Mr. WELTMER. Is this retrospective commission arrangement included in the retention rate, or the retention, or is it a separate thing? Mr. SMITH. It is entirely separate. Mr. WELTMER. Do you consider the retrospective commission arrangement to be a commission? Mr. SMITH. Yes. Mr. WELTMER. And not a dividend? Mr. SMITH. That is correct. Mr. WELTMER. Now I notice here you have general expense and acquisition and field expense totaling 5 percent. Is that in connection with writing or administering or servicing the policies? Mr. SMITH. In connection with writing, administering, servicing, and the general operations of the company. Mr. WELTMER. It includes the whole thing? Mr. SMITH. Yes, sir. Mr. WELTMER. Thank you. Now, as to this retrospective commission arrangement, would you please tell the committee at whose suggestion this arrangement was made, about its inception, its start, and how long you have carried it on? Mr. SMITH. I frankly do not know whether it may have been a suggestion of mine, or maybe it was a suggestion of the agent. There was a question of a desire for more commission by the agent. There was a desire on our part not to pay more commission, and there was more or less of a compromise reached. Well, look. If the risk is profitable, we will pay more; and if it is not, we will not. I truly do not know whether it was my suggestion or the other party's suggestion. It could have been either. Mr. WELTMER. How many brokers do you have this arrangement with? Mr. SMITH. I know of only one. Mr. WELTMER. Who is that person? Mr. SMITH. Earl Liever. Mr. WELTMER. In other words, this retrospective commission arrangement is confined exclusively to group cases in which Earl Liever is the broker, as far as your company is concerned? Mr. SMITH. I believe that is correct. Mr. WELTMER. To go into the subject of the guaranteed retention rate, I would like to read a photostat of a letter dated August 19, 1954, to Mr. Earl Liever, Earl Liever, Inc., Los Altos, Calif. It is from J. E. Bruton. Atlantic City hotels and other group cases: Thank you for your August 13 letter, addressed to Mr. Darrell O. Smith, which has been passed to me for an answer. Your letter has been discussed with Mr. Smith. As you know, it is illegal in the State of New York and some other States to enter into a retention agreement, either by letter or otherwise. For this reason, we would much prefer not to issue such a letter on each of these cases. However, this will confirm that it is our intention to return in the form of a retrospective premium adjustment in each of the cases mentioned in your letter an amount based upon the formula previously used in connection with your retrospective commission adjustment agreements. We hope that this letter will serve the purpose and that it will not be necessary for us to issue a letter in connection with each case, for the reasons outlined in this letter. Your confirmation that this is in order will be appreciated when we shall make the necessary notation on our files so that restrospective premium adjustments can be considered at the end of each calendar year for each case. We shall wait to hear from you. Regards. Another letter from Earl Liever, Inc., dated August 23, 1954, to Mr. Jim Bruton, American Casualty, Reading, Pa. Re Atlantic City hotels, et al. DEAR JIM: In reply to your letter of August 19, I assure you that I am well aware of the fact that you cannot give a guaranteed retention since the American Casualty Co. is domiciled in the State of New York. However, that does not prevent you from giving an estimated retention, which will serve my purposes just as well. I am trying to set this up on the proper basis, and that is the reason why I would like to have the letters attached to each contract, and the estimated retention is good enough for me. Very truly yours, EARL LIEVER. Another letter from Earl Liever to Mr. Jim Bruton, American Casualty Co., Reading, Pa., dated September 22, 1954. Re Atlantic City hotels. DEAR JIM: I am in receipt of the contract relative to this group which shows a commission of 121⁄2 percent. What you failed to send along is a separate contract paying me an additional 5 percent as a service contract. That was my arrangement when I was in your office. I will hold the commission agreements in abeyance until I receive the 5 percent service contract so that I can return everything in one swoop. I am still waiting for letters from you on the other cases showing your estimated retention which you can do without violating any insurance code in the State of New York since I have estimated retentions from other companies doing business in the State of New York along the same lines. Upon receipt of these letters I will also return all the other single-case commission agreements so that we can write finish to our commission agreements. Very truly yours, EARL LIEVER, INC. Mr. Smith, would you please explain the difference between a guaranteed retention rate and an estimated retention rate, in practice? What is the difference and how does it work out? Mr. SMITH. Well, under a guaranteed retention rate, the company would say that the maximum amount which the company will retain is X