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1,722.48




Fees for collection


1,313.96




Furniture and fixtures


1,448.58




Incidentals


2,711.93




Inspection of risks


1,457.48




Legal fees


1,078.39




Medical examination


16,117.54




Municipal and state licenses


49.50




Postage and expressage


3,247.97




Printing and stationery


4,274.19




Rent


3,361.00




Reinsurance on renewals


1,189.95




Reinsurance first year


305.80




Salaries to managers


15,620.04




Salaries to clerks


14,185.84




Salaries and allowances to agents


13,456.70




Telegraph and telephone
Taxes, first year


579.56




2,292.90




Taxes, renewals


4,936.67




Taxes, capital stock


2,070.00




Taxes, real estate


3.77




Taxes, miscellaneous


7.37




Traveling expenses


1,928.91


,


Bad debts


4,523.25





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§ 38 ACCOUNTS FOR INSURANCE COMPANIES 11

Assets



Agents' accounts


$ 42,274.32




Bonds


5,055.37




Cash in home bank


16,024.66




Cash in outside banks


11,625.51




Policy loans


180,991.09




Mortgages on real estate
Due from officers


1,089,707.30




60.00




Premium notes, first year


1,556.84




Premium notes, renewals


2,039.46




Northern office, cash


100.00

LlABn.ITlES




Joseph Danforth, fees unpaid
Prottt-and-loss account (incl




203.84


uding capital




$100,000)




1,067,101.17




$1,654,892.62


$1,654,892.62



22. The disbursements are usually classified as Amounts
Paid Policy Holders and Other Disbursements. Under
Amounts Paid Policy Holders is included amotirits paid for the
surrender of policies, amotmts paid as dividends, death claims,
matured endowments. Supplementary Contracts is an accotmt
representing amoimts paid on instalment policies; that is, where
the payment of a death claim is spread over a term of years.
Premiums Notes Voided by Lapse represent all notes charged
off where the assured failed to pay their premiums. Under
Disbursements are other items, but the titles in most cases
explain themselves. The accounts show expenditure or pay-
ments to soliciting agents, amotmts paid stockholders, salaries
to officers and clerks, department fees, legal and inspection fees,
amounts paid to medical examiners, general expense charges,
various amounts paid for taxes; the sum represents all expenses
outside of those paid as benefits to policyholders.

23. Mortgage loans, as a rule, represent the greatest portion
of the assets of a company. Insurance companies are not
allowed to invest in second mortgages, hence the mortgage'
account represents a good investment. Policy loans represent
money loaned on the security of the company's policies. The
amotmt of loan on a policy plus interest should not be greater
thaa the reserve belonging to it. Interest on policy loans is
usually collected in advance, otherwise the company would
lose by borrowers lapsing their policies.

I L T 234—15



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12 ACCOUNTS FOR INSURANCE COMPANIES ^8

24. The various Pranium Notes Accounts represent per-
sonal notes given by the assured, and are not admitted as assets
unless the reserve on said policies is in excess of the notes
received. This is true with the agents' accounts also. In the
statement appended, only a portion of agents* account has been
deducted as not admitted, although the practice is to deduct
the whole amount. In this way a company practically estab-
lishes a secret i-eserve, as most of these accoimts are paid at a
later date. Furniture, fixtures, and supplies are not admitted,
as it would be practically impossible to use these in liquidation
of policy claims.

25. Sample Statements. — The accompanyifig statement
shows the manner of presenting information for publication. It
shows the receipts and disbursements for the year as well as
the assets and liabilities. The auditor's report is also attached.

