Reply. A 52% tax on underwriting income would

Dur

not jeopardize the ability of most mutuals to expand. ing the 17 years, 1943-1959, net income in excess of one billion one hundred million dollars was retained by mutuals and reciprocals. Even if their taxes had been double the $334,000,000 actually paid by them, it would not have been necessary for them to reduce their retained income. The dividends voluntarily distributed to mutual policyholders were 10 times such a tax increase. (The dividends voluntarily distributed to reciprocal policyholders were about 50 times the taxes the reciprocals paid to the Treasury.) (Exhibit C).

d. Argument.

to the capital market.

Mutual companies do not have access

Reply. Mutual companies do have access to the capital market, and many have borrowed substantial funds. Unrealized gains on securities have met the major part of their capital needs. One-third of the mutual companies included in Best's Aggregates and Averages have obtained substantial amounts in the capital market. This is true not only at the time of organization, but also from time to time for purposes of expansion. (Exhibits L and M)

e.

Argument. The 1% formula for taxing mutuals produces a stable revenue of increasing size to the Treasury as contrasted to a fluctuating income.

Reply. This argument is true. The point would apply equally to stock companies if they were taxed on the mutual basis. However, the revenue to the Treasury would be greatly reduced.

(Exhibit C)

f. Argument. Mutuals accumulate surplus by charging, for a time, premiums greater than necessary and retaining or "borrowing" these amounts as surplus funds. A debtorcreditor relationship exists.

Reply. Such an argument ignores the realities. The unreturned part of underwriting income belongs to the company; the policyholder is not a creditor and could not get payment upon demand. It is identical with earned surplus in other corporations. The amount that will be returned to policyholders, or whether any will be returned, is in the discretion of the directors of the corporation.

The retained earnings of the mutuals are not recoverable by the policyholders unless the company is liquidated and then such funds, if any, would be paid, to a substantial extent, to persons other than those who paid them in. In practice, mutual companies are rarely liquidated, except in cases of insolvency. In such cases, of course, there is no surplus to be distributed.

Mutual corporations and reciprocals usually

charge premiums greater than required to meet the cost of insurance, and each year retain some of such excess

permanently to provide for contingencies and future growth. Stock companies accumulate surplus for exactly the same purposes, but after payment of a 52% tax.

g. Argument. Funds retained by mutuals serve only the function for which they were contributed, i.e., insurance protection.

Reply. Mutuals, reciprocals, and stock companies all retain net income not only for insurance protection but also for the financing of growth. Mutuals and reciprocals retain net income for the same reasons as all other corporations. A growing business ordinarily finances all or a large part of its additional capital needs from retained income. The mutuals and reciprocals are just like other businesses in this respect, except that under existing law it is easier for them, by reason of lower taxes, to finance their capital needs than for stock companies. The stock companies depend largely upon retained income after payment of the full corporate tax. (Exhibit C).

h. Argument.

Mutuals provide their policyholders insurance at cost by payment of dividends or discounting premiums in advance.

Reply. This argument is simply not factual. (Exhibit C). If insurance were actually furnished at cost,

there would be no retained income. If insurance were

actually furnished at cost, there would be no net income and therefore there would be no tax under the proposed

bills.

1.

(Exhibit C).

Argument. Stock companies have larger incomes from investments than the typical mutual company and thus have an income to support their operations and build their surplus in excess of what comparable mutuals would have.

Reply. Mutual companies have much larger in

comes from underwriting than the typical stock company. (Exhibit C). The fact that stock companies have larger investment income, which is subject to full corporate tax, is no basis for the mutuals' claim for tax freedom on

In the Panel Discussions before the Committee on Ways and Means on December 15, 1959, representatives of the mutual and reciprocal companies conceded that in general it was easier for mutual companies to accumulate reserves under existing law than for stock fire and casualty companies. Professor Moor expressed the view that all types of insurance companies should accumulate reserves against contingency risk and for growth in the same way, after taxes. The Chairman of the Committee, Mr. Mills, asked why it should be more difficult under existing laws

for stock companies to accumulate necessary reserves than for mutuals. The Chairman stated that he thought this was really the heart of a lot of the discussion that is, whether or not it is in the best interest for all of us for the tax law itself to make it easier for some types of operations to grow in the economy in the future than for others.