in America by which the organization was formed and has always been lavishly and almost entirely supported.

By contrast, our Mutual Committee represents nearly 95 percent of the mutual industry and no one company there has contributed any substantial portion of our own modest income.

The charge of competitive disadvantage in the existing tax system is rather overwhelmingly disproved by a look at the record of the principal complainants, the Allstate Cos.

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 their sole stockholder has already received cash and stock dividends aggregating more than $49 million. That's almost 90 percent of the sole stockholder's total cash investment in these two companies from the beginning, many years

ago.

Furthermore, during the period in which the present tax laws have been in operation, and they are the laws these companies are complaining about, these two companies have increased their premium volume from $6,967,000 to $438,508,000. That is annual. They have increased their surplus from $5,097,000 to more than $213 million.

In the light of such prosperity the complaint of these Allstate Cos., or their committee that they are suffering from some alleged tax preference with mutuals borders on the ridiculous, gentlemen.

It is another significant thing that one of the five members of the taxation task force-you know the taxation task force. You haven't seen the report. The Senate Finance Committee tried to get it. They can't get it. It appears to be confidential, but one of the five members was a lawyer whose firm was at the same time in the employ of the chief mutual agitator, this so-called national committee, this Allstate Committee. And serving on this task force with this lawyer was the present Assistant Secretary of the Treasury in charge of taxation.

As I say, the report of this task force has never been made public, has even been withheld from Congress.

In the beginning stock companies had 100 percent of the casualty business.

On the other hand, in the beginning mutual companies had 100 percent of the fire business. Since then, the mutuals have acquired approximately 25 percent of the casualty business, while the stocks have acquired approximately 75 percent of the fire business. Those facts show that just changes in percentage of stock business have not been affected by the different tax systems because the mutuals have gained on the one hand, and they have lost far more on the other hand.

Different methods of taxation are no proof of any unfair discrimination. Just because different segments of an industry are taxed on different bases or by different plans, it doesn't necessarily follow that there is any inequitable distribution of the tax burden.

Otherwise, individuals, partnerships, and corporations in competition with each other would have to be taxed identically the same. That's what the Treasury argues, that our companies and stocks should be taxed alike, because they are in direct competition with each other. If that is valid, then reason and consistency and fairness would re

quire the Treasury to recommend and your committee to approve the same principles in the taxation of other lines of business and, consequently, tax corporations identically with the same law and on the same basis as competing individuals and partnerships. I don't believe the committee or the Congress is ready to do that. I know the Treasury hasn't recommended it.

Even if you have the same identical law for both types of companies you won't get the same tax burden. Under the same identical tax plan, the same tax statute, different companies with approximately the same premium volume and even the same underwriting results will frequently end up with vast differences in their taxes. For example, stock fire insurance companies are taxed, of course, under the same law as stock casualty companies, and yet, for many years, the stock fire company taxes as a class have averaged substantially less in relation to their net revenues than the tax on stock casualty companies. The same variation can be found frequently among mutual companies for the same reasons, largely differences in investment policy. The separate tax systems have not enabled the mutuals to make any unreasonable additions to surplus.

The Treasury's statements recognized the necessity of surplus, but then they implied that there was some sort of tax preference to the mutuals that enabled them to get an unreasonably large percentage of earnings for surplus. Well, the facts are, as shown by a tabulation we have here, from 1942 to 1959, the entire period. While the mutuals have increased their surplus by 4.03 percent, a little over 4 percent of their net written premiums, the stock surplus has increased by 4.36 percent, about the same, but the stock increase is a little bit more. Incidentally, the surplus of the mutuals is little more than half proportionately, of the surplus of the stock companies today. The Treasury proposal, if enacted into law, would deprive the mutuals of reasonable and necessary surplus increases. The stock companies in the last 5 years, increased their surplus $2,683,000,000. This wasn't unreasonable. It was necessary. It was desirable. But it didn't all come from retained earnings. About one-fourth of it came from the capital market in the form of tax-free additions, in the sale of capital for capital and surplus.

Since the mutuals had no practical access to the capital market whatever, any increases made in the surplus of the mutuals had to come entirely from retained earnings, or practically so, within a small fraction of 1 percent.

