223Information and investment with a condition: that the British company deposit a sum of money as an investment with them. Concerned, Jackson canvassed Holden for his views. Holden informed him that he had had reports from the American bankers, the Kountze brothers (whom he had met in 1904) on the company in question and that these were anything but favourable. He read the reports he had received to Jackson and advised him to keep out of the whole business.154 Once again, information gleaned from financial and social networks appears to have exerted an influence over commercial and financial decision-making. Personal contacts and experience mattered. The case of the Midland simply illustrates that this was no less true for banks than it was for individual investors.
Insurance companies A profound transformation of the investment practices of British insurance firms took place in the latter part of the nineteenth century. Like the commercial banks, the insurance industry had its own orthodoxy with regard to the management of investment portfolios. First annunciated by A. H. Bailey in 1861, these ‘principles’ governed how life assurance funds were invested. In a way, the principles reversed the priority set by the banks. Beyond a very small amount to be set aside as a reserve, insurance firms aimed to invest in assets that would provide a regular flow of income and could guarantee timely repayment of the principal. Liquidity was not such a concern. Indeed, the favourite of the commercial banks – the consol – was frowned upon because of its variable rate of return and declining market price. Similarly, the uncertainty of stock exchange securities was to be avoided. Instead, insurers were actively encouraged to prefer fixed-term securities, whose maturities were well defined in advance and enforceable before the law. Thus, since the mid century, the great preponderance of insurance funds tended to be invested in UK mortgages and real estate, particularly agricultural land. As late as 1880, just under £71 million – about 46 per cent of the industry’s assets – was tied up in funding mortgages in the UK.155
As Table 5.7 demonstrates, this situation was about to change. Over the following three decades, mortgages’ share of total industry assets fell to less than a quarter (and the majority of these mortgages in 1913
154 HSBC Archives: E. H. Holden Diary, ref 26/7 (Midland Bank Papers), entry for 24
August 1909.
155 M. Baker and M. Collins, ‘The Asset Portfolio Composition of British Life Insurance
Firms, 1900–1965’, Financial History Review 10 (2003), 137–64 (pp. 137, 143–4);
Hall, London Capital Market, p. 52; and C. Trebilcock, Phoenix Assurance and the
Development of British Insurance, 2 vols., Vol. II: The Year of the Insurance Giants, 1870–
1914 (Cambridge: Cambridge University Press, 1998), pp. 63–5.
188024,635
113,852
5,314
19,728
22,712
14,718
132,357
49,056
268,520
382,372
1913
(21.5)
(1.0)
(3.6)
(4.3)
(4.7)
(2.8)
(24.9)
(9.3)
(50.5)
(72.0)
530,112
Table 5.7. The value and distribution of UK life insurance companies’ assets, 1870–1913 (in £1,000; share of total assets
appear to have been recorded under other categories of assets. For further details, see A. R. Hall, The London Capital Market and Australia,
included. The figures for debentures and shares in 1870 are tentative owing to classification problems in that return. Similarly, the cited
figures for total securities up to 1910 are probably slightly underestimated because until then some colonial and municipal securities
Notes: This table includes some companies that also engaged in general, non-life insurance business. Only the main asset types are
292,378
103,293
7,307
20,321
17,358
99,485
44,614
189,085
(65.4)
1910
(23.1)
(1.6)
(4.5)
(3.9)
(22.2)
(10.0)
(42.3)
447,343
—
—
91,833
9,673
19,713
10,507
63,147
39,900
142,940
234,773
(26.0)
(2.7)
(5.6)
(3.0)
(17.9)
(40.5)
(66.5)
352,613
(11.3)
1905
—
—
Sources: Annual returns of the life assurance companies to the Board of Trade, British Parliamentary Papers.
