other
forms of insurance as being but one phase of a single thing — life
insurance.^ Though it is, true, as Mr. Lincoln's testimony indicates
that industriahpolicy benefits have been liberalized over the course
of years, it is only the development of industrial endowment policies
which have in any way changed the traditional character of this form
of insurance. The writing of endowment insurance, which has been
confined to a large extent to childrenj.has been very expensive from the
point of view of the policyholder and recently subject to great criticism
and even legislative restraints.^" Furthermore, as has been indicated
above,' the average amount of the industrial policy remains small and

< 1938 rate book, Metropolitan, "industrial department, table of rates for weekly premium and monthly
premium industrial policies (male>. Tbis is, of course, an oversimplification. For a more complete discus-
sion of cost, see pp. 283 to 289, infra.

' The first legal reserve life insurance on the industrial plan issued in the United States appears to have
been written around 1870 by the Mutual Life Insurance Co. of Baltimore, Md., now the Monumental Life
Insurance Co. (pt. 12, R. 5598; pt. 13, R. 6363).

' Address and Papers on Life Insurance and Other Subjects by John F. Dr.yden (19C9), pp. 52-53. A simi-
lar statement appears in Industrial Insurance— Past and Present, by John F. Dryden (1912), p. 21. Mr.
Dryden believed that industrial insurance helped to eliminate pauper burials (Armstrong report, vol. VI,
pp. 4946-4947).

' Pt. 12. R. 5734. See also testimony of C. F. Williams, president, Western & Southern Life Insurance
Co. (pt. 12, R. 5937).

« See p. 288, infra.

« Pt. 12. R. 5837-5843.

i" See p. 302. infra.

2G47C3— 41— No. 28 17

250 CONCENTRATION OF ECONOMIC POWER

it seems higlily unrealistic to suppose that policy proceeds are sufficient
to do more than cover burial and expenses incident to death. It
is partly for this very reason that a large proportion of industrial
insurance is written on the lives of women and children as well as On
the lives of the breadwinners.

A. SIZE AND GROWTH OF INDUSTRIAL COMPANIES

.From its inception in this country in 1870," industrial insurance has
had a remarkable and spectacular growth. On December 31, 1900,
there were approximately 11,200,000 industrial policies in force in the
United States, representing a face amount of $1,469,000,000.^^ It was
about this time that Mr. John F. Dryden prophesied: ^^

The progress which has been made [in industrial insurance] during a quarter
of a century, wonderful as it is, wiU sink into insignificance in comparison with
the progress which wiU be made during the next 25 years.

In terms of growth Mr. Dryden was not wrong. At the end of 1927,
25 years after his prediction, there were 82,246,402 policies in force,
representing a face amount of $15,548,488,326.**

Ten years later, on December 31, 1937, with about 138 companies
writing industrial insurance, there were over 88,900,000 policies in
force, representing about $20,591,000,000'^ of insurance. From
1900 to 1937 the number of policies in force increased almost 700
percent, while the total population of the United States increased
only 70 percent,** with the result that m 1937 it could be said that the
amount paid in industrial premiums represented an annual average of
$5.99 for every inan, woman, and child in the United States.*^ During
this same period, the amount of industrial insurance in force increased
1,402 percent. So great was the growth that by the end of 1937 the
number of policies in certain States actually exceeded the total popu-
lation. This was true in Connecticut, Delaware, District of Colum-
bia, Massachusetts, New Jersey, New York, Rhode Island, and Mary-

" Following the introduction of industrial insurance in 1870 by the Mutual Life Insurance Co. of Balti-
more, an organization known as the Widows and Orphans Friendly' Society, under the guidance of Mr.
John'F. Dryden, began in 1875 to issue industrial insruance. This company later became the Prudential
Insurance Co of America. Mr. Dryden studied the methods used by the Prudential of London, and copied
them in organizing the business here. In 1879 the Metropolitan and John Hancock also entered the
industrial insurance field (pt. 12, R. 5598, 5599; pt. 13, R. 6363). Burial insurance in the form of legal reserve
life insurance was originated in England in 1843. Among the Greeks and Romans, mutual organizations
existed to provide for burial funds, and in China there have been burial tongs for many centuries (pt. 12,
R. 5598).

'2 Pt. 12, exhibit No. 945.

" Address and Papers on Life Insurance and Other Subjects, by John F. Dryden (1909), pp. 60-61.

" Spectator Life Insurance Yearbook, 1928.

" Pt. 12, R. 5597, exhibit No. 949.

" Pt. 12, R. 5599, exhibit No. 945. Industrial insurance is sold principally in urban communities, so it
is perhaps more appropriate to compare its growth with the 239 percent growth of urban population during
this period (pt. 12, R. 5599, 5601).

" Pt. 12, R. 5606, exhibit No. 948. In 8 States premium income collected per person in 1937 amounted
to an average $10 or more, ranging as high as over $13 in the case of 1 State, Rhode Island (pt. 12, exhibit
No. 948). An analysis of industrial premium income collected during 1937 disclosed that 58.1 percent was
collected from 6 States which can be listed in the o''der of their importance as follows: New York, Pennsyl-
vania, New Jersey, Illinois, Ohio, and Mftssachusettt.; 24 States and the District of Columbia accounted
■foi" 92.8 percent of the total industrial premiums collected during that year. Id.

CONCENTRATION OP ECONOMIC IfOWER

251

land. In Maryland there were about one and one-half policies in
force for each person resident in the State. '^

In spite of this rapid growth the bulk of the industrial insurance
business has remained concentrated in three companies. These
companies, Prudential, Metropolitan, and John Hancock, together
carry approximately 80 percent of the industrial insurance in force, or
36.78, 36.48, and 8.18 percent, respectively.'^ The 135 smaller
companies writing industrial insurance are not to be considered
insignificant, however, as they have millions of policyholders
and collect millions of doUars of premiums every year. In fact, the
companies other than the three largest wrote over 8,000,000 hew poli-
cies during 1938, an amount representing about 55 percent of the total
issued that year.^° The following table shows the relative positions of

" Pt. 12, exhibits Nos. 945, 948. The relation of industrial insurance policies in force to total population in
these States was as" follows (pt. 12, exhibit No. 948):

States

Connecticut - . ^ .

Delaware

District of Columbia

Maryland

Massachusetts

New Jersey

New York

Rhode Island

Industrial

insurance

Population,

premium

policies in
force, 1937

1937

collected .

1,801,941

1,741,000

$11.86

300,100

261, 000

11.52

772, 700

627,000

10.47

2, 336, 200

1,679,000

11.15

4, 731, 032

4, 426. 000

11.32

5. 429, 457

4, 343, 000

12.75

13, 583, 107

12, 959, 000

11.66

841,500

681, 000

13.86

'» Pt. 12, exhibit No. 946.

21 Pt. 12, exhibit No. 1092. In his Eighty-first Annual Report to the Legislature of the State of Naw
York (1939) the superintendent of insurance reported that since 1933 the rate of growth of the Metropolitan
and Prudential had declined while the rate of growth of smaller companies admitted to do business in the
State had increased slightly. In this connection, his report stated (Life Insurance, extract from the Eighty-
first Annual Report of the Superintendent of Insurance to the Legislature of the State of New York, Louis
H. Pink, superintendent of insurance, p. 8 et seq.) :

'•While industrial insurance has been of great service to the lower-income groups in this country and has
been a social factor in promoting thrift* and bringing the benefits of life insurance to those groups which
could not have had it but for this type of insurahce, it has probably reached its peak. The indications are
that while there is still necessity for industrial insurance it is becoming less essential than it was. The
social-security program of the Federal and State Governments may displace it to some extent. New insti-
tutions such as savings-bank life insurance and, morte particularly, group insurance, will undoubtedly
offer competition. In view of the added costs of industrial insurance because of the expense of selling it and
collecting on a weekly basis, this department is making every effort to encourage the purchase of monthly
instead of weekly insurance and ordinary instead of industrial insurance. Then, too, there has been some
improvement in the financial condition of the lower-income groups which makes it possible for them to buy
other types of insurance. All of these things indicate a gradual slowing down in the sale of indu.strial insur-
ance which will mitigate the rapid growth of our two large companies."

252

CONCENTRATION OF ECONOMrC POWER

the companies having the largest amounts of industrial insurance in
force at the beginning of 1938: ^^

Stock or
mutual

Industrial

insurance

in force

(million.^)

Per^centage of
total

Cumulative

percentage

of total

1. Prudential Insurance Co. of America

2. Metropolitan Life Insurance Co.

Mutual- - -
do...-

$7, 574

7,512

1,684

577

461

393

■ 302

200

164

36.78

36.48

8.18

2.80

2.24

1.91

1.47

.97

.80

.41

36.78
73 26

3. John Hancock Mutual Life Insurance Co

4.* Western & Southern Lifq Insurance Co

5 American Nation Insurance Co

.-do

Stock

. do -

81.44
84.24
86 48

6. National Life & Accident, Tennessee. -

_ do

88.39

7. Life Insurance Co. of Virginia . - .. .

...do

89 86

90 83

9. Life & Casualty Insurance Co

do .-

91 63

Iff. Industrial Life & Health Insurance Co . . .

.do

92 04

18, 952
1,639

92.04
7.96

92.04

Total of 56 other companies for which information
was available in published sources --

100 00

Grand total of 66 companies..

20, 591

100.00

100 00

Unlike the three largest companies, most of the smaller companies
selling industrial insurance are stock companies. No general dis-
cussion of the history and grow th of industrial insurance would be
complete v/ithout reference to the enormous profits w^hich these
companies have realized from the sale of this form of insurance. ^^
An analysis of 44 such companies demonstrated that in the aggre-
gate these companies, wdth a paid-in capital of $4,146,925, have paid
tP stockholders cash dividends in the amount of $66,238,943, stock
dividends in t-he amount of $32,337,950, and, as of December 31, 1938,
had accumulated aggregate surplus of $44,201,982.^^ The great
profits that can be realized from industrial insurance business are
demonstrated in the following table which shows the cash and stock
dividends, surplus and original paid-in capital for 8 well-known stock
companies.^*

Company

Date or-
ganized
as stock
company

Original

, paid-in

capital

Cash •
dividends

Stock
dividends

Surplus

1905
1899
1871
1928
1900
1897
1911
1888

$100, 000

5,000

100,000

550,000

15, 500

15,000

300, 000

100, 000

$3, 795, 000
4,111,000

14, 177, 423
1,830,000
6, 693, 349
2, 103, 900
2,994,790
1 19, 102, 500

$1,750,000
170, 000
5, 200, 000
1, 500, 000
3,934,500
1,483,000
975. 000
14, 900, 000

$9, 776, 550

1, 830, 156

Life Insurance Co. of Virginia

5, 307, 844

2, 576, 172

National Life & Accident

4, 060, 613

1, 036, 954
1, 477, 020

Washington National

Western & Southern ..

8, 807, 683

1 In addition, income taxes of officers, directors, stockholders, and employees were paid by the company
amounting to more than $5,800,000 (pt. 12, exhibit No. 1015).

The extraordinary profits indicated above are particularly striking
when it is recognized that no single stock company listed accounts for

ai Pt. 12, exhibit No. 946.

■'' In describing industrial insurance, the Armstrong report of 1906 stated that, "• • • from margins
small in individual cases, but large in the aggregate, enormous profits have been realized upon an insignifi-
cant investment" (Armstrong report, vol. X, p. 318).

" Pt. 12, R. 5614, exhibit No. 951. In considering the large profits paid by these 44 stock companies to their
shareholders, it must be recognized that in most instances the shares are closely held by individuals promi-
nent in the management of the company who receive substantial salaries in addition to the dividends on
their stock. For information showing the 5 largest owners of stock of each of these 5 companies and the sala-
ries paid to leading executives see pt. 12, exhibit No. 952.

«' Pt. 12, exhibit No. 951.

GONCENTRATI'ON OF ECONOMIC IPOWEB

253

more than 3 percent of all the industrial insurance in force in thellnited
States. In general these profits result from gains from mortaUty,
interest and lapse and surrender.^^

B. DUTIES AND COMPENSATION OF AGENTS

Since industrial premiums are generally collected at the homes- of
the policyholders, the industrial companies T-equire an especially
complicated agency system. The phenomena g^ owth of this form
of insurance demonstrates the effectiveness of the agency system in
reaching the particular insurance market for which it was adapted.
It is estimated that there are about 100,000 agents selling industrial
insurance in the United States, of whom about 40,000 are employed
by the Metropolitan and Prudential alone. ^® Each agent is assigned
a debit; that is to say, he is given a specific territory from which he
must collect premiums from policyholders insured in his company
and within which he is expected to confine his selling activities. The
debit can be technically defined as the life insurance measured by the
premiums of the company's policyholders witMn a given area.^^ The
territory covered by the debit of one company may, -of course, and
frequently does, overlap or coincide with the debits of other companies,
and indeed it is not unusual to find that a single family may hold
industrial policies of two or three different companies. ^^ In the case
of the largest industrial companies, the agent's debit, that is to say,
the amount which he is required to collect, ranges in amount from
about $200 to $400, while in the smaller companies and sometimes
even in the larger companies if new territory is being opened up, the
debits are smaller, frequently being less than $100.^^ In the four
largest industrial companies, agents have an average of over 1,000
policies in their debit. The Metropolitan agent has an average of
1,335 policies while agents of other representative industrial companies
range on the average from 500 to 1,000 policies per debit. ^°

25 For a discussion of profit fiom lapse and surrender, see pp. 188 and 189, infra.

" Ft! 12, R. 5735, 5848, exhibit No. 990.

2' Ft. 12, R. 5737.

5« J't. 12, R. 5743. A survey of 1,427 insured families revealed that 31 famihes paid premiums to agents
representing three different industrial companies, and 303 families or 21.3 percent paid premiums to agents
representing two or more different companies. See report of the stall of the Securities and Exchange Com-
mission entitled "Families and Their Life Insurance" printed as Monograph No. 2 of the Temporary
National Economic Committee at p. 53^ This report is hereafter cited as Families and Their Life Insurance.

2» Ft. 12, R. 5737, 5941, 6002, 6029, 6121, 6155, 6159.

3' See following table:

Number of agents in eight representative companies, compared with the number

of policies in force

Company

Metropolitan Life Insurance Co

Prudential Insurance Co. of America

John Hancock Mutual Life Insurance Co.
Western & Southern Life Insurance Co. ..

