The foregoing tabulations include some stock companies in different States of the members of your committee. We realize that there are some other stock companies in your States that would benefit some by this Allstate plan. But here are some stock companies in various States, that would have been greatly damaged if this proposal had been in effect for the past 5 years.

Here are companies in various States that would have been damaged by increased tax burdens, ranging all the way from $14 million to nearly $18 million in the past 5 years alone. And the ones that would have been damaged the most would be the ones that had the worse underwriting results.

NO COMPETITIVE ADVANTAGES DEVELOP FROM PRESENT TAX LAWS

In its presentation, the Allstate committee tried to make it appear that the stock companies, as a whole, have suffered greatly from mutual competition and that this had resulted in the stock companies losing an increasing percentage of the insurance business to the mutuals. You will remember they filed a chart indicating that the stock companies back in 1943 had 80.5 percent of the premium volume, while

in 1956 they have only 76.4 percent-a smaller percent; that the mutual companies then had 17.8 percent, while in 1956 they have 22.4 percent a larger percent.

That was just a trick of statistics. They made that comparison, in table F of their presentation, on the relative premium volumes after deduction of refunded dividends to policyholders.

Their chart and comparison is fallacious and misleading because it fails to recognize that in recent years, because of the adverse underwriting results experienced by most insurance companies, the rate and amount of mutual dividend-refunds to policyholders has gradually decreased. Consequently, the dollar volume of mutual premiums, after policyholder dividends and in relation of premiums, has necessarily increased. But such increase in net dollar volume does not necessarily indicate a corresponding increase in the business. If a mutual in 1943 refunded to policyholders a $20 dividend on a $100 premium the remainder of $80 was net premium, whereas if the refund dividend was only $10 in 1956, then the $90 would be net premium. That would increase the net premium volume of the mutual in 1956 compared with 1943 and yet it would not increase in any way or change the mutual share of the business.

As far as the charge of competitive advantage or disadvantage is concerned, it is rather overwhelmingly disproved by a look at the two Allstate insurance companies themselves. I speak, of course, of the Allstate Insurance Co. and the Allstate Fire Insurance Co.

These two companies are among the largest, wealthiest, and most prosperous insurance companies in America. They have made such tremendous profits after Federal taxes, that they now claim have discriminated against them, that in the past 3 years alone, 1954-56, they have paid to their sole stockholder cash dividends aggregating $9 million. That is almost double the total cash investment the sole stockholder has made in the entire period of the companies' life.

Furthermore, in return for a total investment of a little more than $5 million ($5,127,000), the sole stockholder of the two Allstate companies received, in 1943-56, cash dividends of $16,900,000, plus stock dividends of $2,300,000, or a grand total in cash and stock dividends of $19,200,000, nearly 4 times the total amount invested in stock and contributed to surplus.

Further, during this same period of 1943-56-the period during which the present tax law which Allstate complains of has been in operation-the two Allstate companies increased their premium volume from $6,967,000 to $281 million and increased their policyholder surplus from $5,097,000 to $87,396,000.

Their sole stockholder is now receiving $3 million annually in cash dividends, which is equal to the entire par value of the stock of the Allstate Insurance Co.

And all this has been achieved during the period in which Allstate claims to have been discriminated against by the tax laws. Lord knows what they would have done if they had not been discriminated against.

In view of these facts, it cannot be successfully contended that the Allstate companies have suffered or are suffering any competitive disadvantage under the existing tax laws.

THE FALLACY OF CONTENDING THAT DIFFERENT TAX TREATMENT WAS INTENDED TO MUTUALS TO SELL NON ASSESSABLE POLICIES

The Allstate committee contended that the differences in tax treatment between stocks and mutuals was originally intended to permit mutuals to build surplus and thus qualify to write nonassessable policies. It also contended that since today most mutuals are not writing such assessable contracts, the reason for the difference in tax treatment has disappeared.

It is true that there has been a trend on the part of the smaller advance-premium mutuals to increase their surplus so as to qualify under the various State laws to write nonassessable policies. In Virginia, for example, you have to have a minimum of $300,000 surplus to write nonassessable policies. These State requirements are in some cases sizable, but they still represent only minimums.

The needs of fire and casualty insurance companies for surplus is less a matter of meeting statutory requirements than it is a matter of prudent management seeking surplus to support the volume and the variety of coverages needed and desired by their policyholder

members.

The pressure for adequate surplus is acute as small fire companies move into the casualty field, and casualty companies take on the risks of fire and allied lines in conformity with the trend toward multiple line underwriting. Mutual companies needing this increased capacity do not have access to the capital market as do their stock competitors, and hence must find their additional surplus out of retained income. Any tax, such as that proposed by the Allstate committee that would impede the accumulation of these needed funds would be punitive, and would be particularly harmful to the great bulk of mutual companies which are small businesses as compared with the giants of the stock insurance field.

It should be noted, in passing, that the practice of discontinuing the writing of assessable policies is not entirely new, nor has the practice of writing assessable policies disappeared. The Nation's oldest insurance company, the Philadelphia Contributionship for the Insurance of Houses From Loss by Fire, gave up writing assessable policies before the first stock insurance company was organized. Today, of the 270 advance premium mutuals listed in Best's Guide, 1957 edition, 70 have some sort of assessment liability, and have a total premium volume of over $404,500,000. In addition, there are 1,658 farmassessment mutuals with a total premium volume of $69,924,710.

