accumulate them as pure endowment to the end of the distribu-
tion period, which method compensated the deferred dividend pol-
icyholder for the risk he has run of losing his dividend. That
method, I think, would meet the approval of other actuaries.
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Q. At the end of 1904 the surplus had been exhausted and
the capital impaired? A. Yes, sir.
Q. As a result up to 1904, that is the end of that year there
was no accumulation ? A. Yes, sir.
Q. For any of the deferred dividend policies previously is-
sued? A. Yes, sir.
Q. So whatever will be apportioned to the deferred dividend
policies of issues earlier than 1905 will depend on the surplus
^ain, beginning January i, 1905? A. Yes, sir.
Q. And will be apportioned in accordance with their contri-
butions to that surplus? A. Not necessarily, Mr. Hughes, be-
cause the surplus it seems to me must be drawn upon to make
tip the accumulation of past years, that were wiped out. That
is only fair to the individual policyholders.
Q. Well, is that fair to the policyholders, who in 1905, are
providing the surplus which is then accumulated? A. Strictly
speaking, perhaps not, but it is a question of expediency of
practice rather than of strict theory it seems to me.
Q. Isn't that the vice in this whole matter of dividend ascer-
tainment, that the effort is to keep people quiet, and deal with
the situation in such a way as to create harmony rather than
to give them the gains they are actually entitled to on the busi-
ness according to its actual results? A. There seems to be a
good deal of evidence that would justify that view. I would
not go quite as far as that myself.
Q.Don't you think that starting with a deficit on December
31, 1904, and then accumulating the surplus through the con-
tributions made in the premiums of policyholders paid after
that date, that the accumulations should be distributed accord-
ing to those contributions? A. So far as your statement is
true that is correct, yes, sir; but there are miscellaneous sources
of profit which seem to me are fairly entitled to be credited to
policyholders who lost their accumulations before.
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Q. You mean a gain on some investments that have been
made for example years ago? A. No, I do not mean that; I
mean current gains on investments, profit and loss gains, and
gains on excess of interest.
Q. Those are gains at this particular time? A. They are
gains at this particular time, of course, but it seems to me that
the old policyholders are entitled to something out of that.
Q. The point is you think they would feel very sore if they
didn't get it? A. I know they would feel very sore if they
didn't get it, but if they have a right to — the problem is not a
simple one by any sort of means.
Q. Do you now permit estimates to be distributed with regard
to the prospects of policyholders under deferred dividend
policies? A. No, sir.
Q. How do you endeavor to control that matter? A. Well,
it is one which from the particular nature of the business it
is impossible to control. Wlienever the question has been pre-
sented to me I have said that I in no wise authorized estimates
to be given out, that I didn't approve of them, and that no agent
of the company — 1 have said this to several policyholders in
writing— certainly by word of mouth — that no agent of the com-
pany had any authority to express an opinion on the question
of profits, either his own or any other person's premiums.
Q. Have you, as a matter of fact, any deferred dividend
policies maturing this year, 1905? A. Yes, sir.
Q. Have you made any calculation with regard to apportion-
ment to them of any surplus? A. Those apportionments were
all made before I took hold of the company and the dividends
have been paid in accordance therewith.
Q. In accordance with those apportionments? A. In accord-
ance with the previous apportionments.
Q. How could YOU do that on the ascertainment of the fact
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there had been no accumulation? A. We simply felt it was
right to those policyholders to give them those dividends.
Q. That had been declared upon a false hypothesis ? A. Yes,
sir.
Q. Have you any system of accounting by which the amount
ultimately payable to a deferred dividend policyholder is placed
to his credit annually and merely awaits payment? A. No, sir.
Q. Testimony has been given here with regard to the adoption
of that system by another company. What in your judgment
is the objection, if there be any, to determining each year the
dividend which will be payable at the end of a given year, and
ascertaining the present worth of the amount now determined
and accumulated for a given period, and crediting it to the
policyholder as a legal obligation of the company ? A. I see no
objection to it whatever.