REVENUE ACCOUNT

Year Ending December 31, 1913

Receipts

Premiums $10,881,232.62

In teregfc and rents • 3,326,671 .35

Supplementary contracts 443,532.02

$14,651,435.99
Disbursements

Death claims, less $45,000 reinsurance ' $ 3,282,880.18

Matured endowments, less $10,000 reinsurance 399,789.00

Surplus returned to policy holders in dividends 2,078,191.67

Surrender and canceled policies 1,263,634.86

Total payments to policy holdei^ $ 7,024,504.71
Claims under supplementary contracts not involving life

contingencies 246,770.65
Commissions and agency expenses 1,239,788.25
Medical examinations and inspection of risks 101,611.95
Investigation of policy claims and legal expenses 5,500.32
Salaries of officers and home-office employes 295,934.00
Rents, home office and agencies 99,351.10
Advertising, printing, stationery, postage, telephone, tele-
graph, express, and furniture 121,560.22
Federal and other taxes, fees, and licenses 224,252.95
All other insurance expenses 22,624.36
Expenses on real estate "25,175.93
Net expense? of mortgage-loan agencies 4,679.62
Profit and loss 2,097.53
Decrease by adjustment in book value of ledger assets 135,1 60.77
Excess income over disbursements, increase in ledger assets 5,102,423.63

$14,651,435.99



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§ 38 ACCOUNTS FOR INSURANCE COMPANIES 13

BALANCE SHEET
Assets

Mortgage loans ' $28,161,854.00

Policy and premium loans 12,024,797.38

Real estate 961,500.00

Railroad and other bonds, market value 27,228,852.00

Railroad stocks, market value 451,158.00

Cash in banks, $2,101,373.33 at interest 2,393,627.14

Cash in office 1,826.78

Net deferred and uncollected premiums 1,361,731.27

Interest due and accrued 1,138,466.11

Gross assets $73,723,812.68

T TARTT TTTWQ

' Reserve, Massachusetts standard $66,066,293.00
PoHcy claims awaiting proofs, $175,878.95; in course of

settlement, $58,227.14 234,108.09

Policy claims of 1913, reported to Company in 1914 52,223.00

Supplementary contracts 699,540.30

Unpaid dividends 106,945.30

Accumulated dividend fund, subject to insured's order 1,395,031.19
Dividends apportioned in 1913, payable first 5 months

of 1914 1,005,707.14

Federal and state taxes, payable in 1914, estimated 191,689.47

Premiums, $60,057.89; interest, $1,146.36; paid in advance 61,204.25

Unpaid expenses, bills not presented 45,444.64

Surplus, December 31, 1913 3,865,626.30

$73,723,812.68

New insurance paid for in 1913, 16,357 policies, $39,721,961
Insurance in force, 144,024 policies, $328,578,136.

Springfibld, Mass. January 21, 1914.
The receipts, disbursements, and balances of the Massachusetts
Mutual Life Insurance Company for the year 1913, as shown by
the foregoing statement, have been carefully audited under our
supervision and found to be correct, and we have personally
examined and verified the Company's securities.

H. S. HYDE 1

E. A. GROESBECK} Auditors.

W. S. MARTIN J

26. Annual Report to State. — ^Each instirance company
is required to file a comprehensive annual report with the
insurance department of every state in which it carries on busi-
ness, and these reports are of course subject to careful scru-
tiny by the various insurance commissioners. The report
forms are about the same in all states and require an exhaustive
description of the company's business, including assets and
liabilities, income and expenditures, investments, reserves,
insurance risks, death claims carried and paid, classes of policies,
and classifications of risks carried, etc.

The form required in Pennsylvania is a book containing
44 pages 11| inches by 16 inches. Every page has to be used



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14 ACCOUNTS FOR INSURANCE COMPANIES § 38

to impart information; on page 1 is to be given the names of
the officers and director^. In order to provide specific informa-
tion on insurance accoimts and reports, pages 2 to 10. of this
report are reproduced in Fig. 1 (a) to (i).



FIRE INSURANCE

27. Fire insurance is a contract to pay all, or a certain
part of, any damage that may be done by fire to an insured
property. Fire-insurance companies, or the companies that
give this protection are organized in the same manner as other
busiaess corporations, though imder special state insurance
laws.

28. Classes of Risks. — ^Fire-insurance companies have
all risks carefully classified, and the rate of premium charged
depends largely on the classifications. Classification is based
on the location, condition of surrounding buildings, proximity
to hazardous risks, construction and use of building, fumishiag,
goods handled therein, public and private fire protection, etc.
The companies have each city carefully surveyed and mapped
so that every location and risk is not only clearly set forth in its
maps but accurately surveyed, inspected, and described from
top to bottom, including foundation, roof, surroimdings, and
all moral hazards.

