# Appendix — United States v. Consumer Life Insurance Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_2189%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1977 - **Citation:** 430 U.S. 725 ## Text APPENDIX IN THE Supreme Court of the United States OCTOBER TERM, 1976 No. 75-1221 UNITED STATES OF AMERICA, Petitioner —.— CONSUMER LIFE INSURANCE COMPANY ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF CLAIMS PETITION FOR A WRIT OF CERTIORARI FILED FEBRUARY 25, 1976 CERTIORARI GRANTED MAY 24, 1976 IN THE Supreme Court of the United States OCTOBER TERM, 1976 No. 75-1221 UNITED STATES OF AMERICA, Petitioner —.— CONSUMER LIFE INSURANCE COMPANY ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF CLAIMS INDEX Page Docket Entries of the Court of Claim 1 ß ———— —rö 5 Exhibit A, Claim for Refund — 14 Transcript of Proceedings of July 17-18, 19722 34 Testimony of Arthur Crooks Eddy ................................... 74 yr OK OO rele 159 Testimony of Hubert B. Sturtevant ..............0000...00.......... 168 Testimony of Tom Robinson 260 Testimony of Arthur Crooks Eddy (Rebuttal) —.............. 274 Plaintiff's Exhibit 2, Reinsurance agreement between Ameri- can Bankers Life Assurance Co. and Consumer Life In- surance Co. (June 1957), addenda and amendments .......... 292 Plaintiff's Exhibit 3, Reinsurance agreement between Con- sumer Life Insurance Co. and American Bankers Life Assurance Co. (April 18, 1962), addendum and amend- ——ꝛñññůñůꝛůůů ——-—„V 319 Plaintiff's Exhibit 10, Report of examination of Consumer Life Insurance Co. as of April 30, 199292 333 Plaintiff's Exhibit 11, Report of examination of Consumer Life Insurance Co., as of December 31, 1963 . a ii INDEX Plaintiff's Exhibit 18, Report of examination of American Bankers Life Assurance Co. as of December 31, 1960 Plaintiff's Exhibit 19, Report of examination of American Bankers Life Assurance Co., as of December 31, 1968 Plaintiff's Exhibit 20, Illustration—Reserves ....................... Plaintiff’s Exhibit 21, Illustration—1957 Agreement; A&H r ̃é . ̃ Plaintiff’s Exhibit 22, Illustration—1959 Amendment; A&H r . . Plaintiff's Exhibit 24, Illustration—Initial Effect of 1957 r èÄ r Plaintiff’s Exhibit 25, Illustration—Initial Effect of 1962 D i a E Plaintiff’s Exhibit 26, Illustration Consumer Life Ratio of Premiums Written to Surplus Plaintiff's Exhibit 27, Illustration—Comparison of Agree- ESIC SLES 7... ce Order Allowing Certiorari tthe eee ee eee 1 GENERAL DOCKET Case No. 463-70 CONSUMER LIFE INSURANCE COMPANY v8. THE UNITED STATES DOCKET ENTRIES DATE PROCEEDINGS Dec. 30,1970 Filing fee of $10 paid by plaintiff. Dec. 31, 1970 Court filed order referring case to Com- missioner George Willi. Feb. 25, 1971 Defendant’s motion for extension of time (to April 29, 1971) to file its answer filed. Copies (2) to atty. ALLOWED MAR. 16, 1971. Apr. 23, 1971 Defendant’s answer to the petition filed. Copies (13) to atty. Apr. 26, 1971 Commissioner’s standard pretrial order on liability filed. Copy to parties. Jun. 7, 1971 Plaintiff's motion for extension of time (to August 9, 1971) to comply with pretrial order filed. Copies (2) to deft. ALLOWED JUNE 8, 1971. Sep. 30, 1971 Defendant’s motion for leave to file out of time a motion for extension of time filed. Copies (2) to atty. ALLOWED OCT. 19, 1971. Oct. 19, 1971 Defendant’s extension of time (to Novem- ber 22, 1971) to comply with pretrial order filed. Copies (2) to atty. ALLOWED NOV. 4, 1971. Nov. 18, 1971 Defendant’s motion for extension of time (to December 22, 1971) to comply with pretrial or- der filed. Copies (2) to atty. ALLOWED DEC 6 1971. DATE PROCEEDINGS Mar. 23, 1973 Commissioner’s memorandum and order under Rule 113 filed. Copy to parties. Dec. 3, 1973 Transcript of testimony (2 volumes plus a master index—471 pages) taken at Atlanta, Georgia on July 17 & 18, 1973 together with plain- tiff’s exhibits 1 thru 6, 7a-f, 8a-d, 9a-h, 10, 11, 12a- e, 13a-c, 14, 15a-c, 16 thru 27 and defendant’s ex- hibits 1 thru 8 filed. Notice to parties. Dec. 3, 1973 Trial judge’s order closing proof, etc. filed. Copy to parties. Dec. 26, 1973 Plaintiff's motion for extension of time (to February 6, 1974) to file requested findings, ete. filed. Copies (2) to deft. ALLOWED DEC 28 1973. Feb. 4, 1974 Plaintiff's requested findings of fact and Plaintiff's brief filed. Copies (2 of each) to deft. Mar. 5, 1974 Defendant’s motion for extension of time (to April 20, 1974) to file requested findings, etc. filed. Copies (2) to atty. ALLOWED MAR 6 1974. Apr. 19, 1974 Defendant’s motion for extension of time (to May 11, 1974) to file requested findings, etc. filed. Copies (2) to atty. ALLOWED APR 23. May 13, 1974 Defendant’s objections to requested find- ings of fact, defendant’s requested findings of fact and defendant’s brief to the trial judge filed. Copies (2) of each to atty. Jun. 3, 1974 Plaintiff's motion for extension of time (to June 27, 1974) to file its reply brief, etc. filed. Copies (2) to deft. ALLOWED JUN 4 1974. Jun. 26, 1974 Plaintiff’s objections to defendant’s re- quested findings of fact filed. Copies (2) to deft. Jun. 26, 1974 Plaintiff's reply brief to the Trial Judge filed. Copies (2) to deft. Dec. 13, 1974 Trial judge’s opinion and findings of fact filed. Copies to parties. 23444 ä ee ee — ———— DATE PROCEEDIN GS Jan. 15, 1975 Plaintiff's notice of intention to except to commissioner's report filed. Copies (2) to deft. Feb. 3, 1975 Plaintiff's motion for extension of time (to March 5, 1975) to file exceptions and brief filed. Copies (2) to deft ALLOWED FEB 4 1975. Mar. 10, 1975 Plaintiff's exceptions to trial judge's find- ings of fact, ete. filed. Copies (5) to deft. Mar. 10, 1975 Plaintiff's brief accompanying exceptions filed. Copies (5) to deft. Mar. 12, 1975 Court entered order that this case shall be heard en banc by the court at the June 1975 ses- sion of the court. Copies (3) to parties. Apr. 8, 1975 Defendant’s motion for extension of time (to April 24, 1975) to file its brief filed. Copies (2) to atty. ALLOWED APR 9 1975, with no further ex- tension to be granted. Apr. 24, 1975 Defendant's brief filed. Copies (5) to atty. May 6,°1975 Motion by Penn Security Life Insurance Company to participate as amicus curiae [in the oral argument] filed. Copy to parties. MAY 7 1975: Motion GRANTED provided Penn Security shall not be allowed any oral argument if the court finds, as presently indicated by the briefs, that no new and significant issues are raised in the oral argument in No. 463-70. May 19, 1975 Plaintiff’s reply brief filed. Copies (5) to deft. Jun. 6, 1975 Argued and submitted on the merits be- fore Cowen, Laramore & Skelton}. Jun. 13, 1975 Defendant’s motion for leave to advice court of the opinion in First Railroad & Banking Company of Georgia v. United States filed. Copies (2) to atty. ALLOWED JUN 16 1975. DATE PROCEEDINGS Jul. 14, 1975 Plaintiff's motion for leave to advise the court of a petition for rehearing, etc. filed. Copies (2) to deft. ALLOWED JUL 25 1975. Oct. 22, 1975 Judgment for plaintiff with the amount of recovery to be determined pursuant to Rule 131 (e). Opinion by Judge Kashiwa. Dissenting opinion by Judge Nichols. Mar. 3, 1976 Notice of fil'ag, by defendant, in Supreme Court of a petition for writ of certiorari, on Febru- ary 25, 1976, No. 75-1221, filed. May 27, 1976 Order of the Supreme Court, dated May 24, 1976, allowing certiorari filed. Notice to trial judge. May 27, 1976 Record in re certiorari forwarded to Su- preme Court. A ote Sata) SETHE FRR ae D d . 5 IN THE UNITED STATES COURT OF CLAIMS No. 463-70 CONSUMER LIFE INSURANCE Co., PLAINTIFF, U. UNITED STATES OF AMERICA, DEFENDANT. (Filed: December 30, 1970) PETITION Count I 1. Plaintiff herein is a stock insurance company or- ganized and existing under the laws of the State of Ari- zona with its executive offices located in Atlanta, Georgia. 2. This is a civil action for the recovery of income taxes and interest erroneously overpaid and collected under the Internal Revenue Code of 1954 (hereinafter referred to as the Code“) and jurisdiction of this Court is invoked pursuant to Title 28, U.S.C. § 1346 (a) (1). 3. This count of this petition is brought for the recov- ery of the overpayment of federal income taxes and in- terest in the amount of $86,804.47 for the taxable year ended December 31, 1958, $120,275.60 for the taxable year ended December 31, 1959, $82,746.88 for the taxable year ended December 31, 1960, $461.88 for the taxable year ended December 31, 1962, $38,479.61 for the tax- able year ended December 31, 1963, $22,625.44 for the taxable year ended December 31, 1964, plus interest as allowed by law. 4. Under date of February 20, 1969, the District Di- rector of Internal Revenue, Atlanta, Georgia (hereinafter referred to as “District Director”) sent Plaintiff a notice of deficiencies in federal income taxes in the aggregate amount of $235,762.75, plus interest, for the taxable years ended December 31, 1958, 1959, 1960, 1962, 1963 and 6 1964. The statement accompanying said notice of de- ficiency set forth the reasons for the alleged deficiencies in federal income taxes as follows: It is determined that for your taxable years 1958, 1959, 1960, 1962, 1963 and 1964, you did not qualify as a life insurance company within the meaning of section 801 of the Internal Revenue Code of 1954, en- titling you to taxation under section 802 of the 1954 Code. Consequently, your taxable income is being computed under section 832 of the 1954 Code. This determination is based on the following: “(1) You did not compute or estimate your life insurance reserves on credit life contracts on the basis of a recognized Mortality Table and assumed rates of interest, as required by section 801(b) of the 1954 Code, and/or “(2) You did not reflect in your total reserves, defined in section 801 (e) of the 1954 Code certain unearned premiums on accident and health contracts under certain reinsurance agreements which should have been included therein. Accordingly, when your total reserves are corrected, your life insurance re- serves as reported, even if recognized as having been computed or estimated on a basis of a recognized mortality table, would not exceed 50% of your cor- rect total reserves pursuant to section 801 (a) of 1954 Code.” 5. On or about July 30, 1969, Plaintiff paid to the District Director the aggregate amount of $351,393.88 additional federal income taxes and interest thereon for the taxable years ended December 31, 1958, 1959, 1960, 1962, 1963 and 1964. 6. For each of the taxable years in question, Plaintiff filed timely federal income tax returns and paid all in- come taxes shown due on each such return. 7. On or about October 14, 1969, Plaintiff filed with the District Director Claims for Refund for the overpay- ment of taxes and interest in the respective amounts and for each of the taxable years as described in paragraph 3 above. On or about June 26, 1970, Plaintiff filed amended 7 Claims for Refund for the overpayment of taxes and interest in the respective amounts and for each of the taxable years as described in paragraph 3 above. Copies of such amended Claims for Refund are attached hereto as Exhibit A and made a part hereof. 8. On or about October 27, 1970, the District Director notified Plaintiff that the aforesaid amended Claims for Refund for the overpayment of taxes and interest had been disallowed. 9. Plaintiff has overpaid its federal income taxes for the taxabie years ended December 31, 1958, 1959, 1960, 1962, 1963 and 1964. 10. During each of the taxable years in question, Plain- tiff was a “life insurance company,” as defined in Section 801(a) of the Code, and its life insurance reserves, as defined in Section 801(b) of the Code, plus unearned premiums, and unpaid losses (whether or noi ascer- tained), on noncancellable life, health, or accident poli- cies not included in life insurance reserves, comprised more than fifty percent of its total reserves, as defined in Section 801 (e). 11. Plaintiffs life insurance reserves were computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, were set aside to mature or liquidate, either by payment or rein- surance, future unaccrued claims arising from life insur- ance and noncancellable health and accident insurance contracts involving, at the time with respect to which the reserve was computed, life, health, or accident con- tingencies, and were required by law. 12. The District Director erroneously increased Plain- tiff's total reserves, as defined in Section 801 (e) of the Code, by including in such total reserves the total un- earned premiums on certain health and accident insur- ance contracts as herein described. 13. During the taxable years ended December 31, 1958, 1959 and 1960, Plaintiff was a party to a Reinsurance Agreement with American Bankers Life Assurance Com- pany (hereinafter referred to as “American Bankers“), pursuant to which Plaintiff agreed to reinsure, in the manner described in such Reinsurance Agreement, each 8 and every life insurance policy and each and every health and accident insurance policy written by American Bankers in respect to debtors of Southern Discount Com- pany, the Plaintiff’s parent company, and its subsidiaries, which companies were primarily engaged in the business of consumer finance. The said Reinsurance Agreement between Plaintiff and American Bankers provided that the liability of Plaintiff on the life insurance policies and health and accident insurance policies shall follow the liability of American Bankers; except that the liability arising under the reinsurance of health and accident poli- cies would be on a month-to-month basis only and Plain- tiff's liability was limited solely to the amount payable by American Bankers to Plaintiff under the terms of the Reinsurance Agreement, which amount constituted the monthly earned portion of the total premiums. 14. For the taxable years 1958, 1959 and i960, Plain- tiff did not establish and maintain unearned premium reserves with respect to such health and accident insur- ance reinsured by Plaintiff, and pursuant to the laws of the State of Arizona Plaintiff was not required to main- tain the unearned premium reserves with respect to such health and accident insurance. 15. For the taxable years 1962, 1963 and 1964, Plain- tiff issued combined life insurance and health and acci- dent insurance policies in certain states to debtors of Southern Discount Company and certain of its subsid- iaries. During such taxable years, Plaintiff was a party to a Reinsurance Agreement with American Bankers pur- suant to which American Bankers agreed to reinsure a portion of such health and accident insurance written by Plaintiff. 16. Plaintiff did not establish and maintain unearned premium reserves with respect to that portion of the health and accident insurance so reinsured by Plaintiff with American Bankers, and pursuant to the laws of the State of Arizona Plaintiff was not required to maintain the unearned premium reserves with respect to such health and accident insurance. 