85,174
7,718
19,330
10,865
51,995
35,111
125,019
210,193
(2.5)
(6.2)
(3.5)
(67.6)
311,084
(27.4)
(16.7)
(11.2)
(40.2)
1900
—
—
153,830
85,143
5,502
15,818
4,162
28,770
14,435
68,687
1895
(36.8)
(2.4)
(6.8)
(1.8)
(12.4)
(6.2)
(29.7)
(66.5)
231,362
—
—
5,915
12,696
3,534
139,741
82,808
21,857
12,931
56,933
201,603
1890
(41.7)
(2.9)
(6.3)
(1.8)
(10.8)
(6.4)
(28.2)
(69.9)
—
—
1870–1914 (Canberra: Australian National University, 1963), p. 53.
75,039
5,343
10,705
3,898
12,623
10,398
42,972
118,011
1885
(42.9)
(3.1)
(6.1)
(2.2)
(7.2)
(6.0)
(24.6)
(67.5)
174,757
—
—
70,787
4,887
7,059
4,412
10,570
7,939
34,867
105,654
(2.9)
(68.8)
153,403
1880
(46.1)
(3.2)
(4.6)
(6.9)
(5.2)
(22.7)
—
—
48,183
7,455
3,952
1,323
10,565
3,276
26,571
74,754
1870
(44.3)
(6.9)
(3.6)
(1.2)
(9.7)
(3.0)
(24.4)
(68.7)
108,825
—
—
Indian and colonial government
Indian and colonial municipal
Mortgages and securities
Foreign governments
British government
Foreign municipal
Shares and stock
Total securities
Types of assets
in brackets).
Total assets
Mortgages
Debentures
Securities
225Information and investment were on properties outside the UK, whereas in 1880, non-UK mortgages were of negligible importance).156 A variety of securities rose in their place. Given the preference for fixed-term securities recommended by Bailey’s principles, foreign and colonial stock – in particular muni cipals and debentures – grew in importance from about 7 per cent of investments in 1880 to 30 per cent in 1913.157 Thus, by the outbreak of the First World War, debenture stock figured more prominently than mortgages in the industry’s investment portfolios. Stock and shares purchased off the London Exchange – usually domestic, US and colonial railway shares – also grew in importance from about 3 per cent in 1870 to approximately 10 per cent by the turn of the century; and the proportion of industry’s assets invested in colonial government bonds also rose over the late Victorian period, reaching its apogee at around 7 per cent in the late 1890s. This percentage, though, almost certainly underestimates the empire’s importance in the portfolios of insurance companies, since the data on debentures and mortgages reported in Table 5.7 cannot be analysed by country of origin. Given the prevalence and attractiveness of social overhead and land development projects in the dominions at this time, it would not be unreasonable to presume that a considerable proportion of the debentures and mortgages acquired were colonial in origin.158 For many insurance companies, the transformation in investment behaviour followed a pattern not dissimilar to that being taken at the same time by the commercial banks: diversify first towards local government stock, then colonial and US, and finally towards securities that lay beyond the British World. It was a strategy based on investing in what one
156 The stimulus for the transformation in investment practice appears to have originated
in alterations in the returns of different types of assets. Differences in the rates of return
of comparable assets in the UK and overseas also drove the changes. See J. H. Treble,
‘The Pattern of Investment of the Standard Life Assurance Company, 1875–1914’,
Business History 22 (1980), 170–88 (pp. 170–1). See also Trebilcock, Phoenix Assurance,
p. 74.
157 Colonial municipals were not separated in the return from other colonial debentures or
government securities until 1913. It is worth noting that part of the rise of foreign and
colonial stock can be explained by the fact that North American authorities compelled
insurance companies to acquire some of this stock as insurance guarantee. This was the
price of doing business there. In 1909, for example, in order to expand its insurance
business in North America, Phoenix Assurance was required to purchase $160,000
of US securities and $150,000 of Canadian securities at prices above par. Such pur-
chases, of course, reinforced a trend that was happening naturally. Indeed, at least in
this case, they may have accelerated that trend, since compulsory purchases inadvert-
ently brought Phoenix greater familiarity with North American securities, prompting
it in just a few years’ time in 1913 to invest heavily in the municipal stock of the cities
of Christiania, Port Arthur, Victoria, Winnipeg, Regina and Moose Jaw. See Trebilcock,
Phoenix Assurance, pp. 70, 75.