MUTUALS RETAINED NO GREATER PERCENTAGE OF TOTAL INCOME THAN STOCKS WHILIE THE TWO ALLSTATE COMPANIES RETAINED A GREATER PERCENTAGE THAN STOCKS AS A WHOLE OR MUTUALS

The Allstate committee spokesman conceded frankly, under crossexamination at the January 14 hearing, that the surplus and reserves of the mutuals is not excessive. But in the text and in table E of the Allstate committee statement, it is erroneously claimed that the mutual companies have retained in the business a greater percentage of income than has been retained by the stock companies.

The fallacious nature of their contention is made perfectly apparent by even a casual inspection of table E, which shows that while

20675-58-pt. 3—55

the mutuals had 4.2 percent of their receipts left, after payment of losses, expenses, and taxes, the stock companies had a slightly larger percentage, namely, 4.8 percent, left before they distributed a little over half of their net income to their stockholders.

Of course, such distributions by stock companies are entirely proper. But it is manifestly improper, in calculations of income retained in the business, to deduct amounts neither refunded to nor used for the benefit of the policyholders, from whom the gross revenues were derived.

In this connection, if the figures on table E had been given for the 2 Allstate companies, they would have shown a retention of $94,708,000, which is equivalent to 7.17 percent. This is far higher than the percentage attributed either to the stock companies as a whole or to the mutual companies.

THE ABSURDITY OF CHARGING TAX INEQUALITY BECAUSE OF DIFFERING RATIOS OF TAXES TO NET PREMIUMS

The absurdity of alleging tax inequity because of differences in the ratio of taxes to net premiums is well illustrated when we examine the ratio of taxes to premiums of various classes of stock companies, all subject to the same tax base.

Attached to this statement is an exhibit showing percentages of Federal income taxes to net premiums for 30 subclassifications of stock companies, which shows wide variations in the ratios of taxes to premiums for these groups.

TAXATION OF ALL COMPANIES BY THE SAME STATUTE AND PLAN WOULD NOT PRODUCE IDENTICAL TAX RATIOS

From time to time through the years there have been various suggestions that all fire and casualty insurance companies should be taxed in identically the same manner and by identical statute. This suggestion is usually made with the laudable but mistaken idea that taxation on the same plan and by the same statute would insure tax equality.

Even under the same identical tax plan and the same identical tax statute, different companies-with approximately the same premium volume and the same underwriting results-will frequently end up with vast differences in their taxes. This comes about because of the differences in operating expenses and of the differences in the types of investments made by the different companies.

For example, stock fire insurance companies are taxed under the same identical statute and tax plan as stock casualty companies. Yet stock fire company taxes, as a class, have averaged for many years substantially less percentagewise in relation to their net revenues than the taxes of the stock casualty companies.

Furthermore, any number of instances can be pointed out where different stock fire insurance companies with approximately the same amount of net revenue paid substantially different amounts in Federal income taxes. The same contrasting examples can be found frequently among stock casualty companies. Yet they are all taxed under the same identical Federal statute and the same Federal tax plan.

The same variations can be found among mutual companies, except to the extent that the 1-percent gross receipts tax floor comes into the picture.

If you take a look at the records, you find that under the same identical law, governing both the stock fire-insurance companies and the stock casualty companies as a class, the stock fire companies have generally paid net, in relation to the premiums, a smaller tax as a class, substantially less than the taxes of the stock casualty companies, percentagewise.

That is because of a difference of business. Even among stock casualty companies, you will find under the same identical law and plan quite a difference in percentage; and you find the same thing among the mutual companies, all operating under the same plan, same tax law.

The reason, of course, is the different types of investments that different companies make. Some of them have enough surplus so that they can afford to invest more in higher income-producing securities, while others have to be more careful. Companies out in the cyclone belt have to be more careful. Incidentally, Virginia companies are going to have to be more careful, because the weather people tell us that cyclones are moving out of Florida and coming north up toward Virginia, so that if they are correct, we are going to have to watch out for that.

INCOME TAX EQUALITY CANNOT BE MEASURED BY SALES TAX STANDARDS

A sales tax imposed uniformly on all vendors is the only kind of a tax which would show uniform percentages of tax dollars to sales dollars. Thus, to say that the prevailing net income-tax structure is wrong because under it stock companies have paid out in taxes a larger percentage of their sales dollars than mutual companies is equivalent to saying that the present net income tax is wrong because it is not a sales tax.

On this basis, one could argue that General Motors had been discriminated against, if General Motors paid a higher ratio of Federal income taxes to net sales than did Chrysler.

There is another defect in these premium ratio comparisons. A substantial part of the taxes paid by stock companies have been taxes paid on investment income. Stock companies have realized more investment income per dollar of premium than mutual companies, because they have more assets per dollar of premium and because they have invested a larger share of them in high-income securities. They have more assets because:

(a) A larger policyholders' surplus is required for fire lines than for casualty lines, and the stock data used in the Allstate committee presentation involves more fire insurance than the casualty data.

(b) Mutual companies writing participating or assessable policies do not need as large a policyholders' surplus for equivalent security. (c) Mutuals cannot invest as great a proportion as the stock companies of their assets in high-yield common stocks because the mutual ratio of surplus to premiums does not permit them to do this with safety.