Q. Would that tend to cramp a company in any way in do-
ing its business? A. Under conditions that have existed it
would, but if I may speak personally, my theory has always
been that a surplus was for distribution and not for accumula-
tion.
Q. Yes; and you would set aside how much of the surplus oi
the company to protect you against contingencies and fluctua-
tions in values, that could not be definitely anticipated? A.
Well, of course, that must be determined by the conditions of
the individual companies ; but it seems to me that the prpvisions
of the Massachusetts law which I think says no company shall
accumulate above ten per cent, of its assets is a very good rule
for a general rule.
Q. And you would personally favor a plan by which gains in
excess of ten per cent, of the assets should be either annually
distributed or put in the form of a liability annually ? A. I see
no objection to that, with the single exception, if I may state
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right here, that the annual dividend system has never appealed
to me personally as anything but a good deal of a makeshift.
Q. Makeshift for what? A. Well, from the very nature of
the business of a life insurance company it is impossible to de-
termine with a high degree of accuracy what the earnings of
any one year are in that year. It seems to me that this busi-
ness of taking, say, a premium of thirty-five dollars a year and
giving him. back four dollars and seventy-three cents at the end
of the year, there is no justification for it. Of course, there is
justification if he takes the dividend in the form of addition to
his policy, but personally, if I may say so, I should favor a sys-
tem of surplus distribution at periods of not more than five
years, or less than three — within a period of three or five years,
an actuary can determine with a very high degree of accuracy
the actual surplus earnings of a given class of policies and to
a degree beyond which he can determine it for a period of a
single year. The distribution of dividends must necessarily be
made on the basis of policy years. The fiscal years of all life
insurance companies under the laws and in accordance with their
practice are calendar years. Policy years must therefore lap
over calendar years, and by taking a period of three or five
years you can determine the factors which constitute surplus
with a much greater degree of accuracy and of fairness than you
can of taking only one year.
Q. Then you would favor the distribution at periods
within which the actual gains can be determined? A. Yes, sir.
Q. You would favor an actual cash distribution at such times?
A. Certainly. I see no objection to that.
Q. Of course, at the option of the policyholder in reversionary
additions. A. Yes.
Q. But your objection to an annual payment is that you can-
not annuallv determine the amount accurately ? A. Well, there
are other considerations, too. The real problem that concerns
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an actuary with an annual dividend company is what the first
annual dividend shall be, because he knows that by the scale
there determined in the first year he has got to stand or fall.
The policyholders and agents will view with disfavor any marked
fluctuation, especially in the way of a decrease in the coming
years, and the problem really is to determine to the best of his
judgment the scale for what the future years shall be, and that
is why I call it an arbitrary system.
There is also this to be considered, that the annual dividend
system was engrafted upon American life insurance companies
partly because of the system of making an annual valuation
under the State laws which was set up, and also on account of
competition. The original system, as you know very well, was
a five year distribution, five year determination of the surplus.
Then one or two companies, I think, began distribution at less
periods, and finally an annual dividend system grew out of that,
coupled with a system of annual valuations.
Q. When do you begin to accumulate a surplus upon a policy
— ^in what time in the average? A. Well, that depends; that is
rather an academic question, but it depends necessarily upon
the point of view, as to from what source you pay your ex-
penses of getting new business. If you take the view that the
expenses of new business are properly chargeable to the pre-
miums of new business itself, the authorities have decided that
there is no surplus on policies probably for three years. If you
take the contrary view, that new business is paid for out of the
treasury of the company as a general expense charge, then of
course there must be some surplus on the first year's premiums
on new business because the premiums — first year's premiums
are only chargeable with their pro rata share of the expenses.
Q. Dividends paid by a Ufe insurance company are in effect
a return of an overcharge? A. Yes, sir.