9 17. The Reinsurance Agreements between Plaintiff and American Bankers were negotiated at arm’s length, and the Reinsurance Agreements were entered into for valid business purposes and had economic significance to both parties thereto. 18. The unearned premiums with respect to the health and accident insurance written by American Bankers for the taxable years 1958 through 1960, and the health and accident insurance written by Plaintiff for the taxable years 1962 through 1964, a portion of which was rein- sured with American Bankers, should not be included in Plaintiff's “total reserves“ within the meaning of Section 801(c) of the Code. 19. The District Director erroneously determined that the Plaintiff did not qualify as a “life insurance com- pany” within the meaning of Section 801 of the Code and the District Director erroneously determined that the Plaintiff was not entitled to taxation pursuant to Section 802 of the Code. The District Director erroneously deter- mined that the Plaintiff did not compute or estimate its life insurance reserves on the basis of recognized mor- tality or morbidity tables and assumed rates of interest. The District Director erroneously determined that Plain- tiff should include in its total reserves, as defined in Section 801(c) of the Code, unearned premiums on health and accident insurance contracts which were the subject of Reinsurance Agreements between Plaintiff and American Bankers. 20. The District Director erroneously disallowed Plain- tiff's Claims for Refund and such additional taxes and interest paid thereon should be refunded to Plaintiff. WHEREFORE, Plaintiff prays that it be given judg- ment against the Defendant in the amount of $351,393.88, plus interest as allowed by law, or such greater amount as may be legally refundable, plus costs of this action and such other relief as this Court may deem just and equitable. 10 Count II This Count sets forth an alternative claim in the event it is held that the District Director was correct in de- termining that Plaintiff should establish and maintain reserves with respect to the health and accident insur- ance which was the subject of the Reinsurance Agree- ments between Plaintiff and American Bankers. 1.-10. Paragraphs 1 through 10 of Count I are in- corporated in this Count II as paragraphs 1 through 10 respectively. 11.-12. Paragraphs 13 and 15 of Count I are incor- porated in this Count II as paragraphs 11 and 12 re- spectively. 13. Such health and accident insurance was written in a single policy with the life insurance which was also sold to the insureds. The policies of life insurance were noncancellable, and the life insurance benefit was co- terminous with the health and accident insurance bene- fit and both benefits were combined in a single policy. 14. The reserves with respect to such health and acci- dent insurance would be includable in the computation of Plaintiff's “life insurance reserves“ in that such amounts were computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest, and were set aside to mature or liqui- date future unaccrued claims arising from life insur- ance, annuity and noncancellable health and accident in- surance contracts (including life insurance contracts com- bined with noncancellable health and accident insurance) involving, at the time with respect to which the reserve is computed, life, health, or accident contingencies. 15. Such health and accident insurance was noncan- cellable and the unearned premium reserve established with respect to such noncancellable health and accident insurance would be includable in the computation of unearned premiums, and unpaid losses (whether or not ascertained) on noncancellable life, health or accident policies not included in life insurance reserves, as de- scribed in Section 801 (a) (2) of the Code. 11 16. The District Director my ag = determined a Plaintiff did not qualify as a “life insurance comp within the meaning of Section 801 of the Code, and the District Director erroneously determined that Plaintiff was not entitled to taxation under Section 802 of the Code. 17. The District Director erroneously disallowed Plain- tiff's Claims for Refund and such additional taxes and interest paid thereon should be refunded to Plaintiff. WHEREFORE, Plaintiff prays that it be given judg- ment against the Defendant in the amount of $351,393.88, plus interest as allowed by law, or such greater amount as may be legally refundable, plus costs of this action and such other relief as this Court may deem just and uitable. 1 Count III This Count sets forth an alternative claim in the event it is held that the District Director was correct in de- termining that Plaintiff should establish and maintain reserves with respect to the health and accident in- surance which was the subject of the Reinsurance Agreements between Plaintiff and American Bankers, and in the event it is held that such reserves do not qualify as “life insurance reserves.” 1.-10. Paragraphs 1 through 10 of Count I are incor- porated in this Count III as paragraphs 1 through 10 re- spectively. f 11.12. Paragraphs 13 and 15 of Count I are incor- porated in this Count III as paragraphs 11 and 12 re- spectively. 13. The Reinsurance Agreement that was in effect between Plaintiff and American Bankers for the taxable years 1958, 1959 and 1960, provided for monthly pre- mium payments from American Bankers to Plaintiff. Any excess premium payments over the amount of monthly premiums required to be remitted pursuant to the terms of the contract would be premiums paid in advance of the due date. Such premiums paid in advance would not 12 be unearned premiums and would not be included in the computation of the amount of “total reserves” as defined in Section 801 (e) of the Code. 14. Plaintiff's total reserves, as defined in Section 801 (e) of the Code, would not include any amounts re- lating to advance premiums, and Plaintiff's life insur- ance reserves plus unearned premiums and unpaid losses on noncancellable life, health or accident policies would comprise more than fifty percent of Plaintiff’s total reserves. 15. The Reinsurance Agreement that was in effect between Plaintiff and American Bankers for the taxable years 1962, 1963 and 1964, provided for Plaintiff to remit to American Bankers a percentage of the single premium for each policy reinsured with American Bankers at the end of the quarter with respect to which such premiums were collected. Any premiums not remitted to American Bankers in accordance with the terms of the Reinsurance Agreements would constitute a liability from Plaintiff to American Bankers and not unearned premiums. 16. Plaintiff’s total reserves, as defined in Section 801(c) of the Code, would not include any amounts relat- ing to premiums which were not remitted to American Bankers in accordance with the terms of the Reinsurance Agreements, and the Plaintiff’s life insurance reserves plus unearned premiums and unpaid losses on noncan- cellable life, health or accident policies would comprise more than fifty percent of Plaintiff’s total reserves. 17. In computing the amount of “total reserves” as defined in Section 801 (e) of the Code, the District Direc- tor erred in determining the cost of carrying the insur- ance risk. 18. The District Director erred in failing to include in the calculation of unearned premiums and unpaid losses, as defined in Section 801 (a) (2) of the Code, the amount of unpaid losses on noncancellable life insurance con- tracts. 19. The District Director erroneously determined that Plaintiff did not qualify as a “life insurance company” within the meaning of Section 801 of the Code, and the District Director erroneously determined that the Plain- 13 tiff was not entitled to taxation under Section 802 of the Code. ' 20. The District Director erroneously disallowed Plain- tiff’s Claims for Refund and such additional taxes and interest paid thereon should be refunded to Plaintiff. WHEREFORE, Plaintiff prays that it be given judg- ment against the Defendant in the amount of $351,393.88, plus interest as allowed by law, or such greater amount as may be legally refundable, plus costs of this action and such other relief as this Court may deem just and equitable. E. Michael Masinter Attorney for Plaintiff Hansell, Post, Brandon & Dorsey 3300 First National Bank Tower Atlanta, Georgia 30303 (404) 522-3558 Of Counsel. Hansell, Post, Brandon & Dorsey 3300 First National Bank Tower Atlanta, Georgia 30303 Plaintiff’s Post Office Address: Consumer Life Insurance Co. 919 West Peachtree Street, N. E. Atlanta, Georgia 50309 14 15 ur A Dan Aegerter unter. Aren rut: lie eIND form 843 — Stomp rem 843 Director's Stamp rev. Nev 1968) Date nove 2 3 — The teure Revenue Service wil Indic ote ln the 22 The internal Reveave Service will indicate in the block below the hind of cipim filed, ond AB in, where required, DOD Refund of Taxes egen. Erroneously, or Excessively Collected. LD Refund of Taxes ere. Erroneousty, or Eacessivety Collected. CC Refund of Amourt Psid for Stamps Unused, or Used in Error or txcess. D Ratund of Amount Paid for Stamps Unused, or Used in Error or Excess, LD Abatement of Tay: Assessed (not applicable to income, estate or taxes), Q Abstement of Tax Assessed (not applicable to incame, estate or gift u. Please Type or Print Mainly ~ Please Type or Print Itainty Dame of taxpayer or purchase of stamps ‘Teams of taxpoyer or purchoser 4 clamps ~CONSUMER LUVE INSURANCE CO, —__ CONSUMER LIFE INSURANCE CO, Humber ond street City or town, Stata, and — Humber pnd street City oF town, State, ond Zi’ code —212 West Peachtree Street, N. E Atlanta a 30309 . — 30309 Fill in appli iLems— Use attachments if necessary — —— . Your cle security number — we — Emploper idenuncoten number Of aay) mimes os Te ee . Empteyer identincation umber OF eny), . 58 -0825266 252 — —1—— N where „. Name and eddress shown on re NG. (rem above . 1 — 1 Phoenix, Arizona Phoenix, Arizona © Perted—it for tax reporied on sanual bool prenare tepereta term fer N Pee r . } ag 198, wD Income Tax and Interest — — Tex and Interest © Amount of assessment payment & Amount of esecerment ot peyment P uly 30, 1969 |_July 30, 1969 _ _ 186,804.47 ——— iS hasan Go be sbeted Quel apgeahia to income, &> Dots stamee were purchased — . ̃ ̃ —— — Sate cigs ware purtaoesd tom Gove | © Ament — —— . —-H Desens, oe — 1s E . Tar.. thai this cise should be slowed fer the following sssseua: Tr Wee cictmont believes Ghet this —2—ä— ——— Plus interest allowed by law, Pius intefest allowed by law. ** Amount from Line 9 below 53, 683.33 Interest assessed through 6-27-69 ’ 1 % Amount from Line 9 below TT, 249.06 Total to g. and i, above r Interest assessed to 6-27-69 Total to g. and 1. above . COMPUTATION OF INCOME TAX REFUND income Tax COMPUTATION OF INCOME TAX REFUND r I „ eeeeeeseeeeeeeeeee snes ELLE eee 3 Tax peid with originsiretum. 9 „ „„ „„ „„ „ „6 48.1 UL :: 22222229888 oo ee eee 2222222 LLL un @Gd fines h „ „ 0 6 „ 6 „ „ @ Less: Yourcomputstionefcorrecttax,. „„ „„ „ 0}. 627.85 — eee 0 ELLE =, , , 53, 683.33 1 Amount ol overpayment. 2 2 ee ee ee eee eee eee eeeee & Amount previouslyrefunded. . 2. es eee eee „ „ „ „ „ „ „„ & Amount previously refunded. 2 2 2 ee eee eee eee eee eens 8 Net overpayment (enter in item | above) . ila i i ee a oS . 683,33 9% 2 Dr. —————— ——— Under penatties of perjury, | declere ~ Ueder peostties of perjury. | deciare that | this claim, ch accompanying schedules and statements, asinine Sa pooh , 2 — 2 — and to the best of my hacutedge and baiiet it — Wa . f Dyed June 25, 19.70 — 25, __ __ 9.70. — SCL ce On REVERSE tom 643 Gun tem — e m OF REVERNE tom 043 On 1 16 17 EXHIBIT 4 AMENDED Cc FOR REFUND term 043 Otrector) Stamp an * Claim — — . The Interns! Revenue Service wl indicate in the bieck below the Lind of cisim Bled, sad Sl in, where required. (DD Refund of Taxes ea. Erroneously, or Excessivety Collected. Q Refund of Amount Paid for Stamps Unused, or Used in Error or Excess, DL Abatement of Tax /ssessed (not applicable to income, estate or g N taxes). Please Type or Print F ay J. c CONSUMER LIFE IN INSURANCE CO, — ons eben City or own, State, ond ZIP code 919 West. Peachtree Street, N. E. Allanta, Georgia 30309 Fill in applicable itemis—vse attachments if necessary — ‘al Sead — eas Bb Employer cenuficaton number Of any) i 58 -082526 © loterns! Revrove Service office where re | ¢. Name and turn Gl ony) was filed DD shown om et Af Gerad from above Phoenix, Arizona . Period—t! fo” tex repurted on saavel basis, prepare separate form for each taxable year t. King of tox 30» December 31 Income Tax and Interest Oates of payment 3 82,746.88 July 30, 1969 N Dete stamps were purchased trom Geverm | L Amount — to de refunced Of income tax, . 3 * The claimant believes isi Uris Claim should be allowed for the following reasone: — attached Plus interest allowed by law. err A SAE FOR KErUND tem 843 a —— — a. Claim *. 1 — from Line 9 below 55, 276.15 terest assessed through 6-27-69 27, 470.73 Total to g. and 1. above $82, 746.88 (COMPUTATION OF INCOME TAX REFUND Income Tax ; nn „„ b . 6925 5„„5„„„%„%?ö „„ „ „ „1 „ eee 3 Tax paid with original retum. « « © 0 0 0 6 © 2892•—“ù‚B „„ „ a 1 — — mtr my „ 0% „ „eee e % e 0 0 0 . — Total tax paid (add lines -)) „ „„ „„ „˖IũmAa „ „„ „ „ „ „ „ „ b — 6 Less: vVeur cemęutaen of c s „„ „ „ „„ „ „ *eeees = — 7 Amount of overpeymemt. 2 cw ec ec ces eee cee es eeeeeeeee * 8 Amount previously refunded. * * * *-_ ee „% „ „ „ „„ % „ „„ „ * „ „ „ „ „ — — © Net overpayment (enter n Rem I Sers „ „„ „„ „„ „ „ „ „ 8 76. 89 Under penalties of periury, | declare that | have and to the best of my knowledge and belief it is : 3 LP po — — SEK rc õο⁰ẽ⁰mw ON ACYERSE form Ai (tev. 11-48 The Internal Revenue Service will indicote in the biech below the hind of e ond G1 in, where required. oD Retund of Taxes We catty, Erroneousty, or Cxcessively Collected. OD Refund of Amount nid tor Stamps Unused, or Used in Error or Excess. (D Adetement of Tax Arsessed (not applicable to income, estate or git taxes). Please Type or Print F ainty Meme of taspayer er purchaser @ stomps CONS JMER LIFE NS. RANCE CO, Mu mbe: ond street ; City or own, State, ond ZIP code 919 West Peachtree Street, N. E. Atlanta, Georgia 30309 Fill in applicaui2 items—use attachments if necessary 0. Your social security Wite’s n at return d. Leere, identucation number Of any) ii | 3 889823288 bee Revenve Service office where re | 6. .. „% shown on return, # eee (rom sbove tem Gi ony) wes fies Phoenix, Arizona egy ee el „% From January } 19.82. December 31 12. 2 Income Tax and Inte rest Oates o (B Amount — 2 payment 9 461.88 July 30, 1969 a Dee ei were purchased rem 1 — 1 to be sbeted „ . 