percent. Under an estimated retention, they would simply say, "We believe that the amount which we retain will be X percent." The one is where the company is guaranteeing that it will do a thing, and the other is where we are saying, "We expect it will be this." Mr. WELTMER. I would like to read another note from Mr. J. E. Bruton, Reading, Pa., involving the Ambassador and Chelsea Hotels and the Trustees of Hotel Employees of Atlantic City, N. J., dated August 9, 1954. Please note that effective immediately the arrangement we have with the agent to pay commission on this case is changed. In the future we will pay 12% percent as a commission plus 5 percent as an administration fee. This, of course, will not change the overall amount paid but it should be clear that the 5 percent administration fee is not to be considered as a commission. Would you please explain what this 5 percent administration fee is and what is done to earn that 5 percent administration fee? Mr. SMITH. May I answer that differently by saying that upon reflection we think that entire file is rather ridiculous, and it is simply another way of stating the same thing. Mr. WELTMER. I do not know that I follow you, Mr. Smith. You still have not answered what the 5 percent administration fee is for. 53814-54-pt. 2-6 Mr. SMITH. We believe that the 5 percent administration fee as used in this particular case was primarily a matter of calling black dark gray, possibly. Mr. WELTMER. In other words, there was no service rendered for that 5 percent administration fee? Mr. SMITH. Not sufficient to justify the use of a 5 percent fee; no, sir. Mr. WELTMER. You pay the 1712 percent commission? Mr. SMITH. For practical purposes, it amounts to that; yes, sir. Mr. WELTMER. What is the retention rate on these Atlantic Hotel cases? Mr. SMITH. Thirty-seven and one-half percent. Mr. WELTMER. Does that include Mr. Liever's 171⁄2 percent commission? Mr. SMITH. Yes, sir. Mr. WELTMER. Does it include any other commissions to Mr. Liever? Mr. WELTMER. Is there another commission paid to Mr. Liever? Mr. WELTMER. Is there another payment to Mr. Liever out of this policy, in the form of a retrospective commission arrangement? Mr. SMITH. No longer, sir; not since the 1st of January 1954. Mr. WELTMER. When was this arrangement made to cancel this retrospective commission arrangement? Mr. SMITH. I would say in early summer or the middle of the summer of this year. Mr. WELTMER. And made retroactive back to include this entire calendar year? Mr. SMITH. Yes, sir. Mr. WELTMER. How many years did you have that arrangement before? Mr. SMITH. I think it was 5 years. It was 5 years. Mr. WELTMER. Can you tell me the amount of money paid to Mr. Liever during that 5-year period on this 1 policy? Mr. SMITH. In the retrospective adjustment, $17,267.81. Mr. WELTMER. Can you tell me the amount of commission paid on the premium to Mr. Liever during that same period? Mr. SMITH. $29,107.61. Mr. WELTMER. What was the total premium for that period? Mr. SMITH. $166,329.31. Mr. WELTMER. What was the claim pay-out? Mr. SMITH. May I say there that if these figures differ a few dollars from yours, mine may be carried a month or two longer than the figures reported on the statements reported to this committee. Mr. WELTMER. What was the claim pay-out during that same period? Mr. SMITH. $54,170.55. Mr. WELTMER. Now I would like to go into the field of life insurance for just a minute, and read a letter dated June 27, 1952, to Earl Liever, Inc.; San Francisco, Calif.; Earl Liever, from J. E. Bruton, Teamsters Groups and Others, attention Mr. Liever: DEAR EARL: Thank you for your June 23 letter in connection with the calculation under various policies to determine the amount of contingent commission, if any. Frankly, I cannot understand why you should say that I was not aware of your commission on the Teamsters Group was reduced to 122 percent, as our records clearly indicate that the reduction of 121⁄2 percent was made in the calculations on which our June 19 memorandum was based, took this into account. We agreed that the original commission on the Teamsters Group was 171⁄2 percent, but you will recall in July of 1951 it was necessary to provide live insurance under the Teamsters' policy without increasing the overall premium charged to the employer. In order to do this, you agreed to accept a reduction in commission of 5 percent, which was to be used toward the cost of life insurance. In effect, therefore, you are still receiving 172 percent on the Teamsters' policies but you have agreed to voluntarily relinquish 5 percent to go toward the cost of life insurance. You will no doubt agree that we are still in effect paying you 171⁄2 percent on these risks, and for this reason the contingent commission agreement should be on 621⁄2 percent of the earned premiums. In this connection we would like to refer you to the first page of the August 14 agreement on commissions which states in paragraph 1, in part, as follows: "The premiums previously determined for life insurance are paid by American Casualty Co. and considered the equivalent of 5 percent commission to the agent." In addition, please refer to your August 22 letter