Paradoxically, the very success of the Metropolitan life insurance company brought with it serious financial difficulties. The establishment of many new district offices, the forging of a home office organization, the setting up of reserve funds, and the payment of commissions to agents, all entailed an outlay of considerable money.
The situation in 1883 reached a point where in its high flush of prosperity the company was probably insolvent; certainly the capital stock was impaired. Faced with this situation, Mr. Knapp set about to increase the company’s capital. He solicited his friends; he even mortgaged his own home. In these ways he brought in $400,000 in new money, increasing the company’s capitalization to $500,000.
Metropolitan was still expanding so rapidly that even this additional cash did not immediately put it upon a sound basis. Notwithstanding the fact that $400,000 had been added during the year, at the end of 1883 the surplus was slightly more, than $300,000an increase of less than $33,000 over the previous year. With the passing of another year, the surplus was further reduced, due partly to the expenses occasioned by the substantial increase in new business, and by the end of 1885 it had dropped to just under $140,000.
The company had a bookkeeping loss of $560,000 in three years. In effect, all the new capital was wiped out. Then the tide turned. In 1886 the surplus increased to $258,000 and grew rapidly thereafter. Never since has there been any question as to the financial stability of Metropolitan Life Insurance.
When Mr. Knapp was seeking new funds in 1883, the company’s precarious financial condition obliged him to offer the prospect of a good-sized profit to the investors. This was especially true since the Charter limited annual dividends to 7% of the capital stock. His inducement was a provision that if the business succeeded, the capital stock could be increased to a maximum of $2,000,000, yielding four shares for each one purchased.
Mr. Knapp himself contributed so large a portion of the added funds that he came to control a majority of the stock51%, to be exact. It is important to note that despite these generous terms to the investors, the dividends were limited to $140,000 a year at a maximum.
Actually, even after the life insurance company had grown to giant proportions, never a penny more than $140,000 a year could be paid to stockholders. The full significance of this provision became apparent during the mutualization of Metropolitan.
Through these ups and downs, Mr. Knapp was steadfast in his belief in the ultimate success of the venture. His efforts for business went on vigorously even during the period of critical financial difficulty. During 1883, for example, the industrial business on the books increased by almost $22,000,000.
With an average amount of each policy only a little more than $100, one can realize what a prodigious achievement this was. If the company only knew that the era of no medical exam term life insurance was only decades away. Once the financial stability of the company was assured, the business grew at an even more rapid pace. In 1886 the industrial in force increased by more than $28,000,000, and by 1890 the annual growth mounted to $30,000,000.
In the short period between 1883 and 1891 the amount of industrial insurance in force, despite a high lapse rate, increased from $56,500,000 to more than $250,000,000; the number of policies jumped correspondingly from 526,000 to more than 2,200,000. Nothing like this had ever before happened in the field of life insurance.
The warm and spontaneous response of the people to industrial insurance clearly demonstrated the widespread need for this new form of protection. Wage earners and their families were quick to realize that this type of insurance was suited to their pattern of life.
These people could not afford to buy ordinary policies, but they were glad to purchase insurance in small amounts and to pay premiums weekly to an agent who called at the home. Moreover, all members of the family, including the husband, wife, and children, were eligible.
Insurance officials were equally quick to recognize the value of Industrial insurance. As early as 1881 the Superintendent of Insurance of New York State wrote in his annual report:
“This class of insurance is somewhat new and is yet an experiment in this country, but thus far it seems to meet with success which promises well for its future growth and prosperity.”
And four years later, the Hon. Ephraim Williams, the Insurance Commissioner of Connecticut, actually recommended industrial life policies as an antidote to poverty. He said:
“If people so circumstanced would generally avail themselves of its benefits, the tendency would be to diminish the population of poorhouses and decrease the public burden in this respect.”
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