Monumental Life Insurance Co.

Home Beneficial Association

Baltimore Life Insurance Co

Home Friendly Insurance Co _-

Number of
agents

Number of
industrial poli-
cies in force
Dec. 31, 1938,
excluding paid-
up policies

Average
mmiber of

policies
per agent

20, 459

27, 313, 635

1,335

r,299

22, 223, 223

1,152

-,960

6, 198, 396

1,040

1,854

1, 915, 679

1,033

865

699, 565

809

834

586, 510

703

619

312, 731

505

257

165, 420

644

Ft. 12, R. 5720, 5735, 5941, 6043, 6094, 6112, 6121; exhibit ,^r 990; 1938 ConveJitiun Form Annual
Statements.

254 . COXCENTRATrON OF BCONOMIC TOWER

The duties of the industrial agents are both exacting and varied
and, to be successfully performed, require constant application to the
job and a substantial knowledge of life-insurance technicalities. The
Agents are supervised by a district manager or superintendent who
is answerable to the home office and is aided by approximately six
assistant managers, each of whom in turn has charge of six or more
agents. ^^ Agents generally make the rounds to the homes of their
policyholders on Monday in order to collect the premiums which, on
weekly industrial policies, are customarily £lue on that day. On the
following days I'^pe^t calls are made at homes where the premiums
have not been p ic, while the Litter days of the week and usually
some evenings during the week are spent primarily in canvassing the
debit for new insurance.^^ Several days a week the agents report in
to the branch office to turn in collections, and this occasion is frequently
used for pep meetings and speeches designed to stir the agents into
greater activity. The last workday of the week is devoted principally
to the preparation of weekly reports and accounts. ^^

It must be pointed out again that the industrial agent frequently
works among poorly educated industrial laborers.^* To most of these
policyholders the agent is the only point of contact with the company.
He searches out the prospect in the first place and induces him to buy
insurance.^^ He makes out. the application for the insurance. In
general practice the choice of policy Is left to him. It is often his,
influence which determines which members of the family are to be
insured and for how much.^^ If any programming of insurance is
done the agent is expected to do it.^^ Dividend credits, cash-surrender
values, and death benefits are all handled through him.^^ Not infre-
quently the agent changes companies, and the policyholders from
whom he collects premiums change also or merely lapse their policies. ^^
While on the debit the agent cannot be supervised, and in spite of
the fact that some companies have developed special inspection serv-
ices, it is recognized that the agent has great latitude both as to the
manner in which he utilizes his time and the methods he may adopt
in persuading people to buy his product.^"

31 Pt. 12, R. 5757, 6026, 6050, 6051, 6063, 6081, 6090, 6107. Companies often maintain a system of inspecting
theactivitiesof agents in the field as a check on their work ''pt. 12, R. 5746, 5865, 6083).

5J Pt. 12, R. 5749, 5750, 5751, 6005, 6063, 6151, 6152. The industrial agents' selling activity is usually con-
fined to his debit. In this connection, Mr. Sutphen testified (pt. 12, R. 5737):

"Mr. Oesell. Is there more or less an unwritten code among the agents that one fellow won't go over and
raid another man's debit for new business? I mean, as a practical matter, does it work out that each agent
has his own territory?

"Mr. Sutphen. You are speaking about industrial, because in the writing of ordinary quite a different
situation obtains. The latitude and practice in connection with ordinary is entirely different.

''Mr. Qe.sell. We are talking about industrial:

''Mr. Sutphen. Yes; I think that that is fairly well established. It is no rule of the company.

"Mr. Oesell. But as a practical matter that is the wayit works out, isn't it? The man has both the job
of collecting in that area and u<;ually is by far the princip_al selling agent of industrial insurance for the
company in that area.

"Mr. Sutphen. That is correct."

" Pt. 12, R. 5749-5751.

3< Pt. 12, R. 6001, 6018, 6049, 6058, 6068, 6069, 6153.

3' Pt. 12, R. 5750, 5751. For form of application used by Prudential, see pt. 12, exhibit No. 974.

3« Pt. 12, R. 5745, 5746, 5752, 5753, 6072, 6073.

" Pt. 12, R. 5745, 5746, 5753, 6072, 6128.

>8 Pt. 12, R., 5751.

«9 Pt. 12. R. 5722, 5739, 6149.

« Pt. 12. R. 5765.

CONCENTRATION OF ECONOMIC POWER 255

Generally spealdng, agents have been paid by commission based
upon production or increase of business, by a system known as "times
increase," and by a collection commission for collecting premiums on
their debits, while managers and assistant managers have received a
basic salary, plus a commission based on the amount of business
written by the agents under their immediate supervision.*^ This
method of compensating field representatives is designed to encourage
the production of new business. By writing a contract of employ-
ment with their agents and managers which emphasizes the obtaining
of new policies, industrial companies have placed their selling force
under a strong economic compulsion to sell more insurance and have
created a condition which influences the entire activities of their field
organization.

During the first 60 years after the inception of the industrial
insurance business the method of compensating agents in general use
was the payment of a "collection commission" ranging from 10 to
over 20 percent of the premiums collected, plus a "special salary"
calculated on a "times increase" basis." "Times increase" means
that the agent receives a special salarj^ after he has written enough
business during the week to give him an increase in the premiimas oil
his debit for that week. The increase must be a "net increase";
that is, the premiums on lapsing policies are deducted from the
premiums on new policies written.*'^ If he is "on increase" he receives

*' Manager and assistant managers are also frequently paid on the times-increase basis.

" The Prudential of London originally devised the collection commission and times-increase method of
rompensation. It now pays agents' compensation on a straight salary basis. In American companies.
however, it is a general belief that the use of a straight salary, no part of which is dependent upon production
of new business, would be unsatisfactory. Mr. Lincoln testified that if V.^e agents were on a straight salary
basis (pt. 12, R. 5882):

"We wouldn't have any company in a short time * * *. Because if you put your agents on a salary
basis the human equation with respect to building the company is going to vanish and you simply have a
company that becomes moribund right away.

"Mr. Qesell. You mean that without a system of compensation which requires the ability of a man to
keep good business and produce new business, yoiu: company would deteriorate.

"Mr. Lincoln. It is true in any selling organization, whether it is vacuum cleaners or automobiles or
life insurance."

Tpe testimony of Henry B. Sutphen, vice president of the Prudential, in charge of industrial agents,
provides an interesting analysis of the reasons behind the compensation system of that company, still based
in part on the writing of new business (pt. 12, R. 5765) :

"Mr. Gesell. Has your company given any thought to the desirability of paying agents a salary?

"Mr. Sutphen. We have thought about it many times.

' 'Mr. Qesell. What have been the reasons for discarding that as an approach to the problem?

"Mr. Sutphen. The difficulty of arriving at-a figure that would be fair to the men. We have men today
that because of their ability and because of their experience in the business are making considerably more
than the average, and you have other men with less ability and less experience and less inclined to apply
themselves who probably on an average would be paid too much for the service that they are retidering to
the policyholder.

' 'Mr. Gesell. I should think it would be possible to take many of those factors into account the same
way any other salaried office does by recognizing ability and paying for it.

"Mr. Sutphen. ItisadiflScult thing to evaluate services of a large body of men. You would undoubtedly
continually have men asking for the highest rate that is being paid, and it is a very difficult matter to satisfy
them that they are not entitled to it. Keep in mind that our men work very largely on their own. It is
not like the clerks that you refer to that are given a certain number of columns to run and they sit right before
your eyes all day and you see exactly whether they do their work and how they do it. The agent is out on
his own on a commission basis very largely, and he can utilize his time or not utilize the time as he happens
to feel about it, and we have always felt that there should be an incentive feature in the i)aymeiit of men
under those conditions."

<3 For instance, suppose an agent is assigned a debit which calls for the collectinn of $100 in premiums every
week. The agent then writes 6 new policies during the following week, each policy calling for a premium of
10 cents per week, making an aggregate gross increase of 50 cents. If during the same week three 10-cent
- pohcies on the debit lapse, the agent would have a net increase of 50 cents less 30 or 20 cents. The special
salary would then be calculated by multiplying 20 cents 67 the appropua;^ mmber of times according to
the agent's contract.

256

CONCENTKATrON OF ECONOMIC POWER

a certain number of times the net increase of premiums. This
number varies from about 15 to 45 times." Under the "times
increase" system of compensation the amount of the premium is the
only operative factor; the amount of insurance and the plan of insur-
ance are of no significance. Therefore, it is to the agent's advantage
to have the policyholder buy the policy which calls for the largest
weekly premium.'"^

The collection commission is paid for the work of administering a
debit, including the advice to policyholders in various matters and the
collection of premiums.^® It has always been the general belief that
industrial policyholders will not maintain their insurance in force
unless agents call at their homes to collect premiums. However,
many policyholders do pay their premiums on their own initiative at
ofRces of the companies, and several companies allow a reduction in
premiums in consideration of such payments. The Metropolitan,
Prudential, and John Hancock policies now offer a rebate of 10 pej-cent
of the premiums if they are paid at a company office continuous'y
for 1 full year. In the ^Ietropolitan, which began to grant this allow-
ance as early as 1911, about 28 percent of the premiums are now paid
at company offices.*^

All but one of the smaller companies whose representatives testified
before the committee were still paying industrial agents on the "times
increase" system.^^ A variation of the "times increase" system of
compensation was introduced by the three largest companies in 1934.

" In many companies the number of times increase varies according to the length of service of the agent, and
sometimes according to the character of the business, such as white or Negro (pt. 12, R. 6040).

<5 Pt. 12, R. 6069. One ageni testified as follows (Id.):

"The determining factor in most instances is the agent, and the determining factor in the agent's status
is the salary, so, because we can get more writing an endowment, we can usually sell an endowment." (See
iilso pt. 12, R. 5953, 5960.

" The collection commission paid by the Metropolitan and the Prudential at the time of the Armstrong
Investigation was 15 percent of the debit, and has continued to be 12 to 15 percent ever since. The following
table shows the amounts of collection commissions and the number of times increase now being paid by a
group of representative companies (pt. 12, R. '■■■:ih, 6040, 6055, 6090, 6107, 6145, 6150, 6159, (exhibit No. 1067):

Company

Collec-
tion

commis-
sion

Number
of times
increase

American National Insurance Co ..-. percent.

Baltimore Life Insurance Co , i

Equitable Life Insurance Co. (District of Columbia) percent-
Home Beneficial Association do. _ .

Peoples Life Insurance Co. (District of Columbia) do...

Virginia Life & Casualty Insurance Co

Western & South?rn Insurance Co percent

"$20

"> 10-.50

15-20

'$22

'■ 12-30

25-40
25-35
15-30
15-30
25
20
20-25

" The average debit in this company was $99.37 (pt. 12, exhibit No. 1082).
*■ The larger percentages are paid only on smaller debits (pt. 12, exhibit No. 1067; R. 5943).
' The average debit in this company is $91 (pt. 12, R. 6090).
<' Pt. 12, R. 5853. For several years the Prudential credited'a policyholder with 52 weeks' premiums if
47 weeks' premiums were paid in advance, and several smaller companies now follow this practice (pt. 12, R.
5720, 5751, 6121, 6122). In some of them, however, the policies do not contain a notice that such a privilege
is available. There may be a tendency on the part of the agent to overlook advising policyholders that a
premium discount arrangement is available, since the agent receives from 12 to 15 percent of all-premiums
which he personally collects. Supra, note 47.
" Pt. 12, exhibit No. 1091.

GONCEISTRATION OF ECONOMIC POWER 257

This was the calculation of the "special salary" on the basis of the
increase for a 13-week period, in an effort to provide a more uniform
weekly compensation.*^ This change in the "times increase" system,
however, made it profitable for an agent to pay the renewal premiums
for some policyholders who would otherwise have allowed their
policies to lapse and to pay the first premiums on a few new policies
himself in order to put his production at a higher level and enable him
to obtain a higher salary for a whole 13-week period.^

In 1938 a new contract,^^ designed to eliminate all incentive for the
agent to pay premiums himself, was introduced by the Metr.opolitan,
Prudential, and John Hancock. It provides for three types of re-
muneration: Collection commission, new-business commission, and
conservation commission. The collection commission amounts to
from 12 to - ' percent of the weekly premiums and 4^ percent of the
monthly premiums collected. ^^ The new business commission main-
tains the interest of the agents in the production of new business. It
provides for the payment of a commission on the amount of premiums
actually collected in the first year after the issuance of a new policy. ^^
The conservation commi= ' Jn ranges up to $6 per week and is computed
according to a complicated formula based on the relationship between
the lapse record of the individual agent and the lapse record of the
company as a whole. ^^ The contracts containing these provisions
have been drafted with great care, but the system is so complex and
the terminology so abstruse that few of the agents are likely to be
able to understand much more than the general principles involved.^®

In spite of these various changes and modifications in the com-
pensation system, the fundamental principle, namely, a compt nsa-
tion system which maintains production of new business as the basic
incentive for the agent, remains unchanged. In this regard, Mr.
Frederick H. Ecker, chairman of the board of the Metropolitan
testified: ^^ "* * * that is inherent in the insurance business.
Insurance agents are paid on the basis of their production — a com-
mission on the premiums on the new business." Another witness,
Mr. Henry B. Sutphen, vice president of the Prudential, testified that

<» Pt. 12, R. 5760, 5761, exhibits Nos. 976, 9f(4, and 1085.

w For instance, suppose he paid premiums for policyholders amounting to $5. This might keep his net
increase at such a figure that he would receive $1 every week during the next 13 weeks* period. He would,
therefore, be $8 ahead.

M Pt. 1 2, R. 5858. For agent's agreements with these companies, see pt. 12, exhibits Nos. 976, 994, and 1085.

" In the debit of these 3 companies the average weekly collection is $217 for the Metropolitan, $257 for the
Prudential, and $220 on the John Hancock (pt. l2, R. 5743, 5853, 6121). The Metropolitan average monthly
premium debit is about $360.

53 The Prudential and the John Hancock pay 35 percent of the premiums paid on the whole-life and limited-
payment-life policies and 25 percent of the premiums on endowment policies. The Metropolitan pays 37
percent on wholf-life policies and 28 percent on endowment policies.