2 U below) tote, er m taxes) $ 461. 88* 4 El Tee clement believes thet @ 0 otsim shew „„ See statement attached. Plus interest allowed by Jaw. Amount from Line 9 below 335.43 Interest assessed through 6-27-69 741.2 Total to g. and 1. above COMPUTATION OF INCOME TAX REFUND Income Tax A Tex withheld . ec cece stece eee eosseeeeer ees „ „„ „ — A Ceumsted un pfl %%% „„ „„ „„ „„ 3 Tax paid with original return . 9ůũõü»ëꝛ %% „ „1 ey 21 4 Ary edditional Income be ell 335.43 & Total tax pod (edd lines 1-4) . “oe % 0 „% % % % % % ee „% „% „% „„ „„ „„ „ „66 1382.25 6 Less: Yourcomputationofcorrecttax. g „„ „„ LL dee „b „ „„ „ „ „ „ „ „ „ „ „ „ „% 6% 6 %% % „„ĩ„%ẽ 8 Amount previously refunded. 2 sw ee eee ee ee eee ee ee eee @ Net overpayment (enter in tem | above) . Nr . . aes [Pe — cron OW N aS ee 18 nr A tom 843 . Some Bete recsee@ Reeve os bese Claim tate eel Reverse Serene — Revenue Service — tn the both below the Rind of chain Med, ond GH tn, — DOD Refund of Taxes Mecatty, Erroneously, or Excessively Collected. O Refund of Anount Psid for Stamps Unused, or Used in Ervor or Exenes. "[]) Abstement of Tax Assessed (not applicabte te income, estate or gif taxes). — Please Type or Print Pi: indy . 1 DS. r LIFE INSUBANCE COQ. __ West Peachtree Street, N. k. Atlanta, Georgia 30309 g Fill in — attachments lt necessary . Your secie! security number Wes t ©. Ch een . E j i 58 -0825266 1 %% ord trem steve @ interns! Rewenve Service office where re 4. Mame „„ shown on return, % Suen OF ony) wos ied , ‘Phoenix, Arizona — for tex reported on snmual Bevis, geupere saperate Sore —— ͤ Feat om © Amount — Oates of payment ; a 3,479. 61 1 July 30, 1938 „ ae oe — — 38, 479. 61* s T cistnent believes Shot this chim shoud tat ‘ . thet this be shared tor the resented Bee attached Plus interest allowed by law. Amount from Line 9 below 20, 218, 23 Interest assessed through 6-37-89 9, 261.38 Total to g. and 1. above $ 38,479.61 ne COMPUTATION OF INCOME TAX REFUND — Tex 2222 cee . „ oft zr. 6 „ 4 — : 22222... „ s [1A IM.SR 22299 ——ᷣᷣᷣ:D ...... se. of Rh M8 28 rere. « «fant MOR Sh .. $43,190 82 r...... „„ „ „„ „ a 222222 ß. „ 9 Net overpayment (enter in item | Cf ft. 0.0 -. 0 D 2 6 2 2 6 6 » @ » @ Penatties of perjury. | deciere thet | heve ond to the best of my knowledge and belie! it is 19 AMENDED CLAIM FOR REFUND, oo Claim 22 Service * Me internet U indinate in the bloch balew the hind of claim Sled, oad GE in, whore required, DOD Refund of Taxes Mandy, Erroneously, or Excessively Collected. D Refund of Amowat eld for Stamps Unused, or Used in Error or Cena. LD) Abetoment of Tax / seessed (not applicable to income, estate or g it taxes —ñ̃ —¾ 2 . — CONSUMER LIFE INSURANCE CO, ond street Ghy or town, Stata, ond Ti? code i 8 K a fia Went Peachirse Street. M.———[_Atlanta. Gaorgia_s0309 . in — ettochenents ¥ soceoneny ; ‘ 3 — om xe „˙, © laternal Revenue eee office where re . Meme end oddrese shown on retyrn, if diferent trem sbove turn Gf ony) was filed Phoenix, Arizona © Pertod—Z8 tor ton reported on snnusl beols, propere separate form ter coch isaable year Kind of ten” ; Income Tax and Interest © Amount of sssesoment Dotes of payment 9 22, 625.44 E July 30, 1969 2 ese quechqees Gam Gove — tJ J de NN 422.628, 44. $ rr rr See statement attached. Plus interest allowéd by law. Amount from Line 9 below 17, 999.95 Interest assessed through 6-27-69 4,625.49 Total to g. andi, above 22, 625.44 COMPUTATION OF “INCOME TAX REFUND income Tax STex wth wcrc „ „„ „„ „„ cess „ „ — A Estimetedtexpeld. « sw sw eee see eoeeeeeeeeeeeees —. B Tax poid eee eee e sfodbdaial 4 Any sdditionat Income tun o's see eee „„ „„ 4 : © Tots tox ped (add lines (9 6.46 © Less: Yourcomputationofcomecttat. «se eee ees eee eee „„ rr I enn NN x Under penalties of perjury, | declare thet | have examined this ciaim, including mmm , —. . tom 643 d, 9 oe 20 EXHIBIT A CLAIM FOR REFUND Consumer Life Insurance Co. (hereinafter referred to as “Taxpayer’’) is a stock insurance company organized and existing under the laws of the State of Arizona. Tax- payer is engaged in the life insurance and health and ac- cident insurance business. Taxpayer’s home office is lo- cated at 222 North Central Avenue, Suite 904, Phoenix, Arizona, 85004, and Taxpayer’s executive offices are lo- cated at 919 West Peachtree Street, N. W., Atlanta, Georgia, 30309. For the period involved in this Claim for Refund, Taxpayer filed its Federal income tax re- turns with the District Director of Internal Revenue, Phoenix, Arizona. Taxpayer is a “life insurance company” as defined in Section 801 (a) of the Internal Revenue Code of 1954 (the Code“). Section 801(a) of the Code defines a life insurance company as follows: “For purposes of this subtitle, the term ‘life in- surance company’ means an insurance company which is engaged in the business of issuing life insurance and annuity contracts (either separately or com- bined with health and accident insurance), or non- cancellable contracts of health and accident insur- ance, if— (1) its life insurance reserves (as defined in subsection (b)), plus (2) unearned premiums, and unpaid losses (whether or not ascertained), on noncancellable life, health, or accident policies not included in life insurance reserves, comprise more than 50 percent of its total reserves (as defined in sub- section (c)).” Section 801(c) of the Code states that: the term ‘total reserves’ means (1) life insurance reserves, (2) unearned premiums, and unpaid losses (whether or not ascertained), not included in life insurance reserves, and 21: (3) all other reserves required by law.” Therefore, from the foregoing statutory definitions, the qualification of an insurance company as a “life in- surance company” depends upon a qualification fraction in which the numerator is the company’s life insurance reserves plus its unearned premiums and unpaid losses on non-cancellable life, health or accident policies not in- ‘ cluded in life insurance reserves, and the denominator is the insurance company’s total reserves as defined in Sec- tion 801 (e) of the Code. Transactions From 1957 to 1962 All of the outstanding stock of Taxpayer is owned by Southern Discount Company, a Georgia corporation. When Taxpayer commenced the insurance business in 1957, Taxpayer entered into a Reinsurance Agreement with American Bankers Life Assurance Company of Miami, Florida, (hereinafter referred to as “American Bankers”) pursuant to which Taxpayer agreed to rein- sure each and every life insurance policy and each and every health and accident insurance policy written by American Bankers in respect to debtors of Southern Dis- count Company and subsidiaries of Southern Discount Company, which companies were engaged primarily in the business of consumer finance. The Reinsurance Agree- ment provided that the liability of Taxpayer on the life insurance policies and the health and accident insurance policies shall follow the liability of American Bankers, except that the liability of Taxpayer arising under its reinsurance of health and accident policies would be on a month-to-month basis only. Such monthly liability of Taxpayer was further limited solely to the amount pay- able by American Bankers to Taxpayer under the terms of the contract, which amount, in effect, was the monthly earned portion of the total premiums. Thus, pursuant to the terms of the Reinsurance Agreement, Taxpayer’s maximum amount of potential liability on the health and accident policies during any one month was limited solely to the amount of premiums earned on all such health and accident insurance covered by the Reinsur- ance Agreement.* In consideration for this reinsurance, Taxpayer was paid a percentage of the monthly earned premium, initially 8742 percent, and increasing in later years to 9014 percent. The Reinsurance Agreement between American Bank- ers and Taxpayer was amended by subsequent agree- ments between the parties, generally for the purpose of modifying the percentage of reinsurance premium paid by American Bankers to Taxpayer. The amendment of May 28, 1958, specifically provided that the liability of Taxpayer on health and accident insurance policies shall be on a month-to-month basis only, and such liability was to be limited to such amounts payable by American Bankers to Taxpayer under the terms of the Reinsurance Agreement. The Reinsurance Agreement specifically provided that American Bankers was to maintain all unearned premi- ums, loss, and other reserves as may be required by law against the health and accident insurance policies. There- fore, American Bankers established and maintained the unearned premium reserve with respect to the health and accident insurance written by American Bankers and reinsured on a month-to-month basis by Taxpayer. Since the Reinsurance Agreement provided that American Bankers was to pay to Taxpayer only the earned portion of the health and accident premiums, American Bankers retained in its possession the unearned portion of the * An insurance company writing health and accident insurance will usually have received the premium during the year which will not have been entirely earned at the end of the year. A reserve must be established at the end of the year to reflect the liability arising therefrom. The same principle applies for premiums which will not have been earned at the end of a month, and accordingly a reserve must be established at the end of each month to reflect the future liability arising from health and accident insurance written during the month. Unearn premium reserves are not based on recognized mortality or morbidity tables, but on the period for which the premium is paid. Therefore, the amount of the reserve established at the end of any period should be the pro rata portion of the premiums or unearned premiums at the end of the period. See gen- erally R. Denney, A. Rua & R. Schoen, Federal Income Taxation of Insurance Companies § 5.5 and § 5.14 (2d ed. 1966). 23 premiums, and American Bankers established and main- tained the unearned premium reserve required by State law to cover the liability for future claims arising under the health and accident insurance policies. At no time did Taxpayer receive the unearned premiums nor main- tain the unearned premium reserve, and pursuant to the laws of the State of Arizona, Taxpayer was not required to maintain the unearned premium reserve with respect to such health and accident insurance so reinsured. Fur- thermore, in all of its reports filed annually with the Department of Insurance of the State of Arizona, Tax- payer never established or maintained an unearned pre- mium reserve for such health and accident reinsurance. Also, the Department of Insurance of the State of Ari- zona, in its regular examination of Taxpayer’s financial condition, never required or sought to require Taxpayer to maintain the unearned premium reserve with respect to the health and accident insurance so reinsured. Transactions Commencing with 1962 In 1962, Taxpayer began writing directly life insur- ance policies and health and accident insurance policies with respect to the debtors of Southern Discount Com- pany and its subsidiaries doing business in Georgia. With respect to this insurance, Taxpayer determined not to bear the insurance risk fully, but to reinsure a portion of the insurance risk with American Bankers. Accord- ingly, on April 18, 1962, Taxpayer entered into another Reinsurance Agreement with American Bankers with respect to the health and accident insurance written directly by Taxpayer on debtors of Southern Discount Company and its subsidiaries in the State of Georgia. Pursuant to this Reinsurance Agreement, American Bankers reinsured eighty percent of the health and acci- dent insurance written by Taxpayer. The Reinsurance Agreement provided that the liability of American Bank- ers with respect to such health and accident insurance would arise immediately. For this reinsurance, Taxpayer paid American Bankers a percentage of the premiums paid on the policies. 24 -In addition, American Bankers agreed to pay Tax- payer an experience refund based upon a formula set forth in the Reinsurance Agreement, pursuant to which, Taxpayer would be entitled to share in the profit from such health and accident insurance in the event the in- surance reinsured by American Bankers was profitable. Such experience refund agreements were customary in the reinsurance industry, and were normal provisions in reinsurance agreements with American Bankers, and other companies engaged in the reinsurance business. There were other Reinsurance Agreements between Tax- payer and American Bankers with substantially identical provisions to cover subsidiaries of Southern Discount Company located in states other than Georgia. The Reinsurance Agreements between Taxpayer and American Bankers were negotiated at arm’s length, and there was no relationship between Taxpayer or Southern Discount Company and American Bankers during the period covered by this Claim for Refund, and thereafter, except as described herein, and except for a nominal amount of stock (approximately 212%) of Southern Dis- count Company owned by American Bankers for the period March 15, 1962, through March 25, 1969. On July 1, 1963, Taxpayer entered into an agreement with Life Insurance Company of North Carolina, pur- suant to which Life Insurance Company of North Caro- lina reinsured with Taxpayer insurance written with respect to debtors of certain subsidiaries of Southern Discount Company engaged in the consumer finance busi- ness in North Carolina. Pursuant to this Reinsurance Agreement, one hundred percent. of the life insurance and one hundred percent. of the health and accident in- surance was reinsured with Taxpayer, except, however, Life Insurance Company of North Carolina maintained a reserve of forty percent. of the cumulative total of premiums written with which to meet claims. With respect to insurance written by Taxpayer, Tax- payer was required by law to maintain all reserves on such insurance, except that Taxpayer was not required under the laws of the State of Arizona to maintain the unearned premium reserve with respect to that portion ——— SS © 25. of the health and accident insurance reinsured with American Bankers. To the contrary, the Reinsurance Agreement provided that American Bankers was required to maintain all reserves on such portion of the health and accident insurance so reinsured. Taxpayer did not include such reserves in its reports filed with the Depart- ment of Insurance of the State of Arizona; and the De- partment of Insurance, in its examination of Taxpayer’s financial condition, did not require Taxpayer to establish or maintain a reserve with respect to the health and acci- dent insurance reinsured with American Bankers. In determining the fraction described in Section 801 of the Code for years prior to 1962, Taxpayer