LAMPERT LUMBER CO., Hon. WILBUR MILLS, Chairman, Committee on Ways and Means, House of Representatives, U. S. Congress, Washington, D.C. DEAR SIR: My name is Leonard Lampert. I am chairman of the board of directors of the Lampert Lumber Co., which operates 60 lumber yards in Minnesota, South Dakota, North Dakota, Iowa, and Nebraska, with headquarters at St. Paul, Minn. Our company has been a subscriber at Retail Lumbermen's Inter-Insurance Exchange (a reciprocal insurer) since 1937, underwriting in that way our fire insurance, which is a matter of extreme importance in the operation of retail lumberyards. It is clear that specialists in this type of hazardous risks can supply various services, inspections, fire prevention, and the like better than someone not familiar with the hazards inherent in retail lumberyard operation, and as a result of this can produce a lower loss ratio and hence a lower cost of insurance. During 23 years of our experience with the exchange out of each dollar that we have deposited our average actual cost has been 64 cents. The actual savings returned to us of the money deposited has been 35.12 cents. The remainder of 0.88 cents has been held as reserve credited to the Lampert Lumber Co. individual account as its share of contribution to a reserve fund either required by law or conservative operation. The funds which my company deposits with the attorney in fact are held under the terms of the power of attorney: “A separate individual account shall be kept by said attorney in fact for each subscriber. The savings effected shall be annually credited to my account either to reduce my next annual deposit or to provide an adequate reserve, and in the event my contract is terminated, after all outstanding claims have been apportioned, the balance remaining to my credit, both of savings and reserve, shall be returned to me in cash." I am opposed to the Boggs-Baker bills (H.R. 6659 and H.R. 6660), since those bills would tax as profit a savings on money which I have deposited with the exchange, out of which insurance costs are to be deducted. The remainder continues to belong to my company. It is not a profit to the exchange. Yours very respectfully, Re H.R. 6659 and H.R. 6660. LEONARD LAMPERT. MICHIGAN FRUIT CANNERS, INC., Chairman, House Ways and Means Committee, DEAR SIR: Our firm has been a subscriber to Canners Exchange Subscribers at Warner Inter-Insurance Bureau for more than 50 years and I have been a member of Canners' Advisory Committee for 3 years. This long standing relationship and complete familiarity with the operation and significance of this reciprocal exchange permit me to comment on the adverse effect of H.R. 6659 and H.R. 6660 on Canners Exchange Subscribers. We obtain fire and allied lines coverage on our various properties from this exchange for several reasons: (1) Canners Exchange Subscribers specializes in providing insurance for food processors and on risks which are closely affiliated with or owned by food processors; (2) The inherent character of food processors has resulted in the development by Canners Exchange Subscribers of a highly specialized engineering and loss prevention service; and (3) Insurance is obtained by us at actual cost; our payment for coverage is through a deposit, the excess of the deposit after payment of losses and expenses is returned to us by way of cash savings or specific allocation of such savings to our company's individual accounts. Canners Exchange Subscribers' plan of operation has remained virtually unchanged since its organization in 1907 by a group of progressive canners who felt that they needed a type of insurance coverage designed for their own specific need. I am sure that these original subscribers, many of whom are still on the books of Canners Exchange Subscribers, and other food processors, who have become subscribers through the years, agree with the reasons stated above as to why Canners Exchange Subscribers' plan is especially desirable. There is an additional point which we would like to mention. All deposits made by all subscribers are specifically allocated to each subscriber's individual account. While a modest reserve is created for all subscribers in an amount varying between 1 percent and 5 percent of the annual deposit, all funds, not otherwise spent, are returned to the subscriber on his withdrawal from the exchange. The exchange presently pays an income tax on its investment income. Even this is not truly equitable since it is apparent that such a tax is on the deposits of individual subscribers. These deposits are not the property of the exchange; these deposits are the property of the subscribers. While we do not take particular exception to the present tax method, we believe that the imposition of income tax as provided in H.R. 6659 and H.R. 6660 does not recognize the basic concept that Canners Exchange Subscribers necessarily has no income, and consequently, no profit. It seems obvious, since all deposits are allocated to the individual accounts of each subscriber and are specifically returnable to him, that the proposed tax treatment is manifestly unfair. Such a tax is a tax on our company on deposits which are simply being held for our benefit by the exchange. We earnestly hope that this legislation will not be endorsed by your committee. Should you have any questions at all about the contents of this letter, please may I hear from you. Sincerely, Hon. WILBUR MILLS, Chairman, Committee on Ways and Means, House of Representatives, U.S. Congress, Washington, D.C. A. EDW. BROWN, President. DEAR SIR: My name is Alfred D. Hall. I am president of Mathew Hall Lumber Co., of St. Cloud, Minn., which operates four retail lumberyards in that vicinity. Because of the serious fire danger in the operation of lumberyards and resultant high cost of fire insurance a group of dealers in the two Dakoats, Minnesota, and Iowa searched for an economical method of handling the coverage required, which resulted in the formation of the Retail Lumbermen's InterInsurance Exchange. Our lumber company has been a