Mr. WALTER. You said "appointing." What do you mean by "appointing"? Mr. STEINMAN. Elected, I mean; elected by the stockholders. Mr. WALTER. In your particular instance the two terms are used synonymously, are they not? Mr. STEINMAN. How was that? Mr. WALTER. I say the election actually means the appointment of somebody that you decide in advance should speak for all of the stockholders. Mr. STEINMAN. Well, the election is by the board of directors, of course, upon the recommendation usually of the officers of the company. Mr. WALTER. The board of directors elects a director to fill Mr. STEINMAN. The stockholders elect the directors. Mr. WALTER. The stockholders; yes. The CHAIRMAN. You have stockholders, and you also have policyholders, have you not? Mr. STEINMAN. Oh, yes. The CHAIRMAN. Do the policyholders and the stockholders have a voice in the selection of the board of directors? Mr. STEINMAN. Not the policyholders; no, sir. The CHAIRMAN. Just the stockholders? Mr. STEINMAN. Just the stockholders. Mr. KEATING. Is your stock closely held or widely distributed? Mr. KEATING. Mostly by the members of the board of directors and the officers? Mr. STEINMAN. Well, no, I do not believe mostly by the board of directors. Mr. KEATING. How many stockholders do you have? Mr. STEINMAN. We have about, I would say, 80 or 85 now, maybe 90. The CHAIRMAN. Is there anything else you care to tell us, Mr. Steinman? Mr. STEINWAN. I do not believe so, Mr. Celler. The CHAIRMAN. Well, we are very grateful to you for coming here and giving us the information that you have given us, Mr. Steinman. At this point in the record there will be placed the list of directors of the Midland Mutual Life Insurance Co. (The document referred to follows:) DIRECTORS OF THE MIDLAND MUTUAL LIFE INSURANCE CO. (Showing names of other corporations in which directors are officers or directors) J. A. Hawkins: None. B. G. Huntington: chairman of the board and Director, the Huntington National Bank, Columbus, Ohio; director, the Little Miami Railroad Co.; director, the Sunday Creek Coal Co., Columbus, Ohio; director, the Granville Inn & Golf Course, Granville, Ohio; president, treasurer and director, the North Union Realty Co., Columbus, Ohio. Charles J. Kurtz: president and director, the Keever Starch Co., Columbus, Ohio; president and director, the Winifrede Co., Charleston, W. Va.; director and member of executive committee, the Columbus & Southern Ohio Electric Co., Columbus, Ohio; director, the Exact Weight Scale Co., Columbus, Ohio. F. Austin McElroy: None. Philip R. Peters: president, Fairfield National Bank, Lancaster, Ohio; director, Lancaster Transit, Inc., Lancaster, Ohio. G. Edwin Smith: director, the G. Edwin Smith Shoe Co., Columbus, Ohio; director, Longwater Realty Co., Columbus, Ohio; director, Columbus Metal Products, Inc., Columbus, Ohio; director, Nisley Co., Columbus, Ohio. Howard P. Stallman: None. Geo. W. Steinman: None. C. O. Sullivan: None. A. H. Thomas: chairman of the board, the Buckeye Steel Castings Co., Columbus, Ohio; director, the Huntington National Bank, Columbus, Ohio; director, Sugar Creek Coal Co. Fred Vercoe: None. Dr. E. H. Wilson: None. Francis J. Wright: director, the Huntington National Bank, Columbus, Ohio; director, Hydraulic Press Manufacturing Co., Mount Gilead, Ohio; director, Ironsides Co., Columbus, Ohio; director, Dobson-Evans Co., Columbus, Ohio. The CHAIRMAN. The chairman announces that we will meet tomorrow at 10 o'clock, when we will hear Mr. Montgomery of the Acacia Mutual Life Insurance Co., Mr. S. B. Cooley, of the Durham Life Insurance Co., and Mr. J. A. Fulton, of the Home Life Insurance Co. of New York. The chairman also announces that there will be an executive meeting of this committee this afternoon at which the members of the staff are invited, as well as the various representatives of the departments who have been aiding us in this inquiry. The meeting will now stand adjourned until tomorrow morning at 10 o'clock. (Whereupon, at 3 p. m., the committee adjourned, to reconvene at 10 a. m., Tuesday, November 29, 1949.) STUDY OF MONOPOLY POWER (Second Series) TUESDAY, NOVEMBER 29, 1949 HOUSE OF REPRESENTATIVES, SPECIAL SUBCOMMITTEE ON THE STUDY OF MONOPOLY The special subcommittee met, pursuant to adjournment, at 10 a. m., in room 346, Old House Office Building, Hon. Emanuel Celler (chairman) presiding. Present: Representatives Celler, Walter, Bryson, Wilson, and Keating. Also present: