proper way to compute this excess item is by the preparation of a schedule similar to the one with which you are familiar (see Appendix H), and which serves to bring out clearly the nature of this disallowance. Against each policy is placed the various credits which are claimed upon its account and the sum of these credits is compared with the liability which the company is maintaining to take care of this particular policy. The headings of the various columns, I am sure, are familiar to you and need not receive any further explanation from me. You will note, however, that in computing the total amount of credits claimed for any particular policy, I have included only the net amount of uncollected and deferred premiums; as we deduct the loading before computing the assets, it is but just to the company to charge it only with that portion of the uncollected and deferred premiums which is allowed.

In the schedule described in the foregoing remarks you will note that each policy is treated separately, and it would be improper to allow the accounts of the various policies to be mingled. If, for instance, a company maintained upon one policy a reserve of $10 more than the sum of the credits which it claimed upon that policy, and upon another policy claimed as an asset $10 more than the reserve which it maintained against that contract, it would be improper to consider that one transaction offsets the other and that no deduction was necessary. An analagous situation would be created if we assumed that because the security behind one mortgage was worth $10 more than the amount loaned thereon, and the security behind another one was worth $10 less than the amount

loaned, the transactions counterbalance one another. The false reasoning contained in this proposition must be obvious to you.

The book value of ledger assets over the market value is an item which is always deducted. The source of this deduction may be traced to one of many causes. If, for instance, the company own real estate which has depreciated from the figure at which it is carried on the books, the difference between the market value at the time of the examination and the price at which the parcel is carried upon the company's books would be deducted; if the company has loaned money on a piece of property which the reports of the appraisers show is not worth the amount loaned upon it, the difference would appear here, and it is independent of any instructions which might be issued by the supervising officer relative to the necessity for a reduction in the amount of the outstanding principal at some early date in the future; if the collateral deposited as the security for a collateral loan is insufficient to maintain the loan, the deficiency is taken care of in this item, and if the market value of the bonds and stocks is less than the amount at which those securities are carried on the books of the company, the deficiency must be deducted. In a subsequent talk I shall refer more to the method of determining the proper book value at which the bonds of a company should be carried, and this will have a bearing upon the matter of depreciation which we are now considering.

In the case of fire insurance and companies transacting what is broadly termed "miscellaneous" business, I have previously called your attention to the

fact that premiums in course of collection more than ninety days past due or agents' balances upon business which was written more than ninety days before the date of the examination, are disallowed as assets.

It may not be amiss for me to call your attention to the fact that while I have referred to the necessity for deducting from the assets any excess which their book value has over the market value, the contrary situation must, of course, be provided for, i. e., if we should find that any of the assets of the company are worth more in the market to-day than the figure at which they are carried in the books of the company, we should allow it credit for that excess value.

CHAPTER IX

Amortization of Bonds Purchased Above Par - Accumulation of Bonds Purchased Below Par- Incorrect Methods of Treating Premiums and Discounts -Necessary Factors.

In my talk to you yesterday I referred to the fact that the appreciation and depreciation in the book values of the ledger assets should be taken into account when we are preparing a statement showing the financial condition of a company. It must be apparent to you that an investor who intends to hold securities until they mature is not concerned with any fluctuations in the market value of the securities; he is interested only in the income earning powers of his investment. In other words, if an investor should buy a bond at par with the intention of holding it until the principal should become due, he would not be affected by any abnormal conditions in the stock market which might temporarily cause his bond to be worth 98 or 105; unless he sold his bond at the current market price, the temporary fluctuations would not affect him at all.

A life insurance company is in the same situation as an investor such as I have just described. Its policy contracts run for a long term of years and the calculation of its premiums is based upon its ability to earn a certain rate of interest on its invested assets; it is not desirable that an insurance company should con

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stantly change its investments, for that process leads to manipulation and the injection of the element of speculation into its operations, conditions which were responsible for many of the evils which were developed in recent investigations of insurance companies. For these reasons a life insurance company should attempt to secure safe investments running for long terms, and it will, therefore, be concerned more with receiving the principal of its investments when they mature and receiving the proper interest rate in the meanwhile, than with any temporary changes in the market value of the securities.

The question of the receipt of the par value of a bond at its maturity brings us face to face with the proper method of taking care of the bonds which have been bought on different bases. The three possible situations are, first, that a bond shall have been bought at par or, second, that it has been bought above par or, third, that it has been bought below par. In order to illustrate these different conditions let us assume that in each of the first two cases the bond is for $1,000, is purchased on June 1, 1910, bears interest at a rate of 5 per centum per annum, that the interest is payable semi-annually on June 1st and December 1st, and that the bond will mature (its principal become due) on June 1, 1915.

It will be apparent to you that if the bond be purchased at par, each of the $25 coupons will be interest on the investment and on June 1, 1915, the owner will receive the amount which he originally invested, $1,000.

The second case is illustrated by a bond similar to the one described, being purchased at $1,044.91; in