29. Premiums, Reserves, and Reinsurance. — ^The
insurance premiums received by the company for fire risks is
generally paid in advance, instead of at stated periods as in
a life-insurance company. This premiimi covers the full term
of the policy, whether it is for 1, 3, or 5 years, or perpetual, and
therefore cannot all be considered as earnings, for the current
year. That portion that has already been earned, according
to months in force, may be considered as earned income for the
period, while the remainder must be held as a reserve for possi-
ble fire losses during the years that the policy has yet to run.
If the policy is for 1 year only and expires at the end thereof.



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§38 ACCOUNTS FOR INSURANCE COMPANIES 15

the premium received thereon will be considered as entirely
earned and included as revenue for the year; but if the policy
(beginning on, say, June 30 of the current year) continues over
a term of 3 years, then one-sixth would belong to earnings of the
first year and five-sixths carried as imeamed reserve to meet
future losses. The vinexpired premium in each case is considered
in proportion to the currency of the policy either in months
or days.

The fire losses that occur each year are chargeable against
the earnings for £hat year, and the balance represents the net
earnings of the company as av^able for distribution in the
form of dividends. The reserve requirements are governed
by the laws of each state and necessarily vary to some extent.
It must be strictly maintained or the Insurance Commissioner
will promptly proceed to wind up the affairs of the company.
The Pennsylvania laws require that "the Insurance Com-
nMSsioner shall calculate the re-insurance reserve for unex-
pired fire risks, by taking 50 per cent, of the premiums on. all
tmexpired risks that have less than 1 year to nm, and a pro
rata on all premiums received on risks that have more than
1 year to run."

30. The 80-Per-Cent. CJolnsurance Clause. — It is

the practice of insurance companies today in well-protected
cities to require the property owner to insure his property to at
least 80 per cent, of its value. Of course a person may insure
his property for as low an amoimt as he desires, but unless
this requirement of the companies is met, in case of any loss
th6 insurance company will consider itself liable for only that
portion of the loss represented by the proportion that the
actual insurance taken bears to the required 80 per cent. It
is an essential principle in fire insurance and companies enforce
heavy penalties against those who decline to comply there-
with, there being usually an addition to the rate otherwise
required. The 80-per-cent. coinsurance clause is briefly ex-
plained in the following illustration taken from a circular
issued by The Philadelphia Contributionship, the oldest insur-
ance company in America.

279B— 10



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16 ACCOUNTS FOR INSURANCE COMPANIES § 38

The 80-Per-Cent. Coinsurance
Tlie Principle of Coinsurance. — Under the principle of
coinsurance the owner of a building has his losses paid only in the pro-
portion that, the amount of insurance he takes out bears to the amount of
insurance that the companies believe he should carry.

Under the 80-per-cent. coinsurance clause, an owner must take out
insurance to the amount of 80 per cent., or over, of the actual cash value
of the property; that is, the cost of replacing the building at the time of
the fire, if he desires to collect in full up to the amount of his policy, any
loss that may occur.

Example No. 1. — Cost of replacing building. $10,000

80 per cent, of such cost 8,000

Insurance taken out 6,000

Loss t 4,000

Result. — Amount collected from companies 3,000

Owner fails to collect 1,000

Explanation. — ^The owner should have taken out at least $8,000
insurance but had only $6,000 and so became a coinsurer for $2,000, the
amount of the deficiency; therefore, the companies pay only 6000/8000
(6/8) of $4,000, or $3,000 and the owner himself loses the balance (2/8) of
$4,000 or $1,000. The owner's loss might have been avoided by carrying
the required amount of insurance, as in the following:

Example No. 2. — Cost of replacing building $10,000

80 per cent, of such cost 8,000

Insurance taken out 8,000 ^

Loss 4,000

Result. — ^Amount collected from companies , 4,000

Explanation. — ^The owner had taken out insurance to the amount
of 80 per cent, of the cost of replacing his building, or $8,000; therefore,
the companies pay 8000/8000 (8/8) of $4,000, or $4,000 the full amoimt
of the loss.