'< The Prudential permits an agent to compare his lapse record witji his own district if it would be more
favorable to him. The John Hancock conservation commission ranges from $2 to $6; the Metropolitan and
Prudential pay no conservation commission in case the agent's ratio is below a certain percentage (pt. 12,
exhibits Nos. 976, 994, and 1085.

" Pt. 12, exhibit No. 997. Industrial agents are frequently better paid than agents selling only ordinary
insurance, particularly in the larger companies. In the case of the Metropolitan and Prudential, the average
earnings of industrial agents exceed $50 a week.

The average Metropolitan agent receives $52 a week, while the average Prudential agent receives $50.07 a
week (Pt. 12, R. 5852, exhibits Nos. 975, 990). For other information concerning industrial agents' com-
pensation, see Pt. 12, R. 6002, 6030, 6042, 6075, 6085, 6107, 6108, 6117; exhibit No. 1053. The average weekly
compensation for superintendents and managers in the Prudential and Metropolitan is $141.51 and $191,
respectively (pt. 12, R. 5859, exhibit No. 975).

M Pt. 4. R. 1252.

258 CONCENTRATTON OF ECONOMIC POWER

both from the point of view of the production of new business and the
conserving of business already on the books, his company felt it
desirable that the agent be compensated in the manner which gave
him a financial stake in the achievement of the results desired by his
company. That is to say, his compensation should give due emphasis
to persistency of business written as well as the production of new
business. In this connection he stated:*^

Mr. SuTPHEN. Not only get new business written but to give proper attention
to the business that is ali;eady in force. It is essential, we believe, that an agent
should have a financial interest, not only in the production of business but in the
conservation of the business that is in force. As a matter of fact, we have an
interest in writing new business, of course; that is the purpose of life insurance,
the purpose of life insurance companies; that is what they were established for
in the first place, to provide protection for the American public.

Mr. Gesell. And you think that tliere is a better chance of selling more in-
surance if you emphasize that through your compensation methods?

Mr. SuTPHEN. Absolutely .5'

C. THE PRESSURE FOR NEW BUSINESS

The system of compensation, although very effective in encouraging
production, is not the only device used to that end. Other devices
take the form of sales contests, quotas, and prizes, all of which fall into
a pattern of operation whose thrust is continuously in the direction of
producing more new business. In furtherance of 'this design, home-
ofhce officials impress upon their local managers the necessity of
obtaining greater amounts of business, and the managers, in turn,
drive their agents.

Sales contests are very popular means of increasing production,^^
They may be sponsored by the home office or by the local manager and

5' Ft. 12, R. 5765. 5766.

5' In this connectiou, Mr. Sutphen testified (pt. 12, R. 5758):

"Mr. Gesell. The commissions that the agent, the assistant superintendent, and superintendent
received are based to some degree upon the production of new business are they not?

"Mr. Sutphen. Yes.

"Mr. G esell. Then there is a very definite motive on the part of all people actively in the field to produce
new business, is there not?

"Mr. Sutphen. Yes."

»» There is real danger that contests result in putting business on the hooiks which does not persist. Agents
in their enthusiasm to do well are apt to accept applications whicti in the ordinary course of events they
would reject. Mr. Sutphen spoke of his company's attitude toward contests (pt. 12, R. 5756, 5757) :

"Mr. Sutphen. It is criticized sometimes. We have tried to adopt a reasonable middle ground on the
basis that anything that is done must be sensible and reasonable and not resort to high pressure and try to
force men to write business that should not be written, or to ask them to do things that they cannot do.

"Mr. Gesell. Do you find that business produced by what we will call improper contests or too strenuous
contests is of poor persistency and poor quality?

"Mr. Sutphen. Yes; that is the reason we have tried to cut it out.

"Mr. Gesell. And bad in the interests of the policyholders and everyone else concerned?

"Mr. Sutphen. Yes.

"Mr. Gesell. So I take it your opmpany is against any extreme form of sales contest?

"Mr. Sutphen. That is right.

"Mr. Gesell. And your company does, not as a company, sponsor any company contests, put out any
cash prizes, bonuses, or anything of that sort?

"Mr. Sutphen. No we do not."

The Metropolitan and the John Hancock are also opposed to unlimited sales contests on the ground
that they are deleterious. Mr. Leroy A. Lincoln testified that his company was decidedly opposed to
sale^ contests (pt. 12, R. 5872):

"Because there would be a human tendency toward an effort to produce a class of business which we
wouldn't want on the books. We don't want business that will not persist. We don't want business

CONCENTRATI'ON OF E^CONOMIC POWER 259

his assistants, or by the assistant managers alone. In fact, it is not
unusual to have more than one contest going on in a given office at
the same time.®" Company-sponsored contests are usually of relatively
long duration and tend to become a traditional part of the company's
operations. Many companies have annual conventions for their
leading producers, and there may be additional contests to honor a
particular officer or anniversary, or to stir up competition between
sectional division*, of the field force. Bonuses, trips, and prizes
constitute the usual awards.®'

Literature distributed in connection M^lh typical contests reveals
their general quality and tone. The assistant superintendent of
agencies of the Home Beneficial Association, for example, sent the
following letter to one of his managers in connection with a baseball
contest which was then in progress: ®^

Batter up! The game is on — baseball season has started and for 9 weeks in
fuly and August — weeks full of excitement, thrills, weeks on the anxious seat —
who will be the winner?

It's a big league yen are in — every team anxious and ambitious and none
giving or asking favors, every team for itself. There are no soft spots. Minor
league performance won't win.

A schedule such as this is one that tests the mettle of every team and every
man on the team. The winners should have and will have the acclaim and
respect of all of us. It's going to be hard work but lots of fun.

The winning team will be the team that puts all it has in each game, never
letting up until the last man is out in the ninth inning of the last game — the team
that hits hard for new business and fields clean with close collections.

The star players will be those who realize that there will be no pinch hitters,
no relief pitchers — that the team's standing and their own standings at the end
of the season depend entirely on the efforts of the individual players.

Team trophies, pen and pencil sets, and fountain pens are the rewalrds for the
good hitters, good fielders, and the fellows who don't give up.

Hit that old apple on the nose and hit it often, and when the winners are
announced let us take our hats off — to you and to your district.

Another letter written in 1936 in connection with "Life Insurance
Week" read in part as follows: ®^

From now on it is your fight. You have been organized and drilled in your
part. The last instructions are being given to you. What j'ou are when Life
Insurance Week is over, depends on whether you are a producer or just another
man in your district.

It's zero hour. "Over the top" is being sounded and you are on your own.
They are out these — let's go and get 'em.

which is written without regard to the family requirements and the family ability to pay, and we believe
that those contests may have that effect. Insofar as it is possible to discourage them, we are doing it."

However, the Prudential and the John Hancock permit "reasonable contests" sponsored by local superin-
tendents, and the Metropolitan in recent years lias conducted contests for which the prize was attendance at
a "star salesman congress" or membership in a "star salesman club" (pt. 12, R. 5755, 5756, 5871, 5872,
6129, 0130, exhibit No. 99S). Significantly, the production of new business is always one of the elements in
determining the winners of all these contests. (For attitude of Western & Southern, see pt. 12, R. 5949.
See also pt. 12, R. 6115.)

61 .Sales contests are by no means infrequent occurrences. One agent for the Equitable of Washington
testified that with company contests and local contests going on continuously throughout the year, a week
without a contest of some kind was rare indeed (pt. 12, R. 6064).

•' Pt. 12, R. 6062, 6064, 6093, 6097, 6098, 6109, 6147, exhibits Nos. 1066, 1074, 1077.

M Pt. 12, exhibit No. 1066.

M Pt. 12, exhibit No. 1063.

260

CONCENTRATION OF ECONOMIC POWER

Local office contests are carried on in the same tone, but are usually
more or less informal affairs. Men may choose sides among themselves
for the competition and put money in a "kitty" to give the winning
side a luncheon or dinner. Frequently a prize is offered such as a pen
and pencil set, a traveling bag, a suit of clothes, or, in some cases, a
cash bonus to the agent or group of agents obtaining the greatest num-
ber of applications or the biggest increase for a given period.^* Some-
times a contest may take on the aspects of a game. The Monumental
Life Insurance Co., has, for example, a "horse race" contest in which
cardboard horses are put on a blackboard, each bearing the name of
an agent, and the horses are moved forward in accordance with the
amount of increase in business made by the agent. Cash prizes are
awarded to the first man to reach the goal.^^

Another method used by some companies to encourage the produc-
tion of new business is the setting of quotas or allotments which
establish a minimum amount of new business which must be written
by a company's agents or branch offices. In the industrial companies,
allotments and quotas are usually measured in terms of increase
rather than writing; that is to say, emphasis is placed upon the ulti-
mate gain in new business to be accomplished rather than the amount
written.^^ The situation is handled differently by different companies.
In many instances quotas and allotments are simply a goal to "shoot
at," and no strict disciplinary action is taken in the event they are not
attained.^^ This is understandable, since the quotas and allotments
may represent the generous hopes of the management and may not be
justified in terms of practical results particularly when economic
conditions change or unforeseen conditions arise. Even when quotas
are handled in this fashion they serve as a means of increasing emphasis
upon production and give to the managers a concrete idea of what is
expected of them and what they in turn may demand of their agents.

8« Pt. 12, R. 6007, 6045, 6051, 6052, 6064, 6093, 6109. Compare Armstrong report, vol. X, p. 393.
« Pt. 12. R. 6081.

8" The- following schedule indicates the quotas or allotments set by a representative group of industrial
companies:

Name of company

Industrial quota or
allotment

Ordinary quota or
allotment

Quota or allot-
ment fixed by —

Prudential--

Western & Southern

Life& Casualty

Peoples--..

Home Beneficial

Equitable Life (District of
Columbia).

Monumental

Virginia Life & Casualty

American National

Baltimore Life...

Lump sum for district of-
fices.

10 cents week increase

50 cents week increase

35 cents week increase. - ^

1& cents to 40 cents per week
increase, depending on
size of debit.
55 cents week increase "..

(")-

$1,500 per month.

(<■)

$2,000 per month .

25 cents week increase

40 cents week increase

$1.50 writing per week

Lump sum for district offices.

$500 per week, plus
$250 managing dis-
trict office and gain
in force of $500.

$2,000 per month

do-

Home office.

Do.
Manager.
Home office.

Dn.

Do.

Manager.
Home office.
Manager.
Home .office.

<• 1/ quota is set it was not disclosed in the testimony (pt. 12, R. 5747, 5748, 5949, 6005, 6041, 6059, 6078, 6085,
0092, 6108, 6113, 6114, 6146, 6155.
6' Pt 12, R. 5746, 5747.

CONCENTRATION OF ECONOMIC POWER 261

Furthermore, though an agent is not dismissed for faikire to achieve
his quota, in the case of some companies he may still be subjected to
various types of embarrassment by the home office or his local manager.
Thus one company makes it a practice to send a letter of "regret"
to the offending agent. ^* Another arranges a dinner at the home office
for those who fill their quotas, excluding those who do not.^^ Tliese
practices may be as effective as the threat of dismissal. Occasionally
the nature of the disciplinary action to be taken against agents who
fail to make their quotas is left to the discretion of the local office
manager, some of whom testified that they were inclined to be lenient
in such matters. '°

Mr. Ambrose J. Watkins, vice president of Home Beneficial Asso-
ciation of Richmond, Va., testified that his company took a stronger
position with respect to quotas. A letter written by the Home
Beneficial to its Washington manager read in part as follows: ^^

To reach our goal of $100,000,000 insurance in force by the end of 1938, it is
going to take a lot of planning and a great amount of work. It will be a big job,
and we should fully realize the futility of any delayed start. There is only one
way in which we can reach that goal, and that is for each district, -each staff,
and each agent to make its proportionate amount of ordinary and industrial
increase each week, as it goes. To do this .it is necessary that we keep our allot-
ments before us for each week, to know each week in the year if we are ahead or
behind in our allotments. Only by doing this can we expect to know where we
are at the end of each week and whether or not we are keeping pace with our
allotments.

In order that every district may keep its allotment on ordinary and industrial
increase before it each week in the year, we are shipping you two large graphs.
One of these graphs is for ordinarj^ increase and the other is for industrial increase.

68 Pt. 12, R. 6114.

69.Pt.12, R. 6086.

'" Supra, note 67. The testimony of Mr. L. H. Hannah, vice president and manager of agencies for the
Equitable Life (District of Columbia), is illustrative (pt. 12, R. 6060):

" Mr. Oesell. Do you rigidly enforrt that quota, Mr. Hannah?

"Mr. HANNfAH. No, sir.
■ "Mr. Gesell. In other words, if an agent doesn't meet it, nothing happens to him?

"Mr. Hannah. Well, we set that up as a goal to work to, and many of them surpass it.

"Mr. Gesell. What about those who don't? What happens to them?

"Mr. Hannah. Well, they don't make as much salary.

"Mr. Gesell. Is there any disciplinary measure taken against them by the company?

"Mr. Hannah. Nothing of a serious nature.

"Mr. Gesell. What of a nonserious nature is done with respect to them?

"Mr. Hannah. We write to the manager, pointing out at times the standing of the different ones, and
let him see 'f he can't find ways and means to bring about an improvement.

"Mr. Gesell. You mean yoa write the manager and say, 'We notice agent, so-and-so in your office
hasn't met these quotas. Please speak to him and try to get him up to snuff?'

"Mr. Hannah. Yes, something to that effect.

"Mr. Gesell. You leave it with the manager to take disciplinary action if he feels it desirable?

"Mr. HANNAH, He can make the recommendation.

"Mr. Gesell. Are men dismissed in your company for failure to get these quotas on occasion.

"Mr. Hannah. None that I know of.

. • • * > » • •

"Mr. Gesell. What is the reason for fixing them?

"Mr. Hannah. As a goal, just like football .something to work for.

"Mr. Gesell. The language of the letter would indicate that it was little more than a goal. It was
pretty definite instructions as to what the man should turn in, was it not?

"Mr. Hannah. That was the quota to fight for."

" Pt. 12, exhibit No. 1004.

262 CONCENTRATION OF ECONOMIC PO^^'ER

Both of the graphs are to be placed in a prominent position in the agent's room,
where they will be plainly visible to everyone.

*******

These graphs are to be marked each week, and only in the meeting on Saturday
morning.