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Q. Calculation is made as to the expected cost of the insur-
ance? A. Yes, sir.
Q. And if anything is gained either through good fortune in
investments, or through good fortune in mortality rate, or
through paying out less on lapsed policies than has been calcu-
lated, you have got something which in a mutual company,
apart from any claims of stockholders should be g^ven back at
some time? A. Yes.
Q. And in some form? A. Yes.
Q. And your point is that it should not be given back until
it can be calculated with accuracy? A. With substantial ac-
curacy.
Q. With substantial accuracy, and that it cannot be calculated
with substantial accuracy short of three years ? A. That is my
individual judgment, others might differ on that point.
Q. Now, with regard to the difficulty that an actuary has in
fixing the dividend for the first year, suppose all cc«npanies
were required to distribute their gains after setting aside a rea-
sonable amount to meet contingencies, would there be any prac-
tical difficulty in the way of such distribution? A. No, sir; I
don't think there would.
Q. It would simply compel them to show the efficiency of
their management A. It would help the Situation very much.
Q. Yes ; what really disturbs you now is that if you attempt to
apportion your gains as they actually are and another company
does not, there will be a factitious advantage in the favor of
the other company ? A. Yes.
Q. And you will suffer from trying to do the honest thing?
A. Yes.
Q. Of course the thing that ought to be done is to return what
the policyholder has paid more than .he should have paid, be-
cause of an overcalculation as to the cost of carrying his in-
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Testimony of John Tatlock
surance? A. Yes, sir. My objection to the annual dividend
system really goes deeper than that.
Q. Go on ? A. I think there is no ground for it.
Q. Why not? A. On the two grounds that is seems absurd
on the face of it to overcharge a man on the ist of January for
handing him back the overcharge on the next January.
Q. You mean it goes back too quick. There is no possibility
of making any pretense that you have earned anything for him
with that overcharge in the short space of a year.
Q. The real point is that you have not satisfactorily at that
time determined that he has been overcharged or the amount
of it ? A. That is also a point.
Q. Of course just as soon as you did determine it and you had
the money you think that you ought to give it back to him ? A.
Oh, yes ; and then in the net view of it the proper system would
be to defer the first dividend until the end of the second year.
Then you would have twelve months more to examine and see
what the man had actually earned.
Q. What is the advantage of accumulating the dividends for
any period beyond a period necessary to make a fair and accu-
rate distribution — is there any advantage to the company? A.
I see no real advantage.
Q. Of course it is a practical advantage to have a good deal
of money in hand, it*makes one feel more comfortable ? A. That
is true.
Q. But there is not any essential advantage, that is if the
company has a proper fund, as a contingency fund? A. If its
surplus for contingencies is large enough.
Q. So that really it is a mere matter of whether it is a good
thing for the policyholder to be allowed to gain whatever ad-
vantage there may be through the discontinuance of other poli-
cies by having a surplus accumulated and perhaps getting at the
end more than he otherwise would, or perhaps through that
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saving money he otherwise would not have saved — ^that is about
what the argument comes to? A. That is about what the ar-
gument comes to.
Q. And if there were accumulations you do not see any way in
which the company would be handicapped by being compelled to
set apart each year as a liability the present value of the amount
payable at the end of the period ? A. I can conceive of no cir-
cumstances under which it would be any detriment to any cor-
poration or any individual to know what his real liabilities are
at any time.
Q. Have you had experience with the business of American
companies in foreign countries? A. Some experience; yes, sir.
Q. What was that experience ? A. Well, I have never been di-
rectly charged with the management of foreign business, but
I have lived abroad more or less on insurance company business
and I have had opportunities to examine the foreign business,
and I am familiar somewhat with its cost.
Q. Was that during your connection with the Mutual? A.
Yes.
Q. In what companies have you examined foreign business —
in what companies and in what countries have you examined
the foreign business? A. My knowledge is confined for the
most part to foreign business of the Mutual Life, and I have
examined practically all over the whole of Europe.