Example No. 3. — If the loss equals or exceeds 80 per cent, of the cost
of replacing the building the conditions will be as in the following:

Cost of replacing building $10,000

80 per cent, of such cost 8,000

Insurance taken out 6,000

Loss 8,000

Result. — Insurance collected from companies. 6,000

Loss to the owner 2,000

Explanation. — The owner should have taken out at least $8,000
insurance but had only $6,000 and while the companies pay 6000/8000
(6/8) of $8,000 or $6,000, 'the full amount of the insurance, yet the owner
himself has a loss of $2,000 because he was underinsured, and had not
heeded the warning of the 80-per-cent. coinsurance clause.

31. The following is made a part of each policy :

Reduced-Rate Average Clause

In consideration of the reduced rate at which this poHcy is written, it is
expressly stipulated and made a condition of this contract that this com-
pany shall be liable for no greater proportion of any loss than the amount
hereby insured bears to 80 per cent, of the actual cash value of the property
described herein at the tin^e when such loss shall happen, nor for more
than the proportion which this policy bears to the total insurance thereon;



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§38 ACCOUNTS FOR INSURANCE COMPANIES 17

provided, however, that if the aggregate claim for any loss shall not exceed
five (5) per cent, of such actual cash value, no special inventory or appraise-
ment of the undamaged property shall be required.

If this policy be divided into two or more items, the foregoing condi-
tions shall apply to each item separately; and if two or more buildings
or their contents be included in a single item, the application of the pro-
vision as to special inventory or appraisement shall be limited to each
building and its contents.

32. Fire-insurance Accounts. — ^The following question

is from a Pennsylvania examination and is used as a basis for

study in the accounts of a fire-insurance company. From the

trial balance of the Safety Fire Insurance Company, here

shown, prepare a balance sheet at December 31, and the relative

income account for the year ending that date; also describe the

procedure adopted in verifying the assets and liabilities and

make any criticisms in respect of reserves apparently omitted.

TRIAL BALANCE
December 31, 1913



Stocks and bonds, book value


$3,000,000




Mortgage loans


1,000,000




Interest receivable on mortgage loans


1,000




Real estate


500,000




Cash at banks and on hand


300,000




Uncollected premiums
Capital stock


500,000






$ 500,000


Unpaid dividends




100,000


Sixrplus account, January 1, 1913




2,000,000


Grass premiums




3,000.000


Return premiums


6,500




Income from stocks and bonds




25,000


Interest on mortgage loans




10,000


Rents received




200


Losses


210,000




Reinsurance premiums


10,000




Commissions


5,000




Taxes


4,000




Salaries


40,000




Uncollectible premiums


3,000




Rebates


200




Real-estate expenses


5,000




Real-estate losses


3,000




Postage


500




Legal expenses


500




Maps


15,000




Underwriters' board and tariff associa-






tions


30,000




Inspections and surveys


2,000




General expenses


500






$5,635,200


$5,635,200



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18 ACCOUNTS FOR INSURANCE COMPANIES § 38

33. The question lacks many details that wotdd ordinarily
be required to enable one to prepare a satisfactory statement,
but this ilo doubt was the intention of the examiners, as the
candidate is required to display his knowledge of fire-insurance
accoimting without assistance. The book value of stocks and
bonds is given, but not the par or market value thereof. Real
estate is evidently to be taken at the book value. It is impossi-
ble "to determine whether or not there is accrued interest on
mortgages and bonds, other than the $10,000 shown, and we
must therefore take the income from these sources as complete
to date. Fire losses for the year amount to $210,000. Return
premiums and reinsurance premiimis must be deducted from
the gross prefkiums, which include premiums received during
the year and all reserves carried over from previous years. It is
obvious that only part of this amount can be apportioned as
earnings for the current year, while the required reserves must
be prorated to unexpired risks. This is the crucial test in the
problem, and certain conclusions must necessarily be assimied.
If the aggregate outstanding insurance was given and classified
as to time to run, the prorating of reserve premiums would be
an easy matter, but as the examiners have purposely omitted
this information, it will be supposed that $750,000 has been
earned during the year and that $2,250,000 is the imeamed
reserve. From this year's earnings are deducted the fire losses,
reinsurance, and return premiimis. The surplus account is
very large when compared with the capital, and no doubt part
of it was contributed by the original subscribers. The capital
and surplus f tmds of insurance companies must be invested only
in first-class mortgages and gilt-edged securities, on which there
is required a given margin of safety.

