CHAPTER XI

CONCENTRATION OF CONTROL AND INVESTMENTS IN LIFE INSURANCE 1

The discussion of the savings-investment problem in the foregoing chapters has necessarily dealt to no small extent with theoretical principles. A study of insurance company investments affords a concrete illustration. In his message on Strengthening and Enforcement of Antitrust Laws, President Roosevelt stated:

The tremendous investment funds controlled by our great insurance companies have a certain kinship to investment trusts, in that these companies invest as trustees the savings of millions of our people. The Securities and Exchange Commission should be authorized to make an investigation of the facts relating to these investments with particular relation to their use as an instrument of economic power.❜

This statement in the President's message became the specific point of departure for the committee's insurance studies. The Securities and Exchange Commission was directed to assemble data on life insurance company investment practices and to examine the affairs of such companies for facts which would throw light on the basic problem of the concentration of economic power. The Commission has submitted a detailed report summarizing the information obtained through its studies and this report has been printed as a committee monograph.3

1 This chapter was written by Gerhard A. Gesell, special_counsel, Securities and Exchange Commission. It was criticized and reviewed by Dr. Theodore J. Kreps, professor of business economics, Stanford University, and Dr. Oscar L. Altman, senior economist, National Resources Planning Board.

2 S. Doc. No. 173, 75th Cong., 3d sess., April 29, 1938, p. 8.

The Temporary National Economic Committee made no special study of the operations and practices of investment trusts. Pursuant to section 30 of the Public Utility Holding Company Act of 1935, however, the Securities and Exchange Commission conducted an exhaustive investigation into the activities and operations of investment trusts and investment companies. The Commission has released several parts of its final report covering the nature, classification, and origin of investment trusts and investment companies; a statistical survey of such trusts and companies and a review of certain abuses and deficiencies found in their organization and operation. The Commission's studies led to the enactment of the Investment Company Act of 1940 and the Investment Advisers Act of 1940. Both acts were passed unanimously by the Congress and signed by the President on August 23, 1940.

3 Temporary National Economic Committee Monograph No. 28, Study of Legal Reserve Life Insurance Companies. The Commission's report contains 21 sections dealing with various topics, including the following: Size and growth of legal reserve life-insurance companies; control of life-insurance companies; interlocking directorships; failure of directors to attend board meetings; activities of directors and officers for personal gain; changes of plan of company operation to benefit personal interests of officers and directors; responsibilities of life-insurance company directors; salaries and profits; company retirements; intercompany agreements to eliminate competition: the life-insurance lobby; classes and type of life insurance sold; policy terminations; agency practices; cost of ordinary life insurance; industrial insurance; savings-bank life insurance; operating results; reports to bondholders and accounting practices; assets and investment practices. The Committee has also published Temporary National Economic Committee Monograph No. 2, Families and Their Life Insurance, which contains the results of a special survey of the life-insurance holdings of 2,132 low-income families, which the staff of the Commission made in cooperation with the Work Projects Administration.

There has also been published by the Temporary National Economic Committee Monograph No. 28-A containing a statement on life insurance submitted to the committee by the presidents of five life insurance companies on behalf of 178 companies. This statement consists of a commentary from the point of view of life insurance management on various discussions and conclusions in the Securities and Exchange Commission analysis of the life insurance problem contained in Monograph No. 28. This supplementary monograph also contains a rejoinder to the foregoing insurance company criticism.

Monograph No. 28-A in addition contains a statement on "State Supervision of Insurance and the National Association of Insurance Commissioners" which was filed with the Temporary National Economic Committee by Col. C. B. Robbins, manager and general counsel, American Life Convention, on behalf of 137 life insurance companies, the names of which appear at the beginning of the statement, pp. 61-64.

4

In addition there are six volumes of testimony comprising nearly a fifth of the total number of volumes of hearings held by the Temporary National Economic Committee. Any attempt to present a condensed report must consequently lean heavily on summaries of facts rather than on the facts themselves.

Among life insurance companies are found the largest corporations in the world, the Metropolitan Life Insurance Co., for example, having assets of over $5,000,000,000, and investing more than $2,000,000 every business day. Their executives are par excellence big business executives. A study of their origins, selection, interconnections, and operations affords thus a striking illustration of large-scale management at work.