C. Murray Bernhardt, general counsel; David Cushman Coyle, consultant; and William R. Foley, counsel, of the committee staff. The CHAIRMAN. The meeting will come to order. Our first witness this morning is Mr. Montgomery, of the Acacia Mutual Life Insurance Co. of this city. Mr. Montgomery, we will be very happy to hear you. Mr. Montgomery, we are grateful to you for coming here to give us some advice on the subject matter of our inquiry, and I would like to state at the outset that this hearing is not primarily an insurance investigation. We are studying the relation between big and small business, including insurance, and one of the aspects of this relation, for example, is the supply of loan money by insurance companies, and another question is who controls the supply; and one purpose of the inquiry is to get your opinion on the relative advantages of large and small insurance companies. Now, with that introduction, you might expand on what I have indicated, or give us any other phase of the subject matter that you care to. You can be seated, if you wish. STATEMENT OF WILLIAM MONTGOMERY, PRESIDENT, ACCOMPANIED BY HOWARD W. KACY, FIRST VICE PRESIDENT, AND LLOYD K. CRIPPEN, VICE PRESIDENT AND ACTUARY, ALL OF ACACIA MUTUAL LIFE INSURANCE CO. Mr. MONTGOMERY. Thank you, sir. I will only stand for 2 or 3 minutes, if you do not mind. I am wondering if I could not approach the matter from a slightly different standpoint of timesaving to you, Mr. Chairman and gentlemen of the committee, and perhaps give as good results in regard to what you desire. May I say—and this is only preliminary to what I want to say in a moment I have been with the company I am with for 56 years next December. Naturally during that time you acquire certain ideas, certain philosophies, and they stick with you, and they influence your actions. When I went with the company I was the only person in its employ, and we had no money, practically, and very little business. Now, therefore, I have seen the company grow from nothing up to where it is today. If we are to continue the present pace, we will have in the middle of next year about a billion dollars of business in force, and well over $200,000,000 in assets. The CHAIRMAN. Is it a stock company or a mutual company? Mr. MONTGOMERY. No, sir; purely mutual. Nobody ever put in any money for stock; nobody ever put any money into it for a guaranty fund. We started on assets of $14,428, and insurance in force of around $500,000. For a long time I was the only person in its employ. We had no telephone, and we did not have heat in the office, either. It was a little room down here at 419 Eleventh Street NW., so that, insofar as insurance is concerned, I have seen it grow from that until where it is today. In due time we got a clerk at $20 a month, and that was the beginning of our employees. At present, including the agents-and they are full-time employees of the company, so recognized and treated-we have between fourteen and fifteen hundred employees. You are not interested in that, except to this extent, perhaps, that when you stay with a company so long, and you put as much of yourself into it as is necessary to get to that point, you naturally have rather fixed ideas. Now, I formed those fixed ideas, and I do not want to impress them upon this committee, but we have one thought in regard to life insurance, and that has been definitely with us all this time, and that is that there are three essentials to life insurance: the first is security; the second is cost: and the third is service. The CHAIRMAN. What is the third? Mr. MONTGOMERY. Service. Now, we have tried during all those years to keep those thoughts before us. We have never reinsured anybody for this business or taken in wholesale insurance or otherwise. In that thought I have had to write all of the annual reports of the company, and I have tried not only to set forth the essentials, so far as figures are concerned, but I have always tried to write a report that the policyholders would understand, at least, or we would try to show them what we were trying to do, and impress upon them. Last year was my fifty-fifth year with the company. I thought it might be well, perhaps, to go back over the years and just touch upon some of the things that we had mentioned that we had done during those years, and we did that in the annual report for that year. Some of the things that you have talked about, and some of the things that