member of that exchange since 1918. During that period, of each dollar deposited the exchange has used 57.26 cents for losses and expenses, has returned to us 41.09 cents in savings, and has credited to reserve kept in our individual account 1.65 cents. This period covers the prewar years, the years of the depression, World War II, and the reconstruction period, each of them varying in its economic impact on our business and during all that time through the operation of the Retail Lumbermen's Inter-Insurance Exchange we have been provided with inspection and engineering services specialized for our own industry, and, as you can see, for a reasonable cost. I am at present chairman of the advisory committee of the exchange, and I am therefore fully conversant with its activities. It is our duty to safeguard the funds of the subscribers by whom we are elected, and the funds which are held by the exchange for and in the name of the subscribers are treated entirely as a trust fund. They do not belong to the exchange. I am therefore opposed to the Boggs-Baker bills (H.R. 6659 and H.R. 6660) because they would impose tax as if an income accrued to the exchange, which it does not. The exchange is basically and essentially a nonprofit organization. Yours very truly, ALFRED D. HALL. Re Baker-Boggs bills. Hon. WILBUR D. MILLS, GROCERY STORE PRODUCTS Co., Chairman, House Ways and Means Committee, DEAR CONGRESSMAN MILLS: Our company has been insured with Warner Reciprocal Insurers for many years. Our insurance expense (fire and allied lines, automobile, workmen's compensation, and fidelity and surety) is a real consideration to us, for which reason we are very much concerned with any opportunity to obtain the best available coverage at a reasonable cost. We purchase our file and allied lines insurance through Warner Reciprocal Insurers because our experience indicates that we cannot obtain better protection elsewhere. This reciprocal exchange specializes in industrial fire insurance. The engineering, inspection, and rate services which are made available to us are unequalled. We know, too, that the underwriting requirements are such that the aggregate excellent experience of all of the insureds directly results in substantial savings to us. You may or may not be familiar with the reciprocal plan of operation provided by Warner Reciprocal Insurers. At the beginning of the policy period, we make a deposit with Warner, which deposit is about the same as-or it might be less than the premium charged by stock or mutual companies. As the policy period progresses, the unused portion of the deposit is posted to our individual accounts. At any time it is possible for us to determine not only the unearned portion of the deposit-this being conventional with any insurance policy premium or deposit--but also those savings or unused deposits which are credited to our accounts. At the end of each year, we receive cash savings or specific credits to our accounts, which remain with the exchange so long as we are insureds. In my many years in business, I have dealt with insurance organizations of many types, and in no other case have I enjoyed such accurate and clear presentations of savings which are earned or details of transactions to reserve accounts which reflect the substantial savings available to us. These are formal, understandable and equitable demonstrations of the net cost of our insurance protection. What is left over from our initial deposits in the cost of our insur ance. It is my opinion that the approach by the Baker-Boggs bills would significantly not reflect the proposition that our deposits with Warner Reciprocal Insurers are an initial estimate of cost. Since these funds belong to all insureds and are simply being held by the exchange in behalf of all of us, I do not feel that these deposits in the aggregate should be treated as income to the exchange. While the exchange is subject to Federal income tax on its "investment income", I would certainly resist any approach that would treat deposits as income or savings retained but allocated to specific accounts as subject to taxation. We respectfully urge that the Baker-Boggs bills, as they apply to Warner Reciprocal Insurers and similar organizations, not be approved by the House Ways and Means Committee. Sincerely, The Honorable WILBUR D. MILLS, House Office Building, Washington, D.C. J. S. Ross, President. LITTLE ROCK, ARK., May 19, 1961. DEAR SIR: In accordance with your requests in conversation with you at Searcy on December 29, 1959, and by telephone in January 1960, regarding the Baker-Boggs bills to amend the Internal Revenue Code with reference to taxation of mutual and reciprocal insurance organizations, we wish to make the following statement regarding the operation of Lumbermen's Reciprocal Insurance Exchange: The laws of the various States differ to some extent; therefore, the facts presented here must apply to the operation of Lumbermen's Reciprocal Insurance Exchange under the laws of the State of Arkansas. The Arkansas law, sections 66-901 to 66-913, and 66–601, set out who may form a reciprocal exchange, under what conditions a reciprocal exchange may be formed, that a reciprocal may insure against any indemnity loss that may be insured against under other provisions of the laws, except life insurance, and the reserves that must be maintained. This exchange was organized in 1939, and began operation on December 5, 1940, carrying only workmen's compensation insurance risks and limiting the risks to lumber producing entities in Arkansas. This field of coverage was chosen because the workmen's compensation insurance rates seemed extremely high, and it was the desire of the organizing subscribers to obtain their insurance at cost; without paying commissions to agents or profits to insurance carriers. The exchange operated under the above outline until 1957, at which time the certificate of authority was amended to include fire and allied lines, for lumber manufacturers only, and rates were promulgated and filed with the Arkansas State Insurance