Life insurance companies collect funds in small amounts from millions of provident citizens seeking to assure protection in event of need to themselves and their loved ones. From these (and their investments) they collect annually over $5,000,000,000, an amount greater in ordinary years than the tax collections of the Government of the United States. In fact, so strongly are payments of insurance premiums regarded as a fixed charge by policyholders that premium income of life insurance companies rose from 4.1 percent of national income in 1929 to 8.8 percent in 1932 and 7.9 percent in 1933, and total insurance income rose from 5.4 percent of national income in 1929 to 11.6 percent in 1932 and 10.9 percent in 1933. These contractual savings represent from one-half to two-thirds annually of all accumulations by individuals, constituting for millions of families the only savings they have. Life insurance is an important factor affecting the flow and maintenance of consumer spending.

8

In 1938 life-insurance companies held 44 percent of the assets of the principal savings institutions. In that year they purchased nearly one-half of all corporate bonds and notes issued. They held about an eighth of all long-term bonds and nearly a fifth of all public utility bonds. They exercise a vital if not dominant influence in the securities markets. They are important owners and managers of farm and urban properties. Life insurance companies are a vital factor affecting the volume, timing, and direction of the flow of investment funds.

There are numerous other phases of concentration of economic power in the life insurance industry evident from the record of the committee, phases of great importance which deserve extended treatment. But the scope of this chapter compels limiting the discussion to:

1. Who are the managers who wield extensive economic power, as illustrated by the life insurance business? How are they selected? What are their interconnections with banks and other corporations? How do they operate?

2. So far as experience in the life-insurance industry is concerned, what is the extent and what are the effects of concentration of economic power over savings and over investment decisions?

4 In the course of its life-insurance inquiries the Committee heard 131 witnesses and printed their testimony, together with research results obtained by the staff of the Securities and Exchange Commission, as Hearings before the Temporary National Economic Committee, Parts 4, 10, 10-A, 12, 13, and 28.

5 Hearings before the Temporary National Economic Committee, Part 10-A, Life Insurance. pp. 94, 100.

Ibid., Part 4, Life Insurance, exhibit No. 218. pp. 1177 and 1512.

7 Ibid., Part 9, Savings and Investment, p. 4055.

8 Statistical Abstract, 1939, pp. 254, 269, 293.

As of December 31, 1938, there were approximately 366 legal reserve life insurance companies operating in the United States. These companies had assets in excess of $28,000,000,000 and policies outstanding with a face amount of about $111,000,000,000.10 This has been the result of 50 years truly spectacular growth at a rate 25 times as fast as population. In the period since 1910 alone their assets have increased 800 percent. Even since 1929 the assets of the principal companies have grown by almost 50 percent.12 Though the future growth of life insurance companies may not continue at this rapid rate, it bids fair, according to one estimate, to increase until assets reach the $40,000,000,000 mark in 1950.13

The control of more than 54 percent of the total assets rests in only five companies,14 all of them with assets in excess of 1 billion dollars, the largest, Metropolitan, with assets of 5.1 billion dollars (December 31, 1939). All do business throughout the United States, but all have their main offices in New York City or its immediate vicinity.15

The assets of life insurance companies represent the major portion of recent net increases in total public saving. From 1929 to 1938, for example, the total assets of principal savings institutions, including life insurance companies and fraternal associations, deposits of commercial banks, assets of mutual savings banks, building and loan associations, Government pension funds and trust funds, total savings deposits and baby bonds increased slightly over $11,000,000,000.16 Of this increase, 94.7 percent is accounted for by the increase in the assets of life insurance companies and fraternal associations. These companies now take in over $4,000,000,000 annually in the form of premiums from their 64,000,000 policyholders. So rapid has been the expansion of the total amount of insurance outstanding that from 1929 to 1938, the total income of principal life insurance companies exceeded by over $10,000,000,000 both the amount disbursed to policyholders and that needed to meet operating expenses of the business.17

The Securities and Exchange Commission confined its studies to legal reserve life insurance companies. These account for about 95 percent of the life insurance in force in the United States. A legal reserve life insurance company is one which agrees to pay a definite sum or benefit that cannot be scaled down, which charges therefor a premium that cannot ordinarily be increased but may be offset somewhat by varying amounts of dividends, 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 involved. 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 outstanding policy contracts as they fall due. (Temporary National Economic Committee Monograph No. 28, p. 5, footnote 1.)