The main books used by fire-insurance companies are ledger
and cash book, the latter with special coltimns to suit the income
and disbursements. There are numerous records kept on cards
and in books of various kinds, also reports from agencies,
whence the greater part of the business comes.

34. From thetrial balance justshown, an income-and-expense
accoimt and also a balance sheet may be worked up as follows:



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§ 38 ACCOUNTS FOR INSURANCE COMPANIES 19



INCOME AND EXPENSE ACCOUNT

Safety Fire Insurance Company

December 31



Expenses


Income




Commissions


$ 5,000


Premiums earned


$734,500


Taxes


4,000


Income from stocks and




Salaries


40,000


bonds


25,000


Uncollectible premiums.


3,000


Interest on mortgage




Rebates


200


loans


10,000


Real-estate expenses


5,000


Rents received


200


Real-estate loans


3,000






Postage


500






Legal expenses


500






Maps


x5,000






Boards and associations


30,000






Inspections and surveys


2,000






General expenses


500






Total expenses


$108,700






Balance down, excess of








mcome over expenses


661,000
$769,700








$769,700


Fire losses paid during




Balance down


661,000


year


210,000






Net earnings for year


451,000
$661,000








$661,000



BALANCE SHEET

Safety Fire Insurance Company

December 31



Assets



Liabilities



Stocks and bonds $3,000,000

Mortgage loans 1 ,000,000

Real estate 500,000

Cash 300,000

Uncollected premituns 500,000

Interest accrued on

mortgage loans * 1,000

$5,301,000



Unpaid dividends
Premiums unearned, not

reserve
Total liabilities
Capital stock
Surplus, January 1, 1913
Net earnings for year



$ 100,000

2, 250,0 00
$2,350,000

500,000
2,000,000

451,000

$5,301,000



Premium Account
Gross premiums received
Less reserve for reinsurance, estimated
Balance available as income for year
Deduct:
Return premituns
Reinsurance premituns
Balance, premiums earned



$ 5,500
10,000



$3,000,000

2,250 ,000

$ 750,000



15,500
$ 734,500



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20 ACCOUNTS FOR INSURANCE COMPANIES § 38

35. Annual Reports and Statements. — ^An exhaustive
annual report and statement must be sent to the Insurance
Commissioner of every state in which the company does busi-
ness. The reports must comply with the laws of said states,
in some of which a deposit of securities must be made. This
report inquires into every detail of the company's business and
financial condition, and furnishes a most exhaustive exhibit of
its affairs. In reporting assets, the company is required to
deduct those that are not usually available for settlement of
fire losses, as furniture, supplies, printed matter, etc., the com-
pany's own stock owned or loans made thereon, bills receivable
past due, agents' balances after a brief time has elapsed, loans
on personal security, book values or ledger assets over market
value, etc. The insurance department is always exacting,
and any assets not capable of realizing full value on forced sale
are either omitted or reduced to a safe working basis. All
liabilities, no matter how small, of a real or contingent nature,
must be amounted for, and all fire losses unpaid, whether in
dispute or not, must be included at the face value of risks.

The form does not differ very much from the one already
shown for life-insurance companies, but in order to show
the usual accounts required, the accompanying reproduc-
tion of pages 2 to 9 of the Pennsylvania form are shown in
Fig. 2 (a) to Qi),



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MUNICIPAL ACCOUNTING



INTRODUCTION



GENERAL. EXPLANATIONS

1. From the earliest times of which historical records



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