was re- quired to maintain reserves only with respect to the life insurance reinsured by Taxpayer, and no reserves were required to be established or maintained with respect to the health and accident insurance reinsured by Taxpayer, since Taxpayer only reinsured health and accident insur- ance on a month-to-month basis, and its liability was limited by the terms of the Reinsurance Agreement. Therefore, the amount of life insurance reserves consti- tutes the numerator, and, likewise, the amount of life insurance reserves constitutes the denominator, or the figure representing total reserves. Hence, Taxpayer clearly qualifies as a “life insurance company” pursuant to the definition contained in Section 801 of the Code for such period. With respect to 1962, 1963 and 1964, when Taxpayer was writing life insurance and health and accident in- surance directly, Taxpayer only reinsured a portion of the health and accident insurance with American Bank- ers, and Taxpayer did not reinsure any of its life insur- ance. Therefore, in this computation, the numerator would constitute all of the life insurance reserves, and the denominator, or the figure representing total reserves, would include the life insurance reserves plus the un- earned premium reserve with respect to the portion of the health and accident insurance that was not reinsured by Taxpayer. Since this fraction results in life insur- ance reserves constituting more than fifty percent. of Taxpayer’s total reserves, Taxpayer clearly qualifies as 26 a “life insurance company” as defined in Section 801 of the Code for such years. The District Director of Internal Revenue erroneously determined that, for the taxable years of 1958, 1959, 1960, 1962, 1963 and 1964, Taxpayer did not qualify as a “life insurance company” within the meaning of Sec- tion 801 of the Code, and the District Director errone- ously determined that Taxpayer was not entitled to taxation under Section 802 of the Code. Furthermore, the District Director erroneously determined that the Taxpayer did not compute or estimate its life insurance reserves on credit life contracts on the basis of a recog- nized mortality table and assumed rates of interest as required by Section 801(b) of the Code; and the District Director erroneously determined the Taxpayer did not reflect in its total reserves certain unearned premiums on health and accident contracts under certain Reinsur- ance Agreements. During the years 1957 through 1960, the District Director erroneously added to the total re- serves of Taxpayer the total unearned premium reserves on all health and accident insurance written by Ameri- can Bankers and reinsured by Taxpayer. During the years 1963 and 1964, the District Director erroneously determined that Taxpayer’s total reserves should include that portion of the unearned premium reserve with re spect to the percentage of health and accident insurance reinsured by the Taxpayer with American Bankers. The Reinsurance Agreements between Taxpayer and American Bankers were valid, bona fide contractual agreements between the parties thereto, and such con- tracts had business and economic significance to both Taxpayer and American Bankers. Taxpayer entered into such reinsurance agreements for valid business purposes. One of the primary business purposes of the Reinsurance Agreements was to enable Taxpayer to indirectly insure the debtors of Southern Discount Company. During the years prior to 1962, Taxpayer was not qualified to en- gage in insurance business directly in those states in which Southern Discount Company conducted business, and therefore, in order to insure debtors of Southern Discount Company, Taxpayer had to enter into Reinsur- — 27 ance Agreements with an insurance company that was qualified to write insurance in those states in which Southern Discount Company conducted business. Also, taxpayer entered into such reinsurance agreements in order to qualify as a “life insurance company” as defined in the Internal Revenue Code. Such a purpose of rein- suring health and accident insurance, or failing to accept reinsurance on the health and accident insurance, except on a month-to-month basis in order to qualify for taxa- tion as a “life insurance company“, is a proper purpose, since Taxpayer is entitled to arrange its business affairs in such a manner as to minimize its tax liability, and to derive the maximum business advantages from the taxing laws. Taxpayer acknowledges that this was one of the business reasons for entering into the reinsurance agree- ments. Since the reinsurance agreements were valid and binding contracts between the parties, the reinsurance transactions in all respects had significant economic and business effects on both parties to the agreements, and accordingly, Taxpayer should not be required to establish or maintain any reserves with respect to the health and accident insurance that was reinsured as described here- in. In the alternative, if the District Director is correct in determining that Taxpayer should establish and main- tain reserves with respect to the percentage of health and accident insurance reinsured by Taxpayer with American Bankers, such reserves should qualify and be treated as “life insurance reserves” as defined in Section 801 of the Code. Such health and accident insurance was written on the same policy forms and was combined with the life insurance which was also sold to the in- sureds. The policies of life insurance were noncancelisile and the life insurance was coterminous with the health and accident insurance. Such health and accident insur- ance was for an average term of approximately 18 months and was noncancellable by the Taxpayer. Such noncan- cellable health and accident insurance should be included in the computation of unearned premiums, and unpaid losses (whether or not ascertained), on noncancellable life, health or accident policies not included in life insur- ance reserves as described in Section 801 (a) (a) of the Code; and the life insurance reserves plus unearned pre- miums and unpaid losses on noncancellable life, health and accident policies would comprise more than 50 per cent of Taxpayer’s total reserves. Further, in the alternative, if the District Director is correct in determining that Taxpayer should establish and maintain reserves with respect to the percentage of health and accident insurance reinsured by Taxpayer with American Bankers prior to 1962, the District Di- rector erred in computing the amount of such reserves. In computing “total reserves,” as defined in Section 801 (e), there should not be included therein any premiums paid in advance. The reinsurance agreement between Taxpayer and American Bankers provided for monthly premium payments from American Bankers to Taxpayer and the unearned premium reserves claimed to exist by the District Director can exist only where there are sin- gle premium payments. However, single premiums paid under a monthly premium contract would clearly pay premiums in advance of the due date, thereby creating advance premiums and not unearned premiums as claimed by the District Director; therefore, even if there were single premium payments from American Bankers to Taxpayer, rather than monthly premium payments, the total reserves computed pursuant to Section 801 (e) would not include the amount relating to advance premiums. Therefore, for such period Taxpayer would qualify as a ‘life insurance company” since the computation of “total reserves” should exclude the advance premiums, and the life insurance reserves plus unearned premiums and un- paid losses on noneancellable life, health or accident poli- cies would comprise more than 50 percent of Taxpayer's total reserves. With respect to years, subseqeunt to 1961, Taxpayer, in accordance with its Reinsurance Agreement with American Bankers, remitted to American Bankers a per- centage of the single premium for each policy reinsured with American Bankers at the end of the quarter with respect to which such premiums were collected. Had Tax- payer withheld any portion of such single premiums due 29 to American Bankers, which would have at least been necessary to have created unearned premiums on the percentage of insurance reinsured as is claimed by the District Director, Taxpayer would have been in violation of its agreement to pay American Bankers single pre- miums. If such amounts had been withheld they would not in fact have constituted unearned premiums but would have been a liability of Taxpayer to American Bankers since American Bankers by contract was the insurer of the risks represented by the percentage of reinsurance and American Bankers was obligated to pay claims arising from such risks and consequently required by iaw to maintain the unearned premiums for such risks. Thus, for the taxable years subsequent to 1961 Taxpayer’s life insurance reserves plus unearned pre- miums and unpaid losses on noncancellable life, health or accident policies would comprise more than 50 percent of Taxpayer’s total reserves. Further, in the alternative, if the District Director is correct in determining that Taxpayer should establish and maintain reserves with respect to the percentage of health and accident insurance reinsured by Taxpayer with American Bankers for years subsequent to 1961, Taxpayer would, nevertheless, qualify as a “life insur- ance company” as defined in Section 801(a) of the Code. In computing the amount of “total reserves” the amount attributable to such health and accident insurance re- serves would be the cost of carrying the insurance risk (see Reg. § 801-3(e)), and when such amount represent- ing the cost of carrying the insurance risk is included in the computation of “total reserves,” Taxpayer would qualify as a “life insurance company” for years after 1961, since its life insurance reserves plus unearned pre- miums and unpaid losses on noncancellable life, health and accident policies comprise more than 50 percent of Taxpayer’s total reserves. Further, in the alternative, if the District Director is correct in determining that Taxpayer should establish and maintain reserves with respect to the percentage of health and accident insurance reinsured by Taxpayer with American Bankers, the District Director, neverthe- 30 less, erroneously calculated the numerator of the fraction expressed in Section 801 (a) of the Code by failing to include in the calculation of the numerator the unpaid losses on noncancellable life insurance contracts. Tax- payer recognizes that it is proper to include such unpaid losses in the calculation of the denominator, total re- serves, as the District Director has recognized in his computations, but such amount must also be included in the calculation of the numerator. (IRC 1954, § 801(a) (2).) In computing both the numerator and denominator the statute clearly provides that there must be included the amount representing unpaid losses on noncancellable life insurance contracts. The life insurance reserves established by Taxpayer during the period in question were computed or estimated on the basis of recognized mortality or morbidity tables and assumed rates of interest. Such life insurance re- serves constituted amounts set aside to mature or liqui- date future unaccrued claims arising from life insurance contracts, and such reserves were required by law. For the reasons hereinabove stated, the District Direc- tor erroneously determined a deficiency in Taxpayer’s income tax as a result of such determination and as a result of the erroneous re-computation and adjustments made to the Taxpayer’s reserves. is (Number and Title Omitted.) (Filed: April 23, 1971) ANSWER The defendant, the United States of America, by its attorneys, in answer to the petition filed herein, denies each and every allegation of the petition, except to the extent specifically admitted below: COUNT I 1. Defendant admits the allegations contained in para- graph 1. 2. Defendant denies any income taxes and interest were erroneously overpaid and collected; defendant ad- mits the remaining allegations contained in paragraph 2. 3. Defendant denies there has been any overpayment of federal income taxes and interest; defendant admits the remaining allegations contained in paragraph 3. 4. Defendant admits the allegations contained in para- graph 4 except to state that the notice of deficiencies was sent to the plaintiff by the Acting Regional Commis- sioner, Internal Revenue Service, Southeast Region, and that the deficiencies in federal income taxes were in the aggregate of $233,762.75, not $235,762.75 as alleged. 5. Defendant admits the plaintiff paid $351,393.88 but states that the Internal Revenue Service’s Certificate of Assessments and Payments (Form 4340) for the taxable years ended December 31, 1958, 1959, 1960, 1962, 1963 and 1964 shows the payment date thereof to be August 1, 1969. 6. Defendant admits the allegations contained in para- graph 6. 7. Defendant admits the allegations contained in para- graph 7 except to state that the Internal Revenue Serv- ice receipt date stamped on each of the plaintiff's original Claims for Refund shows they were filed on October 21, 1969, not October 14, 1969 as alleged. 32 8. Defendant admits the allegations contained in para- graph 8. 9-12. Defendant denies the allegations contained in paragraphs 9 through 12. 13. Defendant is presently unable to obtain knowledge or information sufficient to form a belief as to the truth of the allegations contained in paragraph 13 except ad- mits that “During the taxable years ended December 31, 1958, 1959 and 1960, Plaintiff was a party to a Rein- surance Agreement with American Bankers Life Assur- ance Company * .“ 14. Defendant denies the allegations contained in paragraph 14. 15. Defendant is presently unable to obtain knowledge or information sufficient to form a belief as to the truth of the allegations contained in paragraph 15. 16-20. Defendant denies the allegations contained in paragraphs 16 through 20. COUNT II 1-10. Defendant realleges its answers to paragraphs 1 through 10 as stated above. 11-12. Defendant realleges its answers to paragraphs 13 and 15 as stated above. 13-17. Defendant denies the allegations contained in paragraphs 13 through 17. COUNT III 1-10. Defendant realleges its answers to paragraphs 1 through 10 as stated above. 11-12. Defendant realleges its answers to paragraphs 13 and 15 above. 13-20. Defendant denies the allegations contained in paragraphs 13 through 20. 