Approximately one-fourth of the mutual surplus increases came from net underwriting savings which were not subject to income taxation. This didn't let them enjoy any unreasonable increase because, you see, they haven't gotten even as much as the stocks. But if the Treasury proposal in its present form is adopted, then the mutuals, having no practical access to the tax-free capital market, would be deprived of the existing tax-free availability of one-fourth of their necessary surplus additions.

The inequality and injustice of that situation is all the more apparent when one realizes that the stock companies' surplus, I say, is nearly double, proportionately, that of the mutuals.

They say, the mutuals and stocks are taxed the same in the States. Why shouldn't you be taxed the same by the Federal Government?

The answer is simple. State taxes are not on an income basis with the exception of three States. All the rest are entirely on a premium license basis, not as an income tax. In the three States, Mississippi, Louisiana, and Alaska, where they are assessed with a State income tax, the tax is not assessed on the company's income. It is assessed merely as a fixed percentage of their Federal income tax, thus constituting a definite recognition by those three States of the justice and fairness of separate systems for mutuals and stocks on a Federal basis. The Treasury proposal, instead of equality, would actually bring about inequality. Why? Well, they talk about tax equity. We don't believe that competitive equality is a proper test, but we can't ignore the argument when the Treasury uses it. We have to answer it. So we do.

Everybody agrees that the maintenance, stock and mutual companies both, of adequate surplus for policyholders is necessary. There are legitimate differences as to how much a given company should retain, but they all agree that surplus must be maintained, must be adequate, and that the surplus must be increased generally in proportion to increases in the amount of insurance outstanding.

The ability of an insurance company to maintain its share of an insurance market expanding with the economy depends upon its capacity to keep its policyholders' surplus abreast of its growth. If stock companies need more surplus they just sell more stock, like Allstate, for instance.

A year or two ago, they needed some more so they called on papa, their sole stockholder, and said, "Give me $50 million," and got it like that. But mutuals can't do that. They don't have any papa like that. This difference in competitive strength is one we cannot hope to erase and remain mutual companies. For the mutuals the only source of policyholder surplus is underwriting, and investments, but for stock companies their underwriting, and investments, and the capital market.

Now, I understand it is said, "Oh, yes, the mutuals do have some access to the capital market. Some mutuals have since 1943 actually gotten in $23 million from the capital market." We will accept the figure of $23 million, but that is only "guarantee capital." The courts have so held; the tax courts have held, State courts and the tax court of the United States that this is not capital in the ordinary meaning.

In the first place, it is limited. It is in the way of a loan. It is shown on the company's statement, as required by the State commissioners, as a liability, not a stock. In the next place, though, it is absolutely deminimis. That $23 million amounts to only about 6/1000 of 1 percent of premium writings of the mutuals. Their total additions to surplus amount to a little over 4 percent, and the stocks a little over 4. So I think I am safe in saying that 0.006 percent certainly is de minimis.

In making our comparisons, by the way, between stocks and mutuals, I hope you gentlemen and everyone else will understand that we are not making any criticism of the stocks. They are good companies. As a whole, they are fine companies. They are operating legitimately. They serve the public well. We have no complaint in the world with them. We are in as much competition with ourselves as we are with them, and we have no complaint against them, but we

are forced to make these comparisons because the proponents of the legislation, the Treasury and the Allstate Committee, particularly, have injected these points that require these comparisons.

The facts are the Treasury proposal in its present form would put mutuals at a real disadvantage, a disadvantage leading to an inability of mutual insurance to maintain its present status. Why? Well, let's take a look.

The average typical stock fire and casualty company, according to Best Aggregate and Averages, now has a policyholder surplus almost equal to its annual premium writings, while the average typical mutual company surplus amounts to less than half its writings. With this better surplus position stock companies have more funds to invest, more income per dollar of premium, and they are in position to earn more per dollar invested.

A mutual with minimum surplus just cannot afford to risk investments in securities subject to wide market fluctuations like common. stocks. A stock company with a large surplus relative to its insurance activity can put a large part of its investable funds in common stocks. Accordingly, you will see from the records that 37 percent of the stock company assets are invested in high yielding stocks, while only 14 percent of the mutual's assets are so invested.

