F1 NANCE-PUBLIC & PRIVATE.
[BY OUR CITY EDITOR.]
SOME LIFE INSURANCE VALUATIONS.
[To the Editor of the SPECTATOR.] SIR,—In a recent issue of the Spectator I referred to the considerable rise which had taken place in the quota- tions of insurance shares, and especially in the shares of some of the life companies. A number of reasons might be assigned for the improvement, and I am far from asserting that there may not have been a tendency in some directions prematurely to discount the prospects ahead. In the main, however, and up to a certain point, the rise is no doubt justified by the general character of recent reports, and especially some of the valuation reports. Moreover, the effect of such reports has probably been all the greater as they have followed a period of considerable anxiety during and immediately following the War.
In numberless ways the insurance companies were hard hit by the conflict, and one consequence of the War was to emphasize the fact that a superabundance of Stock Exchange securities is about the worst form of superabundance in international crises. In many cases a drastic writing down was the order of the day, and there was nervousness as to the future. The board of one company, indeed, which had hitherto produced excellent results in the matter of combined bonuses, after arranging that the maintenance of the previous system of bonuses to existing participating policy holders should be a first charge on future profit earnings, with- drew all with-profit tables from their prospectus.
It was not only a case of depreciated securities ; high taxation had to be faced and, in addition, a rise in salaries owing to the advance in the cost of living. There was also increased mortality in respect of war claims, and even amongst civilians, who also were affected by the strain and distress of life. Moreover, office expenses in general increased. During this period also the ratio of new business seriously contracted. Many were in the fighting services, and except on pro- hibitive terms were uninsurable. The situation, indeed, was in almost all respects one of unprecedented difficulty, and suspension of bonus declarations became the order of the day. On the other hand, as the War advanced, so did interest rates, and in the main it is the higher net yields obtained which have played a great part in the re-establishment of prosperity. In recent years appreciation in securities has partly restored margins diminished by depreciation, and to some extent recent satisfactory announcements have, for this reason, reflected appreciation just as they have, in part, been due to large sums carried forward, instead of allocated, during the period of doubt.
Moreover, the latest quinquennial valuations are of a character to suggest that mortality has become normal again, and while office expenses are large, there appears to be an all-round and apparently permanent increase in the public demand for policies, and with interest sufficing to maintain profit earnings, there seems no reason to suppose that future bonuses will not be up to or above the level which was the order of the day before the War. The best argument in support of that view is, perhaps, to be obtained from an examination of the records of a few institutions, divergent in point of plans for operating. From a correspondent well versed in insurance accounts I have received the following illus- trations, the offices selected for the purpose being styled a to d. My correspondent says :— " Office (a), which is one of the most intensively organized, paid a pre-War bonus at the rate of 30s. per cent. per annum ' compound,' that is to say, reckoned en the sum assured and on bonuses already added to it. When it valued as at December 31st, 1913; it showed a surplus of £839,951. At the valuation five years later two items were shown to have cut profits down. These were, War claims £496,079, and depreciation £428,679. The surplus shown was £254,108, of which all save £70,627, absorbed by interim bonuses, was carried for- ward. As at December 31st, 1923, including the £183,481 in the account, the surplus worked out at £1,520,865. After satisfying shareholders and carrying forward £272,476, there remained sufficient to allocate to whole life policies additions as folloWs :— Years in force 5, bonus per cent. £8 10s.
„ „ „ 10, - „ „ £8 10s.
PI 15, PP PP £9 3s.
„ „ „ 20, „ „ £9 17s.
„ „ „ 25, „ „ £10 12s.
31 h
„ 30, „ „ £11 8s.
The aggregate for the thirty years, £58, compared with £54 before the War, or was £40 per £1,000 policy better. " In the case of office (b) a special valuation was made for three years. At the two preceding quinquennial investigations the institution had been unable to allocate any bonus at all. For the three years, however, the Directors were able to announce a simple bonus (a bonus reckoned on the sum assured only) at the rate of 55s. per cent. per annum, and, for 1924 and 1925, the two remain- ing years of the quinquennium, an interim one of 40s. per cent. per annum. The figures, it was pointed out, were no guide to what the future might hold. " The valuation of office (c), a mutual one, followed one disclosing rather sensational losses. For the five years ended December 31st, 1918, the subtraction items traceable to the War had- been £1,986,500. A valuation at that time showed that in the absence of these a surplus of £2,745,220 would have appeared, which would have sufficed to pay more than the 34s. per cent. compound bonus which had been maintained previously for many decades. In the position disclosed £58,720 was carried forward, after £700,000 had been added to the reserves, as a buffer between them and possible further adverse contingencies. As at December 31st, 1923, part of the latter sum was shown to have been used in the service of interim bonuses, and the rest was considered to be no longer required for the purpose for which the whole had, originally, been earmarked. The residue was accordingly transferred to surplus which, after deduction of £62,126 carried forward, amounted to £2,564,000, and sufficed to justify a declaration at the rate of 40s. per cent. per annum compound. That, of course, was special ; but an intimation that the interim bonus would be 35s. per cent. per annum, instead of 84s. per cent., was no doubt an indication of what might be expected in the future.
" In the case of office (d), history had, as usual, disclosed considerable depreciation. The first valuations following the outbreak of hostilities was made as at December 31st, 1916, and £732,144 then had to be written off. Five years before that time a compound bonus at the rate of 35s. per cent. per annum had been declared ; this, as at the end of 1916, was cut down to 20s. per cent. simple. As at December 31st, 1920, the sum of E1,350,798 had to be written off, and no bonus was declared. As at the end of 1923 a triennial valuation was made. This disclosed, after an addition of £300,000 to Investment Reserve (already £250,000), a surplus of £1,417,689 after carrying forw. ard £160,822 ; £37,423 had been brought forward from the previous investigation, and £33,143 had been used in the service of interim bonuses. The position allowed of a declaration varying according to policy age of from 35s. per cent. per annum to 51s. per cent. per annum, the latter in the case of even compara- tively new policies." The examples furnished by the foregoing instances might be multiplied without fear of challenging the generally cheerful view of the prospects of life offices as a whole, although forecasts in relation to _individual offices would necessarily be less reliable. For the most part, however, the general factors affecting the main life assurance companies are very similar in character, especially as regards the securities representing the various companies' funds, while expenses seem likely to move favourably especially where business is pro- gressive. The average amounts of new life policies are generally below those recorded in the boom period, but considerably above pre-War figures, and high average policies mean substantial economies in new business.—I am, Sir, yours faithfully,
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