of the company or in the name of some individual who has assigned them to the company in blank. The latter is a very dangerous condition, for it permits the certificates to be used by any person into whose hands they may fall. It is important, therefore, that stock certificates should be issued to the corporation, or, if indorsed, the name of the insurance company should be specifically set forth in the indorsement. There are cases where the entire stock issue of a corporation may be owned by an insurance company, in which case it is necessary that certain individuals should hold qualifying shares to enable them to act as directors, but in this case the rule for the indorsement just cited should be followed.

In connection with the question of certificates of stock, you should know that section 16 of the New York Insurance Law permits surety companies to invest in and loan on the stock of a similar corporation transacting business in other countries (see Appendix F).

You will, of course, observe whether the bonds and stock certificates of an insurance company are kept in a secure place. Unless a company is of a sufficiently large size to justify it in having a specially constructed vault on its own premises, it is usual for companies to keep their securities in public safe deposit vaults; caution requires that access should not be had to such vaults by less than two of the officers or employees of the insurance company, appearing at the same time.

In some cases you will find that among the assets of an insurance company are loans on collateral; these are loans which have been made to an individual or

a firm or a corporation upon their note secured by the deposit of certain collateral. This collateral may consist of bonds or stock certificates or even the assignment of a mortgage, which assignment has not been recorded.

In my opinion collateral loans are a form of investment which belong more properly to banking institutions than to insurance companies. I think that an insurance company should not be burdened with the necessity of looking after the securities which have been pledged as a security for a loan. They may be of such a nature as to have a constantly fluctuating market value, in which case the company must keep in constant touch with the stock market. It goes without saying that in no case should a loan be made upon any kind of collateral in which the insurance company would not invest its own funds, for, should the borrower fail to pay his note upon its due date, the company would have to take the collateral in satisfaction of its debt if it could not secure the repayment of its loan from the borrower. In consequence, any loans which are made upon securities in which the company is not authorized to invest its own funds should be disallowed in the calculation of its assets.

The examiner should pay particular attention to the collateral loan, should determine whether the interest is paid promptly, and should also observe whether the note is past due. In the latter case some adequate explanation should be offered to account for the condition.

It is also essential that the name of the actual borrower in each case should be known. The use of "dummy borrowers" should be condemned, and their

employment will undoubtedly be found to lead to conditions which should be discouraged. The funds of an insurance company should never be used for the purpose of personal aggrandizement or for the convenience of the officers and their friends. The name of the actual borrower in many cases indicates whether the funds are being used for such purposes.

I wish to briefly refer to a term with which you may be familiar in connection with collateral loans. "Window dressing" has been applied to that practice in the past of some companies which have attempted to keep from the public and the supervising officials the evidence of the use of their funds for collateral loan purposes; as the companies are required to prepare their statements as of December 31st, any loans which were made on or after January 1st, and repaid before the close of business December 31st, did not appear in the schedule of assets. Realizing this, it was the practice of some companies to have those collateral loans which they wished to hide, paid on December 31st, and two or three days afterward remake the same loan. A continuance of this practice accomplished the purpose of keeping the knowledge of the loan from those who were entitled to the information and led to a reprehensible condition. The examiner should observe the collateral loan account in the ledger for the purpose of determining the existence of such a practice; if found, it should be condemned unscathingly. The annual statement blank now in use aims to disclose this situation, if it exists.

I wish to contrast a collateral loan with a policy loan; the latter, in my opinion, constitutes as good an investment for an insurance company as can be found,

if the loan does not exceed the reserve which the company is required to maintain. Not only is the investment protected by the securities and operations over which the company has direct supervision, but it carries out the true intent and purposes of a legal reserve, which, you will recall, is nothing more or less than the payment which the policyholder has made to the company in excess of the cost of furnishing his insurance in order that his premiums may be kept level throughout the history of the policy. By loaning to its policyholder, the company is fulfilling the highest purposes of an insurance company, inasmuch as it is permitting him the use of his own money and not permitting the interest of the other policyholders to suffer thereby; he is paying an adequate rate of interest; and if he should not pay his loan when it matures, or the interest, his policy would be canceled, and the liability of the company would cease on that score. The care which should be exercised in making policy loans will be referred to in another talk.

CHAPTER VI

Cash in Office and in Bank-Percentage of Cash to Invested Assets - Certificate from Banking Institutions Interest Bearing and Non-interest Bearing Accounts-Policy Loans-Liens and Their Sources -Premium Notes.

It is safe to say you will find in every company which you are called upon to examine, cash in office or cash in bank. A verification of the cash in office is, of course, a simple matter, and it will be sufficient to merely point out the necessity of determining that everything in the cash drawer is cash or its equivalent. You should not find any notes of officers or of employees or cheques which are post-dated or cheques which have been held for a long time without being cashed or cheques which have been returned protested. Should you find any of these items, you will request an explanation. Of course, in some cases you may find that the cashier has made temporary advances to clerks until the arrival of the next salary day, but these are matters which I feel can safely be left to your discretion.

The bank deposits may be divided into two parts: first, those which are interest bearing, and second, those upon which the bank allows no interest. In well-managed companies the percentage which the cash in bank bears to the invested assets varies with the size of the company, special conditions and the form of insurance transacted; the smaller the company