THE NONPROFIT NATURE OF MUTUAL INSURANCE

In its appearance before this committee, the Allstate committee argued that mutuals were not nonprofit organizations merely because they frequently have both underwriting and investment gains. Certainly, we have both underwriting and investment gains. Our contracts of insurance would not long be acceptable to our policyholders if we did otherwise. But it is not the presence of underwriting and investment gains that determines whether an insurance company is profit or nonprofit, but, rather, the ownership and ultimate disposition of those gains.

Mutual companies make every effort to conduct their affairs on the basis of sound insurance principles. Like other insurance companies in the field, we anticipate that our premiums will be sufficient to cover operating costs and losses, and with a little left over. This small amount, as an addition to surplus, has a different connotation in insurance accounting than it has in ordinary accounting.

Ratemaking is not an exact science. Insurance-company rates, based, as they are, largely on past experience, are assumed to be adequate to cover losses and expenses. But losses often exceed expectations. As the Allstate committee correctly stated, funds to meet unusually large losses are shown as surplus in insurance accounting, rather than as reserves. Surplus, then, policyholder surplus, is in reality the only source of reimbursement to which the policyholder may look under

such adverse circumstances.

Obviously, as you all know, income taxation is not based on volume of business. In the case of profit-making companies, it is based on what you have got left, net profits. In the case of nonprofit companies owned by the policyholders instead of outside ownership, its basis should be on the only earnings that they make; namely, investment income.

Neither the amount of the contribution to surplus nor the surplus itself, as long as it is held and used exclusively for the protection and benefit of policyholders, can ever be considered a profit. Thus, when we speak of a mutual insurance company as being nonprofit, we mean that its ownership resides in the policyholders alone, and that there can be no diversion thereof to any outsider (third-party stockholders), as is the case in a stock company.

NO CRITICISM OF STOCK COMPANIES AS A WHOLE

Please understand that any reference I make to stock companies is in no way critical of stock companies as a whole. We mutuals are competitors with the stocks, but we have a high regard for them. We feel that they are ethical as a whole, and that they are rendering good service to their policyholders and their stockholders; are doing a fine business, and bearing their fair share of taxation, and we have no complaint whatsoever about them as a whole.

In fact, we tend to our own knitting as far as we can, and we never try to tell you how you should tax other people.

FACTS DEVELOPED IN 1951 HEARINGS ARE EQUALLY APPLICABLE NOW

In the 1951 Internal Revenue hearings, the Ways and Means Committee, first, and the Senate Finance Committee, second, heard rather

fully the attacks made then on the Federal tax status of the mutuals. After hearing both sides, it was plain that there was no tax inequality between the mutuals and the stocks. The facts and principles developed in the 1951 hearings are fully applicable today.

FINAL ANALYSIS

In the final analysis of this Allstate committee proposal, which would shift and unload a substantial part of the tax burden of some of the most prosperous insurance companies in America to the mutuals and reciprocals and to some stock companies, these four points stand out in bold relief:

1. There would be no appreciable benefit to the Treasury which would be worthwhile or commensurate to the detriment that would be caused. They estimate $143 million increased revenue to the Treasury in 14 years, but, if you check their table G you will find that nearly $142 million out of that $143 million would have occurred in the year 1956, which was a most unusual year, and that in several of the other years, for example, 1949, 1953, and 1954, the Treasury would have suffered substantial decreases.

2. Some stock companies would derive some benefit to some extent, but many stock companies-large, medium, and small-would suffer serious damage.

3. Mutual policyholders, as the owners and beneficiaries of the mutual companies, would suffer gross injustice by having their taxes nearly doubled.

4. The two prosperous Allstate companies would be unjustly enriched by a tax decrease of millions of dollars per year.

We submit that the proposed plan is utterly unsound, and that the existing laws pertaining to fire and casualty insurance, and that the present tax laws, substantially in effect since 1952, which apply separate tax plans to mutuals on the one hand and stocks on the other hand, have not resulted in any real tax inequality or unfair discrimination.

Thank you, gentlemen. That concludes my formal statement, and I would be delighted to answer, to the best of my ability, any questions anyone may have.

The CHAIRMAN. Are there any questions of Mr. Wicker?

