0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 320 340 360 Risk (Percent2/10) Industry Return = (Fixed Charges + Dividends + Change in Market Value)/Market Value Industry Risk Average Intercompany Dispersion = Industry Return = (Net Income + Fixed Charges)/Total Capitalization Industry Risk Average Intercompany Dispersion = ! The rate of return of the property and liability companies as calculated by the First National City Bank appears in Tables 1 and 2. Of all the industries in the economy studied by the First National City Bank, the lowest one in the year 1965 was the property and liability insurance industry. We have reported in Table 2 the history from 1955 to 1965. It appears that the lowest rate of return in the financial sector was the investment trust industry with the property liability companies following at 4.5% rate of return. However, it should be noted that the definitions employed by the First National City Bank overstate the rate of return earned by the fire and casualty insurance companies when compared to that earned by investment trusts. Please note that in the net income section of investment trust companies capital gains whether realized or not are not included, while the net income section of the fire and casualty companies includes realized capital gains. In addition, the net worth section of the fire and casualty companies consists of policyholders' equity while for investment trust companies net worth is defined as net total assets at market value. - - The conclusion, then, of these comparative analyses of the rates of return of the property and liability insurance industry with those of other industries in the American economy is quite clear. By any standard whether risk related rate of return or just a simple listing from high to low of industrial rates of return the rate of return earned by the property and liability industry, even when including all possible sources of income, such as unrealized capital gain, cannot be called excessive. In fact, the property and liability insurance industry can be more appropriately characterized as "underearning" when compared with alternative employment of capital. TABLE 1 RETURN ON NET WORTH OF LEADING CORPORATIONS FOR THE YEARS 1964 AND 196 ⚫ Net worth (listed previously as "Book net assets") is based upon the excess of total balance sheet assets over liabilities; the amounts at w assets are carried on the books may not represent present-day values. * Net income is reported before depletion charges in some cases. Due to the large proportion of capital investment in the form of funded debt, rate of return on total property investment would be lower that shown on net worth only. * Federal Reserve Board tabulation of all member banks; number of banks (6,221) is not included in total number of companies; earning! clude profits and losses on sale of securities; net worth figures are annual averages. • Figures in most cases exclude capital gains or losses on investments. Source: Monthly Economic Letter, April 1966, First National City Bank, New York. III. Investment (Trust) Companies A. Net Worth = Net Assets at Market Value B. Net Income Operating Profit, Interest and Dividends, IV. Sales Finance Companies A. Net Worth Stock and Surplus B. Net Income = Operating Profit not including Capital Gains Source: First National City Bank (New York). |