8 WHEREFORE, defendant prays that the petition be dismissed with costs against the plaintiff. Respectfully submitted, /s/ Johnnie M. Walters JOHNNIE M. WALTERS Assistant Attorney General /s/ Mark Segal MARK SEGAL Attorney April 16, 1971 g [1] (Number and Title Omitted) ( Filed: ) TRANSCRIPT OF PROCEEDINGS LOCATION OF HEARING: UNITED STATES COURT OF CLAIMS ATLANTA, GEORGIA DATE: July 17, 1973 BEFORE: THE HONORABLE GEORGE WILLY APPEARANCES: ROGER A. SCHWARZ HERBERT GROSSMAN for the Defendant E. MICHAEL MASINTER JAMES H. LANDON for the Plaintiff [23] TESTIMONY FOR PLAINTIFF Pursuant to the order of reference by the Honorable, the United States Court of Claims, in the above entited cause, testimony on behalf of the Plaintiff was taken as follows: THE COURT: Do you solemnly swear that the testi- mony you are about to give will be the truth, the whole truth, and nothing but the truth, so help you God? THE WITNESS: I do. THE COURT: Be seated. THE REPORTER: Would you state your name and 24] address for the record, please? 85 THE WITNESS: John William Born, 1110 Kingston Drive, Northeast Atlanta, Georgia. THE REPORTER: And, how do you spell your last name? THE WITNESS: B-o-r-n. JOHN WILLIAM BORN, itn roduced on behalf of the Plaintiff, having first * —— by said Commissioner, was examined and in answer to interrogatories, testified as follows: DI * EXAMINATION BY MR. LANDON: Q Mr. Born, would you tell us by whom you are presently employed? A Southern Discount Company. Q Is Southern your only employer? A That's right. Q Do you hold positions with any other companies? A Yes, with various subsidiary companies owned by Southern Discount. Q How long have you been employed by Southern Discount group? A Since March the 2nd, of 1959. Q What is your position with the Plaintiff? A I’m financial vice president, and secretary and [25] treasurer. And, how long have you held that position with Consumer Life Insurance Company? A Since, about 1965. Q Can you tell me, and tell the Court, what is the nature of your responsibilities as the secretary-treasurer and financial vice president? A I supervise the overall administrative functions of the company, namely record keeping, and filing reports of all sort—of all types. 36 Q Among those reports are you familiar with the tax returns of the company? Q Yes, I am. And, with the annual statem i submitted by the company? eta co ry Ves. Do you hold professional i . I p degrees or certificates, A Yes, I do. And, what are those? A I’m a CPA, and also a member of the Bar. Q Thank you. Can you tell us please the relationship of credit insurance in general to the business of Southern Discount Company, the parent of Consumer Life Insur- ance Company? 1261 A Southern Discount is licensed under the State Small Loan Laws to make small loans, and these statutes authorize the companies to sell credit life and accident health, and also fire insurance, as an agent for insurance companies. Q Prior to the formation of Consumer Life, how did Southern Discount arrange for credit insurance for its customers? A They were represented by American Bankers as agent, and prior to that some other companies. Q But, Southern Discount Company was the agent? A That's right. Or some other subsidiary companies. ey 1 ay. authorization to sell insurance, —that is limi insurance incident t ‘ outstanding credit risks, or a THE WITNESS: That's right, yes. BY MR. LANDON: (Resuming) Did Southern Discount receive commissions for act- ing as agent on those sales of insurance? A Yes, it did. Q How were those commissions determined? A _They were generally regulated by the states, North Carolina limits the commission to 40 percent, Georgia to advance commission of 50 percent, and then depending 87 upon [27] the profitability of the business, an additional commission could be earned of up to 15 percent. Q What motivated Southern Discount to consider forming Consumer Life Insurance Company at this time? A To increase its earnings, and—out of the insur- ance, which is sold. Q How could those earnings be increased by forming an insurance company subsidiary? A Well, by making within the company the profit that was earned by the insurance company, over and above the commissions paid to the agent. Can you explain what that profit might be, in other words we might take a hypothetical transaction, of not—not considering any of our re-insurance questions, just for an insurer, how does an insuring company make money—assume that it is paid $100.00 in premium, what happens to that? A If you assume $100.00 in premium, the agent’s commission would be $50.00 or 50 percent, the loss ratio depending upon whether it is life, or accident-health, could vary from as low as 10 to 15 percent, or as high as 30 or 40 percent. So, that if you were to take the commission expense of $50.00, and add for example a $20.00 loss ratio, for claims, that would leave $30.00 to —to the insurance company to cover its overhead, pre- mium, taxes and profitabil- [28] ity. Q And, would anything else come out of that $30.00? You mentioned a contingent commission, would that— A Assuming—based on a loss ration of 20 percent, the company would pay an additional contingent com- mission of up to 15 percent. Q Right, then, whatever was left after that would be the profitability to an insurance company? A That's correct. THE COURT: Before you were getting the commis- sion income as a practical matter, weren’t you? You didn’t have anybody selling this insurance, the—the lend- er sold it didn’t he, when he loaned the money? THE WITNESS: That’s correct, prior to the forma- tion of the company, the finance company officers were 38 agents for American Bankers, and received a commission —insurance. THE COURT: Well, they had been getting this all along, and they didn’t improve their earnings? THE WITNESS: Not as it relates— THE COURT: Not in that respect— THE WITNESS: No, not as it relates to the com- mission, they would not improve it by formation of a company. 29] THE COURT: Right. BY MR. LANDON: (Resuming) Q The improved earnings though came from what? A The profitability of the life insurance company operation, as such. Q Thank you. Can you tell us as opposed to the in- surance company, how a re-insurance company makes money? A The re-insurer normally re-insures through a con- tract or a relationship with another insurance company, who is authorized to write business in a particular state, where the re-insurer may not be, and with the general plan being that the re-insurer receives certain premiums in order to insure the risk, and bears the losses, related to those premiums. For example, you might have a—a treaty that would call for such as in the case of the treaty between Con- sumer and American Bankers, Consumer Life would receive 87142% of the premiums. American Bankers would retain 1212%, pay the premium taxes and their overhead. With Consumer paying the losses, and com- missions if any out of the 87½ %, and retaining what additional profit might be available. Q So, then, would it be correct to say that it is the same sort of profitability that an insurance company 130] has, it is just that if you are not qualified as an insurance company, the way that you do it is to be a re-insurance company? A You cannot normally get through a reinsurance contract 100 percent of the premiums, you can get 87 to 90, sometimes higher, percent of the premiums. 39 THE COURT: When you say you, you are speaking of the re-insurer? THE WITNESS: That’s correct, sir. BY MR. LANDON: (Resuming) What exactly is re-insurance? 7 Re-insurance is a contract that is entered into be- tween insurance companies, the result of which is to spread the risk over a—a period of years. It is normally done to—as a capital consideration, and in the case of Consumer, the re-insurance contract was—was a con- sideration to permit them to increase its earnings through this arrangement. Q Why did Southern Discount create a subsidiary which acted as a re-insurer, rather than as a direct insurer? A Because of capital requirements, the re-insurer, Consumer, could be formed for approximately $38,000.00 capital, and get into the business via the re-insurance arrangement, to form a company to write directly. It [31] would have required approximately $400.00 capital —$400,000.00 capital to do so in Georgia, at the time. Q But the re-insurer was not required to meet that capital requirement? A That's correct. THE COURT: From the standpoint of the insurance —what you might call insurance function, what if any- thing is different in the nature of a re-insurer, on the one hand, and an insurer on the other hand? THE WITNESS: The primary difference would be that the re-insurer does not issue the policies under its THE COURT: But that’s mechanical, isn’t it? THE COURT: I’m saying, from—in the context of insurance function, that is to say, I suppose what—ah— assumption of risk, is there any institutional or intrinsic difference between an insurer on the one hand, and a re-insurer on the other hand? 40 THE WITNESS: The only difference would be that the re-insurer joins another company, in the carrying out of the functions of an insurance business. And,—it was just a means whereby the companies share in the profits, and also the risk. THE COURT: But, would it be fair to say that [32] —that assumption of risk is the basic hallmark of the two— THE WITNESS: Yes, sir. THE COURT: Enterprises, that they have in com- mon? THE WITNESS: Yes, sir, that’s right. BY MR. LANDON: (Resuming) Q Mr. Born, I want to show you now certain of the Plaintiff's Exhibits that we have identified previously, and would like for you to comment on each one of them, just describe what it is. Plaintiff's Exhibit #27 A This is the re- insurance treaty between American Bankers and Consumer Life Insurance Company, dated in 1957, which was the first re-insurance agreement. Q I show you Plaintiff's Exhibit #3? A This is the re- insurance treaty between Consumer Life Insurance and American Bankers Insurance Com- pany, dated in 1962, which covered business ceded to American Bankers by Consumers. Q Plaintiff's Exhibit #4? A This is a re-insurance treaty between the Life In- surance Company of North Carolina, and Consumer Life Insurance Company. This treaty arose out of the fact that Southern Discount Company purchased, I believe it was three or four branch offices in North Carolina, and through [33] this arrangement Southern through Con- sumer was able to get an additional income over and above the limited commission that was payable by North Carolina, or that North Carolina allowed, into the busi- ness that was in force, and sold by the Insurance Com- pany of North Carolina at the time, this amounted to approximately 7% percent additional income. 41 Plaintiff's Exhibit number 5— MR. SCHWARZ: Off the record for a moment, please I didn’t hear the last — (Whereupon, the Reporter played back part of the tape. ) BY MR. LANDON: (Resuming) Plaintiff's Exhibit #5? 2 This is the insurance treaty between Consumer Life Insurance Company, and American Bankers, and it covered business ceded to American Bankers, under insurance be Ad op aan Plaintiff's 2 This is a reinsurance treaty between Consumer Life Insurance Company and American Bankers, ye which Consumer ceded to American Bankers the - ness written in the State of Florida. Q Thank you. I show you Plaintiff's Exhibit 16, can you describe what these Exhibits constitute? ) [34] A These were the re-insurance ceded siatements that Consumer received from American Bankers, under —1957 re-insurance treaty. Can you state what is chown on the face of this? A Yes, the—under the treaty, American Bankers was t remit to Consumer on the life—credit life ousiness, the premiums writien, and there is a calculation showing the session of the credit life business, showing that Con- sumer received 90% percent, which is for the year Janu- ary, 1959, and under this particular Code, received 901% reent of the written premium, and Consumer reim- — American Bankers with the losses paid to that period, and shows the reserve set aside for incurred, but unreported claims, which—with the balance being paid to Consumer. This was a net 7 but it included i the losses, on a net 8. 1 you — hl — 17, and ask you to comment solely on this Exhibit A This oy re-insurance assumed statement, showing that American Bankers, assumes risk under the 1962 agreement. This showed that—a summarization of the 42 premiums assumed by them, the computations of un- earned and earned premiums, and the amount re-insured by Consumer as shown as 80 percent, with a resulting computation showing on a quarterly basis the experi- enced refund, due Consumer for 135 that particular period. Q To turn your attention now to the re-insurance treaty that we first examined there, the re-insurance treaty dated 1957, how were the credit life insurance— not the credit accident and health premiums, physically handled under that—under that re-insurance treaty? A They were ceded by American Bankers to Con- Sumer on an as written basis, less their retention. Q As re-insurer then, to what extent was Consumer A Liable for ail of the life claims. Q Did the method of re-insuring credit accident and health insurance differ from the method of re-insuring credit life, insofar as the transfer of the premium pay- ments went? A Yes. On the credit accident and health insurance, the premiums were ceded to Consumer on an as-earned basis Q What does as earned mean? health premium or insurance premiums generally, the policy is written,—the policy might be written for 15 or or sum of the digits’ method. Q Were—why was there a difference in the way that these two, the life insured, one as written, one as earned? economic loss in going into the business, based on the capitalization of the company, which was originally some 00. The re-insurance of the accident on an as earned pais was considered aecesary to pro tect the capital of the company, and to ena tinue to qualify to re-insure the life business. 8 Q Did this method of re- insurance affeet — appearance of the company in any way or the eapi i the company? 1 — the financial statement of ne — 4 would not reflect reserves for accident and hea i it would only reflect elaims for one month. 