Mr. Eberharter will inquire.

Mr. EBERHARTER. Mr. Wicker, I want to be sure I understand this. Am I to understand that while the 2 Allstate companies write less than 2 percent of the total stock-company business, under their proposal they would get 53 percent of the tax reduction, while all the other stock companies, who write 98 percent of the insurance, would get only 47 percent of the proposed tax decrease?

Mr. WICKER. Yes, sir. That is absolutely true.

Of course, they presented a lot of charts and tables and statistics. about stock companies as a whole, but none that they presented disclosed any of those important facts about those two companies. We had to dig all that out, ourselves, from Best's insurance reports and other recognized authorities.

Mr. EBERHARTER. In other words, their proposal would provide that the 2 Allstate companies get 53 percent of the tax decrease, while all other tax companies would get only 47 percent?

Mr. WICKER. Yes, sir.

Mr. EBERHARTER. And they write only 2 percent of the insurance. Mr. WICKER. Less than 2 percent.

Mr. EBERHARTER. Thank you. I wanted that clear.

Mr. WICKER. They write less than 2 percent of the stock share of the business. Their percentage of the total business is even less. The CHAIRMAN. Mr. Reed will inquire, Mr. Wicker.

Mr. REED. Mr. Wicker, we are glad to see you here.

Mr. WICKER. Thank you, sir.

Mr. REED. Your statement says that the proposal presented in these hearings on January 14 in the name of the National Committee for Insurance Taxation is substantially the same as the one presented by the Allstate insurance companies some years ago. Would you elaborate on that, please?

The recent proposal

Mr. WICKER. Yes, sir. That is absolutely so. is not only substantially the same; it is exactly the same except that in 1953, it was published and presented directly and openly by these two companies. Here is a copy of the original brochure, and it was presented by these two companies in their own name, "Prepared by Allstate Insurance Co.," it says. And there is their proposal and all their calculations and tables, in 1953.

But in the next years, in their next proposals, they issued three subsequent brochures, and here is the last one. They changed the color and some of the words and calculations, but as we say down in Virginia, "it is the same old coon, with just another ring around his tail."

But the last proposal and those in between them had the same identical tax proposal. They changed the name, but there was a substantial difference in the results that they estimated like these:

In their first proposal, they showed a very small decrease of tax on the stocks as a whole and a small increase on mutuals. They showed a net loss to the Treasury, not big but a net loss. Then, in their 1956 brochure, which was published in November 1956, in the name of the National Committee for Insurance Taxation, that the two companies had formed, they then presented the same plan but estimated that there would have been a slight net revenue increase for the Treasury in the period from 1943 to 1955, a little over a million, less than $2 million. Their 1956 brochure estimated then a tax decrease of more than $167 million for the stock companies, with a tax increase of $147 million on the mutuals. Less than 14 months later, they came here before your committee and presented this statement I have in my hand, January 14, and their statistics included only 1 more year. Instead of a little over a million gain for the Treasury, which they estimated in 1956, they now estimate $143 million, with just 1 year more, and instead of $147 million tax decrease for the stocks, they reduced that estimate to only about $54 million, almost reducing it two-thirds; and instead of a tax increase of $167 million on the mutuals, their latest estimate indicated a tax increase of nearly $173 million for the mutuals, just by that 1 additional year.

But so far as what they said they wanted to do, the plan that they presented here January 14 is the same one that these two companies themselves went all over the country trying to sell in 1953, and then formed their so-called national committee organization and have been

trying ever since, under different colors and in different brochures, to put across.

Mr. REED. You referred to the National Committee on Federal Taxation as being essentially composed of the two Allstate insurance companies, although there are over 300 company members. Do you know how much money was contributed by these two companies to their committee and how much by the other companies?

Mr. WICKER. Yes, sir, I think I do, substantially. We do refer to them as a "front" because they were organized by the 2 companies and present the same plan and, as we have seen, almost entirely for the benefit of these 2 companies.

The Journal of Commerce reported recently that this Allstate committee was 1 of the top 10 lobby organizations in the United States, as to amount of money collected and spent in lobbying, based on reports filed under the lobbying law. They also reported that these two Allstate companies-2 out of 304-alone contributed about 80 percent of the total.