Commissioner covering the added lines. The administrative policies of the exchange are formulated by a group of individuals known as an advisory committee. This committee is composed of a minimum of seven members, who are elected by the subscribers, and are owners, partners, or officers of corporate subscribers. From this committee three members are elected to serve as an executive committee to confer with the attorney in fact regarding policies, investments of retained funds, etc., when the full advisory committee is not in session. The cost of operation of this exchange is composed of management fees payable to the attorney in fact, reinsurance premium for reinsuring losses, and taxes. These expenses are paid to the attorney in fact on the basis of a percentage of premium deposits, and in consideration for this payment of fees the attorney in fact pays salaries of its employees, office rent, and all ordinary operating expenses; also, the attorney in fact obtains the reinsurance treaties and pays the premium therefor; also, the attorney in fact pays the premium tax to the State of Arkansas. All premium deposits, in excess of the percentage taken by the attorney in fact for expenses, are credited to the accounts of the individual subscribers who paid the premium deposit, and accounts are maintained for each individual, separate subscriber. This part of the premium deposits is kept in two accounts for each subscriber, one representing savings from nonpayment of sales commissions, called a contingency fund, and the other a reserve for payment of claims. The contingency fund may be returned to the subscribers annually or retained to meet the reserve requirements of the law. The percentage allocated to reserve for claims is credited to each subscriber when paid. The losses attributable to each subscriber are charged to that individual subscriber and any remaining credit balance is retained until all liability applicable to that policy year is definitely known. As will occur in any insurance program, there are times when the loss reserve created from the premium deposits of one particular subscriber is not sufficient to liquidate the entire loss payments of that subscriber. In this eventuality, the reserves created by all other subscribers are charged on a pro-rata basis an amount sufficient to make up the excess loss of the subscriber who sustains an excessive loss. This is the reciprocal exchange (exchange of indemnity) feature which gives this method of insurance its name. As soon as the indemnity liability is definitely known for each policy year, any remaining credits to the subscribers are removed from the reserve accounts for refund to the subscribers or to be retained in the exchange to meet reserve requirements set by law. The savings, if retained, are still credited to the individual subscribers to whom such savings belong and are never credited into a common or unallocated surplus account. When the attorney in fact determines that certain funds are not necessary to meet legal reserve requirements, with the approval of the advisory committee, such funds are returned to the subscribers to whom they belong. The Lumbermen's Reciprocal Insurance Exchange, because of refunds to subscribers, does not maintain the investment portfolio that other forms of insurers have. However, it is good business to have. necessarily retained funds invested in interest-bearing bonds or dividend-paying stocks. The income arising from such investments is allocated to all subscribers at the end of each policy year on a pro-rata basis; that is, each subscriber is credited with the percentage of investment income that his retained deposits bears to the total retained deposits. This investment income is not retained in the exchange, but is paid to each subscriber, each year, on the basis previously stated. Investments of the reciprocal exchange are restricted, by law, to investments approved for trusts, since they are investments made by the attorney in fact for the exchange from funds held by the attorney in fact for the individual, separate subscribers of the exchange. In conclusion, the reciprocal exchange retains only a small portion of the premium deposits and then only long enough to meet legal reserve requirements; the investment income is paid to the subscribers annually; there are no common or unallocated surplus funds held by the reciprocal exchange; and in the operations, savings accrued through subscribing to the exchange are included in the income or losses of the subscribers, when the liabilities are determined, and all savings are refunded to the subscribers. The attached schedule shows total deposits made by subscribers and refunds to these subscribers for the period 1943-59. The increase represents additional reserves required. In the opinion of the members of Lumbermen's Reciprocal Insurance Exchange, the provisions of the Internal Revenue Code as now applied to interinsurers and reciprocals should be retained. Due to the difference in the nature of operation of a reciprocal insurance exchange to that of the mutual insurance companies or other types of insurance operations, it is recommended that, if it is necessary to amend the Internal Revenue Code as now written that a separate section, or sub-section, be included applying only to interinsurers and reciprocals. Sincerely, (Signed) ROY SHULL, Lumbermen's Reciprocal Insurance Exchange, the Findley Co., Attorney May I add, Mr. Chairman, there will be a later statement by another segment of the insurance industry by Mr. Desmond. His people are not members of our association. That is why there are two statements. We have exchanged some information so that I think he will not duplicate what I have said. The CHAIRMAN. Mr. Houston, you gave us some background in your prepared statement. Let me ask just a few questions to get some better understanding of the situation as it has existed over the years. Prior to 1942, the reciprocals and the other mutuals engaged in the fire and casualty business were not taxed at all under the income tax law, were they? |