2 * Did it affect the consolidated net income a : or net capital picture for Southern Discount in gen — A Ah—of course the—Southern’s overall ineome — increased by reason of having formed the life insur 2 2822 insurance agreement, which we have AL and the re- insurance of credit aceident — health on an as earned basis, affeet that — — — consolidated capital picture yA — Discoun 4 11 — the A&H on an as written, the income would have been decreased, . * @ You mentioned the term economic loss, an — I believe that you would have had to have retain 4 serves [38] in the total amount of the premiums written, 4a had you re-insured as written, what exactly would have caused the economic loss that you referred to? A The requirement that Consumer set up 100 percent of the unearned premium. Where does the loss come in with that? In other words how much does Consumer receive—how much does it reserve? A Well, under the treaty—originally it only received 874 percent of the premium, and it would have been required to set up the full 100 percent of unearned in the reserve. Q And, under the treaty, where—where was the 12% percent retained? A That was retained by American Bankers. Q As to the credit life insurance, which was re- insured under the 1957 treaty, what reserves were main- tained by Consumer Life and what reserves were con- tained by American Bankers? A Consumer on the credit life, since it re- insured the business on a written basis, maintained the total required reserve, which was a reserve estimated, based on mor- tality tables at approximately 40 percent of the unearned premiums. Q Those reserves therefore, are different from [39] the sorts of reserves required to be retained for accident and health insurance? A That's correct. Q Ah—who under this same treaty—the 1957 treaty, as it was amended, maintained the accident and health insurance reserves? A American Bankers, I assume it was their contrac- tual obligation to do so under the treaty—Consumer— MR. SCHWARZ: I object to that answer, the con- tract not only speaks for itself, but doesn’t have those terms in it, I don’t think. BY MR. LANDON: (Resuming) Q All right. Did Consumer Life Insurance maintain any reserves as to the accident and health insurance, re-insured under the 1957 treaty? A No, it did not—no it did not. 45 Q Are you aware of whether American Bankers maintained any reserves as to those premiums? A Yes, I have been told that they did, yes. Q Were you ever required by any—by any regula- tory agency, or anyone else to maintain reserves as to that insurance which you re-insured? A No. , Q The accident—no? A No. aN See [40] @Q How were these various reserve liabilities re- flected on Consumer Life’s annual statements in its tux returns for the credit life and for the accident and ? ery same as—as they were reflected in the annual statements,—the reserves—for the life insurance was reflected as a liability. The reserves under the periods 1957, 1958 through 1961, the company did not have an accident and health reserve. Q Is Consumer regulated by law? A Yes, it is. ; Q What regulation does exist for Consumer in the various states in which it operates? A The home state, being Arizona, regulates Con- sumer as to certain financial statement figures, invest- ments, as to what generally the—sets up the rules and regulations for the conduct of an insurance company operation. When you get admitted into a state to write direct business, then you are subject to regulations by that state as to policy forms, but primarily the home state law, as I understand it governs the financial state- ment practices, and establishment of reserves, and— So, as to the reserve requirements of Consumer Life, which state law were you concerned with? A Generally, the reserves were determined by the [41] actuary, but based on my understanding, the—the law of the State of Arizona was the—the law that we were concerned with maintaining the reserves under. Q Did Consumer Life comply with those reserve re- quirements of the State of Arizona? A Yes. Q Was Consumer Life ever examined by the Insur- —_ ** of the State of Arizona? es. Q_ How often did that occur under in the years in which we are concerned, 1957 through 1964? A It was examined—the period ending December 31, 1959, and then the period ended December 31, 1963. Normally these examinations are conducted every three years, but we went from 1959 to 1963 for some reason without one. Q That was in—who determi - 1 rmined when they were ex A Well, as I recall, I requested the the December, 1963 examination, because we contemplated naking ap- plication to do business in other states, and this is gen- * 8 requirement for that. as—in either of those examinations, was Con- — 5 — * maintaining the — which you ave just described to us, ever challenged or di A Not to my knowledge. —s [42] Q Would you have knowledge of such a challenge or * Ves. Q What is the nature of that examination by the Insurance Department of the State of Arizona? What do they in fact physically do? A They conduct a general audit of the assets and liabilities of the company. Q During period I you stated I believe, that your annual statement reflected reserves for the credit life insuranee, is that correct? A Yes. Q Then, you stated—or what did you state concern- ing your annual statements as far as reflecting any re- serves for credit accident and health insurance? ; A Under the first treaty, where Consumer was a re- insurer, on the accident and health on an earned basis, there was no reserves maintained. Q Why did Consumer and American Bankers enter a different re-insurance treaty in 1962? A Ah—Consumer had—had been admitted to—as a direct writer, and the—really it is a part of my analy- sis of the—of the operation. We went to another com- pany and got proposals to find out just what—what the net cost of the profitability of the business [43] could be to Consumer, so that the re-insurance treaty, in 1957 would not be applicable to the company as a direct writer. We didn’t feel that we could carry the full risk, so that that gave rise to a re-insurance treaty, and— because of the fact that as you build the accident and health business, you—you have to set up the full un- earned premium, and pay the commission on it, it creates a loss, so that based on my analysis of the business, we determined to continue the re-insurance treaty in force to execute a re-insurance treaty to cover the direct busi- ness being written. This was in early 1962. THE COURT: Excuse me, before you move into this current era, referring now to the prior period, in which, as I understand it, Consumer was functioning as a—a re-insurer with American Bankers, operating as ceding carrier, for both credit life and A&H, correct? THE WITNESS: Yes, sir. THE COURT: All right. Now, recognizing that in the two categories the—the—the nature of the risk haz- ards are different, nonetheless, if you examine the risk assumed by the ceding carrier on the one hand, in your credit life, and on the other the A&H, and then look at the extent to which Consumer as the re-insurer in each instance relieved American Bankers of the risk to which it had exposed itself with the policy holder, do you follow [44] what I am saying so far? THE WITNESS: Yes, as to the credit life, yes. THE COURT: All right. Did—or was there any difference in the degree of risk to the insured that Con- sumer assumed as a re-insurer in the case of A&H as there was in the case of credit life, or put otherwise, did Consumer assume any lesser portion of the risk as a whole in the case of A&H than it did credit life? THE WITNESS: No, the contract stipulated that the re-insurer would assume 100 percent of the risk. THE COURT: In each instance? 48 THE WITNESS: In each instance. But, that the contract was amended in 1958, to limit Consumer’s lia- bility to the earned premiums on a month to month basis, which meant that Consumer as an operating com- pany would not be liable to re-imburse American Bank- ers, the ceding company, except to the extent of earned premiums on the accident and health. THE COURT: From 1958 forward? THE WITNESS: That’s right. THE COURT: Proceed. BY MR. LANDON: (Resuming) Q You have stated that Consumer Life and American Bankers based on your investigation of the business and the decision to qualify as a direct writer, then entered into [45] a second re-insurance treaty in 1962. What was the effect of that treaty as to the credit life written by Consumer Life? A Consumer retained all of the—the credit life in- surance, the risk, the whole operation, the American Bankers did not re-insure any of the credit life business. Q And, what was the effect of that treaty on re- insurance of credit accident and health insurance? A We- Consumer ceded to American Bankers 80 per- cent of the risk on aceiden“ and health. Q did this re-insurance on an 80 percent basis, have an effect—were the terms of the treaty intended to have an effect on Consumer’s capital structure? A Yes, because without the re-insurance, we would have had to build the reserve plus pay the commission to the finance companies, resulting in a—a—an opera- — decrease in earnings, and thereby decreasing capi- tal. Q As to the 80 percent of the credit accident and health insurance, which was ceded by Consumer Life to American Bankers, did Consumer Life maintain any un- earned premium reserve? A Ah—not as to the 80 percent. Consumer did main- tain and carry the reserve on 20 percent, which was retained. 49 Who maintained the reserves on the 80 percent? 46] A American Bankers. Q On whose annual statements were those reserves reflected? A On American Bankers. Q Did any state regulatory body ever require Con- sumer to maintain those reserves or indicate that those reserves were being incorrectly maintained by American Bankers, rather than by Consumer? A No. (Pause.) MR. LANDON: That concludes our examination. THE COURT: We'll have a ten minute recess. (Whereupon, the hearing in the above case was re- cessed at 10:29 as described above. ) THE COURT: Very well, before cross I would like to inquire of the parties whether they discriminate or distinguish at all between the—the situation presented by the Plaintiff’s re-insurance of A&H up to this point in time in 1958, at which I understood the witness to state that its liability as a re-insurer by treaty amend- ment became limited to its premium receipts as con- trasted with the situation obtaining there before, which I understood it, it was on the entire risk. MR. MASINTER: If Your Honor, please, we do not distinguish, because we have treated that all along [47] as merely a clarifying amendment, more like clearing up a typographical error. THE COURT: Do you mean that you are contending that as a matter of law, as it were, that—that Consum- er’s liability as a re-insurer was at all times limited to its premium receipt, so that the— MR. MASINTER: Well, that’s—that’s— THE COURT: 1958 action then, in your view was simply declaratory of the existing arrangement? MR. MASINTER: For the original re-insurance con- tract of re-insured accident and health, on an as earned basis. Now, the clarifying amendment merely sets forth in the words what it meant by an as earned basis. THE COURT: But didn’t the witness indicate that there was a reduction in risk exposure to the Plaintiff as a re-insurer by virtue of this 1958 amendment. I thought that he told me that prior thereto in both the credit life and the A&H, Consumer as the reinsurer assumed the entire risk. That is to say the entire risk that the ceding—that American Bankers assumed vis a vis its insured. Then I thought he went on to say, that in the case of A&H. by virtue of a treaty amendment, in 1958, its risk assumption was narrowed in that it was subject to a ceiling amount. That ceiling being its premium receipis, or maybe I misunderstood him. [48] MR. MASINTER: Well, I think that is what he said, but—ah—what he did not go further to say, is that really the parties treated it from the very outset in the same manner as they did after the 1958 amendment, and actually I think the amendment was the early part of 1959. There was no difference in the treatment, no differ- ence in the forwarding of premiums, no—no intent dif- ference—the intent was there all along from the very outset, and I don’t think that there was any difference. I think that he was just trying to pinpoint the date. But you might— THE COURT: Excuse me, you say the intent, by that you mean the intent that Consumer’s not assume the risk without limitation? That it was never intended that it assume the entire risk incurred or shouldered by American Bankers as the ceding carrier. MR. MASINTER: I think that that is correct, Your Honor. I think that the contract is clear that the intent was that the re-insurer, Consumer, only re-insured the A&H business on an as earned basis from the very out- set. And, as earned means, as I understand the insur- ance actuarial and accounting principles, on a month to month basis. And, all that the 1958 or 1959 amend- ment did was to say, that the liability of Consumer will be on an as earned or month to [49] month basis, and that’s really all it was from the very beginning. 51 So, I don’t—I don’t take the amendment to have any substantive or risk shifting difference. I think that that was the way it was intended to be from the very outset, but this really just clarifies it. THE COURT: Well, in ary event, can I correctly assume that the amendment ia question is in the record as a part of Plaintiff's 2? MR. MASINTER: Yes, sir, it is, and—and if I might— THE COURT: Well, that’s fine. You all may cover it any way you see fit, I just thought at the outset that I would like to know whether there was a contention that there was any difference, and you have answered that in your view there is no difference. MR. MASINTER: There has—there has never been any contention by us or by the Government that it should be treated any differently, and really it has just been assumed that this was just a clarifying type of amend- ment, which set forth the intent of the parties from the very outset, of— THE COURT: All right. MR. MASINTER: Of the agreement, and had no sub- stantive effect. And, his answer I think would stand [50] really from the very beginning of the contractual ar- rangement between Consumer and American Bankers. THE COURT: All right, proceed, Mr. Schwarz. MR. SCHWARZ: Your Honor, we do intend to pur- sue the—these terms in the agreement on cross examina- tion. I think that that may clarify your question some- what more. CROSS EXAMINATION BY MR. SCHWARZ: Q Mr. Born, would you agree that under both of the insurance treaties that were the subject of your direct examination, all losses that were ultimately paid to an insured, were paid out of funds which would otherwise have been earned by Consumer under the treaties, and not by American Bankers? A Well, they were all paid out of the premiums. 52 And, if those premiurms—if the losses were not paid because they were not incured, that is because the loss did not arise, would the money that would other- wise have been used to pay those losses be earned by Consumers under both treaties? A Ah—yes, because, I suppose the premiums—the source for the payment of the losses—as risk. Could you—I think that I understand your answer, but I believe you summarized it a little too quickly, [51] could you be a little clearer? A The premiums—generally, the revenue is a source to pay the losses with. Now, under the first contract, the premiums were generated through American Bank- ers, so that the losses were transferred to Consumer through the—through the first re-insurance treaty. Under the second contract the policies were written by Con- sumer, with a portion of the loss being transferred to American Bankers by the treaty. Q Now, there was experience refund provision under the second treaty, is that right? A That's correct. Q Was the fact of that experience refund provision such that any portion of that total amount subject to the refund, which was not used to pay losses, would be re- turned to Consumer? A Ah—yes— Q Asan experience refund? A As an experience refund. Q Is it correct, that under the second treaty then, American Bankers stood to earn a three percent flat fee under the agreement, and regardless of the loss experi- ence, it could not earn more or less than three percent? A Well, American Bankers stood to earn the three [52] —the three percent, plus the investment income on the reserve funds, which they held. Q You are referring to the income on a portion of the premium which was temporarily transferred to American Bankers? A That's correct, right. 