Furthermore, the lobby reports for the latest 2 years filed by this National Committee on Insurance Taxation, that we call the Allstate committee, revealed contributions aggregating $129,825 from these two companies alone, but they do not show any contributions from any of the other members. Of course, these other companies did contribute something, but their contributions were evidently too small to be listed in the lobby reports.

That, Congressman, is one of the reasons why we refer to this as a "front" organization.

Mr. REED. That is all, Mr. Chairman.

The CHAIRMAN. Mr. Herlong will inquire.

Mr. HERLONG. Mr. Wicker, I am wondering if you could tell us briefly how the National Committee for Insurance Taxation proposes to change the way that they are being taxed at this time.

Mr. WICKER. Yes, sir. They are now being taxed, these two companies, as profitmaking companies.

Mr. HERLONG. I mean how they propose to change the way stock companies are being taxed. Let me put it that way.

Mr. WICKER. They propose to abolish the present statute which taxes them and other stock companies on their combined underwriting and investment results.

Mr. HERLONG. How are they being taxed at this time?

Mr. WICKER. They are now being taxed on net profits or they get tax credits, if they have net losses; that is, by taking the total that they take in from their policyholders, deducting from that what they pay out for losses, for operating expenses, and for taxes. That leaves them net underwriting income or loss. Then, taking the total that they have received as investment income from the investment of their funds on hand, deducting their investment expenses and the 85 percent credit allowed on dividends of domestic corporations, and of course exempting the income that comes from tax-exempts, like State and municipal bonds, they get a net investment income.

They add that net investment income to combine it with the net underwriting income or offset it against the net underwriting loss. Then they apply the 52 percent corporate rate to the net results. That then produces either a tax or a tax credit.

Mr. HERLONG. Depending on whether there would be an underwriting loss or not?

Mr. WICKER. Yes, sir. That is right, on the combination of underwriting results and investment results.

In the present year, for example, the very latest year, 1956, the larger of these two Allstate companies, which is the casualty company, had a tax credit, because it had a heavy underwriting loss of $1,198,000, under the present law.

Mr. HERLONG. How do they propose to change the present law? Mr. WICKER. They propose to change the present law by wiping out first the right to offset underwriting losses against investment gains, or vice versa. They propose to exclude from all consideration underwriting gains or losses, to tax only on investment income, net investment income, and net capital gains or losses realized, when you actually sell a security, plus a 1 percent premium tax, less certain small deductions, like refunds to policyholders and $150,000 of the first premium volume.

Mr. HERLONG. And mutual companies are taxed in what manner today?

Mr. WICKER. Today the mutual companies are taxed on 1 of 2 bases, whichever produces the greater tax: That is, either 1 percent on their total receipts from investment income and underwriting income, what they receive in their gross premiums after refunds to policyholders, without any deduction for losses at all, and their total of their investment income. They combine those and figure that tax at 1 percent.

Then, they compare that with the tax at the full corporate rate, 52 percent on their investment income. Whichever one produces the greater tax, that is the tax the mutuals pay.

The change that this would make in the mutuals is this. It would leave the tax on investment income the same as it is now, just the same way as it would with the stocks. The tax on investment income would remain the same is it is now. But instead of paying that or 1 percent of their gross receipts, this proposed plan would make them pay the full corporate tax on investment income and also 1 percent on their premiums in addition, practically double. In other words, they would almost substitute the word "and" for "or" in the mutualtax formula.

Mr. HERLONG. In other words, in the case of the stock companies, unless there was an underwriting loss to be carried over against something else, they would virtually be in the same position that they are today under the proposed change, would they not?

Mr. WICKER. Yes, sir. But if they had good underwriting gains, like the two Allstate companies, they would escape taxation of those gains. For instance, the Allstate Insurance Co. in the last 5 years, had a net underwriting gain exceeding $58 million, all of which would have completely escaped taxation under their plan. But stock companies whose underwriting gains and losses balanced off, leaving only investment income, would be in about the same position; yes, sir. If they had heavy underwriting losses, they would be in a terrible fix. Mr. HERLONG. Suppose the Congress were to make the change. Just assume that it did.

Mr. WICKER. Yes.