The 1980 Presidential Address: The Underdeveloped Concepts of Profitability and Dividend Payout Ratios for Mutual Life Insurers

Abstract

This address has two related contentions. First, the financial performance of most mutual life insurers would improve as a result of their deeper exploration of the many facets of profit. Second, profit should be measured on a generally accepted accounting principles (GAAP) basis rather than by the far less revealing statutory income statements. The major beneficiaries of more emphasis on GAAP profitability and how it is distributed would be the executives and policyowners of mutuals. Many interesting questions arise when the subject of profit is discussed. Let us consider some of them. How should profit be defined'? When do profits really appear'? How should profits be shared by policyowners, retained earnings, and employees (through performance-based compensation systems)'? How does the speculative risk of life insurers compare with that of non-insurance enterprises'? How can stockholder-owned organizations make satisfactory returns in industries (e.g., hospital and life insurance) with strong not-for-profit competitors'? Should part of executive salaries be considered profit'? The list of intriguing questions appear endless. Before departing for his summer home in Montana this spring, my distinguished colleague James L. Athearn left a pearl of wisdom taped to his office door. The author was not named; it sounds like Athearn's work to me! In any