* - * * * rf: * *

We feel certain that you will use these graphs to the best of advantage in your
meetings and that they will assist you in keeping before. your district the allot-
ments of the district. The record of your district will be very closely watched
this year. Can we count on your district to do its part in reaching our goal of
$100,000,000 insurance in force by getting its allotment on both ordinary and
industrial? This is yo"ur opportunity to demonstrate your leadership ability.

.Mr. Watkins testified: "

Mr. Watkins. I did mention to you from the beginning the industrial increase
of from 10 to 40 cents a week, according to the size debit.

Mr. Gesell. Are those allotments strictly adhered to? Do you insist upon
a man getting those allotments unless he has some particularly vahd excuse?

Mr. Watkins. We put those allotments so reasonable we feel that men ought
to make those allotments.

Mr. Gesell. What do you do to a fellow who doesn't make them?

Mr. Watkins. I say we leave that to the discretion of the manager of the
district. There are some men whb, where we find they couldn't make that
progress over a period of time, it would really be better to have out of the business.

Without regard to the attitude of their home offices, local managers
sometimes exact pledges from the agents under their supervision. '^^
One industrial agent who had been employed by his company as a
whole-time agent for over 12 years stated that in his district agents
were compelled to give a written pledge from time to time stating
the amount of new business both ordinary and industrial they would
write. These pledges were demanded by the office manager. A
lettelr written by the agent's manager in this connection read: ^*

I ain surprised that you only made one ordinary canvass (each) Thursday and
.Friday. That does not indicate to me that you care very much about fulfilling
the company program of one ordinary sale each week. You realize that the
responsibility of the record of this staff is on my shoulders and I therefore must
insist that you make a sufficient number of ordinary canvasses each and every
week to give you an ordinary sale each and every week, and I know of no better
time for you to do that than on Thursday and Friday, but you cannot do it on
two canvasses. • " ,

This old stuff of "leave it to me" and "I will arrive" is getting to be the bunk
with me, for I'm looking for results and not excuses. You will please give me a
written statement outlining just what I may expect of you each day and each
week. It is necessary that I have this so I may know what course and action to
follow in my responsibility and supervision of your activities.

lo also appeared that if an agent connected with this office failed
to sell an ordinary policy of $1,000 or more each week or failed to write
a certain" amount of new industrial business during any working day
he was required to fill out a written explanation for his manager, who

" Pt. 12, R. 6015. See also testimony of John H. Ruehlmann, vice president, Western & Southern, pt.
12. R. 5948-5949.
" Pt. 12, R. 6108, 6155.
'• Pt. 28, exhibit No. 2598.

CONCENTRATION OF ECONOMIC POWER 263

communicated with him in the abusive terms of the followinsr ques-
tionnaire letter: ^*

IMPORTANT

In re j'our pledge of $33,000 placed ordinary 'and one placed accident from Sep-
tember 6, 1937, through December 1937
Mr.

Dear Sir: In view of the above and our company's increase requirement for
1938 sales congress qualification, how do you explain the fact that you've allowed
another week to go by with you "blank" in ordinary production and/or WTiting
and "blank" on accident written?

How many ordinary canvasses did you make during the wTiting week that ended
last night? Give date of each canvass you made. Full name of the prospect.
Amount and plan you canvassed him for.

How many ordinary prospecting interviews did you make during the writing
week that ended last night? Give date of each. Full name of the prospect.
Amount and plan you canvassed him for?

Please have your exact and definite reply on my desk not later than next
Wednesday a. m., October 27, 1947.

Thanks and regards,
Yours for success,

Contests and quotas are not the only means by which home-office
executives keep managers alert to the necessity of producing business.
From many company home offices there emanates a constant stream
of correspondence cajoling, threatening, and bullying managers and
agents into writing more and more new policies.^® This correspond-
ence is illustrative of the vigor with which these demands are made
and may be quoted without comment.

On one occasion the Washington, D..C., district manager of the
Life & Casualty Insurance Co., of Nashville, Tenn., was instructed
by letter from his home office to "ask your superintendents to contact
their agents immediately in order to make a determined effort to
double their production of collected on business for this week." "
Another similar letter stated : ^^

Let's put on a drive this next week for the biggest production we have ever
had in the southeastern division. Contact all of your men Saturday, either by
letter, telegram or personally and ask them to give you 100-percent cooperation
in this drive.

Still another letter contained this peremptory order: "

Now, we need to keep this drive up through this next week. Upon receipt of
this letter, I wish you would contact all of your men either personally, by tele-
graph, telephone or by letter and let them know what we are up against and ask
them to really "turn on the heat" for production this next week. I am counting

" Id.

'« Pt. 12, exhibits Nos. 997, 1042, 1043, 1044, 1054, 1055, lOol, :.32, 1063, 1074. 1075, 1076, 1086. Practices of
industrial companies are not identical in this respect. The three largest companies, for exemple, appear to
place less emphasis upon browbeating tactics, being content to allow the natural results of the compensation
system to have their eflect. The record contains no evidence of such tactics by the Prudential or John
Hancock. In the case of the Metropolitan, the evidence is not so clear.

^ Pt. 12,, exhibit No. 1045.

■spt. 12, exhibit No. 1042.

•■» Pt. 12. exhibit No. 1043.

264 GONCENTRATION OF BCQNOMIC POWER

on you, your superintendents and agents to put this drive over and make it a
great success. Let's go after a minimum writing of $2 for each agent.

Letters written to the Washington, D. C, supervisor of the Home
Friendly Insurance Co. office ailso reveal the pressure to which man-
agers and agents are subjected. . Portions of two such letters are
reproduced below: ^'^

I note from your report of field operations for the week of October 25 you
wrote nine applications for $1.75 while collecting open debit No. 331, and your
district consisting of six agents only submitted $5.95, which is less than $1 per
man. Frankly, I am disappointed that you have not formulated plans that would
be the means of securing satisfactory results. The writings of your district
during the contest have been one of the poorest of any of the branches.

Please impress upon your entire organization that they must submit adequate
writings and obtain a good percentage for collections if they expect to be retained.
Your district should submit at least $9 per week, which would be equivalent to
$1.50 per man. The writings of your district on a per-man basis do not compare
favorably with other districts. At your meeting Thursday, advise your agency
force that your are going to expect each man to produce in a satisfactory manner.

In many cases these letters serve a double purpose. Not only do
they spur managers and assistant managers to increase production
but often these managersread them to the agents to goad the agents on.

The use of "board calls" or "pep meetings" is frequent. Most
managers hold such meetings daily or weekly, at which time they
try to work the agents up to the highest possible selling pitch by
commenting on individual records,*^ offering hints on how to break
down sales resistance,^- or flatly ordering the agents to bring in more
business on threat of dismissal. ^^ The testimony of one agent on
this point was as follows:®*

•Mr Gesell. Do you have meetings?
Mr. McCarry. Practically every morning.
Mx- Gesell. Tell me about those meetings.

Mr. McCarry. Why, they are mostly conducted by our manager, sometimes

-our vice president comes from Richmond, and when the manager doesn't speak,

the assistants speak to us. The first thing, I think, you referred to a board call.

They' call it marking the board, and if production has been very low, we are given

fits, so to speak.

™ Pt. 12, exhibit Nos. 1075, 1076.

81 Pt. 12, R. 6025, 6051, 6052, 6063. ..

8- These are sometimes, called door openers. Mr. Sheehan, assistant superintendent in the Washing-
ton office of the American National testified to some interesting ones (pt. 12, R; 6156):

"Mr. Gesell. Tell us some of these door openers he gives you.

"Mr. Sheehan. Well, for instance, you might be calling on a regular old policyholder and collecting and
you would ask the lady's name next door and in that way that is a very fine opener, you can get in that
way by saying that "Mrs. So and So recommended you to me" and you get in the door that way; that is
one of the best ones 1 used to sell.

"Mr. Gesell. Give me some more.

Mr. Sheehan. Well, another one is making a little survey in the neighborhood. You really are making
a survey; you are finding out what the program of their insurance is and whether they could stand any
more or not Without overloading them, and you would like to ask them a few questions, tell them who
you are and what company you operate from.

"Mr. Gesell. You mean you go in and say, 'Mrs. Jones, I am not here to sell you insurance. 1 am here
to conduct a survey.'

"Mr. Sheehan. That is right."

" Pt. 12, R. 6060, 6085, 6086, exhibit No. 997.

9< Pt. 12, R. 60S5, 60«6

CONCENTRATrON OF ECONOMIC J^OWEU 265

Mr. Gesell. What do you mean, you are -given fits?

Mr. McCarry. Well, "heck" in other words.

Mr. Gesell. How does the manager give you "heck"?

Mr. McCarry. Well

Mr. Gesell. What be says, in other words?

Mr. McCarry. There are some threatening notes. He.says that the manage-
ment of the company at Richmond is not at all satisfied with the production,
and we are threatened sometimes with finals.

Mr. Gesell. If you don't produce?

Mr. McCarry. If we don't produce.

Another agent employed by the Peoples Life of Washington, D. C,
testified that there was a "board call" in his office every morning, at
which time each agent whose name was posted on a blackboard was
asked to state publicly the amount of business he had written the
preceding day. If the agent had not been successful in writing any
business a cross was placed opposite his name and in the "pep meet-
ing" which followed the manager would single out an ag^nt from the
floor and pointing to crosses opposite his name would refer to them
as crucifixes and berate the guilty agent, accusing him of having
crucified his manager. ®^

Most descriptive of the tactics employed are the following excerpts
from letters written to Mr. Leroy A. Lincoln, president of the Metro-
politan, during 1937 by members of his company's field force, giving
evidence of the pressure for new business to which the industrial
agent is subject.^''

Our managjer is the militant and dynamic type. Unfortunately, however, he
has been using the browbeating method so long that he knows no other method
of getting; results. I have tried to reason with him on occasions without success.

* * * * * * *

The high pressure in brought about what the managers called

meetings 3 or 4 times daily, often as late as Saturday midnigb,t and Sunday a. m.
reports to the office, occasional telegrams (collect) to agent's home, if his report
was below expectation.

* * * * * . * *

It is hard to describe in words the suffering and humiliation forced on men
by these so-called managers and assistant managers. Here are some expressions
used by them during their "pep" talk meetings, "Wl^y don't you go on relief;
you are too old to be useful." "I will give }^ou 2 weeks to make good or get
out." "You are yellow." "You are a coward." Once I heard the manager
tell a' man, who was with the company over 11 years, that he was a yellow dog
if he did not resign, and for that they receive $500 or more per week, or about
$30 per week for humiliating each man. They never go out in the field with
the nien, they constantly threaten them with dismissal, and do not prove to
them that it is possible to get business. Instead of lending a helping hand to the
man who is down, they force him to desperation.

About a year ago I was called by my manager into his private oflSce and was
bluntly told to tender my resignation, because my ordinary and A. & H. record

w Ft. 12, R. 6065.

*' On November 17, 1937, Mr. Lincoln addressed a personal letter to 'each member of the Metropolitan
field force, in which he discussed various company problems, and suggested that any agent might commu-
nicate with him (pt. 12, exhibit No. 996). An analysis of 271 replies received was introduced into evidence
(pt. 12, exhibit No. 997). Excerpts printed in the body of the text are selected from these replies, which
covered a multitude of different problems.

. 26476:{^41— No. 28 18

266 CONCENT RATION OF ECONOMIC POWER

was poor. I pleaded and begged for my job, reminding him that I was a married
man with two children and that I was the only breadwinner for my home, that
if I lost my job my family's financial structure would collapse. It would ruin
me and the innocent ones at home. It w-ould cause untold suffering to my dear
ones. He relented a bit and said, "Well, if you get me a $5,000 application
and two A. & H.'s by the end of the week, you may continue working."

When I walked out of that office, I was in a quandary. I was dazed. That
night I could not sleep, thinking and thinking where I could get the $5,000 appli-
cktion and the two A. & H.'s. Mr. Lincoln, you know those kind of prospects
do not grow on trees. I only had 3 days to get the business. The next 48
hours I canvassed every eligible prospect that I knew. The only success I had
was a $1,000 application and one A. & H. I was sure this would not pacify my
chief, so in desperation and as a last resort I went to a relative of mine who could
not afford to buy the insurance, and I offered to pay the first premium on a
$4,000 life insurance and also the semi-annual premium on the A. & H. as long
as he would help me keep my job.

He readily agreed: the applications were submitted and issued. I paid out
$48 of my hard-earned money. Now, I am not one of the average agents -who
you claim earn $3,225 a year. My average weekly salary in reality is about
$40 so for months my family and myself .were denied some of the necessities
of life.

From the foregoing it is not difficult to understand why the vice
president of one industrial company stated in a letter to one of his
managers :^^

Business put on at a time when the agent is worked into a frenzy is worth very
little to the agent or to the company.

He might well have added:

* * * or to the policyholder.

Pressure encourages many undesirable practices from the point of
view of the policyholder. The undue emphasis upon the writing of new
business leads to a higher cost for insurance, more lapse and overload-
ing of policies, and maldistribution of insurance within a family group.
From the point of view of the agent, it fosters undesirable working
conditions and results in high agency turn-over and poor service to
existing policyholders. Finally, from the point of view of the com-
pany itself, emphasis upon the writing of new business, if carried to
an extreme, makes the sale of industrial insurance purely a merchan-
dising venture and thus places management in a position where it
may lose sight of the social implications of its action. A few practices
of the industrial agent, consequences of the pressure to which he is
subject, may be mentioned at this time.

In his enthusiasm to put business on the books, the agent often
pays the first premium himself.^® Sometimes this is the beginning of
a purely dummy sale in which the agent pays premiums until his real
increase is great enough to withstand the lapse of the fictitious policy.

f Pt. 12, R. 6010.

" Pt. 12, R.-5944, 6011, 6027', 6028, 6066, 6087. This is one explanation of the high termination rate e.\peri-
onces after the first premium has been paid. The actuary of the Equitable Life (District of Columbia)
testified that 11.9 percent of his company's policies terminate after payment of one premium, largely as a
result of this situation. Pt. 10, R. 4314.

