UNITED FIRE INSURANCE COMPANY O. T. Hogan, President Chicago, Illinois UNITED NATIONAL INSURANCE COMPANY UNITED PACIFIC INSURANCE COMPANY UNITED SECURITY INSURANCE COMPANY Baton Rouge, Louisiana UNITED STATES LIABILITY INSURANCE COMPANY A. W. Berry, President King of Prussia, Pennsylvania UNIVERSAL AUTOMOBILE INSURANCE COMPANY Indianapolis, Indiana UNIVERSAL SECURITY INSURANCE COMPANY Memphis, Tennessee UNIVERSAL SURETY COMPANY Fred K. Stiner, Executive Vice President UTAH HOME FIRE INSURANCE COMPANY Salt Lake City, Utah UTILITIES INSURANCE COMPANY John J. Nangle, Jr., President St. Louis, Missouri VANGUARD INSURANCE COMPANY Hugh H. Gaffney, President Dallas, Texas VERMONT ACCIDENT INSURANCE COMPANY C. P. Mason, President and Treasurer Rutland, Vermont VERNON FIRE & CASUALTY INSURANCE COMPANY Harold H. Bredell, President and Treasurer Indianapolis, Indiana VIRGINIA SURETY COMPANY, INCORPORATED J. E. Hankison, President Toledo, Ohio WABASH FIRE AND CASUALTY INSURANCE Henry F. Schricker, Chairman of the Board WASHINGTON FIRE & MARINE INSURANCE W. E. Burtelow, President St. Louis, Missouri WEST AMERICAN INSURANCE COMPANY Hamilton, Ohio WEST JERSEY TITLE AND GUARANTY COMPANY Frank McDonough, President Camden, New Jersey WEST VIRGINIA FIRE & MARINE COMPANY Fred C. Campbell, President Huntington, West Virginia WESTERN ALLIANCE INSURANCE COMPANY Austin, Texas WESTERN FIRE & INDEMNITY COMPANY Murrell R. Tripp, President Lubbock, Texas WESTERN PACIFIC INSURANCE COMPANY Seattle, Washington WESTERN PIONEER INSURANCE COMPANY Oakland, California WESTERN STANDARD INDEMNITY COMPANY Denver, Colorado WESTERN STATES INSURANCE COMPANY Omaha, Nebraska WESTERN STATES TITLE INSURANCE COMPANY Rendell Mabey, President Salt Lake City, Utah WESTERN SURETY COMPANY Dan Kirby, Chairman of the Board Sioux Falls, South Dakota WHEELER COUNTY TITLE INSURANCE COMPANY William A. Bennett, President Fossil, Oregon WILSHIRE INSURANCE COMPANY Lester R. Hill, President Los Angeles, California WOLVERINE INSURANCE COMPANY W. H. Krasean, Secretary and Treasurer WORKMEN'S AUTO INSURANCE COMPANY Los Angeles, California WORTH INSURANCE 'COMPANY Fred D. Thompson, President ZENITH NATIONAL INSURANCE COMPANY Edgar S. Wilkinson, President Los Angeles, California Mr. MACHROWICZ. Thank you. The CHAIRMAN. Any further questions? Mr. Alger. Mr. ALGER. Mr. Cate, the earlier witness, Mr. Houston, pointed out that the reciprocals' money on hand that they had in their reserve was not profit. Would you agree with that? He further went on to say that the money, while invested was held in the reserve and insofar as it gained income was profit and would be subject to tax, but beyond that he said this money was not profit. Would you agree or not? Mr. CATE. I do not agree with that at all. I believe that the income to the reciprocal after payment of its losses and expenses is income. It is the profit earned on that operation, and that, in turn, is transferred to a surplus fund. Out of that surplus fund, the reciprocal may declare a dividend to the policyholder, but this is earned income which is earned from the insurance operation, just as the difference between the premium income and losses and expenses of a stock company is earned. Then, in the case of a reciprocal, they may return a portion of their earnings to the policyholder, in which case under the Boggs-Baker bill it would be deductible, but the portion which they retain and put in their surplus is earned income. It is retained income. I was interested in the comment made by the prior witness on page 7 of his statement where he said: The unused portion of the deposits, however, remain at all times the property of the subscribers. And he said on page 8: Such savings are subject to disposition on behalf of the subscribers as they shall direct, and there should be no inteference with their rights in such disposition. I have had occasion to look into the manner in which the surplus of reciprocals has been accumulated, and in that instance I think it is significant that in the case of the largest reciprocal in the United States, which accounts for approximately 24 percent of the reciprocal premium volume, the rules and regulations Mr. ALGER. Excuse me. One company accounts for 24 percent? Mr. CATE. Yes; that is a company writing in premium