10 Compiled from the Spectator Life Insurance Year Book, Best's Life Reports, Convention Form Annual Statements, and replies to the preliminary questionnaires of the Securities and Exchange Commission.

11 Hearings before the Temporary National Economic Committee, Part 4, pp. 1170 to 1173, and Exhibit No. 217.

12 Ibid., Part 10-A, p. 5. The term principal companies as used herein refers to the 26 largest companies whose operations and investments are analyzed in detail in Part 10-A. 13 Temporary National Economic Committee Monograph No. 28, p. 12.

14 Spectator Life Insurance Year Book, 1939. See also Hearings before the Temporary National Economic Committee, Part 4, p. 1195. These companies are, in order of their size, Metropolitan Life Insurance Co., Prudential Insurance Co. of America, New York Life Insurance Co., Equitable Life Assurance Society of the United States, and Mutual Life Insurance Co. of New York.

15 Hearings before the Temporary National Economic Committee, Part 4, exhibit No. 222, pp. 1514, 1515. As of December 31, 1937, 6 companies with their main offices in New York City and Newark, N. J., accounted for 56.9 percent of the total life insurance assets, and an additional 10 companies with offices in New England accounted for 17.2 percent.

16 Ibid., Part 28, Life Insurance, p. 14725.

17 Ibid., exhibit No. 2258, p. 15493. Total income was $42,679,883,000 and disbursements were $32,094,901,000. Since 1890 there have been but 4 years in which total premium payments income alone for all legal reserve life insurance companies did not exceed all disbursements, including both disbursements made to policyholders and disbursements required to meet expenses in the administration of the business itself. (Ibid., Part 4, exhibit No. 218, pp. 1175-1178.)

THE MANAGEMENT OF LIFE INSURANCE COMPANIES

Who manage and control the life insurance companies? The affiliations, interests, control, and concentration represented by the directors and officers of life insurance companies were investigated by the Armstrong Committee in 1906,18 by the Pujo Committee in 1913,19 and by the Temporary National Economic Committee. All have shown that the life insurance industry is managed and controlled by a small number of men.

Nomination and Election.

Life insurance executives and directors constitute a small group that is self-appointing and self-perpetuating. The facts are discussed first with respect to the mutual companies, which control $22,000,000,000 of assets, or 80 percent of the total,20 and secondly with respect to the stock companies, which control $5,000,000,000 of assets.

The mutual companies are theoretically owned and controlled by their policyholders and operated on the principle that each policyholder is entitled to one vote, regardless of the amount of his insurance. But the election mechanism and the legal election requirements make it difficult to nominate or elect any director not sponsored by the management.21 Though the policyholders are widely scattered, New York State's insurance statutes require that individual nominations be supported by a petition of one-tenth of 1 percent of the number of existing policyholders.22 In the case of the Metropolitan Life Insurance Co., with its 25,000,000 policyholders, this requires a nominating petition signed by 25,000 policyholders. Securing such a large number of signatures is, even under the most favorable circumstances, difficult and expensive. No policyholder would be financially able to undertake such a task.

Furthermore, the companies do not keep a complete list of all policyholders readily available. The Prudential testified that it had no list of policyholders and that it would find it extremely difficult to prepare one.28 The Metropolitan said that it had a card record of all persons carrying ordinary life-insurance policies, and that it could prepare a list from this file. Though ordinary life-insurance policyholders in the Metropolitan pay for the bulk of the outstanding insurance, they constitute less than 10 percent of the total number of policyholders. More than 90 percent of the total number of potential voters are industrial policyholders, of which the home office has no list. These lists are decentralized and kept in the various branch agencies charged with the collection of premiums.24

Nomination is thus in the hands of the management, and election of the slate selected by the management is a foregone conclusion. Voting in most cases is a formality.25 In 1938, for example, the directors of the Equitable, a $2,000,000,000 company, were elected by 532 votes, representing one-twentieth of 1 percent of the eligible voters.