COXCENTRATI'ON OF ECONOMIC I'OWER 267

This has been called writing "tombstones" or "lampposts." ^^ Be-
sides paying the first premium on real policies and putting fictitious
policies on the books, agents often pay renewal premiums for people
on their debits to keep the policies from lapsing. This is called
"carrying excess." ^^

Once the policy has been sold, it is to the interest of the agent to
keep it sold. Not only must it not lapse, but the policyholder must
not be allowed to terminate it in any other way, if possible.^^ • How-
ever, if he insists upon surrendering it for cash, the agent may attempt
to sell a new policy to replace it. The companies have made some
concessions in the f onn of allowing cash-surrender values for persons in
dire need before the surrender value is contractually available.®^
Nevertheless, the agents have frequently been urged to see that part
of the cash thus obtained through surrender be used to pay the first
premiums on a new policy as well as the renewal premiums on old
ones.^^ Sometimes this practice results in the policyholder's having

6« Pt. 12, R. 6071. In this connection Mr. Cohen, an agent of the Equitable Life (District of Columbia)
testified as follows (Id.):

"Mr. Qesell. Have you ever heard of what are called 'tombstones' or 'lampposts'?

"Mr. Cohen. Yes; that is a common ailment.

"Mr. QESELi,. Will you tell us what it is?

"Mr. Cohen. It is a policy sold to a person who has no intention of maintaining it. We do this in order
to maintain production. •

"Mr. Gesell. You mean in order to meet the quota or present an increase which would be acceptable to
the manager you write bogus applications known as 'tombstones' or 'lampposts'?

"Mr. Cohen. That is correct.

"Mr. Gesell. Is that a fairly prevalent practice?

"Mr. Cohen. I think it is.

"Mr. Gesell. Have you done it?

"Mr. Cohen. I have done it.

"Mr. Gesell. Who paid the premiums on it?

"Mr. Cohen. The agent, nfiturally.

"Mr. Gesell. 'How long do you keep these 'lampposts' or 'tombstones' in existence?

"Mr. Cohen. Only so long as it takes to feel it is safe to take it off the book because we may be able to
make some increase and so we maintain our jobs.

"Mr. Gesell. I suppose that if a man goes off the debit and a new man comes on he may frequently find
on that debit quite a few 'tombstones' o^ 'lampposts'?

"Mr. Cohen. When I first went on my debit I found it in such a condition.

"Mr. Gesell. How many did you find?

"Mr. Cohen. Several solid pages of it, but it was all lapsed off immediately.

"Mr. Gesell. Were you charged with those lapses?

"Mr. Cohen. Not at the time; no; except, pardon me, with one exception. It was rather interesting that
when I was introduced on the debit my training was confined to 3 days with an assistant manageinpho spent
two of the days assuring me that he owned the company and everything in the company and the ihird day
showing me how to write tombstones, and these I did^have to pay for when they were lapsed off.
. "Mr. Gesell. The assistant manger himself instructed you how to write these tombstones?

"Mr. Cohen. Ye^."

«o Pt. 12, R. 6739, 5740, 5857, 58585.5944, 5945, 6066, 6087.

»i In an effort to prevent lapse, the Equitable Life of \\ ashington, D. C, distributes to policyholders the
following warning which is printed across the face of a sample policy (pt. 12, exhibit No. 1071):

"I am a lapsed pohcy. A widow's tears have stained my withered surface. I am only a scrap of paper
consigned to the trash heap where I now belong. Once I was a living contract. I was proud of my ability to
guarantee my owner's wife a regular income should she have to go on without him. 1 represented comfort
and security for his family. I was a guaranteed estate free from taxes and administrative costs.

"But something happened. The money from my premium was used, for other things much less im-
portant. And then came Death. Suddenly and unexpectedly it took my owner away. Its swiftness
stunned his family, and when they turned to me for help they found me as I am today— a lapsed policy."
»-' Pt. 12, il. 5970.

93 Pt. 12, R. 6072. The Metropolitan even encouraged this practice by having a special form, P. S. 200,
which was used for this purpose. However, the Metropolitan, Prudential, and John Hancock now dis-
courage this practice by means of a clause in the agents' contracts providing that no commission may be paid
upon the issuance of a policy to a member of a family in which another policy lapsed or. was surrendered
within 13 weeks. See agents' contracts. New York Insurance Report, 1932, Part III. Appendix p. 208.

258 CONCENTRATION OF BCONOMrc POWER

a larger premium to pay tliari before the surrender. A situation of
this kind was described by the agent of the Equitable Life Insurance
Cc«*

Mr. "Gesell. Have you any cases of that — individual cases that you could
call to our attention — specific cases in your debit?

Mr. Cohen. Yes; I have a case on Tennessee Avenue where a woman was
paying for $2.12 worth of insurance a week in the Equitable and because her
husband was in the hospital she had to surrender some insurance to meet her
current expenses; She cash surrendered 30 cents with me, but after I had finished
writing new business in the house her weekly premiums instead of Vjeing $2.12
were $2.79.

Mr. Gesell. You say when she cash surrendered 30 cents; you mean she
surrendered policies amounting to 30 cents a week payment?

Mr. Cohen. That is correct.

Mr., Gesell. So that at the end she ended with more insurance than when she
started?

Mr. Cohen. That is correct. •

Another source of cash used for the sale of new policies is the
premium credit dividend annually allowed by the Metropolitan and
John Hancock. The policyholder, who is ready to pay his regular
weekly premium, is told by the agent that the premium for that week
is waived on account of the dividend. Therefore, some cash is
available for a new policy, and frequently the agent takes this oppor-
tunity to make another sale.^^ Considerations of social desirability
are of little weight in discouraging these practices on the part of
agents whose jobs and commissions depend upon the issuance of as
many new policies as possible.

D. TURN-OVER OF AGENTS

In measuring the effect upon the agent of the constant demands for
new business, it must be recognized that many agents are inex-
perienced. Industrial agency organizations are in a continuous state
of flux, and the agency turn-over is phenomenal. This problem of
agency turn -over has for many years confronted companies writing
industrial insurance. In 1908 the Metropolitan's agency staff
experienced a turn-over from "chargeable finals" equal to about 76
percent of the entire staff, while in 1910 Prudential's turn-over reached
a high point of 84.90 percent. ^^ These companies have made very
substantial progress in reducing chargeable finals, so that by the end
of 1938 the figures for one company, the Prudential, had dropped to
7.02 percent. ^^ That the problem is still a pressing one, however, can
be demonstrated from recent figures. During the 11 years from 1927

««Pt. 12. R.6072. ■

" See Families and Their Life Insurance, p. 69.

»« Pt. 12, R. 5850, exhibit No. 972. Generally speaking, the term, "chargeable finals," is applied to termi-
nation of an agent's contract as a result of his resigning from the service, or being requested to resign, and does
not include deaths,, retirements, disabilities, promotions, and transfers, which are considered "npnchargeable
finals" (pt. 12, R. 5739).

»' Pt. 12, exhibit No. 972. For the first 7 months of 1939 Metropolitan turn-over was 7 percent (pt. 12,
R. 5849). John Hancock experienced a 22 percent turn-over in 1938, and 15 percent for the first 9 months of
1939 (pt. 12, R. 6124).

CONCENTRATION OF ECONOMIC POWER 269

to 1938 the Metropolitan alone, which employs about 20,000 agents,
hired 74,607 new agents, while in the single year of 1928 it hired
9,500.^^ Similarly, the Prudential appointed 25,336 new agents
from 1931 through 1936.^^ In the smaller companies high rates of
turn -over still exist. Recent figures for the Western. & Southern
show a turn-over equal in number to over 42 percent of the entire
agency force while the Baltimore Life, Peoples Life, and Equitable
Life (D, C.) all show an experience of about 60 percent, ranging as
high as 69 percent in the case of the latter company. '°'' In fact the
testimony showed that in certain branch offices of some of these com-
panies the turn-over was equal to 100 percent of the agency force. ^"^
As a natural corollary of this turn-over the average period of service for
an agent in the industrial companies is low. In the case of the Metro-
politan it is slightly over 7}^ years, while in the Monumental it is 4
years. ^°^ It should be recognized that these averages are somewhat
confusing. In fact in the case of the Metropolitan 7,903 agents have
been with the company for less than 5 years. ^"^ Company .repre-
sentatives stated that it was difficult for them to estimate the exact
cost of replacing one agent for another and undoubtedly tliis cost
varies as between companies. The Metropolitan, however, has
estimated that the cost is as high as $530 per man, at which rate
the 74,607 "finals'' which the Metropolitan experienced between 1927
and 1937 would have cost in the neighborhood of $39,500,000 if
every "final'' represented an appointment during the period.^"*

An officer of the Western & Southern presented the following
highl}" informative analysis of the cost of agency turn-over.*"^

Minimum cost of a final direct and immediate lossct

Oiie-lialf of suporintendents average -weekly earnings during final and

introduction (3 weeks) ' $78. 06

Manager's time recruiting and training new agent — 10 hours at $2.80 28. 00

Special commission — average per final in 1938 ' 85.03

Deficiencies — average per final in 1938 1. 55

Cost of new agent's minimum earnings guarantee 10. 86

To manager — three-fourths time on final lapses 3. 97

To superintendent— four times on final lapses 21. 16

Multiply number of your finals by this figure 228. 63

I These items demonstrato that under the times increase method of compensation used by the Western
& Southern and many other companies a lapse on the debit of an agent who left the company can be
especially expensive because it is then impossible to offset, acainst commissions on policies thereafter written,
the commission already paid to him with respect to the lapsing policy.

M Pt. 12. R. 5852.

»« Pt. 12, exhibit No. 973.

"o« Pt. 12, exhibit Nos. 1017, 1069, 1082, 1088.

"01 Pt. 12, R. 6063, 6087.

102 Pt. 12, R. 5723, exhibit Nos. 1072, 1130.

'»3 Pt. 12, exhibit No. 1130.

'0' Pt. 12, R. 5849, 5850. For the cost estimates of other companies see pt. 12, R. 5722, 5946, 6(J03, 6004.
6124, 6149. It is significant that a vice iiirsident of the Prudential states his company has no informauon
as to the cost of recruiting and training a new agent (pt. 12, R. 5738).

«" Pt. 12, exhibit No. 1020.

270 CONCENTRATrON OF p:CONOMIC POWER

Losses not measurable in dollars

Morale

Production

Goodwill and prestige on debit

By other agents needing superintendent

Wasted home office supervision and expense

Policyholders' business needlessly sacrificed

Poor collections, conservation, and lower compensation

Causes of turn-over are numerous. Many agents find themselves
unsuited to the business and dissatisfied with the pressure for produc-
tion to which they are subjected, and resign voluntarily. Other
agents are discharged either for failure to produce, which is frequently
termed "lack of success," or for deficiencies and irregularities in their
accounts.^™ A memorandum from the files of the Western & Southern
Life Insurance Co. analyzing causes for 160 finals during 1939 presents
a fairly typical situation and reads in part as follows: ^°^

1. Lack of training. — Eighty-nine finaled because of nonsuccess, inabihty to
produce, dissatisfied, insufficient earnings, other employment, not qualified for
l)usiness. Sixty-seven of these had been with the company less than 1 year.
Practically no one in this group ever made sufficient money to really become inter-
ested in the business.

2. Lack of supervision.— FoTty-three finaled for deficiency, manipulating
company funds, irregularities. Twenty of these were in service less than a
year * * *.

The reference to deficiencies deserves special analysis. The memo-
randum in question bore the following interesting notation after the
second paragraph relating to lack of supervision, namely "Wlio taught
them to be crooked ?"^*'^ Mr. John H. Ruehlmann, vice president in
charge of agency operations for the Western & Southern, testified that
this comment was intended to point out the fact that new men could
only have learned to manipulate accounts and create deficiencies
through their contact with the older agents. ^°^ The problem of defi-
ciencies and irregularities is one confronting many companies and con-
stitutes one of the principal causes for turn-over. In some instances
actual thefts of money collected and the juggling of accounts' such as,
for example, the crediting of one policyholder's advance payments to
the account of a policyholder in arrears for the purpose of preventing a
lapse, appear. In other instances agents advance their own money to
pay premiums for policyholders. This latter practice, called "carry-
ing excess," appears to be common among industrial agents. As has
been indicated it arises from the system of compensation by which
the agent is penalized for policies which lapse and often finds it profit-
able to keep a policy in force with his own money for a short time."**

•09 Pt. 12. R. 573&-6742, 5856, 5857, 5943, 6018, 6031, 6032, 6044, 6057, 6077, 6113, 6124.
'"T Pt. 12, exhibit No. 1018.
">8 Id.

i«» Pt. 12, R. 5944.

I'l See p. 257rsi}pra. Also pt. 12, R. 5740, 6057. The agents' contract How used by Prudential specifically
forbids this practice. Pt. 12, exhibit No. 976.

CONCENTRATION OF ECONOMIC POWER 271

In the case of the Prudential from 1931 to 1936 the company "finaled"
over 5,300 agents, or over 20 percent of all agents "finaled" during this
period, because of deficiencies or irregularities in their accounts."^ To
suggest that the thousands of agents discharged for deficiencies and
irregularities were actually dishonest in all cases would certainly be un-
realistic. The reasons are rather to be found in the pressure exerted
for new business and the system of cor ^pensation, both of which have
already been commented upon.

E. MALDISTRIBUTION AND OVERLOADING OF POLICIES

Insurance sold under the conditions described cannot be carefully
underwritten."- This is made strikingly apparent by a recognition
that the class of people purchasmg industrial insurance is unable to
understand its insurance needs and, as one debit agent of an indus-
trial company suggested, can be sold anything if the installment is
sufficiently small. "^ That such should be the case appears almost

I'l Pt. 12, exhibit No. 973. Prudential realized a shortage of $44,125.68 from deCciencies in accounts of
agents finaled during 1938 for this cause. It is only in a very blatent case that the company initiates criminal
prosecution against agents finaled for deficiencies (pt. 12, R. 5743, 5767).

'12 A recent report by a committee of the New York State Legislature which made an extensive study of
industrial insurance is of interest in this connection:

"The committee's investigation of the industrial business reveals that the great number of lapses is one of
the chief causes for the present dissatisfaction with this business. Various factors bring about the high lapse
ratio. The number of lapses is principally due to the pressure and force employed by everyone concerned
with the sale of the industrial policy. The cycle commences with the home office and ends with the agents.
All seek to establish records for premium income. Agents' compensation is paid in the form of commissions
on total premium income, as distinguished from the number of policies sold. Managers' and assistant
managers' salaries or income depend in part on increase in premium volume. The increaseof the premium
income is a determining factor whether or not a manager, assistant manager, or agent is promoted or demoted.
The very contracts which the companies have with the agents provide that most of the agents' income shall
come from the industrial business.'