Now, against this background let's place a typical stock company next to a typical mutual. Suppose that this legislation, in its present form, is adopted. Let's see the mutuals try to compete and maintain their relative shares of the market. The mutual would be at a dra-. matic disadvantage. If they are to retain their percentage share of the market, they must expand their surplus protection to policyholders as their premium volume grows with the economy. Since they have no practical access to equity capital, they can place much less reliance on investment yield than typical stock companies.

The mutuals will have to rely more on underwriting than stocks. If half or more of this underwriting gain is taxed away, their difficulties are seriously compounded. This wouldn't be competitive equality. It would be an unfair start for which the bulk of the stock companies haven't asked, and if competitive equality is to be the controlling test of tax equity, then the Treasury proposal must be seriously and significantly modified.

The necessary modification can take a number of forms. When you considered the life industry, and worked out a solution and a new plan and moved the life insurance from an investment-tax formula to a total-income formula, you recognized a number of problems which have their analogous counterparts in mutual fire and casualty insurance. If you want to bring about a situation of equal competitive opportunity it is necessary that the proposed legislation be modified to eliminate or minimize the disadvantages under which mutuals would operate.

The life law itself doesn't operate exactly the same on stock and mutual life companies. The 50-percent-tax-deferral feature in the life law is a permanent deferral for mutuals, but it is only a contingent deferral for stock companies. In that life law, furthermore, here is another point.

An amount equal to 2 percent of group life, accident, and health premiums is deductible from gross income subject to limitations, and

that deduction is because of the less diversification and greater fluctuation of loss experience under group insurance.

Now, Mr. Chairman, there is even less diversification and even greater loss fluctuation in the usual fire and casualty lines. For example, mutual insurance coverages such as crop, hail, earthquake, and windstorm are subject to periodic catastrophe losses. They have little diversification and very great loss fluctuations.

Life insurance companies are in direct competition with mutual casualty companies and accident and health insurance. Now, if competition has anything to do with it, in all fairness since you allow that deduction, any legislation that would be passed should certainly grant similar treatment to mutual companies with their smaller policyholder surplus.

For some kinds of insurance, the amount of net premium is fixed years before the amount that will have to be paid to beneficiaries and claimants can be determined or even satisfactorily estimated. In fire and casualty insurance the dividend, if any, typically will be determined at or before the end of the policy period, and the net premium accounts are closed at or before that time.

In some lines, the losses are known about that time, but in other lines, years and years may elapse before the losses or claims can ever be determined. In workmen's compensation, for example, and bodily injury coverages, companies must try to put aside enough money in reserve for losses that they can only estimate crudely at the time the policies expire. If their estimates are found years later to be too low, they cannot reopen the premium or dividend rates on the policies involved. Now, if the life insurance analogy is to be followed the mutuals should be permitted some deduction equal to some percentage of premium or of the increase in reserves for claims not known or settled at the end of the policy period.

Then, there is a policyholder surplus fund precedent in life law. In that law, the Congress provided for the establishment of a special fund called the policyholder's surplus fund built up by deductions from otherwise taxable income. A similar provision should be incorporated into any revision of the tax law applying to mutual fire and casualty companies. This special fund would enable the typical mutual company with a low surplus premium ratio to cope somewhat with the ups and down of the usual underwriting cycle.

Unless the Treasury proposal is appropriately modified by some such protective provision as that included in the life law, these frequent increases and decreases in surplus would put the mutual companies at a distinct disadvantage in competition with well-financed stock companies. Life insurers writing casualty lines are permitted to deduct or defer tax on 50 percent of underwriting gain on their total income tax base.

As I say, they are directly in competition with fire and casualty insurers in lines other than accident and health to a far greater degree than generally recognized.

You know, it is perfectly possible for life insurance companies to write fire and casualty lines under the laws of some States, many States. In fact, they do. For example, one large stock life insurer in the year 1959 alone wrote a volume of general casualty lines which would rank this company as the fourth largest writer among all mutual