158 Hall, London Capital Market, p. 54.
226knew best, and that reveals itself clearly in company records.159 As Phoenix Assurance’s historian notes about that company’s investment history: the purchase of colonial government stock – from the Cape and from Victoria and South Australia in 1878, and from New South Wales, Queensland, Tasmania and New Zealand in 1889 . . . represented the first willed diversifications of the portfolio towards major foreign opportunities. This opened a path that was to become much more heavily trodden in the 1900s, especially in relation to American railway stock.160 Further insight into the changing investment behaviour of the insurance industry can be gleaned from another prominent firm, the Standard Life Assurance Company, which was founded in 1825. Standard Life was a pillar of the British life assurance establishment. It operated offices all over the world, often in support of Scottish expatriate communities involved in the engineering, construction and oil industries. By the early twentieth century, one-third of the company’s new business came from within Britain, a further third came from professionals in the British empire and the remainder came from a miscellany of ‘foreign’ countries (including Hungary, Argentina, Uruguay, China and Egypt). It was William Thomson, the Manager of Standard Life, who first pressed for life cover to be available to those who lived and worked overseas. Thomson was quick to appreciate the security that well-to-do emigrants craved. To this end, a new company was created in 1845 – Colonial Standard Life – with four regions earmarked for initial operation: Australia, North America, Ceylon and the West Indies.161 The first Colonial Standard Life policy was issued to George Smith on 6 November 1846 for £1,000. Smith was a twenty-eight-year-old merchant in Ceylon. It was Canada, however, that was the company’s main target for this business. Standard Life already had a number of policy-holders in the dominion, and within a few years a network of twenty-six agents had been established there.
159 Take the case of Phoenix Assurance. For the period between 1880 and 1910, it can be
seen that the proportion of Phoenix’s investment in UK stock rose from 25 per cent in
1880 to 43.7 per cent in 1890, before declining to 21.8 per cent and 11.7 per cent in 1900
and 1910 respectively. Colonial and US stock’s share rose from 27.5 per cent in 1880
to 32.4 per cent in 1890 and 36.0 per cent in 1900, before it too fell to 21.1 per cent in
1910. By contrast, the proportion of its investment devoted to foreign stock remained low
(1.2 per cent in 1880, 2.9 per cent in 1890) until around the turn of the century, when
it became steadily more important, accounting for 17 per cent of the company’s invest-
ments in 1900 and as much as 42.7 per cent in 1910. See Trebilcock, Phoenix Assurance,
pp. 73, 82.
160 Ibid., p. 70.
161 The new company was dissolved in 1866, its activities having been taken over by
Standard Life.
227Information and investment Standard Life also had premiums to invest; indeed, the company’s assets were approximately £13 million by 1910. Table 5.8 details how these funds were disbursed between 1870 and 1910. In the face of the downward movement of UK interest rates, Standard Life began restructuring its portfolio from the 1870s. Colonial property markets, Indian and colonial government securities, and especially colonial municipal bonds all became attractive options, as did railways and debenture stock after 1900. Mortgages on UK property, which in 1870 constituted almost two-thirds of its assets, steeply declined, while mortgages on property outside the UK rose. By 1910, 30 per cent of the company’s assets were invested in mortgages, of which two-thirds were on foreign, mostly colonial, property.