"In order for the managers, their assistants, and agentf to keep pace with the company's efforts to increase
business, a system has been created whereby intense pressure has been brought to bear upon the low-income
groups who are the principal purchasers of industrial insurance."

' * * * * • • • ■

"The pressure exercised on the agents for the sale of industrial policies has driven them to the point where
they' have been forced to depart from the ethics of their calhng. An agent, because of his close contact with
the people, is in a position of public trust. Policy purchasers usually accept the agent's advice in their choice
of policies. If an agent is compelled to reach a certain quota of premium income in order to maintain a
standard with the company, he is not likely to give his best judgment to his customers" (Legislative Docu-
ment (1939) No. 101, State of New York, Report of the Joint Legislative Committee on Revision of Insur-
ance Laws, pp. 20, 21).

"3 Pt. 10, R. 4316. One agent described his sales approach in these graphic terms (pt. 12, R. 6068, 6069):

"Mr. Gesell. Can you tell a little'of what your sales talk or canvass is, Mr. Cohen, when you go to a
prospective policyholder with a view to selling him a policy? What do you tell the policyholder?

"Mr. Cohen. Well, it will largely depend upon the type of person the policyholder is. Since the bulk of
mine are Negroes, I will metaphorically draw a hearse up in front of his door and park it there until he signs.

"Mr. Gesell. What do you mean by that?

"Mr. Cohen. I mean I will have to paint pictures of the Grim Reaper and everything else to frighten the
person into believing that unless the person is actually covered with insurance, death might take place
almost momentarily.

"Mr. Gesell. Then the sale campaign is primarily directed toward showing the policyholder that in his
present circumstances, if he dies he won't have funds tr b ivy him?

"Mr. Cohen. That is correct. . '

"Mr. Gesell. Do you find that policyholders on y. u debit can distinguish between a 20-payment life,
an I ndowment policy, or a whole life policy?

"Mr. Cohen. In the year and a half I have been w .h he company I have only had one policyholder read
his policy and that was because he misunderstood th' w. cd epilepsy to be the word leprosy and was scared.

"Mr. Gesell. So, by and large, you don't think o? lyholders read their policies?

"Mr. Cohen. I know they don't.

"Mr. Gesell. What -determines the fact that a p - if holder will take out an endowment policy or 20-pay-
ment life policy or whole life policy?

272 CONCENTRATION OF ECONOMIC POWER

inevitable when it is recognized that industrial insurance is sold by
agents who are in many cases not only inexperienced but insufficiently
trained and who are, in addition, subject to a constant pressure to
place new policies for the sake of bringing in a daily or weekly increase
in their debits."*

Maldistribution and overloading of policies take several forms. In
some families, particularly those on relief, or iij the especially low-
income brackets, too much insurance may be sold with the result that
an excessive amount of the family income is taken from essential
living expenses to meet pre niums as they fall due. Furthermore
there is ample evidence tha ; t.e pressure fo." new business to which the
agent is subjected prevents adequate adjustment of a policyholder's
program to meet changing conditions and actually encourages the
writing of policies which from the outset are not- properly adapted to
the policyholder's requirements. Certain situations appear with
regularity in the examination of policies held by industrial families.
Not only are industrial endowment policies too frequently sold on
children under 10 years of age in lieu of policies which more properly
should be placed on the lives of the breadwinners, but there is a general
tendency to sell the more expensive types of industrial policies, not-
ably endowments and 20-payment life policies, under circumstances
which leave no doubt that the policyholders would be better off to have
the increased protection which the purchase of a whole life policy mig'ht
have afforded.

In considering maldistribution and overloading, one should not lose
sight of the fact that in many families several different forms of insur-
ance may be held on the members and even on a single life. ^ It is not
unusual to find both ordinary and industrial insurance in force in the
same family, and these may be accompanied by group life or fraternal
policies. It must also be recognized that several different industrial
companies may succeed in placing policies within a given fanidy group.
Thus the situation is presented in which a variety of classes of insur-
ance may be in force in a single family and even several different in-
dustrial companies may have a stake in the family's insurance program.

In order to obtain first-h&,nd information on insurance holdings of
low-income families — information which the companies themselves

"Mr. Cohen. The determining factor in most instances is the agent, and the determining factor in the
agent's status is the salary, so, because we can get more writing on endowment, we usually sell an epdowment.

"Mr.GESELL. Do you find you can usually pretty well decide for the policyholder the type of policy he
wants?

"Mr. Cohen. I think the average agent could if he were properly schooled. I am afraid that this isn't
actually the case, because the agent, when he approaches the policyholder, does so from the viewpoint of the
agent's own pocketbook and not from the interest and well-being of his prospect." (See also pt. 12, R. 5795. )

IK In this connection, see testimony of Mr. C. F. Williams, president of Western & Southern Life Insur-
ance do. (pt. 12, R. 5939):

"Mr. Qesell. I wanted to know whether you didn't think it was more difficult Tor an agent to sell in-
dustrial insurance today than it was during the pioneer days.

"Mr. Williams. I think he must be a better salesman today than e\er before.

"Mr. Gesell. And as a result, the tendency may be to push men a little more.

"Mr. Williams. Yes.

• 'Mr. Gesell. And the result of that may be a poor grade of business.

"Mr. Williams. It will be a poor grade of business.
■Mr. Gesell. Written in families which may not be able to afford additional business.

"Mr. Williams. That is right.

"Mr. Gesell. And that will result, you feel, In bad selection of risks, maldistribution of insurance within
the family and from an over-all point of view poorer earnings to the company and the agents.

"Mr. Williams. Yes * * *." _ *

CONCENTRATTON OF ECONOMIC POWER 273

failed to furnish— the Commission sponsored a Work Projects Ad-
ministration survey of the - insurance habits and holdings of 2,132
families residing in the greater Boston 4rea. The results of this
survey have already been published,"^ but it is desirable that certain
findings be repeated at this time since they throw considerable light on
some aspects of the problem of overloading and maldistribution.

The survey demonstrated that 4 out of 5 of these families were
covered by insurance at the time they were interviewed and that a
considerably larger number had previously carried life insurance.
In fact, it appeared that 92 percent of all the families were either
insured at the time of the interview or had been insured at some time
in the past. There were 1,666 insured families concerning whose
holdings detailed information was obtained. Of this number 415
families were on relief. In these insured families there were 6,050
persons who held 10,150 separate life insurance policies. This group
was, generally speaking, chosen from the low-income brackets, and
had average incomes in the case of nonrelief families of around $400
annually per family member, and, in the case of relief families, about
$243 per family member. Forty-eight percent of the persons in these
relief families were insured. Forty-two percent of the total number of
insured families, or 701 families, carried no class of insurance except
industrial insurance. Of the remaining families, however, a sub-
stantial nlimber carried industrial insurance in conjunction with other
forms, notably fraternal, ordinary and group, with the result that
88 percent of all insured families held some industrial policies. The
average person carrying insurance of any kind was insured for $683
and paid an average annual premium of $20.79. In the aggregate, the
group of insured families paid 4.92 percent of their income for life
insurance or $125,800 annually."^ Numerous cases were found, how-
ever, where a percent of the income much in excess of the average was
contributed to industrial insurance. This was particularly true in the
case of the relief families of whom there were 415 covered in the insured
group. Of this number over 64 percent contributed 5 percent or more
of their income to insurance premiums, and it is interesting to note that
33 families contributed 6 percent, 5 contributed 7 percent, 5 contrib-
uted 8 percent, and 7 contributed 9 percent or more. An instance was
found where as high as 16.4 percent of the family income was spent for
insurance premiums. In this case the family, consisting of father
and mother and nine children, held 19 policies, of which 14 were in-
dustrial. In spite of a family income of $1,248 (an average income per
family member of only $113) 16.4 percent of this income was spent on
industrial policies. In another instance, 'a family consisting of a
father and mother and eight children with an annual income of $4,220,
or $422 per family member, spent 10.9 percent of its income on 35
industrial and 7 ordinary policies which were in force on its members.
A record of the famUy holdings disclosed that on the life of the son,
age 7, there were in force four 20-year endowment policies for a total
of $600 and one 15-year endowment policy in the amount of $130. It
appeared from the survey that the lower the economic status of the

115 See Families and Their Life Insurance.
'■« Ibid., p. 75.

274 CONCENTRATION OF ECONOMIC POWER

family the greater was the percentage of its income which it paid for
life insurance premiums. ^^^

Some interesting facts indicating maldistribution within the family
group were revealed. The insured families, of which it will be recalled
there were 1,666, held 8,214 premium paying industrial life insurance
policies. Of this number 9.7 percent had been in force for less than
1 year; 46.9 percent for less than 5 years and only 28.4 percent had
been in force for 10 years or more. In addition it appeared that the
great bulk of industrial policies were on the lives of policyholders who
were under the age of 30. It is indeed significant that a form of
insurance designed primarily to provide a fund for the expenses inci-
dent to death and burial should have its greatest distribution in a
group under 30 years of age. The study disclosed that 60 percent
of the industrial policyholders were in this group and that 42.1 per-
cent of the industrial policyholders were under 20 years of age.^^*
This startling fact is to a large extent accounted for by the extraor-
dinarily large number of sales of endowment insurance to children
under the age of 10 years. It was found that 42.2 percent of the
total industrial premiums was paid for endowment policies and that
55.8 percent of these endowment policies were issued on the lives of
children under age 10 and 24.8 percent were issued on the lives of
infants less than 2 years of age. In fact the survey disclosed that
256 families, or 17.5 percent of all the families which had industrial
policies, were paying all their premiums on endowment policies wliile
8.95 percent of the families receiving relief were in this class. Five
hundred seventy-four families, 83 of them receiving relief, were paying
over 50 percent of their total premiums for endowment policies.

As might be expected from the highly concentrated sale of indus-
trial policies to persons under the age of 30, there were frequently
cases where the chief breadwinners of the family or other persons
contributing substantially to its support were either underinsured or
entirely without insurance in spite of the fact that other members of
their family held industrial policies written on the endowment or
other expensive plans. In the insured families 11.58 percent of the
chief breadwinners were entirely without insiu-ance and 20.21 percent
of other breadwinners, namely those persons earning 50 percent or
more of the average annual income per family member, were not

>" Families and Their Life Insurance, p. 48.

1" Families and Their Life Insurance, p. 24. An analysis made of weekly premium and monthly pre-
mium industrial policies issued by the Metropolitan from January 1, 1934, to December 31, 1938, disclosed
that the greatest number of policies, or 19.43 percent, were issued to policyholders between the ages of 16
and 25 whereas the second largest number, or 11.69 percent, were issued on or before age 1 (pt. 12, exhi^iit
No. 989).

CONCEXTRATI'ON OF EC0N0:MIC POWER

275

insured. This situation was particularly aggravated in the case of
the chief breadwinners of relief families."^

It is obvious that the above discussion presents averages and
general figures which do not disclose the degree of maldistribution and
overloading which was found to exist in the case of individual families.
The report on the W. P. A. project sets forth in detail selected case
histories. A few of these case histories may be briefly summarized
at this stage for purposes of illustration. '^°

One family, which consisted of 10 members, paid 5.4 percent of its
income for premiums on 23 different policies in force on its various
members. The total family income at the time of the enumeration was
$3,120 or $312 per family member. This case illustrated an all too
frequent occurrence where insurance on the parents had been sacrificed
in order that policies could be carried on the children. A schedule of
family insurance holdings disclosed that neither the father nor the
mother were insured, having lapsed or surrendered any insurance they
had previously held, whereas each of the children was insured, as was
a niece, 23 years of age, who was not living with the family. In spite
of the fact that the average annual income per family member was only
$312, a total of 15 industrial policies, including 13 20-year endowments
and 2 whole life policies were in force on the 3 younger children, age 1 1 ,
14, and 16, respectively. ^^^

The case of the "Blank family" is equally startling. This family
lived in a dilapidated house in the industrial section of Cambridge,
Mass., and consisted of the father, mother, mother-in-law and 10
children, ranging from 8 months to 21 years of age. The father had
been on W. P. A. since its inception and prior to that on relief rolls for
a period of 2 years. During the past year he had received a weekly
wage of $13.75 or a total of $715 a year. No other member of the
family had been able to obtain any work except one daughter, who
worked in a shoe factory. The total family income amounted to
$1,117 including the value of food and clothing issued in lieu of cash
by relief agencies. Thus the average annual income per family
member was $85. In spite of the meagerness of this sum it appeared
that the family expended 6.5 percent of its income on insurance, all of

in Families and Their Life Insurance, p. 142. In this connection attention is called to the following table
from the New York Insurance Department's recently concluded "Special Field Investigation of Industrial

Insurance."

Average insurance in force per family

Number of
policies

Amount of
insurance

Annual
premium

On head of family

On wife or dependents
On the children..

1.22
1.03
2.33

$1, 433
421
664

$38.41
18.66
35.04

In commenting on this table the Superintendent of Insurance stated:

"It is significant that among the families interviewed almost as much of the family income is spent on
insuring children as on insuring the wage earner. This is an uneconomic distribution of insurance within
the family. The inducement to the agents to sell insurance on wage earners rather than on their children
Should be made more compelling^." (Industrial Life Insurance, Recommendation to the Joint Legis-
lative Committee for Recodification of the Insurance Law. Louis H. Pink, Superintendent of Insurance
of the State of New York.'p. 19.)

1 2" Families and Their Life Insurance, pp. 57-74.

i2> Families and Their Life Insurance, p. 62. .