Q. What conclusions have you reached concerning the advisa-
bility of an American company's doing foreign business? A.
Well, of course it is to be said that much of the foreign business
done by American companies has been profitable. It has been
of exceedingly good quality and low mortality, and some of it
is claimed to have been secured at a reasonable cost, but the
sum of my conclusions is that life insurance is a business which
is admirably adapted to be done by the companies domiciled in
the countries in which the business is sought to be done.
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Testimony of John Tatlock
Q. What are the reasons for that conclusion? A. WelJ, based
on these facts, that the American business in foreign countries
has for the most part been done at a very high rate of expense.
In some European countries the mortaHty is not as good as in
America. Of course the business has suffered from that end,
and the high rate of expense is largely due to very excessive tax-
ation, fees and administrative cost — I mean official administra-
tive cost. To my mind one great objection is the requirements
of most foreign countries to the end that the liability under the
policies issued in that country shall be placed in assets pre-
scribed by the governments of those countries and held there.
I do not believe in this business of putting your money out of
your hands. I merely state that as a personal opinion.
Q. Mr. Tatlock, do you desire to correct any of your testi-
mony given yesterday? A. Yes, sir; in one or two respects. I
inadvertently gave you an impression in my statement that the
net premiums used in computing the participating rates on the
so-called preferred class policy were based on 3^ per cent. I
regret the inadvertence and I want to correct it. They were
based on 3 per cent. The loading on those premiums is 14
per cent., plus the 25 cents on 3 per cent, premiums. The effect
of that is to make the difference in percentage of loading between
the regular rates and the preferred class rates 40 per cent, in-
stead of 60.
Q. Is there anything else? A. There is one matter I would
like to speak of in regard to the investments of the company,
and that is that no investment that has ever been brought up in
the Finance Committee has ever been bought unless the full
Committee present agreed. And I want to say that Mr. Ryan
has never made any attempt whatever to influence the Commit-
tee in its decisions, in fact he has been the one member of the
Committee who has taken less interest in its deliberations than
anybody else ; and that all our investments have been made of
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securities that have been purchased and sold with the full know-
ledge and consent of the Committee and in their best judgment
with the view of making the utmost profit we could for the com-
pany.
Q. Who did suggest the investments which you referred to
yesterday in American Tobacco? A. My recollection is it was
Mr. Morton.
Q. Was that concurred in by all the members of the Com-
mittee? A. Yes, sir.
Q. Did you concur in it ? A. I did, for the reasons I stated
to you yesterday.
Q. You said yesterday as I recall it, that you acted under in-
structions? A. I desire to correct that if I said so.
Q. What did you do? A. I concurred as a member of the
Finance Committee in that purchase.
Q. How did you justify your concurrence? A. As I told you
yesterday that it seems to me they were securities which would
yield up a very great rate of interest for a time, and that might
yield us a profit on sale and the necessities of the company were
such that I considered we were abundantly justified in that in-
vestment.
Q. As a regular policy you do not feel that a company should
buy securities with a view to a resale for the purpose of mak-
ing a profit on the rise in the market, do you? A. I think I do,
Mr. Hughes. It seems to me that one of the functions of a life
insurance company is that of a banker where it can make a
legitimate profit in safe securities for the benefit of its policy-
holders, sir.
Q. Isn't a preferable policy that it should invest its money so
far as possible permanently with a view of keeping a uniform
rate of return, and of being compelled to turn its money over as
infrequently as possible? A. No, sir, I don't think so. That
was the policy adopted by the old management. Their invest-
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ments were made entirely for many years in bond and mortgage;
the results were that they made heavy losses, and were saddled
with a large amount of real estate, and I think that
Q. That was because of the unwisdom of their investment,
was it not ? A. Yes, sir, but at these times — at this time I think
one would regard it as a mistake to invest exclusively in any one
class of securities — notably in bond and mortgage. The bond
and mortgage market in New York has become very much re-
stricted for first class investments with the growth of the title
companies and other corporations who invest in mortgages for
the purpose of selling them, and certainly the experience of the
Washington Life in that respect seems to me to justify the
opinion that a mixed class of investment is altogether desirable.