In shifting its investment strategy, Standard Life was assisted by the presence of salaried staff in the colonies who monitored economic trends and gauged prospective investment yields. It was to Australia and New Zealand that the company’s attention first turned. In 1881, Standard Life took £20,000 of debenture stock from the recently reconstructed New Zealand and Australian Land Company. Two large advances on the security of freehold property in New South Wales and Queensland followed in 1883. Many of its antipodean loans were made to sheep farmers, with sureties provided by partners in Scottish Borders textile mills (who had switched to buying wool from Australian and New Zealand producers). Rates of interest in the colonies were much higher than those prevailing at home during this decade. Not until the financial crises of the mid 1890s, which brought the land boom in Australia to an end, did Standard Life begin to look further afield. Thereafter Canadian municipal bonds and high-yielding urban and farm mortgage transactions, such as the £18,000 lent on the property at the corner of St James and Victoria Square and the £300,000 advanced to the Roman Catholic Church in Montreal in 1895, were the favoured investments; they, in turn, stimulated new business in life assurance in the dominion from 1913 to 1914.162 Company rules further encouraged investment in the dominions. These rules insisted that for a mortgage to be provided on non-UK property two non-negotiable conditions had to be met: that the borrower hold sufficient collateral in the UK, and that interest payments on the loan be fully guaranteed by a UK-based mercantile firm or bank. In other words, tapping Standard Life’s funds required a potential mortgagee to have significant prior roots in the UK: something, it can be assumed, that
162 J. M. Atkin, British Overseas Investment, 1918–1931 (New York: Arno Press, 1977), p. 120;
Hall, London Capital Market, pp. 53–4; Treble, ‘Pattern of Investment’, pp. 170–88; M.
Moss, The Building of Europe’s Largest Mutual Life Company: Standard Life, 1825–2000
(Edinburgh: University of Edinburgh Press, 2000), pp. 112–20.
19102,810,029
336,181
776,400
1,311,587
2,645,555
940,529
138,765
113,96
2,028,668
(6.0)
13,058,045
(10.0)
(20.3)
(7.2)
(1.1)
(0.1)
(15.5)
(21.5)
(2.8)
Table 5.8. The value and distribution of the Standard Life Assurance Company’s assets, 1870–1910 (share of total assets in
Sources: Annual returns of the life assurance companies to the Board of Trade, British Parliamentary Papers, and Treble, ‘The Pattern of
Notes: Only the main asset types, together accounting for over three-quarters of the total, are included. See also the notes to Table 5.1.
191,058
1,963,007
1,775,347
150,058
856,659
1,871,771
2,257,672
679,224
142,703
(15.3)
(1.3)
(7.4)
11,574,556
1905
(16.2)
(19.5)
(5.9)
(1.7)
(1.2)
(17.0)
2,089,873
1,670,367
466,189
80,638
186,313
2,093,759
889,094
70,553
857,755
(0.8)
(21.1)
(8.9)
(0.7)
(8.6)
9,943,490
1900
(21.0)
(16.8)
(4.7)
(1.9)
Investment of the Standard Life Assurance Company, 1875–1914’, Business History 22 (1980), 170–88 (pp. 173–4).
435,814
2,537,088
2,632,686
402,280
29,218
300,152
292,336
331,143
(4.9)
(0.4)
(3.6)
(4.1)
—
(5.4)
8,146,519
1895
(31.1)
(32.3)
(3.7)
—
334,631
3,341,144
1,279,531
355,539
37,790
402,469
457,991
199,115
1890
(44.6)
(17.1)
(4.8)
(0.5)
(5.4)
(6.1)
(2.7)
(4.5)
7,488,625
—
—
39,810
636,134
102,578
257,949
3,914,561
505,075
313,178
(1.6)
(3.9)
6,592,974
1885
(59.4)
(7.7)
(4.8)
(0.6)
(9.7)
4,077,396
221,049
274,788
38,242
281,552
139,946
—
—
—
(2.5)
5,693,150
1880
(71.6)
(3.9)
(4.8)
(0.7)
(4.9)
—
—
3,371,831
52,811
241,633
40,742
199,682
82,623
116,605
1875
(69.9)
(5.0)
(0.9)
(4.1)
(1.7)
(2.4)
4,821,005
(1.1)
77,603
2,769,730
35,816
209,346
79,060
72,630
81,500
1870
(63.7)
(0.8)
(4.8)
(1.8)
(1.7)
—
(1.9)
—
(1.8)
41,346,028
Loans on surrender
British government
Railway and other
colonial municipal
Mortgages on UK
House property –
non-UK property
Loans on shares
debenture stock
value of policies
with collateral
Types of assets
Mortgages on
Total assets
government
Indian and
Indian and
brackets).
securities
securities
property
colonial
freehold
security
bonds