276 CONCENTRATION OF ECONOMIC POWER

which was written on the industrial plan. Although the maximum
protection was on the mother-in-law, father, and mother, insurance
was also carried on many of the children. The family still had in its
possession 10 industrial policies which were worthless, having lapsed
before nonforfeiture values became available. An analysis of the 5
policies most recently lapsed disclosed that on January 30, 1939,
six 10-cent weeldy premium industrial 20-payment life policies had been
issued exactly 1 week after a $6 dividend had been recorded in the
premium receipt books. It appeared that the dividends had been used
to purchase new insurance and that the insurance had lapsed in 5 out
of the 6 cases within 3 weeks' time. An analysis of two premium
receipt books revealed that insurance holdings had been increased by
dividends in 1933, 193G, and 1937, as well as in 1939. Since during all
or most of this time the father of the family had been on relief rolls or
W. P. A., it is quite conceivable that the savings represented by these
dividends could have been put to more effective use.^^^

It is not necessary to confine the discussion of these case histories
to information disclosed by the Work Projects Administration survey.
A particularly striking and admittedly exceptional case was obtained
from the files of the Policyholders' Advisory Council. This was the
so-called case of the "unfortunate fortune Familj^" which consisted of
three members. In addition Mr. Fortune was paying premiums on
six policies written on his brother who was not living with the family.
The head of the house was the father, a longshoreman by trade, and
his income constituted the sole support for his wife and son.'^^

In May of 1938 this family held 14 insurance pohcies, 4 of which
were written on the ordinary plan, and 40 of which were written on
the industrial plan. These policies gave total protection of $18,000
and cost an annual premium of $926.89, or approximately $51 per
thousand. The annual premium represented about 55 percent of the
father's yearly income at the time.

'22 Families and Their Life Insurance, p. 67. In this connection, the testimony of Mr. Bert B. Cohen, an
agent of the Equitable Life Insurance Co. of Washington, D. C, is of interest. Mr. Cohen testified (pt. 12,
p. 60fi9):

"Mr. Oesell. Do you have a ])retty good idea of the family income of the various families on your debit ?

"Mr. Cohen. Generally, you know your people.

"Mr. Gesell. Can you give us some idea of what percentage of their money is going for premiums, not
only in your own company, but in other companies?

"Mr. Cohen. I actually have colored famihes who pay more for insurance in two or three or four different
companies than they get in a week, and how they do that I sometimes don't know.

"Mr. Gesell. Do you think there are a considerable number of families on your del)it who are paying as
much as 15 or 20 percent of their income for premiums?

"Mr. Cohen. Oh, yes.

"Mr. Gesell. Have you your debit book here with you, by any chance?

"Mr. Cohen. No; I don't.

"Mr. Gesell. Can you give us, from memory, a case history of any particular family where there may be
a considerable number of policies sold against a small amount of income?

"Mr. Cohen. Well.^es, I have a colored widow woman who has her whole family and all of her relatives
and (rieads insured witfi the company. She has a poor woman's salary; I think she told me it amounts to
$7.50 a week and in the Equitable alone she pays .$2.42 a week in insurance, and she pays as much in other
companies, I am sure, as what she carries with the Equitable.

"Mr. Gesell. Can you give us another case?

"Mr. Cohen. I have a cab driver, a Negro, also who tells me that his profit at the end of a week is not over
$10. His insurance in the Equitable is $1.75, and he has insurance in two or three other companies, I think
equal to what the Equitable amounts to."

'" The facts of this case, discussed in the body of the text, may be found at pt. 12, R. 5813-5818; exhibit
No. ,980. There is some evidence that the family income had been greater in previous years. Pt. 12, R
5866. For a discu.ssion of the Policyholders' Advisory Council, see pp. 299 to 303, infra.

OONCENTEATI'ON OF BCONOMIC POWER 277

The policies were divided among 3 companies, the Metropohtan,
the Prudential, and John Hancock, which collected annually $362.35,
$336.48, and $227.56, respectiv-ely. Mr. Fortune, the head of the
family, carried 15 policies which included 1 ordinary policy for $2,000,
1 intermediate pohcy for $500, and 13 industrial policies. Six of
th^se 15 policies wer« written on the whole-life plan, 6 on the 20-
payment life plan, 2 on the 20-year endowment plan, and 1 on a
38-year endowment plan. The mother of the family held 13 policies
and the son held 10.

The order in wliich these policies were sold to the Fortune family
discloses the constant pressure to which it was subjected. The first
pohcy was purchased in 1919 from the Metropolitan. ' Another policy
was sold by the Metropohtan in 1920. In 1921 the John Hancock
succeeded in placing a policy in the family. In each of 1922 and
1923 the Metropolitan sold an additional policy. In 1924 the John
Hancock sold two policies. In 1925 the Metropohtan sold another.
In 1926 three additional policies were sold by Metropohtan. In 1927
the Metropolitan sold five more policies and at this time was joined
by the Prudential which sold three. In 1928 the Prudential sold one,
the John Hancock five. In 1929 the Prudential sold one, the John
Hancock two. In 1930 the Prudential sold a policy and the following
year, 1931, sold five more. In 1932 it sold still another policy and
after a year had elapsed, in 1934 the Metropolitan sold one policy, the
Prudential sold one policy, and the John Hancock sold two. In
1935 two more Prudential pohcies were placed, and finally in 1936 the
John Hancock sold one and the Prudential two. The records indi-
cated that in one instance the John Hancock sold four $250 industrial
policies to Mr. Fortune at the same time.

There will be occasion to consider other aspects of maldistribution in
subsequent sections. ^^'^ Enough has been said already, however, to
indicate the serious character of the problem, and it must be noted
that there is no evidence that industrial companies have taken
vigorous steps to prevent its continuance. Some companies have
avoided selling policies to Negroes or have attempted to keep out of
the "suitcase" and "red light" districts, but in the main the selection
of risks and the type of insurance to be sold rests with the agent whose
financial interest combined with the driving of his manager force him
to secure policies at any cost.^" No company seems to restrict its
representatives as to the maximum percentage of family income
which may be expended for insurance premiums. A few companies,
among them the Metropolitan, have apparently recently attempted to
keep some check over this question of family income in relation to
policy premiums but the facts reviewed above do not indicate that the
methods adopted have as yet met with any success. ^-^

There is emphatic need for immediate improvement in this direction .

12* See pp. 289 to 303. infra.

'" Pt. 12, R. 5753, 5949, 6001, 6035, 6117, 6128, 6129, 6150, 6157. Industrial companies will not write insur-
ance on the lives of persons engaged in very dangerous occupations such as wild-animal trainers, motorcycle
racers, divers, etc. Pt. 12, R. 5753.

"« Pt. 12, R. 5865, 5869, 5870. For example, the Metropolitan has a corps of employees who examine
applications on an individual case basis. It is more or less an unwritten rule at the home office that not
more than 10 percent of a family's income may be utilized for insurance premiums. An applicant for in-
surance must indicate the amount he carries in all companies. The Metropolitan has inspectors who
make test checks of the accuracy of the information contained on the application. It is interesting to note
that these inspectors reported for the year 1936 that the biggest item' under misstatement" or omissions on

278 GONCEJS*TRATION OP ECONOMIC POWER

F. LAPSE

Maldistribution and overloading inevitably lead to lapse. ^" The
previous discussion of lapse and other modes of policy terminations
has made it clear that a lapse deprives a policyholder of all of his
reserve and defeats the purpose for which the insurance was written. ^^*
It is only necessary herein to point out the extraordinary amount of
industrial insurance which has terminated. by lapse, for, from the bare
statistics themselves, it will be apparent that the amount of lapse
in industrial companies is so great as to give irrefutable evidence that
most of the policies issued- do not fulfill their essential purpose.

Company managements cannot justify their drive for new business
unless it results in a steady increase in insurance in force which has
some reasonable relation to the amount of new business written. If
the drive is offset by an equally heavy lapse rate the insurance ma-
chinery has stalled. The selling procedure is then a "squirrel cage"
operation through which the public is sold policies which lapse only
to be sold again. The insurance service is not appreciably extended.
The policies which terminate in death or mature as endowments
number but few in comparison with those which lapse. This is the
situation which unfortunately prevails in the case of industrial in-
surance, as may be readily seen from an examination of the experience
of the industrial companies for the period from 1928 to 1937. In
this period of time, the companies wrote and revised 193,714,338
policies or a number well in excess of the total population of the
country. At the end of the period, however, the total gain of policies
in force was only 6,635,400 policies. The tremendous difference
between the number of policies written and the increase achieved
results from heavy policy terminations, the vast majority of which
have always occurred by lapse. It appeared that, in the given period,
of the 187,760,806 industrial policies terminated, only 4.45 percent
terminated by death while less than 1 percent terminated by maturity.

applications was that referring to insurance already in force. (Id.) For the results of a special survey-
conducted by the Metropolitan of families paying a large percentage of their income for insurance, see pt.
12, R. 5872, 5873. On the basis of information submitted in the applications the Metropolitan believes its
industrial families do not spend in excess of 3 percent on the average for premiums. Pt. 12, R. 5874, 5875,
5876. This should be compared with the average of 4.9 percent found in the Works Progress Administra-
tion survey of 2,132 Boston families.

The Prudential has handled the matter in a more general fashion. In its manual of instructions for ,
agents, it states that it shall l^e one. of the duties of the agents "to advocate the class of insurance most suit-
able to the applicant's position in family insurance program and not to press for a larger amount of insur-
ance than -the applicant is able to maintain" (pt. 12, R. 5746).

'27 This was recognized in a recent report by the legislative committee investigating insurance in New
York State.

"The reason for the vast number of sales of policies to children is that an appeal is made by the agent to
a mother to protect her child, It is not difficult to arouse the human emotions of a mother or father to
'protect' a child. A real protection to the child would be to have the father insured instead of the child.

"Many families have several industrial policies on the lives of the children, and no insurance upon the
father. When the father dies, not only does the family lose his support but the industrial policies on the
children are lapsed for nonpayment of premiums. This is another primary cause for the high lapse rate.

"Angthor niivjor cause of the great number of lapses in the sale of industrial policies is the large number
fir I'flli'f recipients who purchase industrial policies. The committee has been informed by the State de-
l>urtmcnt of social welfare that about 60 percent of the families on public relief are paying for industrial
insurance."— Legislative Document (1939) No. 101, State of New York, Report of the Joint Legislative Com-
mittee on Revision of Insurance Laws, pp. 23, 24, 25.

12* See pp. 184 to 191, sunra.

CONCENTRATION OF BCONOMIC POWER

279

On thp other hand, 20.47 percent terminated by surrender and 70.68
percent or 132,708,931 policies lapsed. ^^^ Thus only slightly more
than 5 percent of the policies which go off the books of the industrial
companies terminate in a manner which represents the accomplish-
ment of the purpose for which the insurance must be deemed to have
been taken out.

The experience of the larger companies, though somewhat better
than that of the smaller companies, does not demonstrate a result
much better than the average and both large and small companies
reached the same unsatisfactory results during the prosperous years
from 1924 to 1928 as they did in the subsequent years. Figures for
the industrial business as a whole demonstrate the acute nature of
the problem for during the period 1918-37 there were only 17,596,437
pohcies which terminated by death, or maturity while 202,366,266
terminated by lapse. ^^° The following schedule shows for a group of
seven companies the percentage of their respective total terminations
resulting from death and maturity of policies and the percentage
resulting from lapse. ^^^

Percentage of total terminations
DEATH AND MATURITY

Metropolitan

Prudential ..

Western & Southern

Life Insurance Co. of Virginia

Equitable (District of Columbia)

Washington National..

Peoples (District of Columbia)...

1924-28

1929-33

7.15

4.76

5.99

4.36

3.01

2.55

4.85

3.35

1.95

2.01

1.22

.96

1.23

1.18

1934-38

6.34
5.41
3.72
2.15
1.11
1.48

LAPSES

Metropolitan

Prudential- -.

Western & Southern

Life Insurance Co. of Virginia

Equitable (District of Columbia)
Washington National

Peoples (District of Columbia)—.

76.48

5?.. 72

76.26

64.18

88.23

87.52

83.13

78.96

92.08

82.04

98.40

95.77

98.74

98.67

50.31
■ 22.50
1 60. 18
79.65
84,94
96.80
97.31

' The sharp decrease in lapse for the Prudential and Western & Southern, as. shown by a comparison
of the 1929-33 figures with those for 1934-38, is explained by changes in policy terms, which were designed to
minimize loss due to lapse by means of providing an automatic nonforfeiture benefit in the form of extended
term ir^surance after policies have been in force for 3 weeks in the case of whole life, and 2 weeks in the case
of endowments. Thus, terminations by expiry for these 2 companies increased in the indicated period from
5.54 to 33.05 percent, and from 0.02 to 13.73 percent, respectively. This highly desirable realization of policy
benefits was partially adopted at about this same time by the Metropolitan and John Hancock, which
provided for a similar automatic benefit after 26 weeks. It must be realized that the reduction in lapse
resulting from this change in procedure does not indicate that the problem of lapse has, to that extent, been
eliminated. Actually, the policies terminating by expiry still are a manifestation of the sale of policies to
persons who discontinue premium payments soon after sale.

iM Pt. 10, exhibit No. 685. The experience for the period i9l8 to 1927 is comparable; 85,057,157 policies
terihinated in that period, as compared with new policies issued, plus revivals amounting to 127,753,763.
Of the policies terminating, 81.90 percent terminated by lapse,"7.39 percent by stirrender, 1.49 percent by
maturity, and 7.34 percent by death. Id.

no Id.

i« Pt. 10, exhibit No. 686.

280

CONCENTRATION OF ECONOMIC POWER

The above figures require no particular comment other than to
point out the extraordinary lapse experience of the last two companies
on the list. It will be observed that in the case of each of these com-
pahies terminations by death and maturity never equaled 2 percent
of the total. Terminations by lapse were always in excess of 95 per-
cent and -reached the amazingly high figure of 98.74 percent in the
case of the Peoples Life Insurance Co. of the District of Columbia.

There can be no doubt that, as the table indicates, the experience
of the smaller companies is worse than that of the larger. An exami-
nation of 84 industrial companies disclosed that there were 14 which
lapsed more policies during the year 1938 than they had in force at
the end of the year and that an additional 29 companies lapsed an
amount equal to 50 percent or more of the total policies in force at
the year end. The i4 companies showing a percentage ratio of over
100 percent for the number of policies lapsed to the number of policies
in force as of December 31, 1938, are listed below. These companies
accounted in the year 1938 for 2,311,736 policies terminated by
lapse. '^^

Company

Number of
policies

lapsed dur-
ing year

Percentage
ratio of
number
lapsed to
number in
force Dec.
31, 1938

Industrial Life & Health Co-._ .__

Kentucky Central Life & Accident Insurance' Co

Supreme Liberty Life Insurance Co

American Life & Accident Co. of Kentucky

National Burial Insurance Co

Lincoln Income Life Insurance Co

United Insurance Co.