you wrote in the letters that you sent out, we have discussed before. With respect to the matter of growth of life insurance, I mention it in the annual report of the year before last, and other things along the line, and I was wondering if I might not save you gentlemen time if you would let me if you would accept for the record-let me introduce certain paragraphs from that report, which indicate my attitude and my feeling and my philosophy in regard to life insurance. The CHAIRMAN. I think there would be no objection to that at all, Mr. Montgomery. Mr. MONTGOMERY. Then if that is so, Mr. Chairman, may I refer you to what I say about fallacy of dividend estimates. Since its inception mutual life insurance has been sold almost exclusively under a system of estimated dividends. Under this plan a much larger premium is charged than is necessary and an estimate is given the insured, labeled a "dividend illustration," of the amount of dividend he may expect to receive in the future. The plan is naturally a popular one with the companies and with the agents because it enables the companies to sell more new insurance and the agents to make more money. The policyholder is the one who suffers. Since it began to operate on the legal reserve basis, Acacia has consistently pointed out the fallacy of dividend estimates, which experience has shown have never been fulfilled in practice and which have, thus, resulted in bitter disappointment to the policyholders and a loss of prestige on the part of the lifeinsurance industry. Back in 1903 in our advertising literature and in our annual report to policyholders, we issued the following statement: "No delusive estimate of dividends put out to catch the unwary, and usually deferred for a long term of years, is made. The association has assumed the full mortality under the standard table and a low rate of interest, on both of which there should be a saving, and being purely mutual all members participate in the profits, and the surplus over the legal reserve, or the amount necessary to guarantee the payment of every obligation, will in the future as in the past be returned to the members." We have steadfastly maintained this position ever since. The actual dividend records are available for 30 of the largest United States life-insurance companies for a typical policy ($1,000, whole life, age 35). These records show a startling fact: The amount of the average yearly dividend these companies estimated in 1929 that they would pay over the next 20 years was 50 percent greater than the average dividend which these companies actually did pay over that period of time. This is a tremendous difference and is conclusive proof that it is impossible for any company to even approximately forecast the amounts of the dividends that it will be able to pay over a period of years. Notwithstanding the fact, however, that the use of dividend estimates has invariably resulted in bitter disappointment to policyholders and in a loss of faith on their part in the reliability of the life-insurance industry, the mutual life-insurance companies, for the most part, have refused to abandon this extremely objectionable practice. Instead, they continue to issue dividend illustrations or estimates which continue to be a source of disappointment and disillusionment to their policyholders. We feel very definitely that one of the main causes for the high rate of lapsation of life-insurance policies has been the disappointment which has resulted from the dividends actually received being so much less than the dividends estimated at the time the policies were bought. In the face of the very evident fallacy of this practice, one wonders why any mutual company still continues to use dividend illustrations or estimates. Adoption of low-premium principle, April 1, 1926: Prior to 1926 there were only two principles of old line life-insurance selling-stock and mutual. The stock companies sold nonparticipating insurance at a lower initial premium than did the mutual companies but paid no dividends to their policyholders. The profits of the stock companies instead were apportioned among their stockholders. On the other hand, the mutual companies sold insurance at a much higher initial premium rate than the stock companies charged on their nonparticipating policies but justified the additional cost by giving the prospect an estimate or illustration of dividends he might expect to receive in the future, a |