Q. Well, the pith of your statement is that you went into
these transactions which were stated yesterday to make money?
A. Yes, sir.
Q. And your justification is that you did make money? A.
Yes, sir.
Q. The question is whether you think it advisable to have a
temporary investment with a view of resale; does not that ex-
pose you to the risks of what is tantamount to a speculation? A.
I do not think so, sir, if those investments are made with good
judgment. I do not believe in speculating of course, or of in-
vesting in speculative securities.
Q. How do you draw the line between an investment for a
temporary period with the idea not of holding these securities,
but of reselling on speculation. If a security is likely to fluctuate
upward it may fluctuate downward? A. It may; but I believe
the best financial judgment is able to discriminate as to the
direction it is likely to go.
Q. It comes down to a sound financial judgment in such
cases? A. Of sound financial judgment. It seems to me the
case is no different in investing in securities at a low price for
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temporary investment for the purpose of making a profit from
what it is in making a collateral loan on the same securities at
a high rate of interest when the money market is high.
Q. To what extent do you favor putting out money on col-
lateral loans, Street loans in other words? A. I do not favor
it for my own company.
Q. Why should you not favor a collateral loan as against in-
vestment for a temporary purpose in securities of the same
class ? A. Well, my opinion is based largely on the fact that we
have not the machinery necessary for making collateral loans.
It involves a good deal of labor and trouble, then again, there
are very few occasions when you can make the same profits in
the way of interest on collateral loans, that you can in buying
securities low that are deemed by the best judgment obtainable,
that they will rise.
Q. Do you keep a minute of the transactions of the Finance
Committee? A. Yes, sir.
Q. We found yesterday I believe in one case that their .
You were unable to point out at the moment an authorization?
A. Yes, sir. I can only explain that as a clerical omission. I
have no other explanation for it.
Q. Were in fact all the purchases and sales mentioned yester-
day authorized by the Finance Committee? A. Yes, sir.
Q. Did the Finance Committee act unanimously in the mat-
ter? A. Absolutely, yes, sir.
Q. Did all the members of the Committee concur in an au-
thorization or approval of these transactions? A. Yes, sir.
Q. Did the same thing in the way of authorization or approval
occur in the matter of the syndicate participation to which you
testify? A. Yes, sir.
Q. Is it your point of view, Mr. Tatlock, that an insurance
company is justified in going into any syndicate participation,
or into any transaction in securities merely because it expects
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to make money? A. Yes, sir, that is my point of view. Always,
coupled with the condition that it shall be done with sound judg-
ment.
Q. What is the more likely to fluctuate, real estate values or
the values of securities ? A. Well, I cannot pose as a real estate
expert, Mr. Hughes, but my own judgment is that real estate
is the most speculative form of investment known.
Q. Do you set apart any class of securities in which you think
an insurance company should not invest, or would you leave
it entirely to the business judgment of the men in charge of its
investments? A. I would leave it entirely to the business judg-
ment of the men.
Q. Then you do not favor any action which would control the
liberty of investments on the part of an insurance company ? A.
No, sir, I think it would be a gfreat mistake.
Q. From your judgment of men and experience of affairs do
you think that it is advisable to rely simply on business judg-
ment in determining the investments of an insurance company?
A. Yes, sir, if you rely upon enough of them.
Q. It comes down to a question of personal equation? A.
Yes, sir, I think this idea of control is very much exaggerated;
it certainly is as regards my experience in these matters.
Q. How have you seen it exaggerated? A. Well, this popular
idea that men are led by private interests.
Q. Oh, well, do you think that the limitation of the field of in-