53 Q And, that was the same portion that was subject to the experience refund back to Consumer in the event of a favorable policy experience? A In the event of a favorable loss ratio, yes. Q Is it your understanding that as a technical matter under the insurance law, the direct writer is the only company as between it and a re-insurer, which has a liability to the insured, and that a re-insurer is techni- cally liable only to the direct writer? A That's correct generally. Q But is it the effect of both of these treaties that Consumer whether it was the re-insurer under the first treaty or the ceding company, that is the direct writer under the second treaty, was the one that retained the ultimate liability for any claims that were paid to the policy holder? THE COURT: What-does ultimate mean? MR. SCHWARZ: I’m using ultimate to distinguish between the liability that the direct writer has to pay [53] the claim to the insured, and the liability of some other company, which may be incurred under a treaty to pay the direct writer for the claim which it has paid the insured under the policy. THE WITNESS: I’m not sure that—that I under- stand your question fully. BY MR. SCHWARZ: (Resuming) Q Let me make it a little simpler. Under the first treaty, American Bankers was the direct writer, and Consumer was the re-insurer? A Yes. Q When American Bankers entered into a policy with an insured, it became obliged to pay claims that were incurred by the insured? A Yes. Q Under the re-insurance agreement, the direct writer knew that any claims which it paid to the insured would be repayed to it by Consumer as part of the re- insurance agreement, isn’t that correct? 54 A Yes, I think that it provided that the—the risk of the re-insurer would follow the risk of the ceding company under the policy. And, it was THE COURT: Well, excuse me, Mr. Born, is it your understanding that that obtained from 1957 on until 54] era II, as you have called it here, where they re- versed their roles? THE WITNESS: Yes, sir. THE COURT: So, that was unaffected by this 1958 amendment that you mentioned earlier? THE WITNESS: As to the—the language— THE COURT: A&H. THE WITNESS: —in the contract called for one hundred percent of the risk to be insured—reinsured by Consumer, and that the liability of the reinsured would follow the liability of the ceding company to the insurer. THE COURT: And, that never changed by virtue of this 1958 treaty amendment that you mentioned earlier? THE WITNESS: No, only as to the point in time, as to which when there would be a settlement of this liability between the companies. THE COURT: But, in terms of risk assumption and exposure apart from the settlement or when or where or how, there was never a change in that? THE WITNESS: That’s right, it was one hundred percent by reason of the contract, yes. THE COURT: I see. Proceed. BY MR.SCHWARZ: (Resuming) Q Based on the answer that you have just given, Mr. Born, isn’t it correct that the term as earned which [55] you used in description of the accident and health reinsurance treaties refers to the method by which payments were made between the ceding company, American Bankers, and the re-insurer, rather than ! terms of any modification of the ultimate liability of the re-insurer, Consumer, for the payments which American Bankers paid? A I would look at it on the basis that—under the re-insurance contract as an obligation for Consumer to 55 re-imburse American Bankers for losses, but the first contract called for that liability to be limited to the earned premiums on a month to month basis. Did that term that you are referring to in any way practically limit the liability—the ultimate liability of Consumer for all claims regardless of how high they were? A Well,— Q I believe that you stated, did you not, to—in an- swer to Commissioner Willy’s question that one hundred percent of the liability of American Bankers under ae Oe Te ee Consumer, is that cor- rect A That's right. Right, and the payment provision MR. MASINTER: Your Honor, I would suggest that you allow him to answer one question at a time. I think that he has gotten about three questions involved there. [56] MR. nt ey! - just gave an answer to a question, an ere is one er question pending. THE COURT: Proceed. BY MR. SCHWARZ: (Resuming) Q Now, let’s clarify what is meant by the term as earned under the reinsurance treaty—the first reinsur- ance treaty. Each month American Bankers would re- ceive all the premiums written by Southern Discount during the previous month, isn’t that correct? A That's correct, 7 = the accident and health policies? es. Q Okay. Now, each month, losses would be incurred * A outstanding policies, is that correct? es. Q Under the terms of the treaty, is it your under- standing that in order to determine how much money would transferred from American Bankers to the reinsurer, you would compute first the figure called — earned, is that correct? 56 Q This is part of the computation, I’m not trying to take the whole thing— A Yes, that was a part of it. Q All right. Now, premiums earned would you say [57] was effectively a fraction of the total premiums received which equalled one month’s coverage out of the total number of months over which the policies were issued? A Well, the premiums earned in any one month would be the computation of the earned amount on all of the policies in force. It wouldn’t have necessarily any- thing to do with the business written in a particular—a current month or a preceding month, but a number of months. Q Okay. So that with respect to the policies written, the previous month, a fraction of the premiums earned on those would be remitted, as well as a fraction of the premiums earned on all other policies earned outstand- ing as of that time? A That's right. Q Now, from that figure of premiums earned, Ameri- can Bankers would subtract the losses paid during the month? A That's right. Q And, would remit the balance to Consumer? A This is on the accident and health, yes. Q Was there any—was there ever any month in which the total of the losses paid for the month ex- ceeded the premiums which Consumer was to earn? A I don’t know that I could say positively yes or [58] no. The business was profitable. So, that in most of the months there would have been a positive cash flow to Consumer. Q And, is it your understanding that, whether or not such an event actually occurred— A Ido not know that it did. Q All right. If it had, is it your understanding that under the treaty Consumer would have sent a check to American Bankers for the excess, so that it would discharge its one hundred percent liability for any claims which American Bankers had incurred? 57 A No, it would have been carried over against fu- ture periods. THE COURT: But it would have been in any event an obligation of Consumer to American Bankers? THE WITNESS: That’s correct, yes. BY MR. SCHWARZ: (Resuming) Q You mentioned that one of the purposes for en- tering into the first reinsurance treaty was to permit Consumer to grow in its early years without having the kind of loss position that would occur if it were the direct writer, do you recall that testimony? A Yes. Q I would like to ask you a couple of questions to clarify just what this meant. You were given an [59] example, I believe, where $100.00 in premiums were re- ceived, and $50.00 in commissions were initially paid out, and I believe that the example referred to $20.00 in losses, leaving $30.00 of which a potential 15 per- cent contingent commission might be paid under a re- insurance agreement. Now, let’s assume no reinsurance for a moment. If the direct writer received $100.00 in premiums, its first obligation would be to set up an unearned premium re- serve of $100.00, isn’t that correct initially? A Initially. Q Initially. At the same time it would be obliged to pay $50.00 in commissions at the outset, is that correct? A That's right. Q All right. That's the normal practice in insur- ance, and in this type of eredit insurance? A Yes, generally. Q Now, if an annual statement were prepared as of that date, let’s say that all of this took place in December of the year, and an annual statement is then prepared, is it correct that the surplus would have been invaded by 50 in this example because you would be required to set up a gross unearned prernium reserve of $100.00, you would have paid out $50.00 of the $100.00 in premiums that you received, leaving $50.00 that would have to reduce surplus? 160] A That's right. Q And, if that is all that happened, the company would be in a deficit position, assuming that it had no other surplus? A Yes. Q Okay. And, is that what you meant when you said that unless Consumer arranged its business under a reinsurance agreement, whereby it was the reinsurer, it could not have grown the way it did? A That was an example in Consumer’s case by rea- son of the design on the part of the company to build the capital of the company in order ultimately to become qualified in other companies. Consumer did not pay that advance commission in the early years. So, that the effect on consumer would have been only to the ex- tent of the—the money retained by American Bankers, which was 12% percent. Q Well, then if Consumer had become the direct writer, and had not paid any commission, and also be- cause it did not have reinsurance, would not have had to pay that reinsurance commission, then where would the deficit position come in that you referred to? A Well, Consumer would have had some $400,000.00 in capital in order to become a direct writer. This the company did not have. The company was formed with $38,000.00 [61] capital. Q So that—the reason for setting up is not so much the deficit position, but the fact that the capital re- quirement in—in Georgia, or the states where it was — to do this business, was much higher than another state A In Arizona, yes. Q And, you waived the profitability of entering into a reinsurance agreement, and having to pay a 12% percent commission against what it would have cost to accumulate the necessary additional capital, and I assume decided on the course that you took, is that correct? A This is—this is what I understand. Remember, I indicated that I joined the company in 1959. So, that Consumer had—was in operations under the reinsurance treaty at the time that I came with the compény, but 59 is my understanding as to the reasons the method, plan of operation to go into the insurance company an Arizona company, was because of the small capi- tal requirement, and it was done quite generally in the industry as I understand. THE COURT: And, what did you understand the basis for the $400,000.00 capital requirement was, or would have been, had you gone the alternate route? THE WITNESS: Well, the insurance laws of—of [62] states vary as to the amount of capitalization that is required for a company to write insurance policies in that state. For example, Georgia I believe is 200 200; North Carolina now requires us to have $600,000.00 in capital, and $600,000.00 in surplus. So, that with the—in order to write the business in certain states, where Southern was located, Southern would have had to have had an additional capitalization to have written business directly in the State of Georgia. So, this is the reason the reinsurance company approach was used in order to get into the life insurance business. BY MR. SCHWARZ: (Resuming) Q In what year did American Bankers begin to pay commissions to Southern Discount under the first treaty? A I believe that it was 1959. Q Do you recall approximately how much those com- missions ran as a percentage of premiums? A I believe that they were 20 percent. Q Until that period began, was it correct that Con- sumers was earning the money which was later paid to Southern Discount as commissions? A Well, Consumer was—was earning—was receiving the—the life insurance premium, less the American Bankers retention, and setting up the reserves, and earn- ing this [63] —the profit on the life business over the lives of the policies. Q I’m not talking now in terms of the timing of the earnings, but in overall effect, whether this was what happened? this the as Le ] ⁰³můuñ ẽ ͤũͤn ml owàQQ . . 