addressed to Mr. Darrell O. Smith, in the fourth paragraph of which you raise the same question regarding the contingent commission arrangement on the Teamsters' cases. Mr. Smith replied to your letter on August 31, and in the fourth paragraph he stated that the life insurance was going to cost us at least 5 percent, so that the commission plus the life insurance still totaled 171⁄2 percent. In view of the foregoing, we shall be pleased to have your comments on our contingent commission calculations. Mr. Smith, will you please explain how this works; in other words, how is the money paid into American Casualty? How does it go through a trust fund? How does it work? Does it go straight to American Casualty from the employer? How do you purchase life insurance? Who is the broker on that life insurance? Mr. SMITH. May I ask Mr. Bruton to answer that? Mr. BRUTON. On the teamsters case the premium is paid directly to the company by the various employers separately. Commission is paid by this company or by our company direct to the agent. The life premium-we do not write life in our company and it is paid by us directly to the life company, and we do not pay the life commission. Mr. WELTMER. You do not pay the life commission? Mr. BRUTON. No. Mr. WELTMER. But according to this letter, if I understand it, you pay 5 percent of the 172 percent commission to Earl Liever, which is to be considered for life insurance. Mr. BRUTON. What happened there was when the teamsters case was originally written there was no life insurance involved. Later on we were asked to provide life insurance for the teamsters, and there was no additional money available to pay for the life insurance because the employers were only bound by a labor contract to provide so many dollars and cents each month for each teamsters member. As a result of discussion we agreed to reduce our premium so that there was no money available for life insurance. Mr. WELTMER. You reduced your premium? I do not follow you. Mr. BRUTON. We reduced the amount we required each month per 'teamster member. Mr. WELTMER. Which in effect was 5 percent of Earl Liever's commission? Mr. BRUTON. It averaged around 5 percent. Mr. WELTMER. Five percent of Earl Liever's commission was used to purchase life insurance? Mr. BRUTON. Yes, but it was not his commission; it was really the premium paid to us by the employers. But then the amount of money we had left out was less. Mr. WELTMER. There is no trust fund involved in this case? Mr. BRUTON. No. Mr. WELTMER. The employers pay straight to you? Mr. BRUTON. Yes. Mr. WELTMER. And you purchase the life insurance by reducing the premium charge each month? Mr. BRUTON. We did not purchase it; it comes to the same thing. Our premium was reduced to life insurance and could be purchased. It is a customary thing, I like to say, that for companies who do not write life insurance to bring in another life insurance company and have the premiums collected together and then split in one office or the other afterward and remitted. Mr. WELTMER. I was interested primarily in this 5-percent reduction in Earl Liever's commission to purchase life insurance. Mr. SMITH. I think possibly I might clarify that. Let us just take an illustration. We will say that there is a gross premium of $10. Let us say that the company's retention out of that is $8. That is the amount of money which is necessary for the company to receive. Now, then, it becomes necessary that life insurance be purchased. If we spend $1 out of that $8 to purchase life insurance, we have $7 left. Now, then, to bring that $7 up to $8, we change the commission which gave us a greater net to start with, and therefore we end up with the same net. Mr. WELTMER. In other words, really Mr. SMITH. It is a matter of mathematical adjustment. Mr. WELTMER. All right. I think that explains it well enough. Mr. Smith, will you tell the committee your opinion as to the amount of retention and commissions and retrospective commission arrangements paid to Mr. Liever. Do you think that they were excessive, looking back over them? Do you think they were too high, too small, or were they in line with the business? Generally, what have you done to change those things recently? Mr. SMITH. You are now referring to the Atlantic City risk? Mr. SMITH. My answer may have to be a little bit lengthy on this. I will make it as short as I can. As far as if we were to consider the Atlantic City risk only, I would say it was high. What we are failing to consider in this, in the picture that we are missing, is the fact that Atlantic City was but a part of a number of risks in connection with the culinary union. We are failing to take into consideration that very shortly after we wrote that--and the second one we wrote was the Miami Hotels-on the Miami restaurants the first year we paid in claims $13,985, and we took in $11,299. The second year we paid in claims $19,829, and we took in $15,669. The commissions in that period of time were not 1712 percent. It was 1712 percent the first year, which was entirely logical and proper, and the second year it was reduced to 5 percent. The third risk which we wrote in connection with the culinary |