18 Report of the Joint Committee of the Senate and Assembly (New York) to investigate the life insurance companies, February 12, 1906, vols. I to X.

19 Report of the House Committee on Banking and Currency on Money Trust Investigation, pursuant to H. J. Res. 429, 504, 62d Cong., 2d sess.

20 Compiled from Spectator Year Book, 1939.

21 The Metropolitan advertises the approach of an election only after the close of the period within which the policyholders may make independent nominations. (Hearings before the Temporary National Economic Committee, Part 4, p. 1375.)

22 Ibid., pp. 1399, 1405-1406.

23 Ibid., Part 12, Industrial Insurance, p. 5921.

24 Ibid., Part 4, pp. 1305-1306.

25 But data were presented to indicate that even the formalities were not correctly obrved. See ibid., pp. 1295-1296, 1302-1303, 1313-1369, 1398, 1409-1410, and Part 12, 5924-5925.

In that year 1.76 percent of Metropolitan's, and 2.51 percent of Prudential's policyholders voted.26 The average for the 12 largest mutual companies, which at that time accounted for 72 percent of the assets of all American life insurance companies, was even lower, only slightly more than one half of 1 percent of the eligible policyholder votes being cast.27 Even this small percentage of votes is unnecessary, for under section 94 of the New York Insurance Law a single vote is sufficient to elect the slate if no independent nomination has been made.28 In some instances when policyholders have not been notified of their right to vote, it happens that the only policyholders voting are employees of the company.29

Managements seem to have made little effort to keep policyholders aware of their franchise privileges. Many companies do not advise their policyholders in any way with respect to their right to vote. In other cases the notice is completely inadequate and fails to serve any useful purpose.30 With but one or two exceptions companies do not advise their policyholders of their right to make independent nominations to the board.81 Often the policyholder must scan the financial journals to learn the final results of the election.32 In fact, in letters to the Temporary National Economic Committee many policyholders of mutal companies expressed astonishment that they were eligible to vote in the election of directors of their companies.38

In the case of the two largest companies, evidence was presented indicating that agents instructed by the company to solicit policyholders' signatures to proxies on occasion signed the proxies themselves without the knowledge or consent of the policyholders.34 Furthermore, it appeared that both of these companies used their investigative forces to inquire into the personal history of policyholders who requested more detailed information as to their rights to vote.35

Opportunity for policyholders of mutual companies actually to take part in the management of their companies is even less than the foregoing would indicate. The absence of provision for cumulative voting, the occasional use of perpetual or long-term proxies by which policyholders are asked to sign away their voting rights for a period of years, the staggering of directors' terms, as the failure of companies to bring their management face to face with policyholders at annual meetings even to the small extent that takes place in most stockholders' meetings, and the policyholders' lack of legal access to the books and records of their companies,40 are all factors tending to disfranchise the policyholders and to entrench management in control. The nomination and election of officers and directors of stock companies is somewhat different. As corporations they are legally con

26 Ibid., Part 4, p. 1400.

39

27 Ibid., exhibit No. 255, p. 1552.

28 No election has been contested in New York in 15 years except in the case of one small mutual assessment company in 1932. (Ibid., pp. 1405-1406.)

29 Ibid., p. 1392.

30 Of 80 mutual companies examined, 28 sent special notices announcing meetings for the election of directors by mail alone or by mail in combination with other methods, 11 gave notice only on the premium receipt, 19 gave notice only on the policy or policy jacket, and the remaining 22 companies used other methods, none of which involved the mailing of special notices. See ibid., exhibit No. 256, p. 1400, for complete details on this analysis.

31 Ibid., p. 1378 ff.

82 Ibid., exbibit No. 256, p. 1400.

33 Ibid., p. 1403.

34 Ibid., pp. 1313 and 1371; Part 12, pp.5924-5.

35 Ibid., Part 4, pp. 1307 to 1310; Part 12, p. 5923 and Exhibit No. 1010.

36 Temporary National Economic Committee Monograph No. 28, p. 24.

37 Ibid., pp. 24-25, and Hearings before the Temporary National Economic Committee, Part 12, Exhibit No. 1073.

88 Temporary National Economic Committee Monograph No. 28, p. 25.

39 Ibid., p. 23.

40 Ibid., pp. 23–24.