60 A The end result was that yes, Consumer realized these earnings. Q Now, once American Bankers began to pay com- missions to Southern Discount, was it then in a position whereby it set up a gross unearned premium reserve of 100 percent of the premiums received, paid out 20 percent commission at the outset, and with respect just to those transactions, would have also been in a deficit position— A Except that I believe that the contracts were amended to permit a pass through of that commission expense to Consumer. Q How did that work? A The contracts were amended to show that—that Consumer did in effect reimburse American Bankers for the—for the 20 percent commission. Q Well, in a normal reinsurance treaty, the rein- surer will assume the liability for commissions as well as for the payment of claims, isn’t that correct? A Yes, um-huh. Q If $100.00 in premiums are received by a ceding [64] company, and under a typical agreement, 97 per- cent of the premiums received will—will be the rein- surance premium, and let’s say that the ceding company or the direct writer pays over that 97 to the reinsurer, from which commissions are then taken out, and claims ultimately paid, the direct writer will still set up an unearned premium reserve of $100.00, will it not, and then offset that by reinsurance premiums paid? A Yes, um-huh. Q Under the first treaty, the parties agreed that unearned premium reserves would be maintained by direct writer—I withdraw that statement. Would you look at Article 6 of Plaintiff’s Exhibit 2, please, and tell me your understanding of its import? (Pause.) A Yes, I think that it stipulates who was to main- tain the—the reserves. Q Is it your understanding— A Required by law. 61 Q Is it your understanding that Article 6 states that the—that American Bankers—it is your understand- ing that all this Article 6 says, is that American Bankers shall maintain any reserves required by—by law? A On the accident and health business. Q Do you understand this to reflecting an agreement [65] of the parties that it was American Bankers that would maintain the unearned premium reserve rather than Consumer on that business? A Ah—I think that you would look to the contract to determine that—the way that I read that it states that American Bankers shall maintain the unearned premiums, the loss and other reserves required by law. Q Well, if the law states who is to maintain the re- serve, then wouldn’t it be superfluous in this contract to say that the parties shall obey the law? A Well,—except that— Q What I am getting at, Mr. Born, couldn’t the parties agree here, within your understanding of the —of the discretion allowed to companies, which enter into reinsurance agreement, that one company or the other might maintain the unearned premium reserve as part of their overall agreement? MR. MASINTER: I object to the question, I think that the contract speaks for itself. This would be pure speculation and conjecture on h‘s part as to what a contract could or might say. MR. SCHWARZ: I’m not—vwell,— THE COURT: Well, I thought that he was asking him about practice. This is—he told us that he is a lawyer. The question—would seem to me, relate to his [66] regular functions with, employment functions with the Plaintiff. I—I think that he would be competent to —if he—if he MR. MASINTER: If he knows. THE COURT: Exactly, if he's short on an under- standing, he can so indicate. THE WITNESS: Well, I’m not sure that I’m an expert on reinsurance. But, companies quite often re- insure policy risks for financial reasons, and the terms of the contracts—the contracts that I have seen, and have discussed with other people who have companies similar to ours, and insurance companies can by con- tract transfer their risk with the purpose generally to spread their risk over a longer period of time for—for capital reasons. Companies quite often in maybe De- cember determine that maybe their capital is going to be impaired, and if they do not do something they might stand the chance of losing their license in a par- ticular state, so that they would enter into a reinsurance arrangement to transfer this liability to another com- pany. THE COURT: And, that is what we understand, Mr. Born, but unless I misunderstand, all of that goes to the function of—of reinsurance arrangement as a means of transferring risk, and distributing risk, and all the rest of it. But, I thought that what he was talking about [67] was whether you had any impression either way that once a reinsurance arrangement was in force, so that the risk matters that you have just told us about have been redistributed in accordance with the parties wishes, then at that point is it your thought that the parties are free to determine and decide among themselves as to which of the respective risks they will maintain requisite reserves, are they free to do that, are they free to—ah—if you are the ceding carrier, and I’m the reinsurer, do you have an impression as to whether we are free, assuming that our reinsurer is going to take 80 percent of the loss, or 100 percent of the loss in this instance, is it your thought that, insofar as regulatory requirements are concerned, we would be left free to determine among ourselves who is going to maintain these reserves, assuming of course, that however we do it, we will wind up in the aggregate with a— with a total reserving of the risk exposure? THE WITNESS: Well, I could perhaps answer that this way. It is my understanding that the regulatory— the regulatory authorities would require the—the reserves to follow the premiums. If you have the premiums, then you required by law to set up the reserves. THE COURT: I see. 63 THE WITNESS: If you do not have the premiums, [68] then you—under the state laws, you would not be— now as a matter of— THE COURT: I see, so it is your impression that reserve obligation follows premiums rather than reserve obligations following risk assumption, in the event that the two differed, the determinative would be premium receipt? THE WITNESS: That’s my understanding, yes. THE COURT: Isee. Right. BY MR. SCHWARZ: (Resuming) Do you know what unauthorized reinsurance is? A Generally, it would be a company that is not authorized to reinsure, a contract company as a direct writer having a contract with an unauthorized—a com- pany that is not authorized by law, not approved by the state regulatory authority as a reinsurer. Q Could that reinsurer still be a competent, liquid company, but for any number of reasons might not be an authorized reinsurer in some particular state? A This is entirely possible. Q If a company entered into a reinsurance agreement with an unauthorized reinsurer, and remitted the rein- surance premium to the reinsurer, he—the insurance regulatory authority or the direct writer might still require it to maintain the unearned premium reserve if the reinsurer [69] was not authorized, isn’t that cor- rect from your understanding? MR. MASINTER: If Your Honor please, I object to the question, and I don’t think that it has anything to do with this case, and— THE COURT: I—I’m inclined to—ah—agree that at least I don’t understand affirmatively what it has to do with the case. What does it have to do with what he is testifying about, Mr. Schwarz? MR. SCHWARZ: Your Honor, he made a statement as to his understanding concerning where the unearned premium reserve would have to be set up, that is— 64 THE COURT: He said that the reserve obligation followed premium payments or receipts, is that what you mean? MR. SCHWARZ: Les, and I am pursuing that prin- cipal which he stated, in terms of one situation, one where the reinsurance premium is transferred to a reinsurer, but where that reinsurer is unauthorized to do business in the state in which the ceding company is domiciled. That is a very common situation, and I’m asking him as to how he—what his understanding of the reserve reserve requirement would be in that situation, and my specific question was, isn’t it your understanding that in that situation, the ceding company would still be required to show the [70] unearned premium reserve even though the premiums had been transferred to the reinsurer. THE COURT: If you have an understanding, the— THE WITNESS: Well, I do not really have a basis to answer, because I think that that would be a question of determination of whether or not the ceding company could take the reserve, it would depend upon the ex- amining authority in the particular state. But, follow- ing the same statement, the unauthorized reinsurer hav- ing received the premiums would be required to carry the reserve, I assume. This is— BY MR. SCHWARZ: (Resuming) Q Would it be in the discretion of the regulatory authority in the ceding state to require it or not as it saw fit? A Ah—I think under general regulations, the insur- ance commissioners have a certain authority to regulate the companies, and they generally review its contracts from a standpoint of financial soundness of the company for the benefit of protection to policy holders, and under certain circumstances, for many reasons, perhaps a par- ticular state insurance commissioner could require a par- ticular company to also carry those reserves, this—this I’m not certain of. [71] THE COURT: I think that you are getting close to trying to push the witness into an expert status, Mr. 65 Schwarz, so—there are going to be experts, as I under- stand it. MR. SCHWARZ: I’m going to move on, Your Honor. BY MR. SCHWARZ: (Resuming) Q Would you state again the reasons Consumer had for entering into the second treaty? A The second treaty came about because we—we had become licensed in Georgia, and later in North Caro- lina, and had made application for the State of Florida. The reasons that the reinsurance treaty was continued was because of the—the financial analysis which I made as to the effect on Consumer and on the company from its consolidated income standpoint, that if we wrote this business without continuing the insurance, there were considerations of the net profit, and also considerations of income taxes involved, related to the company. So, that my overall analysis was that if we began to pick up all of the life business, and all of the accident and health, without a reinsurance company, it would cost us in terms of consolidating net income, consider- able money, which I did not want to reflect because of the large volume of borrowings that Southern Discount Company regularly made. 721 From a financial standpoint, it was my responsi- bility to plan the affairs of the company so that from an accounting standpoint the—well, I didn’t feel that I was called on—upon to arrange or not arrange the reinsurance, whch would have resulted in a reduced profit- ability in financial statements thereby limiting the amount of funds that we could borrow. Q You would agree that you were entitled to arrange your affairs so as to make as much money as you could? A Yes. Q And, that if tax considerations contributed to that, you were also entitled to take those into consideration? A Yes. Am I correct that you still intended to continue the assumption of 100 percent of the liability that arose under the policies that were issued, as between you and American Bankers, and that it was just a question of rearranging the financial affairs of the company so as to maximize the profitability of doing that? A That was the result, yes. Q Is it correct that even as you entered into the second treaty, the first treaty remained in operation with respect to policies that were in force at the time of entering into the second treaty? [73] A Yes, it did. And that that treaty remained in force until all the policies that were in force at the time of the second treaty had expired in their normal course, is that right? A Yes. (Pause.) MR. SCHWARZ: Your Honor, if I may just have one minute, I think that I— (Pause.) BY MR. SCHWARZ: (Resuming) Q I just have one more question, Mr. Born. Under the first treaty, is it your understanding that if—that if American Bankers had become insolvent, the rein- surer would still be obliged to pay claims that arose under the policies? A Yes. Q If the unearned premiums were being held by American Bankers, where would the reinsurer get the funds to pay those claims? A Well, you would have had the accountability for the unearned premiums. If American Bankers was in- solvent, the—on the life business, there is no question but what Consumer had the funds and was liable. But on the accident and health, Consumer’s liability was lim- itted to the monthly earned premium. 74] So, that had American Bankers become insolvent, I would assume that as losses were incurred, that Con- sumer would under the reinsurance treaty been required to pay those losses, which would have had the same effect really of spreading the losses out over the expira- tion date of the policies. 67 Q To Consumer’s— . 3 I assume that, yes, Consumer would have been iable. Q I see. There was no limit to Consumer’s liability under those provisions, is that your understanding? A I think that that is right, yes. MR. SCHWARZ: I have no further questions, Your Honor. THE COURT: Redirect. REDIRECT EXAMINATION BY MR. LANDON: Mr. Born, let me ask you one question solely. The counsel for the Defendant referred to a three percent guaranteed commission, which was paid, was that in fact a guaranteed three percent commission at the time of the treaty being written? A That was an agreed rate. Q Was there any way that that three percent [75] could have varied based on the loss ratios, the loss profitability that in fact occurred? A No, we might have tried to negotiate it lower, but insofar—insofar as the—contract it would remain the same. Q The three percent figure, right, had the money been there, had losses increased to an extent that they would have exceeded 97 percent for some reason with the com- missions, and so forth, would that three percent have been affected by that fact? A Well, I think that American Bankers would have been liable for 80 percent of the risk, and could con- ceivably under those circumstances, it could have wiped out their three percent, yes. A And, that would be in effect to some degree in addition to the capital reasons, which you gave for mak- ing the determination under the second treaty— A Yes. Q And, other consideration would have in fact re- sulted in some risk sharing to that extent, were—had 68 those events occurred, which apparently they did not during that time? A That’s right. MR. LANDON: Thank you. THE COURT: May I ask for my own edification, [76] are you contending that Consumers loss liability as a reinsurer of these risks was to any extent affected or reduced or limited by the amount of premium dol- lars that it got at any one time? MR. LANDON: Your Honor, I am not one to inter- pret the exact words of that contract. Mr. Born men- tioned the 1959 amendment, which stated that it was limited. I think that the— THE COURT: Well,—but I am putting that to one side. Now, I would just like to be clear about what— about what you are contending here, because frankly, I—he is a very knowledgeable witness, and he seems to be completely forthright, but I feel that I am with him, I’m following everything, and then he’ll make a remark like he did here just a minute ago, well, yes, up to the extent of the premiums they got. And, then, I think to myself, well, apparently I didn’t understand him. Now, can’t you tell me what you’re contending, as to this risk liability, is it affected by the amount of premium dollars that Consumer receives as a reinsurer, as dis- tinguished from a contractual covenants assigning or apportioning risk, as such, and not premium dollars? MR. LANDON: Ah—I think—what I gather your understanding is is the correct—and as Mr. Born ex- plained, the distinctions were as to the settlement, the [77] times of payment, and that sort of thing, but did not affect the— THE COURT: Fine. MR. LANDON: That is my understanding. THE COT'RT: Now, what I meant is, just a minute ago when counsel was asking him about—well, suppose American Bankers went broke, became insolvent, would Consumer not have to come up with any risks incurred, or losses experienced, and then I thought he said yes, up to the amount of the premiums they had gotten. 69 Well, that set me back again. Now, as I understand it, if you disregard when they have to make this pay- ment, and just focus on whether they have to make good these risks, there is no question but what Consumer as a reinsurer in A&H and credit life had to come up with 100 percent of the risk exposure, is that right, Mr. Born? THE WITNESS: That’s correct, yes, sir. THE COURT: At some time or another? THE WITNESS: That’s rig [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_2189%3A2. Public record. Not legal advice.