volume approximately, oh, $123 million. Mr. ALGER. Continue. Mr. CATE. That company with regard to its reserve and its surplus provides in its rules and regulations, and Best bears out that this is still the rule, that their board of governors, and I am quoting section 3 of their rules and regulations: Said board shall have the power to create and maintain a surplus free from any claim or demand by any or all policyholders, members, or subscribers, individually or collectively, and shall have power to set aside from premium deposits or premiums or other income such sums as it shall elect for the creation, maintenance, and increase of said free or general surplus. Any such sum so set aside and allocated to such free or general surplus may be retained by the exchange free from any claim or demand by any policyholder, member, or subscriber, but shall be applied, after providing for the payment of all liabilities of the exchange, only to such purposes as may be deemed by the board of governors to be proper and advantageous to policyholders. In the event of the termination of the business of the exchange, by liquidation, merger, or otherwise, any surplus remaining after the payment of all its liabilities shall be distributed only to the members and policyholders who have policies in force in the exchange at the date of such termination. That does not provide for these surplus funds to go back to the policyholder who contributed funds originally and from whose funds this income was retained. Mr. ALGER. Mr. Cate, would you agree that we give Mr. Houston, since we both mentioned him in his testimony, the right to file a rebuttal to whatever you have said? I know so little about this. Is it all right, Mr. Chairman, for the record to be left open at this point in case Mr. Houston would like to answer that quotation? The CHAIRMAN. Upon your request, it is perfectly all right. The CHAIRMAN. All right; without objection, the record will be left open. (Information referred to follows:) STATEMENT BY CHARLES T. HOUSTON In his testimony, Mr. Cate of the Allstate group challenged a number of assertions contained in my statement, and the committee has afforded me the op portunity to respond. 1. Mr. Cate quoted from the rules and regulations of a large reciprocal exchange. This quotation, taken out of context, is intended to convey the misleading impression that surplus funds retained by reciprocal exchanges are not the property of the subscribers and that savings over the cost of insurance are not returned to the subscribers who contributed these funds. The exchange to which Mr. Cate refers is not a member of our association, and it would be inappropriate for me to speak for it. However, to correct the implication that the provision quoted by Mr. Cate is typical of all reciprocal exchanges, I should like to cite for the committee's information pertinent portions of the powers of attorney of a few exchanges that are members of our association. One such exchange, for example, provides fire and allied insurance for the lumber industry and has operated successfully since 1917. The powers of attorney executed by its subscribers provide in pertinent part: "A separate individual account shall be kept by said attorney in fact for me and for each subscriber, my account at any reasonable time to be open for inspection. "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." This exchange, according to Best's Guide, has during the 1955-59 period achieved underwriting savings of $2,323,000 and, in this same period, has returned $2,589,000 to its subscribers. (The views of two subscribers to this exchange, Lambert Lumber Co. and Mathew T. Hall Lumber Co., with regard to the Boggs-Baker bills, appear at p. 2118 in the unrevised stenographic record of these hearings.) Another exchange in our association has provided fire and allied insurance for lumber businesses since 1905. The powers of attorney executed by its subscribers state: "*** A separate individual account shall be kept by our attorney with us and with each other subscriber. "Our said attorney, with the consent of the advisory committee, shall have the power to call on us for an amount not exceeding one annual premium deposit to pay excess losses incurred under this contract and we hereby agree |