Guaranty Life Insurance Co -

Star Life of America _

Union Life Insurance (Arkansas)

State Capital - - -

Cincinnati Mutual Life _

American Life of Alabama . .

Santa Fe National Life Insurance Co.-.

, 407, 606
186, 751
190, 663
119,395
86, 275
84, 949

39, 085

40, 765
27, 518
26, 514
26,299
44,658
20, 804
10, 454

149.6
104.9
141.5
103.8
135.1
162.4
113.1
139.4
121.3
118.1
143.0
267.2
159.7
106.4

A brief comparison between the general termination experience of
ordinary and industrial companies further illustrates the serious
nature of the industrial lapse experience. The following table '^^ re-
flects three modes of termination expressed as percentages of total
amount of insurance terminated for the two classes of insurance for
the periods indicated. It will be seen that the industrial lapse" is
almost twice as great, as ordinary.

"2 Pt. 12, exhibit No. 950. In this connection it is interesting to note that there were 6 companies where
the number of policies lapsed during 1938 was greater than the number issued. These companies had the
following percentage ratio of number lapsed to new issues (id.):

Afro-American _ 112.4

Globe Life Insurance Co _ _' .• 361.6

Alta Life Insurance Co - - .- 235. 2

Star Life of America _. 102.2

Cincinnati Mutual Life 101.8

Security Life Insurance Co 199.7

'35 Pt. 10, exhibit No. 683.

CONCENTRATION OF ECONOMIC I'OWEIl

281

1922-25

' 1926-29

1930-33

1934-^37

Ordi-
nary

Indus-
trial

Ordi-
nary

Indus-
trial

Ordi-
nary

Indus-
trial

Ordi-
nary

Indus-
trial

Lapse -

52.59
2.86
7.94

83.75
.90
5.14

53.16
1.31
8.29

81.66
.36
4.7

42.19

.99

6.66

73.67
.26
3.11

36.47

"'1.69

9.88

63.32

.68

Death-.-

4.01

That much industrial lapse is the result of overenergetic selling
may be demonstrated by the early date at which most policies go off
the books. A very large proportion of the total lapses in the indus-
trial companies occurs during the first few months after the issuance
of the policies. A special study of the experience of the Metropolitan-
during 1935, for example, showed that almost 16 percent of all the
policies written during that year lapsed after the premiums had been
paid for only 1 to 4 weeks. Approximately 30 percent lapsed after
they had been in force for less that 26 weeks, and 35 percent
lapsed during the first year after issue; 1,^71,995 policies, or 42.67
percent of all those issued in 1935, lapsed before they had been in
force for 3 years. During 1938 and 1939 slightly over 20 percent of
the policies issued lapsed before premiums had been paid for 26 weeks,
and the actuary of the company testified that this is the currently
expected experience.'^*

The actuary of the Equitable Life Insurance Co, of Washington,
D. C, a stock company, testified that about 12 percent of the pohcies
issued by his company lapsed after only 1 week's premium had been
paid. He stated that a considerable amount of this lapse represented
cases in which the first premiums were paid by the agents themselves
and, of course, the policyholder suffered no loss. However, in this
company, 60.2 percent of the policies which terminated during the
first 3 months of 1939 represented policies which had been in force
for less than a year. Even if the 12 pei:cent on which the agent may
have paid the first premium were eliminated, still almost- 50 percent
of the remainder lapsed in the first year. Almost 80 percent of the
terminations represented policies which lapsed before they had been
in force for 3 years. "^

The Western & Southern has also experienced a large amount of
lapse after premiums have been paid for only 2 or 3 weeks. In 1931,
.more than 25 percent of the policies issued lapsed before the fifth
premium had been p^id. This, percentage, although it has decreased
in the following years, is still large. In 1938 about 13 percent Is^psed
before the fifth premium had been paid. In 1931, 55 percent lapsed
after 26 weeks and in 1937, 30 percent. In 1931, 65 percent lapsed

is< Pt. 12. R. 5970; e«iibit No. 992.
' '3» Pt. 10, R. 4313-4317; exhibit No. 688.

264763-^-41— No. 28-

-19

282 CONCENTRATION OF ECONOMIC POWER

after after they had been in force under 1 year, and in 1937 almost 39
percent lapsed during the first j'-ear.^^^

Company representatives urge that industrial policyholders are of
small ineans and cannot be expected to sustain even a limited savings
program. They further point out that such policyholders are subject
to a certain insecurity of income because of uneven employment and
when they lose their jobs are consequently^ apt to lapse their policies."^
Unquestionably these are factors to be considered. Of equal im-
portance are high-pressure selling, excessive agencj'^ turn-over and
the other agency conditions which have been considered above and
which are subject to the control of the companies. ^*^

"•■Pt. 12, exhibit No. 1022. For information on lapse experience of the Monumental Life, see pt. 12,
exhibit No. 968.

As has been indicated, a lapse is one of the sources of profit accountable for the larse stockholder^' divi-
dends paid In the case of stock companies. Because of the nature of life insurance accounts it is impossible
to determine with accuracy for all companies the amount of profit attributable to this source. See p. 188,
supra. The testimony of one company actuary was of value in this connection, however. The actuary of
the Equitable Life (District of Columbia) testified that though the company had no definite information
on the" profits it received from lapses there was probably a profit on all lapses between the second ajid third
year (pt. id, R. 4315, 4316). In this comiectiou it is also interesting to examine the testimony of actuaries of
the Metropolitan and Prudential who describe their companies' practice of aUowing nonforfeiture values
after 26 weeks or ,2 weeks, respectively. These actuaries indicated that the benefits were possible because
the policies had paid for themselves, i. e., had commenced to buUd up a reserve in excess of the cost of acqui-
sition <pt. 12, R. 5907, 5908, 5959). ' ' .

1" Pt. 12, R. 6020, 607J, 6118. A n officer of the Baltimore Life Insurance Co., Mr. Albert Burns, who had
been in the business for 37 years, testified to this feature as follows (pt. 12, R. 6ll8) :

"Mr. Qesell. You say that many people are out of work and they lapse, and if they do have a job they '
keep their payma' cs up? I gather then that you think this lapse rate which your company shows, which is
pretty weU typical of other industrial companies, is attributable to a condition which has existed over many
years in this country, not a product of the depression, necessarily?
" "Mr. BuKNs. I think that is correct.

"T^.' Oesell. You believe there is just that high a turn-over in jobs and ability of policyholders?
Mr. BuKNS. I-wouldn't say that was the average for the country, considering all kinds of jobs, but we
are considering now only industrial fobs having in mind steel mills, coal mines, textile factories, industries of
that type,"

"«• In some cases, industrial policies are lapsed at the initiative of the companies. This seems to occur
primarily with certain companies which write industrial policies carrying health benefit clauses. One such
company, the Life & Casualty Insurance Co. of Nasvhille, Tenn., provides its agents and managers with a
special form known as the "pink lapse sheet." This is a form on which the field force reports lapses which
are induced by the company in order to avoid the Jccumulation of further^sick claims. A specifii form is
provided in order that the agent on whose debit the policy wasm force is not charged with tlie lapse when his'
compensation is computed. An Instance of how this procedure operates was disclosed in the record. The
associate medical director of the company wrote its Washington, D. C, manager referring to the case of a
policyholder who had "a long list of $5 claims." The letter stated (pt. 12, exhibit No. 1047): 'iThe qucker
you can get rid of this case the better it will be. Make special note of it and watch for an opportunity. , We
are willing to leave the handling of this to your own good judgment."

The manager testified that a lapse resulted and that he had undoubtedly adopted his usual procedure
whicl) was to have the agent on the debit make a rninimum number of calls and to permit the policy thus to
fall in arrears (pt. 12, R. 6012-6015, 6021; exhibits Nos. 1047, 1048, 1049). A similar situation was shown to exist
fn the case of the Home Friendly Insurance Co. of Baltimore, Md., which gave its oflSce manager instruc-
tions from time to time to "lift policies" (pt. 12, R. 6101, 6102). An agent of the Equitable Life Insurance Co.
(District of Columbia) stated that he had been instructed by his home office not to collect premiumS'at the
home of one family. He described a case when subsequently he and one of his assistant managers walked
by the home of the policyholder in the following vivid terms (pt. 12, R.. 6073): "• • • we went by the
bouse one day when the woman was on the porch ^th the money and the book waiting for us and although
she hollered to me I was told that I didn't hear anything, it was just the wind, and we kept on walking and
the policy did lapse."

It should be mentioned in passing that one feature of the industrial policy makes this procedure possible;

namely, the fact that the company is not '^ound under the terms of the policy to collect premiumsat the

homes of the insured. Qace having established a regular procedure of collection with follow-up calls, it is

obviously an easy matter for the routine tc be changed and thus an unwary policyholder may be forced to

» lapse bis policy (pt. 12, R. 6770. See also p . 12, R. 6046, 6047.)

CONCENTRATION OF ECONOMIC I^OVVER

G. COST

283

Closely related to the problem of lapse is. the high cost of industrial
insurance, It is indeed an anomalous situation that this form of
insurance, sold to low-income famihes, should be the most expensive
form of life insurance available.

In selling industrial insurance emphasis is generally placed on the
weekly premium to be paid instead of the amount of insurance provided
by the pohcy. The following table shows the premiums for a group
of representative companies at two of the most representative ages,
for both whole-life and 20-yea;r-endowment pohcies. Policies are
not in all respects comparable, but the policy forms shown are those
offered as substitutes for, or entirely comparable with, the whole-life
form.

Amount of insurance which can be purchased for 5 cents weekly premium,

19S9 rates ^

Whole life

20-year endowment

Agel

Age 25

Agal

Age 25

$210

$102

$60

$44

200

(})

215

105

210

215

97
96

200

(')

215

105

200

(?)

200

100

210

. 97

' 215

105

200

96
97

50
60

210

American National

Colonial Life

Equitable (District of Columbia)

Franklin National

Home Beneficial

John Hancock

Life Insurance Co. of Virginia

Metropolitan.-

Monumental

National Life & Accident..

Peoples -.-

Washington National i

Western & Southern

' Pt. 12, exhibits Nos. 1023, 1024, 1025, 1026. In some instances, these figures are subject to explanations or
qualifications, which are indicated on the exhibits from which the table h^ been compiled. Whole-life
policies, for example, may be paid up at different ages while in some cases premiums are payable until
death (id.) . Infantile policies call for the payments of smaller sums if death occurs during the first few
years after issuance (pt. 12, exhibit No. 1030). The scales of graded benefits are not uniform in the vari&us
companies and only careful examination of each policy wUl enable the policyholder to know just what the
benefits are in each year. The numb'er of policies issued on the lives of children makes this lack of uniformity
a significant factor contributing to the confusion of the policyholder; 11.69 percent of all the Metropolitan
policies issued from 1934 to 1938 were on the lives of children who had not yet reached their first birthday,
while about 28 percent of all the policies issued by the Metropolitan and the Prudential in that period were
on lives of persons aged 10 or under. About 40 percent of all industrial policies written are issued on persons
15 years of age or under and almost one-third of these are issued at age 1 next birthday (pt. 12, exhibits Nos.
989, 1002).

* Not written in 1939. See p. 302, infra.

It may be seen frorn the foregoing that the amounts of industrial
insurance which can be purchased from the indicated companies for a
5-cent weekly premium vary within narrow limits. If, however, the
net costs for a given amount of insurance are considered, a much ^\dder
variation will be found. The accepted method of determining the
liet cost of a life insurance poUcy over a given period of time has
already been described ; the cash-surrender value available at the end
of the period is difeducted from the aggregate amount of premiums

284

CONCENTRATrON OP ECONOMIC POWER

paid during the period, less the dividends declared. The following
table indicates the net cost of $250 of industrial insurance computed
for a whole-life policy or nearest equivalent form according to this
accepted method. Dividend rates for 1939 have been used in all
cases, and the figures reflect net costs on surrender of policies at the
end of the twentieth year. It will be seen that whole-life policies for
$250 of industrial insurance differ as much as $36.22 on a 20-year net-
cost basis. ^^^

Company

Whole life

Issue at
age 1

Issue at
age 25

American National

ColoniaJ,Life

Equitable Life (District of Columbia) .

Franklin National

Home. Beneficial (Virginia)

Tohn Hancock.

Life Insurance Co. of Virginia

Metropolitan--

Monumental - -..

National Life & Accident

Peoples Life (District of Columbia) .-..

Washington National

Western & Southern..

$72, 89
79.09
68.56

43.77
16.99
30.89
18.93
46.19
26.36
42. 15
29.37
32.59

.88.38
48.13
68. 58 .
j2. 16
77.85.
73..15
74.55
73.91

The spread between the net cost of endowment and wholcrlife
policies is even more striking. Endowment policies have higher pre-
miums per dollar of insurance than whole-life. policies. The amount
of this difference is shown by the fact tliat a $250 policy issued by the
Metropolitan at age 1 on the whole-life plan, paid up at age 75, costs
$3.25 a year. A 20-year endowment policj" based on the 1938 rates,
iosued for the same amount and at the same age, would cost $13 a
year. The $9.75 difference princinally represents the extra savings
element in the endowment policy.

If an industrial policyholder applied for a whole-life policy and
every year deposited in a sa\angs bank the difference between the
premium for an endowment policy and the premium for a life policy,
at the end of 20 years his savings account would be practically as large
as the amount of the endowment he would have received. In addi-
tion, he would still be insured at the original rate based on his age
%yhen the policy was issued. If he defaulted in premium payments
during the first few years, he would not lose the money that he was
paying in order to have a small fund at the end of 20 years. If at the
end of 20 years he no longer wanted any insurance, he could surrender
the policy and his cash would then be at least as much as the original
endowment would have been. Thus a Metropolitan 20-year endow-
ment policy issued in 1918 at age 2 would cost $13 per year for a $250
tace value. A whole-life policy, paid up at 75, issued by the same
company at the sam.e age, would call for a premium of $3.04 for a $250
face value (these rates were not changed during the next 20 years).
If the insured deposited in a savings bank every year for the next 20
years the difference between these premiums, with appropriate adjust-

"» Pt. 12, exhibits Nos. 1023, 1024.

GONCENTRATI'ON OF ECONOMIC POWER 285